Mainzeal creditors can find some satisfaction in a $36 million award, but the building company's collapse six year's ago still highlights "deep flaws" in the system, a construction lawyer says.
The High Court has ruled that Mainzeal traded while insolvent for nine years and upheld claims of reckless trading made against four directors, including former prime minister Dame Jenny Shipley.
Justice Francis Cooke ruled Shipley, Peter Gomm and Clive Tilby should pay up to $6 million each to creditors, with the rest made up by Richard Yan, who founded parent company Richina.
Read more: Three Mainzeal directors speak out
Mainzeal went into liquidation in early 2013. The unsecured creditors are owed about $110m, including $45.4m to sub-contractors and $43.8m to construction contract claimants.
Jeff Walters, a specialist in property and construction law at K3 Legal in Auckland, said Mainzeal's downfall in 2013 was followed by Ebert and Corbel last year and the collapses all clearly illustrated problems which have hurt sub-contractors especially.
Walters said the Construction Contracts Act 2002, brought in after the collapse of Hartner construction, was not working because it prejudiced main contractors such as Mainzeal which generally did not have large balance sheets and were very vulnerable to financial shocks.
"And when there are disputes, adjudication decisions are not made public – and that needs to change. Practically speaking, sub-contractors will hardly ever be current in terms of payments," Walters said.
Mainzeal liquidator Andrew Bethell of BDO welcomed the High Court decision: "As I understand it, this is the largest awarded for reckless trading in New Zealand," he told the Herald.
The lengthy and complex case had been funded by Auckland litigation funder LPF Group.
It is understood that Mainzeal held about $24m of directors' and officers' insurance for its directors. But even if an insurance claim was successful, it would not cover all the $36m, he said. Whether they would make an insurance claim was up to them, Bethell said.
In his decision Justice Cooke said it was unclear whether the liability would be regarded as only one insured event and he suggested that some of the directors, including Shipley, may struggle to meet the costs without insurance cover.
"Whilst it is not beyond argument, it appears that any limits of cover would result in the benefit being distributed pro-rata. This cover might be relevant to the extent that the directors would otherwise have difficulty in meeting the judgment.
"One difficulty with my taking this into account, however, is that I did not receive any evidence from the defendants on their inability to meet a significant judgment, although I would be surprised if the second to fourth defendants could do so without insurance cover."
Shipley was a director of Mainzeal from 2004, and chair of the company when receivers were appointed.
She currently lives in a $1.67m three-bedroom apartment in Auckland, owned by Shipley, husband Burton and accountant Gary Leech. Her name is also on the title of a six-bedroom holiday home in Russell, Northland.
Shipley did not respond to requests for comment.
The liquidators argued the directors breached their duties and were negligent in allowing the company to continue trading while insolvent.
Justice Cooke said Mainzeal "used money owed to trade operators, particularly sub-contractors, as working capital".
The directors also relied on assurances that the millions of dollars Mainzeal had lent to its China-based parent company Richina Pacific would be paid back if Mainzeal got into trouble.
"The assurances relied upon were ambiguous, conditional, and subject to the constraints of Chinese law, which restricted the ability to return money to New Zealand from China," the High Court judgment said.
Walters said many other builders had gone before Mainzeal and others would follow.
Following the decision a statement was issued on behalf of Shipley, Gomm and Tilby.
"The court's basis for finding liability appears to have novel aspects which will require careful consideration. The directors will not comment further at this stage as they take advice and consider their options," the statement said.
Another director, former Brierley boss Paul Collins, was not ordered to pay any compensation, as he joined the Mainzeal board not long before its collapse.