A useful last resort: pursuing directors personally for unpaid company debts

We are often asked to advise directors of companies in financial difficulty about their duties (see previous articles here, here and here). What if you find yourself on the other side of the ledger? What if you are owed money by a company that can’t pay because it is insolvent, and you believe that the director has caused or contributed to your loss in breach of his or her duties?

The main focus of the commentary following the decision in Mainzeal last year was around the large award made against the directors and what it meant for other directors. Slightly lost in that was another notable part of the decision. The Supreme Court confirmed that section 301 of the Companies Act 1993 allowed for direct claims by creditors for losses that they have suffered as a result of breaches by directors of their duties.

Since then, there have been several claims made. The most recent case we are aware of is Boaden v Mahoney [2024] NZHC 2783. The Court ordered Mahoney, the director of Civil Underground Ltd (in liquidation), to pay Boaden, a creditor of Civil Underground, around NZ$100,000 plus costs as compensation for losses Boaden had suffered. 

The losses resulted from Mahoney’s breach of his duties. In particular, Mahoney had allowed Civil Underground to continue trading for over 12 months while it was insolvent. During that time, Civil Underground was failing to pay the IRD, and its overdraft was increasing. The Court found that Mr. Mahoney should have taken stock and that ‘A sober assessment was required’. Instead, Mr. Mahoney relied on advice that was based on incorrect and unrealistic forecasts that he had provided, and continued trading. 

In this period, he caused the company to enter into new obligations which the company could not meet, including an amended lease with Boaden. In doing so, he caused loss to Boaden (and presumably others). By making a claim directly under section 301, Boaden has improved his chances of getting paid (although, of course, obtaining a judgment in your favour and enforcing that judgment are two very different things).

When considering whether a claim of this sort might be available to you, some of the key considerations are as follows:

• • What is the position of the liquidator(s)? Section 301 applies to claims against companies in liquidation. In those circumstances, it may be that the liquidators will bring claims directly. You should consider (and take advice on) how that will impact on your decision.
  • What evidence do you have of a breach? The Supreme Court in Mainzeal was very clear that directors are entitled to take commercial risks. To be successful in a claim against a director, you will need to prove more than that the company owes you money and cannot pay. Also, unlike a liquidator, you will not have immediate access to the records of the company.
  • Can you show the breach caused you loss? If you can prove a breach of duty by a director, can you also show that that breach has caused your loss? For example, did the debt the company owes you increase in the period after the date on which the director should have realised the company was unsalvageable?
  • Are there any assets available? If you are successful in your claim, will that lead to any recovery? You should consider whether the director has available assets or if there is D&O insurance that will respond to your claim.
  • Is a claim available under the Fair Trading Act? In many cases, it will be possible to bring a claim under the Fair Trading Act at the same time. For example, you may be able to point to misleading conduct by the director (e.g. if the director made assurances to you when entering into a contract). In some circumstances, the measure of damages under the Fair Trading Act may be more favourable to you.

Claims of this type are rarely straightforward, but the possibility of bringing a claim directly against one or more directors is another string in the bow of creditors seeking payment.

As a side note, as we have reported previously (here), the Law Commission is reviewing the law around director duties and director liability. The issue of claims against directors directly by creditors will no doubt be looked at, especially in the context of how that ties in with claims made by liquidators.