Tuesday 5th March 2019
|Text too small?|
The Mainzeal court decision has opened a can of worms for Mainzeal directors and their insurers as they work out who gets up to $23 million of liability insurance payouts to cover $36 million of court-ordered payments.
Last week Justice Francis Cooke ruled that four directors of the failed construction company, including former Prime Minister Jenny Shipley, should pay $36 million to unsecured creditors.
The Mainzeal directors had traded recklessly, Justice Cooke said, particularly by allowing the mostly loss-making company to trade for several years while technically insolvent.
The losers had been those unsecured creditors, particularly sub-contractors and some employees, who ended up being owed $110 million when the company collapsed in February 2013.
There’s a strong likelihood at least one side will appeal. The Mainzeal liquidators could argue that $36 million is only a third of what the creditors lost and ask for a bigger compensation payment. The directors could argue either that they weren’t reckless, or that they are paying too much.
In the meantime, arguments have already begun about the insurance. Under the directors and officers (D&O) liability insurance policy Mainzeal took out with insurance company QBE, $23 million is potentially available to help the directors pay the money they owe.
But will QBE pay out? And if so, how much will they pay, and who gets what?
One problem is there appears to be no precedent about what happens in this sort of situation. It would be easy (or easier) if all four directors had been given the same punishment - you just divide up the money equally.
But that’s not the case. Justice Cooke said in the judgment summary that all the directors had breached their duties, but Shipley and two other directors, Clive Tilby and Peter Gomm, “had all acted in good faith and with honesty and had done so throughout”. In other words, they thought they were doing the right thing, even if in the end they weren’t.
The judge made Shipley, Tilby and Gomm liable for up to $6 million each of the $36 million total.
But the case was different for a fourth director, Richard Yan, who was also the founder and main shareholder of Mainzeal’s parent company, Shanghai-based Richina Pacific.
A key reason for the Mainzeal collapse was that the New Zealand construction company had lent millions of dollars to Richina and never got it back.
Although Yan also acted honestly, the judge said, “he was in a very different position [as he] benefited very significantly from the funds extracted from Mainzeal... He induced the other directors to breach their duties, including by making misleading representations to them.”
Justice Cooke said Yan should be liable for the full $36 million.
The implication being that if the other directors for some reason weren't able to make a contribution, Yan will end up carrying the can for Mainzeal's collapse.
So how do you divvy up the insurance money?
At the end of the court hearing in October last year, Justice Cooke asked the parties pretty much that. Let’s say that I do find the directors behaved badly but the sum I award is more than the insurance would cover, he said in essence. Who do you think might get what?
And there was some head-scratching among the lawyers.
“There is scant authority on the apportionment of cover between co-insureds making simultaneous claims that exceed the limit on indemnity,” Mark O’Brien QC, lawyer for the liquidators BDO wrote in a submission to the court after the hearing finished.
Jack Hodder QC, the lawyer for Shipley, Gomm and Tilby, said much the same in his own memorandum of counsel.
“Where co-insured defendants face differing liability sums between themselves, in relation to one Wrongful Act, the position is unclear,” he said.
However, in an uncannily familiar-sounding theoretical example, Hodder imagines a $3 million judgment scenario where three defendants (he calls them defendants 1, 2 and 3) are “jointly and severally” liable for $1 million, while defendant 1 is “severally liable for $2 million in addition.
Trouble is, there is only $1 million in the insurance pot.
Hodder imagines three potential solutions to this imagined problem:
First, give one third of the $1 million insurance money to the three together (approximately $111,000 each) for the “jointly and severally” part, and two thirds to defendant 1 ($666,000). That way, defendant 1 gets the lion’s share of the cover ($777,000) while stumping up with another $1.56 million out of their own pocket, and defendants 2 and 3 have to pay $222,000 of their own money to make up the difference of what they owe;
Second, divide the $1 million insurance payout by three (approximately $333,000 each);
Third, use the $1 million to pay off the $1 million “joint and several” liability of defendants 1, 2 and 3, leaving defendant 1 with the additional $2 million liability “without the benefit of the policy”.
In both scenarios 2 and 3, defendants 2 and 3 end up being fully covered by the insurance payout.
Commenting on these scenarios, Hodder argues for a solution where “any payment of the insurance funds is... simply made towards the judgment of $3 million. It is not made either to the joint and several liability of defendants 1, 2 and 3, or the several liability of defendant 1.
“When the judgment is satisfied to the value of $1 million by the insurance funds, the joint and several liability of defendants 2 and 3 is necessarily extinguished.”
Of course, a lawyer acting for Shipley, Gomm and Tilby is likely to argue that way.
Under the real scenario, the QBE-issued D&O indemnity policy pays out a maximum of $20 million to the Mainzeal directors, plus a $1 million extension for each non-executive director. Total: $23 million, maximum.
Under Hodder’s solutions 2 and 3, Shipley and Tilby’s part of the payment ends up being covered by insurance. That is, $5 million as each one’s quarter share, plus $1 million extra because they were non-executive directors.
The total: $6 million each, which is conveniently exactly the amount they owe.
Under this arrangement, Shipley and Tilby would likely be keen to pay the money and see the whole case closed. Problem gone away.
Gomm, the former Mainzeal chief executive, wouldn’t get the $1 million non-executive payment, but would get the $5 million.
Yan could get $6 million, but be left with a $12 million shortfall. In that case, he might put pressure on his fellow directors to push more of the insurance money in his direction. Or he could decide to appeal.
The waters are muddied by an argument about whether Yan should get any of the insurance payout at all.
In his memorandum, filed in court just before Christmas, Jack Hodder said the QBE policy arguably did not cover a director who “gained personal profit or advantage from a Wrongful Act, where that Wrongful Act was intended to gain the personal profit or advantage”. In this case, the wrongful act is the reckless trading, leading to the collapse of Mainzeal.
“In that regard, as the Court was advised during the trial, the insurer has expressly reserved the indemnity position in respect of Mr Yan,” Hodder said.
Which means, in layman’s terms: Don’t assume QBE will pay out on Richard Yan.
Although Justice Cooke was aware of the D&O insurance behind the directors and asked the lawyers about the position, in his judgment he expressly said the existence or size of the $20 million of cover didn’t make a difference.
“The Court considered, but ultimately did not take into account, the insurance cover held collectively by the directors,” he said in the judgment summary. “The court made no findings on the extent and operation of this insurance cover.”
Which doesn’t help the directors, the liquidators, their lawyers or the insurers.
Imagine plenty of behind-closed-doors meetings.
No comments yet
NZ dollar rides Australian dollar coat-tails higher
Electricity switching at four-year low amid high wholesale prices
S&P lowers Asset Finance's credit rating to
Trade Me halts sales of semi-automatic firearms
NZ service sector expansion slows in February
Synlait and Fonterra to report diverging earnings
Metroglass downgrades profit again
18th March 2019 Morning Report
NZ 4Q GDP growth likely muted
NZ dollar rangebound; focus on domestic GDP and US Federal Reserve