Hanover: Securities Commission v. Hotchin

Exercising its new powers to make pre-emptive strikes, the Securities Commission has gained a court order freezing the New Zealand assets of Hanover Finance director, Mark Stephen Hotchin. This was done without first warning Mr Hotchin that legal action was underway.

The Commission is investigating Hanover Group, in particular net borrowings from the public of some $32 million from early 2008 up to the collapse of the Group. It is alleged prospectuses issued to support this borrowing did not comply with the Securities Act and that Mr Hotchin is responsible.

The Court was told that many of Mr Hotchin’s New Zealand assets were for sale and it appeared that Mr Hotchin was taking steps to shift overseas. News media investigations tracked Mr Hotchin and his family to Queensland.

Freezing orders apply to New Zealand assets only. They don’t apply to assets held outside the country.

Subsequent to the freezing order, Mr Hotchin asked the terms be varied. In particular, he wanted sufficient funds to pay pressing bills and meet weekly outgoings stated to be approximately six and half thousand dollars weekly. He also asked that personal possessions in Auckland including a Mercedes and a Porsche Cayenne be released for shipping to Queensland.

Asked by the Court to list his assets and liabilities, Mr Hotchin said this would be difficult to complete quickly, particularly since his accounting advisers, Ernst & Young, were not willing to assist because he had not paid the firm for previous work done.

Mr Hotchin did disclose some offshore bank accounts: $A240,000 held in Australia and a few thousand pounds in a UK bank account.

The Court allowed clothes, photographs and personal effects to be shipped. But the motor vehicles, furniture, art works and jewellery were to remain in New Zealand pending a more detailed court hearing in February 2011.

The court refused to release frozen funds. Outstanding bills and weekly expenses could be met out of money held by Mr Hotchin in Australia.

Securities Commission v. Hotchin – High Court (21.12.10)

01.11.002

Leaky homes: North Shore City v. Sunset & Byron

Local councils must accept responsibility for negligent inspection of leaky homes, ruled the Supreme Court.

North Shore City, now part of Auckland City, failed in a concentrated attack against a legal principle holding it liable for repair costs when a negligent council inspection fails to identify that a residential building under construction might in the future leak.

This legal principle arose from a 1990s court case against Invercargill City Council.

North Shore’s primary argument was that liability applied only to the construction of “modest” stand-alone residential dwellings, not high-rise apartments and not multi-unit dwellings.

The Supreme Court ruled there was no good reason to depart from the 1990s rule. Home-owners should expect the rule would apply and not be retrospectively overturned. Councils owe a duty to take care when inspecting homes in the course of construction.

It did not matter that the leaky residential building is a stand-alone house or part of a block of apartments.

Not only is the first buyer entitled to sue, but also subsequent purchasers who have to bear the cost of repairs.

The multi-million cost of repairing leaky homes will fall on ratepayers to the extent that a local authority did not have insurance cover for its losses or was not able to recover a contribution from architects, engineers or builders held partly to blame in particular cases.

North Shore City v. Sunset Terraces & Byron Avenue – Supreme Court (17.12.10)

01.11.003

Share valuation: Fong v. Wong

Company directors purchase of shares from other shareholders are required to be at “fair value”. A discount to the price may be appropriate where shareholders bought out hold a minority interest, but this is unlikely where it is a closely-held company.

Multiple court hearings followed inter-generational dissension within an Asian family about future direction for their companies: a son-in law wanted to borrow heavily for further expansion; his father-in-law didn’t. To avoid an impasse it was agreed that the older generation would buy out the younger generation, leaving them cashed up to pursue their own interests, with a debt of $500,000 owed to the father-in-law to be deducted from the price paid.

Pave Capital Ltd held their collective investment interests, with the younger generation holding a 32 per cent interest. A buy-out valuation could not be agreed.

Company law requires the father-in-law as a director of Pave Capital to pay “fair value” when buying out other shareholders.

The father-in-law argued that normal valuation principles should be applied to establish fair value: the minority holding should be reduced in value because the younger generation’s 32 per cent shareholding did not give any measure of voting control.

The court did not agree. This was a closely-held family company with a small number of shareholders: it operated like a partnership. In these cases, no minority discount should be applied.

Without a minority discount, the younger generation’s shareholding is worth more – estimated at an extra $600,000.

