Institute of Directors’ Mainzeal statement

The Supreme Court’s unanimous decision relating to Mainzeal’s directors may have far-reaching effects on the New Zealand director community. The decision provides guidance on the responsibilities of company directors working with distressed companies.

An issue is a director’s fundamental duty to act in the best interests of the company. The Supreme Court has clarified that, when a company is distressed, avoiding risk to creditors fits within that fundamental duty.

As the sums involved in the judgement show, creating a risk of loss to creditors was not in the company’s – or the directors’ – best interests.

The Supreme Court agreed with the earlier Court of Appeal’s decision that Mainzeal’s directors acted in breach of sections 135 (reckless trading) and 136 (duty in relation to obligations) of the Companies Act 1993. It ordered Mainzeal’s directors to pay $39.8 million plus interest, with the liability of three of the four directors capped at $6.6 million plus interest each.

The Supreme Court decision is a stark reminder that directors involved with a distressed company must take utmost care in monitoring the company’s performance and prospects, and provides clarity on what they must do to avoid liability under the Companies Act creditor protection provisions (section 135 and section 136):

• Carefully monitor the performance and prospects of your company.
• Seek professional advice about your options, including if there is risk of a potential breach of directors’ duties.
• Develop a plan for continued trading that directly deals with the company’s solvency issues.
• Monitor progress with the plan.
• The courts must apply a standard of reasonableness when assessing the decisions of directors.

The 142-page decision will take some time to assess in detail but we note the Supreme Court endorses the Court of Appeal’s view that the relevant insolvency provisions in the Companies Act 1993 need to be reviewed. This view aligns with our own submission on the Companies (Directors’ Duties) Amendment Bill that a thorough review of the Companies Act 1993 is required.

We believe a review is necessary because the Act has not been comprehensively reviewed in the 30 years since it was passed, there is apparent difficulty interpreting its provisions, and both of New Zealand’s higher courts have endorsed the need for a review.  

Directors and Officers insurance policies, exclusions and premiums could also be impacted by today’s decision. Our recently published Directors’ Fees Survey found some 98% of respondents had some level of D&O insurance.