If you’re a business owner in New Zealand, you’ll know the importance of careful financial management, especially when times are tough. But if a company becomes insolvent, the question arises: who should benefit from claims against directors found liable for reckless trading?
Should these funds flow to secured creditors like banks, or be reserved for unsecured creditors such as suppliers and contractors? Recent court decisions and proposed legislative changes are reshaping the answer.
The current position: Mainzeal case explained
The high-profile Mainzeal case, which went all the way to the Supreme Court, recently put a spotlight on reckless trading. The directors of Mainzeal Property & Construction Ltd were found liable for continuing to trade despite serious financial difficulties, resulting in millions of dollars owed to creditors. Although secured creditors like banks had already been paid, the case raised an important question: could secured creditors theoretically claim compensation awarded against directors?
The Supreme Court didn’t make a final binding ruling on this, but strongly suggested these recoveries should primarily benefit unsecured creditors, the very people who typically lose out most during insolvencies.
What’s the legal situation right now?
Currently, the law doesn’t explicitly exclude secured creditors from these funds. Technically, money recovered from reckless trading claims is treated as a general company asset, meaning secured creditors could potentially benefit if their debts aren’t fully paid. But courts are increasingly aware this might not be fair, particularly if the secured creditor is connected to the directors involved.
Judges now seem inclined to ensure these recoveries go to unsecured creditors, who are often smaller businesses or contractors and don’t have other protections in place. In short, while there’s no firm legal rule yet, the practical approach courts are taking strongly favors unsecured creditors.
Changes on the horizon
Recognising this issue, the New Zealand government is proposing clear changes to insolvency law. These changes would explicitly state that money from reckless trading claims should not flow to secured creditors. This reform aims to protect unsecured creditors better and ensure directors face meaningful accountability for their actions.
What does this mean for you?
As a business owner, this development is significant. It provides stronger protections if you become an unsecured creditor due to another company’s insolvency. It also clarifies expectations and liabilities for directors, emphasising responsible financial management.
We’ll continue monitoring these proposed changes closely, so stay tuned. Understanding these developments could help you better navigate business risks and protect your interests.