Fong v. Wong – Supreme Court (13.12.10) & Court of Appeal (16.07.10)

01.11.001

Blue Chip: GE Custodians v. Bartle

Just because a commercial transaction runs at loss doesn’t mean that it is an “oppressive” transaction justifying court intervention. And it is not for lenders to investigate the commercial wisdom of a borrower taking out a loan, particularly where the borrower has received independent advice.

In what is a test case on the legality of funding lines set up to finance investments promoted by the Blue Chip Group, the Supreme Court has ruled mortgages securing loans can be enforced. This will result in elderly investors losing their family homes following the collapse of prices in the Auckland CBD apartment market.

Blue Chip targeted asset rich/cash poor elderly investors in what it described as joint venture development projects. Investors were encouraged to mortgage their family homes, buying into deals whereby they financed the construction of inner city Auckland apartments. The “profit-share” formula buried in the fine print saw Blue Chip entitled to some 90% of any realised capital gain on the sale of finished apartments, while not sharing in any capital losses.

Blue Chip sales staff smoothed the way for investors by helping complete loan applications for funding from independent third party financiers and by steering investors towards a legal adviser who was recommended as “understanding” the Blue Chip way of completing property developments.

Touted apartment valuations proved to be grossly optimistic. There was evidence of completed apartments selling for less than 50 per cent of pre-construction valuation. Realisations did not cover loans raised by investors to fund the construction. As a result, investors’ homes were forced into mortgagee sales.

The Supreme Court was asked to reopen loan contracts under the Credit Contracts and Consumer Finance Act 2003 on the basis that the loans were “oppressive”. This required evidence that the loans did not measure up to reasonable standards of commercial practice.

In particular, it was argued that it was not reasonable to enforce contracts where elderly pensioners on limited income had taken out substantial mortgages for terms of 25 to 30 years.

The Supreme Court, in this case, ruled there was no evidence of oppressive behaviour. Asset based financing (as distinct from cash flow based financing) is a perfectly legitimate form of financing. There was nothing in the documentation supplied to GE Finance in this case which signalled that the transaction was anything other than a normal commercial application from an investor seeking to profit from a real estate development.

The Supreme Court said there is no obligation on a financier to go beyond the information provided to investigate the commercial soundness of the proposed development or the personal circumstances of the borrower. To do so, said the court, would be economically inefficient.

GE Custodians v. Bartle – Supreme Court (03.12.10)

12.10.001

Bankruptcy: Williams v. Simpson

First use of legislation enacting cross-border insolvency rules shows you can run but not hide: a Lloyd’s name bankrupted in England has been traced to New Zealand with gold bullion and foreign currency valued in excess of two million dollars seized to pay his creditors.

The High Court was told that London psychiatrist, Alan Geraint Simpson, was forced into bankruptcy in England over his failure to pay a debt plus accrued interest of some £242,000. This followed losses on insurance underwriting. So-called “names” at Lloyd’s form part of underwriting syndicates that act like insurance companies. Individual names can be personally liable for insurance losses.

Evidence was given that Mr Simpson claimed after his bankruptcy to have no personal assets of any significance and said he was being provided with a car and house in Hamilton by a trust called the BV Adams Trust. He was proving evasive, giving as his UK contact address a Citizens Advice Bureau in Hertfordshire.

UK authorities suspected he was hiding substantial assets in New Zealand. In particular, there were rumours that Mr Simpson was heavily involved in speculative bullion trading.

Using the Insolvency (Cross-border) Act 2006, UK authorities asked for a court order to search Mr Simpson’s Hamilton residence.

The 2006 Act puts into New Zealand law an international treaty designed to assist the cross-border pursuit of assets held by bankrupt individuals: a United Nations-brokered Model Law on Cross-border Insolvency.

The High Court issued a search warrant under strict terms: officers of the New Zealand insolvency service were authorised to enter Mr Simpson’s residence, in the presence of a police officer, to search for and seize any gold bullion or precious metals found there, with the process to be videotaped in its entirety.

Their subsequent report to the court disclosed safes and secret compartments holding bullion and foreign currency valued at over two million dollars. On the court’s order, these liquid assets are being held in safekeeping at the Westpac Bank in Auckland.

Subsequent to the search and seizure, the High Court instructed the New Zealand insolvency service to act as if Mr Simpson had been bankrupted in New Zealand, in particular to establish the extent of his assets and liabilities in New Zealand. Inland Revenue in particular is expected to have an interest in any taxable profits made by Mr Simpson.

Once the extent of New Zealand creditors has been determined, the High Court will be asked to rule on the distribution of the assets held by Westpac.

