The way one lawyer tells it, "complicated" hardly begins to describe the hunt for the boardroom truths behind the collapse of construction titan Mainzeal, and the $110 million toll on the people who were its casualties.

Mainzeal was a big company that had been in business a long time.

Understanding what went on in the lead-up to its collapse was an enormous job for liquidators BDO and their lawyers, as they searched for, and navigated through, hundreds of thousands of emails and thousands of boxes of hard copy files.

Read more: Judgment may pit Mainzeal directors against each other


Zane Kennedy was one of the hunters.

A partner in law firm Minter Ellison Rudd Watts, which acted for Mainzeal liquidators BDO and two Mainzeal group companies in taking the case to trial, Kennedy says he's had bigger cases in dollar terms, but he struggles to recall a more complex one.

"This was complicated from a factual perspective and very complicated from a legal perspective," he says. "Many defences were run by the defendants and there were very complicated theoretical arguments raised about the quantum of loss ... and there was quite technical evidence including detailed quantity surveying evidence, which all-up went for three or four days, where damages were based on the hypothetical evaluation of the projects which would have been on foot had Mainzeal been put into liquidation at an earlier time."

You get the picture.

Minter Ellison Rudd Watts partner Zane Kennedy.
Minter Ellison Rudd Watts partner Zane Kennedy.

This week Justice Francis Cooke ruled that Mainzeal Property and Construction had been trading while insolvent and that four directors – former Prime Minister Dame Jenny Shipley, Richard Yan, Peter Gomm and Clive Tilby – were liable for $36 million in damages.

The 178-page judgment said Mainzeal directors breached their duties under section 135 of the Companies Act, which is concerned with "reckless trading". Mainzeal was trading while balance sheet insolvent, there was no assurance of group support directors could rely on if things turned bad, and Mainzeal's financial trading performance was generally poor.

They had breached their directors' duties and were negligent in allowing the company to continue trading while insolvent.

They had also relied on assurances that the millions of dollars Mainzeal had loaned to its China-based parent company Richina Pacific would be paid back if Mainzeal got into trouble.


But the assurances relied upon were ambiguous, conditional and subject to constraints of Chinese law, which restricted the ability to return money to New Zealand from China, said the judgment.

By the end of 2009, excluding the value of more than $42m of loans, including interest, to the Chinese parent company, Mainzeal was insolvent and was continuously so from 2005 through to its failure in 2013.

Richina had required Mainzeal to follow an insolvent trading policy using its authority as a holding company, the judgment said.

Read more: Mainzeal: Anatomy of a corporate downfall

"It extracted amounts from Mainzeal by way of loan through vehicles that did not themselves have the ability to repay. The money was used by the Richina Pacific group for its considerable advantage – it was used to acquire assets in China that are now extremely valuable."

The total compensation of $36m ordered was approximately one third of the total loss to creditors and was similar to the balance of funds that the directors had allowed the shareholder group to extract from Mainzeal, said Justice Cooke.

Shipley, who was chair of the Mainzeal board, and directors Gomm and Tilby were expected to pay up to $6m each. The rest must be made up by Richina founder and boss Yan.

Former Prime Minister Jenny Shipley was chair of the Mainzeal board. Photo / File
Former Prime Minister Jenny Shipley was chair of the Mainzeal board. Photo / File

Another director, former Brierley boss Paul Collins, was not ordered to pay any compensation as he joined the Mainzeal board not long before the company's collapse.

Mainzeal went into liquidation early in 2013, owing creditors, including subcontractors and employees, more than $110m.

Kennedy says $11.1m was returned to Mainzeal from China in the two years before it collapsed.

"But it was nowhere near enough and much more had been taken out. There was also interest on top of that."

For those who police company governance standards, the great irony of the Mainzeal case is that the while the courtroom legalese might have been complex, the principle at its heart was simple.

Kennedy: "What directors did wrong here was they were prepared to run a very substantial construction company with over $100m worth of creditors in a very volatile industry with negative equity and reliance on expressions of support from an entity which had no assets in the jurisdiction.

"When you put it like that, it's not a complicated case when you put it at principle level.

"The actual principles aren't complicated: the directors' obligations are not complicated. You can boil it down to some pretty fundamental propositions that everyone should be able to understand," he says.

"The focus of the judgment is on section 135 of the Companies Act, which is headed 'Reckless Trading'. It says directors should not cause, or agree to, or allow the business of the company to be carried out in a manner likely to create substantial loss to the company's creditors.

"Fundamentally, that's it.

"You don't need to be a lawyer to understand that."

