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University of Otago Law Theses and Dissertations |
Last Updated: 14 April 2024
To Lead or to Follow? A Critical Analysis of Section 135 and Section 136 of the Companies Act 1993 in Light of Sequana
Sophie Turner
A dissertation submitted in partial fulfilment of the degree of Bachelor of Laws (Honours) at the University of Otago, Dunedin, New Zealand – Te Whare Wānanga o Otāgo
October 2023
Acknowledgements
Thank you to my supervisor Struan Scott. Your advice, feedback, meetings, and answers to my many questions were much appreciated.
Thank you to my Mum for all your guidance and support over the years. You inspire me every day!
Thank you to Anton for your love and for putting up with me.
Thank you to Abbey and Natalya for your friendship. I am grateful that you were always there for me when I needed it.
Thank you to my other friends and family who have helped me along the way.
Table of Contents
Abbreviations
Companies Act 1993 – CA Companies Act 2006 – UK CA Insolvency Act 1986 – UK IA
Introduction
Directors’ duties are “central to company law.”1 This is a bold but accurate statement. Directors’ duties are contained in the Companies Act 1993 (CA) and directors must comply with their duties or face personal liability. Section 131 (duty of directors to act in good faith and in best interests of company) is the most fundamental directors’ duty.2 While this dissertation and the Law Commission3 view s 131 in this way this has not been reflected within case law considering the rights of creditors when the company is unable to pay. Rather, recourse primarily has been through s 135 (reckless trading) and s 136 (duty in relation to obligations);4 collectively, referred to by some as the reckless trading duties.5 Unfortunately, the point at which liability arises under these sections (the concern for directors) is unclear. It is important for directorial duties to be clear and accessible so that directors know their responsibilities and what they should do in certain situations to avoid liability.6
The underutilisation of s 131 in this context has led to a lack of recognition of a creditor duty (as interpreted by BTI 2014 LLC v Sequana SA7 (Sequana)) under s 131. In the United Kingdom (UK), the creditor duty comes under s 172(1) of the Companies Act 2006 (UK CA), the functional equivalent to s 131. This dissertation argues that New Zealand (NZ) should adopt a creditor duty (as formulated by Sequana) into s 131. When the creditor duty applies directors need to consider the interests of creditors and in certain circumstances treat creditor interests as paramount. The incorporation of a creditor duty into s 131 would provide clarity to the application of ss 135/136 and prevent the need for these sections to be amended.
Chapter one outlines preliminary definitions, concepts, and history. The aim of chapter one is to demonstrate the need for creditor protection and to create a basic understanding of the mechanics of the sections and earlier case-law.
1 Law Commission Company Law Reform: Transition and Revision (NZLC R16, 1990) at 14.
2 Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) at 241.
3 At 241; and cited in Cooper v Debut Homes Ltd (in liq) [2019] NZCA 39 at [25].
4 Lynne Taylor “Directors’ Duties on Insolvency in New Zealand; an Empirical Study” (2019) 28 NZULR 171 at 186.
5 William Porter “Directing the Sinking Ship – Where to From Here?” (2021) 32 JBFLP 125 at 126.
6 Law Commission, above n 2, at [186].
7 BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2022] 3 WLR 709.
Chapter two considers Madsen-Ries v Cooper8 (Debut) and Yan v Mainzeal Property and Construction Ltd (in liq)9 (Mainzeal CA). It was hoped these judgments would provide clarity on ss 135/136. However, the sections were interpreted in a way that ultimately created a state of disarray within the law. This was because the judgments mistakenly focused on insolvency as the determinative for liability which justifiably resulted in academic criticism and calls for reform.
Chapter three discusses Yan v Mainzeal Property and Construction Limited (in liq)10 (Mainzeal SC). Mainzeal SC provided welcomed guidance on ss 135/136 by finding that while insolvency is a factor towards liability it is not the core determinative for the application of the sections.11 However, embracing a creditor duty in s 131 would add further to this clarification. While not the focus of this dissertation, it should also be noted that Mainzeal SC also clarified the operation of s 301, confirming that creditors can directly receive awards from directors.12 While aspects of Sequana were noted in Mainzeal SC, the nature of the facts and claims in the case meant that the Court was not required to consider s 131. Therefore, it is argued Sequana remains relevant for s 131.
Chapter four analyses Sequana. This includes the key findings of the case; the existence of a creditor duty, when the duty is engagement, the application of the duty and that the focus of s 172 was not on insolvency but rather on the shift of risk of loss from shareholder to creditors.
Chapter five demonstrates how the creditor duty would be adopted under s 131 and its operation. Because of legislative differences, Sequana’s reasoning cannot simply be adopted into ss 135/136 (as pointed out in Mainzeal SC) but should be applied under s 131.
8 Madsen-Ries v Cooper [2020] NZSC 100, [2021] 1 NZLR 43.
9 Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99, [2021] 3 NZLR 598.
10Yan v Mainzeal Property and Construction Ltd (in liq) [2023] NZSC 113.
11 At [189].
12 At [163].
Chapter One: Preliminary Definitions, Concepts and History
It is important to briefly cover some of the key terms and historical development of this area of the law.
I Preliminary Definitions
A Meaning of Insolvency
Solvency is a cornerstone to the CA13 and the solvency test14 explicitly applies to some provisions.15 Mountford v Tasman Pacific Airlines of NZ Ltd even considered that the CA was premised upon solvency, as it was a condition for the unconditional right to trade.16 While the reckless trading sections do not explicitly reference insolvency, the concept is still important in this context.17 This is because the application of these sections requires significant deterioration in the company’s finances.18 While the financial state of the company is relevant to ss 135/136, insolvency is not the deciding factor for liability; rather it is an indicator of risk to creditors.19 Unfortunately, Debut and Mainzeal CA placed too much emphasis on the concept of solvency under these sections, a purpose for which these sections were not aimed at.
To meet the solvency test a company needs to be able to pay their debts (cashflow solvency) and have assets greater than their liabilities (balance sheet solvency).20 At first glance this test seems straightforward and clear cut. However, it must be applied with a sense of commercial reality which complicates it.21 The immediate future, past and present condition of the company as well as the “existing and/or contemplated demand for the company’s goods or services” provided by the company are considered within the test.22 Therefore, a company may be able
13 Law Commission, above n 2, at [330]; Madsen-Ries v Cooper, above n 8, at [33] and [49]; and Reckless trading under s 135 (online looseleaf ed, CCH) at [.50].
14 Companies Act 1993, s 4.
15 4 Meaning of “solvency test” Company Law 492526454 (online looseleaf ed, Thomson Reuters) at [CA4.01]; and see Companies Act 1993 ss 52, 55, 59, 70, 77, 107(1), 108, 110-115 as well as Part 13 and Part 19.
16 Mountford v Tasman Pacific Airlines of NZ Ltd [2005] NZHC 514; [2006] 1 NZLR 104 (HC) at [25].
17 4 Meaning of “solvency test”, above n 15.
18 4 Meaning of “solvency test”, above n 15.
19 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [270].
20 Madsen-Ries v Cooper, above n 8, at [34]; Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [203]; and 4 Meaning of “solvency test”, above n 15.
21 Vercauteren v B-Guided Media Limited [2011] NZCCLR 9 (HC) at [43].
22 Vercauteren v B-Guided Media Limited, above n 21.
to trade on for a couple of months while technically insolvent23 (the twilight zone).24 In recognition of this a company does not need to stop trading the moment it becomes balance sheet insolvent.25 The test for solvency has been distinguished from liquidity or a temporary lack of liquidity.26 It was confirmed in Sequana27 that the UK requires the same solvency requirements as NZ; balance sheet solvency28 and cashflow/commercial solvency.29 As in NZ the UK allows short term/temporary cash flow insolvency30 as commercial realities are considered and can prevail.31 This is to allow companies the ability to try to trade out of their difficulties.32
One of the purposes of the solvency test is to protect creditors,33 but there are no direct remedies for creditors when the test is breached.34 Mainzeal SC confirmed that under s 301 creditors can get a direct award for a breach of duty35 which demonstrates a shift to considering creditors. Identifying at what point the breach of duty occurs is important in terms of assessing relief.36 There are also “other statutory liabilities during insolvent trading,”37 like “failure to keep accounting records,”38 improper distributions and enriching transactions.39
23 Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255 at [199]; and 4 Meaning of “solvency test”, above n 15.
24 Pedro Schilling de Carvalho and Booby V. Reddy “Credit where credit’s due: the Supreme Court take on directors’ duties and creditors’ interests” (2023) 82 C.L.J. 17 at 17; and Kayode Akintola and Navajyoti Samanta “Directors’ Duties towards Shareholders and Creditors in Corporate Insolvency - Legal and Practical Implications of the UK Supreme Court’s decision in BTI 2014 LLV v Sequana SA” (2023) 34 I.C.C.L.R. 43 at 45.
25 Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC 263,570 (HC) at [125].
26 Yan v Mainzeal Property and Construction Ltd (in rec & liq) [2014] NZCA 190 at [59].
27 BTI 2014 LLC v Sequana SA, above n 7, at [120].
28 Insolvency Act 1986 s 123(2); and Saleem Sheikh “Serving two masters: balancing shareholders’ and creditors’ competing interests” (2023) 34 I.C.C.L.R. 305 at 346.
29 Insolvency Act 1986 s 123(1)(e); and Sheikh, above n 28. 30 BTI 2014 LLC v Sequana SA, above n 7, at [120] and [309]. 31 Akintola and Samanta, above n 24.
32 BTI 2014 LLC v Sequana SA, above n 7, at [120].
33 4 Meaning of “solvency test”, above n 15 at [CA4.08]; Joel Manyam “Madsen-Reis and Levin as liquidators of Debut Homes (in liq) v Cooper” [2021] NZLJ 96 at 96; and Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) at [214].
34 4 Meaning of “solvency test”, above n 15, at [CA4.08].
35 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [163].
36 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [292].
37 Peter Watts Duties to creditors, Heath and Whale on Insolvency (online ed, LexisNexis) at [32.4].
38 Companies Act 1993, s 300; and Watts, above n 37, at [32.4.1].
39 Companies Act 1993, s 298; and Watts, above n 37, at [32.4.2-32.4.3].
B Solvency Test and Restrictions on Distributions Replace Other Mechanisms
Prior to the CA and the introduction of the solvency test NZ had a capital maintenance doctrine and other principles that could be used to protect creditors.40 The capital maintenance doctrine,41 “required a company to have a notional capital and precluded distributions that would impair that notional capital.”42 The capital maintenance doctrine therefore centred around the idea of preventing insolvency.
In the UK the capital maintenance doctrine has yet to be abolished and other mechanisms like the equity-capital rule, debt-capital rule and fraud principle exist.43 The equity-capital rule provides that when a company is insolvent or probably insolvent it cannot return money to a shareholder in the form of a dividend or forgiveness of debt, for example.44 The debt-capital principle stops repayment of a debt to an unsecured creditor.45 The fraud principle prevents “a fraud on a company’s creditors.”46 Watts argues that as the UK still has these principles that protect creditors, a creditor duty is not needed.47 Watts predicts the creditor-extension in the UK will absorb the three main common law protections of creditors.48 However, as NZ does not have these equivalent mechanisms in place it is argued that Watt's reasoning can be used to support a creditor duty in NZ as it is needed in place of these principles. Restrictions on distributions in NZ only provide creditors with limited protection, in that a distribution cannot be made if immediately after the distribution the company would fail the solvency test.49
C Meaning of the Company
While the company is recognised as a legal person, it is of course an artificial construct. So, just what is considered to be the ‘company’ and the purpose of the company is vital to this area of the law. What is understood to be the company and what is expected of companies has changed over time. For example, creditors were previously not protected50 and now they are increasingly becoming so. The company used to be equated with the shareholders (or members
40 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [204].
41 4 Meaning of “solvency test”, above n 15.
42 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [204].
43 Peter Watts “Sequana in the Supreme Court: Cautious Confirmation of the Creditor-Extension to the Director’s Duty of Loyalty” [2023] JIBFL 74 at 74.
44 Watts, above n 37, at [32.2.1].
45 Watts, above n 37, at [32.2.1].
46 Watts, above n 43, at 77.
47 Watts, above n 43.
48 Watts, above n 43, at 82.
49 Companies Act 1993, s 52.
50 Porter, above n 5, at 131.
as they were once referred to in the Companies Act 1955) and now it has been extended to employees, stakeholders, and creditors in certain circumstances.51 For example, ss 135/136 require directors to contemplate creditors. This shift to considering creditors is necessary, and it is argued an introduction of a creditor duty under s 131 would be coherent with this change.
