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Director Duty Breach leads to recovery by creditors: Norling Law Success

August 29, 2025

In a decisive judgment released recently, the High Court has ordered a director to personally pay the losses of two unsecured creditors of the company in full, plus interest due to the breaches of director duties.

In addition to that, the Court has also ordered that the director pay close to the full legal fees incurred by the creditors in pursuing the director for breach of duties.

The decisions in Batley v MacDonald [2025] NZHC 974 (substantive judgment) and Batley v MacDonald [2025] NZHC 2122 (costs decision) are significant legal wins for creditors of companies in liquidation. The strategic approach of Norling Law will guide how future similar cases are progressed and decided.

Traditionally, it was liquidators who would commence proceedings against the company directors (if at all). The difficulty in this process is that creditors do not control the process. It also comes at significant cost. Often the liquidator and legal costs see little to no benefit returned to creditors. The problem is deepened if litigation funders are involved.

This approach allows creditors to control the process and the costs. This also sees them in the room when settlement conversations occur and are decided.

Background

Norling Law acted for creditors who separately entered into building contracts with a construction company, John S. MacDonald Builders Limited (in liquidation) (JSMB), in 2020.

Each creditor paid substantial deposits to JSMB for JSMB to undertake residential builds at their respective properties. In some instances, JSMB issued invoices to the creditors, charging them for building costs, despite the understanding that the building costs would be drawn down from the deposits in the first instance. However, construction had barely begun and was completely ceased when JSMB was placed into liquidation.

In January 2021, JSMB was placed into liquidation by its sole director, Mr John MacDonald. The creditors were left with no progress on their builds and no return of their deposits.

Later, the creditors approached Norling Law and we commenced proceedings against Mr MacDonald personally due to his breaches of duties.

Norling Law’s Role and Strategy

Our team:

Explored, filed and advanced claims under ss 135 and 136 of the Companies Act — which deal with reckless trading by a director, and incurrence of obligations by the company without the director reasonably believing the company would be able to perform those obligations. We relied on s 301, which is now confirmed to provide standing to creditors of a company to bring these kinds of claims.
Obtained and arranged analysis of financial records evidencing JSMB had been insolvent for at least four financial years before it was placed into liquidation, and that the creditors’ deposits were misused to pay other older debts, rather than being credited against the creditors’ builds.
Proceeded through to judgment, even after Mr MacDonald effectively withdrew participation late in the litigation process.
Argued for indemnity costs in favour of the creditors (being a very rare costs order whereby the Court orders an unsuccessful party in a litigation to pay the full reasonable legal costs incurred by the successful party).

We presented a compelling case supported by expert financial evidence. The Court accepted our arguments, and we also overcame Mr MacDonald’s various defences.

Court’s Findings

The High Court found that:

JSMB had been insolvent for at least four years prior to liquidation.
Mr MacDonald directed client deposits to fund other company debts and, in some instances, personal interests.
He breached his duties under:
i) Section 135 – Reckless trading
ii) Section 136 – Causing the company to incur obligations without a reasonable belief that they would be fulfilled.
His conduct appeared to be deliberately misleading, including altering a contract term in the first creditors’ contract, which initially required the deposits to be used towards building costs. This conduct was of particular interest to the Court.

The Court was unequivocal: Mr MacDonald should never have allowed JSMB to accept client funds, knowing the company could not meet its obligations.

In respect of the costs decision, the Court found Mr MacDonald’s conduct in pursuing his defence post-Mainzeal decision was unreasonable.

Judgment

The Court awarded the losses claimed, by each creditor respectively, in full, plus interest, and indemnity costs in respect of steps taken by Mr MacDonald in his defence post-Mainzeal. The Court also awarded increased costs to the creditors for the steps taken pre-Mainzeal, noting several delays caused by Mr MacDonald in the proceeding.

The orders in the substantive judgment were made under s 301 of the Companies Act, which is now confirmed to allow direct compensation to creditors for losses caused by director breaches.

This is not a recovery from company assets, it is a judgment for personal liability against the director.

Why It Matters

This judgment serves as a sober reminder to company directors, who might assume they are protected by the corporate veil, to monitor the solvency of their companies, and be cautious not to allow the company to take on obligations that they do not reasonably believe will be performed. In some circumstances, the corporate veil can and will be pierced by the Courts if directors are found to have breached their duties.

In this case, the director’s conduct was particularly bad, as the evidence indicated he used the creditors’ deposits towards other debts almost as soon as the deposits were paid to JSMB. There is also indication that some of those debts were related to his personal interests, rather than the business of JSMB.

Directors must have regard to the interests of the company’s creditors, and should not allow the company to use funds earmarked for certain creditors, towards other debts (“robbing Peter to pay Paul”).

It also reaffirms:

Creditor standing to sue directors directly under s 301;
That Courts will look through corporate structures where director duties have been breached; and
That full restitution may be awarded where the evidence clearly supports that the harm caused to the creditors should be reversed.

This outcome represents the maximum legal relief available to the creditors and creates an important precedent for other creditors considering similar action.

The costs decision also serves as a cautionary tale against defendant directors employing delay tactics in the hope that the creditors will simply abandon the litigation owing to the costs associated with litigation and legal fees. Defendants should rather assess the merits of their defence early, and engage early on in the process if they hope to achieve a good outcome having regard to the circumstances.

Summary

Norling Law specialises in director duties matters.

This case is one of several where our team has pursued directors personally on behalf of our clients, and in some instances, we also defended directors against such claims.

If you are a creditor, liquidator, or stakeholder affected by similar conduct by a director, or if you are a director looking to defend such claims, our litigation team can help you explore your options.

Please use this link to book a FREE 30-minute Legal Consultation.

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