Tax: Tannadyce Investments v. CIR

It was an abuse of process for a taxpayer to try and circumvent the prescribed tax disputes process by claiming Inland Revenue was refusing to disclose records it was holding. In refusing judicial review of Inland Revenue’s behaviour, the Supreme Court ruled the taxpayer did not specify how it was in any way prejudiced by Inland Revenue conduct.

Tannadyce Investments has been in a long running dispute with Inland Revenue. Controlling shareholder of the Christchurch-based company was David Ian Henderson.

The court was told Tannadyce claimed Inland Revenue was holding financial records needed by the company to file its tax returns for the years 1993-1998.

If Inland Revenue were acting in bad faith, withholding documents it knew a taxpayer required, judicial review is available to hold officials to account for an abuse of power. The Supreme Court ruled this was not such a case.

In March 1999, Inland Revenue issued Tannadyce with “nil” assessments for the tax years in question. The company responded with what it called a “global return” for these tax years claiming tax losses of $1,539,733. Inland Revenue argued that a “global return” does not comply with the statutory requirement to file returns for each tax year. It reissued its “nil” assessments, requiring Tannadyce to follow the normal tax disputes process to prove its claimed tax losses. In subsequent tax years, Inland Revenue disallowed the claimed tax losses as losses carried forward.

Tannadyce said it could not use the tax disputes process because Inland Revenue was holding all necessary records and was refusing to release them. Tannadyce stood by its global return.

The Supreme Court ruled that Tannydyce failed to show it was not practically possible for the normal rules to be followed. Its global return managed to claim a loss for the six tax years down to the last dollar. It is perfectly plain, said the court, that Tannydyce had sufficient information and records to file a global return. It should have been able to apportion this global figure between the various tax years, using reasonable estimates where needed.

While the claimed losses collectively covered six years, there was evidence that Tannydyce ceased trading in 1992 having traded for no more than 18 months at most.

Tannadyce Investments Ltd v. CIR – Supreme Court (20.12.11)

12.002

Blue Chip: re Northern Crest Investments

Australian investors needed High Court approval to support their claim to three million dollars used to prop up Blue Chip operations in Australia just before the company went into liquidation. New Zealand based liquidators had their doubts as to whether the money was ever available for use by the insolvent Australian Blue Chip company.

With Blue Chip operations in New Zealand going down the gurgler, promoter Mark Bryers set up shop in Australia with a company later named Northern Crest Investments. The company was listed on the Australian Stock Exchange (ASX) in 2006. The court was told some $A22 million was invested in the company by Manifest Capital Management Pty Ltd acting as a conduit for a number of investors.

In February 2008, Northern Crest was suspended from trading on the ASX. Attempts to rescue the company became problematic when Macquarie Bank withdrew previous offers of funding. With its large investment in Northern Crest, Manifest became deeply involved in refinancing negotiations. It agreed to provide $A3 million to help the company through its liquidity difficulties. Manifest described this advance as part of an underwriting agreement pending Northern Crest raising more equity capital, with the advance to be treated in the interim as a non-interest bearing loan.

In June 2011, Northern Crest was put into liquidation with New Zealand-based liquidators appointed: Messrs Lawrence and McCullagh.

Manifest’s claim in the liquidation for its purported $A3 million advance was rejected by the liquidators. They doubted whether there was a debt due because of concerns over the accuracy of Northern Crest’s financial records. Manifest was required to provide originals of any documents supporting their claim.

In the High Court, Justice Heath approved Manifest’s $3 million claim in the liquidation of Northern Crest. While the liquidators acted precipitately when initially rejecting the claim, he said, Manifest was criticised for not being more open with the liquidator about the circumstances of the debt.

The liquidators had been suspicious because documents supporting Manifest’s claim were miss-dated and the funds were paid not to Northern Crest but to a related company.

re Northern Crest Investments Ltd – High Court (20.12.11)

12.001

Tax avoidance: Alesco NZ Ltd v. CIR

Sixteen different taxpayers and revenue totalling $300 million is in dispute with Inland Revenue as it targets use of hybrid securities to fund intra-group transactions.

The first shot has felled ASX listed company Alesco after a High Court finding that use of optional convertible notes to buy into New Zealand companies amounted to tax avoidance. Tax deductions of $10.95 million were disallowed for the tax years 2003-2008. In addition to tax payable on an extra $4.9 million assessable income, Alesco was ordered to pay shortfall penalties of $2.4 million and use of money interest of $1.2 million.

Alesco spent $85 million investing in New Zealand companies. It relied on advice from chartered accountants KPMG in seeking the most tax effective way of documenting the transaction.

The court was told Alesco (NZ) issued convertible notes to its Australian parent in return for advances totalling $78 million for a term of ten years. On maturity, Alesco had the option of being repaid the $78 million or converting the notes into 78 million Alesco (NZ) shares. These notes were hybrid securities, split into debt and equity components. The beauty of this arrangement was that Australian and New Zealand taxing authorities treated hybrid securities in differing ways: in New Zealand Alesco (NZ) could claim a deduction for a notional interest expense arising from the debt component of the notes with no withholding tax deduction; in Australia this notional payment was not assessable to the parent company, Alesco.

No cash would change hands. But Alesco (NZ) would be claiming a deduction for this notional interest, reducing taxable income for its New Zealand operations.

This notional liability for interest arose because of the accruals regime operating in New Zealand tax law since the 1980s. The accruals regime seeks to reflect the economic effect of financial transactions and aligns tax law with general accounting principles.

