Yan v Mainzeal Property and Construction Ltd (in liq)

IN THE SUPREME COURT OF NEW ZEALAND

I TE KŌTI MANA NUI O AOTEAROA

SC 48/2021
SC 52/2021
[2023] NZSC 113

BETWEEN	RICHARD CILIANG YAN First Appellant PETER GOMM Second Appellant JENNIFER MARY SHIPLEY Third Appellant CLIVE WILLIAM CHARLES TILBY Fourth Appellant
AND	MAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN LIQUIDATION) First Respondent ANDREW JAMES BETHELL AND ANDREW MCKAY Second Respondents

Hearing: Further Submissions:	7–11 March 2022 22 November 2022 and 2 March 2023
Court:	Winkelmann CJ, William Young, Glazebrook, O’Regan and Ellen France JJ
Counsel:	D J Chisholm KC, T P Mullins and T Hu for Mr Yan J E Hodder KC, M D Arthur and J Marcetic for Mr Gomm, Dame Jennifer Shipley and Mr Tilby M D O’Brien KC, Z G Kennedy and M D Pascariu for Mainzeal Property and Construction Ltd (in liq) and Messrs Bethell and McKay
Judgment:	25 August 2023

JUDGMENT OF THE COURT

A The appeals by the directors are dismissed.
BThe cross-appeal by the liquidators is allowed to the extent that in lieu of the remittal of the proceedings back to the High Court, we order the directors to contribute to the assets of Mainzeal $39.8 million together with interest at prescribed rates since 28 February 2013 with the liabilities of Dame Jennifer Shipley and Messrs Tilby and Gomm each limited to $6.6 million and interest.
CThe directors are to pay costs in the sum of $65,000 together with reasonable disbursements.

____________________________________________________________________

REASONS

(Given by Winkelmann CJ and William Young J)

Table of Contents

Para No
Introduction	[1]
Factual background	[12]
Takeover by interests associated with Mr Richard Yan	[13]
Relationship between Mainzeal and its controlling shareholders	[15]
Funds extracted from Mainzeal for use in China	[20]
Trading 2005–2012	[24]
Balance sheet solvency/insolvency	[31]
Promises of shareholder support	[36]
Mainzeal’s strategy for dealing with the irrecoverable loans	[45]
Window dressing	[50]
Events in 2010	[51]
The position as at 31 January 2011	[69]
Events February 2011–February 2013	[73]
The High Court’s approach	[100]
The Court of Appeal’s approach	[106]
Legal context and history	[111]
Preliminaries	[112]
The 1993 Act and relevant principles and features of company law	[115]
The statutory antecedents of ss 135, 136 and 301	[126]
Judicial recognition of a requirement for directors to have regard to the interests of creditors	[142]
The report and recommendations of the Law Commission	[144]
The Parliamentary process in relation to the 1993 Act	[149]
Section 301 as enacted	[155]
Recent case law	[170]
Debut Homes	[170]
BTI 2014 LLC v Sequana SA	[178]
Stanford International Bank Ltd (in liq) v HSBC Bank Plc	[185]
Where we get to	[189]
Liability under s 135	[190]
The directors’ arguments as to how s 135 should be applied	[190]
The liquidators’ arguments as to how s 135 should be applied	[194]
Our approach to the application of s 135: overview	[195]
Fault requirement	[200]
Can directors balance loss on insolvency against risk of loss of trading on?	[212]
Our approach compared to that adopted in Sequana and Stanford	[217]
Did the directors breach s 135?	[219]
Mainzeal’s position in 2010	[221]
Steps taken by the directors to address Mainzeal’s problems	[222]
Reliance by the directors on assurances of support	[226]
Other issues as to governance	[230]
Our conclusions as to breach of s 135	[234]
Liability under s 136	[237]
Approach of the Court of Appeal	[237]
Directors’ argument as to the scope of liability under s 136	[240]
Our approach to the scope of liability under s 136	[242]
The directors’ arguments as to the application of s 136 in this case	[250]
How the case was pleaded and run	[251]
Our approach: the four major projects	[256]
Our approach: all obligations incurred after 5 July 2012	[259]
Implications for the future of our approach to liability under ss 135 and 136	[269]
Measurement of loss in relation to ss 135 and 136: principles and quantification	[274]
The issues	[274]
Our approach to assessing loss	[277]
Practice under s 320 of the 1955 Act (and equivalent legislation)	[278]
Net deterioration and s 135	[280]
Net deterioration or new debt under s 136	[290]
Quantification of loss	[297]
The approach of the Court of Appeal to quantification	[298]
The parties’ contentions	[305]
Our approach to quantifying compensation	[309]
Relief under s 301	[319]
The issue	[319]
The parties’ contentions	[322]
Approach in the lower Courts	[326]
The legal context	[330]
Approach taken under s 321 of the 1955 Act and similar provisions	[330]
Approach taken under s 320 of the 1955 Act	[334]
May a company in liquidation bring proceedings as a plaintiff under ss 135 and 136?	[336]
Authorities as to the scope of the s 301 discretion	[341]
Our approach as to the nature of the discretion	[343]
Application of the discretion in this case	[352]
Summary	[359]
Concluding comments	[376]
Disposition	[377]

