The liquidators’ claim against the Mainzeal directors wrapped up this week after an eight-week trial, with the judge reserving his decision. As one of New Zealand’s largest trials for a breach of directors’ duties in some time, the Court’s decision will likely have significant implications for directors and their insurers, as well as liquidators and litigation funders.
Mainzeal collapsed in 2013, with its liquidators reporting that creditors were owed in excess of $117 million. The liquidators sued the company’s directors for an alleged breach of their duties owed to the company. The liquidators said that the directors should have ceased trading and put Mainzeal into liquidation in 2011. They alleged that, instead, the directors recklessly continued to trade until 2013, causing additional losses to creditors totalling $75 million. The liquidators have also questioned a number of related party loans, the company’s restructuring prior to liquidation and the adequacy of the company’s provisions for leaky building claims.
The directors denied the alleged breach of their duties for a number of reasons, including that:
The liquidators are applying hindsight to judge a situation that was fine at the time;
The directors relied on offers of support from Mainzeal’s Chinese parent, which they say they were entitled to do in assessing whether the company could continue to trade; and
If the company had been put into liquidation earlier, its financial position would have been worse than it was at the date of liquidation.
The Court’s decision will likely have a number of implications:
Directors will be concerned to see that the Court does not unnecessarily broaden the scope of potential liability that they face, particularly given that taking risk is an integral part of any business.
Insurers will be watching with interest, as evidence of the value of the directors’ insurance policy was before the Court. In our view, the Court should not take this into account in reaching its decision.
Liquidators will also be looking at the outcome of the case. In many liquidations the only asset of any value will be a claim against the directors, but it is also typically a costly and uncertain claim to bring.
Finally, litigation funders will be watching closely. According to reports, litigation funder LPF has paid more than $3.4 million to support the claim, and a positive outcome in this case may encourage more funders to fund more litigation in New Zealand.
We will provide a further update when the Court releases its decision. In the meantime, if you have any questions or would like to discuss further, please contact the authors or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.