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Apr 8 24

The measure of damages for breach of warranty – under a SPA

by Stephen

In 2020, I commented on a breach of warranty case, using the theme of a cautionary tale about due diligence[1].  Another recent decision, again from Christchurch, contains another stark illustration of the need for caution – this time coupled with a damages award, for breach of warranty under a SPA, that seems out of kilter.

The 2024 decision, Cunningham v European Interiors Limited (in liq), involved a claim about a turnover warranty in a SPA.  Unfortunately, during the 2 years that the case was going through procedural skirmishing, the defendant and its sole director went broke.  As a result, when the case came to trail, the only defendants left standing were the purchaser’s accountants – who settled out of court.  As a result, there was little or no active defence.  Despite this, aspects of the judgment seem quite curious. 

The widely-used, at least for sales of SMEs, ADLS form of SPA contains a turnover warranty.  The warranty speaks to past performance.  Curiously, in this case, the Court awarded damages for breach of the turnover warranty in the SPA based on loss of [expected] profits – which appears to be out of step with the usual basis for compensating the purchaser on a diminution in value basis for receiving something that was worth less than what they contracted for.

Once again, if there is a cautionary tale – it hinges on due diligence.


The buyer in this case had agreed to buy the Canterbury regional component of a kitchen supply and installation business.  The SPA included a turnover warranty for the 9 months prior to the date of the SPA.  The warranted turnover was $2.2 million – when the plaintiffs claimed that it was less than half that figure.  The plaintiffs also brought a claim under the Fair Trading Act saying that the information provided by the vendor misrepresented business margins and the profit and loss information misrepresented matters relating to product cost price and the profitability of the business for that 9-month period.  They also sued the sole shareholder and director of the vendor (as covenantor) for his personal covenants under the SPA – backstopping the warranties. 

Because of the lack of any active defence by the (insolvent) defendants, the evidence comprises briefs of evidence (largely by experts – including the plaintiffs’ accountants – before they settled the claim against them).


Finding that the turnover warranty had been breached, the judge noted that, on the breach of contract causes of action, the plaintiffs must be put as nearly as possible into the position they would have occupied if the contract (SPA) had been performed.  And that where a turnover warranty is breached, it is common to approach the calculation of the plaintiffs’ loss by reference to its loss of profits.  In other words, the innocent party has an expectation interest, which the law requires to be fulfilled, by financially restoring them to the position they would have occupied if the contract had been performed.

He continued by noting that whilst the appropriate income period from which to assess damages arising from loss of profits is a matter for professional judgement – in this case the Court has the uncontradicted opinion of the plaintiffs’ expert that the 3-year period commencing with the (financial) year of purchase is reasonable.  He said that there is no reason not to adopt that assessment.

It is noted that the plaintiffs pleaded that, had the turnover warranty been correct, they would have recovered profits of $2.3 million (in excess of what was recoverable as the business truly existed).  Alternatively, they said the true value of the business at the date of settlement was $194k – and therefore (in the alternative) they claimed $1.1 million being the difference between the purchase price and the true value.  And, they also claimed direct consequential trading losses of approx. $300k for the 3 financial years following the purchase – giving an aggregate for the alternative claim of approx. $1.4 million.

There was also a large costs award – largely relating to the costs of the plaintiffs’ expert accountant.


It is a pity that this case suffered from a lack of active defence.  On its face, the truncated (for the reasons noted above) decision seems to depart from the usual approach for assessing damages for a breach of warranty.  That approach, based on such notable decisions as that of the Privy Council in Lion Nathan Ltd v C-C Bottlers Ltd (1996), is on a diminution in value basis. 

Applying that approach to damages claim for a breach of warranty requires a comparison between the actual value of the business with the value that [it] would have had if the warranty had been true.  Importantly, in C-C Bottlers, the Privy Council drew an analogy between the sale and purchase of a company, and the sale and purchase of goods.  In each case, the purchaser was entitled to assume that what it stood to receive would be of the warranted quality, which means that the purchaser could claim damages to compensate them for having received something that was worth less than what they contracted for.

As noted above, by definition a turnover warranty is backwards-looking.  The outcome might be different had the warranty been about future performance (which itself would be quite rare).  Instead, warranties as to historic matters (for example as to the performance or state of affairs disclosed by historic financial statements) are treated as a warranty as to quality – like that in a sale of goods context.  And in such cases the usual (correct) measure of damages for claims for breach of warranty as to quality is the diminution in value measure – the difference between the value of the position as warranted and the actual value. 

And whilst an application of usual valuation methodology (by capitalising future maintainable earnings – utilising past performance to determine the future maintainable earnings and capitalise those earnings by an expected rate of return on investment) to calculate the loss suffered contains an element of extrapolation of past earnings, that was not the measure applied here.  Consequently, by using the loss of profits measure – the measure of damages appears to be greatly overstated.  


Noting the truncated nature of the case and therefore the scarcity of evidence, this seems to be another example of due diligence gone wrong. 

Even more distressing here for the plaintiffs is that, depending of course on the terms of the settlement reached with their accountants, the plaintiffs could have ended up seriously out of pocket.  This is because both the defendants (the vendor company and the shareholder/director) are insolvent. 

As a result, the additional takeaway is the importance of developing an understanding of the ability of those providing warranty cover to respond to a claim.  If in doubt, any one or more of security for the warranty claim period, an earn out or an escrow arrangement may be called on to provide a would-be buyer with the necessary comfort that warranty claims can be met.  In larger purchases, warranty & indemnity insurance cover may be obtainable. 

Once again, for those who have experienced an economic cycle or two, a contracting economy with a lot of businesses seeking to jettison non-performing / non-core activities, will mean that such comfort will assume greater significance.

For more information, please do not hesitate to contact me.

[1] See

Feb 23 24

The Companies (Address Information) Amendment Bill

by Stephen

Late last month, Commerce Minister Andrew Bayly gave a speech that reiterated the new Government’s economic priorities and then concluded with a list of things to be done in the financial services sector.  Interesting, it concluded with an announcement of work to simplify, modernise, and digitise the Companies Act.

In an odd piece of timing, because of the ballot process involved, last week a [private] member’s bill emerged from the scrum that has its goal a single change to the Companies Act to allow directors to use an address for service where there would be a risk to making their home address publicly available.

