Ground rules for assessing damages following insolvent trading were set down by the Court of Appeal, part of long-running litigation following the 2013 collapse of Mainzeal Property leaving $117 million owed unpaid creditors.
While Mainzeal did have an independent board of directors, primary control lay with entrepreneur Richard Yan. Liquidators found much of Mainzeal’s cash had been spirited off shore to China in return for what proved to be vague and unenforceable promises by companies associated with Mr Yan to make repayment at a later date.
In 2019, the High Court ruled Mr Yan and fellow directors Peter Gomm, Clive Tilby and Dame Jenny Shipley were liable to pay damages totalling $36 million for breach of directors’ duties. All parties, including the liquidator, appealed; challenging different parts of the High Court ruling.
The Court of Appeal confirmed Mainzeal directors were in breach of s.135 Companies Act; ‘carrying on business in a manner likely to cause serious loss to creditors.’ But no damages were payable. Damages for breach of s.135 required proof Mainzeal’s financial position saw a ‘net deterioration’ between the date it was clearly insolvent (2011) and the date of subsequent liquidation (2013), the court said. Arguably, Mainzeal’s net position had improved over this two year period; liquidity was improved by shareholders putting in more cash and final payment was received on completion of a number of construction contracts.
Mainzeal directors were also in breach of s.136 Companies Act; ‘incurring obligations at a time when there were no reasonable grounds to believe the company would be able to perform these obligations.’ Directors were potentially liable for damages totalling some $63.5 million for failure to comply with s.136, the court ruled. This was ‘new debt,’ incurred after the company should have stopped trading in 2011.
The case was sent back to the High Court to decide the amount of damages Mainzeal directors should pay. Trial judges have a discretion in assessing insolvent trading damages.
Yan v. Mainzeal Property and Construction Ltd – Court of Appeal (31.3.21)
21.060