Mainzeal was a basket case for years.
The company was propped up like a sad puppet, taking advantage of a pile of clients' cash before it dished that out to workers, kept afloat when really it should have dropped like a plumb line years before 2013.
But few people knew the full extent of its problems, at least not until issues were laid bare on Tuesday this week.
That was when Justice Francis Cooke's 178-page High Court decision was released. It told a story of withheld money, a lame business, leaky buildings, broken promises, false hopes and all-round corporate ineptitude which resulted in him making a $36 million ruling for reckless trading against four of the five directors.
Kingpin was Richard Yan, the migrant from China whose Richina Pacific owned Mainzeal, found liable for $18m of the $36m.
The judge described how the company, once said to have been New Zealand's third largest builder behind Fletcher and Hawkins, traded while insolvent for several years.
He also mentioned that it had an annual turnover of $270m-$380m, and used that cash flow from clients to its advantage before handing it to subcontractors.
The judge said Mainzeal was milked by parent Richina Pacific to buy lucrative assets in China, and told it would be supported, but was given little cash to back that up. In fact, by 2009 Mainzeal had loaned Richina $42m, meaning the builder was insolvent and had been since 2005, the judge said.
That, as he pointed out, was the most important point overall.
"At the heart of the plaintiff's reckless trading claims," he said of the action brought by BDO liquidators against Yan and three other Mainzeal directors, "is the allegation the company was insolvent as a consequence of the Richina Pacific group extracting considerable funds from Mainzeal for investment in China. Mainzeal nevertheless continued trading in an insolvent state for years."
The ruling referred to the Mainzeal directors being told by Richina group about how the money would flow one day.
"Directors relied on promises from the Richina Pacific group that financial support would be provided when needed."
Sir Paul Collins was on the board for only a year and he raised questions early on, but Dame Jenny Shipley and the other directors rejected allegations that Mainzeal was insolvent, or that they had acted unreasonably in relying on Richina's support for the builder to stay afloat.
Yet those directors had nothing in writing — no contracts giving guarantees, nothing formal or legally binding.
What were they thinking?
The judge also gave Richina's side, saying stringent Chinese foreign exchange restrictions limited Richina's ability to fulfil Yan's promises.
So how did Mainzeal limp on?
Simple: belief in the Richina promise and a quirk in our construction sector which allowed Mainzeal to use a rich cash flow. Time was on its side. Then, time ran out.
Mainzeal's clients paid it for work by the subcontractors and the company retained that mountain of cash to keep itself afloat, "effectively using this money as its working capital", in the words of the judgment.
And Richina Pacific was using Mainzeal as its own cash cow, "extracting more funds for the benefit of the group from Mainzeal than recorded in the audited annual accounts", the decision said.
"Richina Pacific had extracted considerable funds from Mainzeal. This had been done to help secure assets of considerable value in China," the judge said. These transactions were completed via loans which were recorded as assets on Mainzeal's books.
But at times, Richina was also generous. For example, the judge noted how a developer could not complete a commercial block in Wellington called Mobil on the Park, so Richina handed over $37.4m to Mainzeal so it could finish the project, then sell it at a profit.
Yan told the court the money was returned to Richina in the form of loans.
Richina also supported Mainzeal by guaranteeing money for construction bonds so it could win work, and sometimes it even put up the entire bond, the judge said.
Mainzeal's demise could be traced back to 2004 and 2005, said Justice Cooke, when capital was extracted from Mainzeal for Richina Pacific to buy assets in China, including the Shanghai Leather company, today worth more than US$700m ($1 billion).
In 2005, Mainzeal recorded a significant operating loss of $12.1m, and although it was profitable in 2006 due to Mobil on the Park's sale, it lost money in subsequent years.
In 2009, former Prime Minister Shipley resigned from the Richina board but kept her Mainzeal directorship. That very year, the judge noted, the builder was insolvent, with negative equity of $44.8m.
How could this country's third-largest builder be so financially crippled?
The answer was a string of unfortunate projects including the Spark (then Vector) Arena and its roofing issue, and troubled apartment buildings such as Scene on the Auckland waterfront.
But much worse were leaky buildings and Mainzeal's liability for those sad structures.
The court ruling spelt that out clearly.
By 2012, Mainzeal had weathertightness liability provisions on its books at a crippling $21.8m. On the list were Summerfield Villas in Grey Lynn, Hobson Gardens on Hobson St in Auckland's CBD, Botany Town Centre in south Auckland, Wellington's Bay Point Apartments and The Lofts, Tauranga's Braemar Villas, Anchorage Apartments in Mount Maunganui and Argent Hall in Auckland's Eden Crescent.