Introduction

The issues in this appeal are of fundamental importance to the business community. They involve the scope and application of duties under ss 135 and 136 of the Companies Act 1993 (the 1993 Act) — provisions that address the interests of creditors — and how compensation for breach of these duties should be assessed. These issues arise in the context of the failure of a major New Zealand construction company, Mainzeal Property and Construction Ltd (Mainzeal), which was placed in receivership and liquidation in February 2013.[1] By the conclusion of the receivership, the receivers had paid the secured creditor, Bank of New Zealand (BNZ), and preferential creditors in full. However, the shortfall owed to unsecured creditors in the liquidation is approximately $110 million.
[1]Receivers were appointed on 6 February 2013. Liquidation commenced on 28 February 2013.
For many years Mainzeal had traded in a difficult industry while balance sheet insolvent. From 2008 it generated, at best, limited operating profits but, more usually, losses. In permitting Mainzeal to continue to trade in those circumstances, the directors relied substantially on assurances of support from associated companies. A central focus of this appeal is the directors’ reliance on these assurances of support as a primary basis for continued trading.
The liquidators brought claims alleging, amongst other things, that from January 2011, Mr Richard Yan, Dame Jenny Shipley, and Messrs Clive Tilby and Peter Gomm, as directors of Mainzeal (the directors),[2] had agreed to:
(a)the business of the company being carried on in a manner likely to create a substantial risk of serious loss to creditors, in breach of s 135 of the 1993 Act; and
(b)the company incurring obligations to creditors when they did not believe on reasonable grounds that the company would be able to perform those obligations when required to do so, in breach of s 136 of the 1993 Act.
[2]They were directors of Mainzeal throughout the time critical to the ss 135 and 136 claims.
In the High Court, Cooke J dismissed the s 136 claim but allowed the s 135 claim, concluding that the directors had been in breach of that section by no later than 31 January 2011.[3] For that breach, he awarded compensation of $36 million, representing approximately one third of the $110 million owed to unsecured creditors.
[3]Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255 [HC judgment] at [292].
The directors appealed to the Court of Appeal.[4] The liquidators cross‑appealed, seeking a larger award of compensation under s 135, a finding that the directors had also breached s 136 and compensation for that breach.
[4]Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99, [2021] 3 NZLR 598 (Kós P, Miller and Goddard JJ) [CA judgment].
As to the s 135 claim, the Court of Appeal agreed with Cooke J that the directors of Mainzeal breached s 135 of the 1993 Act by no later than 31 January 2011.[5] However, for reasons to which we will come shortly, it held that the liquidators had not established losses for which compensation could be awarded under s 135.[6]
[5]At [452].
[6]At [516].
On the liquidators’ cross-appeal, the Court of Appeal held that the directors breached s 136 by entering into (a) obligations incurred in respect of four major projects entered into after 31 January 2011 (the four major projects) and (b) all obligations incurred from 5 July 2012 onwards.[7] It held that for those breaches of s 136, compensation should be fixed by reference to the amount of the debts incurred after the relevant breach dates, to the extent that those debts remain unsatisfied after allowing for any dividends in the liquidation.[8] It remitted the proceedings to the High Court to determine the amount of the relevant new debt and to decide whether, in the exercise of a discretion conferred by s 301 of the 1993 Act, that amount or a lesser sum should be awarded as compensation.[9]
[7]At [480].
[8]At [531] and [536].
[9]At [538]–[540].
There are appeals and a cross-appeal to this Court against the Court of Appeal judgment.[10] The submissions for Mr Yan were presented by Messrs Chisholm KC and Mullins. Submissions for the remaining directors were advanced by Mr Hodder KC. Broadly speaking, where the submissions were sufficiently aligned we refer to them as being made collectively by the directors.
[10] Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZSC 109.
The directors seek to reverse the findings of liability under ss 135 and 136 and argue that, in any event, the liquidators did not establish losses for which compensation may be awarded. The liquidators argue that the Court of Appeal findings that the directors had breached ss 135 and 136, and its general approach to compensation for breach of the latter section, should be upheld. They also seek compensation for breach of s 135. The liquidators ask that this Court fix compensation in respect of both claims rather than referring the issue back to the High Court.
The theme that runs through the arguments as to the application of ss 135, 136 and 301 of the 1993 Act is the extent to which, and how, they provide protection for creditors. The directors say that these provisions should be interpreted as protecting the interests of the company as a going concern and as primarily directed to preventing directors taking illegitimate risks. They maintain that applying the provisions in ways that focus on the interests of creditors is inimical to key premises that underpin the 1993 Act: limited liability, that directors’ duties are owed to the company, and respect for the business judgment of directors around assessment of risk and reward. In contrast, the liquidators say that the purposes of ss 135, 136 and 301 extend to protecting the interests of creditors, particularly in situations of questionable (or worse) solvency and that such purposes are material to decisions as to liability and assessment of compensation.
A substantial part of this judgment addresses the provenance of ss 135, 136 and 301 and the company law context in which they operate. In that part we discuss the statutory antecedents of these provisions, the associated case law, the reform proposals developed by the Law Commission in the late 1980s and the rather confused legislative history of the 1993 Act. We group all this together under the heading “Legal context and history”.[11] But, before we engage in that exercise, it is necessary to attend to preliminary matters — the factual background and the approaches of the High Court and Court of Appeal.

Factual background

[11]Beginning at [111].

Mainzeal was incorporated in 1987. At that time, Mainzeal’s holding company, Mainzeal Group Ltd (Mainzeal Group), was listed on the New Zealand Stock Exchange. Mainzeal Group had interests in a number of sectors, including, via its subsidiary Mair Astley Holdings Ltd, the leather industry. Its construction activities were carried on through Mainzeal.

Takeover by interests associated with Mr Richard Yan

In 1995 a majority interest in Mainzeal Group was acquired by an investment consortium (REH Capital Ltd) which was represented and largely controlled by Mr Yan. Mr John Walker, a New York lawyer, was also involved in this investment consortium, at least from 2004 onwards.
REH Capital’s investment focus was China where it had, along with other investments, interests in the leather industry. Mr Yan’s primary reason for investing in Mainzeal Group was Mair Astley Holdings’ involvement in the leather industry in New Zealand. The acquisition of Mainzeal (as a wholly‑owned subsidiary of Mainzeal Group) was an incidental consequence of the pursuit of this strategic objective.

Relationship between Mainzeal and its controlling shareholders

In 1996, Mainzeal Group was renamed Richina Pacific Ltd (Richina Pacific) with Mainzeal remaining as a subsidiary. In 2003, as part of a group restructuring, Richina Pacific was removed from the New Zealand Companies Register, while a new company with the same name was registered in Bermuda and listed on the New Zealand Stock Exchange. Mainzeal became a wholly‑owned subsidiary of the Bermuda company. In these reasons, reference to Richina Pacific in relation to events that occurred after 2003 are to that Bermuda company.
Following the restructuring in 2003, the Richina Pacific board decided that Mainzeal should be administered for operational purposes by a separate board of directors. In April 2004, a new Mainzeal board was established. The directors of Mainzeal, who are parties to the appeals and cross-appeal, are:[12]
(a)Dame Jenny Shipley, who was the Chair. She was also appointed to the Richina Pacific board and the board of another associated company. Dame Jenny has had a lengthy career in politics, including service as Prime Minister of New Zealand between 1997 and 1999. After retiring from politics, she has served on the boards of a number of companies.
(b)Mr Tilby, who was appointed as a director of Mainzeal in 2004. Mr Tilby was a consultant with significant governance experience in the construction industry.
(c)Mr Yan, who was a director of Mainzeal in April 2004 but resigned from its board in November 2004. In 2006 he and his family came to live in New Zealand, and in April 2009 he again became a Mainzeal director. Throughout the relevant period, Mr Yan was also a director of Richina Pacific.
(d)Mr Gomm, who started working for Mainzeal as its Chief Operating Officer in May 2007. He became the Chief Executive Officer in April 2009 and a member of the board in June 2009.

In April 2012, Sir Paul Collins became a member of the board. The claim against him that was pursued at trial was dismissed and he is not a party to the present appeals and cross-appeal. He does, however, feature in our narrative of the events that led to the collapse of Mainzeal.

