THE MAINZEAL LITIGATION

Mainzeal Debut Homes,

The case was a little different from in that the company could have been salvaged if the directors had acted decisively. The Court of Appeal acknowledged that directors could allow their company to continue trading while technically insolvent for a limited time, but they had to take meaningful and realistic steps to turn it around.

They could take some time to explore all realistic alternative courses of action to try to avoid an insolvent liquidation. If they were actively engaged in seeking advice and attempting to address the company’s problems, they could not be criticised and would not be exposed to liability. But the time to throw in the towel was when all reasonable options had been exhausted and it was obvious that there was no reasonable prospect of the company pulling through.

A WAKE UP CALL

I expect both of these cases will serve as a wake-up call to directors of large building companies, particularly professional directors who don’t have a fortune tied up in the company and who have plenty of opportunities to earn a good living elsewhere. Those directors are likely to pull the pin earlier than smaller owner/operators. But for the smaller owner/operators, I can’t help thinking that these are unrealistic expectations of human beings who are desperate to salvage their only source of income and ever-optimistic that their fortunes will change given enough time. I suspect that they are more likely to take the risk regardless, and simply pay the penalty if it all comes unstuck.