Mainzeal judgment highlights need for good corporate governance

The recent High Court decision on Mainzeal Property and Construction highlights the need for good corporate governance, experts say.

The High Court ruled on Tuesday that some directors of the shuttered construction giant are liable for $36m because they breached their duties by allowing the company to trade for nine years while it was insolvent. When it collapsed in early 2013, the company, which was one of the largest in its industry in the country, owed unsecured creditors $110m.

Dame Jenny Shipley, who was the first female prime minister of New Zealand, is expected to pay up to $6m. Fellow former directors Peter Gomm and Clive Tilby are expected to pay the same. Richard Yan, founder of Richina Pacific, which was the China-based parent company of Mainzeal, is expected to come up with the rest of the award. The Mainzeal directors collectively have $20m in professional liability insurance.

MinterEllisonRuddWatts acted for BDO New Zealand, the Mainzeal liquidators. The firm’s team is headed by partner Zane Kennedy, and senior counsel Mark O’Brien. The case was funded by LPF Group, a New Zealand-based litigation funder.

“The decision by the High Court is a timely reminder to New Zealand’s director community about the need for strong corporate governance in a corporate group context. Directors are responsible for considering the interests of current and future creditors and should be wary of permitting a company to trade while insolvent for any significant period of time,” Kennedy said. “We and the liquidators identified Mainzeal’s undercapitalised balance sheet and unreasonable reliance by its directors on verbal, non-binding assurances of parent company support as significant factors leading to Mainzeal’s collapse. We are pleased that the High Court agreed that these considerations supported a finding of reckless trading, but are mindful that the award still only represents approximately one third of the total loss suffered by the creditors,” he said.

Justice Francis Cooke ruled that Shipley, Tilby, and Gomm acted “in good faith and with honesty,” but the company’s directors were reckless. He said that the directors used money

owed to trade operators, particularly sub-contractors, as working capital. About half of the money owed by the company when it went under was to sub-contractors.

He also said that the assurances relied upon by the directors were “ambiguous, conditional, and subject to the constraints of Chinese law, which restricted the ability to return money to New Zealand from China.”

The Institute of Directors in New Zealand (IoDNZ) said that the ruling highlights the key role of boards in overseeing organisational risk.

“This is an important reminder about core director duties under the Companies Act, including not trading while insolvent,” said Kirsten Patterson, IoDNZ chief executive.

She also said that the case shows how additional risk comes from the complexities brought about by governance in a global context.

“It is a timely reminder for directors to ensure that they have a good understanding of the wider operating environment, and the risks in that environment. It is important to have formal procedures in place for overseeing risks such as having audit committees and a formal risk register,” she said. “This also highlights that being a director can carry a high level of personal risk along with responsibility. IoD will share the learnings from this case with members to help ensure the director community are up-to-date on best-practice governance.”

Chapman Tripp issued a statement on behalf of Shipley, Tilby, and Gomm.

“Dame Jenny Shipley, Mr Clive Tilby and Mr Peter Gomm, directors of Mainzeal Property and Construction Limited (in liquidation) represented by Chapman Tripp, acknowledge the judgment delivered by the High Court today in relation to Mainzeal,” the firm said. “The Court’s basis for finding liability appears to have novel aspects which will require careful consideration. The directors will not comment further at this stage as they take advice and consider their options.”

Sir Paul Collins was not ordered to pay compensation because he joined the Mainzeal board shortly before its collapse. Isola Vineyards was found liable for $2.1m. The company associated with Richina and which is currently in liquidation also received money from Mainzeal.