Mason v Lewis

Last updated

Mason v Lewis
Coat of arms of New Zealand.svg
Court Court of Appeal
Decided30 March 2006
Citation(s)[2006] 3 NZLR 225
Transcript(s) Court of Appeal judgment
Case history
Prior action(s) High Court Auckland M 459-IM03, 25 November 2004
Subsequent action(s) High Court Auckland CIV 2003-404-0936, 1 October 2008; Court of Appeal [2009] NZCA 306; Supreme Court [2009] NZSC 103
Court membership
Judge(s) sittingHammond, Chambers and Robertson JJ
Keywords
Directors' duties, Corporate law, reckless trading

Mason v Lewis is a Court of Appeal decision that held that the test for determining what reckless trading under section 135 of the Companies Act 1993 is an objective one. The decision also clarified that s 135 is concerned not with deterring mere risk but with prohibiting "substantial risk of serious loss". [1]

Contents

Background

Mr and Mrs Lewis were directors of their own printing business, set up in 1984, who invested in and became directors of a company called Global Print in 1999. [2] Global Print was the idea of Mr Grant, who became its manager. [3] In February 2000 Global Print lost its main contract, although the Lewises did not learn of this until April 2000. [4] Until this point there were four other directors, three former colleagues of Mr Grant and his wife, Mrs Grant, but on 20 April 2000 the three former colleagues resigned as directors. [5] The financial position of the company gradually worsened and in September 2001 Mrs Lewis resigned as a director. [6] In February 2002 Global Print was placed into liquidation and a complaint was made to the Serious Fraud Office about Mr Grant, which resulted in him being convicted of five charges of fraud for arranging false invoices to Global Print which were factored to another company. [7]

The liquidators went to the High Court alleging breaches by the Lewises of their duties under ss 135 and 300 of the Companies Act 1993. Section 135 states,

A director of a company must not—

(a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company's creditors; or

(b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors. [8]

Section 300 allows for the personal liability of directors if proper accounting records have not been kept. [9]

In the High Court Justice Salmon held, "that there must be a conscious decision to allow the business to be conducted in a way that creates a substantial risk of serious loss to the company's creditors or a wilful or grossly negligent turning of a blind eye to the particular situation; in other words, some element of subjectivity." [10]

The liquidators appealed.

Judgment

Justice Hammond delivered the decision of the Court and overturned Justice Salmon's decision that in determining whether or not a breach of s 135 of the Companies Act had occurred a court should consider the director's subjective intentions. [1]

The essential pillars of the present section are as follows:

• the duty which is imposed by s 135 is one owed by directors to the company (rather than to any particular creditors);
• the test is an objective one;
• it focuses not on a director’s belief, but rather on the manner in which a company’s business is carried on, and whether that modus operandi creates a substantial risk of serious loss; and

• what is required when the company enters troubled financial waters is what Ross (above at para [48]) accurately described as a “sober assessment” by the directors, we would add of an ongoing character, as to the company’s likely future income and prospects.

— Hammond J, Mason v Lewis [1]

In applying this test the Court observed, "In our view, any reasonable and prudent director would have known by July 2000, or at the very latest by mid-August 2000, that the company was in deep trouble, that even radical surgery might not save it, and that the cessation of trading had to be contemplated. [...] This is a paradigm case of reckless trading under s 135 of the Companies Act." [11]

The Court then stated, "Directors must take reasonable steps to put themselves in a position not only to guide but to monitor the management of a company. The days of sleeping directors with merely an investment interest are long gone: the limitation of liability given by incorporation is conditional on proper compliance with the statute." [12]

Related Research Articles

Liquidation Winding-up of a company

Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

Insolvency State of being unable to pay ones debts

In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

<i>Salomon v A Salomon & Co Ltd</i>

Salomon v A Salomon & Co Ltd[1896] UKHL 1, [1897] AC 22 is a landmark UK company law case. The effect of the House of Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders for payment of outstanding debts.

Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company. Under Australian insolvency law the equivalent concept is called "insolvent trading".

Mainzeal

Mainzeal Property and Construction Ltd was one of the leading New Zealand property and construction companies until being placed into receivership on 6 February 2013 and then being placed into liquidation on 28 February 2013. According to its website, Mainzeal was involved in delivering $7.5 billion of construction projects across New Zealand and employed 400+ people. It was held by Richina Global Real Estate which is part of Richina Inc, an independent and closely held New Zealand-headquartered Asia Pacific holding company.

