Richard Ciliang Yan v Mainzeal Property and Construction Ltd (in Liquidation)

• Jurisdiction: New Zealand
• Judge: Winkelmann CJ,William Young J
• Judgment Date: 25 August 2023
• Neutral Citation: [2023] NZSC 113
• Court: Supreme Court
• Docket Number: SC 48/2021

[2023] NZSC 113

IN THE SUPREME COURT OF NEW ZEALAND

I TE KŌTI MANA NUI O AOTEAROA

Court: Winkelmann CJ, William Young, Glazebrook, O'Regan and Ellen France JJ

SC 48/2021

SC 52/2021

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

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

Companies — appeal against a finding the appellants had breached their directors duties in relation to reckless trading and incurring obligations — how compensation for breach of these duties should be assessed — Companies Act 1993

• 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 are to pay costs in the sum of $65,000 together with reasonable disbursements.

JUDGMENT OF THE COURT

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

1 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.

2 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.

3 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.

4 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.

5 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.

6 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

7 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

8 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.

9 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...