But Mainzeal had another monster in its midst, this one called the Siemens contract, where payments were withheld for work under dispute.
During 2012, Mainzeal hit cash flow problems, mainly due to issues with Siemens, the company which had the deal to upgrade Transpower's electricity link between the North and South Islands. That required work at each end of the link — Benmore in the south and Haywards in the north — and Mainzeal won the job.
Former director Collins would tell the court that when he joined the board it was business as usual, but Siemens "knocked all that for six".
PwC auditor Michael Schubert told the court of his "considerable concerns" about Mainzeal and how he lost confidence relying on Yan's assurances. Schubert was grateful when PwC lost the builder as an audit client.
Shipley knew of PwC's scrutiny and acknowledged there was "no question that Mainzeal was reliant on its parent in balance sheet terms". Yan and Richina were "open and clear with Mainzeal directors", she said, and spoke of their support.
But the judge said there was an absence of relevant letters of support from any Richina entity for the benefit of Mainzeal, and due to a restructuring, Mainzeal was no longer a wholly owned subsidiary of Richina.
Ex-Mainzeal chief executive and fellow director Peter Gomm was also unconcerned about balance sheet solvency at the time, "because Mainzeal always had the cash flow to pay its debts", the decision said, citing his evidence.
But ex-Brierley boss Collins quickly smelt a rat.
He joined the board only in 2012, a year before the collapse, and "almost immediately .. he identified the significant underlying issues," the judge said. Without Chinese support, Collins realised, Mainzeal would go under and it needed a significant cash injection — specifically, $20m as preference share capital or subordinated debt.
Yan said that by Christmas 2012, "he realised Mainzeal may collapse" and approached Shipley and Gomm, wanting them to talk to the BNZ to get his wife released from her personal guarantees, and that Yan would not support Mainzeal unless they supported releasing his wife.
By January 2013, Yan was writing to all the directors seeking an urgent meeting "suggesting Mainzeal was no longer a going concern and suggesting that a resolution be passed to invite BNZ to appoint receivers."
The judge said: "All the directors gave evidence of their surprise at this turn of events and the collapse of Mainzeal that followed."
Receivers were appointed on February 6, 2013 and liquidation was called on February 28. Further details of the $110m collapse unfolded in subsequent reports.
Yan defended his position on the collapse, saying Mainzeal had lost too much cash too quickly "and Richina couldn't keep up with the volume and frequency of support that suddenly became necessary".
The fall took top names with it, including Shipley, who had told the court how she was shoulder-tapped for the board by acquaintance Sir Allan Wright, himself on the Richina and Mainzeal boards.
It was Wright who introduced her to Yan, and by 2004 she had joined both the Mainzeal and Richina boards.
BDO had sought more than $70m for the $110m collapse but Justice Cooke ruled $36m must be paid:
• Yan $18m "because he induced them to breach their duties";
• the other three directors Shipley, Gomm and Tilby $6m each;
• Collins was not found liable to pay any money.
The judge said he accepted that Yan had "acted honestly and he was genuinely committed to Mainzeal "nevertheless he led on the other directors in a way that contributed to their breach of duty."
Gomm, Shipley and Tilby "acted in good faith and with honesty and they did so throughout," the judge said, but they failed to fully appreciate the risks they were exposing creditors to.
Liquidator Andrew Bethell of BDO welcomed the ruling, saying it was the highest amount awarded in this country for reckless trading.
Mainzeal held directors' and officers' insurance of around $24m, so a claim could well be made on that.
Via lawyers Chapman Tripp, Shipley, Gomm and Tilby released a statement on Tuesday, saying: "The court's basis for finding liability appears to have novel aspects which will require careful consideration. The directors will not comment further at this stage as they take advice and consider their options."
Prepare for an appeal? The Mainzeal saga could well continue.
The curious tale of Richard Yan
Richard Ciliang Yan's story is one of a Chinese immigrant making good.
The immaculately groomed, slightly-built businessman with a smiling demeanour came from humble beginnings: he was reportedly raised in a single-room flat in the northern city of Tianjin.
But this country gave him his real start.
He arrived here well before the latest wave of Chinese migrants, coming in 1981 after he won a Rotary Scholarship to study in this country. He worked hard to make ends meet, at one time sweeping floors at Auckland's historic St James theatre on Queen St.
The ambitious young man went to Auckland University and stayed with local hosts, including the family of Peter Menzies, an influential businessman who was once a major shareholder and the chief executive of construction company Mainzeal.
