Mainzeal Property and Construction Ltd was a New Zealand construction company placed into liquidation in 2013. The liquidators brought proceedings against the directors of Mainzeal, alleging a breach of directors' duties, including reckless trading and allowing Mainzeal to take on obligations that the company could not perform. The High Court found the directors were personally liable for reckless trading. The decision was appealed to the Court of Appeal.
Reckless trading: The Court of Appeal upheld the High Court's decision relating to reckless trading, finding that the directors continued trading on a 'business as usual' basis, while Mainzeal was in a perilous financial position. Mainzeal was balance sheet insolvent and effectively using creditors' funds as working capital. The directors kept trading, and failed to engage in any meaningful way with Mainzeal's financial position, ignoring the risks that this created for current and future creditors.
Obligations: The Court of Appeal also found that the directors did not have reasonable grounds to think that Mainzeal would be able to fulfill the obligations that were being entered into by Mainzeal once insolvent.
While the Mainzeal case is somewhat unique, the courts' decision is relevant to all company directors, especially those who find themselves as directors of companies that are insolvent or near-insolvent. The case makes it clear that continuing to trade in a 'business as usual manner' without taking a realistic view of the situation will likely result in a breach of directors' duties. As in the Mainzeal case, directors in this situation may be personally liable for the obligations that company assumed due to such breaches.