Past sins can haunt directors who jump

By DANIEL RIORDAN aviation writer

Tasman Pacific directors who bailed out as the airline slipped towards receivership could still be personally liable to its creditors.

Several of the airline's key investors, including its chairman, Ken Cowley, resigned their directorships in the weeks before last Saturday's receivership.

Mr Cowley and fellow Australian investor Ken Parker resigned on March 30.

Trevor Farmer, who invested alongside Alan Gibbs, resigned on April 6 with his alternate, Rob Campbell.

Bryan Skeggs, who was an alternate for his brother David Skeggs, resigned on April 11, and was replaced a week later by South Island professional director Ian Farrant.

The same pattern of resignations was repeated at Zazu, the investment consortium which is Tasman Pacific's sole shareholder.

When Tasman Pacific (Qantas NZ) went into receivership on Saturday morning, its board and Zazu's comprised merchant banker David Belcher, Tasman Pacific chief executive Kevin Doddrell, Mr Farrant, David Skeggs and accountant Fred Watson.

Mike Brooker, a partner at law firm Phillips Fox, said the resignations would not release the directors from any personal liabilities they might have to creditors - if it could be shown they remained on the board past the point where they should have known the company was trading while insolvent.

Whether Tasman Pacific was trading while insolvent has yet to be determined.

Under Section 131 of the Companies Act, directors have a responsibility to act in the best interests of their company, said Mr Booker.

But once a company reaches a point where liabilities exceed assets, the creditors have a bigger stake in the company than shareholders, and the courts have tended to interpret directors' responsibilities from that point to be to the creditors, rather than to shareholders.

Under Section 135, which covers reckless trading, directors must not allow a company to trade in a manner which is likely to create a "substantial risk of serious loss" to creditors.

"The temptation for directors, once the shareholders' funds are gone, is to carry on looking for a windfall gain to restore shareholders' funds," said Mr Booker.

The grey area is where a company might have liabilities greater than its assets, but directors continue trading, hoping they can clinch deals with creditors that would postpone payment of their debts - as Tasman Pacific tried to do with Wellington Airport - and perhaps trade out of trouble.

"That's the difficulty for directors. They have to assess on a day-by-day basis the prospects for the company in what may be difficult times, and then make a judgment on when they should stop.

"That's a very hard judgment. It may be they shut up shop late and incur personal liability."

Sources close to the horse trading that went on between Tasman Pacific and its creditors, including franchisor Qantas Airways, say cracks appeared within the consortium over whether to pump more money into the company.

Mr Cowley, Mr Parker and Mr Farmer were all major investors, and the staggered nature of their resignations may reflect differing thresholds of what they perceived as the point of no return for the company.

Mr Booker said Tasman Pacific directors might have resigned because they didn't want to be involved with bad publicity, or because the other directors had taken the company on a course they weren't happy with.

"It then becomes incumbent on them to resign.

"It may dawn upon different directors at different times that it's time to shut up shop. If they can't convince other directors of this, then the best thing they can do is resign.

"They can't then absolve themselves from what's already gone on, but they may incur less liability than the other directors who go on."

If Tasman Pacific's receivership becomes a liquidation - and all signs point that way - one of its assets may be a claim against its directors, if the liquidator considers such a claim valid.

In the past, the courts have found directors personally liable for up to 100 per cent of a company's debts from the point where the company traded while insolvent.

"It's a very powerful remedy that can totally abrogate the concept of personal liability - with respect to directors, not investors," said Mr Brooker.

Institute of Directors policy director Peter Webb said directors had legal obligations to their troubled companies, but wider issues of moral accountability were harder to determine.

"What's ethical to one person is not ethical to another. But certainly if it's the chairman you'd hope he would stick in there as long as he could.

"But there are all sorts of circumstances you have to take into account. No one seems to have a handle yet on what these particular circumstances are."

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