Williams v. Simpson – High Court (17.09.10 & 12.10.10)

10.10.001

Receivership: Low v. Body Corporate 384911

Receivership of Lighter Quay, the company leasing Auckland waterfront property to Westin Hotel, resulted in an arm wrestle for control of income received by Lighter Quay from operation of the hotel. Investors who funded construction of the hotel are trying to put a court-appointed administrator in charge.

Appointment of an administrator was put on hold pending a meeting of investors.

Westin Hotel’s rights to operate its hotel sits at the end of a complicated chain: freehold title to the land is held by a company called Viaduct Harbour; a lease over the land is held by Melview Viaduct Harbour; this leasehold interest is subdivided into residential units which have been sold to investors; and the units are sub-leased to a company called Lighter Quay which in turn contracted Westin to operate the hotel.

Many of the individual investors are offshore, particularly from Singapore and Malaysia. Their collective interest is represented by a Body Corporate, in which investors have voting rights much like a company.

Investors complain of getting a poor deal from the start of the project. They were promised a guaranteed rental for the first three years of their investment. By July 2010, overdue guaranteed rentals were in the region of $3.5 million. A group of 92 investors got together, getting a court order to cancel their sub-leases to Lighter Quay. This would allow them to take personal control of their rooms then in use for the Westin Hotel.

Events moved quickly with Lighter Quay put into receivership by a secured creditor.

The Body Corporate was at risk because ground rentals due to Viaduct Harbour were $150,000 in arrears. Insurance cover was at risk of lapsing because the annual premium was unpaid. These bills were unpaid because investors were unwilling to pay levies due to the Body Corporate. Instead, they paid the money into their solicitors’ trust accounts claiming they didn’t trust those in charge of the Body Corporate to pay the money across. Investors have two representatives only on the five member Body Corporate management committee.

Justice Heath said the case looked to be an instance of high level brinkmanship: with investors and the Lighter Quay receivers tussling over income from the continuing operation of the Westin Hotel.

He ruled it was premature for the court to intervene when the parties still had a chance to resolve their differences through a forthcoming annual meeting of Body Corporate investors.

Justice Heath warned that he would have no hesitation in appointing an administrator to handle Body Corporate affairs if the annual meeting was disrupted by technical arguments about meeting procedure.

Low v. Body Corporate 384911 – High Court (02.09.10)

09.10.002

Telecoms: Commerce Commission v. Telecom

Telecom holds a dominant position in the telecommunications industry, but it is allowed to fight its corner as fiercely as any other telecoms provider. Provided it uses strategies available to any non-dominant supplier, Telecom cannot be said to be abusing its market position in breach of the Commerce Act.

The Commerce Commission lost its long-running litigation against Telecom in which it alleged Telecom’s 1999 introduction of the 0867 prefix to control internet usage was a misuse of its dominant position.

The Supreme Court ruled there was no evidence that Telecom’s behaviour was any different to that expected of a non-dominant supplier responding to market dynamics.

Evidence was given that tensions between suppliers grew as Clear Communications began to expand its services. Internet penetration meant shorter residential phone calls were being replaced by much longer internet dialup connections.

This upset the revenue balance between Clear and Telecom because most of the residential internet callers were on the Telecom network and their traffic to service providers on the Clear network was not only causing congestion on Telecom’s lines but also resulting in substantial “termination” charges from Telecom to Clear. “Termination” charges arise because the network on which a call originates must pay a per minute charge to the network on which the call is received (or terminated).

Clear exploited these changing dynamics by sharing its increasing volume of termination charges with internet service providers on its network, reducing costs to users and encouraging them to log on for even longer periods – to Telecom’s further cost.

Telecom responded by introducing its “0867 package”. Customers who did not use either the 0867 prefix for internet dialup, or did not use Telecom’s own internet service provider (Xtra), were required to pay two cents per minute for internet usage beyond a free allowance of ten hours connection per month. Use of the 0867 prefix was justified as a means of managing internet traffic.

The Commerce Commission acknowledged that Telecom was justified in taking steps to manage internet traffic on congested lines, but claimed that the method used was anti-competitive and amounted to abuse of its dominant position as owner of the fixed line network.

The Supreme Court said that the Commerce Act prohibits uses of market power that damage competition, not market power that damages competitors. Nothing in the Act prohibits vigorous legitimate competition by a dominant firm which may damage competitors but does not damage competition.

The Commerce Commission had failed to prove that because of a fear of losing retail customers, Telecom would not have introduced the 0867 prefix if it had not been dominant.