II Conceptual Underpinnings
A Rationales for a Creditors Interest
Over time different conceptions of a creditors interest and rationales have emerged for why a consideration of the rights of creditors is required. These rationales can be used to justify why a creditor duty is needed. Rationales can be grouped into three categories. Firstly, that creditors are “beneficially interested in the company or contingently so.”52 Secondly, that creditors have a “proprietary or quasi-proprietary interest” in the company.53 Thirdly, that creditors have the main economic stake in insolvency (due to a prospective entitlement).54 In NZ the case law previously suggested creditors had a beneficial, proprietary, or quasi-proprietary interest.55 However, this changed when Mainzeal SC adopted Sequana’s economic interest reasoning.56 Sequana confirmed that in the UK creditors have an economic interest.57
The UK Supreme Court stated:
“The company’s creditors have an economic interest in the company, based upon their entitlement to be paid the debts owed to them, ultimately enforceable against the proceeds of realisation of the company’s assets, which is distinct from the interests of its members and requires separate consideration.”58
Mainzeal SC found that the rationale for reckless trading duties was the need to protect the economic interest creditors have in recovering their debts.59 Therefore, as creditors have an
51 BTI 2014 LLC v Sequana SA, above n 7, at [19].
52 Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985] 1 NZLR 242 (CA) at 249; and Sheikh, above n 28, at 338 and 340.
53 BTI 2014 LLC v Sequana SA, above n 7, at [44].
54 BTI 2014 LLC v Sequana SA, above n 7, at [130] and [147].
55 BTI 2014 LLC v Sequana SA, above n 7, at [12] and [44]; and Sheikh, above n 28, at 340 and 342.
56 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [359].
57 BTI 2014 LLC v Sequana, above n 7, at [12] and [44]; and Sheikh, above n 28, at 340 and 342.
58 BTI 2014 LLC v Sequana SA, above n 7, at [12].
59 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [180].
economic interest, they require consideration when their interest is at risk. As a company becomes more at risk of becoming insolvent there is more risk of creditors not being paid. One of the reasons for this is because creditors have no direct say in company decisions.60 Shareholders have an indirect influence in company decisions as they can remove or appoint a director or resolve to place the company into liquidation.61 Another reason is that creditors are also under an information asymmetry when compared to directors (and to shareholders).62
While this dissertation supports the economic interest rationale, no matter which category of interest is preferred, it is apparent that creditors do have an interest, and this should be respected. The more critical question is at what point should this interest be considered. It is argued that a creditor duty (as interpreted by Sequana) demonstrates when a creditors duty should be considered in that a creditors interest is on a sliding scale and its relevance and weight will depend on the risk of non-payment that is posed to creditors.
B Justifications for a Creditor Duty
The various understandings of a creditors interest have also led to different justifications for a creditor duty. Sequana discussed three potential justifications for the duty – i) “incorporation with limited liability is a privilege,”63 ii) the company owes a responsibility to creditors when insolvent64 and iii) that creditors have the main economic stake in insolvency (based on a prospective entitlement).65 The judges in Sequana found the third justification to be most persuasive.66 This is likely because there has been a lot of academic criticism on the limited liability justification originally presented in Nicholson v Permakraft (NZ) Ltd (Nicholson).67 Sequana suggested that limited liability is not about offering a privilege but about encouraging risk.68 This dissertation favours the economic stake justification for the above reasons.
60 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [230]; and Porter, above n 5, at 132. 61 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [230]; and Porter, above n 5, at 132. 62 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [230]; and Porter, above n 5, at 132. 63 BTI 2014 LLC v Sequana SA, above n 7, at [127].
64 At [129].
65 At [130] and [147].
66 At [147].
67 Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985] 1 NZLR 242 (CA) at 250; and BTI 2014 LLC v Sequana SA, above n 7, at [145].
68 BTI 2014 LLC v Sequana SA, above n 7, at [145].
III Historical Development
A Origins of a Creditor Duty
The beginnings of a creditor duty (considering positions of creditors when the company is in financial difficulties) can be seen prior to the enactment of the CA in Nicholson.69 In obiter the NZ Court of Appeal confirmed there was a duty to consider the interests of creditors in certain situations.70 Cooke J stated, “for instance creditors are entitled to consideration, if the company is insolvent, or near-insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency.”71 Cooke J’s dicta could have had a dramatic influence on company law, however until recently when Sequana referenced it, there has been little focus on it.72 This is likely because the statements were in obiter and once the CA was enacted the focus was placed on the CA rather than the common law. Section 131 provides the scope for Nicholson’s creditor duty to be applied but there has been limited implementation of the dicta in this way. Instead, ss 135 and 136 have been applied the most in terms of creditor protection.
B Section 131
Section 131 stipulates “when exercising powers or performing duties, a director of a company must act in good faith and in what he or she believes to be the company's best interests.”73 As demonstrated above what is considered to be the company has changed overtime. Creditors deserve to be considered and prioritised in certain situations because of their economic interest. When a company is nearing insolvency creditors’ interests should be considered as part of the company. Some academics, for example, Tom Pasley suggest that Nicholson’s dicta and its conception of a creditor duty is already reflected in s 131.74 Lynne Taylor also agrees and argues that s 131 protects creditors’ interests.75 However, this dissertation argues that
69 Nicholson v Permakraft, above n 67, at 249. Cooke J at 250 also suggested this duty only applied to current or continuing creditors and not to future ones. Future creditors therefore had to be guardians of their own interests as Cooke J based this on a beneficial interest rationale, in that future creditors had no beneficial interest in the company. Under the economic interest rationale and s 136 future creditors now have an interest that requires consideration.
70 At 249-250; and Watts, above n 37, at [32.2.3].
71 Nicholson v Permakraft (NZ) Ltd, above n 67, at 249; and Sheikh, above n 28, at 338.
72 BTI 2014 LLC v Sequana SA, above n 7, at [30].
73 Michael Harris Laws of New Zealand Directors’ Duties (online ed) at [190].
74 Tom Pasley Morison’s Company Law Duties of Directors (online ed, LexisNexis) at [24.13].
75 Taylor, above n 4, at 172.
Nicholson’s dicta has not established a creditor duty but has rather served as an exception to look into a director’s subjective belief under s 131 as demonstrated in Debut.76 Nicholson’s conception of its creditor duty is also formulated differently to Sequana. It is argued that Sequana’s creditor duty is superior to Nicholson’s and should be adopted.
C Section 135
Under s 135 a director must not agree, cause, or allow the business of the company to be carried on in “a manner likely to create a substantial risk of serious loss to the company’s creditors.”77 ‘Agree’ is considered to be a positive act, while ‘cause or allow’ arises when a director sits back and does not object to something happening.78 Mainzeal CA stated “the division between ss 135(a) and 135(b) turns on the degree of involvement of the director, direct or indirect.”79
The focus of (and resulting controversy over) is what is “a substantial risk of serious loss”.80 Case law has tried to clarify this statement with Mainzeal CA adding judicial gloss to this through the statement “in a manner that is more likely than not to create a large or significant risk of a serious (not minor) loss to the company’s creditors.”81 There has not been specific guidance on the quantum of loss that is needed to make something a serious (not minor) loss. What qualifies as a serious loss would likely depend on the size of the company and the amount of money owed to the creditors as the focus is on the impact upon creditors. Substantial and serious have ordinary meanings,82 this section applies to the “conduct of the company” and is “owed by a director to the company, as opposed to the shareholders or creditors.”83
While insolvency is not mentioned in the section the company needs to be facing some financial difficulties or action to risk insolvency to trigger ss 135/136.84 Australia has an “outright prohibition on insolvent trading” which is said not to be true of NZ.85 Commentators have
76 Madsen-Ries v Cooper, above n 8, at [113]-[115].
77 Harris, above n 73, at [194].
78 Mainzeal Property and Construction Ltd (in liq) v Yan, n 23, at [161].
79 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [29].
80 Porter, above n 5, at 127; and Yan v Mainzeal Property and Construction Ltd (in liq) above n 9, at [29].
81 At [260]; and Porter, above n 5, at 127.
82 135 Reckless trading Company Law 492526518 (online looselead ed, Thomson Reuters) at [CA135.01].
83 Harris, above n 73, at [194].
84 Pasley, above n 74, at [24.17].
85 Porter, above n 5, at 130.
suggested the section applies before insolvency but that practically courts are using it if a company is insolvent or near insolvency.86 Currently the two leading Supreme Court cases of Debut and Mainzeal SC involved companies that were clearly insolvent and not salvageable. A substantial risk likely only arises if insolvency is a potential issue because there is a risk to creditors rather than shareholders money.87
Decisions under the predecessor of s 13588 provide some assistance to interpreting s 135.89 Under the predecessor section, Thompson v Innes (Thompson)90 found it was concerned with recklessness, that is acts contrary to what an ordinarily prudent director would do.91 In Re South Pacific Shipping Limited (in liq) it was stipulated that Thompson was not the whole test.92 The Court stated the section was concerned with illegitimate risks.93 If the risk was more than negligible this would be illegitimate.
In Fatupaito v Bates (Fatupaito) which concerned the current CA, the test under s 135 was said to be objective and the duties owed to the company.94 Substantial risk and serious loss were said to be assessed objectively.95 If there was a substantial risk associated with a particular course of action, this could not be taken even if there was a potential benefit.96 In Mason v Lewis (Mason) the legitimate versus illegitimate risk distinction was picked up in the context of s 135.97 Mason also provided the essential pillars of s 135 in that the duty is owed to the company and not to creditors, it is an objective test, the focus is on the manner of the company and not the directors belief and there should be a sober assessment of the likely consequences
86 135 Reckless trading, above n 82, at [CA135.01].
87 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [164]; and 135 Reckless trading, above n 82, at [CA135.02].
88 The predecessor of s 135 was s 320(1)(b) of the Companies Act 1955 which applied on liquidation if there was reckless or fraudulent trading.
89 Pasley, above n 74, at [24.17].
90 Thompson v Innes (1985) 2 NZCLC 99,463 (HC).
91 Reckless trading under s 135, above n 13, at [.12].
92 Re South Pacific Shipping Ltd (in liq), above n 25, at [128].
93 Re South Pacific Shipping Ltd (in liq), above n 25, at [123].
94 Fatupaito v Bates [2001] NZHC 401; [2001] 3 NZLR 386 (HC) at [67]; and confirmed in Yan v Mainzeal Property and Construction Ltd (in liq) above n 10 at [142].
95 Pasley, above n 74, at [24.17].
96 Fatupaito v Bates, above n 94.
97 Mason v Lewis [2006] NZCA 55; [2006] 3 NZLR 225 at [49].
of trading on if the company is in financial trouble.98 It was also stated that a sleeping director was no longer accepted.99
The High Court (HC) in Mainzeal viewed illegitimate risk as a difficult touchstone for liability as it does not dictate when something is illegitimate.100 The HC rather found that if there was a substantial risk to creditors, that this risk creates a serious loss, the conduct is the manner of the business and the business manner is likely to create a substantial risk of serious loss to creditors than this is the taking of an illegitimate risk.101 A risk is therefore illegitimate if the company is insolvent and will remain insolvent. The HC also suggested that the concern of risk to creditors should be one that is abnormal or illegitimate.102 During insolvency excessive risk taking is exacerbated103 and “perverse incentives arise,”104 hence why creditors interests should be considered and protected.
D Section 136
Under s 136 a director “must not agree to the company incurring an obligation unless at that time he or she believes on reasonable grounds that the company will be able to perform the obligation when it is required to do so.”105 This section involves looking at the director’s belief (subjective test) but the belief must be on reasonable grounds (objective test).106 The belief is at the time the obligation is incurred.107 Originally it was suggested this section was limited to specific transactions.108 Fatupaito was the first recognition that s 136 may be wider.109 This broader scope was later affirmed in Debut (s 136 is not confined to specific transactions) and
98 Mason v Lewis, above n 97, at [51]; picked up in Yan v Mainzeal Property and Construction Ltd (in liq),
above n 9, at [30]; and Porter, above n 5, at 127.
99 Mason v Lewis, above n 97, at [83].
100 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [163]; and 135 Reckless trading, above n 82, at [CA135.01].
101 At [160]-[163]; and 135 Reckless trading, above n 82, at [CA135.02].
102 At [165]; and 135 Reckless trading, above n 82, at [CA135.02].
103 Rosemary Langford and Ian Ramsay “The contours and content of the ‘creditors’ interests duty’” (2021) 21
J. Corp. Law Stud. 85 at 89.
104 Porter, above n 5, at 132; and Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [231].
105 Harris, above n 73, at [195].
106 Fatupaito v Bates, above n 94, at [80].
107 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [286].
