The long-running legal case following the collapse of Mainzeal reaches the Supreme Court this morning.
Mainzeal collapsed in 2013 and two courts have since ruled the directors liable for its failure. Photo: RNZ / 123RF
The former directors of the construction firm - Dame Jenny Shipley, Clive Tilby and Peter Gromm - and chief executive Richard Yan are fighting to overturn the Court of Appeal's decision to send the case back to the High Court to determine new penalties for breaching company law.
This prompted the company's liquidators to cross-appeal.
Mainzeal collapsed in 2013 and two courts have since ruled the directors liable for its failure.
In 2019, the High Court [https://www.rnz.co.nz/news/business/383397/high-court-rules-mainzeal-directors-liable-for-36m ruled the directors were liable for the $36 million after they allowed Mainzeal to continue trading while technically insolvent for a period of nine years.
The directors subsequently challenged the decision and last year the Court of Appeal upheld the lower court's ruling that the directors traded the company recklessly.
However, the directors were successful in overturning the $36m in penalties, saying that while they exposed Mainzeal's creditors to the risk of a serious loss that risk did not materialise.
But the Court of Appeal found the directors breached a separate part of company law when they entered into four long-term contracts without reasonable grounds to believe it could meet those obligations.
"They are liable to pay compensation to the company in respect of those breaches," the court said, ordering the case to be sent to the High Court to determine the size of the financial penalty.
Mainzeal's liquidator, Andrew Bethell of BDO, celebrated the decision as there was now a prospect the damages would be significantly higher because there compensation would be calculated using a different method.
But the directors appealed to the Supreme Court and cross-appeals soon followed.
Landmark case for director duties
The outcome of the case would have significant ramifications for directors.
Historically, directors were largely insulated from liability for a company's conduct but the case had thrown their duties into the limelight.
"There is limited case law on these matter and the Supreme Court hearing and subsequent judgement will broaden this, one way or the other," Institute of Directors (IOD) general manager Guy Beatson said.
"The case will have company directors actively considering their positions and maybe have a reduced tolerance for reasonable risks in their practice, and the operation of the entities they govern."
Similarly, cases such as these have an impact on the scope and cost of Directors & Officers insurance, he said.
In its 2021 judgement, the Court of Appeal made the point that the current laws governing insolvent trading were unsatisfactory and in need of a review to ensure it provided a clear regime that protects creditors.
That call had been supported by both the IOD and the chair of Restructuring Insolvency & Turnaround Association (RITANZ).
RITANZ chair John Fisk had previously said that any review should consider "safe harbour provisions" for directors.
The provisions were rolled out in Australia in 2017 and protect company directors from liability for reckless trading if they act early at the first signs of financial stress, such as seeking independent advice or avoiding taking on new debts.