Commerce Commission v. Telecom – Supreme Court (1.09.10)

10.10.002

Bridgecorp: Davidson v. Registrar of Companies

The High Court ruled that directors of a finance company must have some degree of financial literacy as it upheld a two and half year prohibition order made against Bridgecorp director, Auckland lawyer, Bruce Nelson Davidson, preventing him from acting as company director or charity trustee.

Described as naïve and trusting, Mr Davidson claimed he was hoodwinked by managing director Rod Petrecivic. Bridgecorp collapsed in mid-2007 owing some $486 million. Investors might expect a return of ten cents in the dollar.

Bridgecorp suffered a punishing liquidity crisis over its final twelve months, with declining investment renewals, falling gross margins and growing loan impairments.

There was evidence that senior management became selective in repaying term deposits on maturity, favouring those due to clients of investment advisers who would probably recommend reinvestment. Litigation has followed allegations that Mr Petrecevic took company resources without authority and that substantial related party lending benefited executive directors to the company’s detriment.

Securities Act charges have been commenced against all directors, including Mr Davidson, alleging Bridgecorp issued misleading prospectuses when borrowing from the public.

Mr Davidson, amongst other directors, was banned by the Registrar of Companies from acting as a director. Power to ban is an administrative power, designed to stop incompetent directors from continuing in business.

Mr Davidson challenged use of the ban against him, saying he acted honourably throughout but was misled by fellow Bridgecorp directors.

Upholding the ban, Justice Miller said Mr Davidson is a man of integrity with an admirable record of community service but had acted unwisely.

The court ruled that power to prohibit is intended to set standards of performance for company directors as well as protection of the public.

Justice Miller said Mr Davidson was unwise to rely on more financially literate directors, particularly when evidence of insolvency mounted and the unreliability of Mr Petrecivic became apparent.

Davidson v. Registrar of Companies – High Court (27.08.10)

09.10.003

Pollution: Thurston v. Manawatu-Wanganui Regional Council

Described as polluting for profit, a landowner was fined nearly $175,000 after pouring industrial waste into a local river. This after signing a lease where he agreed to accept responsibility for waste management from the property but then found that cost of disposal was exceeding the rent coming in.

The court was told the main problem concerned waste from a meat processing plant based at Longburn, near Palmerston North. The plant was leased to a Goodman Fielder subsidiary. The terms of the lease, which runs to 2035, required the landowner to bear the cost of waste removal. The landowner’s company received monthly rent of $12,300, but was having to pay between $20,000 and $30,000 per month to truck industrial waste to a treatment plant run by a local council.

Council staff became suspicious when deliveries to the treatment plant stopped. On investigation, council staff found raw waste was being dumped illegally into an old pipe leading to the Manawatu River.

At council’s insistence, the landowner has had to build a five kilometre pipeline, at a cost of some $2.6 million, to transport waste direct to the local treatment plant.

In the District Court, the landowner and his company were convicted and fined for illegal waste discharges from both the Longburn plant and a dairy farm operated by the landowner personally.

On appeal, the High Court refused to reduce the fines.

Justice Miller described the case as a clear example of polluting for profit; the landowner was criticised for the calculated nature of the offending, the attempt to evade accountability by misleading council staff and failure to respond to abatement notices.

Thurston v. Manawatu-Wanganui Regional Council – High Court (27.08.10)

09.10.001

Leaky homes: Auckland City v. McNamara

Local councils bear no responsibility for leaky homes when developers choose to use independent building certifiers rather than paying for a council inspection. This applies even where the independent certifier has failed to comply with the prescribed rules when assessing for weather tightness. A council is not obliged to check on a registered certifier’s competence.

Litigation followed the purchase of an Auckland property after purchasers, the McNamara Family Trust, found it leaked. Built in 2004, the developer contracted Approved Building Certifiers to complete certification of the property as then required by the Building Act 1991.

After repairing leaks, the Trust sought to recover its loss suing some 18 defendants for negligence, including the Council.

The Council took legal action to be struck out of the case, saying it had no liability.

The Court of Appeal agreed. It said the Building Act gave house builders a choice between the use (in whole or in part) of a private certifier or the use (in whole or in part) of the relevant local authority. Where a private certifier is chosen, a council assumes no responsibility for the work. A council merely carries out the administrative act of recording the fact that a compliance certificate has been issued.

In this case, Approved Building was listed as an approved certifier on a register maintained by the Building Industry Authority. As from December 2002 the standard applying to weather tightness was strengthened. It was alleged that Approved Building issued a compliance certificate when the building did not comply with this tougher standard.

