June 09 2019
Mainzeal case – highlights director responsibilities
The recent high-profile Mainzeal case has highlighted the importance for directors to know and understand their duties under the Companies Act 1993.
Four of Mainzeal’s directors were found liable for $36 million in damages for breaching section 135 of the Act which is headed ‘reckless trading’. This section prohibits directors from agreeing to cause or allow the business of the company to be carried out in a way that is likely to create substantial risk of serious loss to the company’s creditors.
The directors of Mainzeal authorised a transfer of around $40 million to Mainzeal’s parent company in China relying on a promise that the money would be repaid. The directors then allowed the company to continue trading and to incur further debts to creditors while it was balance sheet insolvent. When Mainzeal started to hit stormy financial waters, the directors attempted to call on the loan to the parent company. They found, however, that Chinese restrictions meant that there was no way for the parent company to pay back the full sum immediately.
When Mainzeal went into liquidation in early 2013, it owed about $110 million to unsecured creditors.
The High Court ruled that the directors were reckless in allowing the company to continue trading in this way. The directors have appealed the decision and a hearing is likely to take place later this year.
The Mainzeal case is one of many reminders of the importance for directors to understand the obligations that come with their role.
The CLOUD Act: Clarifying Lawful Overseas Use of Data
Some possible implications for this country
The Clarifying Lawful Overseas Use of Data Act was enacted in the United States in 2018. It enables federal law enforcement to force US-based electronic communications or remote computing service providers to disclose requested data in their possession, custody or control, whether or not that data is stored in the US or a foreign country. This is a game-changer for global data sovereignty.
The legislation was a response to the case of Microsoft v United States where it was ruled that the FBI, undertaking a drug trafficking investigation, could not compel the US-based Microsoft Corporation to turn over data stored in Ireland. The only way for US law enforcement to access overseas data had been to form a Mutual Legal-Assistance Treaty with the country where the data is stored.
Even though the 2018 Act was passed in the US, it could have serious implications for businesses and individuals in New Zealand.
You may think your sensitive data is safe if it is stored at a data centre located in New Zealand, but that data could be accessed and disclosed if stored through a US-based service provider.
Do you have the right to play the music you’re playing?
A 2018 High Court decision has shown you should consider your right to use a third party’s intellectual property, such as playing music in the course of your business operations.
If you use music or play the radio in a business or public setting that is considered a ‘public performance’ you could be contravening a provision in the Copyright Act 1994. This includes playing music and/or radio broadcasts in any commercial environment, such as a café, restaurant, bar, shop or factory.
In December 2018, The Rock Salt Bar & Restaurant at Kerikeri was ordered by the High Court to pay $4,605 in damages and $18,000 in additional damages for failing to obtain a licence to play music in the course of its business. In this instance, The Rock Salt Bar & Restaurant was found to have infringed copyright of the Australasian Performing Right Association (APRA), and ignored requests to stop using such copyright until they obtained an applicable licence. A licence to use the copyright was offered to The Rock Salt Bar & Restaurant by APRA a number of times in 2017 and 2018, but the offer was ignored.
In his judgment, Justice Palmer noted that he awarded the additional damages of $18,000 on the basis of ‘the flagrancy of the breach, the importance of the music as a reason for customers’ attendance over a significant period of time and contempt towards the copyright regime indicated by the defendants’ behaviour’.
This case goes to show that if you’re a business owner, you must consider whether you have a right to use third party intellectual property rights in all aspects of your business. Otherwise you could be exposing your business to unnecessary financial risk.
1 Mainzeal Property and Construction Group Limited v Yan  NZHC 255.
2 United States v. Microsoft Corporation, 253 F.3d 34 (D.C. Cir. 2001).
3 Australasian Performing Right Association Ltd v 3228 Business Ltd  NZHC 3088.