Governance - Parry Field Lawyers

Why minutes matter

Accurate and thorough board minutes are as critical for charitable entities as they are for companies. Well-written minutes help to ensure charitable entities are legally compliant and assist effective and efficient governance. They are an important record for current, absent and future board members about meeting discussions and decisions as they provide concise summaries of key points discussed.

Furthermore, accurately noting conflicts of interest, identifying documents tabled during meetings, and maintaining a list of action items all help the board to manage its workload and responsibilities effectively, ensuring progress is tracked and necessary actions are completed for future meetings.

Legal Requirements

In New Zealand, different types of charitable entities have specific legal requirements for meeting minutes.

Charitable Trusts: The Trusts Act 2019 requires trustees to keep core documents, including any records of trustee decisions made and any written contracts entered into, which will typically be records in minutes.[1]

Incorporated Societies: The Incorporated Societies Act 2022 stipulates that minutes of annual general meetings must be maintained.[2] Sections 89 allows resolutions to be passed without a meeting, for example, via email, if a society’s constitution allows. Failure to adequately hold and maintain minutes for annual general meetings constitutes an infringement offense, carrying a $500 fee per violation.

Charitable Companies: The Companies Act 1993 requires charitable company directors to maintain detailed minutes of all directors’ and shareholders’ meetings, documenting decisions and resolutions. The Companies Act also requires that minutes be accessible for inspection by directors, shareholders, and regulatory authorities.

What minutes should include

There are numerous templates available for minutes. Our advice is to tailor any template to the needs and preferences of your entity.

The administrative basics.

Start and finish times.
Name of chair.
Name of minute taker.
Attendance: those present and absent, and whether a quorum was established and maintained.
Date, Time, and Location: Schedule and details for the next meeting.

Each agenda item.

Note the item number and topic and keep this consistent with the agenda for ease of reference.
Note key points discussed. Record sufficient detail for people to understand the topic and discussion. Avoid unnecessary detail. Avoid attributing any comment to a particular Board member.
Resolutions: Detail the specific resolutions. We recommend that the chair sit beside the minute-taker and verbalise the proposed resolution for the meeting to hear. This allows meeting attendees to hear what is being minuted, to ensure it is accurate and makes sense.
Good minutes should signal whether something was simply ‘noted’ or ‘resolved’. If something is being tabled for the awareness of the board but does not require a decision, it is enough to note what was tabled and that it was noted. If the board paper has asked the Board to make a decision, the minutes should state that the matter was resolved.
If relevant, note whether voting was unanimous, tied, or whether a casting vote was necessary. (Tip – refer to your entity’s rules to see what is required for decision making.)
Note whether any attendees absented themselves due to a conflict of interest.
Actions: List any actions, who the actions are assigned to, and the date required. It can be useful to list the actions in a separate part of the minutes for easy reference.

Distribution

It is best practice to send the draft minutes to Board members within a week of the meeting, or soon after. Board members should review these while the content is still fresh, and send any proposed amendments to the Chair.

Approval

The approval of minutes should be a standard agenda item for each meeting. At this time, the Chair will ask if any board members have changes to the minutes. The meeting minutes can then be ‘approved’ or ‘approved subject to the changes noted’.

Storage and Accessibility

Minutes must be securely stored while also being readily accessible if required.

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This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.

[1] Section 45, Trusts Act 2019.

[2] Section 84, Incorporated Societies Act 2022.

Why good papers matter

Board papers help to ensure effective and efficient board meetings and well-informed decision-making. They should be clear, concise, and structured to assist decision-making while avoiding unnecessary detail.

Board members, including those in charitable entities, have a number of duties. Well-informed, well-constructed board papers will assist board members to consider what matters and make appropriate decisions.

These should be provided well before the meeting itself so they are ‘taken as read’.

What sections should be included?

Use your judgement and adjust the length and detail of the paper to suit the matter being considered.

