Disputes - Parry Field Lawyers

How do you keep safe if you are overseas but buying land in New Zealand?

Two overseas investors, William Mitchell and Marzio Keiling, faced legal consequences for attempting to circumvent the laws around purchasing forestry land in New Zealand.

The pair used a strategy of incorporating New Zealand Companies where the main shareholder was a New Zealand Citizen. This was done so that the Company could purchase land with the pair behind the scenes funding their respective investments. As these were then “New Zealand Companies” with majority shares held by New Zealanders, they did not apply or obtain consent under the Overseas Investment Act (“the Act”) to purchase.

Mitchell, bought eight forestry blocks, totalling 111 hectares, in the Tairāwhiti/Gisborne area in 2011 through his company, Heidi Mitchell Sustainable Ltd (HMSL). Keiling set up AJN Land Ltd (AJN) in 2014 and purchased a 160.6-hectare forestry block near Auckland. Both properties were classified as “sensitive land,” requiring government approval before purchase, which neither obtained prior to purchase.

Land Information New Zealand (LINZ) took the investors to court, seeking penalties and orders to sell the properties. The court ruled that both companies had breached s42 of the Act, (an overseas person giving effect to an overseas investment without consent under the Act), and Mitchell also admitted to liability under s43 of “knowingly or recklessly enter[ing] into a transaction that defeats, evades or circumvents the operation of the Act.” The Court ordered Mitchell and Keiling to pay penalties totalling over $1.6 million and to divest their remaining properties.

The key point of this is to be careful when buying property in New Zealand. If you are interested in your options and would like to discuss further, please contact our team, or read more here.

Please note that this article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact us by phone 03 348 8480.

Why weren’t Board members liable in the Port of Auckland case?

By Steven Moe (Partner) and Hannah Carey (Special Counsel) at Parry Field Lawyers

Former Port of Auckland Chief Executive Tony Gibson has recently been sentenced for health and safety breaches. It’s the first time a high profile CEO has had such a prosecution brought which was in relation to the death of stevedore Pala’amo Kalati in 2020. The outcome: he will pay a $130,000 fine and $60,000 in costs.

Judge Steve Bonnar at the sentencing noted that the CEO had been a “hands-on CEO in relation to health and safety issues at the port”. Perhaps that ironically worked against him, as it may have highlighted and showed a failing in this area. The judge said he had “failed to exercise the care, diligence and skill” which is expected of a reasonable officer.

The impact of the case, and an obvious question

This will likely have a chilling effect on those being recruited for CEO roles – but as this news broke it led to an obvious question. What about the Board of Directors? They seem to be largely silent in the proceedings, yet surely, they were integral to the health and safety at the company as well?

When we talk with clients on governance or provide training an essential part involves emphasising that it is the “PCBUs” who are ultimately responsible. That acronym stands for a “Person Conducting a Business or Undertaking” – and that includes the Directors.

The reason Officers have such potential liability is that they can exercise significant influence over how the business is done.

In this case Maritime NZ brought the prosecution against the CEO and the Company, not the Directors. The Company itself pled guilty and paid fines of more than $500k and the Judge noted it had paid a large amount in private reparations to the family.

So why was the CEO charged?

Mr Gibson was charged alongside the Company and this was done as it was alleged that he did not exercise the due diligence needed to keep workers safe and ensure that the company complied with its health and safety obligations.

In Mr Gibson’s case, he was alleged to have failed to take a number of steps and had not done the following. This had resulted in the exposure of the workers at the Port to risk of death or serious injury because of a failure to:

Take reasonable steps in order to ensure that the company had appropriate processes in place as well as resources that ensured they were followed, so as to minimise or eliminate key health and safety risks; and
After they were in place, take appropriate steps to verify the actual provision and use of those resources and processes.

The key factors that led to the CEO being liable

The key factors here regarding why it was the CEO and not Board members who had the proceedings brought against him appear to relate to the fact that the CEO had been the one tasked by the Board with a role of leading the Port company.