Alesco argued the financial arrangement chosen was a legitimate business transaction. Inland Revenue was dismissive, calling these hybrid securities interest free advances stapled to valueless and purposeless warrants.

In the High Court, Justice Heath ruled the transaction was invalid for tax purposes as tax avoidance. While the accounting treatment for the notes was appropriate, the tax advantage gained was not within the intent of tax legislation, he said.

First: there was no taxable income arising from the deduction claimed. Secondly: the hybrid security used was artificial, designed only to secure a tax advantage in New Zealand. There was no arms length negotiation to settle the terms of the transaction. The hybrid security had no commercial value. No third party buyer would be interested in buying the security. Thirdly: no real interest had been incurred and the notional interest deduction did not represent a real economic cost.

A shortfall penalty of $2.4 million was imposed after the court ruled that Alesco had taken an “abusive tax position” entering into the financing arrangement with a dominant purpose of avoiding tax.

Alesco NZ Ltd v. CIR – High Court (12.12.11)

(12.11.003)

Bankruptcy: Taylor v. Official Assignee

A court ruling that $227,000 be repaid by a family trust following bankruptcy was reversed on appeal when the bankrupt argued that payments were not made fraudulently. The bankrupt said she had been suffering from depression and there was no intent to defraud creditors.

Auckland accountant Bronwyn Taylor set up a family trust in 2000 to protect the family home from business creditors. In what is normal commercial practice, the family home was transferred to the Trust and the value of her equity in the home was left as a loan owing by the Trust to her personally. This loan was not repayable until 2030, but interest could be demanded on the outstanding balance and the loan was immediately repayable if any interest was not paid. Further money was later lent to the Trust to finance the purchase of a replacement family property.

She was bankrupted in 2006. Two creditors claimed $207,700: the tax department $123,100 and her failed accounting business Bronwyn Taylor Accounting Services Ltd claiming about $84,600.

The High Court ordered her family trust to repay $227,000 of the outstanding loan to cover the amount claimed from Taylor by creditors plus an extra $20,000 to cover administrative costs of her bankruptcy.

Being under the impression that Taylor had no income from the date the family trust was set up, the High Court considered the act of transferring her home to the Trust as being a fraudulent scheme intended to cheat creditors.

In fact, household income at the time the Trust was established totalled some $200,000. For the first two years after the Trust was established all personal debts were able to be paid. Arrears began to accumulate after that period.

There was evidence that Taylor developed depression lasting several years following an acrimonious breakup with her business partner. During this time she did not keep proper business records and took money out of the business as and when needed, leaving creditors unpaid. Taylor’s depressive state was compounded by falling ill with hepatitis.

The Court of Appeal ruled the evidence did not amount to fraud. Her disturbed mental condition meant she did not focus on the practicalities of the business. And when the extent of debts due to the tax department became apparent Taylor presumed she would be able to negotiate a deal, though no deal ever eventuated.

While reversing the earlier court ruling that Taylor’s family trust pay $227,000 to the Official Assignee, the Court of Appeal pointed out that the Official Assignee could still recover some money for creditors by calling for interest to be paid on her loan to the Trust.

Taylor v. Official Assignee – Court of Appeal (9.12.11)

(12.11.001)

Maori: Takamore v. Clarke

In disputes over burial custom, it is the executor who has final responsibility for decisions over the manner and place of burial. With a high proportion of inter-racial relationships in New Zealand, Maori burial custom is coming into conflict more frequently with English-derived common law.

The 2007 death in Christchurch of Jim Takamore resulted in a cultural collision between his mother and sister on one side and his partner on the other. Ms Clarke, his partner, had lived with Mr Takamore for twenty years and was named as executrix in his will. Before his death, Mr Takamore had expressed the desire to be buried in Christchurch. This was also Ms Clarke’s preference as she would be remaining in Christchurch following his death.

Contrary to these wishes, Mr Takamore’s body was seized by Tuhoe whanau prior to burial and taken north to the Kutarere Marae near Taneatua for burial with ancestors on the home marae.

Following an urgent hearing, the High Court ruled that Mr Takamore’s body be returned to Christchurch.

Mr Takamore’s sister appealed against the court order, arguing Tuhoe custom was paramount and that he should remain with his people.

The Court of Appeal set out detailed rules governing the relationship between Maori customary law and English-derived common law.

For Maori custom to be part of the law of New Zealand it must be a long-standing custom, must have continued without interruption since its origin, must be reasonable, must be certain in its terms and must not have been overturned by any statute.

The court ruled that Tuhoe burial custom could not be considered reasonable because it allows the use of force to take a body without agreement. Use of physical force to settle private disputes is directly contrary to the rule of law.

It also ruled that any wishes of the deceased about the manner and place of burial are not directly relevant. It is something for the executor to take into account.

The court said Maori burial custom can be incorporated into the common law by having the executor discuss the manner and place of burial with the wider family, where possible. If no consensus can be reached, it is for the executor ultimately to decide.

The court ruled that Ms Clarke as executrix was entitled to possession of Mr Takamore’s body and was entitled to make the final decision as to burial.

Takamore v. Clarke – Court of Appeal (23.11.11)

(12.11.002)

Infrastructure valuations: Vodafone v. Telecom

Valuation of infrastructure assets got an airing in Supreme Court litigation closing out a long running dispute over the cost to Telecom of providing uneconomic residential phone coverage. The court ruling will impact on pricing policies for utilities enjoying natural monopolies such as airports, power, gas and water. The Supreme Court frowns on revaluation of legacy assets, saying this results in windfall gains for the owner leading to unjustified retail price rises.

