Creditors claims against directors
Words by Heather Froude
In its September 2025 report, Centrix noted that there has been a 26% year on year increase in the number of liquidations of companies across all sectors, in New Zealand.
When a company is placed into liquidation, liquidators are appointed to gather in that company’s assets, and then to distribute those assets amongst the company’s unsecured creditors, on a pari passu basis.
A liquidation is a collective proceeding which is intended to benefit all of the unsecured creditors of a company. Placing a company into liquidation also acts as a moratorium on all claims against the company. The purpose being that the moratorium protects a company’s assets against individual claims, to provide larger reserves for division amongst all unsecured creditors.
However, the moratorium does not appear to apply to personal claims against the directors of a company in liquidation, for breaches of their directors’ duties under sections 135 and 136 of the Companies Act 1993 (Act).
The Supreme Court decision in Yan & others v Mainzeal Property and Construction Limited (in liquidation) [2023] NZHC 113 (Mainzeal) confirmed that section 301 of the Act allowed creditors of a company in liquidation to bring claims directly against the former directors of that company, for breaches of sections 135 and 136 of the Act. Mainzeal also confirmed that compensation for such claims can be paid directly to those creditors. The claims do not require the court’s leave.
It appears that these comments in Mainzeal have highlighted an unintentional loop hole whereby unsecured creditors can improve their position vis à vis other unsecured (and sometimes secured) creditors in a company’s liquidation.
A good of example of this occurring is in the fairly recent decision in Batley v MacDonald [2025] NZHC 974 (Batley). In Batley, two unsecured creditors brought their own claims directly against Mr John Macdonald, the former director of the John. S. Macdonald Builders Limited (in liquidation) (JSMBL), for breaches of Mr Macdonald’s duties as a director, specifically sections 135 and 136 of the Act.
In the High Court, Mr Macdonald argued that whether or not creditors were entitled to direct receipt of compensation under section 301 of the Act was unsettled law. Justice Wilkinson-Smith referred to Mainzeal, and Boaden v Mahoney [2024] NHZC 2783 where creditors had recovered directly from a former director for breaches of ss 135 and 136 of the Act, and held that the creditors were entitled to direct relief.
The two creditors were successful in their claim, and Justice Wilkinson-Smith ordered that they were entitled to recover $289,277.60 (in total).
It is unknown whether these creditors have received payment in full of the amounts owed to them by Mr Macdonald. However, it is clear that the position that they have been able to get themselves into by bringing the proceedings is far better a result than would’ve been achieved through the collective process of the liquidation.
The liquidator’s final report for JSMBL shows that only one of JSMBL’s secured creditors received a payout from the company’s assets, of 16 cents on the dollar. Other secured creditors received no payout, which was the same for the entire body of unsecured and preferential creditors. In total, JSMBL will shortly be removed from the companies’ register owing a total of $2,091,177 to creditors.
On the contrary, the two creditors who brought proceedings against Mr Macdonald have the benefit of an award in their favour for the full amount of the deposits they’d paid. The award also gives rise to options to enforce directly against Mr Macdonald’s assets (assuming he has some).
Whereas, absent any personal guarantees given by Mr MacDonald, the other creditors of JSMBL walk away with no direct recourse against him.
While Batley is good news for those creditors with the ability to fund a claim against former directors, it is bad news for those unsecured creditors who have to rely upon the liquidation process to see any return of the money owed to them.
In the past, claims for breaches of directors’ duties were generally bought by the liquidators of an company, against the former directors. The claims themselves were classified as assets of the liquidation estate, because any award would be paid into the liquidation estate to be distributed amongst creditors.
Claims against former directors in their personal capacities are attractive propositions for two main reasons: (1) directors might have insurance; and (2) directors might possess substantial assets against which liquidators could enforce a judgment.
Mainzeal identified and noted the tension which section 301 of the Act created, by giving creditors the option to claim direct relief against former directors for breaches of directors’ duties. An observation which is playing out in liquidations around the country.
Our expectation is that more and more creditors (who have the means) will start bringing claims against former directors outside of a liquidation (if available to them), and that this will essentially create a race to the kitty. The difficulty for liquidators is that individual creditors are likely to be able to move faster when it comes to bringing claims, and so (if successful) are likely to obtain awards in their favour before the liquidators are able to.
The effect is that these awards will deplete the assets owned by the directors and/or the insurance cover the directors hold. Therefore rendering any subsequent claims by liquidators or other creditors ineffective (in terms of recovery). Moreover, this ultimately leads to a situation where the claims of one or more individual creditors trump the interests of the creditor body as a whole.
In our opinion this loophole undermines the benefits of a collective procedure like liquidation. As is clearly evidenced in the Batley case, where even secured creditors were not fully repaid from JSMBL’s assets. Undermining the collective, liquidation procedure could lead to:
- costly and wasteful litigation by multiple creditors and/or liquidators in an effort to get to former directors’ assets first; and/or
- some creditors receiving preferential payments for arbitrary reasons. Something the collective procedure is specifically designed to avoid.
The Law Commission is currently reviewing the law on directors’ duties and their enforceability. However, it is not clear whether this particular aspect of the law will be included in that review. In light of decisions like Batley, we certainly hope that it does.
Ultimately, the Law Commission’s findings are only due to be reported on in 2027. Until then, and absent any legislative amendment, creditors are free to take action under section 301 of the Act to better their own positions, potentially to the detriment of the general unsecured creditors of liquidated companies.
