Business Archives | Parry Field Lawyers

Parry Field are now registered as a Service Provider under the Regional Business Partner Network. If you are looking to grow your business but require some support, you may qualify for vouchers to help pay for services, as Parry Field are able to provide legal support in the following categories:

Business Planning: We can provide training for Directors of businesses who are looking at their plans and considering what changes they might need to put in place or those who are looking to start a business and are planning the first steps they need to take when it comes to legal structures.

Capital Raising: Growing your business is important and we can provide training around how business owners can raise funding for their venture, covering topics such as types of investors, due diligence processes, Financial Market Authority rules and documentation often needed, such as share Sale and Purchase Agreements and Shareholder Agreements.

Governance: It is important that you have all the right practices, processes and policies in place in order to guide your business in the right direction. Therefore, it is important to know and understand how to run a business, as well as the legal obligations that are associated with it. We can provide you with the knowledge of different legal structures that will assist you in deciding the best structure for the business based on what stage it is at. We will also assist with director duties, governance documents, explain how these work and the importance of having the right documents in place.

If you would like to know more, please contact the Regional Business Partner Network www.regionalbusinesspartners.co.nz

The Government recently introduced a one-off loan for businesses and organisations impacted by Covid-19. Applications must be made by 12 June 2020 through myIR.

Eligible applications can receive $10,000 plus $1,800 per full-time employee with a maximum loan amount of $100,000.
Once approved, most applications will receive the funds within 5 working days.
Applicants will have 5 years to pay off the loan with an annual interest rate of 3%.
The loan will be interest free if paid off within 1 year.
Repayments are not compulsory for the first 2 years.
You can choose to borrow the maximum amount or a small portion.

These loans are also accessible for NFP, Charity, NGO entities who meet the criteria. IRD recently attended a hui organised by one of our Partners, Steven Moe, and in the video here they explain how the system works and run through slides describing it. The relevant parts are:

00:00 Introduction from Steven Moe

02:14: Stewart Donaldson from IRD overview of what they are involved in currently

05:25: Rata Kamau from IRD with an overview of the Small Business Loan Scheme

20:40: Rata and Stewart answering questions.

Those thinking of applying should obtain financial advice to determine whether this is appropriate for their situation.

Click the following link to start your application.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Aislinn Molloy at aislinnmolloy@parryfield.com should you require assistance.

In part one and two of our articles on buying and selling a business we looked at both the important issues and what the agreement for sale and purchase should cover. In part three, we will consider the impact of Covid-19 and how it has affected the buying and selling process and further points that need to be considered during these unprecedented times. Whether you are considering selling or purchasing a business, or you have just started the process, the following should be taken into consideration:

Due Diligence

In part one, we explored the importance of due diligence and key questions that should be asked. The effects of Covid-19 should not alter your approach to carrying out due diligence, in fact it may be that a more rigorous approach is taken by buyers to understand the implications Covid-19 has had on the business and how it would fare if another situation like this were to happen again. When carrying out due diligence, both seller and purchaser should be mindful that more time may be required to undertake and complete the process due to the restrictions in place, as the ability to obtain information such as important documentation or carrying out physical inspections may not be possible right away.

Material Adverse Change Clauses

As we are in the midst of the unknown, agreements between buyer and seller will be subject to greater scrutiny and negotiation. The inclusion of material adverse change (MAC) clauses in an agreement is likely to be of particular interest, especially to a buyer. A MAC clause is used to reduce risk and uncertainty for buyers during the period between the agreement and the date the deal closes. Such clauses give the right for the buyer to walk away from a deal. For a seller, taking the current climate into consideration the inclusion of such a clause should be drafted carefully, thinking about what is considered to be a change and looking to the future and the potential of a similar situation occurring again.

Finance

As a buyer, if you are obtaining finance from a third party such as bank, it may take longer and become more difficult. In these uncertain times, banks may be reluctant to lend or may seek additional requirements are satisfied in order to obtain approval. Therefore, it important that the sale and purchase documentation covers the risks that are associated with lending during this time. For example, the seller may want to include a break fee, if finance is unable to be obtained by the buyer. Where a buyer may want the ability to walk away from the deal and have a financing out condition. It will be up the parties to balance the risk and reach an agreement that they are both comfortable with.

