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