Tuesday 26th February 2019
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Former Prime Minister Jenny Shipley has been ordered to pay $6 million to creditors of failed construction company Mainzeal, as part of a $36 million award by the High Court against the company’s directors.
Mainzeal was one of the country’s largest construction companies when it went under in February 2013, owing unsecured creditors $110 million. Just under half of the money was owed to unpaid subcontractors, including tradespeople working on Mainzeal projects.
Shipley was a director of Mainzeal from 2004, and chair of the company when receivers were appointed.
The liquidators, Brian Mayo-Smith and Andrew Bethell of BDO argued the directors breached their duties and were negligent in allowing the company to continue trading while insolvent.
Justice Francis Cooke agreed. In a statement following the release of a 178-page judgment, the High Court said Mainzeal directors were reckless, “had adopted a policy of trading while insolvent”, and “used money owed to trade operators, particularly sub-contractors, as working capital”.
The directors also relied on assurances that the millions of dollars Mainzeal had lent to its China-based parent company Richina Pacific would be paid back if Mainzeal got into trouble.
“The assurances relied upon were ambiguous, conditional, and subject to the constraints of Chinese law, which restricted the ability to return money to New Zealand from China,” the High Court statement said.
Justice Cooke decided on total compensation of $36 million, with Shipley and two other directors - Peter Gomm and Clive Tilby - expected to pay up to $6 million each. The rest must be made up by Richina founder and boss Richard Yan.
“The court arrived at a total figure of $36 million, being approximately one third of the total loss to creditors, and being similar to the balance of funds that the directors had allowed the shareholder group to extract from Mainzeal,” the statement said.
Another director, former Brierley boss Paul Collins, was not ordered to pay any compensation, as he joined the Mainzeal board not long before its collapse.
Waiheke winery Isola Vineyards, an associated Richina company, which also received money from Mainzeal, was ordered to pay $2.1 million. Isola is in liquidation.
Justice Cooke ruled that Shipley, Tilby and Gomm had acted “in good faith and with honesty”. However by adopting and sticking with a “vulnerable trading approach”, they had jeopardised the company.
“It is likely that the Richina Pacific group would have taken steps to stop the vulnerable trading approach had the directors declined to agree to it, if necessary by threatening to resign,” the court said.
Liquidator Andrew Bethell says he is “thrilled" that the High Court found the directors of Mainzeal had breached their duties and has awarded a "meaningful distribution for creditors”.
BDO was originally seeking to recover up to $75 million.
“We would have liked a higher number, but it’s a big judgment in terms of New Zealand reckless trading,” Bethell says.
“I think it’s all about the governance that company directors owe to New Zealand companies and their creditors.”
The other significant impact of this decision is the role played by litigation funding in this case. Litigation funding has some similarities to class actions in the US, in that third parties pay for mostly small litigants to take court cases against big corporates or organisations.
In this case, the action by the liquidator against the Mainzeal directors was funded by Auckland-based litigation funder LPF.
“Litigation funding has enabled creditors to get access to justice,” Bethell says. “We didn’t have the funds to take this claim without it, so it’s a good result.”
LPF also funded the successful 2018 claim by kiwifruit growers against MPI over kiwifruit disease PSI.
Justice Cooke said that he had considered “but ultimately not taken into account” the $20 million of insurance liability cover held collectively by the Mainzeal directors.
Documents from Richard Yan’s evidence at the trial suggest that had Mainzeal’s original $3.2 million loan to Richina been a share investment, it could now be worth $900 million. Shipley’s US$50,000 investment could be worth US$14.5 million ($22 million), on paper at least. And Yan’s Richina stake is possibly worth US$1 billion-plus.
A statement issued by Chapman Tripp on behalf of Shipley, Tilby, and Gomm acknowledged the judgment.
"The court’s basis for finding liability appears to have novel aspects which will require careful consideration," it said. "The directors will not comment further at this stage as they take advice and consider their options."
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