Whilst piecemeal reform of important legislation is not always welcomed, this proposal is not new and has some support.

Overseas, the risks of doxxing and other anti-social behaviour has been recognised for some time.  In the UK, director residential addresses are protected, and Australia began moves in this direction with the introduction of Director Identification Numbers (DINs) in 2021.

Locally, MBIE first began consulting on the issues relating to the idea of protecting director privacy in 2018.

The member’s bill is promoted by Labour MP Deborah Russell.  A similar proposal was floated in 2021 by Brooke van Velden of ACT.

It is quite short and proposes to add a new section 360D to the Companies Act, enabling a company director to apply to the Registrar to replace the public details of their residential address – with a service address.  Unfortunately, the mechanism proposed by the member’s bill then gets bogged down in process noise – by requiring a director to verify (by means of a statutory declaration) that public availability of this information is likely to result in harm (physical or mental) to the director or their family.

This seems unnecessarily clunky.  Following similar models overseas, privacy (whether by means of a service address or, better still by use of a DIN which has an enhanced anti-fraud role) should be simple and available as of right.  There doesn’t seem to be any need for extensive form-filling in order to demonstrate why privacy is needed.

Therefore, whilst there are provisions in the Companies Act that need work and the Minister’s announcement at the end of January is welcomed, this is one item of piecemeal reform that is needed.  But it still needs work.  As a result, whilst the strike rate for member’s bills is still quite low, and it will require cross party support, the bill is one that could do with progression and public submissions – and some panel-beating through the Select Committee process.

Feb 2 24

High Performance Sport – funding decision

by Stephen

This week’s decision of the Employment Relations Authority, finding that the Government agency High Performance Sport New Zealand, is obligated to engage in good-faith collective bargaining with the newly-formed Athletes Cooperative, which represents around 60 elite athletes (mostly rowers and cyclists) – is a welcomed start to what I expect will be a lengthy journey. 

The decision itself involves some of the more complicated outer reaches of employment law in circumstances where HPSNZ does not have a formal employment relationship with athletes.  As a result, I do not propose to comment on the technicalities.  That is best left to the experts, such as the very experienced employment lawyers who represented the parties.

However, as a parent of a couple of athletes in ‘the system’ and therefore someone with more than just a passing interest in the outcome of the journey, I share the concerns of many other sporting parents about the design and implementation of the funding model for athletes.  From where I sit, there are aspects of the model that seem uncertain (and at times unfair) with, seemingly, constant changes and a high level of uncertainty. 

Self-evidently, the application of the model is key factor in the matrix of things affecting athlete welfare and, therefore, performance. 

These concerns are not new and have surfaced previously – such as in the 2022 inquiry in relation to Cycling New Zealand. 

Some of the issues have manifested themselves as a result of the current pressures on the cost of living – because the model often results in low levels of funding to individual athletes.  And they are not confined to New Zealand.  A report at the end of last year noted that Australia risks losing elite athletes before the 2032 Brisbane Olympics unless philanthropic funding can help fill a funding shortfall.  There it seems that, but for the intervention of an Australian billionaire to top-up some of the most high-profile Australian swimmers, they too would be suffering from the same cost-of-living pressures that are causing athlete wellbeing concerns for elite athletes in Australia.

The next stages of the journey are likely to be complicated.  And in a period when all Government agencies are facing cost and spending pressures.  The example provided by Australia, in a much bigger, apparently wealthier, environment points to the difficulties. 

But, with all of the risks and regards of being a sporting parent, sponsor, gear fetcher and carrier etc, as well as a sports tragic – I would like to think that there are enough good people on both sides of this discussion to continue working on solutions for the best interests of all concerned.  And I have some confidence that they are [all] aware that, without a working solution, the system risks undermining one of the key parts of the fabric of our society. 

Nov 6 23

FMA consultation:  Proposed guidance on winding-up requirements for registered schemes

by Stephen

Sometime in August the FMA undertook a limited process of consultation, by sending a draft guidance paper, to clarify [its] intention and compliance expectations under sections 212 and 213 of the FMC Act – being the initial steps in winding-up of a registered managed investment scheme and the requirements of the subsequent winding-up report.

It is not clear how widely the FMA has consulted.  For example, a copy was not sent to the New Zealand Law Society for comment.  A copy of the draft guidance is available via the FMA website – but only if you know to look for it.  Its existence did not come to my attention until mid-October. 

Because of the subject matter and my experiences, advising the directors of the manager of a number of small, registered schemes, as they each seek to navigate the winding up process, I took it upon myself to provide comments to the FMA.

Subject matter – the winding-up regime

The FMA has sought to clarify its expectations about the application of the winding-up regime for managed schemes – having observed varying approaches to that regime, some of which it considers inconsistent with the intention of the regime.

Winding-up resolutions

On the subject of winding-up resolutions, the draft guidance says:

  • winding up resolutions should clearly state the ‘wind-up effective date’ to create a reference point for other winding-up events – such as preparation of final financial statements (winding-up accounts);
  • a ‘wind-up effective date’ can be the date of the resolution, a specific future date or set by reference to a future event (e.g. settlement of the sale of scheme assets); and
  • if a resolution does not clearly specify the ‘wind-up effective date’ – then that date will be the date the resolution is approved/signed.

Sadly, the guidance does not seem to contemplate single-purpose schemes – in which the need for a winding up resolution seems unnecessary.  This is a concept that is accommodated by other legislation such as the Companies Act and the Limited Partnerships Act.  The latter refers to a ‘terminating event’ which includes an event or the expiry of a period of time when, under the [governing document] the limited partnership terminates. 

A simple example is a scheme established to undertake a single rotation forest.  It seems unnecessary to go through yet another process hurdle to define the ‘wind-up effective date’ – when its existence is typically a matter of fact (such as harvesting of the forest and distribution of the harvest proceeds). 

Winding up accounts and distributions

The FMC Act requires that the (audited) winding-up accounts must be prepared and audited within 4 months of the ‘wind-up effective date’, and sent to the FMA and investors within 20 working days of audit completion, together with an explanation about how any remaining scheme assets will be distributed (winding-up report).