There has been no love lost between Vodafone and Telecom in arguments over the cost to Telecom of its former statutory obligation to provide a “free” telephone service to all residential customers. The two telcos have held over 90% of the market between them. Over the years, Vodafone has been obliged to pay Telecom millions of dollars as compensation for Vodafone’s share of the subsidised cost of a residential service to uneconomic customers. Not surprisingly, this has lead to tortuous litigation over the methodology used by the Commerce Commission to determine Telecom’s cost of providing infrastructure assets used by Vodafone and other telcos to service their customers.

Telecom is to be set free as a stand alone retailer following the establishment of Chorus as the infrastructure operator. Telecom was forced to settle all outstanding legal disputes with Vodafone so it could clean up its balance sheet prior to the Telecom/Chorus demerger.

Despite Telecom and Vodafone reaching a confidential commercial settlement ending their disputes, the Commerce Commission had to see the long running litigation through to its end in order to get some finality on rules governing the valuation of Telecom’s infrastructure assets.

Asset valuations feed into formulae used to determine the rate of return on infrastructure assets and have an impact on retail prices. In common use are ORC (optimised replacement cost) and ODRC (optimised depreciated replacement cost).

ORC is the present-day cost of acquiring an asset to provide efficiently a specified quantity and quality of service. Replacement cost is based on current market values, taking current technology into account.

The Supreme Court warned against distortions caused by artificially revaluing old assets which were in reality not likely to be replaced or improved. It is not appropriate to attribute a modern equivalent value to an old asset which is not actually being replaced, said the court. This has the effect of artificially inflating the value of the asset, providing a windfall in the terms of an increased capital base resulting in a “free lunch” equal to the amount of the upward revaluation.

In the Telecom case, the Supreme Court said the Commerce Commission erred in its valuation of Telecom’s infrastructure assets by inappropriately increasing the value of its legacy copper fixed line network and by not allowing in its valuation for replacement of uneconomic parts of the fixed line network with the cost of an alternative mobile phone service for geographically isolated customers.

Vodafone v. Telecom – Supreme Court (17.11.11)

11.11.003

Earthquake Insurance: EQC v. Insurance Council

Losses following the Canterbury earthquakes have been shifted from the private sector to the Earthquake Commission following a High Court ruling. The Commission is liable for multiples of $100,000 for each earthquake during the currency of an insurance contract. Over 110,000 properties have multiple claims.

New Zealand is very unusual in having statutory insurance cover for earthquake damage. Private insurance cover is the norm in most of the world. In places such as California and Japan, the cost of private cover is so high that many go uninsured.

The Earthquake Commission Act 1993 in New Zealand creates a government-underwritten insurance scheme for all private dwellings having fire insurance cover. The statutory scheme does not apply to commercial buildings. For residential dwellings, a levy charged on top of the fire insurance premium is paid to the Commission as insurance against “natural disasters”, which includes earthquakes. This statutory levy amounts to fifty cents for every one thousand dollars cover.

This earthquake cover provides the first layer of insurance: $100,000 for loss of land and buildings; $20,000 for contents. Fire insurance policies typically provide private cover for the excess.

Since 2010, Canterbury has suffered an unprecedented series of earthquakes with over a dozen quakes registering magnitude five on the Richter scale, triggering Earthquake Commission (EQC) liability.

EQC together with the major fire insurers sought a High Court ruling on the application of statutory earthquake insurance cover to losses in Canterbury. Since fire insurers cover the “excess”, it was necessary to first establish the extent of EQC liability.

EQC argued that its full liability on each residential dwelling was $100,000 for each year of an annual fire insurance contract; the fire insurer was responsible for any further losses be it from one claim or multiple claims in that year.

The High Court did not agree. Wording of the 1993 Act together with provisions enabling EQC to charge a further premium for the period between an earthquake and the conclusion of an annual fire insurance policy meant that EQC was liable to multiples of up to $100,000 for buildings (and $20,000 for contents) for every claim during the one year currency of a fire insurance policy.

As a result, private insurers will have no liability for damage to many Canterbury homes suffering damage from successive quakes.

Earthquake Commission v. Insurance Council – High Court (2.09.11)

09.11.004

Nathans Finance: R. v. Moses, Doolan & Young

Two directors of Nathans Finance have been jailed for their part in the company’s failure; two others received home detention. Just over one million dollars in reparations is held by the High Court to be divided among investors. While imposing jail sentences, the judge emphasised that the directors had neither acted dishonestly nor intentionally misled investors but were being punished for inept performance, failing to do their job properly.

Penalties followed convictions for breaches of the Securities Act 1978 after Nathans issued a misleading prospectus and investment statement when seeking funds from the public. Investors were owed some $174 million when Nathans went into receivership in 2007. On current estimates, losses of about $168 million are expected.

Statements in Nathans’ prospectus about related party lending and the extent of bad debts were misleading. Investors could not make an informed decision before investing. Nathans received about $66 million by way of new investment or reinvestment after issuing the misleading prospectus.

Justice Heath said penalties imposed must reflect three consequences of the directors’ behaviour:

· their inept management discourages investors in future from lending to finance companies

· this will reduce venture capital investment, and

· might reduce overseas investment in New Zealand ventures because of doubts about the integrity and competence of New Zealand management.

