To those directors not actively engaged in the management of or
with an eye on the financial affairs of their company - beware. The
recent quantum decision of the High Court in Mason v Lewis
 NZHC 1535, following the earlier decision of the Court of
Appeal on liability, provides a strong warning for sleeping
directors. In particular, the case highlights to directors that the
courts will not be shy to impose very substantial penalties on them
for breach of duties.
Mr and Mrs Lewis were directors and shareholders of a printing
company. The Lewises had failed to ensure that proper accounts of
the company were kept, relying instead on the financial advice of
others rather than making proper enquiries themselves. They had
even left the overall management of the company to the
company's manager, Mr Grant who later turned out to be a
fraudster. Having discovered Mr Grant's fraudulent activities
and the woeful financial status of the company, it was still some
time before the Lewises arranged for a liquidator to be voluntarily
The liquidators commenced proceedings against the Lewises for
alleged breaches of their duties as directors, specifically under
section 135 (reckless trading), section 300 (liability if proper
accounting records not kept) and section 301 (power of court to
require persons to repay money or return property) of the Companies
Act 1993. The Court of Appeal held that the Lewises had breached
their duty to the company by paying little or no proper attention
to the financial affairs of the company.
Quantum of Damages
Having found Mr and Mrs Lewis guilty of breaching their
director's duties, the Court remitted the question of the
quantum of damages back to the High Court.
In assessing quantum, the High Court considered:
Size of the creditor pool: the size of the creditor
pool will influence the amount of damages awarded.
Causation: there must be a clear link between the
director's breach of duties and the company's subsequent
liability to creditors.
Duration of the trading: how long the breach of duty
has persisted and the directors have allowed the company to run up
debts will be relevant.
Culpability: level of culpability will determine the
extent to which the director should be made to contribute to the
Means: allowance can be made for the means of the
director to meet the amount of the damages award.
Punitive awards: a punitive element can be included in
The High Court found the Lewises liable to pay a total of
NZ$1,261,330 in compensation and contribution towards the
company's creditors and debts.
Mason v Lewis serves to remind directors that failure
to take proper steps to guide and monitor the management of a
company may put a director in breach of his or her duties and
thereby expose him or her to very substantial penalties.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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