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 [2008] 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 appointed.

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 company's liabilities.
  • 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 award.

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.

Implications

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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