[12]In the period between 2004 and 2009, there were other directors of Mainzeal. But because they were not on the board at the times that are most material to the litigation, they were not defendants in the High Court litigation.

A charter was agreed in 2004 between the Richina Pacific and Mainzeal boards to formalise the relationship between them. Under the charter Richina Pacific would exercise control over dividends to be paid by Mainzeal and the flow of loan funds between Mainzeal and other companies in the Richina Pacific group. It was agreed that if Mainzeal required additional capital, it would have to “compete with other demands from other subsidiaries or from initiatives within the [Richina Pacific] corporate group”.
The Richina Pacific group was restructured in 2006 and 2009:
(a)In 2006, a company that later changed its name to Richina Global Real Estate Ltd (RGREL)[13] was interposed in the ownership structure between Richina Pacific and Mainzeal. Richina Pacific, however, remained Mainzeal’s ultimate parent company.
(b)In 2009, a limited liability partnership, Richina (NZ) LP, acquired RGREL and, through RGREL, Mainzeal. From this point, there was no direct connection between Mainzeal and the companies in the Richina Pacific group which had substantial assets.
[13]For ease of discussion, we will refer to this company as RGREL, even in relation to events that preceded its change of name.
These changes in ownership structure were significant to what later happened. As we come on to discuss, for the purposes of the audit of Mainzeal’s 2008 financial statements, Richina Pacific had provided a letter of support to the board of Mainzeal whereas, after the 2009 restructuring, similar letters came from Richina Pacific (NZ) LP. Unlike Richina Pacific, Richina (NZ) LP had no substantial assets that were independent of Mainzeal. As well, at the time of the 2009 restructuring, Dame Jenny stepped down from the board of Richina Pacific, while remaining Chair of Mainzeal. The effect of this was that she was removed from the discussion and decision‑making that took place at the parent group level.

Funds extracted from Mainzeal for use in China

During the years that ended on 31 December 2004 and 2005 Mainzeal advanced approximately $34.0 million[14] to Richina Pacific subsidiaries, in particular to MLG Limited (MLG). The money received by MLG was transferred to Richina Pacific and, amongst other things, used to fund acquisitions in China.
[14]All figures recorded in this judgment are approximate figures to one decimal point.
There is no hint in documents generated at the time that the funds extracted were not repayable. Indeed, the expectation, as recorded, was that they would be repaid. But, in relation to the money advanced to MLG, there was no corresponding receivable owed by Richina Pacific to MLG. This is because the money MLG received from Mainzeal was paid to Richina Pacific not as an advance, but rather through a buy-back by MLG of shares held in it by Richina Pacific.[15] More generally, MLG did not have sufficient assets to repay the advances from Mainzeal. As well, Chinese exchange controls in place at that time made it difficult for Richina Pacific to remit funds to New Zealand.
[15]MLG bought back shares from Richina Pacific for $19 million. On the basis of the financial statements for MLG for the 2004 and 2005 years, the amount paid appears to have no correlation to MLG’s net assets. No explanation for this transaction was offered.
Mainzeal continued to provide funds to other companies in the wider Richina Pacific group, a pattern that only changed from 1 May 2012 onwards in circumstances we later discuss, from which point in time there was a net flow of funds into Mainzeal from the group.
Interest was not paid to Mainzeal on the related-party advances but rather accrued and was recorded as owing in its financial statements. We also note that Mainzeal’s 2004 financial statements recorded that it had forgiven a debt of $5.5 million owed to it by Richina Pacific. These financial statements also recorded what was described as a capital call option for $5.5 million in favour of Mainzeal, but this apparent option was not mentioned in subsequent financial statements.

Trading 2005–2012

Revenue and operating profit (losses) for Mainzeal between 2005 and 2012 were as follows:

Year	Revenue from construction contracts	Operating profit (loss)
2005	$432.2 million	($12.1 million)
2006	$451.9 million	$12.2 million
2007	$288.7 million	$2.5 million
2008	$270.0 million	($2.4 million)
2009	$378.8 million	$0.9 million
2010	$340.7 million	($1.0 million)
2011	$382.1 million	($10.1 million)
2012	$333.3 million	($13.2 million)

We add some explanation of these figures. Mainzeal’s balance date was 31 December. The figures for 2005 through to 2011 are taken from the statutory accounts. Those for the year ended 31 December 2012 are from management accounts. Between $10–$11 million should be added to the losses of $13.2 million recorded in those management accounts. These were costs funded by Mainzeal but incurred by an associated company for the remediation of leaky buildings for which Mainzeal was liable. For reasons that are not clear, the costs met by Mainzeal were treated in the management accounts as advances to that associated company rather than as expenses. Adding in this figure, losses for the year ending 31 December 2012 were around $24 million and the accounts should have shown this.
It should be noted:
(a)Operating profit (loss) figures are on an EBIT basis and thus exclude interest. These figures provide the best guidance about Mainzeal’s trading position as they do not include the interest that was accruing but not being paid on the related-party advances.
(b)Such operating profits as were generated represented comparatively small percentages of revenue, emphasising that Mainzeal was operating on fine margins.
(c)The substantial profit in 2006 included a one-off apparent revenue boost in excess of $7 million associated with the liquidation of one of Mainzeal’s subsidiaries.
There are three other features of Mainzeal’s trading that warrant mention.
The first is that Mainzeal had a history of not being able to accurately predict its future trading. The expert evidence for the liquidators at trial, which the trial Judge accepted, was that Mainzeal failed to meet its budgeted EBIT figures every year between 2006 and 2012.[16] There was a good deal of evidence at trial as to this. For present purposes it is sufficient to note that Mr Richard Westlake, an expert witness called by the directors as to corporate governance, agreed that, in light of that evidence, it would have been appropriate for the directors to view these forecasts “with a degree of healthy scepticism”.
[16]HC judgment, above n 3, at [243].
Secondly, Mainzeal was able to operate with negative working capital (in other words with a ratio of current assets to current liabilities of less than one). This is because it was able to convert its own progress payment claims into cash more quickly than it was required to pay out on the claims of its subcontractors. That it could do so was, in part, a function of the way the retentions system worked. Retentions are money due under construction contracts (in this case by Mainzeal to subcontractors) but withheld as security for performance by subcontractors of their obligations. Such retentions are customarily paid out at the end of the defects liability period. But, as well, Mainzeal was sometimes able to structure contracts so as to entitle it to payments that were in advance of work carried out.[17] The working capital advantages of this business model were appreciated by Mr Yan, who noted in the Richina Pacific annual report for 2003 that:
Like most construction companies, Mainzeal generates income from two distinct but related sources. First, it generates revenue, and hopefully also profits, by constructing buildings. Second, it generates interest income from the negative working capital it holds in the business. … Mainzeal employs little equity capital and as a result, as long as it makes an overall operating profit, which it has with only one exception in the past 10 years, the return on capital invested in this business can be excellent. With such potentially outstanding economics, the critical factor becomes how do we contain as much as possible the downside risk in this business?