The FMA must be advised of the date on which the final distribution of scheme assets is completed.

The draft guidance notes that:

  • If the governing document allows, partial distributions of assets can be made before the winding-up report is sent to the FMA and investors.  A partial distribution must be in the best interests of investors.
  • The FMA can extend the statutory timeframes for compliance with these provisions – but does not provide guidance on the grounds for such an application.

Alarmingly, the draft guidance says that an ‘appropriate proportion’ of scheme assets should remain undistributed until the winding-up accounts have been provided to all investors.  The rationale for this point is on the basis that the FMA considers one purpose of the winding-up accounts is to give investors the opportunity to challenge how the assets are being distributed.

The draft guidance continues by asserting that this also means that the ‘wind-up effective date’ cannot be immediately before or on the date of the final distribution of scheme assets.

There is no authority cited for this ‘view’.  And any policy underpinnings are difficult to understand.  There is nothing in the legislative history of this part of the FMC Act which appears to support this view.  Put simply, why should investors have to wait for some undated grace period after the finalisation of the winding-up accounts before receiving their final distribution out of the scheme?  The most relevant guidance I could find from a comparable jurisdiction is that from ASIC (Australia) which, whilst not a neat fit (because it is largely focused on external administration of insolvent/near insolvent managed investment schemes) notes, by reference to decided Australian case law, that the winding-up of a registered scheme should follow the same path as the winding-up of a company.

To suggest this new (and seemingly unsupported) legislative purpose – of providing an opportunity for challenge without factoring the opportunity costs for investors is quite odd.  And, from a practical perspective, it seems quite unnecessary – given the involvement of the supervisor (coupled with the assurance provided by the requirement that the winding up accounts must be audited).

This also suggest that the FMA’s view that the ‘wind-up effective date’ cannot be immediately before or on the date of the final distribution of scheme assets is a matter of some debate.

In practice scheme managers, and supervisors, seek to distribute the remaining scheme assets to investors as soon as reasonably practicable.

Annual financial statements during the wind-up

The FMC Act requires that, even during the winding-up process, annual financial statements must be prepared for each subsequent balance date.

The draft guidance suggests the timing of winding-ups should be managed to avoid the preparation of unnecessary additional financial statements, but the FMA will consider tailored relief from this requirement on a case-by-case basis.  Again, there is no guidance on the possible grounds for granting such relief.

The existence of potentially overlapping financial reporting obligations calls for relief.  Whilst the FMA suggests the wind-up should be managed with an eye on the annual balance date, this is not always possible.  A starting point (for relief) may be to consider the information needs of investors in a scheme that is in wind-down mode, and will continue in that mode beyond the end of the current financial year.  One possible benchmark may be a modified form of the 6-monthly reporting that is required under section 255(2)(d) of the Companies Act – in respect of a company in liquidation. 

The GNA problem

The draft guidance also says that final distribution has not been completed until all investors have received their respective distribution (entitlements) – and any undistributed amounts (e.g. for investors who are ‘Gone No Address’) have been transferred to Treasury or Inland Revenue under the unclaimed moneys regime.  Sadly, the FMA does not consider the pragmatic approach already being adopted by some schemes and their supervisors – for the entitlements of ‘Gone No Address’ investors to be held by the supervisor on bare trust for the relevant investors to allow completion of the winding-up.  This approach will give a little more time to locate ‘Gone No Address’ investors and have them navigate AML/CFT formalities before transferring those funds into the unclaimed moneys regime. 

Experience suggests that a number of factors have collided to make it harder for GNAs to be traced. Such as changes as the patterns of postal delivery and the reduced number of people with landlines point to the need to consult more widely on this issue.  For example, by dialogue with the two main share registries and the insurance industry – who will all have practical experience to add (at scale).

Concluding comments

The draft guidance addresses important issues that have significant implications for managers, supervisors and particularly investors. 

There is also the makings of a ‘rule of law’ issue in the proposed guidance.  From where I sit, the FMA is seeking to develop something more than merely ‘guidance’ and is imposing what appear to be substantive new obligations on managed investment schemes – in a manner that risks being seen as law-making without the necessary underpinnings. 

Sep 4 23

Upstart Nation

by Stephen

This post is a bit long.  I have picked I up and put it down far too many times.  Initially, I did so as a reaction to what I saw as some quite limited media coverage last month (which was not overly positive) on the ‘Upstart Nation’ report – several times.  The target audience for the report is the Government and it was the output of work by a panel of industry folk assembled by MBIE and called the Startup Advisory Council.  MBIE and therefore the Council’s goal was to accelerate innovation and development in the start-up ecosystem.

The Report makes 25 recommendations, clustered under 4 headings and then sets some metrics for success, in terms of start-up generation and, particularly, the generation of high-value (new) jobs. 

The principal media coverage, the day after the report was released, focused on the suggestion that the Government should invest $500m over 10 years, through the NZGCP (NZ Growth Capital Partners – which was previously NZ VIF), a program which has already received circa $300m of Government funding for seed capital purposes. 

As might expected from such a heading, the commentary that followed came attached with the usual pejorative labels.  And it ended with a pretty damning criticism of one of key elements of the recommendation to make it easier for KiwiSaver funds to invest in start-ups.

Having hung my own shingle out, after a long innings institutionalised in big law firms, my footprint in start-up land is not large.  But I try to make sure that I always have one or two in my roster at all times.  And whilst might be seen as some sort of altruistic contribution – there are plenty of other members of the legal profession who contribute far, far more than my modest effort.  Perhaps selfishly, one of the other primary drivers for (my) wanting to stay involved is because I meet the most fascinating people and encounter the most interesting ideas.  Mind blowing, often, and fascinating for someone with distinctly a nerdy/trainspottery bias.

I continue to try to read the things published by those with a proven track record in the industry, which I also try to link to people at the coalface, trying to make their start-up happen.  This is because the basics, such as decent (by which I also mean fair) and understandable contracts are important – but lessons from those who have played the Saturday matches are vital.

