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

JurisdictionNew Zealand
JudgeGoddard J
Judgment Date31 March 2021
Neutral Citation[2021] NZCA 99
CourtCourt of Appeal
Docket NumberCA113/2019 CA119/2019
Date31 March 2021
Between
Richard Ciliang Yan
Appellant
and
Mainzeal Property and Construction Limited (In Liquidation)
First Respondent
King Façade Limited (Previously Known as Richina Land Limited) (In Liquidation)
Second Respondent
Mainzeal Group Limited (In Liquidation)
Third Respondent
Andrew James Bethell and Brian Mayo-Smith
Fourth Respondents
Peter Gomm
Fifth Respondent
Jennifer Mary Shipley
Sixth Respondent
Clive William Charles Tilby
Seventh Respondent
Paul David Collins
Eighth Respondent
Richina Global Real Estate Limited (In Liquidation)
Ninth Respondent
Isola Vineyards Limited (Previously Known as Waiheke Vineyards Limited) (In Liquidation)
Tenth Respondent
Between
Peter Gomm
First Appellant
Jennifer Mary Shipley
Second Appellant
Clive William Charles Tilby
Third Appellant
and
Mainzeal Property and Construction Limited (In Liquidation)
First Respondent
Andrew James Bethell and Brian Mayo-Smith
Second Respondents
Richard Ciliang Yan
Third Respondent

[2021] NZCA 99

Court:

Kós P, Miller and Goddard JJ

CA113/2019

CA373/2019

CA119/2019

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Company, Insolvency — appeal by the directors of a High Court decision which held they had engaged in reckless trading in breach of their directors duties and award of NZD $36 million in compensation — cross-appeal by the liquidators who sought an increase in compensation and an the order the directors had also breached their duties in relation to obligations — major construction company — approach to the quantum of compensation for reckless trading — net deterioration approach — new debt approach — Companies Act 1993

Counsel:

D J Chisholm QC, T P Mullins and C I Hadlee for Appellant in CA113/2019 and CA373/2019 and Third Respondent in CA119/2019

M D O'Brien QC, Z G Kennedy and M D Pascariu for First to Fourth Respondents in CA113/2019 and CA373/2019 and First and Second Respondents in CA119/2019

J E Hodder QC, M D Arthur and J Marcetic for Fifth to Tenth Respondents in CA113/2019 and CA373/2019 and First to Third Appellants in CA119/2019

  • A The appellants' application in CA113/2019 and CA119/2019 for leave to adduce further evidence is declined.

  • B The appeals are allowed.

  • C The cross-appeals are allowed.

  • D The orders made in the High Court are set aside.

  • E The appellants must pay compensation to the first respondent under s 301 of the Companies Act 1993 on the basis set out at [534]–[539] of this judgment. The proceedings are referred back to the High Court to determine the amount of compensation payable on that basis.

  • F Costs in the High Court are to be determined in that Court.

  • G The appellants must pay one set of costs for a three-day complex appeal on a band B basis to the liquidators, with usual disbursements. We certify for second counsel.

JUDGMENT OF THE COURT
TABLE OF CONTENTS

Para No

Introduction

[1]

Background

[13]

Richina Pacific acquires Mainzeal

[14]

Mainzeal board membership

[21]

Relationship between Mainzeal and Richina Pacific

[27]

Funds extracted from Mainzeal for use in China

[32]

Construction bond support from Richina Pacific

[38]

RGREL introduced as holding company

[39]

Chinese foreign exchange controls

[40]

Mainzeal financial performance 2005–2008

[42]

Restructuring in 2008–2009

[48]

PwC raises concerns

[65]

Developments in 2009

[70]

2010 — Increasing expressions of concern

[87]

January 2011

[133]

Further developments in 2011

[139]

2012 — Cashflow difficulties

[151]

2013 — Mainzeal's collapse

[174]

Overview of Mainzeal's finances in the relevant period

[189]

The statutory regime governing insolvent trading — an overview

[195]

Overview

[195]

Insolvent trading — the policy concerns that underpin ss 135 and 136

[230]

The obligations of a director under s 135

[258]

The obligations of a director under s 136

[272]

Relief in claims for breach of directors' duties

[288]

Relief under s 301

[298]

The claim before the High Court

[310]

The liquidators' pleading

[312]

Developments during trial: the Judge's minutes

[326]

Liquidators' closing submissions

[341]

High Court Judgment No 1

[343]

Detailed findings of fact

[343]

Section 135 of the Companies Act

[344]

Section 136 of the Companies Act

[385]

Other causes of action

[392]

Quantum

[393]

No net deterioration

[414]

Result

[419]

High Court Judgment No 2 — Applications to alter quantum and costs

[420]

Issues on appeal

[431]

Did the directors breach s 135?