He also said offers by a director to pay reparations should be taken into account as evidence of remorse for wrongful behaviour.

Kenneth Roger Moses was sentenced to two years and two months imprisonment and ordered to pay $425,000 reparations. He had expressed concerns about the high level of intercompany lending but while on the board and as chairman did little to correct the position. “Actions speak louder than words”, Justice Heath said.

Mervyn Ian Doolan was sentenced to two years and four months imprisonment and ordered to pay $150,000 reparation. He is a qualified chartered accountant and along with Moses was described as having a full understanding of Nathans finances.

Donald Menzies Young was sentenced to nine months home detention, 300 hours community service and ordered to pay reparation of $310,000. He joined Nathans’ board two years before receivership. He was described as the least culpable of the company’s directors, being reliant on information from his co-directors. The court indicated that Young was not given as complete a picture of the company’s position by his fellow directors as could be expected.

At an earlier High Court hearing, John Lawrence Hotchin, another Nathans director, was sentenced to eleven months home detention, 200 hours community work and ordered to pay $200,000 reparation. He was sentenced early, after pleading guilty to the charges and agreeing to give evidence at the trial of his fellow directors.

Reparations ordered against the four directors totals $1.085 million. Justice Heath directed that the money be paid into the High Court and distributed pro rata by the receivers among those investors who had invested in the company. A further court hearing will determine who is eligible for payment.

R. v. Moses, Doolan & Young – High Court (2.09.11) & R. v. Hotchin – High Court (4.03.11)

09.11.003

Leaky Homes: Tisch v. Body Corporate 318596

Proposals which force owners in leaky apartments to pay over the odds for water damage to other owners’ apartments do not find favour with the Court of Appeal.

Collective solutions dealing with the cost of repairs to leaky apartments have reached the courts. A collective solution minimises cost and disruption. And work is completed to a uniform standard.

Most apartment buildings are governed by Unit Titles legislation. Apartment owners, like shareholders in a company, get to vote on rules governing operation of their building.

With multi-million dollar costs arising from the repair of a leaky apartment building, owners of individual apartments have been voting on proposals to collectively repair the damage. This enables all the repairs to individual apartments in the building to be done at the same time, by the same contractor. If the court gives approval to the proposal, the cost of the scheme can be imposed on apartment owners who vote against, and also imposed on subsequent purchasers of an affected apartment. Court approval also enables costs to be imposed retrospectively on individual owners who refused to pay up.

Disputes arise over how these costs should be allocated between differing apartment owners. Arguments also arise over who has legal responsibility to maintain specific parts of the building and who will benefit most from particular repairs.

The Unit Titles Act 2010 sees property entitlements in an apartment building divided between a common area (which all owners may use and all must share the cost of maintaining) and owner’s exclusive areas (which are the responsibility of an individual owner).

The court was asked to rule on a two million dollar proposal for repairs to a leaky beachside apartment building in the Bay of Plenty. The building has a “wedding cake” configuration with each floor set back from the floor below. This results in the balcony fronting each of the upper apartments acting as part of the roof for the apartment below. The body corporate rules for the building specify that each balcony is an owner’s exclusive area and each apartment owner is responsible for its maintenance and repair. Repair of the building roof is a collective responsibility.

Eight of the ten Bay of Plenty apartment owners voted in favour of the two million dollar proposal. Owners of the two ground floor apartments voted against. They objected to $498,000 for balcony repairs being allocated as a collective cost. Even with the balcony above acting as a roof for their apartment, balconies were the responsibility of each apartment, they said.

The court said it was important in this case that body corporate rules assigned balcony repair costs to the owner of each individual apartment. It was an unwarranted departure from these rules for a proposal to treat these individual obligations as a collective cost.

The apartment owners were told to rework their proposal

Tisch v. Body Corporate No. 318596 – Court of Appeal (29.08.11)

09.11.002

Tax avoidance: Penny & Hooper v. CIR

Artificially low salaries having the effect of diverting taxable income to other taxpayers on a lower marginal tax rate will be hit as tax avoidance following strong words from the Supreme Court. If the salary is not commercially realistic or not supported by any commercially legitimate reason it is open to attack as tax avoidance.

These comments followed an unsuccessful appeal by two Christchurch orthopaedic surgeons who made use of company structures owned by family trusts to divert income from their medical practice to other family members. At the time, the company marginal tax rate was well below the rate imposed on personal income earned by the surgeons.

The two surgeons worked as salaried employees of their companies. The salaries paid were well below market rates payable to orthopaedic surgeons in private practice.

This re-arrangement of their business affairs resulted in tax savings of some $65,000 over three years for one surgeon, and $103,000 for the other.

The Supreme Court did highlight commercial circumstances where a company’s payment of a lower than market salary could be seen as legitimate and not tax avoidance: In a one-person company where an annual salary amounted to the company’s annual profit; where a company was looking to expand and retained earnings were necessary to support proposed capital expenditure; and in circumstances where a company was facing a liquidity crisis and cash was needed to pay creditors.

Penny & Hooper v. CIR – Supreme Court (24.08.11)

11.11.001

Money laundering: Westpac v. MAP Associates

While banks might have legitimate concerns about liability for assisting money laundering, they are not entitled to block money transfers unless they are positive that fraud is involved. Suspicions alone are not enough and there were suspicions aplenty for Westpac in a US$49 million deal.