For example, I wholeheartedly agree with some comments that I read recently that, at the start-up / friends & family funding stage, as with the documenting of all commercial relationships, underinvestment can be disastrous, and leave the project exposed to the usual risks of fallings out and a minority shareholder with a bee in their bonnet that prevents progress – often for no good reason.  As a result, clarity, transparency and one (or a small set) of understandable documents are needed almost from the get-go – to make sure things “work” for everyone.  A short list of what this looks like will include:

  • Clarity, on the part of the founders, about their personal commitment to the project – time and money – and what they expect in return.  If this isn’t a side hustle – how are they going to put Weetbix on the table?
  • Clarity, again, about the process for building the business – and funding that process.  Everyone who has some exposure to this sector has their share of war stories and scar tissue about investment rounds and dilution – and the disappointments, arguments and, seemingly, surprises, involved.
  • A consensus about what happens if someone leaves the band early (particularly before one / a good number of the key milestones, waypoints etc have been achieved) – can they get their capital out, will they get some sort of “ride” (Ugh!), etc.
  • The housekeeping basics – pre-emptive rights (for both capital-raising and transfers), board appointments rights, drag along and tag along rights, etc – in the event of an exit.

More recently, I was pleased to see some more measured and more constructive commentary about Upstart Nation from one law firm with a long-held commitment to the sector.  I am sure they won’t be alone.  Maybe the others have other channels with which to address their audience.


I can’t add much more on the bits of the ecosystem that one commentator labelled ‘Derivatives’.  Perhaps mine was a kneejerk reaction to what felt like a bureaucratic process and more hurdles and reports.

I also worried about support for the regions (more on this below) and what was being done to support the really important science being developed every day around those areas where New Zealand (still) has a competitive advantage and important export industries populated by a lot of smart, busy and very committed people. 

Nonetheless, I observe that there are some people working very hard in the start-up resource, incubator etc space, and maybe they have a measurable strike rate.  But the successful start-ups that I have been fortunate to advise have typically not found success through any of the existing infrastructure.  They haven’t had time for much of it.  They have either been working around the clock on what they have developed, or they have been investing time in the (small) network of relationships that ultimately provided the resources (human and financial) they needed.

Talent visa

And I confess to having little time for permutations on the talent visa theme – unless it means importing the specific skillset needed to do a specific job.  Robotics engineers being one target being discussed often of late.  Whoever occupies the Treasury benches after 14 October will, I suspect, have more pressing issues with our immigration settings. 

From my narrow window on the issue, I cannot help but conclude that winning the war to attract and retain talent needs a system-wide approach towards the key things that will (continue) to make this a great place to raise a family.  Largely, they are the same issues that will be on the minds of voters at this election – and each one of them will require a mix of sound policy settings, sound investment and sound management to deliver outcomes.  And they will take time.

Tax discussion

Next, I found the tax discussion baffling.  To me, until we reform the tax system generally in line with the Tax Working Group’s recommendations, the authors of ‘Upstart Nation’, no matter how well-meaning, risk being painted as just another ginger group pleading for special treatment in ways that will (inevitably) be seen as risking the integrity of the tax base.  At a time when that tax base is going to be under some pressure to fund the things that this little economy so desperately needs – such as infrastructure and hospitals and social housing and climate change mitigation and the list goes on. 

In my time working in central Government, there was a Wellington joke attributed to Muldoon that past Presidents of the Manufacturers Assoc were only buried 3ft under – so they could still claim the next hand out.  From where I sit, the Economics are bad, and the optics are worse. 

One of the bits of commentary does contain a detailed and well thought-through discussion about making one of the recommendations “work”.  They are likely to be right – but (sadly) it might be some time before this bit of re-engineering sees the light of day.


And finally, there is the capital piece.  The idea of more taxpayer (funded) involvement was always going to attract media headlines and bad press.  On one level, every bit of encouragement (all good things in moderation) to encourage local investors to get involved in start-ups – even if it is simply reducing a few more of the hurdles that impede that investment, will be another value-add for the start-up ecosystem.  But I would add that my list would include a serious review of the operation of a number of (fundamentally important) provisions in the Companies Act.  Which are likely to be a hurdle to a number of start-ups attracting the governance support that many of them need, if not from the outset, then certainly from an early point in the lifecycle.

I can’t leave this topic alone without mentioning regional development.  Perhaps surprisingly for someone who studied Economics in the mid-80s, I do think there is a place for regional development.  So, I view the calls to scrap Government support for it with some alarm.  And I have come to fully appreciate just how tough this role is.  But, equally difficult to watch is the risk of how a very small administrative resource seems to get stretched every which way.  Which makes it very hard for candidates (who are also typically very thinly-resourced) to deal with.  For reasons that are not always easy to understand.  People who are seeking to ‘partner’ (ugh) with them, seem to spend an inordinate amount of time shaping pitches and proposals to the ever-evolving approach to investment.  And, from where I sit, not all of the would-be applicants have the time and/or the skillset to do so.  Which must be unsurprising.  It is a landscape to which the more experienced end of the consultancy market is better suited.  From where I sit, these advisers do a really good job – but struggle to make this market segment financially viable.  And, typically, have more work than they know what to do with – so someone else misses out or they are donating time (that the individuals themselves often don’t have). 

And I worry about those start-ups who need experienced help to front those conversations – but don’t have an entree to someone who has played the Saturday matches.  I suspect that they either miss out altogether or someone has to spend vast amounts of time helping them to help themselves on what may well be viable and important projects for the region.

So, in the spirit of election season, it is often very easy to identify what’s wrong – not so easy to pinpoint solutions.  At least ones which are viable and/or palatable with the target audience.  But, with no disrespect to the people involved with the report, who will have worked hard and, I am sure, meant well – there was little at the macro end of Upstart Nation that I thought (noting my narrow, small footprint) grabbed me as a ‘must have’.  There might be some gems at a micro level – but I was put off by (my view of) the top 10.

And finally, I am not at all persuaded by the conga line of recent commentators bagging NZ and literally telling our kids’ generation to migrate to the West Island.  Sure, there are a lot of things that need fixing, and we (my generation) have made a real mess of some things, structurally, because of some very short-term thinking.  But time served doing a Big OE – and reading and talking to others continues to underline, for me, that this is (still) a great place to get things done.  So, no criticism by me of the task force members one and all – I just found a number of the recommendations missed their mark.  But I remain optimistic that, perhaps with some more input from MBIE officials and those commentators who took the time and made the effort to offer constructive criticism, the workable bits of the report can be mined and put to good use.