Read more: Can Jenny Shipley and co-directors pay up?

Or as forensic accountant and insolvency exert Dennis Parsons of Indepth Forensic puts it: "A company is a very simple creature. [The rules have] all been codified, it's all laid out clearly by judge, after judge, after judge".

Kennedy agrees, saying the Mainzeal case is "the latest in a long line which apply settled principles arising out of analysis of section 135".

Parsons, who investigated some of New Zealand's biggest financial company collapses, says in all the reports on these failures, "it was quite clear there were obligations and people didn't meet them".

He says it's easy to find help to understand the rules of governance. There's no excuse for a director of any size of business not to know their obligations.

While there are layers of obligations – for example, a company offering shares or a bank has more obligations than a dairy owner with a company – a director's obligations are codified in the Companies Act, says Parsons.

"The laughable thing is that the obligations Jenny Shipley breached were the same obligations that Mr and Mrs Smith with the dairy could breach.

"That is, they have to make sure all the assets are real in terms of advancing money to third parties. If they become aware there is some unlikelihood that can be realised, thereby placing their solvency at risk, then they have to take positive action.

"There are two insolvency tests and it has to be continuous. Pay debts as they fall and assets must be greater than liabilities. You have to satisfy both under the Companies Act at all times.

"Standing there staunch and saying 'I relied on third parties' just doesn't cut it when you are a director. You have to take the information and act in the interests of the company.

"If you determine the company is at risk, you make the call and you do that either by resigning after spelling it out [the reason] or you can cause grief by going to the board and saying 'if you don't act I'm going to go to the creditors'."

Parsons says Mainzeal directors had plenty of opportunity to get independent advice.

"This was a big company playing with big numbers. They had all the experts in the world (to turn to) – the Deloittes, the PwCs, everyone. If I was a director and concerned about the company I would say you must commission an independent review.

Mainzeal went into liquidation early in 2013, owing creditors, including subcontractors and employees, more than $110m. Photo / File
Mainzeal went into liquidation early in 2013, owing creditors, including subcontractors and employees, more than $110m. Photo / File

"If it comes back saying there is a solvency issue, the board has to address it. If it doesn't, you say I'm not willing to carry on, and you walk away."

Minter Ellison's Kennedy says the Mainzeal board did get independent legal advice in 2012 – "but it was way too late".

He says Justice Cooke was also "big" on the need for Mainzeal to have obtained independent advice – advice on its own interests, not as part of the wider business group which included its parent company.

Kennedy says if you are a director of a company continuing to trade when the financial situation is challenging or potentially so, it "would be a natural, in fact, a sensible, reasonable and prudent response to obtain advice from lawyers acting for the company – not from lawyers who are taking into account the interests of the rest of the group".

"Your obligations as a director are owed to that particular company – particularly where it is in a financially challenging position."

Kennedy says there are "very good arguments" that the directors should have contributed more in damages to unsecured creditors, some of whose businesses failed because of Mainzeal's collapse.

"You can't get away from the fact that $72m of creditors have not received anything from directors as a contribution to the loss [of $110m].

"What is available for distribution to creditors gets distributed pro-rata amongst them all. But the point being made is if you are contributing $36m to losses of $110m, there's a very significant portion of losses you are not contributing to."

Parsons says the job of a board chair is to be the liaison between management and the board, to seek independent advice, and to provide counsel to directors.

"A chairman is not just a figurehead. The chairman is different from the normal director – they have a heightened obligation. The principal role is to provide management and leadership to the board.

"Directors rely on the chairman to be the board's eyes and ears, to lead the company in reaching its strategic goals."

New Zealand's corporate history bristles with the names of former politicians, some with no, or little, commercial background, who have landed directors' jobs at prominent companies and other organisations.

Parsons says these "name" appointments will continue.

Former politicians are valued because they know how to open doors, he says.

They have networks and can use their connections for the benefit of the company.

"They provide access, especially to global markets. Overseas, the fact you are a former Prime Minister gets you through the door.

"They know how to lobby, they know the system. They've had to defend themselves against the system, they're good at pressing the flesh, they've got rhino hides.

"They bring something you can't buy. You can have all the lobbyists in the world but you can't buy that name or that title."

Parsons says politicians in general are confident in their own ability.

The first reactions of a former politician invited onto a board of a company whose business they know nothing about will be to feel flattered, and tell themselves they're capable, he says.

"But will they actually step back and take an objective view and ask themselves if they have the necessary skill set that will be required?

"That's how they go to being nobody in a commercial sense to chairman of the board."