When directors of a company breach their statutory duties, the consequences can be significant—not only for the directors themselves but also for the creditors of an insolvent company. Recent case law confirms that funds recovered from directors for such breaches are not ring-fenced for specific claimants. Instead, they are considered company assets and are to be distributed in accordance with the priorities set out in Schedule 7 of the Companies Act 1993.
Duties of Directors and Consequences of a Breach
Under the Companies Act 1993, directors must meet specific standards of conduct. Section 131 requires directors to act in good faith and in what they believe to be the best interests of the company. Section 137 imposes a duty of care, diligence, and skill. Section 135 prohibits a director from engaging in reckless trading and section 136 requires a director of a company to not incur obligations unless they are able to be performed. These sections are the ones that director’s breach claims are commonly based on.
When these duties are breached and the company suffers a loss, section 301 empowers the court to inquire into the conduct of the director and to make orders holding them personally liable to contribute.
Compensation orders under s 301(1)(b)(ii) are the primary mechanism for recovering sums in respect of loss resulting from director misconduct, suffered by the company. These are made for the benefit of the company as a whole, and the resulting funds become part of the general asset pool, available for distribution among all creditors. The underpinning principle of this is that the loss is borne by the company, so relief should be attributed back when ordered under s 301.
The Pari Passu Principle
Section 312(1) of the Companies Act enshrines the long-standing pari passu principle: unsecured creditors rank equally and are entitled to share in the assets of the company rateably. The importance of this principle means that any funds recovered by a liquidator—whether from a debtor, a third party, or a director following a breach of duty—are included in the common fund available to all unsecured creditors unless statute or case law provides otherwise.
Lynn Taylor and Grant Slevin’s Text on Insolvency Law in New Zealand states that claims under s 301 are brought “to swell the pool of assets” available for the benefit of the general body of unsecured creditors. This reflects the collective nature of the insolvency regime and the role of the liquidator as a fiduciary for all creditors, with the scope of s 301 being to give a right of action against a wrongdoer who is a company director. [1]
Case Law Support
The courts have consistently reinforced the principle that funds recovered under s 301 are company assets subject to ordinary distribution rules. In Masden-Reis v Cooper the court held relief in form of an order under s 301 for a breach of s 131 can be for restitution or compensatory in nature and regarding calculation of compensation ordered, the court stated all factors must be taken into account and relief ordered will take account of all circumstances; including the nature of the breach(es), level of culpability, duration of breach, holding the director to account and reversing the harm to the company.[2]
In Mason v Lewis, The Supreme Court upheld an order requiring directors to pay $560,000 to the company’s assets for reckless trading under section 135. This amount reflected the loss caused by their breach of duty. The Court emphasized that when directors breach their duties, any resulting losses should be remedied in a way that benefits all creditors, highlighting the close link between directors’ obligations and the interests of creditors. The Court also explained that it would be illogical to exclude a secured creditor’s claim for post-liquidation interest, as this forms part of the creditor’s actual loss. Accordingly, such interest should be included in the creditor pool when assessing liability. This approach is consistent with the general principle that compensation awarded under section 301 becomes part of the company’s overall assets.[3]
The high-profile case of Yan v Mainzeal involved breaches of ss 135 and 136. The Supreme Court ordered directors to pay $39.8 million to Mainzeal’s assets under s 301. The Court emphasised that, where insolvency is imminent, directors owe heightened duties that indirectly serve creditor interests. The compensation awarded was still payable into the company’s general asset pool.[4]
In Lakeside Adventures 2010 v Levin, The liquidators sought to recover against the sole director and shareholder personally under s 301 for misconduct relating to ss 131, 134, 135,136 and 137 of the Companies Act. The High Court held that an order under s 301)(b) was granted, and he was required to contribute to Lakeside’s assets to the full extent of the sum owed for his breaches of duties owed to the company, once again affirming the standard approach.[5]
To summarize, the consistent position across authorities and commentary is that compensation orders made under s 301 of the Companies Act 1993 are for the benefit of the company as a whole. These funds are treated as company assets and are distributed in accordance with Schedule 7 of the Companies Act, alongside other company property. This reinforces the collective nature of New Zealand’s insolvency framework. Directors who breach their duties may be personally liable, but any recovery flows not to specific aggrieved parties, but into the pool from which all unsecured creditors share equally.
[1] Lynne Taylor and Grant Slevin The Law of Insolvency in New Zealand (2nd ed, Wellington, Thomson Reuters) 2021 at 816.
[2] Masden-Reis v Cooper [2020] NZSC 100 at [161] and [182].
[3] Lewis v Mason and Meltzer as liquidators of Global Print Strategies Limited (in Liquidation) SC 71/2009 [14 Oct 2009 At [2].
[4] Yan v Mainzeal Property and Construction Ltd (In Liq) [2023] NZSC 113 at [359].
[5] Lakeside Ventures 2019 Ltd v Lin (In Liq) v Levin [2014] NZHC 1048 at [47].