Aug 25 23

First impressions of Supreme Court decision in Mainzeal

by Stephen

The much-anticipated decision if the Supreme Court in Mainzeal[1] was released this morning.  Whilst the media headlines largely focus on the impact of the damages award against the directors, there is a lot of detail to unpick.

Largely, the Supreme Court has upheld the Court of Appeal judgment (and key elements of the High Court judgment) – that the directors breached their duties under sections 135 and 136 of the Companies Act 1993. 

The Supreme Court concluded that the total assessed loss of $39.8 million, provided both a starting point for, and the maximum that could be awarded by way of damages against the directors.  Using that approach, the Court saw no reason to depart from the High Court’s assessment of relative culpability – holding Richard Yan liable for the full amount while the liability of the remaining directors was limited to one sixth of that amount ($6.6 million each).  Interest and costs were also awarded.

Helpfully, the media release that accompanies the judgment maps out the Court’s unanimous conclusions on the key issues.

Protection of creditors

Sections 135 and 136 of the Companies Act apply the policy of the earlier law that, once a company is insolvent or bordering on insolvency, directors are required to have regard to the interests of creditors.  The language of sections 135 and 136 makes it clear that their purpose is creditor protection.

Breach of section 135

Following the pathway of the decisions of the lower Courts, the Supreme Court concluded that, from 31 January 2011, the directors allowed Mainzeal to trade in a manner that was likely to, and did, create a serious risk of substantial loss to creditors.  That Mainzeal was trading in such a manner would have been apparent to the directors if they had acted with reasonable skill and diligence.

And whilst section 135 does not permit directors of a company that is insolvent/teetering on the brink to continue trading at the risk of future creditors – they must have time to take stock of the situation and obtain advice.

In this case, the finding of breach included findings that the directors could not reasonably have relied on assurances of support given to them by other companies in the Richina Pacific group or Mr Yan as mitigating the risk to Mainzeal’s creditors as sufficient to ensure compliance with section 135.  This is because those assurances were neither legally nor practically enforceable – and were not honoured.

Breach of section 136

The Court rejected arguments from the directors that liability under section 136:

  • cannot apply to liabilities incurred in a course of trading (as opposed to incurring particular obligations); and
  • depends on affirmative agreement to the incurring of particular obligations – rather than a general agreement to continued trading (and incurring the obligations that were the inevitable outcome of ‘trading on’).

Qualifying the loss – net deterioration/new debt

When quantifying the losses caused by the directors’ breach – two approaches were discussed:

  • Net deterioration:  the extent that the company’s financial position (and that of its creditors) deteriorated between breach and liquidation dates.
  • New debt:  the gross amount of debt that was taken on from the date breach – and was still unpaid at liquidation.

For the section 135 breach, the Court agreed with the directors – that the proper approach was net deterioration.  This is primarily because net deterioration reflects loss to the creditors as a whole and is consistent with the language of section 135 which is directed to substantial risk of serious loss to creditors generally – and not that of individual creditors.  Because no net deterioration had been proved, no award of compensation was given for the breach of section 135.

For the section 136 breach, the Court agreed with the liquidators – that the proper approach was that of new debt.  By contrast to section 135, section 136 is focused on losses to particular creditors including groups of creditors.  Consequently, the most logical basis for quantification is the loss suffered by those creditors.  (Here – the judgment differs from the Court of Appeal and says that the Court had enough information to quantify the losses associated with the section 136 breach – assessed at $39.8 million.)

Orders for compensation

The Court referred to the language of section 301 of the Companies Act as providing flexibility (aka discretion) as to the relief awarded.  This is seen as providing latitude to respond to the specific fact matrix and tailor the damages/compensation granted – so as to respond to the specific breach(es) – and the harm caused. 

Discussion of recent UK decisions

Whilst they are not mentioned in the media release, the treatment of two recent UK decisions, particularly the 2022 UK Supreme Court decision in Sequana, is interesting. 

Sequana was a case about ‘wrongful trading’ under section 214 of the Insolvency Act (UK) which our Supreme Court noted corresponds, but only at a very high level, to sections 135 and 136 of the Companies Act.  There, the liability threshold under section 214 is crossed only if the director knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation.  On this basis, a director will not be liable for a company debt unless, at the time it was incurred, it was practically inevitable that it would not be paid.  This is a much higher threshold than sections 135 and 136. 

Significantly, there is the defence under section 214 which the Supreme Court commented at least suggests that proper implementation of a reasonable strategy of minimising loss to creditors will avoid liability.

Underpinning the Sequana decision is the point that, where the Company’s financial affairs deteriorate, the creditors effectively have an economic stake in the company’s residual assets – which increases in line with their exposure.  As a result, there is a fundamental change to responsibilities when a company is insolvent/teetering on the brink.  Where a company is “hopelessly insolvent” the company’s interests are the same as those of the creditors. 


There is a lot of reading in the Supreme Court decision (142pp).  

Noting the key theme in the decision that the language of sections 135 and 136 makes it clear that their purpose is creditor protection – there is some acknowledgement of the difficulties facing the directors of a distressed company – and the judgment notes that the courts must apply a standard of reasonableness when assessing the directors’ decision-making.

In bullet point form:

  • directors must take stock and plan (and act on the plan) when their monitoring of the company’s affairs (and solvency) indicates that a risk of breach of the duties in sections 135 and 136;
  • the process of forming a plan – may mean that the directors may need to take professional or expert (independent) advice;
  • a decision to continue trading while balance sheet insolvent should not be taken – unless the directors can reasonably rely on assurances of external support;
  • when applying a standard of reasonableness to an assessment of directors’ decision-making, the courts will recognise the need to exercise business judgment, and:
  • the courts will allow a reasonable time for directors to assess risk, review the options to meet that risk and decide what course to take, including time to take advice;
    • where advice has been taken, this must be factored into an assessment of the reasonableness of the directors’ actions;
    • judges are alert to, and will adjust for, the danger of hindsight bias – and will acknowledge that decisions that were reasonable when made may still turn out badly and that in difficult situations there will often be scope for more than one reasonable course of action:
    • directors must often make complex decisions under pressure of time and events and sometimes with incomplete knowledge – despite their best efforts; and
    • although directors will not normally be liable for continuing to trade during the taking stock / planning period, that may not be the case if substantial new obligations are taken on without measures in place to allow for them to be met.

