The recent High Court judgment in Batley v MacDonald [2025] NZHC 974 offers subtle yet significant insights into directors’ duties in the construction sector.
Nick Malarao of Richmond Chambers, who acted for the plaintiffs in this proceeding, gives some insights into the case’s implications.
For readers unfamiliar with the case, could you explain what Batley v MacDonald was about?
Malarao: The case involved two plaintiff trusts who had paid substantial deposits to a construction company, John S. MacDonald Builders Limited (JSMB), for building projects. Shortly after accepting these deposits—$115,000 and $172,500 respectively—the company ceased construction work and was placed into liquidation by its sole director and shareholder, Mr MacDonald. The plaintiffs sought to recover the value of their deposits from Mr MacDonald personally. They used section 301 of the Companies Act (which gave them standing to take the action in their own name) and argued that Mr MacDonald had breached his directors’ duties under sections 135 and 136.
What were the key facts that led to the director being found personally liable?
Malarao: The evidence suggested the company had been balance sheet insolvent for approximately four years prior to liquidation. Perhaps more tellingly, the deposits paid by the plaintiffs were immediately used to settle older debts of the company. In one instance, there appeared to be a deliberate removal of a clause in the contract that would have required the deposit to be credited against future payment claims. The court found this particularly concerning.
How did the court approach the analysis of directors’ duties in this case?
Malarao: The judgment applied the framework established in Mainzeal and Debut Homes quite faithfully. Wilkinson-Smith J considered whether Mr MacDonald could have reasonably believed JSMB would be able to perform its obligations when entering into contracts with the plaintiffs. Given the company’s financial position and the rapid timeline from contract to liquidation, the court concluded he could not have held such a belief on reasonable grounds.
The judgment mentioned a “sober assessment” standard. Could you elaborate on what this means for directors?
Malarao: The “sober assessment” language comes from Mason v Lewis, requiring directors to carefully consider a company’s prospects, particularly when operating with minimal equity. It suggests directors should take a conservative view of their company’s financial outlook rather than an optimistic one when accepting new obligations. In practical terms, this might involve seeking professional advice or conducting thorough financial projections before taking on substantial new commitments.
Does this judgment change anything for directors of construction companies in particular?
Malarao: I wouldn’t characterise it as changing the law, but rather as applying established principles to the construction context, where deposits often create particular challenges. The judgment highlights that using new client deposits to address pre-existing financial difficulties—sometimes colloquially called “robbing Peter to pay Paul”—may constitute a breach of directors’ duties.
The court awarded the plaintiffs the full amount of their loss, which seems relatively uncommon. What might explain this?
Malarao: In directors’ duties cases, it has to date been uncommon for the courts to award the full amount of loss suffered by a creditor. The approach adopted by the court here follows dicta in Debut Homes (2020) and Mainzeal (2023), where the Supreme Court discussed a wide range of approaches to compensation for breach of directors’ duties. The facts of this case justified a restitutionary measure of relief –the Court was on the view that the harm caused to the plaintiffs (the taking of their deposits) should be reversed and this required Mr MacDonald to be held liable for the full amount of the deposits. The Court has also indicated that it is open to awarding indemnity costs to the plaintiffs due to the director’s conduct in the litigation.
What are the implications for directors?
Malarao: The judgment serves as a cautionary tale for directors, particularly the directors of companies who are struggling. The judgment once again emphasises the importance of adhering to their duties and the potential personal liability for failing to do so. Directors would be wise to take a conservative view of their company’s financial outlook and to avoid incurring new obligations without a reasonable belief in the company’s ability to meet them. There is also a broader discussion to be had about the adequacy of New Zealand’s legal settings regarding directors’ duties. The Law Commission examining the issue.
Disclaimer: This discussion is intended to provoke thought and debate among legal professionals. Mr Malarao acted for one of the parties in the proceeding, and the case may be subject to appeal. The views expressed represent Mr Malarao’s personal reflections rather than any official position of Richmond Chambers.