Not explicit in what he said is who was to be protected by containment of the “downside risk”.

[17]The amounts involved were significant. By way of example, as at the end of each month between January and October 2010, Mainzeal’s working capital calculations recorded “construction overclaims” of between $27.4 million and $37.2 million.

A third feature is that, as is common in the building industry, Mainzeal was often required to provide bonds guaranteeing performance of its contractual obligations. Richina Pacific assisted Mainzeal in this regard, either providing guarantees to the parties who did provide the bonds or, on occasion, providing bonds itself. This did not involve Richina Pacific providing funds to Mainzeal, but it did involve it taking on significant contingent liabilities for Mainzeal’s benefit.

Balance sheet solvency/insolvency

Since the loans to related companies were irrecoverable, Mainzeal was balance sheet insolvent from 2005, albeit this was not apparent from its financial statements.[18] We can illustrate this by reference to the financial statements for the year ending 31 December 2008.
[18]HC judgment, above n 3, at [193].
For this year, Mainzeal reported net assets of $21.2 million. This figure, however, reflected an assumption that inter-company debts of approximately some $39.4 million were expected to be recovered in full. If these were disregarded, Mainzeal would have had a balance sheet deficit of approximately $18.2 million. No provision was made in the company’s financial statements to reflect the risk that the advances would not be recovered.
That there was a capital deficiency was recognised in 2008 as part of the work carried out for the 2009 restructuring. PwC, engaged to assist with that restructuring, advised as follows:
The New Zealand Division
15. The New Zealand Division will essentially comprise Mainzeal. Mainzeal’s balance sheet is in a deficit position (excluding its intercompany advance) and it requires the support of the [Richina Pacific] Group to operate in the short term. Consequently, to enable it to operate as a stand‑alone division, it requires a cash injection from the Group. We are advised that this will be [e]ffected through the issue of preference shares …which are intended to qualify for treatment as equity of [RGREL] and the New Zealand Division. Following the investment in preference shares, it is intended that the New Zealand Division will be able to operate independently from the remainder of [Richina Pacific].
16. The issue of preference shares should be undertaken prior to amalgamation and be sufficient to deal with Mainzeal’s deficit.
The proposed arrangements were set out in an investment statement to the public shareholders. This recorded that the value of the preference shares would be USD 13.5 million. When the restructuring scheme was implemented, however, the redeemable preference shares that were issued and recorded in RGREL’s accounts were not called up. This is because Richina Pacific decided not to proceed with the cash injection. PwC had served as auditors of both Richina Pacific and Mainzeal for the 2007 and 2008 financial years and, as we have just noted, had recommended the cash injection. In May 2009 PwC raised concerns in the draft audit report for Richina Pacific about the failure to capitalise Mainzeal and the need for greater transparency on related-party transactions. Although PwC ultimately gave an unqualified audit opinion in relation to the 2008 financial statements, it was then replaced by Ernst & Young as the auditors.
A separate threat to Mainzeal’s solvency came from leaky building claims. By 2009, Mainzeal was facing a number of such claims. These were usually referred to in board papers and minutes as “legacy claims”. They were recognised in the financial statements but only by provisioning calculated by reference to costs that were expected to be incurred in the following year. Although the auditors appear to have been satisfied that this provisioning complied with the relevant accounting standards, it resulted in the financial statements substantially understating the likely liabilities associated with these claims. And as an associated consequence, the financial statements did not reveal the full extent of Mainzeal’s financial vulnerability.

Promises of shareholder support

Fundamental to the willingness of the directors to continue to trade, notwithstanding the poor trading results and the persistent balance sheet insolvency, was their understanding that Mr Yan and the Richina Pacific group of companies would stand behind Mainzeal if required. As we have already mentioned,[19] to a certain extent Richina Pacific did provide support to Mainzeal, most notably in relation to bonds. As well, from May 2012 it advanced nearly $9 million to Mainzeal (in circumstances that we will come to shortly[20]).
[19]See above at [30].
[20]See below at [80].
Assurances of support were provided in connection with Mainzeal’s audited financial statements. Thus, Note 15 to those financial statements for 2008 was in these terms:
15. Continued parent support
The considered view of the Directors of [Mainzeal] is that, after making due enquiry there is a reasonable expectation that the Company has adequate resources to continue operations at existing levels for the next 12 months from the date of the audit report. [Richina Pacific], the ultimate Parent, has undertaken to provide financial assistance to the Company, if necessary, to ensure that the Company will meet its debts as they fall due.

This Note was based on a formal letter of support provided by Richina Pacific for the 2008 year in which Richina Pacific undertook that it would provide sufficient financial assistance, as and when it was needed, to enable Mainzeal to continue operations and fulfil all financial obligations for at least the next 12 months. This letter was addressed to Mainzeal’s directors and was associated with the directors’ formal representations to the auditors that Mainzeal was a going concern. There was no apparent intent to create enforceable obligations owed by Richina Pacific. It was common ground in this proceeding that this and subsequent similar assurances of support were not contractually enforceable.[21]

[21]Such letters of support are often referred to as “letters of comfort”. Whether they give rise to legal obligations depends upon their wording and the context in which they are written: Stephen Todd and Matthew Barber (eds) Law of Contract in New Zealand (Lexis Nexis, 7th ed, Wellington, 2022) at [5.4.4].