This included ensuring its systems and processes were in place to ensure the safety of workers and compliance for health and safety. It also seems that he was ultimately responsible for health and safety at the Port.

Practically speaking, this also meant that Mr Gibson had the capacity and ability to influence the conduct of those responsible for this area at the Port Company. This extended to ensuring reporting processes and policies were in place so that any failures could be addressed prior to their occurring. In other words, the buck stopped with him.

This was shown by the fact that:

Mr Gibson was not a hands-off or remote CEO, operating at a significant distance from the Port Company’s day-to-day operations. Ironically, this may have made him more liable. This is because he personally took the time to get to know the key risks and what controls were or were not in place. As one example of this, Mr Gibson knew of the high risks involved in stevedoring and the role of the workers, including the specific risk (which was handling suspended loads) which eventually led to Mr Kalati’s death.
There were other examples of this which likely influenced the decision to bring the action against him. Some of these included:
- While there seems to have been a Health and Safety Committee in place it had actually not carried out its responsibilities – and that was down to Mr Gibson being ultimately responsible for it.
- Yearly health and safety strategy plans in those years which were adjacent to the incident had not been prepared by the company and that was something Mr Gibson was responsible for and approving.
- While there had been an external audit two years before the recommendations for how to improve health and safety, this had not been implemented and Mr Gibson both knew of the recommendations and was also aware that they had not been actioned yet.

The Judge noted that he had not considered hard controls which might have included signage, or barriers, and adequate lighting around operating cranes. However, it seemed clear that a reasonable CEO, with Mr Gibson’s knowledge and experience, would have looked at the practises in place and seen the shortfalls and ensured additional steps were taken to address any shortfalls.

Was this the right approach … how about those Directors?

Even if the situation really was the way it is described in the case it is still unclear to us why proceedings were not brought against the Directors of the Company as well. Is it really because the CEO in this instance had taken on the full burden of the Health & Safety risk?

At a policy level surely, this is going to send the wrong signal – the Board has the ultimate say on how the company fulfils its mission. Yet this result might lead to Boards allocating important supervision work to a CEO as a way to try and abdicate responsibility (and liability) for health and safety. That is unlikely to be the result that is wanted.

It appears that the Court itself recognised this point. This is because it was noted that they were not placing weight on the mere fact that the Board had provided approval of Mr Gibson’s performance. Also, it was noted that the Court was not being asked to consider failings by any other officers (that is, the Directors) – because the prosecution had not been brought against them.

Boiling it down to the essence of the issue

While directors are all officers and, therefore, could theoretically all have been charged, we think the actual decision appears to come down to Mr Gibson having taken on more specific responsibilities, and having more influence in relation to health and safety matters, than the directors. This led to it being easier to show he had more ability to influence the conduct of the company.

We imagine because this was the first of its kind case in NZ, that it was the lowest hanging fruit that they went after, in the hope of a successful prosecution. But every case is going to be very fact specific and the Judge did indicate that, just because you’re not hands on, doesn’t mean you will avoid being charged or avoid liability. You still need to exercise oversight/make appropriate enquiries.

For example, the Judge seemed to recognise this tension and did this when commenting on the difference between what an officer (ie a director) might know vs the practical implementing to happen at paragraph 55:

“A practical tension exists, therefore, between the purpose of the legislation, which is to sheet home the due diligence duty to those at the “apex of large hierarchical organisations” and the fact that officers in such organisations will be, by virtue of the nature of their role and the size of such organisations, removed from the day-to-day implementation of business systems, processes and health and safety standards. There may be several tiers of management sitting between the officer and those on the shop floor. It is clear, however, from the scheme of the legislation and existing authority, that an officer cannot comply with his or her due diligence obligations by simply relying upon those with specific responsibilities for health and safety in the management chain below them or by assuming, without proper enquiry, that the organisation’s systems are adequately addressing health and safety risks.”