[432]

The issue

[432]

Appellants' submissions

[433]

Analysis

[441]

Did the directors breach s 136?

[453]

The issue

[453]

Submissions on appeal

[454]

Analysis

[459]

Relief under s 301 for breach of ss 135 and 136

[481]

Compensation for s 135 breach based on entire deficiency in liquidation

[484]

The issue

[484]

Was an award on this basis available as a response to the relevant breaches?

[486]

Entire deficiency approach not open on the pleadings — procedural unfairness

[492]

Entire deficiency approach not supported by the evidence

[503]

Summary in relation to entire deficiency approach

[508]

Compensation based on the net deterioration approach

[510]

The issue

[510]

Liquidators' submissions

[512]

Analysis

[513]

Compensation based on the new debt approach

[519]

The issue

[519]

Submissions on appeal

[521]

Analysis

[525]

Quantum and apportionment of liability

[532]

Conclusion

[541]

Costs

[546]

Result

[548]

REASONS OF THE COURT

(Given by Goddard J)

Introduction
1

Mainzeal Property and Construction Ltd (Mainzeal) was one of New Zealand's most significant construction companies. It was placed in receivership on 6 February 2013. Liquidators were appointed on 28 February 2013. The secured creditor that appointed the receiver, Bank of New Zealand (BNZ), was repaid in full. The receivers also paid the preferential creditors. On completion of the receivership the liquidators received approximately $8 million from the receivers, to meet liquidation expenses and some $110 million of outstanding claims by unsecured creditors.

2

The liquidators brought claims against the directors alleging (among other things) that they had:

  • (a) agreed to 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 Companies Act 1993 (the Act); and

  • (b) agreed to the company incurring obligations to creditors at a time when they did not have reasonable grounds for believing that the company would be able to perform those obligations when required to do so, in breach of s 136 of the Act.

3

The s 135 claim was successful in the High Court. The s 136 claim failed. The High Court awarded a total amount of compensation for the s 135 breach of $36 million. This award represented a proportion of the entire deficiency in the Mainzeal liquidation of approximately $110 million.

4

The directors appealed. The liquidators cross-appealed, seeking an increased award of compensation under s 135. They also sought a finding that the directors had breached s 136, and compensation for that breach.

5

We agree with Cooke J that the directors of Mainzeal breached s 135 of the Act by no later than 31 January 2011. They exposed the company's creditors to a substantial risk of serious loss.

6

But, focusing on the creditors and the business as a whole, that risk did not materialise. As the Judge held, there was no net deterioration in the company's position between 31 January 2011 and the date of liquidation in early 2013. We consider that is the relevant approach to assessing compensation for breach of s 135 in this case. The “entire deficiency” approach is not relevant on the facts as the breaches that were the subject of these proceedings did not cause the company to become insolvent: the liquidators did not establish on the balance of probabilities that liquidation would have been avoided if the directors had not breached their s 135 duties. Nor was this an approach pursued by the liquidators in the High Court: we consider it would not be fair to impose liability on the basis of an entire deficiency approach in circumstances where that approach to quantifying the claim was not pleaded, and was not the subject of relevant fact and expert evidence.

7

We have also concluded that the liquidators' preferred approach, under which compensation would be quantified by reference to “new debt” incurred after 31 January 2011, is not available in the context of a breach of s 135.

8

It follows that no compensation is recoverable in respect of the directors' breach of s 135. On the only relevant measure, the breach did not cause loss.

9

We have however reached a different view from the Judge in relation to the liquidators' claim under s 136 of the Act. We consider that the directors breached s 136 by entering into certain obligations: four significant construction contracts entered into after 31 January 2011, certain obligations to subcontractors on those projects, and all obligations entered into from 5 July 2012 onwards. The appropriate measure of compensation for the directors' breaches of s 136 is the amount of those new obligations to the extent that they remain unsatisfied after allowing for any dividends in the liquidation.

10

We remit the proceedings to the High Court to quantify this compensation, as we do not have all the information required to assess the amount of the directors' potential liability under s 136. The High...

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