Auckland City v. McNamara – Court of Appeal (03.08.10)

08.10.001

Tax Avoidance: CIR v. Penny

Orthopaedic surgeons use of family trusts to transfer profits to family members has been ruled tax avoidance by the Court of Appeal. By exploiting the difference between the 33 percent tax rate for a family trust and the then 39 per cent marginal tax rate on personal income, one surgeon made tax savings of about $65,000 for the three tax years in question; the other, tax savings of some $103,000.

The effect of the court ruling is that these tax savings will be taxed as the personal income of each surgeon.

Evidence was given that the two surgeons split their work between salaried employment with the Canterbury District Health Board and private practice. Each was earning gross fees in private practice of some $1.1 million dollars in a typical year. Net income for each from private practice over the period 1999-2004 varied from year to year: in a range from $567,000 to $832,000.

In 2000, acting on professional advice in anticipation of the top marginal tax rate increasing to 39 per cent, the two surgeons restructured their private practices. Their respective businesses were sold to newly-formed companies with a family trust as the primary shareholder. On the surface there was no day-to-day change: patients were still referred to the two surgeons personally who continued to practise as previously. But net income derived from the businesses was attributed to the family trusts after payment of a salary to the two surgeons. Annual salaries were set within the range $100,000 to $125,000. It was agreed that these payments were below the level of salary each could command after arms-length negotiations in a commercial context.

Inland Revenue argued that payment of an artificially low salary amounted to tax avoidance. It enabled income otherwise taxable in the surgeons’ hands to be diverted to family members on lower marginal tax rates.

The surgeons argued tax law has no rules governing levels of remuneration – other than assessments where family members are being paid inflated salaries in family companies for minimal work.

While taxpayers decide their preferred legal structure for business activities, the Court of Appeal said that does not stop the mechanism used amounting to tax avoidance if the arrangements are artificial, contrived or amount to a pretence.

In this case, the legal structure used was designed to exploit the difference in marginal tax rates for the personal benefit of the two surgeons and their families. Income was generated by the surgeons own personal skills and disposition of net income was controlled by the same surgeons through their control of both their companies and their family trusts.

The majority in the Court of Appeal ruled this practice amounted to tax avoidance.

The other judge, Justice Ellen France, decided otherwise: the surgeons had taken advantage of a difference in tax rates in a way that is within the limits of acceptable commercial practice.

CIR v. Penny – Court of Appeal (04.06.10)

06.10.001

Employment: Air Nelson v. NZ Amalgamated Engineering

Having a work pattern of contract staff doing line maintenance on aircraft in conjunction with employees saved Air Nelson from allegations of strike-breaking when the contract staff carried on while employees were on strike.

The Employment Relations Act 2000 stops employers using strike-breakers to fill in when staff are on strike or locked out. Use of strike-breakers was at issue when Air Nelson line maintenance staff were on strike in June 2007.

Line maintenance work involves servicing aircraft between flights and carrying out minor repairs. Air Nelson primarily used its own staff for the job, but employed contract staff for about two per cent of the workload. They carried on working during the strike.

The legal debate was whether contract staff doing the actual work of striking employees were strike-breakers, or whether contract staff who habitually did the work were not strike-breakers despite increasing the volume of work they did.

The Supreme Court ruled that continued use of contract employees who habitually did line maintenance work was not in breach of the Act.

Air Nelson v. NZ Amalgamated Engineering – Supreme Court (17.05.10)

05.10.003

Insurance: Ludgater Hldgs v. Gerling

New Zealand rules allowing insurance claims directly against the policy when the insured is insolvent cannot be used where the insolvent company and its insurer are in Australia.

Auckland property company, Ludgater Holdings Ltd claims it has suffered losses of some $267,000 after a fire in February 2006, alleging a defective fitting in a fluorescent light manufactured by Australian company Atco Controls was to blame. Atco is in liquidation.

Atco has product liability insurance with Australian company Gerling Australia Insurance.

Ludgater sued Gerling direct, claiming on the insurance policy by using section 9 of the Law Reform Act 1936. This gives claimants a charge on the proceeds of any insurance payout. The section is designed to allow direct access to insurance moneys where the insured has subsequently become insolvent.

The Supreme Court ruled that section nine does not have extra-territorial effect. Courts are hesitant to impose local laws in a foreign jurisdiction. It is not for New Zealand to impose its laws on litigants in Australia, and vice versa.

