Mainzeal: What a bleeding mess!

As published in The National Business Review


The liquidator’s first report was issued on Friday. It was delayed due to the complexity of the situation. Having now read the report, I completely understand why the liquidators applied to the Court to allow them more time to prepare it. To say it looks messy is an understatement. As a partner in a chartered accountancy practice and an insolvency practitioner who is representing at least two creditors of the group, I thought it was appropriate to comment on the report.


I have no doubt that more than a few creditors will be scratching their heads while reading it and wondering what it all means and, more importantly, what it all means to them. At 49 pages long, it isn’t the smallest report I’ve seen!


Challenge to the liquidator’s appointment?
Firstly to BDO’s appointment. The liquidators have taken the step of applying to the Court to have their appointment ratified. This means that should a creditor wish to change the liquidators they will have to apply to the High Court to do so. Ordinarily, all a creditor would need to do is request a creditors meeting (if one isn’t already intended) and request a vote take place to remove the existing liquidator in favour of another.


By having the Court ratify the appointment, BDO have avoided a messy creditors meeting where multiple alternate liquidators are put forward. This is eminently sensible and will minimise the cost impact to creditors. While I would love to have the opportunity to be the liquidator myself (what a challenge), I recognise that a firm may not have the spread to handle the matter in its entirety.


BDO have offices around the country and I note that a Christchurch based liquidator is included. Again, very sensible given the size and complexity of the group. While I don’t know Mr Tubbs, I do know Brian Mayo-Smith, one of the Auckland based liquidators, and he is honest and sensible. I have no doubt he will endeavour to ensure they carry out their duties properly.


We will not therefore, representing creditors of the group, be seeking to change the liquidators.
Inter Company Transactions
The first thing that stuck in my mind was the value of the intercompany transactions. The liquidators have raised as the first point in their report, that the collectability of these transactions was a critical factor in the groups demise. At $72 million, the related party debt is massive. Of that there is no doubt.


With $27m due from Richina Pacific (China) Investments Ltd and a further $17.1m due from MGL, the shareholder of MPCL, I think the liquidators have some serious questions to ask as to the rationale for a New Zealand based construction company investing in these other offshore operations. Not just of the directors, and former directors, but of the receivers. I note that PricewaterhouseCoopers who are the receivers were, if they are not still, the auditors of both the Mainzeal group of companies but also the Richina group of companies.


Directors responsibility
When the dust settles there may be creditors who are keen to pursue the director, and former directors, for failing in their duties. Only time will tell if they should be held responsible for some of the decisions made.


Interestingly, I note there are $11.5m of unsecured employee claims. Employees are preferential for their outstanding pay (going back 4 months), any holiday pay and any redundancy pay up to a value of $20,340. There are preferential employee liabilities listed at $6m.


The only employee claims that would be unsecured would be; payments for a notice period, payments exceeding the $20,340 statutory limit or, interestingly, payments due to person who is, or was during the 12 months prior to the liquidation, a director (or nominee, trustee or relative of a director) of the company.


Assets available to creditors
There are land, buildings, plant and machinery which, at book value, should pay back BNZ, the secured creditor who appointed the receivers. However, assets rarely achieve book value when sold in a fire sale scenario. How much money will be left from those assets for the preferential and unsecured creditors remains to be seen.


The more liquid assets consist of trade and other debts and retentions ($24.5m & $11.3m due to MPCL). Some of those debts may be due from creditors, in which case set off rules will apply. Other debts will be disputed. In particular, retentions are normally disputed as it is usual to hold them to cover guarantees and remedial work that may be necessary. The amount collected will therefore be far lower than the values shown.


What I did find interesting is that a number of companies in the group don’t appear to have any assets. If you are aware of these companies owning assets or are a creditor of these companies, I suggest you contact the liquidators to question why.


How much will be available to the other creditors and who gets paid first?
Two common questions with no easy answer. The secured creditors will be paid from the realisation of the assets to which they have security. The remaining creditors consist of preferential (the employees for some entitlements and the IRD for core tax ie GST and PAYE excluding penalties and interest).


All other creditors, including subcontractors, will be unsecured. What funds are left after paying the secured and preferential creditors will be made available to those unsecured creditors that make a claim. If you don’t make a claim, you stand no chance of getting anything.


All creditors need to be aware that this will be a costly receivership and liquidation. There is no cheap and easy way of tidying this mess up. Both the receivers and the liquidators’ fees and costs (including legal) will be paid prior to paying any creditors. I would expect those costs to be in the millions, especially if the liquidators determine that legal action is necessary.


What can the liquidators do that the receivers can’t?
They have strong powers to force parties to provide information. I was glad to see the liquidators comment that the directors have been helpful. They also have the power to unwind transactions or charges if those transactions provide a preference to one particular creditor to the detriment of other creditors. This is referred to as a voidable transaction.


A liquidator is obliged to look into prior transactions, in this case the first and obvious is the business restructure in December 2012, the second is the change in shareholder. Both smell like panic moves to fix a failing group of companies. That doesn’t mean to say they have prejudiced other creditors or in fact were inappropriate in any way. The liquidators have noted they will investigate and I will certainly be interested to see the outcome of those investigations.


The liquidators can also look at transactions “at an undervalue”. A good example of this is transferring an asset between companies at a value less than the market value of the asset. A liquidator can have such transactions unwound or indeed seek compensation for the benefit of the creditors.


Is there a point in attending the Creditors meeting?
Yes. You’ll hear first-hand what the liquidators intend to do. You may even, if they are brave enough, hear from the director and former directors on what they believe went wrong.


You must, however, make a claim in order to attend the meeting and have the opportunity to vote on who should be in the liquidation committee. I was pleased to see that the liquidators are seeking to have a committee. With a group of this size, it is sensible to have one and gives the creditors a voice in the liquidation and the route it takes.


What should you do now?
1. Make a claim. Both in the receivership and the liquidation.
2. If you think you are a creditor and you are not shown on the list of creditors or haven’t received the report, contact both the liquidators and the receivers. Make a claim.
3. Attend the creditors meeting if you can or appoint another to attend in your place.
4. Volunteer to join the liquidation committee if you can or suggest another to join in your place.
5. If you have any information regarding the whereabouts of assets of the company, contact the liquidators immediately. Especially if you think there are assets that belong to the companies stated as not having any assets.
6. If you have any evidence relating to transactions that you feel were inappropriate or provided a preference to one party, contact the liquidators immediately.

I have no doubt that a lot of people are feeling the effects of Mainzeal’s failure. I also have no doubt that the majority of creditors won’t see a penny for years as this is one of the largest, and most complex insolvencies New Zealand has ever seen.


If you are a creditor of Mainzeal and are struggling, talk to your professional advisors (accountant, solicitor, bank) to see what you can do to alleviate that difficulty.