Westpac forced MAP & Associates, a Hamilton firm of chartered accountants, to sue if they wanted to have client funds unfrozen. The accountants were acting as escrow agents, holding some US$49 million as trustee pending sale of a Bolivian bank.

Westpac argued it was entitled to be suspicious. It had been warned of frauds emanating from Bolivia and said it was not clear who were the ultimate recipients of the US$49 million.

The court was told a Panamanian businessman approached MAP Associates in 2006 asking if they would act as escrow agents in a sale of the bank. The bank chairman held a power of attorney stating he had authority to act on behalf of the twenty or so shareholders looking to sell. New Zealand banking facilities were sought to clear the transaction because a Venezuelan purchaser was “not very fond of the USA”.

It was intended that MAP Associates would act as trustee, holding the purchase price paid by the purchaser while due diligence was undertaken. When the purchaser was satisfied, it would authorise MAP Associates to release funds to the vendor. MAP Associates set up a non-interest bearing bank account with Westpac for the short period it expected to be holding the funds in escrow. There was evidence of some US$600,000 payable in fees as part of the transaction.

Funds for the purchase, amounting to some US$49 million arrived in the Westpac account in December 2006 and stayed there for nearly 14 months. When Westpac was instructed to pay out the money in February 2008 it refused.

Westpac said the Financial Transactions Reporting Act required it to be satisfied about the bona fides of the transaction and the identity of the parties. The court was told that Westpac had made inquiries about the Panamanian intermediary negotiating the transaction and was suspicious of his claimed identity. Further it refused to release funds to numbered bank accounts without disclosure of the named owners. When the names were provided, one recipient who was to receive US$11.8 million did not seem to be a shareholder in the Bolivian bank being sold.

Westpac refused to act on instructions delivered by MAP Associates. These instructions had come from overseas in a sealed envelope, held sealed by Westpac until told to open the envelope and pay out the money as the letter instructed.

The Supreme Court ruled that banks are under a strict obligation to carry out client instructions. They can refuse to act if there is fraud or a breach of trust involved. It is not enough that there are mere suspicions of fraud or a breach of trust. Here, Westpac had no proof of actual fraud and was obliged to release the funds as instructed.

Westpac v. MAP Associates – Supreme Court (16.08.11) & Court of Appeal (6.09.10)

11.11.002

Export Sales: Smallmon v. Transport Sales

Exporters selling into Australia are not directly responsible for ensuring goods comply with Australian regulations. A Queensland buyer of used trucks penalised after Australian regulators shifted the goalposts failed in an attempt to pass the problem back to a New Zealand exporter.

The Court of Appeal was told that Smallmons, a Queensland road transport business, purchased four Volvo trucks from Auckland-based Transport Sales Ltd in 2006. The vehicles, previously operated by Fonterra, were sold for NZ$72,000 each.

Smallmons had trouble registering the vehicles after unloading in Brisbane. The trucks were roadworthy, but did not have compliance plates fitted: plates attached at the time of manufacture which verify the vehicle satisfies Australian regulations. The trucks had been originally assembled in Australia and did in fact comply with Australian regulations at the time of manufacture. No compliance plates were fitted because the vehicles were assembled for immediate export to New Zealand.

Evidence was given that Queensland authorities had previously accepted for registration Australian assembled vehicles imported second-hand from New Zealand without compliance plates. In what was an apparent change in policy, registration was refused in this case.

Following political lobbying, the Smallmons were issued with restricted permits: the four trucks could be used on roads in Queensland, but not New South Wales, and if sold the trucks were again prohibited from being used on the road.

Given these difficulties, the Smallmons sued Transport Sales alleging the Auckland company was in breach of contract by selling vehicles which could not be used legally on Australian roads.

Export contracts are governed by a United Nations convention: Sale of Goods (United Nations Convention) Act 1994. The first rule is that goods delivered must comply with the agreed terms of the contract. There was no explicit agreement in this case about who was responsible for getting the trucks on the road in Queensland. Generally, an exporter is not responsible to see that exported goods comply with any regulations imposed by the importing country unless the same regulations exist in both countries, or the importer told the exporter of any special regulations and required the exporter to ensure the goods complied (exporters cannot be expected to know all the importer’s rules and regulations), or the exporter was in fact aware of the importing country’s regulations.

While part of Transport Sales business involved selling second-hand vehicles to Australia, the court said there was no evidence that the company knew of the detailed Australian registration requirements. There was no breach of contract and Transport Sales was not liable to pay damages.

Smallmon v. Transport Sales Ltd – Court of Appeal (22.07.11)

09.11.001

Bridgecorp: R. v. Petricevic

There is no injustice in having to do without a lawyer in a criminal trial. Rodney Michael Petricevic, charged with criminal offences following the collapse of Bridgecorp, claims to be broke and unable to afford a lawyer.

Attempts to stop these prosecutions failed when the High Court ruled there was no breach of the Bill of Rights Act 1990 should Mr Petricevic be forced to defend himself without legal representation.

The criminal trial will focus on allegations that Mr Petricevic took money from his companies without justification. Creditors suspect substantial sums were transferred to a family trust for the benefit of his wife and children. Mr Petricevic claims to have no assets. He was bankrupted in August 2008. His application for legal aid was refused on the basis that his wife could provide funds given that she is a beneficiary of the family trust. Legal aid rules treat assets available to a spouse as financial resources available to her husband.

The Court said that while the Bill of Rights Act says an accused is entitled to a lawyer, the State does not guarantee to pay for a lawyer.

