Former directors of collapsed construction company Mainzeal have penalties overturned, but not ruling

Former Prime Minister Dame Jenny Shipley giving evidence in court in 2018.
Former Prime Minister Dame Jenny Shipley giving evidence in court in 2018. Photo credit: RNZ / Tom Furley

The former directors of collapsed construction company Mainzeal have failed to overturn a decision that they were liable for reckless trading.

However, they have succeeded in overturning penalties of $36 million.

The former directors - Jenny Shipley, Clive Tilby, and Peter Gromm - and the former chief executive Richard Yan appealed a 2019 High Court ruling that they were liable for losses incurred because they allowed the company to trade recklessly and while insolvent.

The original case was taken to Mainzeal's liquidators and resulted in the three named directors being ordered to pay $6m each, and Yan $18m because he was found to be more culpable.

The directors appealed on the grounds the High Court decision was "deeply flawed" and would set a precedent that would deter people from becoming company directors.

The liquidators counter appealed seeking a doubling of the penalties.

The liquidators, BDO, claimed success in the Court of Appeal hearing, and said the four directors could face higher penalties.

BDO partner Andrew Bethell said they had pursued the former directors to show they were liable for their actions in allowing Mainzeal to trade while insolvent and the Court of Appeal decision had confirmed that and found the liquidators should be compensated for those breaches.

"The Court of Appeal has ordered compensation is calculated on the basis of the 'new debt approach' for new obligations entered into by the company ... and that interest is to be added to that amount.

"The Court held that when the directors implemented the illegitimate 'rob Peter to pay Paul' strategy, they breached s.136 (section of the Companies Act) which states directors must not incur any obligation unless they believe on reasonable grounds that the obligation can be met."

Bethell said there was a prospect all the directors being jointly and severally liable for the full amount of damages, which would likely be substantially higher than the directors and officials liability insurance policies they had.

He said the Mainzeal case had been important in setting the standard of corporate governance and care that was required by company directors.

"Given the clear facts of the case, it is disappointing the directors continue to deny any responsibility for using creditors' money and putting them at risk."

There has been no comment from any of the directors.

The Court of Appeal has agreed the directors allowed the company to trade recklessly.

"They exposed the company's creditors to a substantial risk of serious loss. But that risk did not materialise, if one looks at the creditors and the business as a whole. There was no net deterioration in the company's position," the court judgment said.

On that basis, the original penalties were overturned.

However, the Court of Appeal ruled had breached another part of company law by entering into a number of long-term obligations to various parties.

It said the directors believed Mainzeal would meet those obligations, had no reasonable grounds for that belief.

"They are liable to pay compensation to the company in respect of those breaches," the court said.

The amount of compensation has been sent back to the High Court to determine.