It is still open for Ludgater to take the more expensive step of taking legal action across the Tasman. Australia does have rules allowing direct claims against insurance policies when the insured is insolvent.

Ludgater Holdings v. Gerling Insurance – Supreme Court (11.5.10)

05.10.002

Blue Chip: Bartle v. GE Custodian

Blue Chip loan agreements entered into by Mr & Mrs Bartles, a retired Whangarei couple, have been ruled oppressive by the Court of Appeal. The case goes back to the High Court for a decision on the extent to which the agreements should be amended. The Bartles could still lose their Whangarei home after a disastrous investment in the Blue Chip scheme.

To get working capital for its property developments, Blue Chip offered “joint venture” arrangements to investors; a deal typically offered to cash-poor retired couples whose homes were often mortgage free.

In return for funds advanced, investors were offered the chance to share in any capital gain from the development and sale of apartments while being paid an income stream from rent received from the property. To get cash for investment, investors were encouraged to mortgage their debt-free homes. Income from rents was touted as being sufficient to pay interest on the mortgage prior to the sale of the apartment and cashing up of the “joint venture”.

The reality did not turn out as well as expected: the apartments being sold to investors were inflated in value; a falling market reduced realisations; and there was no strong rental demand for the apartments. Blue Chip companies were described as clipping the ticket at every stage of the transaction.

In September 2006, the Bartles agreed to pay $552,000 to purchase an apartment in a building being refurbished in Symonds Street, Auckland. It was sold in July 2009 for $245,000. In the interim they received one rent payment: $1700. The investment was funded with loan advances totalling $630,000 from GE Custodians Ltd, secured over both their Whangarei home and the Auckland apartment.

The Bartles solicitor, Mr Jonathan Mathias, was ordered by the High Court to pay damages for negligence. He is bankrupt.

Faced with a mortgagee sale of their Whangarei home, the Bartles argued that the mortgage transaction should be reopened under the Credit Contracts and Consumer Finance Act 2003 as being oppressive. GE Finance argued the Blue Chip companies were not acting as its agent when they set up the transactions. The financier argued it was an innocent bystander, entitled to enforce a legitimate mortgage transaction. It should not be prejudiced by any alleged oppressive conduct by the Blue Chip companies. GE was described as having “out-sourced” its loan originating operation – Blue Chip companies set up the transactions and presented GE with completed paper work from investors seeking a loan. It was alleged a Blue Chip representative slyly amended the Bartles application to change their status from “retired” to “self-employed investor” in order to facilitate the loan approval.

The High Court ruled that the GE mortgage could be enforced.

The Court of Appeal ruled the mortgage should be reconsidered. The 2003 Act allows a court to reopen credit transactions where there has been oppressive behaviour: behaviour which falls outside current commercial practice.

The loan was held to be oppressive because: GE took no risk (the claimed asset values comfortably exceeded the loan advance and GE holds insurance for any shortfall); the loan was spread over a term of 25-30 years (being a $630,000 loan to a couple in their mid-60s having an annual pension income of about $22,000); and while the Bartles had access to supposedly independent advice, Mr Mathias was described as a “tame” solicitor recommended by Blue Chip to intending investors.

While GE out-sourced the loan origination to Blue Chip companies, the Court of Appeal said it could not avoid potential liability under the 2003 Act by delegating this work.

Bartle v. GE Custodians – Court of Appeal (6.5.10)

05.10.001

Real Estate: Property Ventures v. Regalwood Hldgs

The shortcut summary judgment procedure used to enforce fixed sum contracts cannot be used for property transactions where the vendor is in breach of contract and the extent of the breach has not been quantified.

In 2006, Regalwood Holdings was disputing with Property Ventures settlement of a contract to buy a Christchurch property at a previously agreed price of $1.5 million. Property Ventures argued that the vendor, Regalwood, did not have the building up to Building Act standards, as required by the terms of the contract. Regalwood argued it was entitled to the full purchase price immediately, regardless of any alleged breach, and a cash adjustment could be made at a later date if found due.

The court was told that Property Ventures had plans to on-sell the property to the Christchurch City Council, but this fell through when the Council withdrew: the Council had blocked a building consent for alterations by Regalwood because extra earthquake strengthening was considered necessary.

As an opening shot in the legal war, Regalwood sued Property Ventures, using the High Court summary judgment procedure, seeking a court ruling that it had validly cancelled the sale because Property Ventures had failed to stump up the purchase price due on settlement date.