More information

For more information, please do not hesitate to contact me.

[1] Yan v Mainzeal Property Construction Ltd [2023] NZSC 113

Jul 31 23


by Stephen

(with a compromise solution)

The end of last week saw new developments in the strange Parliamentary journey of an unnecessary amendment to the Companies Act.

The current sponsor of the Bill, Labour MP Camilla Bellich (who had to take over from the Bill’s initial sponsor when he was promoted to Cabinet) provided a last-minute Supplementary Order Paper (SOP) which now sees the proposed amendment to section 131 reading:

This doesn’t improve the proposed amendment to the directors’ primary duty under the Companies Act.  At best, it simply restates the existing law. 

But things could be worse.  A Green Party member unsuccessfully sought to move a further amendment to change the “may” to “must”.  Arguably, this would have made it mandatory for company directors to consider a raft of ESG factors when making any decision.

The Bill is on the Parliamentary order paper this week and should, therefore, complete its third reading and become law.

To do so, it goes against the advice of a list of submitters and Parliament’s own Legislative Design and Advisory Committee.

The Select Committee which reviewed the Bill could not agree that it should pass in the form it was reported back, as a result of which the Bill’s current sponsor seems to have taken some time to take stock and developed the latest change. 

The outcome is pretty meaningless.  It could be used as a hanger for various pejorative labels.

Some [might] say that the change makes the statement of directors’ duties clearer/more accessible – and that, without it, directors might be hostage to the argument that they cannot stray from profit maximisation.  This seems practically unlikely.

The Law Society counselled against such an ad-hoc approach to law reform.  There is a need to review the Companies Act, particularly in relation to directors’ duties and their interaction with an insolvency regime that is seen as not fit for purpose. 

Fundamental elements of company and business law deserve better than itinerant tinkering.  Worse still is the risk that specific legislative [policy] objectives might be slipped in through the side door of general, principles-based, companies’ legislation. 

Jun 29 23


by Stephen

When I first saw the headlines about the community pharmacy group’s victory in its case against the licensing, by DHBs, of joint venture-owned pharmacies within Countdown supermarkets, it took me back several decades.  Studying Economics at university, the pharmacy licensing regime under the Medicines Act 1981 was characterised by one lecturer, who liked a touch of drama, as a protection racket.  At the time, I recall that the lecturer thought it had good company with other statutory regimes such as those affecting the way we obtained (medical) diagnostic services. 

As a result, I have watched various attempts to change the (retail) pharmacy landscape with interest.  Most recently, this has seen the opening of the Big Aussie brand in Queen Street – closely followed by the closure of some CBD pharmacies.  In a related thread, up until this month, anyone in the CBD who was in need of a blood test would have needed access to a car because, for two years post-COVID-19, the CBD has been without an outlet (re-branded collection centres).  

Based on the media coverage, I was also curious about the reported treatment of the concept of ‘control’ by the Court.  At first glance, it seemed to be out of step with similar threshold tests – such as those found in the Takeovers Code or the Commerce Act. 

On closer inspection, the High Court decision is narrow question of statutory interpretation – which the judge said wasn’t straightforward.  The decision concludes that the licences granted to the JV vehicle (49% owned by Countdown) failed to meet the requirements for licensing in the Medicines Act.

Because the decision will have significant impact on the JV pharmacies and other pharmacy operators, the effect of the decision has been deferred for a short period to enable the owners of the JV pharmacy and the Ministry of Health to determine appropriate next steps.


The Medicines Act sets out a list of requirements for licensing of pharmacies – that must be met by the operator in order to be granted a licence.  Importantly, section 55D of the Medicines Act contains two limbs, requiring that a company may be granted a licence to operate a pharmacy if:

  • (at all times) more than 50% of its share capital is owned by pharmacists; and
  • ‘effective control’ of the company is vested in those pharmacists.

A group of community pharmacy owners brought judicial review proceedings to challenge the issue licences for two Countdown pharmacies owned by the JV vehicle.

Importantly, the ownership and governance structure of the JV vehicle was:

  • 51% of the shares are held by three pharmacists – with the remaining 49% being held by a wholly-owned subsidiary of Woolworths New Zealand Ltd (which owns the Countdown chain); and
  • governance of the JV vehicle was determined by a Shareholders’ Agreement and the constitution which provided that:
    • the Board of the JV vehicle was limited to two directors – one appointed by the pharmacists and the other by Countdown; and
    • Board decisions must be unanimous.

Central to the community pharmacy group’s case was its argument that the Health Ministry, when granting a pharmacy licence to the JV vehicle, wrongly interpreted section 55D by accepting that ‘effective control’ by the pharmacist majority shareholders only required them to have negative control (a veto power).  And that the governance of the JV vehicle did not provide the pharmacist majority shareholders with ‘effective control’ because Board decisions had to be unanimous – which effectively granted Countdown a power of veto.

In short, the argument was effectively the mirror image of the (Health Ministry) decision-making process that had decided that the pharmacist majority shareholders had negative control (and therefore ‘effective control’) because they controlled the day-to-day operation of the pharmacy and could veto any resolution by Countdown.

High Court

The High Court held that section 55D required ‘effective control’ of the JV vehicle itself, not merely the pharmacy business or its day-to-day operations.

The judge accepted that the ‘effective control’ was added to the legislation to ensure that the control, by means of a minimum shareholding requirement, could not be circumvented.  That is, to ensure that the company was there to serve independent pharmacists and not some outside interest and thus to protect public safety.  (More on this below).

The judge continued by adding that the case law and commentary illustrated is that various factors can be relevant to determining ‘effective control’ of a company (shareholding, Board appointment rights, day-to-day management and Board and shareholder control over decision- making) but the Court must look at the “real” picture.  And while negative control (veto rights) may be sufficient in other legislative contexts, where the aim is to prevent some mischief from having control, as opposed to not having it – those contexts are fundamentally different from the Medicines Act.  It is aimed at preventing mischief associated with a lack of pharmacist control.

