New Zealand’s economy, like many others, has been significantly impacted by global events such as the COVID-19 pandemic hangover (inflation, supply chain shocks and high interest rates). These events have led to an increase in distressed M&A activity as healthy companies seek to acquire those in financial distress. Distressed M&A is not without its challenges. The uncertainty of the distressed company’s true value, potential liabilities, and the risk of subsequent insolvency proceedings can deter potential acquirers.

The Supreme Court has today released its decision in Yan v Mainzeal Property and Construction Limited (in liquidation) [1] (Mainzeal), upholding the Court of Appeal’s finding that Mainzeal’s directors were liable for insolvent trading and ordering 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.

MinterEllisonRuddWatts acted for the liquidators in the Mainzeal litigation.

Significance of decision

The economic clouds continue to darken alongside the incessant rainstorms outside, and people are paying closer attention to the forecasts to understand what to do to keep dry.

As interest rates continue to rise, and many commentators describe a challenging economic outlook amid an extending inflationary cycle, one only has to look at the recent company collapses in the construction sector to see the struggle that businesses are facing. Times are, and certainly will be, tough for a large number of people, and there are clearly sectors in distress.

A recent amendment to the Goods and Services Tax Act 1985 has clarified that voluntary administrators are personally liable for the GST of companies under their administration.

Recent consideration of statutory insolvent trading duties by appellate courts provides fresh guidance for managing these risks. Three decisions stand out: two recent, one anticipated. Collectively, they provide (or will provide) a critical roadmap for directors operating businesses in precarious financial positions.

The appetiser: Debut Homes

On 5 October 2022, the Supreme Court of the United Kingdom (UKSC) delivered a landmark judgment regarding directors’ duties in an insolvency context. In BTI 2014 LLC v Sequana S.A. [2022] UKSC 25, the UKSC considered the circumstances in which directors must have regard to the interests of creditors when exercising duties owed to the company and what obligations that imposes on directors.

The Court of Appeal has delivered its eagerly anticipated judgment in proceedings brought by the liquidators of Mainzeal Property and Construction Ltd against its former directors, including Richard Yan and Dame Jenny Shipley. In those proceedings, the liquidators sought compensation for breach of certain statutory duties of directors engaged on a company’s insolvency: sections 135 (reckless trading) and 136 (incurring obligations) of the Companies Act 1993.

2020 was a Jekyll and Hyde year for insolvency, both for New Zealand and our closest neighbour, Australia.

In our 2019 Litigation Forecast, we said 2020 would see two significant senior court decisions on directors’ duties engaged on insolvency.

The Supreme Court last Thursday released its long awaited decision on directors duties engaged on a company’s insolvency – Debut Homes Limited (in liquidation) v Cooper [2020] NZSC 100. The decision has profound implications for directors confronted with a business experiencing material financial distress and more broadly, for creditors, lenders and the insolvency profession.