Warranties

In this current climate, sellers may be reluctant to agree to warranties about the state of the business, as the long term effects of Covid-19 on a business may not be known for some time. While for buyers it may be that they look at additional situation-specific warranties in relation to this pandemic. Warranties will be subject to robust negations even more so than before, therefore again, it will come down to the parties being able to find the right balance in terms risk.

Other Conditions

The uncertainty for many businesses during this time may see the inclusion of other conditions in a sale and purchase agreement. Such conditions may relate to maintaining current suppliers or current employees.

Conclusion

As the restrictions ease, many are still trying to navigate their way through the unknown. It is difficult to know the long term implications of Covid-19 and effects that it will have had on the businesses that survived the lockdown period. Therefore, it will be important for those looking to buy a business to ensure they have done their ‘homework’. While sellers will need to be upfront and ensure they are covered if a situation like this were to ever occur again.

We often help both buyers or sellers of businesses and in this unique context would be happy to talk about your situation to make sure the agreements work well.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

When an employer is considering making an employee(s) redundant, there are three key steps they need to get right:

Following the terms of the employee’s employment or collective agreement and, in particular, what it says about making employees redundant.
Making sure that the reasons for the redundancy are “genuine”, rather than, for example, simply a cover to remove an underperforming employee. In other words, being able to demonstrate that any redundancy is genuinely justified on the basis of valid commercial grounds.
Following a fair and reasonable process.

At the centre of this is being clear from the start about why a redundancy may be needed in the first place.

This may seem obvious but not infrequently we see employers coming unstuck at this point. They are unclear and/or imprecise, sometimes in their own minds but, more frequently, when communicating with the employee, about why exactly they are proposing to remove a role and what evidence they are relying on to back up that proposal.

The law is clear that it is not enough for an employer to say or show that it genuinely believes a redundancy is required. While an employer is entitled to make their business more efficient, whether or not the business is in financial dire straits or not, an employer must still:

Be able to clearly advise the employee, and with sufficient detail, about what the relevant issues are, giving rise to a possible redundancy;
Provide the employee with accurate evidence substantiating those issues; and
Give employees a real opportunity to be able to comment on those issues and, in particular, put forward alternative proposals if they are able to.

This means that, in general, it is not enough to simply advise the employee in broad, imprecise terms, as to why a redundancy is proposed. For example, to simply say that the employer has reviewed the business and redundancies are necessary to “streamline” the business, improve efficiencies or to save costs.

While those – making a business more efficient or saving costs – can be valid reasons for a restructure, the employee is entitled to know more on the how and why. The courts have been clear that:

“there must be made available to the other party sufficient information to enable it to be adequately informed so as to be able to make intelligent and useful responses” or, put another way, there must be “the provision of sufficient information to fully appreciate the proposal being made and the consequences of it and, secondly, an opportunity to consider that information and, thirdly, a real opportunity to have input into the process before a final decision is made.”

Consequently, in the example given, this may include providing information on:

What the employer’s review of the business showed? What issues were revealed? For example, “over the past 6 months, we have experienced an X% downturn in work in these areas. This is as a result of the loss of the X and Y contracts, which, on re-application, were re-tendered to Z Group. The effect of this on the company is that revenue has dropped over the same period by an average of by X% and productivity by X%. We are anticipating that these figures will continue over the next Y months because ….”
The evidence the employer has that demonstrate those issues, such as current and projected revenue or productivity figures?
What does the old and new employee structure look like under the restructuring proposal? For example, are other roles proposed to be removed? Who will undertake the employee’s existing role (if the duties under it are still required by the employer)?
How would removing the employee’s role help address the issues identified by the employer?
Have any options, other than removing the employee’s role, already been considered?
Could the employee be redeployed?

In our experience, where employers get this right, it reduces an employee’s disquiet and, consequently, the likelihood of an employment relationship issue arising. It also helps employers make better decisions, more accurately identifying what changes are actually needed and how best to implement them.

