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