108 136 Duty in relation to obligations Company Law 492526418 (online looseleaf ed, Thomson Reuters) at [CA136.01AA].
109 Fatupaito v Bates, above n 94, at [63].
Mainzeal CA.110 Section 136 can apply prior to insolvency which shows the financial state of the company is not the focus for liability but rather the state of solvency is used as a factor towards subjective and objective beliefs. For example, when a company is insolvent a director should know they will not be able to pay new obligations and when a company’s solvency is questionable it may not be reasonable to take on long term obligations. This section therefore requires the consideration of future creditors.
E Differences Between s 135 and s 136
Section 135 is aimed at not making the situation worse for current creditors (a “balance sheet focus”)111 whereas s 136 is about protecting new creditors from loss (a “future cash flow” focus).112 Debut held that the focus of s 136 is on incurring obligations rather than the business as a whole.113 However, Mainzeal SC suggests liability under s 136 may be found for the manner of the business as well as specific obligations.114 This is because as the company was insolvent, carrying on the business in that manner created s 136 liability.115
F Similarities Between s 135 and s 136
Under both sections a director can be liable for debts incurred before liquidation and so proceedings can be brought against directors outside of liquidation.116 As these duties are owed to the company117 and not to creditors directly, if the breach occurs before liquidation an action can only be brought by the company or shareholders (in limited circumstances).118 An action can be brought by shareholders through an injunction,119 or by shareholders derivatively,120 or
110 Porter, above n 5, at 136.
111 Porter, above n 5, at 135.
112 Watts, above n 37, at [32.3.1]; and Porter, above n 5, at 135.
113 Madsen-Ries v Cooper, above n 8, at [67].
114 At [373].
115 At [373].
116 Reckless trading under s 135, above n 13, at [.11].
117 Companies Act 1993, s 169(3); and confirmed in Yan v Mainzeal Property and Construction Ltd (in liq),
above n 9, at [252].
118 Companies Act 1993, s 169(1); Harris, above n 73, at [194]; and 135 Reckless trading, above n 82, at [CA135.02].
119 Companies Act 1993, s 164; Harris, above n 73, at [194]; and 135 Reckless trading, above n 82, at [CA135.02].
120 Companies Act 1993, s 165; Harris, above n 73, at [194]; and 135 Reckless trading, above n 82, at
[CA135.02].
by a court order.121 However, given the need to show a loss, it seems rare that a proceeding would be brought prior to liquidation.
If an action is brought on liquidation (which is the usual scenario) a creditor, liquidator, or shareholder can bring the claim.122 While the CA is silent on the effect of breaching these duties, s 301 provides the necessary guidance. That section is a procedural section applied on a company’s liquidation123 pursuant to which the court can require a director to pay compensation to the company or to a creditor (per Mainzeal SC) for a breach of directors' duties.124
121 Companies Act 1993, s 170 or s 172; Harris, above n 73, at [194]; and 135 Reckless trading, above n 82, at [CA135.02].
122 Companies Act 1993, s 301.
123 Reckless trading under s 135, above n 13, at [.11].
124 Reckless trading under s 135, above n 13, at [.11].
Chapter Two: Debut and Mainzeal CA
The first time the Supreme Court considered ss 135 and 136 was in Debut.125 The Court attempted to provide clarity on the application of these sections. As explained above, the lower courts and previous case law had provided limited assistance on the issue. However, Debut mistakenly focused on insolvency in its discussion of the sections which led to criticism and commentators to suggest reform was needed. The Supreme Court in Debut viewed solvency as vital126 and an important value in the CA.127 Taylor stated “The Court highlighted the importance of maintenance of solvency as a mechanism to protect creditors' interests.”128 This reasoning was contrary to that of the High Court in Mainzeal who had previously recognised that the Law Commission placed a significant emphasise on insolvency, however the enacted provision (not the Law Commission’s version) did not always mean a director would be liable when they decide to trade knowing the company is insolvent.129 The High Court also criticised the idea of a “warranty of solvency.”130 Rather than solvency per se, the High Court in Mainzeal and Mountford viewed balance sheet insolvency as the watershed to be careful of creditors.131 This is how it should be interpreted, rather as a warning sign and not necessarily a signal of liability.
A The Facts of Debut
Mr Cooper was the sole Director of Debut Homes Ltd, a residential property development company132 incorporated in 2005.133 Debut Homes Ltd was balance sheet insolvent from March 2009 but had only been able to pay its debts through shareholder advances from Cooper and his wife.134 In October 2012 the company faced difficulties in paying its debts (cashflow
125 Manyam, above n 33, at 96.
126 Manyam, above n 33, at 96.
127 Madsen-Ries v Cooper, above n 8, at [33].
128 Lynne Taylor “Enforcement of Directors’ Duties in a Liquidation Context: Madsen-Ries v Cooper” (2020) 28 Insolv LJ 216 at 217.
129 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [156].
130 At [157].
131 At [199]; and Mountford v Tasman Pacific Airlines of NZ, above n 16, at [23].
132 Cooper v Debut Homes Ltd (in liq), above n 3, at [3].
133 Laws of New Zealand (A) Decisions of the Supreme Court of New Zealand (online ed) at [133]; and Cooper v Debut Homes Ltd (in liq), above n 3, at [3].
134 Laws of New Zealand, above n 133; and Madsen-Ries v Cooper, above n 8, at [8].
solvency).135 In a meeting with the company's accountant in November 2012, Cooper learned the company would not be able to pay $300,000 of GST to IRD.136 After being told about the deficit Cooper decided it would be best to continue trading and complete the houses that were being built so that they could be sold.137
Cooper believed this would lead to less company debt.138 He thought this would improve the position of unsecured trade creditors and, apart from IRD, all other unsecured creditors were better off through continued trading rather than through liquidation.139 Cooper decided to wind down the company in 2012 and by this stage there was over $300,000 in GST owed to IRD.140 The company was liquidated in 2014 by IRD.141 The court found a breach of s 131, s 135 and s 136.142
B Debut’s Guidance on s 131
Some of the debts discharged by the company were those that Cooper had guaranteed.143 While the Court found a breach of s 131,144 it did not specifically consider s 131’s role as protecting creditors generally. Rather its focus was on resolving uncertainties as to its general application, suggesting that the directors belief under s 131 is assessed subjectively unless an exception applies.145 One of these exceptions is that if a company is near insolvency and creditors have not been considered then subjective decisions can be looked into with an objective lens.146 The Court decided the interests of all creditors (especially IRD) had not been considered so Cooper could not subjectively believe he was acting in the best interests of the company.147 This is because Cooper neglected IRD’s interests as he knew IRD would not be paid their debts and
135 Laws of New Zealand, above n 133; Madsen-Ries v Cooper, above n at [8]; and Debut Homes Ltd (in liq) v Cooper [2018] NZHC 453 at [47].
136 Laws of New Zealand, above n 133; and Madsen-Ries v Cooper, above n 8, at [70].
137 Cooper v Debut Homes Ltd (in liq), above n 3, at [2].
138 Debut Homes Ltd (in liq) v Cooper, above n 135, at [78].
139 Debut Homes Ltd (in liq) v Cooper, above n 135, at [78].
140 Laws of New Zealand, above n 133; and Madsen-Ries v Cooper, above n 8, at [1].
141 Laws of New Zealand, above n 133.
142 Madsen-Ries v Cooper, above n 8, at [185]-[187].
143 At [50].
144 At [116].
145 At [113]-[115].
146 At [116]; and 1.2 General provisions of the Companies Act 1993 Director’s Duties 494436421 (online looseleaf ed, Thomson Reuters) at [1.2.04].
147 Laws of New Zealand, above n 133; and 1.2 General provisions of the Companies Act 1993, above n 146.
there would be better results for some creditors.148 Debut could be viewed as demonstrating the adoption of a creditor duty under s 131. However, this dissertation argues that Debut is not adopting a creditor duty under s 131 but is confirming the law’s concern with self-interested acts and preferential treatment of some creditors at the expense of others.
Indeed, Mr Cooper’s conflict of interest clouded the finding of a breach of s 131, in that the conflict of interest determined liability under s 131 rather than not considering creditors. Jamieson and BNZ both had mortgages which were personally guaranteed by Cooper.149 Cooper was using funds to pay off certain creditors (the ones he had personally guaranteed).150 The Court disliked this as he was acting in his own interest151 and treating creditors unevenly. Mr Cooper and his accountant discussed a strategy of not paying GST when it was due.152 The shortfall was discussed at the meeting and that Jamieson would more likely pursue the company to bankruptcy and should be paid first whereas IRD was more likely to negotiate with the company.153 The Court did not like this compartmentalisation of creditors.154 Cooper was preferring secured creditors155 and therefore himself.156 So, while Debut states there will be a breach of s 131 if a director does not consider creditor interests in these situations and a conflict of interest will likely exacerbate a breach,157 it seems if there was not a conflict of interest a s 131 breach would likely not have been found.
Some academics, like Watts have suggested that s 131 and considering creditors should be part of Debut’s ratio.158 Watts and other commentators are not so critical of the Court assuming in insolvency situations creditors should be considered.159 This is likely because this idea is not new as demonstrated by Nicholson.160 This is because if a company is solvent “the “company”
148 Madsen-Ries v Cooper, above n 8, at [116].
149 At [9].
150 Debut Homes Ltd (in liq) v Cooper, above n 135, at [50].
151 At [50].
152 Debut Homes Ltd (in liq) v Cooper, above n 135, at [39].
153 At [62].
154 1.2 General provisions of the Companies Act 1993, above n 146.
155 Pasley, above n 74, at [24.13].
156 Debut Homes Ltd (in liq) v Cooper, above n 135, at [78].
157 Madsen-Ries v Cooper, above n 8, at [114]; and Laws of New Zealand, above n 133.
158 Peter Watts “Directors’ duties after Debut Homes – a return to the scene” [2021] CSLB 55 at 59.
159 Watts, above n 158, at 61.
160 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court” (2021) 49 ABLR 140 at 141.
means the shareholders as a whole or the hypothetical existing shareholder.”161 If a company is “near insolvency, the creditors’ interests, rather than shareholders’ interests, will need to be considered.”162 If Sequana was released prior to Debut this likely would have had an impact on Debut’s s 131 reasoning. There arguably would have been the opportunity for the Supreme Court to adopt a creditor duty (as formulated by Sequana) into s 131.
C Debut’s Guidance on s 135
The Court concluded Cooper breached s 135 as there was a risk of serious loss to the creditors.163 The Court found that Cooper was advised of the shortfall in November 2012 and as he knew the company’s finances were not recoverable, it was certain that serious loss to creditors would occur.164 The company was insolvent in November and unsalvageable at that point. Cooper was therefore in breach of ss 135 and s 136 from November165 and “should have stopped trading at that point unless a viable formal or informal mechanism was found.”166 The fact that Debut Homes was insolvent at this point indicated there was a substantial risk of serious loss and therefore it was valid that liability was found under these sections. However, the Court placed too much focus on insolvency which is not what these sections are aimed at.
The Court stated it did not matter that it was a sensible business decision to trade on to complete the houses to reduce the deficit and make some creditors better off.167 The Court decided if a director knows of a shortfall (as was the case here), and the company is not salvageable the director will breach s 135 even if the deficit was reduced.168 A factor towards the breach was the fact that Cooper did not change the company's business strategy even though he knew of the financial difficulties.169
161 131 Duty of directors to act in good faith and in best interests of company Company Law 492526338 (online looseleaf ed, Thomson Reuters) at [131.07].
162 131 Duty of directors to act in good faith and in best interests of company, above n 161.
163 Madsen-Ries v Cooper, above n 8, at [70].
164 Madsen-Ries v Cooper, above n 8, at [70]; and Laws of New Zealand, above n 133.
165 At [56].
166 At [183].
167 At [72].
168 At [174]; and Laws of New Zealand, above n 133.
169 At [77]; and Laws of New Zealand, above n 133.
The Court decided a company is not open to trade on if it is insolvent, to conduct its own liquidation or administration.170 The creditors need to consent to trading on in these circumstances and those who did not consent needed to get paid in full.171 Mr Cooper also failed to explore other options when he should have.172 Other options included Part 14 (creditor compromise),173 Part 15A (voluntary administration),174 Part 16 (liquidation or appoint liquidator),175 appointing a receiver,176 and informal mechanisms.177 If after considering those mechanisms and if they were found to be unsatisfactory the company should have been put into liquidation.178 Therefore if a company is clearly insolvent and does not have any formal or informal mechanisms in place this will breach the s 135 duty.179 Some view this as tough on directors, however if a company is insolvent and other mechanisms are not in place to protect creditors the risk is too high. A creditors interest deserves to be acknowledged and protected.