Here are some suggestions on what to include, depending on the topic. It may be helpful to develop a board paper template to help writers.

Consultation

Detail who wrote the paper, who else was involved, and whether any other consultation or engagement is needed, for example, with employees, iwi, funders.

Choose the right speakers

Organise the right people to speak to the paper and ensure they understand the content and can answer questions.

A short Introduction and purpose

Include a summary of the main points at the start and highlight key information or questions to address.

Be clear about whether the paper is for ‘information’, ‘noting’, ‘decision-making’, or ‘advice’. Set out what decision or recommendation is being proposed.

Background

Provide essential context. Outline what is proposed and why and related issues. Using the 4Ps framework (‘Position, Problem, Possibilities, Proposal’) can be helpful. If similar topics have been discussed previously, refer to them for deeper insight. This section should summarise key points from detailed materials and allow the board to understand the current outlook, critical events and significant issues.

Proposed activity

What action is required and what are the timelines?

Financial summary

If a decision has a significant financial impact, provide information that allows decision-makers to understand how that would impact your organisation. Outline what alternatives were considered.

For significant investments, evaluate cash flow impacts and payback periods using methods like cost-benefit analysis, net present value, and internal rate of return. Other tools include ratio analysis, period comparisons, and trend forecasting. State whether the proposed expenditure is within budget.

Risks and benefits

Outline any risks , for example, quality, safety, finance, employment, reputation, and environment. Consider these in the context of your organisation’s risk tolerance. Explore the consequences of not taking the recommended action, providing a balanced view that weighs risks and benefits. Outline mitigation strategies.

Impact

Explain what impact this has had already, if relevant.

Recommendation and Resolutions

Each recommendation should state the proposed resolution, explain why it is the optimal choice, and include a summary of alternatives when applicable. The draft resolution should be ready for the Board’s direct approval.

More tips

Tailor papers to your board. Boards need a strategic view, so avoid operational details.
Have detailed information available on request or place it in an appendix.
Keep language clear and avoid unnecessary words. Avoid jargon and acronyms.
Follow up. After meetings, follow up on action items and decisions, assigning clear responsibilities and deadlines for each task.
Review and edit papers to avoid errors.
If the papers is an important one, seek feedback on the draft.
Provide board members with enough time before the meeting to properly consider the papers.
Get good advice. It is common for the chair and the CEO to work closely on board papers. Papers may also need accounting or legal input. It is worth getting good advice to ensure the ramifications of all potential decisions are considered and understood.

We have an extensive suite of free resources for charities, including our Charities Legal Handbook and Incorporated Societies: Information Hub (which features a free Guide for Navigating Re-Registration, webinar recordings and an FAQ with nearly 150 questions). We also often write articles about specific aspects of charities law. Here are some recent ones:

Recent changes to the Charities Act – Part 1

Recent changes to the Charities Act – Part 2

Transitioning from an incorporated society to a charitable trust

Let us know if you would like to have input on any legal issues you may be facing.

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This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.

The Supreme Court has recently decided the case of Yan v Mainzeal Property and Construction Limited which has direct implications for company directors. What can directors learn from this case and how will it affect how directors undertake their duties? We set out the key facts and principles so that you can stay safe.

Mainzeal was a property focussed company that went into liquidation owing approximately $110 million to creditors. As the Board was chaired by a former Prime Minister it has gotten a lot of attention. There were five directors and four were held liable for breaches.

This case primarily looked at directors’ duties under sections 135 and 136 of the Companies Act 1993. These sections recognise creditors interests that are to be considered by directors where a company is insolvent or near insolvent.[1] Section 135 provides that a director must not carry on a company’s business in a manner likely to create substantial risk of loss to its creditors. Section 136 outlines the duty of a director not to agree to incurring obligations unless they reasonably believe it will be able to be performed on time.