Finally, there are some limits on the information employers are required to provide employees. For example, information which would breach the Privacy Act 1993 or commercially sensitive material, the disclosure of which would unreasonably prejudice the employer’s commercial position.

In these cases, certain information may need to be redacted, before being provided to the employee or, in some circumstances, there may be grounds to withhold particular information altogether. We recommend however that employer gets advice before doing so. It is not enough for an employer to simply say they believe withholding information is necessary. That decision can also be scrutinised and will need to “stack up”.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist you with your employment matters. Please feel free to contact Hannah Carey at hannahcarey@parryfield.com or Carly Armstrong – carlyarmstrong@parryfield.com

What should the agreement cover?

In the first part on buying or selling a business here we saw there were some big picture things you need to think about when buying a business. This part will look at what the agreement for sale and purchase should cover and some key things that need to be thought through. While written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.

Assuming the decision is to purchase the business (rather than the shares of the company – this point was touched on above) then a commonly used template agreement in New Zealand is produced by the Auckland District Law Society. While it provides a base and a process it can also be adapted to reflect the situation. In terms of process what usually happens is the agreement gets signed and it is subject to conditions – once those conditions are satisfied it may Just a few examples of the way that it can be customised are:

Documents to be supplied: We commonly add in many additional terms which relate to the due diligence discussed above and what records will be provided. This usually involves a careful discussion with the client to determine what they expect to see and then being clear about what they have. If you ask for a licence that the seller should have and they cannot provide it, then obviously a red flag goes up.

Conditions: These could include the purchaser arranging finance for the purchase by a certain date, being satisfied with the results of the due diligence, having the lease (if there is one) assigned to the purchaser, obtaining consents or licenses needed. Again, this will vary depending on the business so there is no standard wording that can just be pasted in.

Warranties: It is common to include warranties – these are essentially statements by the Seller about the state of the business. For example, a warranty might state that there is no litigation that the company is a party to. Often these will be subject to robust negotiations – for example, the Seller may want this to say “as far as I am aware” (a knowledge qualifier), or refer to a monetary value such as there being no disputes above “x” dollars (a monetary threshold qualifier).

Restraints: It is common to include restraints on the seller of the business – particularly if it were, for example, a catering business or there was potential that they start something new that competes. Restraints need to be reasonable and usually will involve a certain time period such as one year and there will be a geographic area which is specified. Again, this can be a point of rigorous negotiations.

Intellectual property: Goodwill and reputation often make up a big part of the value of the business which is being purchased so it is important to be clear about what that includes – for example, names (are they trademarked?), website, Facebook pages, client lists, patents or other registrations.

Contracts: As part of the due diligence it is important to look at the really key contracts for the business and focus on whether they have change of control provisions and/or the ability to novate or assign to a purchaser. It might be that there will be issues with the purchaser taking on contracts so that is important to find out as quickly as possible.

Tax and accounting: We always advise involving an accountant to assist with these aspects and confirming with them the tax position – for example, that the transfer will be free of GST. Most of the time both entities will be registered for GST and no GST will be charged but it is far better to get this clear from the start than needing to have a last minute panic.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

In the last few months we have been helping several people as they purchase businesses. At the same time there have been other clients who are selling their business. It seems like for both sets of people there are some basic questions that they always have. This article tries to answer and clarify with some answers to some of the common points regarding the usual process involved and what documentation is required. A part 2 then deals with what the agreement for sale and purchase would normally cover. While this is written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.

So, what are you actually buying?

One of the first things to think about is what you are actually buying. This can be confusing but think about it this way – are you buying the assets of the company, or the company itself? It is very common in New Zealand to simply purchase the assets and the business rather than the company. This is because if you buy the shares of the company then you are stepping into the shoes of that company – which means you get what it owns but you also could get what it owes. So the key here is to be clear about what you actually want and the usual advice would be that purchasing the business and assets is best. Having said that, there may be reasons why purchasing the shares of a company is necessary and you actually want to take on board all that it has – including licenses and registrations – so every situation needs to be thought through.