D Debut’s Guidance on s 136
The Court found a breach of s 136 as there was not a reasonable belief that the company could meet the new GST obligations and trade debts.180 That was because these new obligations were incurred after obtaining knowledge of the company's financial difficulties and GST deficit.181 The company was insolvent at the time it incurred these obligations. The company could not pay its current debts let alone new ones and so there was a breach of s 136.182 So, if a company incurs debts when it is clear it cannot pay these, there will be a breach of s 136.183
170 Madsen-Ries v Cooper, above n 8, at [47]-[48], [179]-[180] and [184].
171 At [48].
172 Cooper v Debut Homes Ltd (in liq), above n 3, at [76].
173 At [36].
174 At [38].
175 At [39].
176 At [40].
177 At [47].
178 At [76].
179 Laws of New Zealand, above n 133.
180 Laws of New Zealand, above n 133.
181 Madsen-Ries v Cooper, above n 8, at [168].
182 At [96].
183 Cooper v Debut Homes Ltd (in liq), above n 3, at [96].
The Court stated, “section 136 was designed to remove any incentive to “rob Peter to pay Paul.”184 This is the idea that a company should not use newer creditors' money to pay the old creditors which would then leave the shortfall or unpaid debt to the newer creditors.
II Mainzeal CA
Mainzeal CA provides more guidance than Debut on the application of ss 135 and 136. While Mainzeal CA places less of an emphasis on insolvency than Debut, its comments surrounding insolvency are still problematic. Mainzeal CA also fails to consider s 131 as it was not argued. This was likely a strategic point from the liquidator as there were no concerns regarding self- interested behaviour by the directors. Arguably if Debut had created a creditor duty under s 131 it could have been applied here.
A The Facts of Mainzeal
Mainzeal Property and Construction Ltd (Mainzeal)185 loaned money to its parent company Richina Pacific.186 These loans were not repayable.187 The company had been balance sheet insolvent since 2005188 but this was not shown in financial statements.189 Mainzeal continued to trade while balance sheet insolvent.190 The company relied on support from Richina Pacific to continue trading191 and in 2008 obtained a formal letter of support (but no guarantee) from Richina Pacific.192 By the end of 2009 Mainzeal was in a vulnerable position and their solvency relied on continued expressions of support from Richina Pacific.193 Mainzeal was found to be insolvent from 2010 but could potentially have traded on if a sober assessment of its finances had been made and a path to solvency implemented.194 Receivership and liquidation occurred in February 2013.195 At this time Mainzeal owed its unsecured creditors approximately 110
184 Cooper v Debut Homes Ltd (in liq), above n 3, at [84].
185 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [1]. 186 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [32]. 187 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [31].
188 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [352]; and Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [31].
189 At [31].
190 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [4]. 191 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [2]. 192 At [37].
193 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [84].
194 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [230].
195 Mainzeal, Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [1].
million dollars.196 The Court found there was a breach of s 135197 but that there was no loss to the company as the company's position was improving.198 The Court also concluded there was a breach of s 136.199
B Mainzeal CA’s Guidance on s 135
The Court provided some helpful guidance for directors on the liability of directors under s
196 Mainzeal, Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [1].
197 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [5].
198 At [8].
199 At [9].
200 At [263].
201 At [263].
202 At [363].
203 At [260]; and cited in Watts, above n 37, at [32.2.3].
204 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [263]. 205 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [48]. 206 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [263]. 207 At [447].
208 At [268].
The Court added “If continuing to trade in a “business as usual” manner is likely to create a significant risk of serious loss to creditors, trading on in that manner is not permitted.”209 This means that if the directors seek to trade-out of the company’s difficulties, to avoid liability the directors need to have made thought-out changes to how the company is operating.210 So, trading on rather than taking steps to cease trading will likely breach s 135 unless the company can service pre-existing debt and meet new commitments.211 The Court confirmed it is not allowable to rob Peter to pay Paul.212 After a director has completed a “sober assessment of the likely consequences of trading on” and if a return to solvency is unlikely it is not open to trade on.213 The company then needs to cease trading or appoint an administrator under Part 15A.214 There needs to be an objective consideration of whether the director's assumptions throughout the process were reasonable. The Court also affirms the distinction in Re South Pacific Shipping Limited (in liq) between illegitimate and legitimate risks.215 The High Court referenced Mason v Lewis, Löwer v Traveller and Waller,216 Re South Pacific Shipping Limited (in liq) and Fatupaito v Bates as helpful to s 135.217 The Court mentioned the essential pillars from Mason218 - the duty is owed to the company, it is an objective test, the focus is on the manner of the company and not the directors belief and there needs to be a sober assessment if the company is in financial trouble.219
Reiterating the approach in Debut, the Court confirmed that it is “not open to directors of an insolvent company to trade on in order to conduct their own informal administration or liquidation, unless they obtain the consent of affected creditors and/or ensure that creditors who have not consented to that approach are paid in full.”220 The Court found Mainzeal was treating creditors funds as company money.221 Mainzeal had had time to remedy its financial position
209 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [269].
210 At [268].
211 At [269].
212 At [269].
213 At [270].
214 At [270].
215 At [49].
216 Löwer v Traveller and Waller [1998] NZCA 36/04.
217 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [151].
218 Mason v Lewis, above n 97, at [51].
219 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [30].
220 At [271].
221 At [105].
but had not done so. The Court concluded that Mainzeal “carried on [business] in a manner likely to create a substantial risk of serious loss to the company’s creditors from mid-2010.”222
The directors in Mainzeal CA did not have to pay compensation under s 135 as there was no loss to the company as the company’s finances were getting better overtime. Therefore, there is an argument that trading when a company is clearly insolvent breaches s 135 but if the company experiences no loss this is accounted for in an award of no compensation (s 301). Mainzeal CA’s guidance on when a company is in a precarious financial position is arguably the best guidance for potential liability pre-insolvency. However, this fact scenario has not yet emerged and so it is unclear how this should be applied. In the bordering on solvency period, it is argued that it would be sensible for directors to follow the steps in Mainzeal CA to avoid potential liability under s 135.
C Mainzeal CA’s Guidance on s 136
The Court also provided guidance on the application of s 136. The Court stated that s 136 was not limited to specific transactions; the result being: “a s 136 claim may relate to specific obligations, an identified class of obligations, or all obligations incurred by the company after a given point in time.”223 The Court outlined what seems to be the beginnings of a test for deciding liability under s 136. The Court stated, “the first step in applying s 136 is to identify the obligation(s) that are subject of the claim, and ascertain whether the director agreed to the company incurring those obligations.”224 Then the director's subjective belief and the reasonable grounds for this belief (objective) will be considered.225 The focus will be on what the director knew or would know if they made reasonable inquiries that a reasonable director would make.226 Then it needs to be identified when the relevant obligations were incurred, when they were due and the belief at the time of the director of the future and the grounds for the belief.227
222 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [383] and [451].
223 At [283].
224 At [284].
225 At [285].
226 At [285].
227 At [286].
In some cases, the company’s financial position may be so dire that there are no reasonable grounds for the belief.228 In other cases its finances may be sustainable in the short term but not in the long term.229 In that situation the director would be liable for the long term obligations only.230 After applying these steps to the facts the Court concluded the directors of Mainzeal were therefore liable for all the debts after July 2012 as there was no reasonable grounds for the directors to think they could pay these debts.231 As the Court noted:
“Plainly the directors of Mainzeal did agree to new obligations being taken on after 31 January 2011. Those obligations included the four new major projects referred to by the liquidators, which involved a significant number of obligations to principals, sub-contractors and suppliers. But it seems to us that the class of obligations to which the directors agreed was much broader than this: it extended to all new obligations undertaken in the ordinary course of Mainzeal's business as a result of the directors' agreement to Mainzeal continuing to trade on a “business as usual” basis, whether those obligations were expressly approved by the board or were approved by executives acting under delegated authority from the board.”232
Commentators support this by stating “That duty was breached both in relation to long-term obligations which the company incurred from 2011, by taking on 4 new major projects and later in relation to short-term obligations incurred in the last 6 months of trading which were ultimately unpaid.”233 This was because at the time the company was insolvent so there were no reasonable grounds for longer term obligations234 and then eventually no reasonable grounds for shorter term obligations. Commentators stated “The company's ability to meet the long- term obligations depended on the company receiving shareholder support as and when financial difficulties arose. However, it was not reasonable for the directors to believe that shareholder support would be forthcoming.”235 The Court therefore found a breach of s 136, which was later confirmed in Mainzeal SC.236
228 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [287].
229 At [287].
230 At [287].
231 At [544].
232 At [460].
233 Duty in relation to obligations under s 136 (online looseleaf ed, CCH) at [.42].
234 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [464].
235 Duty in relation to obligations under s 136, above n 233.
236 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [7].
D Emphasis on Solvency
While Mainzeal CA provides better guidance than Debut, in particular the foundations for a test and criteria for the sections, it is considered that it still mistakenly places emphasis on the company’s solvency as the focus of the sections. Perhaps this reflects the facts, as Mainzeal had traded for many years while insolvent.237 Statements like “The policy of trading while insolvent is the source of the directors’ breach of duties”238 mistakenly suggest liability is based on insolvency. Of course, Mainzeal CA was required to follow the reasoning advanced by the Supreme Court in Debut.
III Reflections on Debut and Mainzeal CA – A Misleading Emphasis on Insolvency
Debut and Mainzeal CA came to the correct conclusions of liability under ss 135 and 136 – clearly in both cases there was a substantial risk of serious loss and directors should not have taken on new obligations. However, it is considered that collectively the emphasis in the judgments on whether the company was insolvent is misleading. Hence, why there was justifiably criticism of the sections and calls for reform.239 Mainzeal CA stated they wanted a review to create a “coherent and practically workable regime”240 and Mainzeal SC also discussed the need for a review.241
A Criticism of Debut
Academics have argued that ss 135/136 are the most problematic, controversial and criticized directorial duties.242 Commentators suggest that the sections are difficult to apply,243 are “incoherent and strangely incomplete,”244 and are “totally uncommercial.”245 Others suggest
237 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [2].
238 Yan v Mainzeal Property and Construction Ltd (in liq) [2021], above n 9, at [351]; and citing Mainzeal Property and Construction Ltd (in liq) v Yan, above n 23, at [188].
239 Porter, above n 5, at 125.
240 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [12]. 241 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [376]. 242 Porter, above n 5, at 125.
243 David Goddard, “Directors’ Liability for Trading While Insolvent: A Critical Review of the New Zealand Regime” in Ian Ramsay (ed), Company Directors’ Liability for Insolvent Trading (CCH Australia, 2000) at 169. 244 John Farrar, “directors’ Duties and Corporate Governance in Trouble Companies” (2001) 8 Canterbury Law Review at 99.
245 Peter Watts “Debut Homes in the Supreme Court – A Product of the Vicarage?” [2020] CSLV 107 at 107.
the drafting of the sections is a mess and when applied in a commercially realistic manner the language is tortured.246 For example, the section title is “Reckless Trading”, but these words are not used in the section.247
Commentators are most critical of s 135.248 As one commentator noted: “The main criticism is that the wording seems to rule out substantial risk-taking, even when that risk is balanced against a high potential gain.”249 Underlying such criticism is an inherent tension in these sections – between encouraging business risk and judgment, and preservation of business (and jobs) versus protecting creditors.250 There needs to be an appropriate balance struck. Mainzeal SC stated sometimes this tension is left to the courts to decide and at other times legislation resolves this.251 What Mainzeal SC meant by this is that in clear cases of unfair risk to creditors the section decides liability, however in unclear cases the court will need to decide.
The way Debut interpreted s 135 and s 136 did not align with the risk-taking aspect of the CA and the idea of limited liability.252 A commentator stated “The Act balances risk taking and a means of economic achievement against the encouragement of efficient and responsible management and the protection of shareholders and creditors against the abuse of management power.”253 If a company always needs to remain solvent to avoid liability under these sections there is not much point to limited liability.254 This explains why commentators argue the current balance is not satisfactory, as they understand it to be more in the creditors favour, rather in the recognition that business is risky, which in turn means directors will act more cautiously.255 This dissertation disagrees and suggests that, with the benefit of the guidance of
246 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court”, above n 160, at 142.
247 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court”, above n 160, at 142.
248 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court”, above n 160, at 142.
249 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court”, above n 160, at 142.
250 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [113]; and Porter, above n 5, at 130.
251 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, [113].
