$6m bill for former prime minister who breached director’s duties

Former New Zealand prime minister Dame Jenny Shipley​ has been made liable for NZ$6m ($3.9 million) in damages for ‘reckless trading’ and failing in her director’s duties. 

Dame Jenny Shipley, a former prime minister of New Zealand, has failed in her attempt to persuade the Supreme Court to reverse a judgment of more than $6 million against her for her part in the failure of the construction firm Mainzeal.

Shipley was a company director and served as the board’s chair.

Mainzeal was placed into liquidation in February 2013, leaving over $110 million in debt to its creditors, many of whom were smaller New Zealand construction firms.

Andrew Bethell and Andrew McKay, the company’s liquidators, filed a lawsuit against Shipley and three other Mainzeal directors, alleging that they violated the Companies Act by allowing the company to operate from January 2011 onward in a way that was likely to result in significant losses for creditors.

In 2019, the High Court in Auckland found the four directors liable for $36 million in losses. 

The Supreme Court stated that the Mainzeal case’s issues were of critical importance because they centred on the duties of directors and how damages for breach of those duties should be calculated.

Part 8 of the Companies Act outlines the legal obligations that apply to company directors. 

These include two statutory duties that apply when a company is insolvent or near insolvent – Sections 135 and 136.

Section 135 imposes a duty to avoid “reckless trading”. 

It states that directors are not permitted to agree, encourage, or permit a company to conduct its business in a way that poses a significant risk of serious loss to creditors.

The Court determined that the directors had violated Section 135 for three key reasons:

• Mainzeal was trading while balance sheet was insolvent because the advances to related companies were not, in reality, recoverable
• There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose; and
• Mainzeal’s financial trading performance was generally poor and prone to significant one-off losses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.

By carrying on business instead of taking action to secure the legally enforceable and significant support needed to fix Mainzeal’s balance sheet and prevent liquidation, the directors violated Section 135 of the law. 

“This is an interesting case because it shows just how important it is to understand one’s duties as a company director and board member. 

“Reckless trading is also forbidden by company law in most countries, including Ireland and the UK. 

“A director of a company agreeing to, causing, or allowing the company’s business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors is a breach of their duties,” says David W Duffy, CEO of the Corporate Governance Institute.

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