With the benefit of hindsight, “Building Certainty” may not have been the best corporate strapline for Mainzeal. Although, perhaps the decision handed down by the Supreme Court last Friday August 25th might build certainty as to the changes required to our Companies Act.
A legal process that began with liquidators (BDO) lodging claims with the High Court in 2015 has finally – eight years later – come to its ultimate conclusion via both the Court of Appeal and the Supreme Court. The wheels of justice turn slowly, especially when $39.8m is involved.
It was no small irony that the verdict was handed down in a building that Mainzeal had in fact constructed (at a cost of approximately $81m).
For the former directors of Mainzeal – Richard Yan, Clive Tilby, Dame Jenny Shipley and Peter Gomm – there is no path beyond the Supreme Court decision. And it’s vindication for the original High Court decision (released in early 2019) and for BDO liquidator, Andrew Mackay.
As a wholly owned subsidiary of Richina Pacific, Mainzeal itself was not listed on the NZX.
NZSA’s interest in Mainzeal and subsequent outcomes relates to the actions of directors and the fundamentals of good governance. While mum-and-dad shareholders were unlikely to have suffered direct loss from Mainzeal, the key impact of the Mainzeal collapse was felt by individuals and contractors who had provided services to Mainzeal and had not been paid.
The significant cash flows involved in the construction industry operated as a kind of working capital.Justice Cooke, High Court, February 2019
A succinct view. But not something you want to hear as a trade creditor; funding is usually provided by banks or informed shareholders, not suppliers.
The other unusual element residing on Mainzeal’s balance sheet was a series of related-party loans, made by Mainzeal back to its parent company – Richina Pacific. Between 2004-2010, Mainzeal had loaned Richina Pacific around $40m, despite making losses since 2008. The loans were poorly documented, with the directors relying on verbal assurances from Richard Yan (on behalf of Richina Pacific) that the loans would be repaid. The situation was further complicated by Richina Pacific’s de-listing and ‘reconstitution’.
Mainzeal’s directors were concerned about cashflow from 2010 onwards. Sir Paul Collins, well known to many older New Zealanders as a result of his leadership of Brierley Investments, had been appointed to the Board in February 2012 and was plainly not happy with what he saw – raising strongly-worded concerns about solvency and transparency in July. It was only in December 2012 that the directors finally sought independent advice relating to the loans.
Two months later (February 2013) Mainzeal was placed in receivership, following a proposal from Yan to ask the BNZ to place the company in receivership.
There was no help forthcoming from Richina or Richina Pacific. The loans made by Mainzeal had been carefully structured to ensure that they were made to Richina Pacific subsidiaries that had no means of repaying them.
Game over – Richina: 1, Mainzeal: nil.
Richina boxing on
Richina itself still exists. It proudly proclaims on its website that “Richina’s operating companies trace their roots in Shanghai back to 1903 and in New Zealand back to 1855“. These days, it’s New Zealand businesses are apparently run from the Campbell Park Estate, a large property near Oamaru in the South Island.
At that point, from a New Zealand perspective, things start to get opaque. Campbell Park Holdings Limited (formerly Richina Pacific Limited) is still registered and is 100% owned by Richina Limited – a company that was removed from the register in December 2022.
Richina Pacific was formerly listed on the NZX. It was used as a vehicle by Richina Capital – a group of US and New Zealand investors – to raise capital to support investment activity in China. It’s notable that Richina Pacific purchased 90% of the Shanghai Leather Company in 2004, although much of the subsequent spectacular economic benefit accrued to the original Richina Capital investors, after Richina Pacific conveniently de-listed from the NZX in 2009. By that stage, Richina Capital held just under 46% of Richina Pacific, mainly thanks to its funding in 2004 of the Shanghai Leather purchase.
And included in that list of Richina Capital investors? Dame Jenny Shipley. She might be hurting from the need to pay NZ$6.8m back to Mainzeal, but is likely to have done rather well from her initial investment in Regina Capital. Regina Pacific purchased its 90% stake in Shanghai Leather for a touch over US$20m, with the real value of the company contained in its exposure to the impending boom in Shanghai property. Estimates made by the liquidator’s lawyers in 2019 indicated that Shanghai Leather was worth around US$700m, although unsurprisingly there was some reluctance expressed by Richard Yan in confirming that figure.
It’s a core assumption of NZSA that strong governance creates strong performance in the long-term. As shareholders, we expect directors to establish governance processes that provide assurance and oversight over strategy, performance and compliance issues.
Our policies highlight arcane matters such as the value of independent advice for a Board and the importance of Board diversity. In our discussions with directors, we offer a constant challenge as to how directors have gained assurance around a particular valuation or decision. Those policies and discussions turn up in our regular Company Assessment Reports – an objective arbiter of the factors underpinning good governance.
For a company listed on the NZX, there is nowhere to hide from NZSA – we cover nearly every company on the exchange.
A factor in a company choosing to list on a public exchange often relates to the trust a listing helps to generate amongst business partners, suppliers and customers. That’s engendered by the (relative) transparency brought about by listing rules and the scrutiny by a fleet of analysts associated with wealth managers and organisations like NZSA that regularly trawl through company disclosures. I’ve heard that from the CEO of one recently-listed company just this week.
So, while small trade creditors may not undertake the same level of due diligence, there is still some value implied by a public listing.
Mainzeal’s parent – Richina Pacific – was listed until 2009 – but that in itself did not provide much transparency on Mainzeal, with reporting covering a variety of geographies and divisions. Mainzeal was included in the “Land” division, which also included Shanghai land, hotels and other investments.
Following 2009, as an unlisted entity, Mainzeal offered none of that.
And under our decidedly-outdated Companies Act, it didn’t have to.
Companies Act implications
Pushing for changes to the Companies Act is becoming something of a recurring theme for NZSA. Our last commentary on this was in early July, and its perhaps not surprising that Mainzeal is an instructive case study.
We maintain that the current Act does not train our widely-held companies, nor their executives and directors, well enough to succeed in a listed environment. A widely-held company need offer little disclosure to shareholders under the current shareholder provisions of the Act. This not only forms a significant barrier to joining a publicly-traded capital market but also acts as a handbrake on the development of corporate expertise in New Zealand.
Mainzeal itself is the has become the antithesis of the “director duties” specified in the Act. The case has helped to clarify what some of those provisions actually mean – and the expected actions of a director governing a company challenged by tight cashflow and/or insolvency. Minter Ellison (acting for BDO) highlight a number of significant factors in their assessment of the case – including that:
directors have a continuing obligation to monitor the performance and prospects of their companyMinter Ellison, August 25th 2023
Minter Ellison’s review of the Supreme Court decision also highlighted the need for directors to take independent advice, explicit consideration for how a breach of their duties could be avoided if there is doubt as to whether the company can honour its obligations and a need to deal with the issue that gave rise to the concern in the first place.
The Court also outlined factors informing a “reasonableness” test that judges should consider in assessing director decisions, including business judgement, timeframes involved in assessing risk, complexity and advice received.
NZSA believes that the implications of this case should form useful input to any review of the Companies Act as to the standards expected of directors in undertaking their responsibilities. The lessons from Mainzeal and the implications of the Supreme Court decision should be incorporated within the Act itself rather than remain solely as case law.
There’s a host of good reading that summarise the history and implications of this sorry tale. Nikki Mandow’s Newsroom article (republished on Stuff) offers a useful summary released just after the High Court decision (March 2019).