‘Power Law’ QC Jack Hodder has described to the Court of Appeal how the Mainzeal High Court ruling affecting his client Jenny Shipley and two other director-clients, was “the stuff of nightmares” that would deter people from taking a director’s role in companies.
The Court of Appeal is hearing appeals from the former directors of Mainzeal, which collapsed in 2013 owing $110 million to 1400 creditors.
Its directors, former prime minister Dame Jenny Shipley, Richard Yan, Peter Gomm and Clive Tilby were found liable for breaching director duties and ordered to pay a total of $36m in damages and $2.3m in costs to Mainzeal.
The High Court ruled Mainzeal had been trading while insolvent since 2007, and creditors would have been better off had Mainzeal been put into liquidation earlier.
The High Court last year found Yan, who is separately represented, personally liable for $18 million while Shipley, Gomm and Tilby were liable for $6 million each.
The liquidators are cross appealing, asking that the penalty amount be doubled.
Jack Hodder told the court the analysis by which the High Court formed its judgment was based on hindsight and, at the time, the directors made business judgments based on decades worth of experience.
He argued that they were not reckless.
“We say recklessness requires more than what was going on here. It requires people who don’t care – these people did care.
“It requires people who pay no attention at all – these people did pay attention.”
Hodder said the directors sought commercial advice to try to make the business as good as it could be, and they were also working in a challenging environment after the global financial crisis.
“… making it very difficult to say that the business judgments the directors made in 2010, that the company could proceed as a going concern, were somehow not just wrong, but unlawful.”
Hodder referred to the High Court judgment which pinpointed mid-2010, shortly after a restructure which cut ties between Mainzeal and its parent company Richina Pacific, as the time at which the directors should have taken action.
He said directors did the best they could at the time, with the information and assurances they had, which included assurances Richina would help the firm financially.
However, Justice Stephen Kos questioned Hodder’s timeframe and said the background as to how the company got to that point was relevant.
“You painted a picture of a group of directors coming across a tottering jenga-edifice, with little blocks sticking out here and there and it’s wobbling a bit.
“You say, well, what could they do but look after it the best they could. The better question might be to ask, who built it?”
Hodder said the High Court judgment was the “stuff of nightmares”, which would deter rational people from wanting to become a director.
“It is true that in the end Mainzeal failed. It is true that in the end that [Richina] did not stand behind all the debts… however it is inappropriate for the High Court to reverse those business judgments.”
He said the judgment had wider significance for corporates.
“Not just for construction companies, but any group of companies. This judgment has the effect of discouraging any rational individual from becoming the director of a company.
“This can’t be a useful policy for corporate law in New Zealand.”
