Commercial barrister Christine Meechan KC reviews two High Court decisions, released on the same day, which determined the extent of the Mainzeal liquidators' recovery under the directors’ and officers’ (D&O) insurance held with QBE, and how much of that recovery must be paid to Inland Revenue.
In Mainzeal Property and Construction Ltd (in liq) v QBE Insurance (International) Pty Ltd [2026] NZHC 2716, Walker J ordered QBE to pay a further $1 million in respect of Richard Yan, rejecting QBE's reliance on a personal profit exclusion. However, in the companion case, Mainzeal Property and Construction Ltd (in liq) v Commissioner of Inland Revenue [2026] NZHC 2715, her Honour held that Mainzeal must account for GST on approximately $20 million QBE had paid. QBE is not required to indemnify Mainzeal for that GST.
Taken together, the decisions leave the liquidators $1 million better off but facing a GST liability of approximately $2.6 million that neither the insurer nor the directors are required to meet.
Background
In 2023, the Supreme Court ordered Mainzeal's four directors to pay $39.8 million plus interest for breaching ss 135 and 136 of the Companies Act 1993. The liabilities of Dame Jenny Shipley, Clive Tilby and Peter Gomm were each capped at $6.6 million plus interest. Mr Yan, the director at the centre of the Richina group, was liable for the full amount.
All four directors were insured under a QBE directors' and officers' (D&O) liability policy with a $20 million limit of indemnity. An extension provided a further $1 million for each non-executive director once the primary limit was exhausted. The liquidators had asserted a charge over the insurance money under s 9 of the Law Reform Act 1936 as early as 2014.
Following the Supreme Court's decision, QBE paid $19,956,930.78 directly to the liquidators. That sum comprised the balance of the policy limit, together with $1 million each in respect of Dame Jenny and Mr Tilby under the non-executive director extension. QBE declined to pay a further $1 million in respect of Mr Yan, relying on the policy's personal profit exclusion.
The GST treatment of the payment then became an issue. Mainzeal included the payment as income in its GST return for the period ending 30 September 2023 but subsequently sought to reverse that treatment. Inland Revenue rejected the proposed adjustment, taking the view that the entire payment was deemed to be consideration for a supply of services under s 5(13) of the Goods and Services Tax Act 1985.
Mainzeal’s liquidators then brought two proceedings: one against the Commissioner, to determine whether GST was payable at all; and one against QBE, concerning the availability of the additional $1 million in respect of Mr Yan and whether QBE was obliged to indemnify Mainzeal for any GST liability under the policy.
The Personal Profit Exclusion
The exclusion removed cover where a director committed a wrongful act that was intended to result, and did result, in a personal profit or advantage to which the director was not legally entitled. However, it applied only if a final judgment or other final adjudication determined three matters: that the director in fact gained the profit or advantage; that the wrongful act was intended to gain it; and that the wrongful act was material to the cause of action adjudicated.
Mr Yan had not fared well in the original proceedings against the directors. The High Court found that he and his fellow Richina shareholders had "benefitted considerably" from funds extracted from Mainzeal and used to acquire valuable assets in China. The Supreme Court described him as "far more culpable" than the other directors, and held that Mainzeal's continued trading while insolvent, and the resulting losses to creditors, were fundamentally his fault.
Walker J accepted that the word "advantage", as used in the exclusion, has a wide meaning. She also accepted that unchallenged High Court findings could be relied on, rather than only the findings of the Supreme Court. However, she read the exclusion strictly, recognising that it could remove cover under the main insuring clause altogether, and held that QBE had to establish each element through clear and unequivocal findings.
QBE's difficulty lay in the timing of the conduct it relied on. The Supreme Court held that the breaches of duty ran from 31 January 2011, but the funds advanced to Richina had largely been paid out between 2006 and 2011, before the breach period began. Mr Yan's conflict of interest was a state of affairs rather than an act or omission. Neither, therefore, was material to the cause of action the courts actually adjudicated.
QBE's alternative argument fared no better. It contended that keeping Mainzeal trading on the strength of non-binding assurances relieved Richina of any obligation to provide support and preserved future opportunities for Mr Yan. Walker J considered that advantage too indirect and too prospective to satisfy the exclusion. There was no finding that Mr Yan gained anything from the continued trading. Indeed, during the breach period there was a net flow of funds from Richina into Mainzeal, rather than the reverse.
Nor did the findings on culpability assist QBE. A finding that one director is more culpable than others goes to the extent of that director's liability, not to whether he obtained a personal profit or advantage.
Is the Payment Subject to GST?
Section 5(13) deems a payment to be consideration for a supply of services where a GST-registered person receives a payment "under a contract of insurance", to the extent that the payment relates to a loss incurred in the course or furtherance of that person's taxable activity. Importantly, the provision applies "whether or not the person is a party to the contract".
The liquidators advanced a carefully constructed argument: the policy responded to the directors' loss, not Mainzeal's, and it was the directors who were contractually entitled to payment. Mainzeal's only access to the insurance money was through the statutory charge, and its claim against the directors existed independently of any insurance. On that basis, the liquidators contended, Mainzeal had not received anything "under" the policy.