In the 2008 financial statements, tax losses that had been earlier recognised as an asset were no longer so recognised. The evidence of Mr Bethell, one of the liquidators, was that this new approach reflected uncertainty as to whether there would be sufficient probable future income to enable the tax losses to be utilised — if tax losses could not be utilised then they could not properly have a value attributed to them in the accounts.
Note 15 to the 2009 financial statements was in similar terms to the corresponding Note to the 2008 financial statements regarding assurances of financial support, save that it referred to a letter of comfort from the shareholders of RGREL. As noted earlier, by this stage RGREL was owned by Richina (NZ) LP. So, it was the latter company that provided the letter of comfort. The wording of that letter was essentially the same as the letter provided in 2008 by Richina Pacific. There was also an “Emphasis of Matter” in the 2009 audit report:
Emphasis of Matter
We draw attention to Note 15 of the financial statements which describes the continued support of the shareholders of [RGREL], the immediate parent company. The financial statements have been prepared on the going concern basis, the validity of which depends upon the continued financial support by the shareholders of the immediate parent company. The financial statements do not include any adjustments that would result should the support of the shareholders of the immediate parent company be discontinued. Our opinion is not qualified in respect of this matter.
The inclusion of this Emphasis of Matter signified that the validity of the going concern assumption depended on continued financial support from shareholders of the immediate parent company. Similar letters of support from Richina (NZ) LP were referred to in subsequent financial statements (that is the financial statements for the 2010 and 2011 years). The audit reports in relation to those financial statements each contained a similar Emphasis of Matter.
Richina (NZ) LP did not have the assets to make good on the support that was promised. So common sense suggests that its letters of support could not provide much assurance that Mainzeal remained a going concern.
Although in their evidence the directors said they relied on the letters of support from Richina (NZ) LP (largely on the basis that these letters implied the support of Richina Pacific), they also placed considerable emphasis on more general and informal assurances of support, said by them to have been given by Messrs Yan and Walker. What we have seen of how Mr Walker dealt with this issue in writing (an example of which is referred to at [60] below) suggests that any indications about support he may have given would have been guarded, or as he might say, expressed in a “lawyerly” way. However, the evidence makes it clear that assurances of support were given by Mr Yan, and sometimes these were expressed in unconditional terms. Very much in issue in the litigation, however, is whether such assurances (whether in the letters of support or informally) as were given could reasonably have been relied on by the directors. This is for reasons associated with:
(a)the practicalities of getting money out of China;
(b)the potential for argument that the assurances were conditional (either explicitly or perhaps by implication) on Mainzeal being profitable and/or a going concern;
(c)the unenforceability of the assurances; and
(d)the steps taken by Richina Pacific to exclude or limit the prospect of legal liability to provide support to Mainzeal (including by way of repayment of debts owed to Mainzeal).
When we come to describe events in 2010 to 2012, we will refer to email correspondence that throws some light on the nature and reliability of such assurances. But at this point we note that the board minutes for the RGREL board meeting on 28 April 2009 (attended by Mr Yan) record:
3.8 Support of Mainzeal by Richina Pacific Limited
[Mr Yan] reaffirmed that the support of Mainzeal is ongoing, however the directive is for Mainzeal to be self-sufficient and to grow to become a much stronger stand-alone viable entity.
This was referred to in a report by Mainzeal to the Richina Pacific board meeting in May 2009 in this way:
The principles of operation now adopted by the Mainzeal senior management team, is that Mainzeal is a standalone business entity which has to be financially self-sufficient from [Richina Pacific]. There is one exception, the need for the [Richina Pacific] Guarantee to support the availability of performance bonds …

Mainzeal’s strategy for dealing with the irrecoverable loans

With the Richina Pacific group apparently unwilling or unable either to procure repayment of the loans from Mainzeal to related parties or to inject further capital in Mainzeal, the Mainzeal board put in place arrangements under which building materials from China would be supplied to Mainzeal with the purchase costs offset against the money owed by MLG. As we understand the evidence, this started in 2009 with supplies coming through King Façade Ltd (King Façade),[22] an associated company, being used for work at Baradene College.
[22]There were in fact two companies referred to as King Façade but for the purposes of our narrative it is not necessary to distinguish between them.
As we come to, these arrangements became more formal at the end of 2011, following a report by Ernst & Young, with:
(a)the restructure of MLG’s debt to Mainzeal, by then of some $33.1 million, so that it no longer accrued interest, and was repayable in 10 years’ time, subject to MLG’s profitability;
(b)Mainzeal assigning the right to receive these repayments to Richina Pacific (China) Investments Ltd (CHC), a substantial member of the Richina Pacific group; and
(c)in exchange, CHC agreeing to supply building materials to Mainzeal under a forward purchase agreement.

A schedule prepared at the time contemplated an effective elimination of the intra‑group debt through the supply of these materials over a three-year period, ending in 2014.

This arrangement dealt with the difficulty of the related-party advances in a way that seemed to step around the foreign exchange restrictions in China. An obligation to pay money to Mainzeal in New Zealand was replaced with an arrangement for the supply of goods.[23]
[23]On the evidence, this agreement was unenforceable under Chinese law. For this reason, the accounting treatment may not have been correct. However, in practice, the agreement was able to be implemented with appropriate approvals being obtained on a transaction-by-transaction basis.
There were, however, as the High Court and Court of Appeal observed, distinct disadvantages to the arrangement.[24] Solvency issues would persist until sufficient materials had been supplied to make good the deficit in Mainzeal’s net asset position. As well, the arrangement tied Mainzeal to a single supplier of building products, with the associated supply and quality risks. While the agreement was reflected in the accounts, with pre-paid goods recorded as an asset replacing the corresponding related-party loans, the value of the agreement depended upon Mainzeal remaining a going concern in need of building materials. There was no right to seek a cash payment in lieu of materials should Mainzeal cease trading. As it happened, there were substantial issues with the materials that were supplied under the agreement, to the point that the supplies appeared to have been of no material financial benefit to Mainzeal given supply delays and product defects. By way of example, in October 2012, Mr Gomm reported to the board an assessment of losses in relation to the goods supplied by King Façade of $6 million, which was approximately the same as the value of the goods that had been offset against the pre-paid goods agreement.
[24]HC judgment, above n 3, at [117]–[118]; and CA judgment, above n 4, at [148]–[150].
As Cooke J pointed out, notwithstanding these arrangements, between December 2006 and December 2012, the related-party receivables (including the value attributed to pre‑paid building materials from 2011) increased from $36.2 million to $60.8 million, at least according to the unaudited management accounts for the year ending 31 December 2012.[25]

Window dressing

[25]HC judgment, above n 3, at [218].

There were three respects in which the accounts of RGREL and Mainzeal were subject to what was described in the judgments below and, in at least one respect, in Mainzeal board papers, as “window dressing”:
(a)In late 2009, it was contemplated that Mainzeal might be required to produce its accounts and those of RGREL to counterparties on major contracts. It was in this context that in October 2009, the directors discussed moving “‘paper equity’ into the NZ division (and out of the China division) which will assist with the technical solvency issues the division currently faces”. This was effected by an agreement under which CHC was to transfer shares in a Chinese entity to RGREL. This transaction was reflected in RGREL’s balance sheet (in the form of an asset described as “land use rights”). But to be effective this transfer required regulatory approval in China, which was never sought. So RGREL’s balance sheet was not, in reality, improved. This transaction was eventually cancelled in October 2012.
(b)Despite Richina Pacific having decided not to capitalise RGREL using the redeemable preference shares mechanism (referred to above at [34]), the subscription agreement for redeemable preference shares between RGREL and Richina Pacific remained in place, albeit that the obligations (to purchase shares if called upon) under it were assigned, eventually, to Richina (NZ) LP. This latter company had no assets independent of RGREL or Mainzeal, with the result that it would not have been able to honour those obligations. Nonetheless, in its financial statements for the 2009, 2010 and 2011 years, RGREL recorded a right to call on the redeemable preference shares.
(c)In the board papers for the Mainzeal board meeting of 19 November 2010 the directors discussed proposals that “[a]ll available cash [be] deposited with Mainzeal at half year and year end for window dressing purposes”. It is no coincidence that $5.3 million by way of apparent repayment of advances was received by Mainzeal on 31 December 2010 with this repayment substantially reversed (by payments back) shortly afterwards. Nor is it a coincidence that the same thing happened at the end of 2011, when $6.4 million was repaid on 31 December 2011, only for it to be in effect reversed by payments the other way shortly afterwards. The significance of this is that in the financial statements for the years ending 31 December 2010 and 2011, the related-party advances were recorded at figures that had been artificially reduced by transactions that took place on the balance date and were then promptly reversed. In her evidence Dame Jenny declined to accept the obvious in relation to these transactions. But the purpose and effect of these transactions is perfectly clear, as Cooke J concluded,[26] and his finding of fact on this issue was not challenged before us.