It was that link which helped propel Yan into the annals of New Zealand corporate history.
Menzies, now retired — "I've been away from the company for 26 years now" — was not saying much after this week's landmark $36 million court decision on Mainzeal's collapse, saying he preferred history to be the judge.
According to the High Court decision, Yan worked at Mainzeal during the school holidays and in 1985 graduated from university.
Previous Herald coverage has noted how he then moved to Australia to work for Westpac, which sent him on a scholarship to Harvard Business School, getting his degree in 1988.
He then worked for Bankers Trust in New York and Hong Kong, and established investment business REH Capital in 1993.
At the inaugural Auckland University Distinguished Alumni Awards in 1996, Yan stepped up proudly, taking his place alongside fellow alumnus Hugh Fletcher, a member of the Fletcher Building family empire.
The university said it was proud to honour Yan because he held the distinction of being the first student at the time to earn two degrees in just three years — a BA and a BCom.
It was quite a feat, given that English is not his first language.
For some years, he and a group of close associates took a table at the glittering summertime event where high achievers get prizes before about 600 banquet guests, seated in a white marquee on the lawn of Old Government House in the university's grounds.
Yan's 1996 alumni citation indicated he was the first Chinese school student to get a Rotary Scholarship to study English here. With a New Zealand Bursary and a Singapore Lee Foundation Scholarship under his belt, the boy who grew up during China's Cultural Revolution transformed himself into a highly formal businessman.
Yan's connection with Mainzeal began in 1995, when his investment fund bought just over half of the company, at that time listed on the NZX.
While the havoc created by Mainzeal's collapse continues, even his harshest critics acknowledge his foresight: he left China well ahead of many others and built a substantial business which at its height boasted that it employed about 5000 people.
By 2008, Mainzeal was constructing buildings worth $400 million annually. The court case cited landmark projects such as Auckland's Spark Arena and Wellington's Supreme Court building.
But it also said of Yan's Richina Pacific (short for Rich China): "At the heart of the plaintiffs' reckless trading claims is the allegation the company was insolvent as a consequence of the Richina Pacific group extracting considerable funds from Mainzeal for investment in China."
For years, Yan worked from a large office at Mainzeal's headquarters, 385 Queen St, although the business left there last decade for 200 Victoria St West, a glass-clad block which displayed the Mainzeal name, near Victoria Park Markets.
Current property records show Yan owns multimillion-dollar homes at 140 Lucerne Rd, Remuera and 53 Margot St, Epsom.
Mainzeal's rise and fall
• 1968: Company established as branch of Australia's Mainline Corp
• 1970s: Listed on NZ Stock Exchange
• 1975: Name changed to Mainzeal
• 1980s: Delisted in management buyout by Peter Menzies and John Roy
• 1987: Relisted on stock exchange
• 1995: Majority shareholding bought by Richard Yan's REH Capital
• 2004: New Mainzeal board established, chaired by Jenny Shipley
• 2005: Mainzeal records $12.1m operating loss
• 2006: Weathertightness issues begin to blight business
• 2007: Mainzeal owed $39.4m by Yan's Richina Pacific
• 2012: Weathertightness liability hits a crippling $21.8m, Siemens contract issues
• February, 2013: Company collapses, owing creditors $110m
• Sept-Nov 2018: High Court case heard
• Tuesday: Justice Francis Cooke delivers decision
Who wants money from Mainzeal?
• Subcontractors: $45.4m
• Construction contract claimants: $43.8m
• Employees: $12m
• General creditors: $9.5m
• Secured creditor BNZ fully paid outThe directors
• Dame Jenny Shipley, ex-Prime Minister, board chair
• Richard Yan, of Richina Pacific
• Peter Gomm, former Mainzeal chief executive
• Clive Tilby, ex-Downer Construction general manager
• Sir Paul Collins, ex-Brierley chief (not sued for reckless trading)
The case
• Length: Ran for 43 days; 21 witnesses appeared
• Venue: High Court at Auckland
• Instigators: Mainzeal liquidators Andrew Bethell and Brian Mayo-Smith of BDO and the Mainzeal companies in liquidation sued Mainzeal's former directors and others
• Main cause of action: Taken under Companies Act 1993 [section 135] that four of the five the directors breached their duties by engaging in reckless trading
• Litigation funders: LPF Group
• Mark O'Brien, QC led the team for BDO
• Jack Hodder, QC led lawyers for Mainzeal directors Shipley, Gomm, Tilby and Collins
• David Chisholm, QC represented Yan
