Legal

Mainzeal failed while parent made billions

Richina, the Chinese parent company of failed New Zealand construction company Mainzeal, owns assets potentially worth billions of dollars, according to information from the ongoing High Court hearing in Auckland. Investors in Richina, including Mainzeal directors Richard Yan and Dame Jenny Shipley, now have stakes worth millions - on paper at least. Yet despite significant loans from Mainzeal to Richina, no one could keep the New Zealand company afloat, or avoid losses to unsecured creditors of more than $115 million.

In 1980 a fresh-faced Chinese student arrived in Auckland, one of the first young people from Communist China to get a scholarship to the capitalist west after the end of the Cultural Revolution.

Yan Ciliang, or Richard Yan as he’s known in English, was 17 years old: bright, enthusiastic, optimistic, poor. The story goes that on arrival in Auckland the sum of his possessions was a Playboy-branded belt, a watch, a few clothes, a borrowed $50, and a scholarship to the University of Auckland.

Yan is now a wealthy businessman. A very wealthy businessman. On paper at least, Yan could be worth over $1 billion.

After leaving Auckland, spending time at the Harvard Business School and with Bankers Trust in New York and Hong Kong, Yan founded a company in China called Richina (short for Rich China), a company very hard to value, but now possibly worth (extrapolating from his own calculations which came up in the High Court last week) almost US$6 billion.

Richard Yan, and before him former New Zealand Prime Minister Dame Jenny Shipley, are spending hours on sunny October days being cross-examined in an Auckland court, because in 1995, Richina bought a controlling interest in New Zealand construction company Mainzeal.

The simplified version of a complicated story, which is gradually being teased out in the High Court over eight weeks, is that when times were good at Mainzeal - around 2004-2005 - the New Zealand company lent its Chinese parent around $3.2 million to buy a Shanghai leather business with significant property assets.

Property in China might have been booming, but New Zealand construction wasn’t - for Mainzeal at least. For most of the next almost 10 years, with Yan at the helm of Richina and on the board of Mainzeal, and Shipley chairing the New Zealand company and on the board of Richina, Mainzeal struggled, mostly loss-making.

Loans to the Chinese operations spiralled to more than $44 million, mostly unpaid. Meanwhile Mainzeal was hit with multiple leaky building problems, and a $22 million dollar loss on the Vector Arena project. It got into an expensive legal argument with manufacturing company Siemens and in February 2013 went into liquidation.

It owed unsecured creditors - many of them subcontractors working on Mainzeal projects - more than $115 million.

Hence Richard Yan being on the stand at the High Court - the first defendant in the high-profile case brought by Mainzeal liquidators BDO.

BDO wants to recover up to $75 million from Mainzeal directors, including Yan, Shipley, and ex-Brierley boss Sir Paul Collins.

In the 40 years since he first came to Auckland, Yan has lost some of his hair and gained near-perfect, lightly-accented English. He owns property in Auckland, he and his wife Tina have children who have attended top private schools here. But Yan still has a fresh-faced look about him, and in court repeatedly emphasises he’s still optimistic, enthusiastic - perhaps more than he should be, he says. It’s something his wife chides him for, he says.

He believed in Mainzeal right up until the end, he says.

“I uprooted my family, brought them here because I thought I could make a difference to Mainzeal,” he told the court under cross-examination by BDO’s lawyer Mark O’Brien. An $8 million dollar personal guarantee he gave BNZ was a sign of his commitment to the New Zealand company.

He also claims that a deal to repay part of the money owed to Mainzeal using imported construction materials was in the best interests of Richina’s Kiwi subsidiary.

“I was the last defender of Mainzeal. I genuinely, genuinely believed that by bringing Chinese building materials into New Zealand not only would you permanently solve the New Zealand company’s problems, but it would have a very promising future.”

He says if Mainzeal hadn’t run out of cash at the end of 2012, “I genuinely believe I would still own Mainzeal today”.

In court, O’Brien is sceptical, questioning Yan’s supposed belief in the NZ company, pointing to a 2006 document where Yan appears to doubt the future of the industry.

“I’ve always believed there’s no big future for a hard-nosed construction company anywhere in the world, let alone in a small market like New Zealand,” Yan says at the time.

And in the end he was right.

Mainzeal was kept afloat for years, in balance sheet terms, by Yan’s promise that Chinese assets would be made available to prop up the New Zealand company if necessary. However in the end, when push came to shove, the Chinese assets couldn’t be translated into cash to keep Mainzeal afloat - or pay its creditors.

Ironically, according to Yan’s own numbers, had Mainzeal’s original $3.2 million loan to its parent Richina been a share investment, it could now be worth $900 million. Shipley’s US$50,000 investment could be worth US$14.5 million ($22 million), on paper at least. And Yan’s Richina stake is possibly worth US$1 billion+. Somewhere there, creditors must be thinking, there’s more than enough to pay us back.

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