Due diligence …

It is one thing to see an opportunity and have some chats with the founder of a business about how great it is going. It is quite another to do extensive due diligence and satisfy yourself that everything is as claimed. A good due diligence process will bring to light anything which you need to be aware of as a purchaser. For example, the founder may have told you that they have both great suppliers and customers – is that all verbal agreements or are there robust agreements in place which specify how those relationships are governed? What licenses are in place – or not in place? What disputes are there or litigation or potential claims? What do the accounts reveal? Is the lease about to expire? How about relationships with employees?

What does a due diligence involve?

A good due diligence process will see the Seller provide access to all the key documents of the business so you can thoroughly examine them. This will likely involve advisers such as accountants and lawyers to look through documents. If you are considering selling a business then the counterpoint here is to keep good records. How many times have I been involved in due diligences where the Seller has no records of decisions or no contracts in place? Far too many times – a Purchaser will be scared off if you cannot show clean records and processes. And if you are a start-up, begin keeping good records right from the start, it will make it far easier to get investors or sell out later on.

Other things to thing about…

There are many other points which we could cover and some hints are: Which employees will come over? What are the actual assets? Is the price sensible when looking at the accounts? Given the industry is there any potential for large claims or liability? What is the goodwill actually worth? Is there a reason they want to sell now? What future changes might there be in the industry that will affect the business?

Conclusion

We hope this is a helpful overview of some of the things to think about when buying – or selling – a business. In part 2 we will look at what the agreement for sale and purchase should cover. In fact the issues and things that need to be thought through will be the same no matter how many zeros there are on the end of the purchase price. The key thing is to remember that every transaction will be unique and so it is important to take a customised approach to what you ask for in the agreement, whether you are a buyer or seller.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

Global economic uncertainty as a result of COVID-19 will impact house purchases. On 30 April 2020, the Reserve Bank of New Zealand (RBNZ) announced the removal of mortgage loan-to-value ratio (LVR) restrictions for 12 months. The decision was made to ensure LVR restrictions did not have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the economic downturn caused by the COVID-19 pandemic. In this article we discuss what the changes are and the likely impact they will have.

LVR: What Does It Mean?

LVR is the amount of loan compared to the value of your property. For example, if the property is worth $500,000 and you have a deposit of $100,000, the LVR will be 80 percent meaning the loan cannot be higher than $400,000. LVR restrictions were introduced by the RBNZ in October 2013, as it was concerned about the rate at which house prices were increasing and the potential risk that it posed to the financial system and the broader economy. These restrictions required banks to restrict new residential mortgage lending at LVRs over 80 percent and allowing no more than 20 percent of its total new lending in this category. This placed restrictions on New Zealand banks and the amount of low deposit lending they could do.

If you were thinking about purchasing a home and had a deposit of less than 20 percent of the home’s value, your home loan application would have been affected by the LVR restrictions. Your application would have had to go through a number of assessments by the bank in order to determine whether it could lend you money or not. If successful, borrowers would face an additional fee called a low equity margin. This resulted in a percentage added to your interest rate that remained there until your loan reduced to the 80 percent threshold. These restrictions certainly did not make it easy for first home buyers and many felt they had been locked out of the property market. However, such restrictions clearly did not deter them. In December 2019 the amount advanced on mortgages was $6.5 billion, with $1.2 billion being advanced to first home buyers, giving this group its highest share since August 2014 (at 18.5%).

Removing LVR

The announcement from the RBNZ to remove LVR restrictions was a strategic one to bolster the economy and increase demand for property as New Zealand comes out of lockdown, with this decision to be revaluated in 12 months. The removal of restrictions on the amount of money that can be lent to high-LVR borrowers will not only have an impact on new home buyers, but also investment property buyers and those who are already current homeowners.

First Home Buyers

If you have been looking at buying your first home for some time but have been put off by the LVR restrictions, the announcement may have come as a breath of fresh air to you. While it is likely that low equity margin rates may still be applicable, as long as you are credit worthy with income and meet the bank’s lending criteria, you could very well be on your way to buying your first home. The removal of LVRs will not only mean it will now be easier for you to obtain lending, it will also mean that you will now have the opportunity to ‘shop around’ and choose a bank that best suits your circumstances. Up until now, you may only have been able to get a pre-approval from your current bank, as most banks have been reluctant to give pre-approvals to non-bank clients in case their existing clients could not be approved. This should no longer be the case and an opportunity is there to be taken advantage of.