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called being "under administration" – is an alternative to liquidation or may be a precursor to it. Administration is commenced by an administration order.

United Kingdom company law Law that regulates corporations formed under the Companies Act 2006

The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution, public companies now employ more people and generate more of wealth in the United Kingdom economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency, and where management was delegated to a centralised board of directors. An influential model within Europe, the Commonwealth and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with.

United Kingdom insolvency law Law in the United Kingdom of Great Britain and Northern Ireland

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

Bednash v HearseyorRe DGA (UK) Ltd[2001] EWCA 787 is a UK company law and UK insolvency law case, which held that a director's pay and pension was excessive and grossly negligent, and could be recovered after the company went insolvent.

Re a Company [1990] BCC 526 is a UK insolvency law case, on the offence of fraudulent trading under s.213 of the Insolvency Act 1986.

<i>Re Produce Marketing Consortium Ltd (No 2)</i>

Re Produce Marketing Consortium Ltd [1989] 5 BCC 569 was the first UK company law or UK insolvency law case under the wrongful trading provision of s 214 Insolvency Act 1986.

<i>Re Brian D Pierson (Contractors) Ltd</i>

Re Brian D Pierson (Contractors) Ltd [1999] BCC 26 is a UK insolvency law and company law case, concerning misfeasance and wrongful trading.

<i>Oldham v Kyrris</i>

Oldham v Kyrris[2003] EWCA Civ 1506 is a UK insolvency law case concerning the administration procedure when a company is unable to repay its debts.

<i>Hague v Nam Tai Electronics</i>

Hague v Nam Tai Electronics refers to a pair of legal decisions of the Privy Council on appeal from the British Virgin Islands. The first was a unanimous decision given by Lord Hoffman, reported at [2006] UKPC 52, which focussed upon the anti-deprivation rule and secured creditor's rights. The second was a unanimous decision given by Lord Scott, reported at [2008] UKPC 13, and concerned the liability of a company liquidator. The second decision was much more widely reported.

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.

Hong Kong insolvency law

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

<i>Allied Concrete Ltd v Meltzer</i>

Allied Concrete Ltd v Meltzer was a landmark Supreme Court decision on the defence to a court order allowing a liquidator to claw back value from an insolvent transaction. The matter in contention concerned whether repaying an old debt satisfied the words "gave value" in section 296(3)(c) of the Companies Act 1993. The Supreme Court unanimously agreed that "gave value" includes value given when a debt was initially incurred by the now insolvent debtor company.

<i>Brooks v Armstrong</i>

Brooks v Armstrong[2016] EWHC 2289 (Ch), [2016] All ER (D) 117 (Nov) is a UK insolvency law case on wrongful trading under section 214 of the Insolvency Act 1986.

<i>Sevilleja v Marex Financial Ltd</i>

Sevilleja v Marex Financial Ltd[2020] UKSC 31 is a judicial decision of the Supreme Court of the United Kingdom relating to company law and the rule against reflective loss.

References

  1. 1 2 3 Mason v Lewis [2006] 3 NZLR 225 at [51].
  2. ↑ Mason v Lewis [2006] 3 NZLR 225 at [10].
  3. ↑ Mason v Lewis [2006] 3 NZLR 225 at [11].
  4. ↑ Mason v Lewis [2006] 3 NZLR 225 at [14] and [15].
  5. ↑ Mason v Lewis [2006] 3 NZLR 225 at [16].
  6. ↑ Mason v Lewis [2006] 3 NZLR 225 at [27].
  7. ↑ Mason v Lewis [2006] 3 NZLR 225 at [33] and [34].
  8. ↑ "Companies Act 1993, s 135".
  9. ↑ Mason v Lewis [2006] 3 NZLR 225 at [36]-[38].
  10. ↑ Farrar, John; Watson, Susan (2013). Companies and Securities Law in New Zealand. Wellington: Brookers. p. 440.
  11. ↑ Mason v Lewis [2006] 3 NZLR 225 at [73] and [76].
  12. ↑ Mason v Lewis [2006] 3 NZLR 225 at [83].
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.