Mainzeal’s ruling will likely lead to a ‘significant increase’ in damages paid to creditors, liquidators say

A Court of Appeals ruling that found that the directors of the Mainzeal construction company failed to fulfill their directorial duties will likely result in a significant increase in damages awarded to creditors, the company’s liquidators say.

A newly released Court of Appeal ruling said Mainzeal directors, including former Prime Minister Dame Jenny Shipley and Richard Yan, did not overturn a High Court ruling that held them liable for damages caused by the company’s collapse. .

But they were successful relative to the amount of compensation they had been ordered to pay and the compensation would be quantified by the Superior Court under a new debt approach, the Appeals Court ruling said.

Mainzeal went into liquidation in 2013, due to nearly 1,400 unsecured creditors $ 111 million.

READ MORE:
* The Mainzeal case is scheduled to start in the Court of Appeal
* Mainzeal director defending bankruptcy says he cannot secure a payment of $ 18 million
* Liquidators from Mainzeal to Richard Yan: Pay or we’ll bankrupt you
* Liquidator appeals seeking $ 73 million from Mainzeal directors
* Former Prime Minister Jenny Shipley alleges there is no ‘natural justice’ in Mainzeal’s trial

Following a civil case brought by BDO liquidators Andrew Bethell and Brian Mayo-Smith in 2018, Supreme Court Justice Francis Cooke ruled that the company had been negotiating while insolvent since 2007, and creditors would have been better off if Mainzeal it would have been liquidated sooner.

Its directors, Shipley, Yan, Peter Gomm, and Clive Tilby were found liable for breaching directors’ duties by recklessly trading, and ordered to pay a total of $ 36 million in damages and $ 2.3 million in costs to Mainzeal.

The Superior Court in February 2019 found Yan personally liable for $ 18 million, while Shipley, Gomm, and Tilby were responsible for $ 6 million each.

The former directors appealed the ruling and a hearing was held before three judges of the Court of Appeals in mid-2020.

The Court of Appeals ruling said the liquidators had “substantial success” in court.

“The liquidators were the winning party in relation to liability and have established that they are entitled to compensation for the breaches of the directors,” says the ruling.

BDO, acting on behalf of the unsecured creditors, had appealed against the calculation of losses, the discount applied to determine the director’s compensation, and the division of liability among directors based on different degrees of fault.

BDO argued that damages of at least $ 73 million should have been awarded. However, the Appeals Court ruling said it was lowered to $ 11.7 million that is now unclaimed in the related party settlement. So the amount of new debt claimed by the liquidators was approximately $ 63.5 million.

The judgment of the Court of Appeal said that the liquidators were the winning party in relation to the liability and had established that they were entitled to compensation for breach of the directors.

There should be no award of costs with respect to the appeal, but the liquidators should receive the costs with respect to the cross appeal, according to the judgment.

Liquidators Bethell and Mayo-Smith said the latest decision is likely to lead to a significant increase in damages for creditors.

“Many creditors faced serious financial difficulties when directors, including Dame Jenny Shipley and Richard Yan, knowingly recklessly exposed creditors to illegitimate risk and allowed the company to continue operating while insolvent for an extended period of time,” Bethell said.

The court had opened “the real perspective” that all directors were jointly and severally liable for the full amount of damages, he said.

This is likely to be substantially higher than insurance policies held by directors and would make it easier to recover losses from creditors, he said.

“This case against the former directors of Mainzeal is vitally important because it sets the standard of corporate governance and care that the directors of New Zealand companies require of the company and its creditors.”

The ruling said Mainzeal was negotiating, in what was essentially a “business as usual” mode, which carried substantial risk of serious loss to creditors.

By January 2011, Mainzeal was in a very vulnerable state.

“Mainzeal had for many years adopted a deliberate policy of dealing with the insolvent balance sheet, using creditors’ funds as working capital. The directors knew this. “

Mainzeal’s directors violated the reckless business rules of the Companies Act (section 135) by January 31, 2011, exposing the company’s creditors to substantial risk of serious loss.

“But that risk did not materialize, if you look at the creditors and the business as a whole. There was no net deterioration in the company’s position. “

That was the relevant approach to assess the compensation for breach of article 135, in this case, said the judgment.

The liquidators did not establish on the balance of probabilities that the liquidation would have been avoided if the directors had not breached their obligations under section 135.

The directors also violated section 136 of the Act, according to the ruling.

The section says that a director of a company must not agree to the company incurring an obligation unless the director believes at that time with reasonable grounds that the company will be able to fulfill the obligation when necessary.

The liquidators had appealed against Supreme Court Justice Francis Cooke’s decision that there was no violation of section 136.

Mainzeal entered into four major long-term major contracts after January 31, 2011, according to the ruling.

“The directors believed that the company would be able to meet those obligations when they came due, but they had no reasonable grounds for that belief.”

“They are required to pay compensation to the company with respect to those defaults, assessed with a new debt approach.”