Investment Property Buyers

Due to the higher risks associated with these types of loans, the current policy classifies investor loans as high-LVR if they are more than 70 percent of the property’s value. These high-LVR loans could make up no more than 5 percent of a bank’s total new lending in this category. It is likely that this percentage will increase over time, but given the period of uncertainty we are in, it is hard to gauge when this will occur and what the removal of LVR restrictions will truly look like for investment property buyers.

Current Homeowners

The impact on current homeowners is minimal. However, this may make it easier to apply for home loan top ups, especially if you were already close to the 80 percent threshold. It may also mean if you have suffered a loss of income or your property value has decreased to mean your mortgage is now over 80 percent, it may not be as dire for you or the bank as it was before.

Conclusion

The announcement from the RBNZ to remove LVR restrictions was certainly welcomed, especially as the implications of Covid-19 from a financial point of view continue to be negatively felt throughout the country. It will certainly be interesting to see what occurs over the next 12 months as the impact of Covid-19 becomes clearer and whether LVR restrictions will be reinstated.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist you in your journey. Please feel free to contact Judith Bullin at judithbullin@parryfield.com or Paul Owens at paulowens@parryfield.com should you require assistance.

The Government has announced several urgent insolvency and corporate law changes in response to the COVID-19 Pandemic, in an attempt to keep solvent businesses afloat during this turbulent economic period. These include:

permitting electronic signatures where necessary;
giving entities unable to comply with their constitutional obligations because of the pandemic temporary relief;
giving the Registrar of Companies authority to extend deadlines imposed by legislation
amending sections 135 (“reckless trading”) & 136 (“duty to relation to incurring obligations”) of the Companies Act 1993 to afford directors greater comfort when making difficult decisions regarding their ability to continue to trade;
bringing forward changes to the voidable transactions regime; and
introducing the business debt hibernation scheme.

Once enacted, the Government has confirmed their application will be given retrospective effect from 3 April 2020.

Changes to Directors’ Duties

In light of concerns directors may prematurely place companies into liquidation for fear of personal liability incurred should they continue to trade or to take on new obligations, two significant amendments have been made to sections 135 & 136 of the Companies Act 1993.

Section 135 places an obligation on directors to abstain from agreeing, causing or allowing for a company to be operated in a manner likely to create a substantial risk of serious loss to the company’s creditors.
Section 136 places an obligation on directors to abstain from taking on a new obligation if they do not believe, on reasonable grounds, that the company will be able to fulfil its obligations under the arrangement.

Under the announcement, directors who continue to trade (including the taking on of new obligations), will be afforded a “safe harbour” period from potential claims providing these criteria are met:

the directors consider, in good faith, that the company is or will likely face significant liquidity problems in the next six months due to the pandemic;
the company was able to pay its debts as they fell due on 31 December 2019; and
the directors consider in good faith that it is more likely than not the company will be able to pay its debts as they fall due within 18 months (for example, utilising the business debt hibernation scheme to get the business back on track).

This “safe harbour” is to be enacted for (initially) a six month period. Notably, directors must continue to act prudently and in good faith in their dealings with creditors, as all other directors’ duties continue to apply including the duty to act in good faith and in the best interests of the company under s 131.

How the change to section 136 will be drafted will be of great interest to directors of companies currently under pressure as a result of the lockdown. The requirement that director(s) be satisfied that “…the company will be able to pay its debts as they fall due within 18 months” may be challenging for directors, who will have to show they has maintained appropriate financial records consistent with the size and nature of the company, that their assumptions are reasonable and (where appropriate)the directors have acted on advice. Contracts with longer-term obligations such as leases may not fall within the safe harbour period so directors need to be prudent when accessing longer-term obligations, whether existing or new.

With this in mind, it is important to keep accurate and up-to-date financial information. This includes reasonable budgets and forecasts for the next 18 months. This will allow directors to reach an informed decision on the company’s likelihood of being able to meet its debts as they would fall due in 18 months.

