Last month The Supreme Court released its decision in the Mainzeal case, upholding the Court of Appeal’s decision that the directors of Mainzeal breached their duties as directors, and finding them liable for losses incurred by creditors following the company’s collapse.
Mainzeal was a construction company established in 1968 which delisted from the NZX in January 2009. Often, we simply don’t hear about the cases of smaller, privately-owned businesses due to their lower profile and lack of media coverage; so this is a good reminder that publicly-listed companies are not the only ones that get hit with large claims.
All organisations, regardless of size, can learn some key lessons from the failures at Mainzeal - so what does this mean for directors in regard to their insurance liability cover and what are some key considerations moving forward?
A quick recap on the Mainzeal case
In 2013 one of New Zealand’s largest construction companies, Mainzeal, went into receivership and liquidation owing around NZ$110 million to unsecured creditors.
Following the collapse, the liquidators of Mainzeal brought proceedings against the directors. This included allegations such as the directors having breached sections 135 (reckless trading) and 136 (duty in relation to obligations) of the Companies Act. After many years of litigating, the case eventually landed at The Supreme Court.
On 25 August 2023, The Supreme Court upheld the Court of Appeal’s decision that the directors breached their duties and were therefore liable for losses incurred by their creditors following the collapse of the company.
As such, the directors were found liable for NZ$39.8 million plus interest. One director, Mr Yan, was deemed to be liable for the entire amount plus interest, while the other directors were liable for NZ$6.6 million each, with interest.
Important things to think about
Following this ruling it is timely to review your Directors’ and Officers’ Liability Insurance (D&O) cover, with the following points in mind: -
Whilst Mainzeal was a large, high-profile company, it is important to remember that directors of even micro-enterprises are subject to the same laws and regulations.
Given the large amount of damages awarded to each director, plus the extensive legal fees incurred over 10 years, it is essential to ensure your overall limits of liability (including any separate defence costs limits) are at the right level.
Many SMEs already buy Public/Products or General Liability policies. If you don’t also already buy D&O, you should consider upgrading to a Management Liability policy, which is very cost effective and designed as a ‘one-stop-shop’ for most usual liability covers, including D&O, General Liability, Statutory Liability, etc.
The Mainzeal case was supported by litigation funders. Given their very public success, this is likely to bring much more awareness of class actions, thus leading to an increase in lawsuits backed by litigation funding. Class actions can be very costly to defend so ensuring you have the right insurance cover in place should this happen is paramount.
Insurance cover is of course just a back-stop should things go wrong. Most important in all of this is to fully understand what your obligations are as a director so that you don’t end up in a precarious position.
If you are concerned about the level of your liability cover, have questions about D&O and/or Management Liability Insurance, or would like a complimentary review, please contact your broker or email firstname.lastname@example.org.