Some key takeaways

We have focussed on the fact that it was the CEO who was charged and not the Directors.

While each health and safety prosecution is always highly fact specific, if you are an officer, even in a large organisation, we recommend that at a minimum, a board should ensure that they:

Don’t just rely on others – this includes those with specific health and safety responsibilities, as you need to check that the systems you believe are there are actually in place and even more important, are being implemented.
Understand and are familiar with the operations of the business and the activities and the work carried out – that way any risks or hazards will be both properly identified and can be proactively addressed.
Ensure that you stay updated by having effective reporting lines, which will ensure that you get ongoing information.
Ensure that if you have assigned health and safety obligations to certain roles, or those with specialist skills, that they do in fact have the ability to perform their roles and regularly monitor and check that they are doing what they are tasked with doing.

The culture is set from the top – if your board doesn’t take it seriously then why will others in the organisation. So, make sure this is prioritised so if there ever were to be an investigation it would be obvious that you had set the right tone for those in the company.

Please note that this article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact us by phone 03 348 8480.

What happens if a family member does not provide for you in their will?

It is always difficult when a loved one passes away. But this can be made significantly worse when someone discovers that they have not received the provision under the will that they expected. What can you do if you think you have not been properly provided for?

The law provides for certain family members to challenge a will on the basis that the will-maker did not adequately provide for them under the Family Protection Act 1955.

Who can make a claim?

The Family Protection Act entitles the following people to make a claim:

the spouse or civil union partner of the deceased;
a de facto partner who was living in a de facto relationship with the deceased at the date of his or her death;
the children of the deceased;
the grandchildren of the deceased;
the stepchildren of the deceased (if they were being maintained wholly or partly or were legally entitled to be maintained wholly or partly by the deceased immediately before his or her death); and
the parents of the deceased (in limited circumstances).

There is no provision for siblings of a deceased to make a claim.

What does it take for a claim to succeed?

To succeed, a claimant must convince the Court that the will-maker failed to “provide adequately for the claimant’s proper maintenance and support”. This does not just reflect economic need, but also the importance of recognising a claimant’s importance as part of the family.

It’s important to note that mere unfairness or disparity between beneficiaries is not sufficient to bring a claim under the Family Protection Act (for example, that one sibling got less than the others).

The success of a claim will depend on the particular facts of the case, but relevant factors include:

The economic need of the claimant;
The size of the Estate and the competing moral claims of other family members and beneficiaries under the will;
The duration and nature of the claimant’s relationship with the deceased;
Any gifts made to the claimant during the deceased’s lifetime; and
Whether there was a rift between the deceased and the claimant and, if so, who was responsible for that.

If successful, the Court is still limited to awarding no more than what is necessary to give adequate provision. The Court will not rewrite a will on the basis of what someone else considers to be fair.

Timeframe for a claim

In order to be effective, a claim must be brought against an Estate before the funds of the Estate have been finally distributed to the beneficiaries.

Where an executor has no notice of any claim against the Estate, the executor can distribute the Estate’s assets 6 months after probate is issued.

Under the Administration Act 1969, a potential claimant can prevent distribution of the Estate for 3 months if notice is given to the Executor that he or she intends to challenge the Estate. To get the most out of this 3 month window, notice of intention should be given just prior to 6 months after probate. This extension can only be obtained once, after which the Executor is safe to distribute if no Court proceedings have been served on the Estate.

Any claim must also be brought within 12 months from the date of probate (we explain probate in this article). A claimant can apply to the Court for leave to extend this timeframe, but extensions are rare and will only succeed if the Estate has not already been distributed.

How to make a claim

A Family Protection Act claim can be brought in either the Family Court or the High Court. The appropriate court will depend on the size of the estate, the complexity of issues, and whether there are already other proceedings relating to the Estate.

The documents required to initiate a claim differ depending on which Court is being used.

