(Originally published in TransportTalk)
The Supreme Court’s decision has far-reaching implications for corporate governance and financial management in New Zealand./blockquote>
In a landmark decision, the Supreme Court of New Zealand has ruled against the former directors of Mainzeal Property and Construction Limited, holding them accountable for trading while insolvent and ordering them to pay substantial compensation. This verdict underscores the importance of prudent financial management by company directors, particularly in times of financial distress.
Mainzeal was once a prominent player in the New Zealand construction industry but faced severe financial challenges caused by various factors, including unresolved building claims and balance sheet issues.
The company’s precarious financial situation ultimately led to its downfall and liquidation.
On the question of compensation for these breaches, the court ordered that the directors contribute $39.8 million together with interest from 28 February 2013, with the liabilities of Dame Jennifer Shipley and Messrs Tilby and Gomm each limited to $6.6 million and interest.
The Supreme Court’s decision centred on two key sections of the Companies Act 1993, specifically sections 135 and 136.
1. Continuing obligation to monitor. Directors were reminded of their ongoing responsibility to monitor closely their company’s financial performance, especially during periods of financial instability.
2. Addressing financial concerns. The court emphasised the need for directors to take swift action when they identify substantial risks of financial loss to creditors or have doubts about the company’s ability to meet its obligations.
3. Seeking professional advice. Directors were encouraged to seek independent professional advice when making critical decisions about the company’s financial health.
4. Direct engagement. The court highlighted the importance of directors addressing financial concerns head-on and developing strategies to mitigate risks and ensure the company can meet its obligations.
5. Corporate governance. Sound corporate governance practices were deemed essential when devising strategies for a financially troubled company.
6. Avoiding balance sheet insolvency. Trading while insolvent was deemed unacceptable, unless there were reliable assurances of external support.
7. Reasonableness standard. The court stressed that directors’ decisions should be reasonable and consider factors like business judgment, available time, and expert advice.
8.Complex decisions. Recognising the complexities directors face when managing distressed companies, the court acknowledged that decisions made under pressure may sometimes result in unfavourable outcomes.
The Mainzeal case serves as a crucial reminder to directors of their significant responsibilities, particularly when their companies encounter financial challenges.
It emphasises the need for directors to act diligently, reasonably, and proactively to safeguard the interests of creditors and the company itself.
The Supreme Court’s decision has far- reaching implications for corporate governance and financial management in New Zealand.
It provides valuable guidance to directors navigating complex financial situations, promoting transparency, accountability, and responsible decision-making.