Walker J acknowledged the force of that argument. She observed that receiving something under a contract naturally connotes a contractual entitlement, and that this analysis, considered in isolation, favoured Mainzeal. She also accepted that the Court should be cautious about Inland Revenue relying on its own officials' commentary to explain the meaning of legislation it had promoted, and she gave no weight to Inland Revenue's published operational statement on s 5(13).
Ultimately, however, the legislative history was decisive. Section 5(13) was amended in 2000 to address insurers paying third-party claimants directly. As originally drafted, the amendment placed the GST liability on the insured. Following objections from the Insurance Council about compliance costs, the Select Committee shifted that liability to the third party who receives the payment. The words "whether or not the person is a party to the contract" were included for precisely that purpose. Read in that light, the "loss" to which the payment relates includes the third party's own loss, and the GST liability follows the payment.
Walker J did not suggest the outcome was entirely satisfactory. She accepted the liquidators' illustration: a GST-registered plaintiff awarded $1 million retains the full sum if the defendant pays, but only $869,565 if the defendant's insurer pays. She acknowledged that the practical consequences suggest a lack of coherence. Nevertheless, her Honour found the statutory language ambiguous and resolved that ambiguity by reference to the provision's history and purpose. Mainzeal must therefore account for GST on the payment.
Who Bears the GST?
Clause 4.12 of the policy provided that where "the Insured" became liable to pay GST under s 5(13) on receiving an indemnity payment, QBE would indemnify it for that tax, in addition to the limit of indemnity. Mainzeal was an Insured Company under the policy, and it was Mainzeal that received the payment. On its face, the claim that the payment should be grossed up for GST appeared straightforward.
The Court took a different view. The policy defined "Insured" as each Insured Person or the Insured Company "as the case may require". The meaning of the term therefore depends on the claim to which the policy was being asked to respond. Here, the policy responded to the claim against the directors, and QBE made the payment on their behalf under the directors' cover. It did not pay under the company reimbursement limb of the policy.
It followed that the directors were "the Insured" for the purposes of cl 4.12, and Mainzeal was a third-party claimant that happened also to be named in the policy. As the judge observed, had anyone other than Mainzeal sued the directors, there would be no suggestion that the GST clause applied to that claimant.
The liquidators' further arguments did not alter that conclusion. The reference to s 5(13) in the clause served only as the trigger for the cover; it did not import the statute's focus on the recipient of the payment. Nor did the statutory charge make Mainzeal "the Insured". On the contrary, the liquidators needed to rely on the charge precisely because Mainzeal was not the party entitled to claim under the policy.
The result is that Mainzeal must account for GST on a payment held for the benefit of its creditors, without any reimbursement from QBE. On a straightforward 3/23 calculation of the $19.96 million payment, that represents approximately $2.6 million drawn from the funds available to creditors. The additional $1 million in respect of Mr Yan is likely to attract GST on the same basis, again without any top-up. Walker J also held that it made no difference that QBE may be entitled to an input tax credit on its payment.
Could the GST have been avoided?
QBE also advanced a further argument. It contended that, even if the GST clause applied, the liquidators could have avoided the GST altogether. The payment could have been made first to the directors, most of whom were not personally registered for GST, and then passed on to Mainzeal as compensation, which would not itself attract GST. QBE called evidence from its general counsel and from an independent GST specialist to explain how such a structure might have operated.
Walker J did not need to decide the point but indicated that she would have rejected the argument. Clause 4.12 is an indemnity that responds to GST payable. It imposes no obligation, akin to a duty to mitigate, on the insured to structure the receipt of payment to minimise its GST liability. Requiring that kind of inquiry before the clause could operate would substantially diminish its value.
The evidence also showed that the proposed two-step structure carried significant risks. Inland Revenue might treat the directors as having received the payment as agents for Mainzeal, in which case GST would still apply. It might also invoke the anti-avoidance provision in s 76 of the GST Act, with the potential for abusive tax position penalties. In addition, the liquidators would risk losing the protection of the statutory charge while the funds were held by the directors.
Key Takeaways
For Claimants and their Lawyers
Those acting for a GST-registered business suing an insured defendant should assume that any payment from the insurer to the extent it relates to a loss incurred in the course of the business, will attract GST under s 5(13). On the reasoning in this case, and on Inland Revenue's stated position, that applies whether the payment follows a judgment, a settlement or the enforcement of a statutory charge, and it reduces the net recovery by 3/23. Any settlement agreement should state clearly whether the sum is GST-inclusive.
For Liquidators
Recoveries against directors are frequently funded by D&O insurance and obtained through the statutory charge. The GST liability now reduces the funds available to creditors and should be factored into litigation funding decisions and reports to creditors.
For Insurers
A personal profit exclusion that depends on a "final adjudication" and on materiality to the adjudicated cause of action will be difficult to invoke where the underlying claim is for reckless trading or another negligence-based breach of duty. The court determining that claim has no need to make findings about personal gain and generally will not do so. Strong criticism of a director's conduct, however pointed, is not a substitute for such findings.
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