Defamation: Siemer v. Stiassny

In what is a record damages award for defamation, the Court of Appeal left untouched damages totalling $900,000 awarded in favour of well-known insolvency practitioner Michael Stiassny and his firm, Korda Mentha. Businessman, Vincent Ross Siemer, was ordered to pay damages after a prolonged and vociferous campaign attacking Mr Stiassny’s integrity.

The court was told legal issues followed a shareholder dispute within a company called Paragon Oil Systems. Mr Siemer was managing director and a shareholder. This shareholder dispute was eventually resolved in the High Court in Mr Siemer’s favour.

While this dispute was being litigated, Mr Stiassny and his firm Korda Mentha were appointed as caretaker managers to control Paragon Oil and maintain the status quo. Mr Siemer took exception to how the caretaker job was carried out and to the level of fees charged.

Korda Mentha negotiated an agreed settlement with Mr Siemer and Paragon in which Korda Mentha wrote off $20,200 in fees claimed while Mr Siemer and his company agreed they would make no further comment about their differences of opinion on the conduct of the caretaker job.

Matters did not rest there. Evidence was given that Mr Siemer then proceeded to lay complaints with the Institute of Chartered Accountants , the NZ Shareholder Association, the Serious Fraud Office and the majority shareholder in Vector Ltd (where Mr Stiassny sits on the board of directors). Mr Siemer set up a website setting out his complaints and advertised the existence of this website with a billboard standing next to another billboard featuring Vector advertising.

In the High Court, content on the advertised website was held to be deliberately defamatory. Content accused Mr Stiassny of lying, giving perjured evidence in court, carrying out dishonest and deceptive accounting practices, having amassed a huge fortune through acting dishonestly, guilty of criminal conduct, and likened Mr Stiassny both to executives in the Enron scandal and to Saddam Hussein.

Trespass notices were served on Mr Siemer after concerns for the safety of Mr Stiassny’s home and family.

Court-ordered arrest warrants were issued to stop Mr Siemer continuing with his campaign of public vilification and Mr Siemer was briefly imprisoned for contempt of court.

The High Court ruled that Mr Siemer’s behaviour was a deliberate and calculated defamation intended to bring Mr Stiassny and his firm into disrepute. Mr Stiassny was awarded damages for defamation totalling $825,000, Korda Mentha damages of $75,000 for defamation and further damages of $20,000 for the breach of their agreement to make no further comment about their past business relationship.

The court prohibited Mr Siemer from appealing his liability to pay damages, given his flagrant disregard of court orders to stop publication. But he was permitted to challenge the amount of damages awarded. In what was an unusual turn of events, Korda Mentha took it upon itself to file papers in the Court of Appeal challenging the amount of damages payable so that the case could be disposed of. Mr Siemer complained that he no longer had the necessary paper work needed to file an appeal.

The Court of Appeal declined to reduce the damages awarded by the High Court ruling that the damages were not excessive. No worse case of defamation could be found in those countries having a legal system similar to New Zealand. Of particular concern in this case was the content and extent of the defamatory comments.

Siemer v. Stiassny – Court of Appeal (30.03.11)

04.11.001

Blue Chip: Hickman v. Turn & Wave Ltd

Blue Chip investors have been held to agreements for the purchase of Auckland inner city apartments. Any representations by sales staff that agreements would not be enforced counted for nothing. Blue Chip investors facing heavy losses after signing up for overpriced apartments bought off the plan are required to complete their purchases, following a Court of Appeal ruling.

Many investors had not counted on having to front up with any money on completion of the apartments, having been told during sale negotiations that Blue Chip would see them right when construction was complete either by taking the apartment off their hands or by finding tenants to fund mortgage payments. When neither happened, investors have been financially embarrassed.

The court ruled that developers could enforce the agreements to buy. Investors must complete their purchases, having made an unconditional personal promise to buy when signing the agreements. Representations to the contrary made by sales staff were not made on behalf of the property developers, companies not related to Blue Chip.

The complicated chain of legal relationships surrounding Blue Chip investments became clear to some investors far too late. Investors dealt face to face with sales staff. Behind the sales programme was a shifting chain of obligations. Many of the sales staff were acting in a dual capacity: acting for Blue Chip in some respects, the property developer in others.

Evidence was given that Blue Chip entered into “underwriting agreements” with property developers with success fees payable if a certain level of apartment sales were achieved in respect of a particular development. For the developer, a minimum level of unconditional sales off the plan were needed before project finance became available to commence the project.

Investors were sold the dream of a solid investment in central city property. To help them, Blue Chip was offering a complete package with a fully-furnished apartment to be completed in 18 to 24 months and all financing sewn up. The only immediate financial commitment required was a deposit of some ten to fifteen per cent of the final price.

In respect of the apartment purchase, sales staff were acting for the property developer. A written agreement for sale and purchase was signed for a specific apartment as delineated on a plan. The written contract specified that all the relevant purchase terms were in writing, in the agreement. That made it difficult for investors to argue that separate promises were made that the contract would not be enforced.