The Court upheld the Court of Appeals finding that the directors had breached their duties under these sections and compensation was granted under s 136 for new debt incurred but not under s 135 as net deterioration to creditors was not proved.[2]

The Supreme Court summarises the implications for directors of their approach to ss 135 and 136 liability. Three key takeaways for directors from this case are:

Don’t rely on assurances
Get advice early
Know your duties

1. Don’t rely on assurances

Mainzeal had been balance sheet insolvent for years yet continued to trade because its directors primarily relied on assurances of support from companies it was associated with.[3] One company provided a formal letter of support, otherwise known as a “letter of comfort”, while other assurances were less formal.[4] However, these ‘assurances’ were far from sure and critically they were not legally enforceable.

The Supreme Court stated that where assurances are not legally or practically enforceable and not honoured, relying on them will raise questions as to the reasonableness of doing so.[5] In this way it may be found that relying on such assurances is unreasonable and may result in a breach of directors’ duties which may also lead to potential liability.

Key point: Assurances should be documented and legally binding.

2. Get advice early

The Court does consider this when looking at the actions a director took. Directors should seek professional or expert advice early and from sources that are independent from the company. This can help directors be sure of their duties and how to avoid potential breaches, and in turn avoid personal liability. It means they can squarely address whether there are potential risks of loss to creditors or doubt as to whether it is reasonable to believe that obligations incurred will be able to be honoured.[6] By engaging external advice early, directors allow themselves reasonable time decide the course of action they should take.[7]

Section 138 of the Companies Act 1993 specifically allows directors to rely on such advice where they act in good faith, make proper inquiries where circumstances require it and have no knowledge that relying on the advice is unwarranted.[8] Directors should ascertain whether the relevant risks can be avoided or a plan for continued trading can be used to avoid the serious loss or creditors and meet the obligations agreed to.

Directors that do this will be appropriately considering creditors interests and it may help prevent personal liability. Furthermore, the courts take into consideration whether directors obtained advice when determining the reasonableness of a director’s actions.[9]

We help directors stay safe by understanding their duties. Check out our free guides or arrange a conversation with one of our team on the support we can provide you.

Key point: If you are wondering about getting advice, that means you probably should.

3. Know your duties

Governance is all about continual learning. While the concept of limited liability protects directors from some liability it does not protect them from their breach of duties. All the more reason for directors to know their duties and learn how to effectively discharge these duties.

This case outlines some of the duties that directors should be aware of. But they are not the only ones. Directors are required to exercise the care, diligence and skill a reasonable director would exercise in the same circumstances.[10] To do this, they need to continue to monitor the company’s performance and prospects and must not carry on trading in a way that creates a likelihood of substantial risk of loss to the company’s creditors.

[11] This is objectively assessed and directors are at fault if they allow the company to keep trading when they recognised this risk or where they would have recognised it if they had acted reasonably and diligently.[12] Further, directors should not take on new obligations without measures in place to ensure they will be met or without the belief on reasonable grounds that they will be honoured.[13]

If you are a director it is vital to ensure you know what duties who owe to the company, shareholders and creditors in order to avoid breaching them and finding yourself personally liable for it.

Key point: Keep learning individually and as a board about your duties.

Mainzeal will be talked about for a long time to come and it perhaps signals that there is a broader need for reform of the Companies Act. In the meantime there are some practical steps which you can take as a director to ensure you keep on the straight and narrow and avoid liability if you are involved in governance of a company which is getting close to insolvency.

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If you have any further queries please do not hesitate to contact one of our experts at Parry Field Lawyers.

This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.

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[1] Yan v Mainzeal Property and Construction Limited (in Liq) [2023] NZSC 113 at [359].

[2] Yan v Mainzeal Property and Construction Limited (in Liq) at [371]-[375].

[3] Yan v Mainzeal Property and Construction Limited (in Liq) at [2].

[4] Yan v Mainzeal Property and Construction Limited (in Liq) at [36]-[37] and [42].

