Sasha Borissenko: Mainzeal case serves as warning for other directors

Mainzeal, one of New Zealand's most significant construction companies, collapsed in 2013.

OPINION

And just like that, the Supreme Court released its long-awaited cross appeal decision on the Mainzeal saga last week. It follows years of litigation after the construction firm was placed in liquidation in 2013. It’s ironic yet poetic that Mainzeal built the iconic Supreme Court premises.

Former managing director Richard Yan, together with directors Dame Jenny Shipley, Clive Tilby, and Peter Gromm, lost their appeal and found themselves liable under the Companies Act for allowing the firm to trade while it was insolvent. The decision confirmed they also failed to protect the interests of creditors, and allowed the company to enter contracts it couldn’t deliver.

The directors were aware of the precariousness of Mainzeal’s position, the judgment read.

Together the directors were ordered to pay $39.8 million in damages, plus interest. To date, unsecured creditors are still owed $110m.

In a joint statement, the directors said they noted the court took no issue with their honesty and good faith, and their absence of conflicts of interest.

“They accept that the court has declared the law on important and difficult questions with potential relevance for the hundreds of thousands of company directors in New Zealand.”

The landmark decision set the bar for director liability, and although the Supreme Court offered guidance to essentially tread with extreme caution, it acknowledged decisions considered reasonable at the time could appear unreasonable in hindsight.

I wouldn’t be surprised if we see a decline in appetite for directorships and liability insurance premiums increase as a result.

White-collar crime?

While Mainzeal concerned reckless trading, obligations, and duties of care as per sections 135, 136, and 137, I found myself in a pickle about whether these sections would fall within the remit of “white-collar crime”, which was coined by US sociologist Edwin Sutherland in the 1940s. I must preface this column by saying I am neither qualified nor insured enough to come to any conclusions.

Coined by Sutherland in 1949, the US sociologist said white collar crime was “crime committed by a person of respectability and high social status in the course of his occupation”. Naturally, only men were respectable, working, and of high social status in the forties.

Sarcasm aside, in 1973, Marshall Clinard and Richard Quinney argued white collar crime included illegal behaviours committed by employees of a corporation to benefit the corporation, company or business.

It’s an area that’s complicated, expensive to monitor and regulate, and it gives rise to jurisprudential issues around what society prioritises as morally repugnant.

White-collar culpability is threaded throughout various pieces of legislation. Tax evasion comes under the Tax Administration Act, then there’s the Secret Commissions Act, which deals with private-sector corruption.

Insider trading and financial market offences predominantly fall under the Financial Markets Conduct Act.

Then there’s the Crimes Act, which accounts for bribery, corruption, and misappropriation of funds, whether through theft, dishonesty, or deception.

There’s no corporate homicide in Aotearoa, which requires the “killing of a human being by another”. This was solidified in the 1970 case of Murray Wright Ltd, which held a company couldn’t be liable for manslaughter, but it could be a secondary party.

The Crimes Act also criminalises money laundering, which is also governed by the Anti Money Laundering and Countering Financing of Terrorism Acts.

As an aside, Transparency International New Zealand estimates $1.35 billion is laundered each year. It goes on to say “dirty money” arises from cleaning money made from crimes such as fraud, tax evasion or illegal drugs. So to be dirty, the act needs to arise from criminal activity.

Inequity between white and blue-collar crime

Once you scratch the surface of this fraught paradigm, inequity issues come to the fore.

In research dating back to 2013, Victoria University professor Lisa Marriott found tax evaders had an 18 per cent chance of going to prison, whereas it was 70 per cent for those convicted of welfare fraud.

Further research revealed tax debtors received more lenient debt repayment obligations, repaying5 per cent of the money owed. Welfare fraud offenders tended to repay their debts in full.

For context, Ministry of Social Development figures suggest welfare benefit fraud in 2016/2017 was $24m while Inland Revenue estimated white collar crime was 50 times that at $1.2b.

Marriott said one of the key differences with some white-collar crimes was a tendency to view them as “victimless” - particularly where the victim could claim insurance.

It was perhaps more accurate to view some crimes as having diffused, rather than individual impact, she said.

“However, this diffused impact ultimately results in a wide-ranging impact, such as higher insurance premiums or higher tax rates for society.”

Perhaps, then, rather than the political football we’ve been seeing from the Labour and National Party over harsher penalties for those already in the justice system, we should turn our attention to the billions lost through corporate balance sheets.

And board members and directors et al should see the Mainzeal case as a warning to pay more attention to the information coming through their inbox.