But, to get there, the decision makes comparisons with the proceeds of crime regime.  Respectfully, I think that comparison is a stretch.  The licensing regime for pharmacists as part of an array of quality and other legislative controls designed to protect the public.  For obvious reasons – the proceeds of crime regime fills a void.

However, the judge rejected the idea that ‘effective control’ is concerned primarily with operational management.  While other provisions of the Medicines Act reinforce the public safety requirements of the Act, section 55D imposes an additional requirement – by requiring effective control of the company, not just the pharmacy or its day-today operations.  And that pharmacist control over the bare minimum obligations does not satisfy the requirement for effective control.

Here the judgment makes the point (presumably to points made in submissions) that many of the active decisions required to be made at Board (and not operational) level can have an impact on the health and safety of a pharmacy’s patients.  But this is followed by a comment that many independent community pharmacists provide optional services for the safety and well-being of the public (such as COVID care).  And then the judgment adds a sort of rhetorical question about opening hours – and whether changes to “normal pharmacy opening hours” might be vetoed at Board level because they impact on profitability. 

There must be a laundry list of countervailing arguments here.  Most of them are economic.  If Parliament had intended the licensing regime as a means of ensuring that individual pharmacists backfilled the gaps in our health system – then surely it would have said so?

Where I think the judge is on stronger ground is the statement that, by requiring ‘effective control’ by pharmacists, there must not be ‘effective control’ by non-pharmacists.  Pharmacist control cannot be jointly held with non-pharmacists – because shared control is not ‘effective control’ as required by section 55D. 

Final thoughts

This decision will have knock-on impacts affecting not only the JV pharmacies – but also other pharmacy ownership vehicles.  It has some potential to affect businesses in other regulated sectors. 

Those parts of the decision identifying the policy issue at stake as being that of safeguarding the public safety – may also have some form of crossover into the realm of professional ethics. 

There is no question about the skills and training of pharmacists and their front-line role in the delivery of health services in often trying circumstances.  Likewise, there can be little doubt about the public-spiritedness of many individual pharmacists. 

But these views will count for little if pharmacies go broke and the services disappear from broad swathes of the community.  As is the pattern for a number of other elements of the heath sector, particularly in rural and remote communities.

There is no need for elaborate due diligence.  A quick glance around the floor of a typical pharmacy while you wait to have a prescription filled will tell you everything you need to know.  In many locations, in order to cover the spiralling costs of rent and payroll, the pharmacist is forced to stock a range of other things in order to make ends meet.  At a glance, this doesn’t seem sustainable. 

I have my doubts about the decision as a matter of statutory interpretation. 

On a policy level, the argument that wider ownership will necessarily lead to a drop in safety standards is open to criticism – in a highly-regulated industry where the professionals are subject to specialist training (5 years) and a range of regulatory and professional obligations.  To do so would require you to ignore the rest of the private healthcare sector. 

Of course, every pharmacy must have a registered pharmacist overseeing the day-today management of its core role – that of dispensing prescriptions.  But, in an increasingly tech-focused healthcare system, private capital is likely to be required to meet the capital costs associated with new technology and drive innovation.  Specsavers anyone? 

Also at a macro level, whilst I don’t detect a layer of profitability akin to that in some other areas in the spotlight, the changes heralded by the arrival of the big Aussie brand are telling.  And they have prompted a competitive response.  In urban centres – the customer is likely to be better off.  Whether those benefits are universal is unknown.  But it seems an odd result that allows the march of the big Aussie brand – but would protect that big Australian from international competition from (say) Boots.  I hope someone at the Commerce Commission is minded to have a quiet word to the Health Ministry about the need for a re-think of the policy settings.

For more information, please do not hesitate to contact me.

May 31 23

Practice liability for default of member

by Stephen

A recent Supreme Court decision is the final act in a piece of litigation that has been rumbling through the legal system for some years and shines a spotlight on the liability of a healthcare practice and possibly other professional practices for the defaults of members.  The facts in Ryan v Health and Disability Commissioner are rather sad and hinge on an unfortunate breach of the Code of Health and Disability Services Consumers’ Rights.

In brief, one of the GP owners of the practice saw the patient of another of the GP owners while the latter was away on leave and made a prescription mistake.  Sadly, the mistake was not corrected, despite a check by a pharmacist and the patient suffered an allergic reaction and had to be admitted to hospital.  This unhappy episode resulted in a complaint to the Health and Disability Commissioner, which found that both the GP and the practice were liable for the breach of the Code.

In the case of the practice, liability was sheeted home under the Health and Disability Commissioner Act 1994 which provides for liability of an ‘employing authority’ for the acts and omissions of its employees, agents and members – typically where the employee, agent or member has been found liable.  However, the employing authority’s exposure to liability is subject to defences, where:

  • Employee default:  The employing authority took reasonably practicable steps to prevent the employee from committing the act or omission.
  • Agents / member default:  The act or omission occurred without the employing authority’s authority (express or implied authority).

The Supreme Court found that the practice was a partnership between the GP members and that the prescribing GP member who committed the breach of the Code was acting as an agent of the practice.  The prescribing GP member was not acting as an employee of the practice.  If had had, the practice would have had a defence – on the basis that it took reasonably practical steps (in the form of the systems and policies that it had in place) to prevent the act or omission.

The Court held that to act as an agent of an employing authority, a person must carry out, on behalf of the employing authority, the work that satisfies an obligation of the employing authority to provide the relevant service.  Additionally or alternatively, where the person said to be an agent is a partner of the employing authority, that person will be acting as an agent if he or she satisfies section 8 of the Partnership Act 1908 (now sections 17 and 18 of the Partnership Law Act 2019):

  • that an agent is a partner of the partnership for the purpose of the business of the partnership; and
  • that the acts of every partner in carrying on the usual business of the firm bind the firm.

The focus of the majority decision in the Supreme Court was the issue of whether the defence (for the practice) under the Health and Disability Commissioner Act was engaged – and that the act or omission could be said to have occurred without the employing authority’s express or implied authority.  Ultimately, the majority decision was that a broad brush approach was required – when considering acts or omissions of an agent or member occur are within the scope of their express or implied authority.  It found that the GP who undertook the consultation with the patient was carrying on the usual business of the partnership – and acting as an agent of the practice when they breached the Code.