Once a claim is brought, it will need to be served on the Estate and other beneficiaries, who can then choose to oppose the application. Where a claim is opposed, the Court will usually ensure that the parties have the opportunity to attend some form of mediation to try and resolve the dispute without the need for a full hearing.

We have experience in both bringing and defending claims in both courts, and in resolving disputes between beneficiaries. Please contact us to see how we can be of assistance.

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.

If you are able to demonstrate that a deceased person failed to fulfil a promise to leave you something after they die, how much will the Court give you?

All claims under the Law Reform (Testamentary Promises) Act (“TPA claim”) are fact-specific. If a claimant succeeds in convincing a court that they have a valid claim (see this article for details on what that requires), the Court will make an award out of the assets of the Estate.

When assessing what size of an award is appropriate, the Court takes into account:

The value of the services or work;
The value of what was promised;
The amount of the estate; and
The nature and amounts of the claims of other persons in respect of the estate.

It can be difficult to assess the commercial or market value of the services performed, especially where they are intangible.

The Court will principally focus on the deceased’s perception of their value. However, there cannot be a major disproportion between the award and the value of the services.

The Court will also take into account any reciprocal benefits that the claimant received from the deceased – whether those are tangible things like payment of groceries, or intangible such as a return of companionship and support.

All TPA cases are heavily influenced by their unique context. Please contact us for specific advice. We have experience in both bringing and defending TPA claims.

For more details about what it takes to succeed in a TPA claim, see this article.

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.

What happens if someone promises to leave you something after they die, but then fails to actually do so? If you performed services for the deceased person in reliance on that promise then you may have a claim under the Law Reform (Testamentary Promises) Act 1949 (“TPA claim”).

To succeed in a TPA claim, you would need to prove that:

You rendered services to, or performed work for, the deceased person during their lifetime;
The deceased person made a promise to you , either express or implied, to reward the claimant for the services provided;
There is a nexus between your services rendered or work performed and the promise; and
The deceased person failed to make the promised testamentary provision or to otherwise remunerate you .

What is a promise?

Promises are defined broadly in the Act. It includes statements or representations of fact or intention. The promise may be made either before or after the services were rendered or the work performed.

It is not necessary that the deceased person ever specified an amount or particular piece of property as the reward. In one case, the Court found that statements such as “I will see you right” and “I will look after you” were sufficient.

In determining whether or not a promise has been made, the Courts may place more emphasis on what you could reasonably have understood by the deceased’s statement than on what the deceased actually intended. However, promises made “in the heat of the moment” and fuelled by emotion may not amount to a promise in terms of the TPA.

Additional evidence of the promise, such as written statements or confirmation by others, will strengthen your claim that the promise was made. However, claims without supporting evidence can still succeed. The Courts also consider the circumstances in which the promise was said to have been made.

Did you perform services for the deceased?

Services can be a variety of things. Cases have recognised things like:

farm work and supervision;
housekeeping and domestic services;
financial advice and assistance with tax returns; or
companionship, affection and emotional support.

If the claimant is a family member, they must show that this kind of support was “something extra” over and above what could normally be expected of a relative.

For example, the Court has found that a stepson’s frequent calls and visits to his stepfather and “odd jobs” around the house were normal in the context of the relationship. By contrast, carrying out significant maintenance and improvements to a house and providing full-time care is usually considered to be beyond what is normally expected.

Were the services related to the promise?

You must show that the promises was made, at least in part, to reward the you for services or work, either performed in the past or expected in the future.

That connection may be expressly stated by the deceased or more commonly inferred from the circumstances. The greater the services or work, the more likely the court is to infer that the promise was made as a reward for the services or work.

All TPA cases are depend by their distinctive facts. We are happy to discuss with you the merits of a potential claim that you have, or that someone else has made against an estate.

For more details on how much you might receive in a successful claim, see this article.

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.

One of an executor’s duties is to obtain probate. But what is probate and how does it work?

