Today several former Mainzeal company directors were ordered to pay N.Z.$36 million in a high court ruling. The ruling is the latest phase of a long running saga that started with Mainzeal going into liquidation in 2013 owing $110 million.
At the core of the problem is the fact that the boardroom directors of the company knew full well that it was in a parlous state, yet they continued to allow it to trade until it imploded. Four directors have now been ordered to pay $36 million in damages including former Prime Minister and National Party leader Jenny Shipley.
So how did Mainzeal get to this point and what lessons does it have for those in corporate positions of responsibility?
A Richard Yan was working for Mainzeal during the school holidays in 1981. In 1996, after completing a business degree, he oversaw the takeover of Mainzeal and the creation of Richina Pacific Group to manage his business assets. During the pivotal year of 2004, several things happened:
- Dame Jenny Shipley was asked to join
- Capital was extracted from the company to prop up business assets in China
- Mainzeal made a small profit that was wiped the following year, and then see-sawed in 2006-07
In 2009 PriceWaterhouseCooper had concerns about the solvency of Mainzeal. The following year Dame Jenny Shipley raised concerns about the worsening balance sheet. By the end of 2011 the working relationship between Mainzeal and the rest of Richina Pacific Group had deteriorated to the point that Ernst & Young were commissioned to do a governance report on Mainzeal.
And all this time fresh attempts to recapitalize Mainzeal were being attempted using various means, such as a pre-paid goods agreement, getting money back from China based assets and setting up entities in New Zealand to distract claimants.
Perhaps the death knell was a spat with Siemens in 2012 that saw them withhold payments over work upgrading the electricity links between the North and South Islands. Coupled with leaky building claims targetting Mainzeal work and the possibility Mr Yan’s wife might be made bankrupt if the company collapsed – leading Mr Yan to warn he would walk if his wife was not released from a guarantee she made to B.N.Z.
The final blow was struck when an emergency meeting in January 2013 saw a motion passed to invite B.N.Z. as the major bank involved to appoint receivers. It immediately suspended loans and shortly after the company caved in.
For years until being liquidated in 2013, it continued to trade, during which time it racked up $110 million in debt that will largely never be recovered.
The directors might have been ordered to pay $36 million, but as holders of liability insurance, it will come out of their company and not their personal pockets. Clearly not smart enough to realize that Mainzeal was in trouble, but smart enough to make sure their pockets were protected by insurance.
For me this is not good enough. If a person or company continues to trade and rack up debt despite knowing it is not in a position where it can realistically trade, then when balancing the books – or what is left of them, the creditors should be able to require the forfeiture of luxury assets to make up the difference.
Of course this would bring howls of rage from the defendants, highly expensive attempts to get the case thrown out in court and warnings of doom and gloom. With similar certainty, the allure of a directorship on a corporate board and the opportunities to make significant money would be enough to overcome the doom saying.
Historic examples of collapses make me wonder if New Zealand has learnt anything from corporate failure. Based on those examples, which include Bridgecorp in 2007 owing $490 million, Equiticorp in 1989 with $1.4 billion in assets and $550 million in debt, among others I think the answer is a resounding no. Whilst not as big, public expectations around the application of the law, the need for greater accountability and the Global Financial Crisis of 2007-2009 have all focussed the spotlight on these types of businesses in ways I think some with influence do not like.