The Mainzeal case: A wake up for Directors of companies of all sizes…

Since writing this article the defendants have lodged an appeal. Case law may yet get rewritten!


You will all have seen the considerable publicity around the suing of the Mainzeal Directors by the Liquidators after the spectacular collapse of the company.  The judgement is in and the Directors are now liable for some $36,000,000, yes $36 million.

On a personal basis that is some $6,000,000 for each of the Directors with one Director owing $18,000,000 and also liable for any shortfall by the other Directors.

The Judge said that the Directors were not entitled to rely on the recovery of $42,000,000 of funds due from related parties that was largely undocumented and unsecured. The judge also noted that it was known to the Directors, or ought to have been known, that these funds were held in China and may not be accessible.

At the time of liquidation, the claims from creditors were in the range of 117 million to 157 million.

The judge suggested the Balance Sheet could be adjusted for the related party loans to show a historical deficit of assets to liabilities, one of the clearest of the definitions of insolvency.

 An insolvency that leads to liquidation can happen in broadly three ways:

Type A.   Poor profitability for years. (gradually)

Type B.   All at once around an event (all at once)

Type C.  A material understatement of liabilities or overstatement of assets. (through better understanding or revised estimates)

It is type A, the gradual path to liquidation that is most problematic for Directors. It inevitably involves trading in the period after insolvency and before liquidation. That triggers personal liability for the Directors.

If a type B (all at once) adverse event occurs, then you need to act to ensure that it doesn't become a type A problem.

Type C (a sudden better understanding) is a different problem altogether. Regular assessment by external experts is probably the Directors best friend. Should this type of event occur it needs to be addressed so that it isn't the start of a type A, gradual path, to liquidation.


Should the Mainzeal case scare Directors?

The result is probably a fair outcome. The case does not put Directors at risk where they take reasonable commercial risks and things don't go well.

Every time you sell something there is an implicit credit decision. When you sell to a company the law says that the purchaser's Director should only be buying when they have a reasonable expectation of paying your bill when it falls due. Clearly the Judge thought this wasn't the case when people were dealing with Mainzeal.

Perhaps an aggravating factor in the Mainzeal case was that the unrepaid related party advances appear to have funded some pretty successful investments.

As a Director of a small, medium or large business I think you need to be able to address five simple questions regularly. I suggest that every time a Board meets they address and document the following...

1.            Do we have a plan that shows we expect to finish the year with net assets and adequate cashflow?  

2.            Have we updated that plan for significant decisions made since? And for significant events?

3.            Do we have current financial statements every time we meet as Directors? And have we addressed the questions of the quality of assets and liabilities?

4.            Are we tracking to budget? and are any variances permanent or just timing?

5.            Do we still expect to finish the year with net assets and adequate cashflow?

We can and do help businesses of various sizes with these questions on a regular basis. Give me a call if you would like to discuss how we might help you.

It may be that the nature of your business requires some specialist analysis and advice around certain contracts and guarantees. As a Director you need to get yourself familiar with the business to know if there are such issues in your business. If there are find any needed experts to assist you.


Protecting your asset base

We spend a lot of time structuring business and private assets to manage and reduce risks. One of the best ways of doing this is to have Trusts.  Once established how you operate them is then the key.

Do give me a call if you would like to discuss how we might help you with protecting your assets.

We can also provide an independent review of your current structure. There is quite some peace of mind to be had when a fresh set of eyes reviews your situation. We have a simple six-point test which quickly gives you insights into both how secure your personal assets are, and how robust your group structure is. Do give me a call if you would like to discuss this.

All of these are fairly simple things to do. The time and expense of doing so can be thought of as a simple insurance policy.


Liquidators Reports

Liquidators file reports with the Companies Office. You can go to the Companies Office website to view them. The reports detail the creditors and give at least some idea of any remaining assets as well as the secured and unsecured creditors.

The liquidator also sets out the events leading to the appointment of a liquidator.

Where these read along the lines of "the business was unprofitable for some time" then the Mainzeal decision may strike fear into the hearts of the Directors. It may also strike hope into the hearts of creditors where they think the Director is of substance and the creditors have an ability to, and a willingness to, tackle the legal process.



How do other more recent liquidations sit alongside this Mainzeal judgement?

A few companies serve as examples.

Wynyard. Did this happen all at once? It is hard to say. It looks like the answer to the five simple questions above got murkier and murkier very quickly at the end. Was it a Type B event, all at once?

CBL. Some material before the Courts suggests that liabilities have been understated 'forever' and that Director liability to creditors due to trading while insolvent would apply. It is important to note that this information has been rejected by the Directors and not yet tested by the Courts. If this evidence about CBL was accepted by the Court, then as well as issues of Director liability around trading while insolvent there might also be charges for Directors around "incorrect" listing and issuer statements.

You can think of other local construction cases. I know in one recent situation the liquidation was the fairly immediate reaction by Directors to an unfavourable court judgement around a construction contract.



Liquidation date

Preferred or secured creditors

Unsecured creditors

Timing of insolvency?


Wynyard (NZ) Limited




All at once?

This was the operating arm of the listed group.

CBL Corporation Limited

Entered voluntary administration 23/2/2018

Trading suspended the same day.




All at once or a sudden better understanding?

Are shareholders creditors?

Ebert Construction Limited


At least 10,574,000

At least 35,124,000

Unclear. The receivership was called by the Directors.

A substantial shortfall to secured creditors expected, with nothing for unsecured creditors.


There has never been a better time for Directors to ensure that:

The five simple questions are answered regularly;

Consider Director and Officer insurance, and of course;

Your group is structured and operated correctly;

Ensure you are personally worthless.


So take care out there…   and do give me a call if we can help.

Matthew Underwood                04 890 0825

Matthew Underwood Ltd          Chartered Accountants & Business Advisers