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Bell Gully Partner David Friar and Senior Solicitor Himmy Lui discuss the likely major implications which will stem from the looming decision in the Auckland High Court case of the liquidators’ claim against the directors of former construction company Mainzeal. The case is one of the country’s largest trials for a breach of directors’ duties in some time, they write.
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The liquidators’ claim against the Mainzeal directors wrapped up last 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.
Liquidators’ claim
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.
Directors’ defence
The directors denied the alleged breach of their duties for a number of reasons, including that:
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- 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.
Implications
The Court’s decision will likely have a number of implications:
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- 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.
David Friar is a partner in the Bell Gully litigation team with 20 years’ experience as a commercial litigator. He has particular expertise in commercial disputes, insurance litigation, and corporate and insolvency law. David regularly represents clients in court, including the Supreme Court, New Zealand’s highest court. He represents insurers and insureds in a wide range of insurance disputes, including issues arising out of the Canterbury earthquakes. David has particular experience in professional indemnity (PI) and directors and officers (D&O) litigation. He also has experience in life and health insurance. He regularly acts for receivers, liquidators and banks. He also acts for a number of corporate clients and financial institutions. The Legal 500 Asia Pacific 2018 ranks David as a leading lawyer for insurance. Chambers Asia Pacific 2018 also ranks David as a leading lawyer for insurance. David writes and speaks extensively on directors’ duties, insurance law, insolvency, commercial law and litigation, including at professional and legal conferences and at New Zealand Law Society seminars. He is a co-author of the chapter on directors’ duties in a leading New Zealand text, Morison’s Company Law. He also co-presented the New Zealand Law Society seminar on Creditors’ Remedies in five centres across New Zealand. His international experience includes six years at Paul, Weiss, Rifkind, Wharton & Garrison in New York, during which time it was named best litigation firm in the United States by American Lawyer magazine. Prior to that, he received an LLM from Columbia University in New York, where he was a Fulbright Scholar. Contact David at david.friar@bellgully.com or connect via LinkedIn
Himmy Lui is a Senior Solicitor at Bell Gully in the Auckland office. Contact Himmy at himmy.lui@bellgully.comor connect via LinkedIn .
Please contact the authors if you have any questions about this article.
Disclaimer
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.
