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Mainzeal case – highlights director responsibilities

Published: 6th June 2019

Author: Jess Collett, Norris Ward McKinnon

Published in: Commercial eSpeaking

The recent high-profile Mainzeal case (1) 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.

The Mainzeal case is one of many reminders of the importance for directors to understand the obligations that come with their role.

 

(1) Mainzeal Property and Construction Group Limited v Yan [2019] NZHC 255

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