Probate is the process by which a Court officially recognises a deceased person’s will and the executors of that will.

Probate is required to ensure that:

The will being relied on is actually the last valid will created by the deceased;
Those applying for probate are the executors named in the will; and
The executors will carry out the deceased’s wishes in line with the law.

Once the High Court grants probate, the executors are legally authorised to deal with the deceased’s property.

Is probate required?

Probate is required for an executor to deal with any asset which exceeds $15,000. If the deceased person did not have any assets in excess of $15,000, the executors do not need to apply for probate. If you are not sure whether an estate is in that category, we are happy to discuss this with you.

If the person died without a will, they are referred to as dying “intestate”. A different process, called seeking letters of administration, is required in that situation.

Have you got the right will?

The first step is to locate the deceased’s last will. A will is often held by the deceased’s lawyer or another entity like the Public Trust.
If you suspect that there is a will but cannot locate it, it is possible to ‘advertise’ for a will. This alerts lawyers and similar entities who will then check their records to see if they hold the will.
There are various legal requirements for making a valid will, including that it be in writing, signed by the will-maker and signed by two or more witnesses.
There is a process by which the Court can validate a document that does not meet the legal requirements but nevertheless sets out the deceased’s testamentary intentions.
A probate application generally requires the original will. However, there are some exceptions to this if the original will has been lost or destroyed.
You must also be confident that the deceased had sufficient mental capacity to make the will.
If you think any of these situations may apply in your situation, please contact us so we can help you work through your options.

Making the application

Once you have the correct will, one or more of the executors named in that will can apply for probate.

You will need to make an affidavit (a statement sworn before a lawyer, registrar or JP) which:

Contains evidence that the will-maker has died (such as a death certificate or an affidavit from someone who went to the funeral);

Contains evidence of where the deceased was living just before they died; and

States that the will is the deceased’s last will.

You may need to file an affidavit that deals with the physical condition of the will, for example if the will has a mark, is crumpled, or has staple holes. The Court will be concerned that the document has been tampered with or previously had something else attached to it. The lawyer who looked after the will can swear an affidavit about the original condition of the will.

Other evidence may be required in some situations, such as where the will-maker had a visual impairment or a shaky signature.

Time frames

Once all the necessary documents have been filed, the High Court will review them. The Court aims to process a standard application within 6-8 weeks, but this may take longer if the Court is busy or the application is complex.

If the Court has any concerns about the application, it may ask for further information or an amended application. This will impact the time it takes to receive probate.

Receiving the grant of probate

Once you have obtained probate, you can proceed to gather in the estate’s assets and act out the will’s directions. For more information about the duties of an executor, see this article.

The grant of probate is important for starting off the timeframe for potential claimants to bring various claims against the estate, such as those under the Family Protection Act or the Property (Relationships) Act, testamentary promises claims and claims by creditors.

We have assisted many people obtain probate and to manage their responsibilities as executors and are happy to talk with you about how we could help you.

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 on 021 761 292 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.

On 30 June 2020, the long-awaited Privacy Bill received Royal Assent, with the changes coming into effect on 1 December 2020.

Privacy Commissioner John Edwards has said “The new Privacy Act provides a modernised framework to better protect New Zealanders’ privacy rights in today’s environment.”

Some of the key changes include:

• All agencies will be required to report serious privacy breaches to the Office of the Privacy Commissioner. If the breach is likely to cause serious harm, the people affected must also be informed. This is consistent with international best practice.

• If an agency uses service providers based outside New Zealand, they will need to make sure the providers meet New Zealand privacy laws.

• Criminal offences will be introduced. An agency could be fined up to $10,000 for misleading an agency about someone’s personal information and/or intentionally destroying requested personal information.

• The Privacy Commissioner will have the power to make binding decisions when someone requests access to their personal information. These decisions may be appealed to the Human Rights Tribunal.

