PHOTO: Mainzeal. FILE
The Supreme Court has dismissed former Prime Minister Dame Jenny Shipley’s attempt to overturn a $6 million compensation award against her related to her involvement in the Mainzeal construction company’s collapse.
Mainzeal went into liquidation in February 2013, during Shipley’s tenure as its board chair, leaving creditors, including many New Zealand building companies, owed over $110 million. Liquidators Andrew Bethell and Andrew McKay from BDO subsequently sued Shipley and three other Mainzeal directors, alleging that from January 2011, they had allowed the company to trade in a way that endangered creditors in violation of the Companies Act. In 2019, the High Court in Auckland held the four directors liable for $36 million in damages. Shipley, who served as prime minister from 1997 to 1999, was deemed liable for a maximum of $6 million. She and her fellow directors, Richard Yan, Peter Gomm, and Clive Tilby, appealed all the way to the Supreme Court.
The Supreme Court has now rejected their appeal, ordering the four directors to pay $39.8 million plus interest. Shipley, Tilby, and Gomm are each limited to $6.6 million plus interest. The interest will be calculated from early 2013, according to the Supreme Court’s ruling.
LPF, the litigation loan company that funded the case for the liquidators, estimated that interest could add up to about $3 million for each director. At least some of the money owed by the directors will be covered by their insurer, QBE.
Lawyers representing Shipley, Gomm, and Tilby expressed their clients’ deep disappointment with the dismissal of their appeal.
Supreme Court Justices Helen Winkelmann, William Young, Susan Glazebrook, Ellen France, and Mark O’Regan concluded that “for many years, Mainzeal had operated while technically insolvent.” By 2010, the directors should have recognized that, without a significant injection of capital or reliable support assurances, allowing Mainzeal to continue trading would likely harm creditors seriously, the justices stated.
The Supreme Court found that Mainzeal had been technically insolvent since 2005, although this was not evident from its financial statements. This financial condition was the result of $34 million in loans provided in 2004 and 2005 from Mainzeal to other companies within the Richina Pacific group to which it belonged. This money was funneled out of Mainzeal for investment in China.
These related-party debts, however, were not legally enforceable, and by 2009, Mainzeal was facing a growing number of leaky building claims. The directors allowed Mainzeal to continue trading by relying on non-binding support assurances from other companies within the Richina Pacific group.
Mainzeal’s directors approved a plan for the related-party loans to be repaid through the supply of building materials from China, but significant issues arose with the supplied materials. Ultimately, Bank of New Zealand (BNZ), Mainzeal’s bank, called in receivers in January 2013 after receiving a letter from Yan confirming that no financial support for Mainzeal would come from China. BNZ’s debts were fully repaid, but subcontractors and Mainzeal employees were among those left unpaid.
The Supreme Court justices noted that after Mainzeal’s collapse, Shipley urged Yan, unsuccessfully, to ensure that debts owed to Mainzeal and money owed to staff and subcontractors were paid.
Liquidator McKay welcomed the Supreme Court’s decision, emphasizing that it reaffirms directors’ obligations to diligently and responsibly fulfill their duties. He noted that creditors had been waiting a long time for this decision, which concludes over eight years of extensive court proceedings. The directors and their insurance company, QBE, denied wrongdoing throughout the process, which delayed justice for the creditors.
The Supreme Court highlighted the significance of the Mainzeal case, as it focused on directors’ duties and how compensation for breaches of those duties should be determined.