The High Court’s decision in Mainzeal - Article

Former directors of Mainzeal Property and Construction Ltd (In Liq) were found to have breached their director duties by trading while insolvent. They are required to pay $36m to the company.

The decision may be appealed and it could be some time before matters and law are settled.

Background

Mainzeal was part of a group of companies that came to be known as the Richina Pacific group. After trading for many years, Mainzeal was placed into liquidation in 2013 with creditors owed approximately $110m.

In a civil case before the High Court, the liquidators of Mainzeal have pursued its former directors for breach of their director duties under the Companies Act 1993. A principal claim against four of the directors was that they breached section 135 of the Companies Act. This section essentially provides that a director must not agree, cause, or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to creditors.

The High Court’s decision

The case is complex and the Court noted “that the circumstances of the case can fairly be described as exceptional”. The Court dissected Mainzeal’s trading history and group transactions, and held that there were three considerations that cumulatively led it to conclude s 135 was breached:

Mainzeal was trading while balance sheet insolvent because intercompany debt (ie funds extracted from Mainzeal and used elsewhere in the group of companies) was not in reality recoverable.
“There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose.
Mainzeal’s financial trading performance was generally poor and prone to significant one-off loses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.”

The Court expands on the above points in its analysis and provides considerable coverage of the legal requirements under s 135. Other causes of action under the Companies Act put forward by the liquidators were unsuccessful (including claims against a fifth director).

Award

As a result of its finding, the Court ordered the directors to pay compensation to the company in aggregate of $36m (three directors are liable for a maximum amount of $6m each and the fourth is liable for it all). There is a D&O insurance policy with potential cover of $24m.

Reminder for directors

Should the case be appealed then it could be some time before matters and law are settled. Notwithstanding this, the case serves as a general reminder for directors about the:

Complexities: of the role and responsibilities of being a director
Personal liability: being a director can carry a high level of personal risk and reputational risk along with responsibility
D&O insurance: Insurance and indemnities for directors should be viewed as investments in risk management.

The IoD will consider how it can share further insights and learnings from the case for directors and will keep members informed of any other developments (eg if the case is appealed).

See also: