The recent high-profile Mainzeal case (Mainzeal Property and Construction Group Limited v Yan [2019] NZHC 255) has highlighted the importance for directors to know and understand their duties under the Companies Act 1993.

Four of Mainzeal's directors were found liable for $36 million in damages for breaching section 135 of the Act which is headed 'reckless trading'. This section prohibits directors from agreeing to cause or allow the business of the company to be carried out in a way that is likely to create substantial risk of serious loss to the company's creditors. 

The directors of Mainzeal authorised a transfer of around $40 million to Mainzeal's parent company in China relying on a promise that the money would be repaid. The directors then allowed the company to continue trading and to incur further debts to creditors while it was balance sheet insolvent. When Mainzeal started to hit stormy financial waters, the directors attempted to call on the loan to the parent company. They found, however, that Chinese restrictions meant that there was no way for the parent company to pay back the full sum immediately.

When Mainzeal went into liquidation in early 2013, it owed about $110 million to unsecured creditors.

The High Court ruled that the directors were reckless in allowing the company to continue trading in this way. The directors have appealed the decision and a hearing is likely to take place later this year.

A recent application by the directors of Mainzeal to have their damages and costs reduced has been denied by the High Court (Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 1637). 

This appeal by the directors was to have the amount of damages reduced, arguing that the losses by the company were overestimated at the starting point. In the same claim, the liquidator also counter-claimed that the losses were underestimated when measured by the judge. The judge accepted both claims as being valid, but ultimately determined that the two claims cancelled each other out; the appeal was dismissed. 

The directors remain liable for approximately $6 million each, as well as one director who is liable for $18 million. The directors have appealed to the Court of Appeal. 

If you are a director, it's important to know and understand your obligations and responsibilities to the company and to shareholders.

DISCLAIMER: All the information published in Commercial eSpeaking, No 52 Winter2019 is true and accurate to the best of the authors' knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Commerical eSpeaking, No 52 Winter 2019 may be reproduced with prior approval from the editor and credit given to the source.  Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: Ph: 029 286 3650 or 04 496 5513.