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From the Directors chair - The Mainzeal Construction case


Main claim: That Mainzeal Directors breached their duties under section 135 of the Companies Act - the duty to avoid reckless trading. The claim is that the directors of Mainzeal allowed the company to operate and continue trading whilst in an insolvent state for many years. What tipped the scales for the Judge to rule the directors had breached section 135? Whilst a very complex case these are the key points:

1. Mainzeal traded while the balance sheet was insolvent.

2. No legally binding assurance of any group financial

support.

3. Mainzeal had a poor financial record of one-off losses and not just one-off losses; significant one-off losses

Number 2. was a major for the Judge when trialling this case. The key takeaway here is there was no legally binding documents in place with its shareholder group for financial support.

This meant unpaid subcontractors were left owed about $43.8 million out of the overall owed amount of $110 million.

How could that be if the construction model where substantial payment is made in advance?

Because Mainzeal used these payments to trade - not to pay their subbies.

A TIMELY REMINDER

It’s a timely reminder review your duties as a director and ensure you are fulfilling them.

Your directors’ duties under the Act

The business and affairs of a company must be managed by, or under the direction or supervision of, the board of directors of the company. In addition to this primary duty, directors also have the following core duties:

to act in good faith and in the company’s best interests;

to exercise due care, diligence and skill;

to exercise powers for a proper purpose;

to comply with the Act and with the company’s constitution;

to avoid carrying on the business of the company in a manner likely to create a substantial risk of serious loss to the company’s creditors; and

to avoid incurring obligations unless satisfied that the company will be able to honour them when required to do so.

THE CONSEQUENCES

In addition to penalties imposed by the Act for breaches of specific obligations, if the company goes into liquidation and a director is found to be in breach of his or her directors’ duties, that director could be held personally liable to repay or restore funds (with interest), or to contribute a sum to the assets of the company. Furthermore, the recently introduced Companies and Limited Partnerships Amendment Bill aims to criminalise breaches.

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