Mainzeal in the Supreme Court

13 April 2022

Mainzeal Property and Construction Ltd (Mainzeal) was one of New Zealand’s largest construction companies before it was placed in liquidation on 28 February 2013. Given its prominence as a high-profile New Zealand business, the presence of a former Prime Minister on its board and the implications for corporate governance in New Zealand, the various Mainzeal court proceedings have received considerable attention. They have also been important given the implications various courts’ decisions have for company directors.

In the Court of Appeal, Mainzeal’s board of directors were found to be in breach of their directors’ duties, namely sections 135 and 136 of the Companies Act 1993 (Act). Those sections concern reckless trading and incurring obligations that a company cannot perform.

The directors’ appeal to that decision was heard by the Supreme Court last month. In that hearing, submissions were made on several issues, including the degree of risk taking that company directors should be permitted to take when a company is facing insolvency, and the measure of damages for breaches of ss 135 and 136.

The decision by the Supreme Court is likely to be several months away, but whatever the outcome, that decision will have significant ramifications for company directors, insolvency professionals and other advisors. The decision takes on even greater significance given the current uncertain economic outlook.

Regardless of the final decision by the Supreme Court, there are several key factors that all company directors should be aware of:

  • (a) If a business is struggling to stay solvent over an extended period of time, directors should seek professional legal and financial advice to assist them in their decision making and fulfilling their duties.
  • (b) If reliance is placed on a significant shareholder or wider group entities for funding, directors should ensure that such assurances are in writing, legally binding and can be implemented in practice.
  • (c) A decision for a company to continue when there is uncertainty about the company’s solvency should only be made after making a professional assessment of the potential outcomes and consequences of doing so.
  • (d) If such an assessment is conducted, and directors form the view that continuing to trade will likely create a loss for creditors, then the company must not trade on those matters.
  • (e) If the directors are faced with a situation in which they have no realistic option of turning the business around, directors should bear in mind they always have as a last resort the option to resign. This is an important consideration as directors can become personally liable for a company’s debts if they continue to allow a company to trade when there is little hope of profit.

If you have any questions about this article, or about the duties that you hold as a director, please contact a member of our Commercial Disputes or Corporate and Commercial Teams.

Tom Corkill is part of our Corporate & Commercial team at Norris Ward McKinnon.

Corporate & Commercial Team