A trial does not become unfair unless the accused cannot conduct his own defence because of legal complexities arising during the trial. Justice Venning ruled that was unlikely to happen in this case. Mr Petricevic has a substantial background in business, was the managing director of a public company and can be expected to be very familiar with documents which will feature as evidence in the trial.

R. v. Petricevic – High Court (12.07.11)

07.11.001

Nathans Finance: R. v. Moses & others

Directors of Nathan Finance have been convicted of misleading the public about the company’s financial position when they failed to disclose the full extent of intercompany debts and wrongly stated that these loans were on the same terms as loans to third party borrowers. The directors claim that they acted honestly, but that was not a defence in itself. They must have reasonable grounds for that belief.

Kenneth Roger Moses, Mervyn Ian Doolan and Donald Menzies Young were prosecuted in the High Court for breaches of the Securities Act 1978. Another director, John Lawrence Hotchin, earlier pleaded guilty.

Over 7000 investors were left out of pocket when Nathan Finance went into receivership in 2007, owing about $174 million.

Nathan acted as a conduit for funds borrowed from the public. Critical for Nathan investors were the lending policies and liquidity of the company. Nathan is a wholly owned subsidiary of the VTL group: a company which sold vending machines and installed proprietary software to record transactions. This was a type of business which found normal bank financing difficult to obtain.

The Nathan prospectus played down the extent of intercompany lending at a time when the bulk of funds were onlent to VTL companies. The prospectus stated there was no history of bad debts written off. While this was literally true, it was misleading as interest on VTL loans was rolled over and capitalised into loans at a time when there would be serious doubt about full recovery.

In the High Court, Justice Heath acknowledged that the directors honestly believed that comments made in the prospectus were not misleading, but this alone was not an adequate defence. They had to reach an independent judgment on the question. The directors relied on advice from management and professional advisers that everything was “compliant”. In particular, the directors said they were relying on company employees, the company auditors, the registrar of companies and the trustee appointed to represent debenture holders – each of which had a role in the preparation of a prospectus. A review of the content of a prospectus was not something directors could delegate to someone else, said Justice Heath. It was for the directors to read each prospectus and determine for themselves whether the statements made reflected the position of the company, as they knew it.

Following conviction, a decision on penalties was deferred for a later hearing.

R. v. Moses, Doolan & Young – High Court (8.07.11)

07.11.03

Bridgecorp: Petricevic v. Legal Services Agency

The family trust of bankrupt Bridgecorp director, Rodney Michael Petricevic, had a net worth of $5.2 million dollars as at March 2009 according to information supplied when seeking legal aid.

Mr Petricevic faces multiple criminal charges under the Securities, Companies and Crimes acts following the collapse of Bridgecorp. He claims to have no assets and needs legal aid to pay for a lawyer.

Legal aid rules look at what “resources” are available to an accused. This includes resources available to any spouse. As part of his legal aid application, Mr Petricevic was required to disclose details of his family trust. He is a trustee, but not a beneficiary of the trust. His wife is also a trustee, and is a beneficiary along with their children.

The legal aid committee requested copies of trust financial statements and tax returns for the previous three years. The court was told that (as at 31 March 2009) the Petricevic Trust:

• had a net worth of $5.23 million
• owned six rental properties in the Auckland area
• owned a residential property in Remuera, valued at $4.4 million
• had made loans to Mr Petricevic (of $3.8 million); his wife ($0.25 million); and a company associated with their son ($0.5 million)
• and held $447,200 in its bank account.

The trust was asset rich, but cash poor, with a declared taxable income for 2009 at $44,300.

A letter from accountants Carlton-DFK acting for the Trust suggested that this net worth of $5.23 million had deteriorated to a net worth of “very little, if any[thing]” by January 2011. It was claimed the properties were unlikely to satisfy mortgages registered against them if sold in the present climate. In addition, the Official Assignee acting on Mr Petricevic’s bankruptcy was claiming $904,000 from the Trust and the Trust owed legal and accountancy fees totalling $150,000.

The legal aid committee also looked at benefits received by Mrs Petricevic. The court was told she had been receiving regular weekly payments of $1000 from the trust through much of 2010. And their son deposited $30,000 into her bank account during the period.

In light of the resources available to his spouse, the legal aid committee said Mr Petricevic was not entitled to legal aid.

Petricevic v. Legal Services Agency – High Court (03.06.11)

07.11.002

Financial adviser: Armitage v. Church

Poor financial advice is not excused simply by having clients complete a risk profile questionnaire. Financial advisers are still obliged to recommend investments suitable for the client’s risk profile. Financial adviser, Carey Robyn Church, was ordered to pay nearly $60,000 damages to a retired public servant and his family trust for losses arising from negligent financial advice.

The High Court was told that Mr Neil Armitage retired from government employment as a veterinarian with a portfolio of investment properties. In December 2005, he approached Mrs Church for advice regarding the investment of some $350,000 to $370,000 expected after selling one of the properties.

Completion of a risk profile questionnaire saw Mr Armitage ranked as a “conservative” investor. He invested the funds in fixed interest securities on the advice of Mrs Church: a mortgage trust, ING and four finance companies (Bridgecorp, MFS Pacific, Strategic Finance, and North South Finance). All four of these finance companies later became insolvent.

