COMPANY DIRECTORS’ LIABILITY FOR INSOLVENT TRADING: A NOVEL APPROACH TO QUANTIFICATION OF DAMAGES FROM THE HIGH COURT OF NEW ZEALAND
The separate legal personality doctrine of corporate law, commonly known as the ‘corporate veil’, means that directors and shareholders are not generally liable for their company’s debts and liabilities. This separation of legal personality and associated liability has provided a clear benefit for business owners forming companies to try and avoid personal liability. However, in certain cases directors will be liable where they fail to discharge their duties to the company, such as when they unreasonably allow the company to continue to trade while insolvent.
This article considers Mainzeal Property and Construction Limited (in liquidation) v. Yan, a recent decision of the High Court of New Zealand, where former directors of the company were held liable for breaching their statutory duties by allowing the company to trade while insolvent.
The decision is of interest in New Zealand, and other common law jurisdictions with similar statutory directors’ duties that prohibit directors from allowing companies to trade while insolvent, because of the novel approach taken by the trial judge in assessing and quantifying the damages awarded against the former directors.
New Zealand position
Section 135 of the Companies Act 1993 (CA93) states that a director of a company must not allow “the business of a company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors”.
Oct-Dec 2019 issue
Lindsay Litigation & Arbitration Limited