Changes to sections 135 & 136 come at a time when directors are increasingly concerned about their civil liability when dealing with third parties while their business is struggling. Often this results in directors prematurely resigning and appointing an external administrator. This is in part due to the recent High Court decision in Mainzeal Property and Construction Limited v Yan discussed here under which the directors of Mainzeal Property Limited were collectively ordered to pay NZ$36 million for a breach of section 135.

In December 2019, the Companies (Safe Harbour for Insolvent Trading) Amendment Bill was proposed with a view to alleviating directors’ concerns regarding their liability when deciding to continue trading, notwithstanding the company being insolvent. This Bill reduces directors’ civil liability when a company is (or will become) insolvent and its directors undertake new debts in an attempt to improve the company’s position. It remains unclear what extent the amendments mentioned hereinabove will reflect contents of this Bill.

Changes to the Voidable Transaction Regime

According to the current voidable transaction regime, a liquidator can “claw-back” payments made from the debtor company to its creditors two years before its liquidation. It has been proposed to shorten the two year vulnerability period to six months when the debtor company and the creditor are unrelated parties. Originally, this change was contained in the Insolvency Law Reform Bill, however the Government has included it amongst the recent changes because of the increase of liquidations predicted.

Business Debt Hibernation

The Business Debt Hibernation Scheme (“the Scheme”) is to be introduced to the Companies Act 1993 to supplement the relief measures that already exist between creditors and businesses. Debt hibernation effectively allows businesses to place their existing debts into “hibernation” until they are able to start trading again.

With the rationale of enhancing a company’s ability to stay afloat in the face of the pandemic, the scheme aims to:

increase discussions between creditors and directors;
enable directors to keep control of their companies rather than appointing an external administrator;
encourage continued trading between the company and its creditors by providing certainty to both parties; and
be simple and flexible.

Companies wanting to participate in the Scheme will have to meet certain criteria. This has not been announced in full, but it is expected to include:

the business would have been solvent had the Pandemic not occurred;
it would be in the best interests of the business (including its ability to pay creditors) for the business to enter debt hibernation;
the creditors of the business will need to be notified of the company’s intention to enter into the Scheme;
once the company notifies its creditors of their intention to enter into the Scheme a one-month moratorium will take effect immediately while creditors cast their votes;
consent must be obtained by at least 50% of creditors;
if the business obtains the consent of 50% of creditors, the Scheme becomes binding on all creditors, except employees, and there will be a moratorium on the enforcement of debts for a six month period once the proposal is passed; and
further payments made by the company to third party creditors during the Scheme will be excluded from the voidable transactions regime – this affords third party creditors with greater protection that, in the event of the company’s insolvency, the advance will not be clawed back.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance with this, or with any other commercial matter, please contact Peter van Rij at petervanrij@parryfield.com or Tim Rankin at timrankin@parryfield.com

If a former Prime Minister of New Zealand is involved in a case then you know it is going to attract interest. Dame Jenny Shipley was the Chair of the Board of Mainzeal and it was found that the directors had breached their duties – what happened, and most important, what can we learn from this?

As a director of a company you must act honestly, in the best interests of the company, and with reasonable care at all times. You must not act or agree to the company acting in a manner that is likely to breach the Companies Act 1993, other legislation or your company’s constitution. The outcome of the Mainzeal case comes as a timely reminder to company directors of their duties and obligations.

Founded in 1968, Mainzeal was one of the leading construction companies in New Zealand, responsible for projects such as the ASB Sports Centre in Wellington and Spark Arena in Auckland, just to name a few. However, the construction industry was sent into shock when Mainzeal collapsed and was placed into liquidation in February 2013. Unbeknown to many, Mainzeal had been struggling financially for a number of years. So much so, that Mainzeal’s liquidators brought proceedings against the former Mainzeal directors, claiming they had breached their duties under section 135 of the Companies Act 1993.

What Happened?