In 2006, he again approached Mrs Church for advice in anticipation of realising some $640,000 on the sale of his remaining investment property. Further risk profile questionnaires were completed by both Mr Armitage personally (now ranking as a “balanced/growth” investor) and on behalf of his family trust (“balanced/moderately aggressive”).

Following her advice, further investments were made in ING products.

Justice Dobson ruled that a financial adviser’s duty to a retail customer included a requirement to ensure both that investments were relevant to a client’s appetite for risk and that cash flow requirements met the client’s need for income.

Justice Dobson ruled that where clients are recommended inappropriately risky investments as part of the fixed interest component in their portfolio, they are entitled to recover losses arising at the time the investment was intended to be realised.

Experts criticised Mrs Church advice for its narrow range of investments, having the effect of exacerbating risk. Her advice saw Mr Armitage holding 67% of his investment funds in three companies and his family trust having 24% exposed to four finance companies, 27% on fixed interest with ING and nearly 47% in other ING funds. No investments were recommended in quality corporate bonds or bonds issued by government or local bodies.

Just over $200,000 in capital losses were suffered because of this negligent advice. The damages awarded were reduced by 25% because Mr Armitage was held partly negligent himself, having pressed for higher paying fixed interest investments than his risk profile warranted. This revised figure for damages payable was reduced again, by 40%, because of evidence that Mr Armitage may not have followed more prudent advice even if given. The court was told Mr Armitage continued later to place funds with finance companies despite his initial losses with a Bridgecorp investment.

Justice Dobson ruled that Mrs Church was not negligent in respect of advice about future cash flows. She was not responsible for cash flow deficiencies suffered. There was evidence that Mr Armitage himself drew up cashflow “budgets” but did not fully recognise the periodic manner in which payments would be received or that withholding tax would be deducted before receipt. Mr Armitage had chosen to retain bank borrowings after the sale of investment properties for reinvestment in fixed interest securities. This cost contributed to his cash flow difficulties. Mrs Church had questioned the wisdom of not paying off bank borrowings.

Armitage v. Church – High Court (27.05 11)

05.11.004

Maori: Haronga v. Waitangi Tribunal

Individual hapu can have property rights which differ from iwi-wide claims. The Waitangi Tribunal has been told to exercise its statutory powers to ensure claimants receive justice. The Supreme Court criticised Tribunal orders which forced Poverty Bay Maori to wait and have their claim to forest assets lumped in with wider iwi claims.

The Tribunal was told to expedite its 2004 report which found that a government 1961 purchase of land in Mangatu State Forest breached the Treaty of Waitangi. Previous Maori owners feared their successful land claim would be diluted by a contemporaneous iwi-wide claim. Rather than make a direct order, the Tribunal had suggested a district-wide negotiation with government to progress the settlement of all local claims with the intent of “increasing the pie” of assets available for compensation.

The court was told 100,000 acres of Mangatu land were vested in local Maori back in 1881. The government purchased a block of nearly 10,000 acres in 1961 for erosion control. This block amounts to about one quarter of Mangatu State Forest, inland from Gisborne. Revenue has been accumulating from logging the forest. Previous Maori owners want access to this revenue, especially since the 2004 Tribunal report supports their claim.

Legislation governing forestry Treaty claims requires that the Tribunal “should” consider return of forest land where a breach of the Treaty has been proved. The Supreme Court ruled that the Tribunal had failed to consider this option. An urgent hearing by the Tribunal was ordered.

Haronga v. Waitangi Tribunal – Supreme Court (19.05.11)

05.11.005

Share offers: Financial Markets Authority v. Carrington Securities

Unsolicited mailshots to small shareholders in listed companies are misleading and deceptive where prominence given to the above-market offer price is not matched by equal prominence given to the fact that payment is deferred, with the buyer receiving all dividends in the interim.

Following an application by securities regulator, the Financial Markets Authority, the High Court has frozen registration of unsolicited share bids made by interests associated with Christchurch entrepreneur Bernard Whimp in listed companies Contact Energy, DNZ Property, Fletcher Building, Guinness Peat, Trust Power and Vector.

Nearly 1200 shareholders responded to Mr Whimp’s offers. His scheme mirrored similar share offers made in Australia.

The Markets Authority argued Mr Whimp’s offers were misleading, in breach of the Securities Markets Act 1988. The front page highlighted an above-market price on offer and generated an air of urgency with emphasis on strict time limits within which to respond. In the fine print on the reverse, it was revealed that only ten per cent of the price would be paid on acceptance with the balance due over the next ten years. Over this decade, sellers would rank as unsecured creditors for payment due and would lose out on dividends paid in the interim.

A share offer can be misleading while still factually true. In this case, the discounted present value of the share offers were below current market value. Shareholders were being invited to give up an income-producing security in return for an unsecured promise to pay in the future, a promise made by a person with a less than stellar track record. The court was told Mr Whimp has been convicted of burglary and was prohibited from managing any company for a four year period commencing 2006.

Financial Markets Authority v. Carrington Securities – High Court (09.05.11)

05.11.003

Lease: Ingram v. Patcroft Properties

Acting one day too soon cost a landlord dearly. The tenant was entitled to $100,000 from the landlord for destroying its business and was not liable for ongoing rental costs amounting to nearly one million dollars.

The Supreme Court case concerned a bar operating in the basement of a backpacker operation in Lorne Street, central Auckland. There was a history of late payments by the tenant and previous litigation over operation of the lease. The lease allowed the landlord to take possession of the bar if the rent was in arrears for 14 days or more.