252 Watts, above n 245, at 109-110; and 1.2 General provisions of the Companies Act 1993, above n 146, at [1.2.04].
253 1.2 General provisions of the Companies Act 1993, above n 146, at [1.2.04].
254 Watts, above n 245, at 109.
255 Porter, above n 5, at 131.
s 131 (and a creditor duty), ss 135 and 136 do provide the right balance when interpreted properly and applied to companies that at the relevant time were insolvent.
Law firm’s articles on Debut suggest that directors need to beware256 as “[b]reach of this duty exposes a director to personal liability to creditors in an insolvent liquidation.”257 This is likely because businesspeople view the decision as being too hard on a director who made a sensible business decision to complete the houses.258 Those who are more concerned with business interests suggest a lot of the reasoning is uncommercial and will create unnecessary litigation.259 However, this dissertation argues that it was right to find liability in Debut not because of insolvency but because of the conflict of interest and the resulting substantial risk to certain creditors.
It was hoped that Debut would resolve some of these criticisms but after Debut uncertainty surrounding s 135’s expression and application remain.260 Commentators stated “it would have been helpful if the Court had addressed the criticism of the allegedly “uncommercial” drafting of s 135, believed by some to have imported into commercial dealings the “morals of the vicarage” and providing protection to those who are not “society's vulnerable” (the IRD in this case).”261 For example, the Supreme Court did not deal with the controversies at the heart of s
135.262 It did not deal with whether legitimate decisions are inhibited, or businesses of high risk and return and temporary difficulties are allowed under the section.263
One of the aims of codifying directors’ duties in the CA264 was to make the law more accessible to directors.265 Scholar’s question whether this goal has been achieved because of the apparent
256 Porter, above n 5, at 130.
257 1.2 General provisions of the Companies Act 1993, above n 146, at [1.2.04].
258 Watts, above n 245, at 58.
259 Watts, above n 45, at 109.
260 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court”, above n 160, at 140.
261 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court”, above n 160, at 143.
262 Taylor, above n 128, at 219.
263 Taylor, above n 128, at 219.
264 Pasley, above n 74, at [24.6].
265 Law Commission, above n 2, at [186]; Pasley, above n 74, at [24.6]; and Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [209].
problems they see with these sections.266 Scholars that prefer clarity would argue that these sections should be amended to specifically reference solvency. However, while amending the CA in this way might provide more certainty when it is clear that the company was insolvent, it would not offer the right balance between creditor protection and directors taking risks when the company, while solvent is facing serious financial challenges. There will always be some level of uncertainty (as this is what is required in this area of the law), but it should be limited as much as possible.
Given the problems with Debut’s judgment it is understandable why it received criticism and caused academics to say the cases show issues the courts cannot resolve so legislative reform is needed.267 Fortunately, Mainzeal SC clarified some of these issues, to the point where ss 135 and s 136 do not need to be redrafted (when interpreted correctly), but a creditor duty (as interpreted by Sequana) under s 131 is still needed to provide further clarity.
266 “New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court”, above n 160, at 142.
267 Porter, above n 5, at 125.
Chapter Three: Mainzeal SC
The judges described their decision as “of fundamental importance to the business community.”268 The Supreme Court recognised that the principles around ss 135 and 136 should be more easily accessible and understandable to directors.269 Mainzeal SC’s reasoning was influenced by Sequana in that the case referenced Sequana. However, Mainzeal SC did not deal with the pre-insolvency question or discuss s 131 and Sequana’s potential application to this.
After the decisions of Debut and Mainzeal CA the law was in a state of disarray because of the focus that was placed on solvency. Mainzeal SC clarifies that the focus of the sections is not on the insolvent company per se and provides further assistance and depth to the application of ss 135 and s 136. The Court did this by confirming that the sections are aimed at risk to creditors and not whether the company failed the solvency test.270 Indeed, in Debut and Mainzeal SC the companies were unsalvageable meaning the risk to creditors was too high as there was a shift in economic risk. Mainzeal SC suggested if there had been enforceable guarantees of support from its parent company Mainzeal could have likely continued to trade while insolvent – the creditor’s being protected by those guarantees.271 This demonstrates that there is not an outright ban on insolvent trading and the sections are rather aimed at risk to creditors. This reasoning was influenced by Sequana’s finding that the focus of the test there is not on insolvency.272 This reasoning will be further expanded on in the Sequana section (Chapter Four).
So, when considering s 135 a sign of this shift is the risk of insolvency. For example, when a company is solvent there is not really any risk to creditors. When a company is bordering on insolvency there is some risk to creditors and so they should be considered under s 131. When
268 Yan v Mainzeal Property and Construction Ltd (in liq0, above n 10, at [1].
269 At [269].
270 At [10] and [189].
271 At [216].
272 BTI 2014 LLC v Sequana SA, above n 7, at [165].
the company is insolvent there is great risk to creditors so s 135 and s 136 (depending on the facts) are in play.
A starting point is the clarity the Supreme Court provides on the relationship of s 135 and s
The Supreme Court also adds clarity to the application of ss 135 and 136. The Court found the scope and application of ss 135 and 136 is about creditor interests and compensating them.279 The Court finding ss 135 and 136 are in play when a company is insolvent or the company’s state of solvency may adversely impact upon a creditors economic interest (the ability to have their debt repaid).280 If the solvency position of the company or other factors show a potential for substantial risk of serious loss to creditors or creates doubt that obligations will be honoured, the director should address the future of the company.281 The Court noting that ss “135 and 136 are to be construed as imposing standards of reasonableness and diligence upon directors.”282 This seems to be adding in elements that would traditionally be under a duty of care (s 137). For example, under the duty of care a director should be monitoring the company financials or otherwise face liability.283
273 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [366].
274 At [291].
275 At [359].
276 At [245].
277 At [291].
278 At [247].
279 At [1].
280 At [259].
281 At [270].
282 At [359].
283 At [270].
A Guidance on s 135
The Supreme Court provides clarity on s 135 in that s 135 is not aimed at insolvency. The Court stated, “s 135, is aimed at mitigating the risk of serious losses to creditors and providing a remedy where such losses have occurred.”284 The Court noted this is a different purpose to what the Law Commission recommended, which was aimed at “protecting the company’s solvency.”285 Therefore a breach of s 135, is about whether the manner of the business likely creates a substantial risk of serious loss and whether the actions of the director were unreasonable.286 The Court stated “substantial” refers to probability of loss to creditors and “serious” to the extent of that loss.”287 The Court found there was an objective approach to whether a business is carried on in a prohibited manner.288 But that there needs to be reasonable care and skill to directors decisions.289 For ‘agree’, ‘cause’ or ‘allow’, these are the circumstances that the director should have been aware of based on the required standard.290 More care, skill and diligence is required the more difficult the company is.291
A reasonable time will be given to the director to assess the business risk, and if professional advice was sought and received this will go towards reasonableness.292 The Court will also recognise hindsight bias and that sometimes directors will have incomplete knowledge.293 Therefore “trading while insolvent may well be legitimate” as the Court gives directors some time and leeway.294 Directors will be given a reasonable time to decide their cause of action.295 The time that is reasonable in the circumstances will be influenced by whether the need to make changes was urgent and the financial position of the company.296 A director may need expert advice.297 The director should look at whether the risks can be mitigated, for example if there is a lack of capital can this be recapitalised or is there a plan so there is not a substantial
284 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [189].
285 At [189].
286 At [219].
287 At [198].
288 At [211].
289 At [273].
290 At [211].
291 At [211].
292 At [273].
293 At [273].
294 At [215].
295 At [271].
296 At [215].
297 At [271].
risk of loss and obligations can be completed, in doing this the directors are accounting for creditors.298
The Court spent a lot of time looking at whether the assurances of support given by Richina Pacific to Mainzeal were reasonable. These sections of the judgment seem to only apply when this fact scenario comes up. The Court found a strategy for long-term balance sheet trading is generally not acceptable.299 However, this may be legitimate if assurances of support are reasonable.300 If a director can reasonably rely on assurances of support this is material to whether trading on will breach s 135.301 As here, the assurances were not legally binding or practically enforceable this meant it was unreasonable for the directors to believe in them.302
The Court stated:
“The directors were in breach of their s 135 duty from 31 January 2011 ([236]). They ought to have recognised by 2010 that, without a substantial injection of capital or assurances of support on which reliance could reasonably be placed, continued trading by Mainzeal posed a likelihood of substantial risk of serious loss to creditors ([234]). The assurances of support the directors received from related companies could not be reasonably relied upon ([227]–[229]). The limited actions the directors took were insufficient to reduce the risk to the extent required to ensure compliance with s 135 ([235]). In not recognising this, the directors acted unreasonably.”303
B Guidance on s 136
The Court clarifies the focus of s 136 is also not on insolvency, stating: “[t]here is no direct connection in the statutory text between s 136 and the maintenance of solvency. When s 136 is read in light of that, and in conjunction with s 135, it is reasonable to infer that its purpose was to provide protection for creditors against the conduct it addresses.”304 The Court also
298 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [271].
299 At [272].
300 At [272].
301 At [216].
302 At [216].
303 At [371].
304 At [189].
confirmed there is a reasonableness standard in it.305 The Court also affirmed that s 136 is not just about particular obligations but can be a course of trading as well.306 The Court finding the directors would usually not be liable for continued trading in the taking stock period unless substantial new obligations without appropriate measures to meet them were taken.307
The Supreme Court found “The directors also acted in breach of s 136 in respect of: (a) the four major projects entered into by the Mainzeal after 31 January 2011, as these projects entailed Mainzeal taking on medium- to long-term obligations, and by 31 January 2011 the directors did not have reasonable grounds to believe that Mainzeal would, in the medium to long term, be able to pay its debts ([256]–[258]); and (b) all obligations incurred after 5 July 2012 ([259]–[268]).”308
While Mainzeal SC provided necessary clarity on these sections after Debut it did not address s 131 or Sequana’s relevance to that section. Therefore, it is appropriate to look at Sequana in depth and see how it could apply to NZ. It will be recalled that that Sequana suggests that directors may need to consider the interests of creditors prior to the company becoming insolvent.309
305 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [364].
306 At [249].
307 At [273].
308 At [373].
309 BTI 2014 LLC v Sequana SA, above n 7, at [12].
Chapter Four: Sequana
The company (AWA) paid a dividend in May 2009 to its only shareholder and parent company (Sequana SA).310 At the time AWA was balance sheet and cash flow solvent,311 and an insolvency was not imminent or likely.312 There was a real and not remote risk of it becoming insolvent at some point in the future, however, because of long-term environmental contingent liabilities.313 In 2018 the company was placed into insolvency and the appellant (BTI 2014 LLC) tried to recover the dividend payment by arguing that its payment was in a breach of a common law duty to creditors that was implicit in s 172(1) of the Companies Act 2006 (UK CA).314 The appellants argued the duty existed and that a real risk and not remote risk of insolvency was enough to trigger the duty.315 The appellants stated “the payment of the dividend created a real and not remote risk of the company becoming insolvent at some point in the future, that the directors failed to have regard to the interests of creditors in deciding to declare the dividend, and that there was accordingly a breach of the duty.”316 The existence of this duty was disputed.317
The issues on appeal were “did the common law creditor duty exist?, can the creditor duty apply to dividends that were otherwise lawfully paid?, if it existed, what was the content of the creditor duty? and when was the creditor duty engaged?”318 While the Supreme Court concluded “that no duty of the kind described arose in those circumstances,”319 its members did consider how the duty would operate and noted that on these facts creditors interests had not been considered.320
310 BTI 2014 LLC v Sequana, above n 7, at [115]; and Daniel Jukes “BTI 2014 LLC v Sequana SA [2022] UKSC 25” (2023) 44 Comp. Law 86 at 86.
311 At [115]; Jukes, above n 310; and Sheikh, above n 28, at 341.
312 At [116] and [9]; and Harris, above n 73, at 12.
313 At [116]; Schilling de Carvalho and Reddy, above n 24, at 17; Sheikh, above n 28, at 341; and Harris, above n 73, at 12.
