The Mainzeal decision
Justice Cook in the High Court awarded $36 million damages against four Mainzeal directors including ex-Prime Minister Dame Jenny Shipley. The judge ordered Mr Gomm, Mr Tilby and Dame Jenny to pay compensation of $6 million each and Mr Yan, a shareholder of Richina Pacific which owned Mainzeal, $18m. The $36m awarded is approximately one third of the total loss to creditors which was $110m
The liquidators, Brian Mayo-Smith and Andrew Bethell of BDO argued the directors breached their duties and were negligent in allowing the company to continue trading while insolvent. The Judge agreed. In a statement following the release of a 178-page judgment, the High Court said the Mainzeal directors were “reckless [and] had adopted a policy of trading while insolvent”, and “used money owed to trade operators, particularly sub-contractors, as working capital”. Although “Mr Yan had acted honestly and was genuinely committed to Mainzeal, he had induced the other directors to breach their duties, including by making misleading representations to them,’” the judge said.
Mainzeal went into liquidation in early 2013, owing unsecured creditors about $110m. Some $45.5m of that amount was owed to unpaid sub-contractors including tradespeople working on Mainzeal projects. Richina Pacific (Mainzeal’s parent company) had extracted more than $42m from Mainzeal.
This is a watershed for directors’ obligations and duties even when acting in good faith. Perhaps unlike the failure of the finance companies after the GFC where directors’ behaviour was brought into question, the Mainzeal directors were acting honestly but ultimately were still held liable for their wrongful acts.
Directors need to spend appropriate time and attention on governance responsibility and management of risk – including scanning and focusing on the operating environment, particularly when complex risks are in play. Directors had to make sure that if they have an overseas parent company, those arrangements should not impact on their governance responsibility.
Directors & Officers Insurance Liability response
The ex-directors of Mainzeal had in place a Directors Liability Policy including Defence Costs, however we understand the Limit of Liability is considerably less than the $36m awarded. Therefore the directors are likely to be personally liable for any shortfall.
This judgement is a timely reminder of the need for
adequate Directors’ & Officers’ liability policy protection both in terms
of Limit of Liability and scope of coverage. The construction industry is
particularly under pressure from financial failure at present as we have seen
with recent high profile collapses, but every director of every company has
duties, obligations and responsibilities which they need to be aware of and
carry out diligently.
It is also worth noting that the litigation landscape in NZ is changing and we are seeing the arrival of litigation funders who are so prevalent in Australia. Litigation funders band together a group of creditors and fund their legal costs to bring a class action against either the directors and/or the company. If the plaintiffs are successful, the funders take a percentage of the award as their fee.
If you have any questions or require any assistance with Directors & Officers Liability insurance, please contact: