The much anticipated Mainzeal judgment is released
On 26 February 2019 the High Court issued its judgment in Mainzeal Property Construction Limited (in liq) & Ors v Yan & Ors  NZHC 255 (Mainzeal). The Court found the directors of Mainzeal liable for reckless trading under section 135 of the Companies Act 1993, by agreeing, causing or allowing the company to be carried on in a manner likely to create a substantial risk or serious loss to the company's creditors, which ultimately resulted in creditors of Mainzeal suffering $110m worth of loss. Three important factors led to the Court's conclusion:
- Mainzeal was trading while balance sheet insolvent, because its intercompany debt was not in reality recoverable
- There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose
- Mainzeal's financial trading performance was generally poor and prone to significant one-off losses, which meant it needed a strong capital base or equivalent backing to avoid collapse.
The trading structure operated by Mainzeal and the parent group, Richina Pacific involved a large scale extraction of funds from Mainzeal to subsidiary companies of the Richina Pacific group, for investment by Richina Pacific in China. Mainzeal relied on assurances from one of Mainzeal's directors, Mr Yan, that Richina Pacific would financially support Mainzeal at all times. The Court found that the directors, Dame Jenny Shipley, Clive Tilby, and Peter Gomm, were not as culpable as Mr Yan, and "acted in good faith, and with honesty, and that they did so throughout" but nevertheless, that they breached s 135 by:
- Relying on assurances from Mr Yan when such assurances were not legally binding, and when the reliance on such assurances was not reasonable for reasons including that the applicable Chinese foreign exchange laws would not allow the Richina Pacific group to send the funds out of China to make the payments required
- failing to obtain independent legal advice, which would have led to the discovery that the assurances from Mr Yan were not legally enforceable and that Mainzeal was trading while insolvent
- Presiding over poor corporate governance standards, such as record keeping and the failure to ensure that any assurances of financial support which were relied on by the directors were in writing.
A claim against a fifth defendant, Sir Paul Collins, was dismissed.
The Court describes Mr Yan as having "induced the [other] directors to breach their duties", and found the Richina Pacific group "initiated" the infringing manner in which Mainzeal traded. The damages awarded by the Court reflected the Judge's opinion of the directors' culpability.
The Court rejected the usual approach to damages in such cases. The approach in Mason v Lewis typically sees the Court consider the difference in the Company's financial position between the initial breach and the date of liquidation.
In Mainzeal, the Court considered that the starting point for the calculation of loss should be the total debts to creditors in the liquidation. Adjustments were then made based on factors such as culpability and the length of time the breaches continued.
The decision has been appealed by the four directors.
Click here to read the judgment in full.
 Mainzeal Property Construction Limited (in liq) & Ors v Yan & Ors  NZHC 255.