A narrower interpretation was favoured by the minority – that the employing authority would only be liable only if it authorises the particular act or omission in question.

In this case, the GP practice:

  • was not a company – but marketed itself as a single practice (and the GPs operated under the name of the practice);
  • did not have a formal Partnership Agreement between the GP members (or any other contract between them – governing their relationship in respect of the practice);
  • operated a centralised system for bookings and patient files;
  • rented the premises, employed staff and owned the equipment and systems used in the practice;
  • operated systems (and policies and procedures) that applied to all staff as well as the GP members;
  • operated separate patient registers and bank accounts for each GP – and each GP received fees directly from their patients (and they billed each other if they saw a patient registered to the other GP).

The submissions against such a broad brush approach were that it conflicted with the medical profession’s view of the liability of such practices, and was impractical – because it did not reflect the inability of practitioners to monitor each other in day-to-day practice.  There were also submissions to the affect that a broad brush approach would have a chilling effect on collective practice by medical practitioners.

However, I observe that the alternative (narrower) interpretation favoured by the minority, of requiring the employing authority to authorise the particular act or omission that caused the breach, would likely render the liability provisions in the Health and Disability Act ineffective.  This is despite the fact that it could produce anomalous outcomes, with a practice arguably having greater exposure to liability for the actions of agents than for the actions of employees.


Whilst the Supreme Court decision does note that it is based on the facts of the specific case, and that the same decision may not have been reached had the GPs practiced independently from the same premises – there are learnings here that are likely to be wider than just the medical profession. 

Without undertaking a benchmarking exercise of other forms of occupational licensing against the Health and Disability Act, it is difficult to see a court warming to an argument that, just because the members of a professional practice have organised their affairs so that they are merely employees (and not partners or working shareholders, etc.), the practice should not be liable for their acts or defaults.  The reception may be especially frosty where the health and safety or possibly even the savings of members of the public are at risk.

As a result, as well as paying close attention to the terms on which they undertake their professional duties, the members of a professional practice should take care with the arrangements between themselves that tackle the issue of responsibility for acts and omissions.  In particular, some care should be taken to ensure that there is the legal equivalent of an ambulance placed at longstop – in the form of an indemnity from each practice member for all liabilities which may be sustained by the practice and its members as a result of the acts or omissions of any member – except for matters occurring with the express authority of the practice or otherwise agreed by the practice members.

For more information, please do not hesitate to contact me.

May 11 23


by Stephen

In a hopeful turn of events this week, the Economic Development Select Committee has reported that it was unable to agree that the Bill should pass. 

Instead, it has recommended amendments to the Bill – should it be determined by the (whole) House that the Bill be passed.

As a recap, the Bill is a member’s bill that proposes an amendment to section 131 of the Companies Act 1993 – the (fundamental) duty of directors, that when exercising powers or performing their duties, the director of a company must act in good faith and in what they believe are the best interests of the company.

The Bill would add new section 131(5) as an ‘avoidance of doubt’ provision – including a non-exhaustive list of five ESG matters that a director may take into account when deciding what is in the best interests of the company.  In doing so, the architect of the Bill submitted that this was to make clear that directors can take actions which take into account wider matters than (just) the financial bottom-line.

Proposed new subsection 131(5) could be shortened and still achieve its objective

In reporting back, the Committee noted submissions that the current law (which is general and principles-based and does not limit what can be considered by directors) already allows a director to consider ESG factors when deciding what is in the best interests of their company.

The Committee also accepted the concerns of submitters as to the Bill risking unintended consequences.  For example, because it listed specific ESG factors and gave the impression that these factors should carry more weight than others.  The reference to the principles of Te Tiriti o Waitangi also risk confusion, because the relationship between the Crown and Māori is governed by Te Tiriti – and does not typically include other individuals or private entities.

The Committee also acknowledged submissions about the risk of creating inconsistencies within the Companies Act and with other legislation – and noted that non-legislative alternatives (such as Government-provided guidance or training materials).

The Committee agreed with the concern of the architect of the Bill that help was needed to dispel uncertainty about a directors’ duties in cases where financial or profit-related considerations appear to be in conflict with ESG-related ones.  However, it proposed a shortened version of the proposed new subsection 131(5), removing the list of ESG factors, and simply providing:

(5)        To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit.

The National Party members of the Committee, whilst agreeing that there is benefit in directors taking into account ESG factors, noted that directors already have existing obligations under their fiduciary duties.  As a result, the minority concluded that the Bill is unnecessary.   In doing so, they noted the opposition to the Bill by the New Zealand Law Society and the (Parliamentary) Legislative Design and Advisory Committee.  In doing so, they echoed the Law Society submission cautioning against ad-hoc changes to the directors’ duties regime.

Next steps

The Bill seems destined for a second reading and then it seems likely to be debated by a ‘committee of the whole House’ – at which the change recommended by the Committee will be considered.

Whilst such ad hoc changes to the fundamental elements of company law are problematic and, in this case, (IMHO) unnecessary, this will also give new impetus to those sector groups who seek to read “may” as “must”.  For example, by giving greater emphasis to the body of opinion that company directors should be starting on the path to identify, assess and manage environment-related risks, particularly if the company’s business model is dependent on the environment.

In turn, this gives rise to the sort of concerns recently highlighted by the Chief Justice (in the context of changes to resource management law) about the impact of pathfinder litigation as interested parties seek to develop a better understanding and/or test the boundaries of the legislative changes.

From where I sit, the proposed alternative subsection 131(5) is likely to be accused of suffering from the same defects as the original drafting – particularly the lack of clarity.  Once again, if real progress is to be achieved on issues such as reducing adverse environmental impacts then clear legal obligations (coupled with efficient enforcement mechanisms) are likely to have a more realistic chance of achieving that goal.  More opaque drafting does not.

In any event, I question why specific legislative objectives should be slipped in through the side door of general, principles-based, companies legislation.  This seems to compound the risk.  It is a point made in submissions and not adequately addressed by the Committee. 

Hopefully, the issue will be grasped when the Bill returns to Parliament.