The details are summarised at the start of the case: “In 1995, an investment consortium with a focus on investments in China acquired a majority shareholding in Mainzeal’s then holding company. This investment consortium was associated with the first defendant, Mr Richard Yan. The company group came to be known as the Richina Pacific group. In 2004, the group established a new independent board for Mainzeal with the third defendant, Rt Hon Dame Jennifer Shipley, as Chairperson. It operated for nearly 10 years under this board until the company collapsed in February 2013. Its collapse left a deficiency on liquidation to unsecured creditors of approximately $110 million. The unpaid creditors were sub-contractors ($45.4 million), construction contract claimants ($43.8 million), employees not covered by statutory preferences ($12 million), and other general creditors ($9.5 million). Mainzeal’s secured creditor, BNZ, was fully paid out.”

Were the director’s reckless?

The crux of the claim came under section 135 of the Companies Act . This section specifies that a director of a company must not—

agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Ultimately, the court had to consider if Mainzeal’s directors had been reckless in continuing to trade while Mainzeal’s balance sheet was in deficit, thus placing the company’s creditors at a substantial risk of serious loss?

Mainzeal had been trading as insolvent from as early as 2005, when Richina Pacific group extracted considerable funds from Mainzeal by the way of loans for investment in China. However, Mainzeal continued to operate as a going concern, as Richina Pacific provided letters of support for when Mainzeal’s accounts were audited. The directors were also given assurances by email and in meetings that support would be provided by the parent group if it was needed. These representations of financial support were relied on by the directors – but they should have done more. It is important to note that the promise to provide financial support when necessary was never formalised or legally binding (eg loan agreements or guarantees).

The ability for Richina Pacific to provide financial assistance when needed was also limited due to stringent foreign exchange controls exercised by the Chinese governmental authorities. Therefore, this made it extremely difficult to take money back out in China, once it had been taken from Mainzeal.

Mainzeal continued to trade, largely relying on funds that were owed to sub-contractors. It must have been a difficult balancing act to work out how long to continue trading in those difficult circumstances. Ultimately, Mainzeal was unable to pay its debts and was placed into liquidation on 28 February 2013.

Looking at the case there are some fascinating exchanges by email between the Directors and representatives of the parent company. For example, Dame Jenny Shipley wrote:

“While I note your desire to run a central treasury function for the NZ interests it is unreasonable to ask Mainzeal Directors to approve the associated related party transfers without the clear understanding if we are liable for these decisions and the associated obligation or of other persons or Directors are legally responsible. We are not informed as to the purpose of these transfers and would not need to be so if we had a clear indication from those responsible for the group that the request had been approved…”

So the directors were asking some questions – which is always good. But they relied too much on answers like this one that came in reply to these comments above:

“Again, there are no independence issues here as it is ultimately the shareholders who are on the hook for everything. Mainzeal is no in way compromised and Richina has always supported it to the full extent even during its more dire situations…”

Another experienced director, Sir Paul Collins, wrote: “I would have to say I’m at my wits end. I joined the board under the impression Mainzeal was solvent … I accepted all your representations re support and more recently redomiciling in NZ later this year and taking out the BNZ. As you will well appreciate I have dealt with a lot of bad news stories over the years and have found that matters can be worked through when you have all the cards on the table. I don’t have that confidence here. …”

What should the directors have been doing? Asking questions – like they did. What they failed to do was getting the answers documented in binding legal agreements.

The court found that the directors had breached their duties under section 135:

“Whilst all the factors I address below are relevant, there are three key considerations that cumulatively lead me to conclude the duties in s 135 were breached:

Mainzeal was trading while balance sheet insolvent because the intercompany debt was not in reality recoverable.

(b) There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose.

Mainzeal’s financial trading performance was generally poor and prone to significant one-off loses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.”

It was held that those were the three key elements in establishing that there had been a breach by the directors. The Court then went on to confirm:

“The policy of trading while insolvent is the source of the directors’ breach of duties, however, such a policy would not have been fatal if Mainzeal had either a strong financial trading position or reliable group support. It had neither.”

As the directors had been found in breach of section 135, the court awarded $36 million in damages. A large sum of money for anyone. The Court found that three directors, Dame Jenny Shipley, Mr Peter Gomm and Mr Clive Tilby had acted honestly and in good faith, therefore each were held liable for up to $6 million jointly with Mr Yan.