The Supreme Court ruled that there was no valid cancellation. In order to cancel, Regalwood must itself have been in a position to settle. It wasn’t, because of an alleged failure to have the building in compliance with the Building Act. When a vendor is in material breach of a contract, it cannot force the purchaser to pay the full amount due and argue about damages later.

It is back to the High Court for arguments over whether Regalwood is in material breach, and if so, what are the consequences.

Property Ventures v. Regalwood Hldgs – Supreme Court (28.04.10)

05.10.004

Price Fixing: Poynter v. Commerce Commission

An Australian manager of the Fernz Group has been removed by the Supreme Court from price-fixing litigation brought by the Commerce Commission. Living overseas and having no physical link with New Zealand operations meant he did not come within the Commerce Act net and the Commission’s allegations of price fixing.

The Commission has been pursuing companies, including Fernz Group, for allegedly fixing prices and divvying up market shares in relation to the wood chemical-treatment business. Mr Poynter was for a brief period a senior manager of Fernz in Australia. He was one of a number of managers and employees sued.

Mr Poynter challenged the right of the Commerce Comission to take legal action against him given that he had never lived in New Zealand and that there were no allegations that he had engineered any price-fixing from offshore.

The Commission argued offshore executives could be potentially liable: either as part of a conspiracy or by having New Zealand employees acting on their behalf.

The Supreme Court ruled that even if a manager had conspired while overseas to fix prices in New Zealand, the manager could only be sued for conspiracy if and when physically visiting New Zealand.

And, even if New Zealand employees were acting on an offshore manager’s instructions, they were not acting on behalf of the manager – they would be acting on his instructions on behalf of the company. Consequently, the off-shore manager could not be liable for their acts.

Poynter v. Commerce Commission – Supreme Court (16.04.10)

05.10.006

Mortgage: Totara Investments v. Crismac

Further fallout from the Digi-Tech tax scheme has left a financier high and dry. A financier could not use a power of attorney clause in mortgage documents to extend its security over other un-mortgaged assets after the initial security proved worthless.

Crismac Ltd fronted the litigation as representative of borrowers who had invested in a project promising substantial tax savings. Tax benefits evaporated after the scheme was successfully challenged by Inland Revenue as tax avoidance.

Totara Investments funded investors like Crismac into the Digi-Tech scheme. Crismac was given a limited recourse loan, with Totara’s rights of recovery limited to prescribed Digi-Tech scheme assets. When these assets proved worthless, Totara used a power of attorney clause in the loan documents to create a mortgage over other Crismac assets and then proceeded to appoint a receiver to realise these assets.

The Supreme Court ruled this was invalid. The primary clause in the loan documents made it clear that it was a limited recourse loan with a right of recourse over specified assets only. A secondary clause creating a power of attorney in favour of Totara could not be used to seize further assets.

Totara Investments v. Crismac Ltd – Supreme Court (16.04.10)

06.10.002

Maritime: Tasman Orient v. NZ China Clays

While the ship captain’s behaviour was described as “outrageous”, insurers of the Tasman Pioneer were held not liable for cargo losses following a grounding in the Sea of Japan because a multi-million dollar legal claim focussed on the captain’s motives rather than his behaviour.

Litigation followed the 2001 grounding of the Tasman Pioneer during a heavy rain storm. The captain was taking a shortcut through a narrow subsidiary channel in the Sea of Japan during a voyage from Yokohama to Busan in Korea. Rather than calling the coastguard immediately for assistance, the captain sailed on at full steam for nearly three hours to reach the main channel before anchoring and contacting emergency services.

Cargo interests looked to hold the shipping line responsible for losses.

Risk allocation for marine risks is governed by an international convention: the Hague-Visby Rules. Shipping lines are responsible for “commercial fault”: seaworthiness and manning at the commencement of the voyage. Cargo interests take the risk of “nautical fault”: acts and omissions of crew during the voyage. But liability for nautical fault can be sheeted back to the shipping line where actions of the crew were carried out “recklessly and with the knowledge that damage would probably result”.

The Supreme Court accepted it was arguable that continuing to sail on after the grounding could amount to reckless navigation. But that was not what the legal papers before the court set out.

Rather, the legal claim stated that the captain’s actions were intended to cover up the circumstances of the grounding and to absolve himself from blame. There was evidence that the ship’s chart was altered to hide the actual course travelled and a story was concocted that the ship had hit a submerged container.

Motive alone did not impose liability on the shipping company for nautical fault.