314 At [115]; and Jukes, above n 310.
315 At [117].
316 At [9].
317 At [117]; and Jukes, above n 310.
318 Jukes, above n 310; and cited in Schilling de Carvalho and Reddy, above n 24, at 18.
319 BTI 2014 LLC v Sequana SA, above n 7, [10] and [14].
320 At [116].
A Existence of a Common Law Creditor Duty
All members agreed that such duty exists321 and was incorporated into the UK CA through s 172 (duty to promote the success of the company),322 in particular s 172(1).323 That subsection provides that:
“a director of a company, must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.”324
Subsection (1) then lists a number of matters that the director has to have regard to. Section 172(3) goes onto provide that “the duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.”325
The first articulation of a common law duty to creditors was in West Mercia Safetywear Ltd v Dodd (West Mercia),326 where the Court concluded that the duty arises when a company is insolvent.327 Sequana concluded that the rule from West Mercia was preserved by s 172(3).328 Watts stated “Sequana is authority for the view that directors are required to consider creditors’ interests where their company is in an insolvency situation.”329 Section 172(3) does not go so far as to affirm the rule which allows it to develop in the common law as Parliament intends it to.330
While it is easy to label this as a creditor duty331 the court stated the rule in West Mercia does not create a new duty per se, it simply modified the good faith duty in s 172(1), in that the
321 BTI 2014 LLC v Sequana SA, above n 7, at [76]; and Jukes, above n 310.
322 At [64].
323 Jukes, above n 310.
324 Companies Act 2006, s 172(1).
325 Companies Act 2006, s 172(3).
326 West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA).
327 BTI 2014 LLC v Sequana SA, above n 7 at [114].
328 At [13], [69], [111] and [209].
329 Sheikh, above n 28, at 349.
330 BTI 2014 LLC v Sequana SA, above n 7, at [71].
331 Jukes, above n 310, at 87.
interests of a company can extend to creditors in certain circumstances.332 This explains why Lord Reed does not want to label it as a creditor duty.333 Lady Arden added that prior to the 2006 Act the law treated this rule as a duty, but now it should be framed as a rule.334 In turn, subsection (1) has its origins in the Equity.
The Supreme Court confirms the duty is owed to the company rather than directly to creditors.335 Section 170(1) of the UK CA provides the general rule that the duty is owed to the company.336 In NZ most directors’ duties are owed to the company (although some are owed to shareholders). The case also confirms that creditors need to be considered as a whole body.337 Jukes stated, “The court held that in certain circumstances the duty is modified by the common law rule which requires a director to consider the interests of a company’s creditors as a whole class.”338
B Engagement of the Creditor Duty
The case is also important for its discussion on what stage in the deterioration of a company’s finances the duty applies. All judges found that the rule does not apply when there is a “real and note remote risk of insolvency.”339 Therefore the judges agree the duty was not triggered in the case.340 It is important to note the subtle differences in the majority and minority judgements as there was a split on what the exact trigger for the duty should be.341
Majority
The majority, of Lord Hodge, Lord Briggs and Lord Kitchin stated the duty applies when “the directors know, or ought to know, that the company is insolvent or bordering on insolvency or that an insolvent liquidation or administration is probable.”342 This is earlier in time than an
332 BTI 2014 LLC v Sequana, above n 7, at [73], [77] and [11]; Akintola and Samanta, above n 24, at 44; Sheikh,
above n 28, at 340; and Jukes, above n 310, at 87.
333 BTI 2014 LLC v Sequana SA, above n 7, at [11].
334 Jukes, above n 310, at 87.
335 BTI 2014 LLC v Sequana SA, above n 7, at [112] and [11]; and Sheikh, above n 28, at 349.
336 Sheikh, above n 28, at 330.
337 BTI 2014 LLC v Sequana SA, above n 7, at [11] and [207]; and Schilling de Carvalho and Reddy, above n 24, at 19.
338 BTI 2014 LLC v Sequana SA, above n 7, at [11]; and Jukes, above n 310, at 87.
339 At [83] and [191]; Sheikh, above n 28, at 343-346; and Akintola and Samanta, above n 24, at 44.
340 “The creditor duty” (2022) 168 Civ.P.B. 3 at 3.
341 “The creditor duty”, above n 340.
342 At [203], [207], [231] and [247]; quotation taken from Jukes, above n 310, at 88.
“inevitable insolvent liquidation or administration.”343 This test departs from the previous lower standard of risk of insolvency or likely to become insolvent344 and the Court of Appeal’s345 trigger of when insolvency is probable.346 Sheikh stated “Directors will be in breach of their duty if they fail to consider the Creditor Interest in these circumstances.”347
The Court also notes that there is a scale from real risk (the company may become insolvent) to actual risk (the company is insolvent).348 Cases will occur on all ends of the spectrum but in most cases, the companies have been at the actual risk stage as have been insolvent.349 In the cases on earlier times, the comments on pre-insolvency have just been obiter.350
Minority
The minority, of Lord Reed and Lady Arden, stipulated the same test, but with the difference that knowledge “that the company is insolvent or bordering on insolvency or that an insolvent liquidation or administration is probable”351 was not needed, rather the directors should know of the company's financial position generally.352
Lady Arden also commented that once the duty is triggered directors should not only consider creditors but not harm them by acting in the creditor’s interests.353 For example, the directors could not enter into insolvency-deepening activity but were allowed to conduct proper activity.354
C Application of the Creditor Duty
The application of the duty (how much weight to give to creditors interests) depends on the condition of the company (what point it is on a sliding scale of solvency).355 The Court stipulated that if the company was insolvent or bordering on insolvency, but it was not an
343 BTI 2014 LLC v Sequana SA, above n 7, at [176].
344 Schilling de Carvalho and Reddy, above n 24, at 19.
345 BTI 2014 LLC v Sequana SA [2019] 2 All ER 784, [2019] EWCA Civ 112.
346 BTI 2014 LLC v Sequana SA, above n 7, at [177] and [200].
347 Sheikh, above n 28, at 344.
348 BTI 2014 LLC v Sequana SA, above n 7, at [179].
349 At [179].
350 At [179].
351 Jukes, above n 310, at 88.
352 Schilling de Carvalho and Reddy, above n 24, at 19.
353BTI 2014 LLC v Sequana SA, above n 7, at [250]; and Sheikh, above n 28, at 334.
354 At [290].
355 Schilling de Carvalho and Reddy, above n 24, at 19.
inevitable insolvent liquidation, the directors must consider the creditors interests,356 but both the shareholders and creditors still have an interest in the company.357 If shareholder and creditor interest's conflict in this scenario they need to be balanced.358 The weight to give to creditor interests increases as the company's financial problems worsen.359 If an insolvent liquidation or administration was inevitable then the creditors interests are paramount.360 This is because if a liquidation was unavoidable, the shareholders no longer have an interest in the company as their shares become worthless and the company's interests become only that of its creditors.361 These stipulations provide a useful clarification on the priority of shareholders and creditor interests in different situations.362 The Court also mentioned there is a difference between considering interests and acting in those interests.363 This distinction did not need to be considered in the case as the directors had not even considered the creditors.364
The rationale behind this is that when a company is financially stable (solvent) the creditor’s interests do not need consideration as they are not at risk and shareholder interests are paramount.365 As the financial situation of the company declines a creditor becomes more at risk of not getting their money back and so their economic interest in the company increases.366
D Focus Not on Insolvency
Sequana stipulates that the focus of the test is not on insolvency.367 It is actually the onset of liquidation (the winding up of the company) rather than insolvency that means creditors have the main economic stake.368 The Court found the rationale for different company interests is not about insolvency, but rather a shift of economic interests and risk - in which insolvency is a clear sign of this shift.369 For example, the shift is discernible if insolvency is imminent.370 Therefore, the question surrounding whether the duty applied is not about insolvency per se,
356 Sheikh, above n 28, at 343.
357 BTI 2014 LLC v Sequana SA, above n 7, at [81] and [176].
358 At [81] and [176]; and Sheikh, above n 28, at 343.
359 At [11] and [81]; and Sheikh, above n 28, at 340 and 343.
360 At [11] and [303]; Schilling de Carvalho and Reddy, above n 24, at 19; and Sheikh, above n 28, at 343.
361 At [50], [77], [80], [81] and [291].
362 Sheikh, above n 28, at 349.
363 BTI 2014 LLC v Sequana, above n 7, at [118].
364 At [118].
365 Sheikh, above n 28, at 343.
366 Jukes, above n 310, at 87.
367 BTI 2014 LLC v Sequana SA, above n 7, at [165].
368 At [165].
369 At [86].
370 At [86].
rather the deterioration in the company’s finances.371 The Court stated, “in principle, the critical factor is whether, given where the economic interests lie, and the consequent distribution of risk, it continues to be appropriate to treat the interests of the company as equivalent to the interests of its shareholders alone.”372 The Court also stipulated that “determination of any pre- insolvency trigger of this duty should be fact specific and depend on whether or not insolvency is inevitable.”373 As mentioned above this reasoning from Sequana was picked up in Mainzeal SC and provided guidance on the application of s 135 and s 136.
E Guidance for UK Directors
Directors should keep the solvency of the company under careful review.374 If directors do not do so they will likely not consider creditors when they need to and be in breach of the creditor duty. It is probably wise for directors to engage with creditors before the trigger point occurs to avoid liability.375 If a company is insolvent or bordering on insolvency, it would be wise for directors to get legal and accountancy advice, and if mechanisms cannot be put in place to stop insolvency the creditor interest is engaged.376 The application of the creditor interest will then depend on the companies circumstances.377 Although Sequana provides a welcomed clarification to this area of the law, gaps and uncertainties still remain and further case law will be needed to solve these unresolved issues.378 This area of the law is complex,379 controversial and still developing.380 Even though this is the true Sequana provides useful guidance on the creditor duty. The creditor duty should be adopted into NZ and left to develop in the NZ context. Although the decision was in obiter so future courts are not absolutely bound by the trigger point, it seems likely that future case law will adopt Sequana’s reasoning and build on it.381
371 BTI 2014 LLC v Sequana SA, above n 7, at [86].
372 At [87].
373 Akintola and Samanta, above n 24, at 45.
374 Sheikh, above n 28, at 346.
375 Sheikh, above n 28, at 347.
376 Sheikh, above n 28, at 347.
377 “The creditor duty”, above n 340.
378 Schilling de Carvalho and Reddy, above n 24, at 20.
379 “The creditor duty”, above n 340, at 1.
380 BTI 2014 LLC v Sequana SA, above n 7, at [4].
381 At [302].
Chapter Five: Section 131 and the Sequana Duty
Section 131 is the functional equivalent of s 172(1). Therefore, it is most appropriate for NZ to adopt a Sequana creditor duty under s 131 and NZ should do so. By utilising s 131 in this context, further clarity will be provided to the application of ss 135/136. Sequana was a momentous decision for the UK382 as it was the first time the Supreme Court looked at the existence of a creditor duty,383 its content,384 and whether it can apply prior to insolvency.385 This included a consideration of the rule from West Mercia and the judgment “clarified the existence, content and nature of the so-called creditor duty.”386 The case is unique in that it was the first case involving a solvent company at the time of the claimed transaction.387 Currently, NZ does not have a judgment or creditor duty of this nature. Cases have rather focused on ss 135/136, and insolvent companies.
Section 131 is always applicable – directors always have a duty to act in the best interests of the company, no matter the company’s financial condition. Section 172(1) (UK CA) also applies at all times.388 Under both these sections when the company is solvent, the company is the shareholders and sometimes stakeholders and employees. In the UK if the creditor duty is engaged the idea of the company changes and creditors need consideration. Section 131 should operate in this way too and the incorporation of Sequana’s creditor duty into s 131 would achieve this. Given the functional similarity between s 172 and 131, Sequana supports the adoption of a creditor duty into NZ law under s 131. As stated in Sequana the courts should be left to develop and refine the duty.389 Sequana is most crucial for it comments on when a creditor duty would be engaged and what the application of the duty would look like.
382 Jukes, above n 310, at 86-88.
383 BTI 2014 LLC v Sequana SA, above n 7, at [7].
384 Harris, above n 73, at 1.
385 BTI 2014 LLC v Sequana SA, above n 7, at [8].
386 Jukes, above n 310, at 86.
387 “The creditor duty”, above n 340, at 2.
388 BTI 2014 LLC v Sequana SA, above n 7, at [94].
389 At [113] and [224].
A Engagement of the Creditor Duty
It is suggested that in NZ the creditor duty should be engaged under s 131 when “the directors know, or ought to know, that the company is insolvent or bordering on insolvency or that an insolvent liquidation or administration is probable.”390 This standard is from the Sequana majority. When the duty is engaged, the idea of who the company is changes. Creditors interests are incorporated into the best interests of the company and become relevant. As Lords Hodge and Reed observed: “creditors always have an economic interest in its [the company’s] continued solvency so that it can pay its debts to them.”391 However, these interests increase when a company is bordering on insolvency and the shift in this economic interest gives rise to the duty.392
B Application of the Creditor Duty
In terms of the application of the duty, NZ should follow Sequana’s reasoning of a sliding scale. The weight to give to creditors’ interests will depend on the condition of the company which corresponds to a point on the sliding scale. When a company is insolvent or bordering on insolvency but there is not an inevitable liquidation, creditors interests must be considered but both shareholders and creditors still have an interest in the company. There will need to be a balancing exercise if shareholder and creditor interest’s conflict.393 Creditors interests will become more acute and increase in weight as the company’s financial problems worsen.394 When a liquidation or administration is inevitable then the shareholders’ interests are subordinate to those of the creditors.395 This is because the shareholders no longer have an interest in the company.