Events in 2010

[26]At [275].

Around this time the directors began to focus on issues of solvency. Mr Gomm’s report to the board meeting held on 22 January 2010 referred to balance sheet solvency issues in this way:
KPI 8 – Mainzeal Balance Sheet
·Negative circa US$10m.
·The market perception as being driven by competitors and feedback from clients, is that we are totally dependent upon the support of [Richina Pacific]. Any matter that is perceived to be a negative outcome for [Richina Pacific] is also a major issue for Mainzeal. The health of both entities is very closely linked.
·The plans to strengthen the Mainzeal balance sheet are welcomed, and from a strategic point of view, the communication to the market needs to be managed to achieve positive support.

The reference to “[n]egative circa US$10m” is to the net asset position if related-party loans were disregarded.

Starting in February 2010, and continuing throughout the rest of the year, the board papers and minutes of Mainzeal and the communications from Mainzeal (predominantly, but not only, originating with Dame Jenny) to Messrs Yan and Walker reveal considerable anxiety amongst Mainzeal directors and Mr Reegan Pearce (Mainzeal’s Chief Financial Officer) about:
(a)the negative balance sheet;
(b)movements of cash between Mainzeal and other Richina Pacific group companies; and
(c)public perceptions as to the substantiality of Richina Pacific and Mainzeal.
In February 2010, the board resolved that a schedule of cash movements between Richina Pacific group companies and Mainzeal, including dates and explanations for those movements, should be tabled for each board meeting. The minutes of that board meeting also record a question as to whose “overall duty” it was to make sure the New Zealand division was solvent “going forward”.
Dame Jenny followed the meeting up with an email (of 19 February 2010) to Messrs Yan and Walker. She said that Mainzeal needed to present accounts to confirm financial strength and recorded her understanding that Mainzeal still enjoyed the support of Richina Pacific for bonding purposes. She reported the directors’ resolution as to cash movements and recorded her expectation that such movements were occurring in accordance with an agreed authorisation and governance framework. She continued:
Mainzeal Directors wish to clarify [whose] overall duty is it to make sure that the NZ division is operating while solvent going forward on who are the Directors who carry this obligation? Both [Mr Tilby] and I feel we need a full understanding of this in terms of meeting our legal obligations.
…
We would appreciate it if as part of the finalizing of the separation of the NZ interests from the China interests that the matters above can be cleared up in writing so that we are clear about how inter company arrangements will occur and who has director responsibilities in each of these cases.
No substantive response to this email having been received, Dame Jenny emailed Mr Walker again on 27 February 2010, emphasising that the issues were “very important” and commenting that she was “personally not comfortable with things as they are”.
These issues raised by Dame Jenny were still outstanding as at 12 August 2010, when Mainzeal directors were advised of requests for the transfer of $1.2 million to Richina Pacific. This request was explained by Mr Yan in an email to the other directors of the same day:
We are simply managing the group’s cash now on a [centralised] basis and will formalize this arrangement by working with BNZ to have group treasury within this coming month so we will permanently eliminate any “related party” issues going forward and all cash will be managed by [Richina Pacific], rather [than] Mainzeal although [Richina Pacific] will [guarantee] sufficient cash for all its operating businesses.
This request prompted emails of 13 August 2010 from Dame Jenny and Mr Tilby to Mr Yan recording concerns. Mr Yan responded in this way:
Mainzeal has always operated and [continues] to operate under a shareholder/parent [guarantee] and all the cash are shareholders’ cash. There is no issue of independent director liability as Mainzeal is a wholly owned subsidiary and NOT an independent company as such. Under the [guarantee], the group has always been willing and so far able and will only be more able going forward to [guarantee] all its obligations.
As I have repeatedly explained in the past [Richina Pacific] does have issues of taking money out of China but it did large amounts last year when Mainzeal needed them so now Mainzeal [has] the cash and we have found a solution for taking cash out through King Façade, we are simply dealing with a time issue.
Again, there are no independence issues here as it is ultimately the shareholders who are on the hook for everything. Mainzeal is in no way compromised and [Richina Pacific] has always supported it to the full extent even during its more dire situations.

The reference to King Façade is to the prepaid goods arrangement discussed earlier. The assertion that “large amounts” of money had been provided by Richina Pacific to Mainzeal is simply wrong. Between 2006 and May 2012, the overall flow of funds between Mainzeal and Richina Pacific group companies was the other way and during the 2009 financial (and calendar) year, related-party advances increased.

