Law Firm Says Mainzeal Decision Shows Need For Legislative Reform

Supreme Court Urges Review of Directors’ Duties

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Bell Gully have written about the Mainzeal case, finding against former directors of the failed business, including former Prime Minister Dame Jenny Shipley, saying that there is a need to recalibrate directors’ duties. The firm says in a briefing paper that a reformed Companies Act will not only offer clarity but also ensure a fair, efficient, and transparent framework for all stakeholders involved.

The need for an overhaul in directors’ duties legislation has obtained the Supreme Court’s endorsement, particularly due to existing “general incoherence” in certain aspects of these responsibilities.

With the Companies Act now celebrating its 30th year, it has become imperative to reassess the provisions governing directors’ duties, the firm says, striking a balance between safeguarding creditors and affording directors the latitude to exercise their business acumen.

At the core of this dilemma lies the delicate equilibrium between directorial discretion and creditor protection.

The Companies Act seeks to navigate this tension, granting directors ample discretion while safeguarding creditors from potential misuse of power.

This issue was underscored by the recent Sequana ruling in the UK Supreme Court, which emphasized directors’ obligation to consider creditor interests when liquidation seems inevitable.

However, the New Zealand Supreme Court’s perspective, as exemplified by the Mainzeal case, has been different, leaning towards prioritizing creditor protection, suggesting that the New Zealand Companies Act aligns itself more staunchly with shielding creditors from harm.

This approach extends to key legal aspects:

Reckless Trading Clarified: The Supreme Court clarified that “reckless trading” in section 135 of the Companies Act isn’t contingent on outright recklessness but rather negligence, manifesting as a substantial risk of grave losses for creditors.
Incurring Obligations Expanded: Section 136’s scope now encompasses all obligations stemming from trading practices, even if they were unintentional or unknown to directors.
Individual Creditor Claims: While the UK approach emphasizes collective creditor claims, New Zealand’s section 301 enables individual creditors to directly sue directors for compensation, even if it’s a result of drafting oversights.

In light of these complexities, the call for legislative reform is a strong one and a comprehensive review of the Companies Act is essential to address ambiguities, especially regarding the allowance of direct claims by creditors.

Without such reform, the risk of a contentious race to the courtroom emerges, disrupting the equitable distribution of assets among creditors and culminating in unwarranted legal battles.