Returning to NZ, in Mainzeal SC the Court thought Sequana was relevant for how creditors should be considered.396 Mainzeal SC noted that Sequana was of assistance in terms of a policy consideration which underpins ss 135, 136 and 301, in that the economic stake of creditors
390BTI 2014 LLC v Sequana SA, above n 7, at [203], [207], [231] and [247]; quotation taken from Jukes, above n 310, at 88.
391 At [246].
392 “The creditor duty”, above n 340.
393 Akintola and Samanta, above n 24, at 44.
394 Akintola and Samanta, above n 24, at 44.
395 Akintola and Samanta, above n 24, at 44.
396 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, [47] and [48].
increases as the company worsens.397 It will be recalled that s 131 was not considered as its application had not been raised by the liquidators. The Supreme Court thought its approach to s 135 was consistent with Sequana in that if there is a near or actual insolvency there must be substantial regard to creditors.398 The Supreme Court viewed s 135 as being about creditor interests and s 136 as about individual creditors.399 The Court agreed with Sequana’s finding that the law must develop in line with legislation and if a balance is shown in the legislation that balance must be followed.400
The Supreme Court did not decide when creditors interests were paramount as this did not arise on the facts.401 The Court did note that if ss 135 and 136 were applicable there would probably need to be substantial regard to the interests of creditors.402 The Court confirms that under these sections if there is doubtful solvency, insolvency or inevitable insolvency, the interests of creditors need to be considered.403 It found this idea was derived from Nicholson, Kinsela v Russell Kinsela Pty Ltd (in liq)404 and West Mercia.405 While the Court found Sequana’s discussion on West Mercia interesting it did not expand further on it.406 Mainzeal SC agreed with Sequana in that limited liability is a statutory right and not a privilege which is based on solvency.407
C Practical Example of the Application of s 131
The application of Sequana’s reasoning to s 131 and in fact situations like Mainzeal SC and Debut will demonstrate how this duty would work in practice. In both cases, s 131 and the creditor duty would apply from the point at which an insolvency was probable (when the companies were starting to have financial difficulties). This would likely be at an earlier stage then when a breach of ss 135/136 would be found. At this point the directors should be considering creditors interests and if they conflicted with those of the shareholders, complete
397 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [180].
398 At [217].
399 At [218].
400 At [180].
401 At [184].
402 At [184].
403 At [142].
404 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 (NSWCA). 405 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [143]. 406 At [185].
407 At [183].
a balancing exercise. As the condition of the companies worsened, the weight given to creditors interests would increase. When the company is bordering on insolvency (could be the point at where the company is failing the solvency test) ss 135/136 are potentially applicable as well as s 131. Once an insolvent liquidation or administration is inevitable (a couple months after the companies failed the solvency test), creditors interests would be paramount.
Under ss 135 and 136 creditor interests are substantial already, but s 131 would make creditors interests paramount at this stage. If directors followed the above reasoning and guidelines proposed, they would be considering creditors from an earlier stage then under ss 135 and 136 and this would likely help them avoid liability under those sections. Directors can also make use of the guidance from Mainzeal CA for the period of bordering on insolvency to avoid liability under ss 135 and 136. The effect of having s 131 would be to bring the date of breach to an earlier point in time and this may be reflected in relief.
Some may argue that the inclusion of s 131 and a creditor duty places additional obligations on directors and creates the possibility of further unnecessary liability. However, as demonstrated above, the use of s 131 provides clarity to the application of ss 135-136. Therefore, the utility of s 131 outweighs the risk to directors. There is also a difference between a director acting in bad faith or one that is ignorant – this would likely be taken into consideration in the relief stage. For example, Sequana discussed the ability to have rescue attempts and found that a reasonable attempt at rescue that would potentially benefit creditors and company members is not a breach of the duty.408 The Court stated “depending on the circumstances, continuing to trade may be honestly believed to offer the best prospect of the creditors being paid, even if it also carries some further financial risk. If so, that course of action will be consistent with the directors’ performance of their fiduciary duty.”409 In turn, commentators have suggested Sequana promotes rescue culture.410 This element of Sequana should be adopted into NZ law as it is coherent with the purpose of the CA.
408 BTI 2014 LLC v Sequana SA, above n 7, at [238].
409 At [62].
410 Schilling de Carvalho and Reddy, above n 24, at 20.
There may also be breaches of s 131, that do not result in the company going into liquidation. In those cases, if no loss has been caused to the company, then proceedings will likely not be brought against a director or relief may not be given. Whereas where a director has caused loss to the company and the company has been liquidated a breach would likely be found. In Debut the breach of s 131 did not affect the relief given but rather helped support a breach of ss 135- 136.
D The Overlap
Based on the above reasoning there will be a stage at which the application of s 131 and ss 135/136 will overlap. This overlap is already apparent within the law as s 131 is a general duty. This is also the case in the UK in that s 172(1) and s 214 will sometimes overlap.411 Sequana found that this is acceptable, and it is argued that while this needs to be pointed out it is not overly problematic.412 Cases in NZ already involve liquidators arguing multiple breaches of directorial duties and this will likely remain a feature of NZ law.413 Each duty however serves a different purpose, and it will be highly fact dependent on whether a breach is found. Liquidators will likely strategically choose certain duties to plead, even though other breaches may be found.
E Ratification Issue
With making directors liable under s 131 there may be the concern that breaches will simply be ratified. This is because, when a company is solvent, shareholders can ratify director’s breaches of duties.414 For example, this would be problematic where the company was just one director and shareholder who were the same person – the position of many companies in NZ. It could be argued that the shareholder would just ratify their breach before insolvency. Sequana pointed out it would not be coherent if shareholder interests were subordinated but that they could ratify breaches.415 Additionally, UK law recognises that a decision that jeopardies insolvency cannot be ratified416 and if a company is insolvent breaches cannot be
411 BTI 2014 LLC v Sequana SA, above n 7, at [326].
412 At [327].
413 Taylor, above n 4, at 186.
414 Companies Act 1993, s 177.
415 BTI 2014 LLC v Sequana SA, above n 7, at [5].
416 At [91]; and Sheikh, above n 28, 346-347.
ratified.417 In NZ Robb v Sojourner (Sojourner) also confirmed the limited ability of ratification in insolvency situations.418 In NZ Sojourner could be extended slightly in that if the solvency of a company was questionable the breach could not be ratified.
Mainzeal SC did not consider Sequana’s reasoning on s 172(1) and the creditor duty in depth. This is because Sequana was a pre-insolvency case and so the reasoning in turn on s 172(1) and the creditor duty is most applicable to pre-insolvency situations. This is why the Supreme Court could not apply Sequana’s reasoning to the facts of Mainzeal SC as that was not a pre- insolvency situation.422 This dissertation argues that this is correct as s 172(1) is Sequana’s reasoning on pre-insolvency whereas Mainzeal SC facts were on a clearly insolvent company. Sequana’s reasoning therefore can be applicable in pre-insolvency situations.
Within the UK’s approach there are a couple of different provisions. Firstly, there is s 214 (wrongful trading) of the Insolvency Act 1986 (UK IA) which is where a director “knew or ought to have concluded that the company had no reasonable prospect of avoiding insolvent liquidation, and then failed to take all reasonable steps to minimise the loss to creditors.”423 If
417 BTI 2014 LLC v Sequana SA, above n 7, at [40].
418 Robb v Sojourner [2007] NZCA[2007] NZCA 493; , [2008] 1 NZLR 751 at [25].
419 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [218].
420 At [218].
421 BTI 2014 LLC v Sequana SA, above n 7, at [1]; and Madsen-Ries v Cooper, above n 8, at [159].
422 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [178].
423 Andrew Keay The Enlightened Shareholder Value Principle and Corporate Governance (Taylor & Francis Group, 2012) at 220.
Debut and Mainzeal SC were heard in the UK s 214 (UK IA) would be engaged424 and liability found. This is because s 214 comes into play in the latest stage of insolvency, where the company is not salvageable or of no return425 as are the facts in Debut and Mainzeal SC.
The Supreme Court in Mainzeal viewed Sequana’s reasoning on s 214 (UK IA) as not applicable to s 135 and s 136 as stated NZ had a fundamentally different statutory framework.426 For example, s 135 and s 136 do not require knowledge. The Supreme Court also interpreted s 135 and s 136 as applicable prior to insolvency and so this is why s 214 (applies only on the latest stage of insolvency) and therefore that reasoning is not applicable.427
There was also a discussion in Sequana on the relationship of s 214 (UK IA) with s 172. It was found s 214 differs from the fiduciary duty of good faith which applies at all times428 and if West Mercia applies this occurs before s 214 applies.429 It was stated that s 214 is more onerous but applies in more restricted circumstances. Good faith under s 172 is judged subjectively430 while s 214 is judged objectively. In NZ s 131 is judged subjectively unless an exception applies, for example if creditors interests are not considered then it is judged objectively.431 Both s 214 and s 172 are aimed at minimising loss to creditors.432 There is a difference in remedies as those in equity (s 172) are wider.433 As stated in Mainzeal CA the relief given will depend on the duty, for example s 131 is a fiduciary duty and so fiduciary relief would be granted.434 Section 214 only applies when a company is wound up/liquidated while a breach of fiduciary duty does not require this.435 This seems to suggest that s 172 applies pre- insolvency and s 214 applies on insolvency.
424 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [182].
425 Jukes, above n 310, at 87.
426 Yan v Mainzeal Property and Construction Ltd (in liq), above n 10, at [182] and [217].
427 At [182], [217] and [218].
428 BTI 2014 LLC v Sequana SA, above n 7, at [94].
429 At [94].
430 At [94].
431 Madsen-Ries v Cooper, above n 8, at [113]-[115].
432 BTI 2014 LLC v Sequana SA, above n 7, at [94].
433 At [94].
434 Yan v Mainzeal Property and Construction Ltd (in liq), above n 9, at [288].
435 BTI 2014 LLC v Sequana SA, above n 7, at [94].
Conclusion
Rather than amending ss 135/136 NZ should adopt a creditor duty (as formulated in Sequana) into s 131. As rightfully pointed out in Mainzeal SC, Sequana’s reasoning cannot simply be adopted into ss 135/136, but it is argued that Sequana’s reasoning remains relevant and should be incorporated into s 131. Sequana provides guidance on the application of this duty in pre- insolvency scenarios. Sequana’s reasoning on when the duty is engaged, and the application of the duty should be followed. Applying Sequana’s reasoning under s 131 in the context of considering the rights of creditors when the company is unable to pay would provide further clarity to the application of ss 135/136 and prevent the need for these sections to be reformed.
Regretfully, s 131 has been underutilised in this context and this has led to the lack of an adoption of Sequana’s creditor duty. Instead, the focus has been placed on the reckless trading duties of ss 135/136. Debut and Mainzeal CA attempted to provide clarification on the application of these sections, but the judgments mistakenly focused on insolvency as the determinative for liability under these sections. This in turn led to academic criticism and calls for the sections to be reformed. Debut and Mainzeal CA were right to find liability under ss135/136, however the cases should be taken to stand for when a company is insolvent the risk to creditors will likely be too high to continue trading and take on new obligations.
Mainzeal SC provided much needed clarity on the application of these sections by confirming that the focus is on the risk to creditors rather than on insolvency. Mainzeal SC also demonstrated that when the sections are interpreted correctly the right balance between encouraging business risk and protecting creditors is struck. An increase in the recognition of the contribution of s 131 and the application of a creditor duty under this section would provide further clarity to the application of ss 135/136. When the duty is applicable directors will need to consider the interests of creditors and in certain circumstances treat these interests as paramount. If directors do this, they are more likely to not breach ss 135/136.
Mainzeal SC represents the start of the influence Sequana should have on NZ law. Mainzeal SC adopted aspects of Sequana like that creditors have an economic interest that is worth recognising. However, as Mainzeal SC involved an insolvent company, the Supreme Court did not consider Sequana’s pre-insolvency reasoning. In Mainzeal SC s 131 was also not argued and so the utility of Sequana’s reasoning under this section was not considered.
An increased recognition of s 131 (and the adoption of a creditor duty) will not prevent all uncertainties (this is impossible if an appropriate balance is sought). Those who prefer certainty would argue that ss 135/136 should be amended to explicitly reference solvency. However, this would stifle risk taking behaviour and would not provide an appropriate balance. It is more appropriate to keep ss 135/136 as it is as Mainzeal SC shows the sections provide an appropriate balance but to use s 131 to provide further clarity to the application of these sections.