Mr Yan’s email revealed several troubling misunderstandings. First, Mainzeal was at the time using creditors’ funds as working capital and was balance sheet insolvent, so the cash being withdrawn could not sensibly be regarded as “shareholders’ cash”. Secondly, Mainzeal was a company in its own right, and its directors had duties under the 1993 Act, including under ss 135 and 136. Thirdly, there was no guarantee which placed shareholders “on the hook for everything”.
The cashflow register provided at the board’s next meeting recorded that the requested advance of $1.2 million had been made on 16 August 2010.
On 26 August 2010 Mr Walker provided a more general response to the directors’ concerns. He described a proposed structure for the wider group. He also confirmed that, if it was necessary to do so to win business, Mainzeal could make available audited financial statements of “the relevant entities” (which we take to be Mainzeal and RGREL) on a confidential basis. The email dealt, in some detail, with inter‑company advances. It then went on to say:[27]
… At appropriate and convenient occasions, [Mr] Wallace [a co-director of Richina Pacific] and I would like to have conversations with the two of you to learn first‑hand your views regarding Mainzeal and its businesses and management. However, we believe that it is the role and responsibility of the Mainzeal Board to make going concern, solvency and similar determinations with respect to Mainzeal.
I hope the above is a helpful step toward addressing the issues you have raised. Of course, I am happy to discuss any of this further with you. [Richina Pacific’s] corporate structure continues to evolve, and it is most important that appropriate governance procedures accompany the restructuring.
[27]Emphasis added.
The response, contradictory in several respects to that of Mr Yan, provided no comfort that there would be any more formalised support from Richina Pacific, and made clear that it was for the Mainzeal directors to attend to insolvency and going concern issues. The Mainzeal minutes for a board meeting on the same date recorded that Messrs Yan and Walker would work further on the paper recording the governance arrangements.
On 5 October 2010 a series of resolutions and letters that had been prepared by Richina Pacific staff were sent to Messrs Walker and Yan. They included promises of support from CHC to RGREL and from RGREL to Mainzeal, and a resolution of the Mainzeal directors accepting the support that was offered. These documents were not related to an audit process and are expressed in language that is redolent of contractual commitment. If completed, they would have provided a substantial basis for legal argument that CHC and RGREL were contractually committed to provide financial support to Mainzeal, commitments that would have been significant as CHC had substantial assets. These documents were premised on centralised management and control of Mainzeal’s assets and business.
The next Mainzeal board meeting took place on 13 October 2010. The minutes record a discussion about governance as follows:[28]
[28]The initials on the right-hand column refer to Messrs Reegan Pearce, Richard Yan and Peter Gomm.

Governance ([Mr Yan] on teleconference)

-   [Mr Yan] discussed his views on the governance issues and the fact that nothing has changed.

…

-   Board agreed that the governance structure had to be formalised prior to Christmas in conjunction with [RGREL].

-   [Mr Pearce, the CFO] to track down the original Mainzeal Board charter to review and update as necessary

-   Authority limits need to be circulated as a refresher.

RP/RY/PG

RP

Following that meeting, on 24 October 2010, Dame Jenny emailed Messrs Yan and Walker, identifying certain matters that “need attention”. The first was that the “[g]overnance relationship needs to be addressed and finalised prior to Christmas”. In response, Mr Walker said this was being worked on, and he attached the draft resolutions and letters to which we have just referred at [62]. There was an issue at trial as to whether the proposed letters and supporting resolutions were ever executed. Both the High Court and Court of Appeal found that they were not, and that this reflected a deliberate decision by Richina Pacific and Messrs Yan and Walker.[29] This finding of fact was not challenged before us and we adopt it.
[29]HC judgment, above n 3, at [98]–[99]; and CA judgment, above n 4, at [126].
The failure to address governance issues and directors’ obligations under the new structure was, by this time, causing Mr Pearce significant concern. In an email to Mr Walker following the board meeting on 13 October 2010, Mr Pearce raised several issues, including in relation to Mr Yan’s comment that “nothing has changed”. Mr Pearce said:
The main point that continues to require agreement is what exactly are the directors obligations and duties under the new structure that you have previously addressed in an email.
…
As you know governance is all about transparency and my fear … is that if this is not adequately sorted out and agreed then [Dame Jenny] and [Mr Tilby] may ultimately resign which [Mr Gomm] and I certainly don’t want to happen.

He went on to note that it would be “interesting” whether Ernst & Young would regard the related-party balances as impaired “should we not be able to [adequately convince] them that they have the ability to be repaid”. He also reported that Mr Yan wished to handle this issue himself with Ernst & Young during the audit and did not want others involved.

When Mr Pearce did not receive a substantive response from Mr Walker, he followed up in a further email dated 12 November 2010. He said that he remained “deeply concerned about the activities that are happening down here”. Referring to continuing cashflows out of Mainzeal and the lack of control over these, he said, “as CFO this is alarm bell material for me” and “I know this is blunt but I find the whole thing nothing short of frightening”.
The board papers for the Mainzeal board meeting on 10 December 2010 provide context for Mr Pearce’s concerns. These record that as at 31 October 2010, Mainzeal had working capital of negative $29 million and negative equity of $24.4 million and that the overall trends in respect of each of these had been worsening since the beginning of the calendar year.
Mr Walker responded on 13 November 2010. He said that it was “important for the Mainzeal Board to have a full and frank discussion with [Mr Yan] regarding the concerns from Mainzeal’s perspective, including from the perspective of Directors’ obligations”. He also said that he had discussed the position with Mr Yan, who had agreed the issue needed to be taken seriously.

The position as at 31 January 2011

In late 2010, Mainzeal sought the advice of Ernst & Young as to governance issues and the directors’ responsibilities following the 2009 restructuring (discussed at [18]–[19] above). A draft report was provided in January 2011.
In the draft report, Ernst & Young highlighted the lack of transparency in the relationship between Mainzeal and other group companies and in Mainzeal’s balance sheet, the effect on Mainzeal of intra-group cash transfers, and the absence of an audit committee. It set out the following “Specific high level findings”:
·The independent directors of [Mainzeal] are not directors of the parent company, [RGREL] (or other NZ group companies). There are no independent directors at the parent company level. This may raise the perception that the independent directors of [Mainzeal] are unable to exercise any effective influence [on] the operations of [Mainzeal], its structure or its balance sheet due to the influence of its shareholder. This may be exacerbated by the external perception that the current group structure is “too hard to understand”.
Under the constitution of [Mainzeal], directors may, when exercising powers or performing duties as a director, act in a manner he or she thinks is in the best interests of the parent, even though it may not be in the best interests of [Mainzeal]. As the independent directors are not directors of the parent or any other group company, this may place them in a position where they are not able to independently assess what is in the best interests of the parent and therefore may be at risk of being compromised in their actions.
Recommendation: Consider the structure of the NZ Group ([RGREL] group) thereby enabling all NZ operations to be transparent to the independent directors. This would enable all NZ operations to be viewed externally in a more holistic manner.
·All assets of [Mainzeal] and the NZ Group are not independently verifiable or transparent. The NZ Group, through [Mainzeal], has significant related party loans with a sister company, MLG. The auditor’s report for the group and for [Mainzeal] has an emphasis of matter regarding future parent company support, primarily due to the inability to independently verify the collectability of these loans. In this regard we note that MLG is not audited.
Recommendation: Consider the financial structure of the NZ Group, bringing all assets under the control of the audited group. This may require a review of the mechanism utilised for transferring cash reserves via the centralised treasury, i.e. utilisation of dividend payments rather than inter-company transfers.
·The above related party loans have arisen due to inter-group cash transfers. Beyond the immediate NZ Group there is no clear visibility of these transfers. We understand that these loans arise through the operation of a centralised treasury function. The circumstances set out above arise due to the manner of the operation of this function, i.e. once the monies leave [RGREL] group all visibility is lost.
…
·The current board charter for [Mainzeal] was last updated in February, 2004. At this time the group structure was different to that which now exists. The continued relevance of the charter needs to be considered.
Recommendation: Undertake a review of the [Mainzeal] board charter in conjunction with a review of the group structure.
·There is currently no audit committee specifically constituted to consider financial matters, particularly the annual financial statements of [Mainzeal] or the NZ Group. Whilst the board fulfils the role of the committee, the operation of a specific committee in our view raises the significance of the process of considering the financial statements. Further, the [Mainzeal] independent directors do not have formal visibility of the group financial statements. This could have an impact where a [Mainzeal] customer wishes to consider the NZ Group financial position.
Recommendation: Constitute a formal audit committee at a NZ Group level. Note this committee may operate as an extension of board procedure, however it should be a formal process operating under a specific audit committee charter.
·No formal risk management framework is in place for [Mainzeal] (or the NZ Group). We understand that plans are in place [to] formalise a risk committee for projects.
Recommendation: The plans for the risk committee for projects should be continued with. Further, oversight of risk at a board level should be considered.