[5] Yan v Mainzeal Property and Construction Limited (in Liq) at [363].

[6] Yan v Mainzeal Property and Construction Limited (in Liq) at [270].

[7] Yan v Mainzeal Property and Construction Limited (in Liq) at [271].

[8] Companies Act 1993, s 138(2).

[9] Yan v Mainzeal Property and Construction Limited (in Liq) at [273].

[10] Companies Act 1993, s 137.

[11] Yan v Mainzeal Property and Construction Limited (in Liq) at [270] and [360].

[12] Yan v Mainzeal Property and Construction Limited (in Liq) at [360].

[13] Yan v Mainzeal Property and Construction Limited (in Liq) at [273] and [369].

The term ‘director’ usually refers to people formally appointed to a Board. However, some people who are not formally appointed may operate as ‘deemed directors’ or ‘shadow directors’. They are increasingly likely to be treated by the law in the same way as formally appointed directors.

Justice Millett in a well-known case said a ‘de facto’ director “… is one who claims to act and purports to act as a director, although not validly appointed as such. A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims are the only directors of the company to the exclusion of himself.”[1]

Justice Millett’s description is perhaps a little cynical. Some shadow directors may be trying to avoid the accountability that attaches overtly to appointed directors, while others may be quite open about the influence they have on directors and boards.

What does the Companies Act say? What matters is that de facto and shadow directors are captured in the Companies Act definition of ‘director’ as a person in accordance with who directors or instructions the board of the company may be required or is accustomed to act. This means that whether or not they regard themselves as directors, these ‘deemed directors’ may be held accountable as though they were directors for any breaches.

Who might this capture? Looking at the definition, whether or not a board is “required or accustomed to act” for a deemed director is a matter of fact. The court will look at any evidence that shows a pattern of behaviour that amounts to directors being “accustomed to acting” on a deemed director’s instruction.

One legal commentator has suggested that the statutory wording of “required to” might extend the accountability net to include people who can be shown to have exercised control over the board even without a pattern of behaviour,[2] although this has not yet been tested in court.

An example in practice could be a large shareholder who is not a director but who behind the scenes is directly what the Board does.

Key points to note:

Parliament implemented this definition intentionally. It makes sense that if deemed directors have been instrumental in action or inaction that breaches directors’ duties, they too should be held accountable; perhaps even more so if they did this to avoid attention and liability.
Boards often rely on the professional advice from lawyers or accountants. It is important that relationships with advisors are purely advisory in nature and that directors or boards are not controlled or directed by the advisors.
If you are a shadow director, or your company has a relationship likely to be deemed a shadow director, be aware of the implications. One question to ask might be whether or not shareholders are aware of the shadow director, and if not, why not. Should the person just be appointed?

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[1] Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180 Ch, at 183.

[2] Taylor Lynn “Expanding the pool of defendant directors in a corporate insolvency: the de facto directors, shadow directors and other categories of deemed directors” New Zealand Business Law Quarterly 16(2) Jun 2010:203.

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If you have any further queries please do not hesitate to contact one of our experts at Parry Field Lawyers- stevenmoe@parryfield.com, yangsu@parryfield.com, sophietremewan@parryfield.com, or annemariemora@parryfield.com

This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.

Business can be complicated but it doesn’t have to be. We have helped thousands of clients and know about the key legal areas that will affect you and have just released our fully revised and updated “Doing Business in New Zealand” free handbook. You can download it here.

New Zealand consistently ranks as one of the most business-friendly nations in the world. Given this appealing status and the interest we receive both from local and international investors, as well as form businesses and entrepreneurs, we produced the “Doing Business in New Zealand” handbook a few years ago and now have fully updated it. It is intended to introduce and provide information for those who may be unfamiliar with how business is done here. The handbook provides introduction on business structures, investment rules, employment, disputes, property, intellectual property, immigration, privacy and social enterprise, just to name a few examples.

