Significant implications for directors, particularly if creditors are well-funded or 'determined', lawyer says.
A recent High Court judgment has thrown open the door to creditor claims against company directors who fall foul of "reckless trading".
A judgment on September 26 against Timothy Mahoney, a director of contractor Civil Underground, is seen as the first "substantive" decision finding a director liable to a creditor for breach of his duties since the Supreme Court decision against Mainzeal directors last year.
In the Mainzeal case, finalised last August after eight years of litigation, the court dismissed appeals from four directors of the failed construction company, finding them liable for claims of more than $40 million against claims by creditors who were left out of pocket by about $mm after the high-profile collapse in 2013.
That left Mainzeal chief executive Richard Yan, chair Jenny Shipley, and Peter Gomm and Clive Tilby on the hook for $39.Sm plus interest, from the date of liquidation, leaving a liability of more than $5om.
Awarded claims
In last month's 'test bed' case, the creditor Drew Boaden made claims against Mahoney for breach of director duties under the Companies Act 1993 and for breach of the Fair Trading Act 1986.
Civil Underground, which had leased a 5500-square-metre Glen Eden property from Boaden, was put into liquidation in October 2020. Boaden had issued a statutory demand for payment for outstanding rent in June of that year.
The liquidators' report to creditors in November 1 last year showed there was a shortfall of $1.34m to outstanding creditors.
Justice Kiri Tahana awarded claims of $131,883 for outstanding rent and other costs including site remediation to Boaden, on the basis that Mahoney had fallen foul of both sections 135 and 136 of the Act - related to reckless trading and reasonable belief in being able to meet obligations.
If you trade while you're insolvent, you're stuffed
"Previously, it was only the liquidators who could pursue the claim and it was money you had to pay back to the company. Now, if you incur an obligation after failing the insolvency test, you're pretty stuffed."
He said while not in the same financial league as Mainzeal, it should remove doubts by litigators and insolvency practitioners as to whether using that creditors judgment was a valid course of legal action.
"The fact that this is just a straightforward commercial property deal and the same Section 301 creditors application process has been used, shows it can apply in any situation," he said.
Lawrence said the decision had implications for directors, particularly if the company had well-funded or "determined" creditors. He said there were several similar cases pending on his books.
Brent Melville
Fri, 11 Oct 2024
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