Why Mainzeal failed

A failed national construction company being ripped off by its parent company and continuing to trade while insolvent for years was never going to end well. Since 2013, we've known about Mainzeal's court troubles through its long and embroiled court case. How did Mainzeal get into such a mess?

It all actually began in 1995, when an investment consortium with a focus on investments in China acquires a majority shareholding in Mainzeal. Many shareholders allegedly didn't like the idea of a large consortium, but they decided to trust Richard Yan, who lead the investment, to make “the best deal for them”.

For around eight years, Mainzeal thrived with projects around the country. There's evidence that in 1999 the company was paying dividends to its parent company in China. But, a red flag had already cropped up: significant cash flows for construction were utilised as a kind of working capital. When Mainzeal was to become insolvent (assets being worth less than liabilities), the company would take money given upfront by clients, but not yet paid over to subcontractors, as working capital.

Former Prime Minister Dame Jenny Shipley became involved in 2004, joining the Mainzeal board as chair. This was seen as a real coup for Yan, because it would give Mainzeal legitimacy and cachet when dealing with China. Shipley was appointment to many boards with Chinese interests in the next 15 years, including China Construction Bank, Beijing-based International Finance Forum, the BOAO Forum for Asia, NZ China Council, and Kiwi food export company Oravida. It is believed Shipley had $22 million in investments (at least on paper) – she was the queen of Kiwi-Chinese business.

During this time, things had taken a strange turn of events at Mainzeal. Because its books looked so good – it appeared on paper to have flourishing assets – Mainzeal began to lend money to its parent company. The first loan was in 2004 for US$2.37 million. By the end of 2007, Mainzeal had lent out $39.4 million. Yet none of the directors seemed to be terribly fussed where the money was going or how the parent was using it. It never sought independent legal advice about their loans. In 2010, Shipley told her board she finally knew how much money was going out, but maintained they could get it back “at any time”.

Nobody at Mainzeal knew that the loans had actually been structured by the parent company to two loss-making subsidiary companies, so when Mainzeal was desperate and did actually need that money back, the parent wasn't legally liable and could fob them off.

Evidence suggests Mainzeal was insolvent for most of those eight years it had been loaning out money. From 2008 it was making losses and in 2011-12 they were in the double digits. Shipley tried to resign in 2011, but was convinced to stay by Yan. Mainzeal somehow continued to persuade its auditors to sign off its annual accounts and continue trading. They were continuously told by the parent company that they will be paid back, and Yan continued to tell the Mainzeal board that everything was fine.

In 2012, things turned obviously sour. Mainzeal got into serious cashflow problems. Many leaky building claims from its sites had emerged, including Botany Town Centre and Wellington's Bay Point block, both of which went to court. Mainzeal also got entangled in contractual disputes with telecommunications company Siemens over a Transpower electricity network upgrade contract, and court adjudications largely ruled against Mainzeal's interests. Mainzeal's bank, BNZ, had finally become very nervous as the company was $33 million in debt.

Mainzeal immediately needed $10 million of additional equity at this point. By the end of 2012, sub-contractors were complaining that their bills weren't being paid. In February 2013, Mainzeal went into receivership and owed $110 million.

Shipley wrote to Yan and the Chinese parent company hoping they would finally front up the money to meet its obligations to its creditors. They never did, and a long and drawn-out court case would then begin.