If you have further enquires please contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com.

Be sure to check out our other free guides too, such as Startups: Legal Toolkit and Social Enterprises in New Zealand: A Legal Handbook. We also provide free templates for resolutions, Non Disclosure Agreements and other resources on our site as well as many articles on key topics you should know about.

There is often confusion over Health and Safety – the rules have been around for a while now but we still get some common questions. Below we set out some of the key points to consider to ensure compliance around volunteers. Check out our other guidance on these topics as well.

Is your organisation a PCBU?

Under the The Health and Safety at Work Act 2015, a PCBU has the primary duty to ensure the health and safety of its workers and others, so far as is reasonably practicable.

Reasonably practicable means that “which is, or was, at a particular time, reasonably able to be done in relation to ensuring health and safety.” A PCBU is not expected to guarantee the health of safety of their workers but they must do what can reasonably be done to ensure health and safety. Factors that will affect what is reasonably able to be done include:

The hazards and risks associated with the work and the likelihood of the hazard or risk occurring;
The severity of the injury or harm to health that could result from the hazard or risk;
What the person knows or reasonably should know about the hazard or risk and the ways of eliminating or minimising it;
What can be done to eliminate or minimise the risks and how available and suitable these risk controls may be;
The cost associated with eliminating or minimising the risk, including whether it is grossly disproportionate to the risk.

What about Volunteer organisations?

Section 17 of the Act states a “volunteer association” is not a PCBU. The Act defines a volunteer association as “a group of volunteers (whether incorporated or unincorporated) working together for 1 or more community purposes where none of the volunteers, whether alone or jointly with any other volunteers, employs any person to carry out work for the volunteer association”.

If your organisation has no employees then it will be known as a volunteer association under the Act. As a volunteer association your organisation would not be a PCBU and therefore the Act would not apply to your organisation. However, frequently this exemption would not apply to organisations.

If your organisation has one or more employees then it is likely it will be a PCBU and thus the Act will apply.

If your organisation is a PCBU

If your organisation is a PCBU, it will have a duty to ensure the health and safety of others so far as is reasonably practicable.

So what about Volunteer officers?

Officers have a duty to exercise due diligence to ensure the PCBU complies with its duties and obligations under the Act. In exercising due diligence, officers must take reasonable steps to:

Know about work health and safety matters;
Gain an understanding of the operations of the PCBU and the hazards and risks associated with those operations;
Ensure the PCBU has appropriate resources and processes to eliminate or minimise risks;
Ensure the PCBU receives information about incidents, hazards and risks;
Ensure there are processes for the PCBU to comply with the Act.

Volunteer workers

Under the Act a “volunteer worker” is a volunteer who carries out work in any capacity for a PCBU on a regular basis, with the PCBU’s knowledge and consent and is integral to the PCBU’s operations. A PCBU would owe a duty to ensure, so far as is reasonable practicable, the health and safety of volunteer workers.

The volunteer worker would also have duties under the Act. While at work they must:

Take reasonable care for his or her own health and safety;
Take reasonable care that his or her acts or omissions do not adversely affect the health and safety of other persons;
Comply, as far as the worker is reasonably able, with any reasonable instruction that is given by the PCBU to allow the PCBU to comply with the act or regulations; and
Co-operate with any reasonable policy or procedure of the PCBU relating to health or safety at the workplace that has been notified to workers.

“While at work” is not defined but likely means while at the workplace or at an event run by the PCBU.

Casual volunteers

A volunteer is not a “volunteer worker” if their voluntary work includes:

Participating in a fund-raising activity;
Assisting with sports or recreation for an educational institute, sports club or recreation club;
Assisting with activities for an educational institution outside the premises of the educational institution; or
Providing care for another person in the volunteer’s home.

Even though this volunteer would not be a volunteer worker, the PCBU would still have a duty to them to ensure their health and safety is not put at risk from the PCBU’s work.

