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Breach of Directors' Duties and Compensation (new Westlaw New Zealand)

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In 2019 the High Court ruled that four directors of Mainzeal Construction and Property Ltd (in liq) had breached reckless trading laws (Companies Act 1993, s 135) and, under Companies Act 1993, s 301, ordered those four directors to pay $36 million compensation for that breach. The High Court calculated the compensation figure on the basis that it was approximately one-third of the entire deficiency on liquidation. The four directors appealed that decision.

The High Court in Mainzeal Property and Construction Ltd (in liq) v Yan dismissed a closely related claim for breach of directors’ duties in relation to incurring obligations (Companies Act 1993, s 136).

The Court of Appeal recently  released its decision on the appeal by the directors and cross-appeal by the liquidators: Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99.


Policy underlying ss 135 and 136

In its decision, the Court of Appeal devoted some paragraphs to an analysis of the underlying policy concerns that ss 135 and 136 of the Companies Act 1993 were intended to address.

Reckless trading (s 135) and compensation (under s 301)

The Court of Appeal upheld the High Court’s findings that the four Mainzeal directors breached s 135 and had exposed Mainzeal’s creditors to a substantial risk of serious loss.

However, the Court of Appeal found that no compensation was recoverable for the breaches of s 135 because:

  • the High Court’s approach to assessing compensation for breach of s 135 — the “entire deficiency” — was not available as a response to the breaches established;
  • the “new debt” approach (which the High Court had rejected) was not available in relation to calculating compensation for a breach of s 135;
  • there had been no net deterioration in Mainzeal’s overall financial position between the date when Mainzeal exposed creditors to substantial risk of serious loss and the date of Mainzeal’s liquidation.

Incurring an obligation without reasonable grounds to believe it can be met (s 136) and compensation (under s 301)

The Court of Appeal disagreed with the High Court’s assessment that the four directors had not breached s 136.

The Court of Appeal set out the steps to be followed in applying s 136 and assessing whether a director had reasonable grounds at the time an obligation was incurred for believing that the company would be able to meet that obligation when it came time to do so.

When the Court of Appeal applied these steps to the facts in Mainzeal, it held that the four Mainzeal directors had breached s 136.

The Court of Appeal held that compensation assessed on a “new debt” approach was recoverable from the four directors for breach of s 136. The matter of the quantum of compensation for breach of s 136 was referred back to the High Court for determination.

Fuller analysis

For in-depth analysis of the Court of Appeal’s decision in Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99 see commentary in Thomson Reuters’ Company Law at [CA135.04(20)] and [CA136.01(25)].

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