Landmark case for directors' duties
Last week the Supreme Court released its long-awaited decision in Yan v Mainzeal Property and Construction Limited (in liquidation) (“Mainzeal”). It confirmed the lower court’s decision that the directors breached their duties holding them personally liable to pay compensation of $39.8 million (plus 10 years of interest).
Mainzeal was one of NZ’s largest construction companies behind an impressive list of projects, including Spark Arena (previously Vector Arena), the Lion Nathan Integrated Beverage Facility and the Rotorua Hospital upgrade. Mainzeal was placed into liquidation in February 2013 owing $110 million to unsecured creditors. This week’s Supreme Court decision ends the long-running litigation with the liquidators that followed.
Directors – what does this mean for you?
This decision is capturing significant attention due to the implications for all directors of companies facing financial turbulence. It provides a wake-up call to directors of companies big and small. This decision is of particular importance to the property and construction industry now, where many companies are feeling the squeeze of tighter margins and pipelines drying up.
What duties were breached?
The Supreme Court found Mainzeal’s directors breached the Companies Act as follows:
Section 135 prohibits directors from allowing the business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
Mainzeal’s balance sheet was dire for many years, yet the directors knowingly allowed the company to continue trading while the company was insolvent. The directors had received external advice that the company needed a significant injection of capital but didn’t receive adequate commitments to seek this out. The directors had relied on oral assurances of financial support without taking steps to ensure these assurances were legally (or even practically) enforceable.
Section 136 prohibits a director from agreeing the company can commit to obligations unless the director has reasonable grounds to believe the company will be able to meet those obligations.
Mainzeal entered into four major construction contracts without reasonable grounds to believe the company was able to meet the obligations required under those contracts given the company’s precarious financial position.
Our advice to directors
- Take stock now. If you’re worried your company is in a precarious position, it’s probably too late to get advice. However, directors are entitled to time, and they should take the opportunity to pause and get expert advice before making important decisions for the company going forward.
- Get advice, and do it early – especially from your accountant.
- Know the balance sheet and what it means. Understand cash flow and ensure long-term planning for sufficient working capital.
- Make sure you’ve got your affairs in order (and early). Ensure you have adequate insurance cover for the risk you’re taking on.
- Liability for breach of these duties is personal and isn’t being limited because your personal assets are tucked away in your family trust or elsewhere. A director will be bankrupted if they are not able to access trust or other assets to meet liabilities.
- Understand your obligations as a director and the associated risks. You can be held liable regardless of your background or qualifications. Directors are held to the same standard whether they have financial and/or legal qualifications or not.