The casual volunteer would not have duties under the Act.

If your organisation is a PCBU and something goes wrong the penalties can be high. It is therefore very important that you are aware of whether your organisation is a PCBU or not. In some cases this may be unclear. We would be more than happy to talk with you about your particular situation to help you determine whether or not you are a PCBU.

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

There is often confusion over Health and Safety – the rules have been around for a while now but we still get some common questions. Below we set out some of the key points to consider to ensure compliance. Check out our other guidance on these topics as well.

Top 10 things to know

Be aware
- The Health and Safety at Work Act 2015 has been in force for a few years and it has introduced greater accountability for Health & Safety for your organisation if you employ staff.
Are you a ‘PCBU’?
- If you are a “Person Conducting a Business or Undertaking” then you are a PCBU. A PCBU can operate in a voluntary way without primarily being set up to make money. It has the primary duty of care in a workplace. See below for more on this.
Officers of PCBUs
- Directors, managers and leaders of the PCBU also face significant penalties under the Act for failing to exercise due diligence in ensuring the PCBU carries out its duties.
To start: Identify risks
- Ensure all risks and hazards are in your organisation are identified. Start by looking at the facility, entry and exit points, stage areas, equipment used, the people, the weather … what are the risks where you are?
Control & Eliminate
- Put procedures in place to control or eliminate risks to health and safety so far as is reasonably practicable.
Prepare
- Maintain a health and safety policy with the help of your employees. Put it into action and ensure your employees and contractors are aware of it and follow it – don’t just hide it in a drawer!
Tailor your documents
- Customise your documents so they are practical for you. One size does not fit all. It may be that a consultant is worth hiring to help you prepare documentation as well.
Check your visitors
- If other contractors or other entities come on to your property you must ensure they have proper health and safety procedures in place and provide you with a copy. Ask for it and check it!
Standing item
- It is good practice to have this topic as a standing item at your board meetings.
Remember the penalties are high
- Fines of up to $3 million and imprisonment of up to 5 years can be imposed. “She’ll be right” is no longer OK. Think about these issues now, not later

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

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This is part of our ongoing initiative to support thought leadership regarding Governance and the Arts, NFP and ‘For Purposes’ initiatives in Aotearoa New Zealand. Other examples include the just released “Charting the Future: A Framework for thinking about Change” here. To find out more about us have a browse of this website and the free resources in the tab above. If you have comments on the paper we’d love to hear them, email stevenmoe@parryfield.com.

Advance readers of the White Paper have commented:

“This White Paper brings to light a topic which is often neglected: the role that creatives can play on boards. In our experience, directors who have a range of diverse and creative talent, capabilities and knowledge bring different perspectives to decision-making, planning and board culture – that will likely enhance an organisation’s performance, as well as better represent the stakeholders.”
Kirsten Patterson (KP), Chief Executive, New Zealand Institute of Directors.

“I have been fortunate to always have had a strong musical and artistic background that has become the pillar stone to my creative success in business.” Sir Michael Hill

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 directors 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 were filed by the liquidators and former directors.

In 2021 the Court of Appeal found that the directors had breached s 135 of the Act, which exposed the company’s creditors to a substantial risk of serious loss. However, that loss did not materialise and the court therefore no compensation should be payable by the directors.

The court also found the directors had breached s 136 of the Act when they entered into four significant construction contracts. The matter was remitted to the High Court to determine the compensation payable. The former directors are seeking to overturn the decision and the matter is currently before the Supreme Court.

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?

A recent United Kingdom case of interest

The Supreme Court of the United Kingdom ruled for the first time in October 2022 on what triggers the directors’ duty to have regard for creditors’ interests ahead of shareholders interests (that is the company). The case is BTI 2014 LLC v Sequana SA and others.

Conclusion

The final outcome of Mainzeal is outstanding. However, what can be taken away from this case is the importance of the obligations and duties directors have to a company and creditors. 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.

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