Cargo interests had to recover losses from their own separate insurers: a total exceeding NZD twenty million.

Tasman Orient v. NZ China Clays – Supreme Court (16.04.10)

05.10.005

Leaky homes: 'Byron Avenue'

Where Council inspectors have failed to pick up deficiencies during a building’s construction, a Council is liable for the cost of repair even where it later has second thoughts and refuses to issue a certificate of compliance.

North Shore City was held liable in negligence over inadequate inspections during construction of a 14 unit residential development in Takapuna. The Council made nearly 100 inspection visits in the course of construction and was on the brink of issuing a certificate of compliance on completion when it was advised parts of the exterior plaster cladding were bubbling. This indicated moisture was leaking through joints between windows and the cladding. No certificate was issued.

The Court ruled that purchasers are entitled to rely on a Council to properly carry out progress inspections. This ensures faults can be identified and remedied before the building is closed in.

Purchasers were entitled to recover damages from the Council for cost of repairs.

In some instances, purchasers were aware there were cladding problems before they were legally committed to the transaction. These purchasers were held partly to blame for their losses and damages were reduced by up to 25 per cent for contributory negligence.

In one case, the purchaser’s lawyer had been negligent in failing to tell her that she could get information from the Council about the issue of a certificate of compliance. The lawyer was negligent, but the purchaser had to accept responsibility for this negligence and also accept a reduction of 25 per cent in the damages payable.

‘Byron Avenue’ – Court of Appeal (22.03.10)

08.10.003

Leaky homes: 'Sunset Terraces'

Council liability for leaky homes extends beyond standalone dwellings to include multi-unit apartments. Attempts by North Shore City to limit its liability failed in the Court of Appeal.

At issue was liability for replacing rotting timber framing and the cladding on a 21-unit two-storey residential development in Mairangi Bay. Historically, the courts have only allowed damages for a property’s loss of value where the loss relates to public health issues – dwellings must be capable of human habitation.

The Court ruled that Building Code rules designed to prevent homes leaking are intended to ensure dwellings are fit for habitation over at least a 50 year period. This brings contemporary “leaky home” problems within the historical rule. It made no difference whether the residence is a standalone building or a multi-unit development.

The Court further ruled that Council liability for homes built in breach of the Building Code applied not only to the first buyer, but also extended to subsequent purchasers of a leaky property.

‘Sunset Terraces’ – Court of Appeal (22.03.10)

08.10.002

Fair Trading: Red Eagle Corporation v. Ellis

Having a reputation for good business judgment and integrity means liability follows for honest but misleading statements made without qualification or reservation. Two Auckland businessmen fell out when a loan went sour.

The Supreme Court was told that Auckland businessman, Mr Tony Falkenstein, was approached by a longtime business acquaintance, Mr Rick Ellis, for short-term development finance. Mr Ellis was assisting a Sydney woman in setting up a paua farm in Singapore. She had asked him to source a three month $250,000 loan to fund the closing stages of the project.

When approaching Mr Falkenstein for assistance, Mr Ellis told him the woman owned substantial Sydney real estate having a net worth of some two million dollars.

At Mr Falkenstein’s request, Mr Ellis obtained details of her assets and liabilities which appeared to confirm the substance of her claimed net worth. Mr Ellis did not personally check the accuracy of the information provided from Australia and did not tell Mr Falkenstein that the information was unverified.

Loan documents were signed by the woman and an unsecured advance for $250,000 handed over. The loan was not repaid, the Australian woman was bankrupted and Mr Falkenstein found out that she did not own the properties she claimed to own.

He sued Mr Ellis, alleging a breach of section 9 of the Fair Trading Act 1986: misleading or deceptive behaviour.

The court said Mr Falkenstein advanced the loan because past experience showed that he could trust Mr Ellis’ integrity. Mr Ellis had initiated discussions about the loan. Mr Falkenstein relied primarily on the information provided by Mr Ellis about the value of the Sydney properties. The woman provided a schedule of her (supposed) assets and liabilities which appeared to confirm the accuracy of what Mr Ellis was saying. This schedule alone was not the reason for making the loan.

The Supreme Court ruled that statements made by Mr Ellis about the borrower’s financial position were misleading. He was liable to make good Mr Falkenstein’s losses.

However, the amount to be recovered was reduced by 50 per cent. The court said Mr Falkenstein could have better protected his position by taking steps to find out who did own the properties.

Red Eagle Corporation v. Ellis – Supreme Court (12.03.10)

12.10.002