Edmonds Judd

Business briefs

Business briefs

Mainzeal: lessons for directors

Mainzeal Property and Construction Ltd was a New Zealand construction company placed into liquidation in 2013. The liquidators brought proceedings against the directors of Mainzeal, alleging a breach of directors’ duties, including reckless trading and allowing Mainzeal to take on obligations that the company could not perform. The High Court found the directors were personally liable for reckless trading. The decision was appealed to the Court of Appeal.

Reckless trading: The Court of Appeal upheld the High Court’s decision relating to reckless trading, finding that the directors continued trading on a ‘business as usual’ basis, while Mainzeal was in a perilous financial position. Mainzeal was balance sheet insolvent and effectively using creditors’ funds as working capital. The directors kept trading, and failed to engage in any meaningful way with Mainzeal’s financial position, ignoring the risks that this created for current and future creditors.

Obligations: The Court of Appeal also found that the directors did not have reasonable grounds to think that Mainzeal would be able to fulfill the obligations that were being entered into by Mainzeal once insolvent.

While the Mainzeal case is somewhat unique, the courts’ decision is relevant to all company directors, especially those who find themselves as directors of companies that are insolvent or near-insolvent. The case makes it clear that continuing to trade in a ‘business as usual manner’ without taking a realistic view of the situation will likely result in a breach of directors’ duties. As in the Mainzeal case, directors in this situation may be personally liable for the obligations that company assumed due to such breaches.

Proposed changes to the Commerce Act

The Commerce Amendment Bill, introduced to Parliament in March, proposes a series of changes to the Commerce Act 1986. Key changes include:

Misuse of market power: In the Act, the current ‘purpose based’ prohibition does not allow a person to take advantage of a substantial degree of market power for an anticompetitive purpose, such as deterring a new entry to the market or harming competitors.

The Bill proposes amending the test for determining whether a person has taken advantage of market power to an ‘effects’ based’ test that will be in line with Australia. This expands the scope of the prohibition to cover any conduct by a person with market power that has the purpose, effect, or likely effect, of substantially lessening competition in a market.

Repeal of safe harbours for intellectual property: The current legislation contains provisions that effectively provide special treatment for intellectual property rights. These provisions are repealed in the Bill, meaning intellectual property rights will be assessed under the new Act in the same manner as other property.

The purpose of these amendments is to strengthen the prohibition against misuse of market power and to make other changes to improve the functioning of the Act.

Incorporated Societies Bill

The Incorporated Societies Act 1908 will receive a long-awaited update after many years of consultation and deliberation. The purpose of the Incorporated Societies Bill is to put in place a modern framework of basic legal, governance and accountability obligations for incorporated societies and those who run them.

The aim of the Bill is to:

  • Make societies more robust
  • Help societies govern themselves, and
  • Provide societies and their members with more constructive options when things go wrong.

Officers’ duties: The Bill puts in place six broadly expressed duties on officers of a society (modelled on directors’ duties from the Companies Act 1993). These include a duty that officers should act in good faith and in the best interests of the relevant society, and that officers exercise their powers of office for a proper purpose.

Gaps in the current Act: The Bill also closes certain gaps in the current legislation, such as providing an express mechanism for societies to amalgamate with each other, based on a simplified version of what is included in the Companies Act.

This Bill is currently at the Select Committee stage with its report due in October; it is expected to become law by the end of 2021. Once finalised it will provide a two-and-a-half to four year transition period for all of New Zealand’s 23,000+ incorporated societies to adjust to the new changes. Each incorporated society will need to review and update its rules/constitution in the transitional period once the Bill comes into effect.