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Directors be warned

08 Jul 2019

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By Janice Hughes, Director, Aspiring Law

It was quite the surreal situation ... the former Prime Minister in the dock – not as a star witness, but as a defendant.

How paradoxical that such an accomplished luminary – someone who’d once run the entire country – was accused of failing so terribly in her governance of a construction company.

As I write, Dame Jenny Shipley and her fellow directors are appealing to the Court of Appeal against their guilty verdicts in the Mainzeal case, and there is further legal argument underway, including a cross-appeal from the liquidators.

Irrespective of the ultimate outcome, however, these proceedings serve as a seismic wake-up call to all – and, I stress, underscore and highlight all – who hold governance responsibilities, regardless of industry and organisational size.

My fear is, however, that many are still soundly snoozing, blissfully oblivious to the nature and scope of their duties, or unwittingly assuming liquidators only pursue big-name leaders of mega multi-million-dollar corporates when things go belly-up. And, if you’re thinking: “Oh, I’m with a not-for-profit; this doesn’t apply to me”, settle in with your commercial counterparts, and read on.

In a very brief nutshell, the Mainzeal case goes like this: the company collapsed in 2013 owing $110 million to unsecured creditors, many of whom were sub-contractors. The liquidators sued four former directors – including Dame Jenny, who was Chair – for breaches of their duties under the Companies Act 1993. At the heart of the case was the liquidators’ allegation the directors had traded recklessly, while the company was technically insolvent.

In his finding, the Judge ruled against the defendants, determining they should pay $36 million in total – up to $6 million for three of the four directors, including Dame Jenny, with the remainder to be paid by a fourth director, who was found to carry principal liability.

You don’t have to be a big cheese

I can’t stress enough at this point, if you’re in any type of governance role, don’t be lulled into a false sense of security by the stratospheric numbers, the household-name Chair and high-profile company in the Mainzeal case. Play your cards wrong and this could happen to you. Increasingly, we’re seeing liquidators explore more deeply how failed organisations conducted their business affairs, whether those at the top have upheld their duties, and if legal proceedings should be launched to recoup losses for creditors.

Just recently, I read a report where liquidators were investigating whether action was warranted against the directors of another collapsed construction company. The losses in question? Well under a million.

While that mightn’t seem much in a commercial context, it’s a pretty, pretty penny for most if you have to pay it out of your personal coffers. And, that’s exactly what many people who take on governance roles don’t at all appreciate – if things turn to custard, losses are incurred, and the court finds you’ve breached your duties, you can be required personally to pay any shortfall.

She’ll be right – I’m insured

Maybe. Maybe not. It’s all very well to have cover, but is it enough? One very large plate of food for thought that the Mainzeal case has served up for all organisations – commercial or not-for-profit – is liability insurance. Reportedly, the directors held $23 million in cover, leaving a rather eye-watering $13 million deficit.

But wait. There’s more. It’s been estimated that shortfall could double if a current application for costs and interest is successful. And, let’s not forget the cross-appeal. While the directors are arguing they shouldn’t be held at all responsible for Mainzeal’s demise, the liquidators contend the court should be doubling to $73 million the compensation to creditors, and that Dame Jenny’s liability be increased, given she was Chair. Cha-ching!

The takeaway for all organisations from this is: first, go and check you have insurance and understand the policy. Second, check the cover is commensurate with any risk. Third, review the nature and level of your insurance regularly. One day, your life savings might depend on it.

Fall prevention

Having to claim insurance, though, is obviously “ambulance at the bottom of the cliff” territory. While being able to draw on cover undoubtedly cushions the landing, the fall, in itself, is, typically, excruciating. Not only, the financial collapse of something for which you’re responsible, together with all that that entails, but then the arduous, costly and protracted court proceedings.

Focus on prevention. Charities Services’ website – charities.govt.nz – has some great information for officers of not-for-profits. Many people in our neck of the woods have set up businesses under a limited liability company structure. Remember, though, that’s limited liability, not no liability. The law accepts that there is inherent risk in all business, but that comes with an expectation you, as a director, will take reasonable and responsible steps to mitigate adverse outcomes – especially significant losses to creditors. It’s imperative you are well versed in your duties under the Companies Act. These are wide-ranging, but, as a start, always act in good faith, put the interests of the venture first and avoid conflicts of interest like the plague. If you’re even a smidgen worried about the financial or legal implications of something that’s going down, seek immediate advice. And, document, document, document.

So many people I see ready to sign up for governance roles, either with companies or not-for-profits, have little-to-no appreciation for their duties – let alone the personal risk they can be signing up for. If in doubt, now’s the time to check it out with your legal adviser.

Always keep in mind: you don’t have to be a behemoth Mainzeal to find yourself, your reputation and your worldly possessions in a liquidator’s crosshairs.

As featured in the Wanaka Sun. Please remember: the information in this column is designed as a general guide only and should not replace specific legal advice on a particular issue.

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