10/29/2024 | News release | Distributed by Public on 10/30/2024 05:15
We are often asked to advise directors of companies in financial difficulty about their duties (see previous articles here, here and here). What if you find yourself on the other side of the ledger? What if you are owed money by a company that can't pay because it is insolvent, and you believe that the director has caused or contributed to your loss in breach of his or her duties?
The main focus of the commentary following the decision in Mainzeal last year was around the large award made against the directors and what it meant for other directors. Slightly lost in that was another notable part of the decision. The Supreme Court confirmed that section 301 of the Companies Act 1993 allowed for direct claims by creditors for losses that they have suffered as a result of breaches by directors of their duties.
Since then, there have been several claims made. The most recent case we are aware of is Boaden v Mahoney [2024] NZHC 2783. The Court ordered Mr. Mahoney, the director of Civil Underground Ltd (in liquidation), to pay Mr. Boaden, a creditor of Civil Underground, around NZ$100,000 plus costs as compensation for losses Mr. Boaden had suffered. The losses resulted from Mr. Mahoney's breach of his duties. In particular, Mr. Mahoney had allowed Civil Underground to continue trading for over 12 months while it was insolvent. During that time, Civil Underground was failing to pay the IRD, and its overdraft was increasing. The Court found that Mr. Mahoney should have taken stock and that 'A sober assessment was required'. Instead, Mr. Mahoney relied on advice that was based on incorrect and unrealistic forecasts that he had provided, and continued trading. In this period, he caused the company to enter into new obligations which the company could not meet, including an amended lease with Mr. Boaden. In doing so, he caused loss to Mr. Boaden (and presumably others). By making a claim directly under section 301, Mr. Boaden has improved his chances of getting paid (although, of course, obtaining a judgment in your favour and enforcing that judgment are two very different things).
When considering whether a claim of this sort might be available to you, some of the key considerations are as follows:
Claims of this type are rarely straightforward, but the possibility of bringing a claim directly against one or more directors is another string in the bow of creditors seeking payment.
As a side note, as we have reported previously (here), the Law Commission is reviewing the law around director duties and director liability. The issue of claims against directors directly by creditors will no doubt be looked at, especially in the context of how that ties in with claims made by liquidators.
If you are struggling to get payment from a debtor and want to explore your options, please feel free to contact one of the authors of this article to discuss your situation.