Mainzeal- a litigation funder's perspective

A superficial grasp of the case and the legal context makes it abundantly clear that the Mainzeal directors would inevitably be found liable for trading the company while insolvent. The only unknown was how much of the $111m the creditors lost when the company collapsed, they would get back.

The Supreme Court’s decision achieved two things: firstly, it clarified the law for director responsibilities and secondly, it ordered Richard Yan, Dame Jenny Shipley, Warren Tilby, and Peter Gomm to pay damages to the tune of $60m (including interest and costs).

Getting the final word from the Supreme Court took three times longer than expected and came at a cost to the company’s creditors (through its liquidators, BDO) of $10m – three times more than they thought it would cost.

Creditors will end up getting at least 50% if not more (after paying the costs of the case) of what the directors pay, but it’s still only a fraction of what they were owed.

The outcome should, and could have been different:

It’s difficult to understand why the directors and QBE chose to waste time and incur legal costs in their ‘no holds barred’ strategy and delay tactics when they could have very easily chosen a different and far more responsible path – one that would have meant the creditors were paid earlier, and the directors truly acknowledged their culpability for the way they traded Mainzeal and the impact its collapse had on the creditors.

During the 8 years, the directors had a number of choices. They could’ve taken any one of the three genuine settlement offers made by the liquidators, which were at amounts far less than what they’re now having to pay, or they could have accepted the High Court’s judgement in 2019, or Richard Yan could have made the Richina companies he controls repay the loans owed to Mainzeal or provide further capital from the Chinese shareholders.

Instead, at every turn, the directors chose to relitigate facts proven in all three courts so they could delay the outcome, including:

1. Mainzeal was insolvent from at least 2006,
2. The directors knowingly produced ‘glossy accounts’ that they knew were misleading and did not reflect Mainzeal’s true financial position and
3. The directors admitted that they knew they were using creditors’ money to keep trading (conduct characterised by the Supreme Court in Debut Homes as “robbing Peter to pay Paul”).

Maybe the directors hoped that the liquidators would run out of money or lack the resolve for a protracted legal battle, or maybe QBE threw its insured directors under the bus in their attempt to increase the costs simply because a funder was involved.

While time might shed more light on the extraordinary conduct of the defence, a Mainzeal creditor would be justified in thinking their plight never entered the minds of the directors or their insurer during the past 8 years.

Importantly, a portion of the losses were offset, and a legal precedent was established:

Establishing legal precedent for director responsibilities has historically been rare, mainly because of the time and cost of litigation, and the availability of funding needed to assume the risks associated with complex legal challenges. It is very telling that the Companies Act is now nearly 30 years and very few cases have made it to the Supreme Court.

The bar is, quite rightly, set very high for holding directors liable when a company suffers loss. Without delving into the specifics of directors’ responsibilities, it’s important to note that when a company is insolvent and its directors knowingly continue to trade using creditors’ funds, and those creditors are unaware of the company’s true financial position, then ‘quite rightly’ those directors should be challenged as to whether they breached their legal duties, and their actions caused the losses.

While some aspects of the judgment are worthy of ongoing discussion, such as the decision not to impose joint and several liability on each board member for the collective decisions of the board (creating the potential for all manner of perverse incentives and outcomes), the case has clarified in law, the responsibilities required of directors when a company is insolvent.

Although the majority of directors and advisors would likely agree the Supreme Court’s decision simply restates what should be regarded as common and commercial sense in the boardroom.

The role of litigation funding:

The Mainzeal case exemplifies how highly specialised and risky litigation funding is. The loans made to plaintiffs, in this case, to the creditors of Mainzeal, to enable them to pay their legal teams and experts during a court case are unsecured except against the successful outcome of a case.

It’s high-risk-reward stuff. The loan amount is usually millions, $10m for Mainzeal, and there is absolutely no guarantee of success, nor is there ever any assurance that the defendants will be able to pay the damages awarded against them. While litigation funding can be rewarding in every sense if the case goes well, if a case is lost, not only does the funder lose the whole loan amount, but they also usually have to pay some of the defendant’s costs.

Because of the risks and costs involved, a funder is highly motivated to ensure the cases they fund are legally meritorious, the plaintiffs are deserving of their day in court, and the litigation is pursued in an efficient manner. While these elements give the funder the best opportunity to have their loan repaid, the risk exposure is significant.

In New Zealand, because our legal system favours defendants (and their insurers), returns to funders have typically been low. With funders now helping plaintiffs who have good claims, the thinking around litigation is being reshaped to achieve a more level playing field where plaintiffs and defendants are treated equally until a matter is finally determined.

The motivation to satisfy the Mainzeal judgement:

As a funder, witnessing defendants and their insurers exhibit the behaviour observed in the Mainzeal case simply hardens our resolve. We believed in this case and the claims of the creditors, and we knew the day would come when we could shine a light on the conduct of the directors.

With the Supreme Court judgment now sealed, the time has come for the liquidator, on behalf of the creditors, and the funder to explore every avenue available to satisfy the Supreme Court’s $60m judgment. This might include investigating the assets of the directors.

Unfortunately, while creditors could have recovered significantly more and much more quickly, that is the way the proverbial cookie crumbles sometimes – and we squarely blame that on the way the directors chose to conduct themselves. Let’s hope if nothing else that this story is a cautionary tale to be heeded by others in future. It’s too late for the Mainzeal creditors though – perhaps Messrs Yan, Tilby, Gomm and Dame Jenny, together with QBE and co, might take a moment to reflect and finally acknowledge that their conduct exposed the creditors to illegitimate risk, leaving them $111 million out of pocket and still waiting for repayment 10 years later.

Interestingly, despite not a single dissenting voice in the Courts and now an order to pay over $60m in damages, the directors still haven’t taken responsibility for their conduct – even the media statement issued by Chapman Tripp and Jack Hodder KC on behalf of Dame Jenny Shipley refused to accept responsibility.

While the outcome should’ve been better for everyone concerned, the ongoing conduct of the directors and QBE has meant that is not the case. The creditors expect the directors to pay the full amount ordered by the Court but based on what I’ve witnessed for the last eight years, I doubt they will unless they’re seriously encouraged to do so.

Published in New Zealand Herald: Mainzeal Supreme Court Judgement – why the case should have ended sooner