This did not go unchallenged. The court left the door open for the parties, if they believed there had been a miscalculation in the amount of damages awarded. Both the liquidators and former directors believed there had been, however both parties had their cases dismissed. An appeal and cross-appeal have now been filed by the liquidators and former directors. This is scheduled to be heard in the Court of Appeal in 2020.

What can we learn: What should the directors have done?

There were a number of red flags for the directors throughout the years. With the benefit of hindsight, there are some important lessons that can be taken from this case:

It’s really simple, but ask questions. Understand the answers and document them well. If someone says there is support, get it in writing.
If you are questioning the information you are receiving from others or it makes you feel uncomfortable, seek independent advice from a professional.
When relying on assurances from others, ensure these are in writing and legally binding.
Understand your duties as director. Ensure it is clear to whom your legal duties lie with. This is particularly important if your company is part of group of companies.
If you are facing financial difficulty, continue to review the situation and be extra-vigilant.
If you have been provided of assurances of financial support, ensure such assurances are clear – ask questions.

Examples of questions could include: How much financial support is available? Are the finances readily available and if not, how long will it take? What are the barriers that need to be overcome? How can we ensure we can legally rely on these assurances?

Conclusion

With an Appeal on foot, it appears that there is more to be said on this matter. However, what can be taken away from this case is the importance of the obligations and duties directors have to a company. The case really emphasised the care that is required, especially if a company is in financial difficulty. It also highlighted, if ever in doubt, seek independent advice, as it is better to be safe than sorry. Also, ask questions and document the answers so there is a clear trail.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

Some of the hardest hit by the current Covid-19 crisis are small and medium sized businesses. The Government has confirmed that they can now apply to their bank for a loan under the Business Finance Guarantee Scheme (the Scheme), set up by the Government in an effort to protect jobs and support the economy during the Covid-19 pandemic.

The Scheme works alongside the Wage Subsidy Scheme which is already available to businesses. The Scheme’s purpose is to help businesses with cash flow and operating expenses in the aftermath of the Covid-19 pandemic.

Not all businesses are eligible for the scheme, however if you are a business with an annual revenue of between $250,000.00 and $80 million you can apply to your bank for a loan of up to $500,000.00 for up to three years. The bank will determine your eligibility and determine the amount available to borrow. Applications under the Scheme are now open and are available until 30 September 2020, or until all available funds, being $6.25 billion, have been exhausted.

Applications under the Scheme can be made through your bank’s website and a standard lending process will be followed through the bank’s credit assessment process to determine eligibility. In addition, banks will take into consideration your circumstances due to the Covid-19 pandemic. The interest rate and other terms of the loan will be determined by the bank under their normal lending criteria. Of course a basic question needs to be asked – does your business need more debt or can it survive without taking that on?

This is important to think through because all this really means is that the process is similar to getting a normal loan from the bank – the difference being the Government has agreed to guarantee 80% of the risk in relation to each loan with the remaining 20% to be guaranteed by the bank. If a business defaults on their loan under the Scheme, banks will follow normal enforcement procedures and it is likely that as a part of the loan process and terms the bank will have obtained personal guarantees (usually from company directors) or other security (for example a General Security Agreement over the assets of the Company) that they can enforce before relying on the Government guarantee of the loan. The guarantee provided by the Government is essentially a protection for banks who might not otherwise provide loans to companies and not as a protection for the businesses who are the ones that actually take out the loans.

For more information regarding this scheme you can refer to your bank’s website. Participating banks are ANZ, ASB, BNZ, Heartland Bank, HSBC, Kiwibank, SBS Bank, TSB and Westpac. If you’d like to talk through your current position and options then you can always contact us.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist you in your journey. Please feel free to contact Luke Hayward at lukehayward@parryfield.com or Emma Piercey (nee Garlick) at emmapiercey@parryfield.com.

So, what are you actually buying?

Due diligence …

What does a due diligence involve?

Other things to thing about…

Conclusion

Christchurch

Hokitika

Rolleston

Make an enquiry

Newsletter signup