Overtime there has been an increasing consideration of creditors within company law. This shift is appropriate considering creditors have an economic interest in being paid the debts that are owed to them. When this economic interest is at risk creditors deserve consideration. The adoption of a creditor duty under s 131 is therefore necessary and consistent with this shift.
Bibliography
A Cases
Cooper v Debut Homes Ltd (in liq) [2019] NZCA 39. Debut Homes Ltd (in liq) v Cooper [2018] NZHC 453. Fatupaito v Bates [2001] NZHC 401; [2001] 3 NZLR 386 (HC).
Löwer v Traveller and Waller [1988] NZCA 36/04.
Madsen-Ries v Cooper [2020] NZSC 100, [2021] 1 NZLR 43.
Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255.
Mason v Lewis [2006] NZCA 55; [2006] 3 NZLR 225.
Mountford v Tasman Pacific Airlines of NZ Ltd [2005] NZHC 514; [2006] 1 NZLR 104 (HC).
Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985] 1 NZLR 242 (CA).
Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC 26,570 (HC).
Robb v Soujourner [2007] NZCA 493, [2008] 1 NZLR 751.
Salomon v A Saloman & Co Ltd [1896] UKHL 1, [1897] AC 22 (HL). Soujourner v Robb HC Christchurch CIV-2004-476-000568, 4 July 2006. Thompson v Innes (1985) 2 NZCLC 99,463 (HC).
Vercauteren v B-Guided Media Limited [2011] NZCCLR 9 (HC).
Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99, [2021] 3 NZLR 598.
Yan v Mainzeal Property and Construction Ltd (in liq) [2023] NZSC 113.
Yan v Mainzeal Property and Construction Ltd (in rec & liq) [2014] NZCA 190.
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 (NSWCA).
Walker v Wimborne [1976] HCA 7.
BTI 2014 LLC v Sequana SA [2019] 2 All ER 784, [2019] EWCA Civ 112.
BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2022] 3 WLR 709.
West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA).
B Legislation
Companies Act 1933Companies Act 1993
Companies Amendment Act 1980
Companies Act 2006Insolvency Act 1986
C Books and Chapters in Books
Andrew Keay “Chapter 2: The duty to promote the success of the company: is it fit for purpose in a post-financial crisis world?” in Joan Loughrey (ed) Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis (Edward Elgar Publishing, Cheltenham, 2012).
Andrew Keay The Enlightened Shareholder Value Principle and Corporate Governance
(Taylor & Francis Group, 2012).
David Goddard, “Directors’ Liability for Trading While Insolvent: A Critical Review of the New Zealand Regime” in Ian Ramsay (ed), Company Directors’ Liability for Insolvent Trading (CCH Australia, 2000) at 169.
D Journal Articles
Daniel Jukes “BTI 2014 LLC v Sequana SA [2022] UKSC 25” (2023) 44 Comp. Law 86.David Russell and Toby Graham “Trustee investment: on-financial considerations; the development of directors’ core fiduciary in s 172 Companies Act 2006” (2019) 25 Trusts & Trustees 867.
Joel Manyam “Madsen-Reis and Levin as liquidators of Debut Homes (in liq) v Cooper” [2021] NZLJ 96.
John Farrar, “directors’ Duties and Corporate Governance in Trouble Companies” (2001) 8 Canterbury Law Review at 99.
Julian Harris “Supreme Court provides guidance on “creditor duty” (2023) 44 Comp. Law. 12.
Kayode Akintola and Navajyoti Samanta “Directors’ Duties towards Shareholders and Creditors in Corporate Insolvency - Legal and Practical Implications of the UK Supreme Court’s decision in BTI 2014 LLV v Sequana SA” (2023) 34 I.C.C.L.R. 43.
Lynne Taylor “Directors’ Duties on Insolvency in New Zealand; an Empirical Study” (2019) 28 NZULR 171.
Lynne Taylor “Enforcement of Directors’ Duties in a Liquidation Context: Madsen-Ries v Cooper” (2020) 28 Insolv LJ 216.
“New Zealand newsletter: reckless trading Makes Its Debut in the New Zealand Supreme Court” (2021) 49 ABLR 140.
Pedro Schilling de Carvalho and Booby V. Reddy “Credit where credit’s due: the Supreme Court take on directors’ duties and creditors’ interests” (2023) 82 C.L.J. 17.
Peter Watts “Debut Homes in the Supreme Court – A Product of the Vicarage?” [2020] CSLV 107.
Peter Watts “Directors’ duties after Debut Homes – a return to the scene” [2021] CSLB 55.
Peter Watts “Sequana in the Supreme Court: Cautious Confirmation of the Creditor- Extension to the Director’s Duty of Loyalty” [2023] JIBFL 74.
Peter Watts “To whom should directors owe legal duties in exercising their discretion? – a response to Mr Rob Everett” [2019] CSLB 49.
Peter Watts Duties to creditors, Heath and Whale on Insolvency (online ed, LexisNexis) at [32.4].
Rosemary Langford and Ian Ramsay “The contours and content of the ‘creditors’ interests duty’” (2021) 21 J. Corp. Law Stud. 85.Saleem Sheikh “Serving two masters: balancing shareholders’ and creditors’ competing interests” (2023) 34 I.C.C.L.R. 305.
“Supreme Court confirms directors’ duty to creditors in insolvency” (2022) 430 Co.L.N. 7. “The creditor duty” (2022) 168 Civ.P.B. 3.
William Porter “Directing the Sinking Ship – Where to From Here?” (2021) 32 JBFLP 125.
William Porter “You’ve got to be in it to win it: direct recovery by creditors under section 301 of the Companies Act 1993” (2022) 26 New Zealand Business Law Quarterly 163.
“Yan v Mainzeal Property and Construction Ltd (in liq)” [2021] CSLB 45.
E Parliamentary and Government Materials
1 New Zealand
Law Commission Company Law: Reform and Restatement (NZLC R9, 1989).
Law Commission Company Law Reform: Transition and Revision (NZLC R16, 1990).
F Dissertations
Bianca Hawkins “Reconsidering Directors’ Reckless Trading Duty Under Section 135 of the Companies Act 1993” (LLB (Hons) Dissertation, University of Otago, 2021).
G Internet Resources
Alicia Murray, Rachel Taylor, Michael Thompson, Mark Williamson, Jonathan Richards and Jo Lloyd-Jones “New Zealand Supreme Court reviews directors’ duties (again)” (30 August 2023) DLA Piper < https://www.dlapiper.com/en/insights/publications/2023/08/supreme- court-reviews-directors-duties-again-the-long-awaited-mainzeal-decision>
Bridie McKinnon, Scott Barker and Luke Sizer “Supreme Court releases Mainzeal judgment” (25 August 2023) Buddle Findlay < https://www.buddlefindlay.com/insights/supreme-court-
releases-mainzeal- judgment/#:~:text=This%20morning%2C%20after%20much%20anticipation,specified%20li mits%20for%20certain%20directors.>
David Friar, Tim Fitzgerald and Jesse Wilson “Supreme Court releases Mainzeal decision on directors’ duties” (25 August 2023) Bell Gully < https://www.bellgully.com/insights/supreme-court-releases-mainzeal-decision-on-directors- duties/#:~:text=The%20Supreme%20Court%20has%20released,creditors%20following%20t he%20company's%20collapse.>
“Directors duties: When should directors take creditor interests into account?” (18 January 2023) Dentons < https://www.dentons.co.nz/en/insights/articles/2023/january/19/when- should-directors-take-creditor-interests-into-account>
Hamish McNicol “Further Mainzeal Supreme Court submissions made this month” (17 March 2023) NBR < https://www.nbr.co.nz/law/further-mainzeal-supreme-court- submissions-made-this-month/>
“Liability of directors for company debts Supreme Court in Mainzeal orders directors pay
$39.8 million plus interest” (29 August 2023) Anderson Lloyd < https://www.al.nz/liability- of-directors-for-company-debts-supreme-court-in-mainzeal-orders-directors-pay-39-8- million-plus-interest/>
Matt Kersey, Nathaniel Walker, James Tocher and Sam Jones “Supreme Court confirms Mainzeal directors liable for $39.8m and calls for law reform” (25 August 2023) Russell McVeagh < https://www.russellmcveagh.com/insights/august-2023/supreme-court-confirms- mainzeal-directors-liable-for-39-8m-and-calls-for-law- reform#:~:text=Supreme%20Court%20confirms%20Mainzeal%20directors,for%20law%20r eform%20%3A%20Russell%20McVeagh>
Nathan Whittle “Mainzeal and the future of director liability” (22 June 2022) Chapman Tripp
<https://chapmantripp.com/trends-insights/rescue-recovery-2022/mainzeal-and-the-future-of- director-liability/>
Nicholas Pointon “Mainzeal case before the Supreme Court today” (7 March 2022) RNZ
<https://www.rnz.co.nz/news/business/462854/mainzeal-case-before-the-supreme-court- today>
Scott Barker and Luke Sizer “Significant insolvent trading decision in the UK Supreme Court
– creditors’ interests in the twilight zone” (11 October 2022) Buddle Findlay < https://www.buddlefindlay.com/insights/significant-insolvent-trading-decision-in-the-uk- supreme-court-creditors-interests-in-the-twilight-zone/>
Scott Barker, Bridie McKinnon and Luke Sizer “Court of Appeal delivers Mainzeal decision: significant implications for insolvent trading” (1 April 2021) Buddle Findlay < https://www.buddlefindlay.com/insights/court-of-appeal-delivers-mainzeal-decision- significant-implications-for-insolvent-trading/>
“Supreme Court clarifies liability for breach of directors’ duties and extent of damages in latest Mainzeal decision – and reiterates call for review of the Act” (25 August 2023) Duncan Cotterill < https://duncancotterill.com/insights/supreme-court-clarifies-liability-for-breach-of- directors-duties-and-extent-of-damages-in-latest-mainzeal-decision-and-reiterates-call-for- review-of-the-act/>
“Supreme Court releases decision in Mainzeal” (25 August 2023) MinterEllisonRuddWatts < https://www.minterellison.co.nz/insights/supreme-court-releases-decision-in- mainzeal#:~:text=The%20Supreme%20Court%20has%20today,million%20plus%20interest
%2C%20with%20the>
“Supreme Court releases Mainzeal decision: creditor protection-but cold comfort for directors” (25 August 2023) Dentons < https://www.dentons.co.nz/en/insights/alerts/2023/august/25/supreme-court-releases- mainzeal- decision#:~:text=The%20Supreme%20Court%20agreed%20that,million%20each%2C%20al so%20with%20interest.>
H Other Resources
1.2 General provisions of the Companies Act 1993 Director’s Duties 494436421 (online looseleaf ed, Thomson Reuters).
4 Meaning of “solvency test” Company Law 492526454 (online looseleaf ed, Thomson Reuters).
4 Meaning of “solvency test” Insolvency Law 494450863 (online looseleaf ed, Thomson Reuters).
5.5 General business agenda items Director’s Duties 494436397 (online looseleaf ed, Thomson Reuters).
7.3 Personal liability of directors Director’s Duties 494436384 (online looseleaf ed, Thomson Reuters).
11.2 Financial difficulty Director’s Duties 494330853 (online looseleaf ed, Thomson Reuters).
131 Duty of directors to act in good faith and in best interests of company Company Law 492526338 (online looseleaf ed, Thomson Reuters).
301 Power of Court to require persons to repay money or return property Company Law 492526420 (online looseleaf ed, Thomson Reuters).
Director’s Duties – What’s New Director’s Duties 494436416 (online looseleaf ed, Thomson Reuters).
Duty in relation to obligations under s 136 (online looseleaf ed, CCH).
Laws of New Zealand Decisions of the Supreme Court of New Zealand (online ed).
Leave to appeal Yan v Mainzeal directors’ duties case granted by Supreme Court (online looseleaf ed, CCH).
Michael Harris Laws of New Zealand Directors’ Duties (online ed).
Michael Harris Laws of New Zealand Origins and Impact of Companies Act 1993 (online ed).
Neil Campbell, Peter Watts, Kim Francis and others Morison’s Company and Securities Law
(looseleaf ed, LexisNexis).
Paul Heath and Michael Whale ed Heath and Whale on Insolvency (looseleaf ed, LexisNexis).
Reckless trading under s 135 (online looseleaf ed, CCH).
Tom Pasley Morison’s Company Law Duties of Directors (online ed, LexisNexis).
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