• International digital platforms that obtain New Zealanders’ personal information through business in New Zealand must comply with New Zealand privacy law, regardless of where the servers are based.

• The Privacy Commissioner will have the power to issue compliance notices. Non-compliance with the notice could result in a fine of up to $10,000.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. If you think your privacy policy is insufficient (or non-existent!), we would strongly encourage you to get in touch with us. Contact Steven Moe at StevenMoe@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 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.

The High Court decision in Lee v IAG[1] provides clarification both on what measure of indemnity should be used, and how to calculate it.

An ‘indemnity’ policy is short hand for a policy that obliges an insurer to pay the insured enough to put them back in the position they were in before the loss happened (old for old basis). The occurrence of the peril (like a fire or earthquake) puts an obligation on the insurer. When do they have to pay? In an indemnity policy, the payment trigger is the happening of an insured event. This is unlike ‘replacement’ policies. In these policies, only once the insured has incurred the cost of repair must the insurer reimburse.

So, what does it mean to be indemnified? What does it mean to be put back into the position you were in before the loss happened?

As with all contractual relationships, the starting point is the contract itself. Some indemnity policies explain how the indemnity is to be calculated.

But what if the contract does not explain the measure and says “We will indemnify you for any insured loss”?

Fortunately, we have the benefit of centuries of common law authorities to guide us. It is ancient law that where an indemnity policy is silent on the appropriate measure, the indemnity is a question of fact. The question will be answered with particular regard to the nature and intentions of the insured party and the purpose served by the insured property.[2]

Lee v IAG concerned a three-story commercial building on Manchester Street. IAG originally paid $672,750 being its estimate of the ‘market indemnity value’.[3] By the time the proceeding came to Court, IAG had accepted that the appropriate measure of indemnity was actually the “estimated cost of restoring [the] business assets as nearly as possible to the same condition they were in immediately before the loss or damage happened using current materials and methods.”

The question before the Court was how that ‘estimated cost’ was to be calculated. The Court was asked to give guidance about the extent to which betterment should apply. The Court concluded that the estimated cost is found by allowing to restore “the property to the same condition as it was before the event that caused the damage or loss, and deducting for any betterment to the insured because the restored building in whole or in part be in new condition rather than old.”[4]

The critical point is that betterment should be deducted by reference to the extent which the restored building is in a better physical condition.

This requires a qualitative comparison between what was there at the time of loss and what will be put back. For example, if a brick wall collapses, the replacement of it with a new brick wall, while ‘new’ may not necessarily be any better than the previous wall; in such a case, it may not be appropriate to make a deduction for betterment.

By contrast, if the same wall being replaced previously had old, decaying lime mortar that was now being replaced with new cement, the new mortar is better than the old and would justify a better deduction.

The case makes four key points:

Reduction in market value is not necessarily the correct measure of ‘indemnity’;
When the indemnity is to be calculated by reference to estimated building costs, betterment will only apply to parts of the repair that leave the building better off than it was;
Assessing whether a repair leaves the building ‘better’ is a qualitative exercise, made by evaluating the extent to which new parts of the building are any better than the parts of the building they are replacing.
It follows that allowing for secondhand materials may obviate the need for deducting for betterment.

Should you need any assistance with these, or with any other Dispute matters, please contact Paul Cowey at Parry Field Lawyers (+64 3 348 8480).

[1] Lee & Or v IAG New Zealand Limited [2018] Llyod’s Rep. IR 345

[2] Earthquake Commission v Insurance Council of New Zealand [2015] 2 NZLR 381 at [109];

Reynolds v Phoenix Insurance Co Limited [1978] 2 Llyod’s Rep 440 (QB) at 451.

[3] Lee & Or v IAG New Zealand Limited [2018] Llyod’s Rep. IR 345 at [4].

[4] At [54]

How do you keep safe if you are overseas but buying land in New Zealand?

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By Steven Moe (Partner) and Hannah Carey (Special Counsel) at Parry Field Lawyers

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