Directors defend ‘reckless trading’
Former prime minister Dame Jenny Shipley and her fellow directors of failed construction firm Mainzeal are defending ‘‘reckless trading’’ allegations in the High Court in Auckland.
Plaintiffs for the liquidators of Mainzeal are making a claim of $75 million against its former directors in order to repay creditors.
Mainzeal Property and Construction, of which Shipley was a director from 2004 to December 2012, went into liquidation in February 2013.
At the time it was one of the largest construction companies in New Zealand, employing hundreds of staff and turning over up to $400m per year.
Plaintiff lawyer Mark O’brien, QC, said the company’s collapse left unsecured creditors with debts in excess of $117m and was a catalyst for legislative change to better protect subcontractors in the construction industry.
Shipley, who was prime minister from 1997 to 1999, made an appearance in the public gallery for the first morning of the hearing yesterday.
The plaintiffs in the case include liquidated companies Mainzeal Property and Construction and King Facde, previously known as Richina Land, as well as liquidators Andrew Bethell and Brian Mayo-smith of BDO.
Defendants include Shipley, China-based shareholder Richard Yan, Peter Gomm, Shipley, Clive Tilby, Sir Paul Collins, Siew Kwan, Richina Global Real Estate and Isola Vineyards.
In his opening address O’brien said Mainzeal’s collapse was largely attributable to a severely undercapitalised balance sheet and ‘‘systemic governance failures’’.
‘‘This company was dangling by a thread of shareholder support,’’ he said.
He claimed Mainzeal directors were responsible for ‘‘reckless trading’’ and failed to exercise reasonable care, diligence and skill. ‘‘If you are going to trade when insolvent you need to take particular care.’’
O’brien said Mainzeal’s directors allowed the company to trade with negative equity from 2008 using ‘‘discretionary’’ financial support from related parties.
‘‘It was trading on super thin margins.’’
From about 2008 Mainzeal generally made losses, was responsible for an increasing number of leaky buildings and had ongoing construction disputes, he said.
When a company had negative equity, its directors were effectively trading with the creditors’ money, he said.
The directors were both responsible and culpable for the loss to Mainzeal and its creditors and should therefore be required to pay for the loss, he said.
The involvement of the first defendant, Richard Yan, began in May 1995 when an investment company he was associated with acquired a majority take in the then Nzx-listed company.
In 2003 Yan started Richina Pacific (RPL) to acquire and develop investments in New Zealand and in China.
RPL, incorporated in Bermuda, listed on the NZX in 2003 and was Mainzeal’s parent company until a group restructure in December 2009.
Under Mainzeal’s constitution RPL was entitled to exercise powers that normally fell to the board, O’brien said.
By the end of 2008, the total related-party advances owed to Mainzeal was more than $39m. This figure was ‘‘largely if not entirely irrecoverable’’, he said.
Mainzeal’s auditors advised directors that in order for it to continue operating it required a significant equity injection, which was communicated to the NZX, he said.
‘‘At the time of the delisting it was recognised that Mainzeal was really insolvent.’’
The advice was taken and RPL was delisted in December 2008. No equity was provided and Mainzeal debts continued to grow, he said.
In late 2009, RPL went through a restructure that resulted in its New Zealand and Chinese assets being separated, leaving Mainzeal further exposed, he said.
Meanwhile, Mainzeal continued trading despite being in a hopeless financial position and by the end of 2011, it had run out of cash and made a $10m loss in that year alone, he said.
Despite this, its directors continued to sign new contracts, including a $66m contract with the Manukau Institute of Technology, until three months before receivers were appointed, he said.
‘‘They were driving towards the wall for a long time.’’
The trial, presided over by Justice Francis Cooke, is set down for eight weeks.
‘‘This company [Mainzeal] was dangling bya thread of shareholder support.’’
Plaintiff lawyer Mark O’brien, QC