NEW ZEALAND: An Introduction to Dispute Resolution

Chambers and Partners Dispute Resolution Overview

Two major Supreme Court decisions in 2020 have flagged important developments for the upcoming year in New Zealand’s disputes resolution landscape. The first, a class-action suit brought by insurance claimants after the Canterbury earthquakes, indicates the potential for an increase in representative actions in New Zealand. The second, addressing a director’s decision to continue trading an insolvent company, has underlined director’s duties in a year that has been particularly turbulent in the commercial sphere.

Southern Response Earthquake Services Limited v Ross [2020] NZSC 126

This case is one of many that have come through the courts in prolonged and costly insurance litigation since the Canterbury Earthquakes in 2010 and 2011. The claimants brought a claim against their insurer, Southern Response, based on misrepresentations and misleading conduct which induced them to settle on less favourable terms than they otherwise would. They brought the claim as representatives of the class of some 3,000 policyholders who settled in similar circumstances.

Class action suits have not been common in New Zealand’s litigation environment, in contrast to other jurisdictions, but are expected to continue to increase. The issue was whether the claimants were able to bring a representative action on an ‘opt out’ basis, rather than requiring interested parties to ‘opt in’.

In line with other jurisdictions and common law history, the court considered that allowing for representative actions on an ‘opt out’ basis would increase access to justice and improve incentives for insurance companies and corporate entities to comply with the law. Whether ‘opt in’ or ‘opt out’ is appropriate for a particular case will require the courts to consider various factors, including the applicant’s choice, potential for counterclaims, class size and the type of relief sought. The operation of these factors will be further refined in the future as the issues arise in different circumstances. In Southern Response, the socio-economic context of the Canterbury earthquakes litigation and the fact that subsequent questions regarding compensation would need to be determined individually meant that access to justice strongly favoured an ‘opt out’ approach for determining the common legal issues.

The Law Commission is currently undertaking a review of the law relating to class actions in New Zealand, as well as litigation funding. Following this Supreme Court decision and the upcoming review, we can expect to see significant growth and developments in representative actions in New Zealand’s dispute resolution arena.

Directors’ duties 

Until recently, company directors had the benefit of ‘safe harbour’ provision from insolvency-related duties, a temporary law change enacted as part of the COVID-19 relief measures package. This protection expired on 30 September 2020. Cases as to how this ‘safe harbour’ applies can be expected to crop up from towards the end of 2021. In addition, a recent decision of the Supreme Court and an anticipated decision of the Court of Appeal are expected to shape ongoing litigation in relation to directors’ duties.

Madsen-Ries v Cooper [2020] NZSC 100

This recent and hardline Supreme Court decision, that a company director had breached his director’s duties, may have other directors in New Zealand feeling the heat of trading during such uncertain times.

Mr Cooper, the Director of Debut Homes Limited (a residential property development company) was held liable for breaching his director’s duties by continuing to trade his company which was nearly insolvent. Recognising that the company would ultimately be wound down, the director elected to finish and sell the remaining properties in its current development to improve the overall return to Debut Homes' creditors. Doing so, however, resulted in $300,000 in Goods and Services Tax becoming payable to the Inland Revenue Department, an obligation the director knew Debut Homes would not be able to meet.

Debut Homes' incurrence of the GST obligation, knowing it would be unable to meet it, was characterised by the Court as “robbing Peter to pay Paul,” even though the director’s actions were undertaken for the purpose of improving the company’s overall financial situation prior to liquidation. The Director’s actions were found to be in breach of the duty to avoid reckless trading, the duty to act in the best interests of the company (including creditors), and the duty not to incur obligations that the company will be unable to fulfil. In interpreting the scope of director’s duties, importance was placed on the Companies Act’s emphasis on solvency, statutory priorities on liquidation and the pari passu (equal) treatment of creditors. The director was criticised for a failure to utilise formal insolvency mechanisms available under the Act (such as creditor compromises, voluntary administration and receivership).

The reversal of the lower court’s finding that the director took a sensible and legitimate business risk, serves as a stark warning to company directors seeking to improve their position when insolvency is likely. In a near-insolvency situation, the best interests of the company require the consideration of creditors’ interests (including the tax department), and the interests of some creditors cannot be favoured over others. It remains to be seen how this decision will be applied when the length of a period of illiquidity is uncertain. We can expect (and would urge) increased vigilance on behalf of company directors moving forward.

Another decision on directors’ duties and reckless trading arising out the collapse of a construction company, Mainzeal, is also due to be released by the Court of Appeal, which will further shape the law in this area and the New Zealand dispute resolution landscape in 2021.