In June 2005, the landlord took possession for non-payment, but did so when unpaid rent was 13 days overdue – one day short of the 14 day time limit. As part of this process, the landlord changed the locks, issued trespass notices against the bar owners and seized property in the bar as security for non-payment.

But acting one day early meant the landlord was in breach of the lease. The court ruled that this action amounted to an unlawful action by the landlord, excluding the tenant from continuing operation of the bar.

The Court ruled that because the landlord was in breach, it could not turn round and claim it was entitled to continuing damages over the term of the lease for ongoing rent.

The landlord had claimed damages of $1.6 million from the evicted tenant: the Court ruled the landlord was entitled to only $84,900 – unpaid rent of $5,100 up to the date of eviction and the balance for deferred repairs and maintenance which had been disputed by the tenant.

This meant the tenant was required to pay the landlord some $84,900. But the Court ruled that the tenant was entitled in turn to receive $136,600 damages from the landlord: $100,000 for the loss of its business and $36,600 agreed as overpaid for the tenant’s share of lift maintenance costs.

Ingram v. Patcroft Properties – Supreme Court (10.05.11)

05.11.001

Charities: Greenpeace

While tax advantages flow from having charitable status, agitating for political change does not fit the legal definition of a charity – as Greenpeace has found to its cost.

The Charities Commission denied Greenpeace registration as a charity saying one of the Society’s aims, to achieve disarmament, together with its explicit approval of direct non-violent protest action amounts to political activity.

Because charities enjoy an indirect taxpayer subsidy by receiving their income tax free, the courts have carefully circumscribed who might be treated at law as a charity.

The High Court ruled that over one hundred years of case law defining what is a “charity” was not altered by the Charities Act 2005. Earlier case law decided that any organisation seeking to achieve a political object is not a charity. An educational programme promoting peace could be charitable, but a programme supporting pacifism would not. Peace can be generally preferred to war, but not peace at any price.

Promotion of disarmament and peace are amongst Greenpeace’s primary objectives. The High Court ruled that while these two objectives are worthy pursuits, they have historically been considered political and “not charitable”.

The Court said there is a distinction between education (encouraging rationale debate) which is charitable, and advocacy (promoting a political result) which is not charitable.

The objectives of Greenpeace coupled with its support of protest action amounts to advocacy, not education.

Re Greenpeace – High Court (06.05.11)

05.11.002

Unclaimed money: Westpac v. CIR

The Unclaimed Money Act applies to unpresented foreign currency drafts and bank cheques. Trading banks must hand over to Inland Revenue the face value of any issued drafts or cheques if they are not presented for payment within six years of issue. Westpac, Bank of New Zealand and ANZ National failed in their argument that banks could keep the money.

Unlike many other countries, legislation in New Zealand requires banks to close dormant accounts and hand the money over to Inland Revenue. Any person with a claim on the dormant account applies to Inland Revenue to get payment.

Three trading banks argued the position differed for unpresented bank cheques and foreign currency drafts. They argued the special status of these documents as negotiable instruments took them outside the legislation applying to dormant bank accounts: the funds were not “unclaimed” until the cheques and drafts were presented for payment.

Bank cheques and foreign currency drafts can be a commercially useful method of payment. A seller unsure of a buyer’s solvency can require the buyer to make payment to a bank and get the bank’s cheque or draft in return: the buyer’s suspect credit rating is replaced by the bank’s promise to pay. A small proportion of these bank cheques or drafts never get presented for payment, leaving a windfall for the bank – it has received payment in advance from its customer in return for issuing the cheque or draft, but has not been asked in turn to pay out by the intended recipient.

The Supreme Court ruled that the Unclaimed Money Act 1971 applied to the proceeds, even though the banks’ obligation to pay was technically conditional on the cheques and drafts being presented for payment.

Westpac v. CIR – Supreme Court (07.04.11)

04.11.006

Fraud: Down v. R.

White collar criminals are guilty of “using” a document to defraud when signing documents even if that person does not then physically perpetuate the fraud. The director of a scrap metal company was sentenced to 23 months imprisonment for her part in a $1.16 million fraud.

Carol Margaret Down unsuccessfully appealed her conviction after claiming the jury verdict was inconsistent: she was convicted on four counts of fraud and acquitted on one, when all five frauds used the same method to hoodwink a finance company.

Evidence was given that UDC Finance was conned into paying out $1.16 million to finance non-existent business equipment. Bins, a baling press and an excavator supposedly purchased for a scrap metal business were a fiction. The business used false sales invoices as evidence of the supposed purchases. Ms Down, as sole director, signed off on UDC loan applications to finance the fictitious purchase of the non-existent equipment.

Money from UDC passed through the scrap metal business bank account before being withdrawn in cash and disappearing without trace. Ms Down was co-signatory on the account.

In her defence, Ms Down argued that she was just a pawn in the fraud, being manipulated by two men who were the real managers of the business – one of the managers had been director of a failed company who was banned from acting as a company director.

The Court of Appeal ruled there was sufficient evidence for a jury to find that Ms Down knew the loan applications were based on false invoices, making her a party to the fraud. The fact the jury acquitted her on one charge (of five) could be explained as the jury accepting that Ms Down did not fully understand the true nature of the fraud when she signed the first loan application, but that she could not remain ignorant when there were subsequent loan applications based on assets the company did not have and resulting in substantial sums of money sloshing through the business.

Down v. Queen – Court of Appeal (06.04.11)

04.11.005