As it happened, none of these recommendations was implemented.

The report went on:
The centralised treasury function originates from [Mainzeal]. Transfers of cash occur for the most part from [Mainzeal] to other group and cross-group companies (where the ultimate ownership is not clear and the ultimate utilisation of the cash is not known). The issue however is not with the transfer or the authorisation of the transfer. The issue is that the resultant receivable held by [Mainzeal] is NOT collectible when demanded.
The report also set out a Mainzeal “self-assessment” prepared by the CEO and CFO in relation to certain matters, including Mainzeal’s relationship with its parent companies. It records “[c]onfusion as to what is the ‘ultimate’ parent company”. In response to a question about the financial strength and capacity of the parent company, the self-assessment notes that the “[p]arent company relies on sister company in China” and that the strength of parent company support is “[c]onditional on getting funds out of China”.

Events February 2011–February 2013

Mainzeal’s audited financial statements for the year ending 31 December 2010 were signed off by the directors, and by Ernst & Young as auditors, in April 2011. The financial statements recorded an operating loss of $1 million. They also recorded a profit before tax of $1.8 million after taking into account the accrued and capitalised interest of $2.8 million on inter-company loans. Excluding that interest accrual, the company made a loss.
The financial statements recorded net assets of some $26.3 million. Receivables of some $44.6 million included debts of $30 million owed by MLG and $12 million owed by RGREL. If the obligations owed by related companies are disregarded, there was a deficit in shareholder funds of approximately $18.3 million. As was the case with the financial statements for the 2009 year, an Emphasis of Matter in the audit report made it clear that the going concern assumption depended on continuation of shareholder support.
In the email to Mr Walker referred to at [65] above, Mr Pearce recorded Mr Yan’s indication that he alone would deal with the auditors about whether the related parties advances were impaired. Mr Yan addressed this issue in a representation letter of 28 April 2011 to the auditors on behalf of Mainzeal’s directors in which he gave an unconditional assurance that “[a]ll accounts receivable … are properly described in the financial statements”, are “recorded at their net realisable value” and that “[a]dequate provision [had] been made for uncollectible debts”. It is difficult to reconcile that assurance with:
(a)the January 2011 draft Ernst & Young report having noted three months earlier that the “receivable” held by Mainzeal resulting from transfers of cash to related companies “is NOT collectible when demanded”; and
(b)an Ernst & Young draft report of 15 July 2011, around three months later, recording that MLG did “not currently have sufficient available funds to repay” the money it owed Mainzeal were it to be called upon to do so.
From late 2011 to late 2012, Mainzeal entered into the four major projects, referred to above at [7], and which we further discuss in relation to the s 136 claim. These four major projects were:
(a)the Wigram Museum contract, entered into in November 2011;
(b)the Manukau Institute of Technology contract, entered into in February 2012;
(c)the ANZ Tory Street contract, entered into around October 2012; and
(d)the Ministry of Justice Manukau Precinct contract, entered into in November 2012.

The liquidators challenged neither the Court of Appeal’s conclusion that liquidation at breach date was the appropriate counterfactual nor its finding that a net deterioration from 31 January 2011 to the date of liquidation had not been proved. Accordingly, the liquidators are not entitled to an award of compensation in respect of the established breach of s 135 ([289]).
The directors also acted in breach of s 136 in respect of:
(a)the four major projects entered into by the Mainzeal after 31 January 2011, as these projects entailed Mainzeal taking on medium- to long-term obligations, and by 31 January 2011 the directors did not have reasonable grounds to believe that Mainzeal would, in the medium to long term, be able to pay its debts ([256]–[258]); and
(b)all obligations incurred after 5 July 2012 ([259]–[268]).
As to quantification of loss, the liquidators have made concessions that adequately addressed all factual uncertainties to the point that we are satisfied that it is more likely than not that the losses for which compensation can be awarded exceed the amount now claimed by the liquidators ([309]–[317]). Taking into account those concessions, we fix the loss calculated on a new debt basis at $39.8 million ([318]).
Treating culpability as the critical factor, the Court has directed the directors to pay compensation of $39.8 million together with interest apportioned on the basis that Mr Yan is responsible for the entire amount, with the liability of the other directors limited to $6.6 million and interest each ([358]).

Concluding comments

There is a tension between the purpose of s 301 and its text as to the ability of creditors to obtain direct relief. We have resolved this tension with an interpretation that gives priority to its purpose because (a) that purpose is clear and (b) the statutory language, if construed literally, makes no sense. There remains a more general incoherence in relation to ss 135, 136 and 301 as to distribution of the proceeds of a successful claim. In this case, the compensation awarded will be shared between all creditors and not merely those whose debts were taken into account in the new debt calculation. The problems just highlighted are not the only ones that have emerged from our consideration of the present case and we endorse the view expressed by the Court of Appeal that a review of the relevant provisions would be appropriate.

Disposition

The orders of the Court are:
(a)The appeals by the directors are dismissed.
(b)The cross-appeal by the liquidators is allowed to the extent that in lieu of the remittal of the proceedings back to the High Court, we order the directors to contribute to the assets of Mainzeal $39.8 million together with interest at prescribed rates since 28 February 2013 with the liabilities of Dame Jennifer Shipley and Messrs Tilby and Gomm each limited to $6.6 million and interest.
(c)The directors must pay costs to the liquidators of $65,000 plus usual disbursements.

Solicitors:
LeeSalmonLong, Auckland for Mr Yan
Chapman Tripp, Auckland for Dame Jennifer Shipley and Messrs Tilby and Gomm
MinterEllisonRuddWatts, Auckland for Mainzeal Property and Construction Ltd (in liq) and Messrs Bethell and McKay

at [55]–[57].

[2023] NZSC 113

25 August 2023