In respect of financing the purchase, the same sales staff were also acting for Blue Chip offering various Blue Chip financing “packages”. This is not unusual in the commercial world: a car dealer can act on behalf of a franchisee in selling a new car and at the same time act on behalf of a finance house in arranging funding for the purchase.

The financing packages varied. One was an undertaking to re-sell on completion and divide up any capital gain – described within Blue Chip as the chance to sell the same apartment twice-over.

The financing promises were very persuasive. Some Blue Chip sales staff themselves signed up for the deals on offer, tempted in part by Blue Chip promises that part of the underwriting fee payable to Blue Chip on reaching a minimum level of sales would be rebated back to the staff member signing up to buy an apartment.

The Court of Appeal ruled the agreements for sale and purchase were enforceable as they stood. They had not been modified by any collateral or unwritten term making the agreements unenforceable. The court also ruled against a separate legal argument that the agreements were unenforceable because no prospectus was issued as required by securities legislation. The Securities Act 1978 does not apply to sales of land.

Hickman v. Turn & Wave Ltd – Court of Appeal (29.03.11)

04.11.004

Whitcoulls: re WGL Retail

Creditors’ claims against Whitcoulls and other REDgroup companies have been frozen for an extended period after administrators claimed a longer moratorium is needed to prepare the business for sale. Administrators have six months, until September 2011, to put a repayment scheme to unpaid creditors.

REDgroup, which includes the Whitcoulls, Borders and Bennetts franchises is in financial difficulty. Sydney insolvency specialist, Ferrier Hodgson, has been appointed administrator. Companies Act rules give them control of the group while creditors claims are frozen. Generally, creditors get to vote within one month on any proposal to sort out the difficulty: common options are to make part payment of debts or to put the company into liquidation. The creditors’ vote can be delayed, with court approval.

Ferrier Hodgson said the REDgroup administration is particularly complicated. Company operations are spread across New Zealand, Australia and Singapore. There are 96 different retail sites in New Zealand. Thirteen of the stores are in Christchurch and seven of these are affected by the February earthquake.

Present plans are to sell the entire business as a going concern. Creditors can then vote on a distribution of the proceeds. Any sale will require an extended period to advertise the business and negotiate with interested parties.

In Australia, the court granted REDgroup administrators a moratorium extension to September in respect of the Australian arm of the business. The High Court in New Zealand granted a similar extension for New Zealand. Ferrier Hodgson have until September 2011 to put a proposal to unpaid creditors.

re WGL Retail – High Court (16.03.11)

04.11.002

Nathans Finance: R. v. Hotchin

John Lawrence Hotchin escaped a jail term after pleading guilty in a plea bargain prior to trial for securities offences in relation to fundraising by Nathans Finance NZ Ltd. He is expected to be a crown witness in the later trial against fellow directors who have pleaded not guilty to similar Nathans Finance charges.

Nathans Finance went into receivership in August 2007, owing about $174 million to over 7000 investors. To date, receivers have repaid investors less than four cents in the dollar.

Hotchin accepted that Nathans Finance breached securities legislation in 2006 and 2007 when raising money from the public. In particular, it was alleged Nathans Finance misled investors about the level of related party dealing, the extent of bad debts and the finance company’s liquidity.

The court was told Nathans directors had detailed discussions with the company’s lawyers about the extent of disclosure required for its lending to a related company: VTL. At this point, $79.6 million of Nathans’ assets were tied up with VTL; 46.2% of its loans. Directors wanted to fudge disclosure of this level of loan concentration.

Wording settled on for the Nathans prospectus said a “significant portion” of its loans were with VTL, but added that these loans were made “on a commercial arms length basis”. Investors had been warned there was a substantial level of related party lending, but the court was told that the second statement was not accurate. There was a long list of sloppy commercial practice in relation to VTL loans: security for advances being taken years after the event, sums advanced in excess of an agreed loan facility and funds advanced after a loan facility had expired.

There was also criticism of statements in the prospectus that Nathans had an “unblemished record of bad debts written off”. This was literally true, but misleading. It was alleged tens of millions owed by VTL and its affiliates were seriously impaired at the time of the prospectus and the commercial reality was that repayment was not going to be made in full. The practice of capitalising interest to loan advances meant no hard decisions need be made about bad debts and future profitability necessary to fund repayment was assessed on the basis of five year and twenty year budgets supported by what were called flawed assumptions.

References to Nathans liquidity were also misleading. For the year to June 2006, Nathans received in cash $4.9 million from those loans where interest was not capitalised. Over the same period, it was paying interest to investors totalling $9.1 million. The company was dependent on renewed funding from the public to get sufficient cash to pay interest to public investors. Nathans business was not generating sufficient cash to pay investors. It was illiquid with significant negative cash flow.

Justice Lang said in determining an appropriate sentence for Mr Hotchin, the starting point should be three years imprisonment, being the benchmark in similar cases for breaches of securities legislation. In Mr Hotchin’s favour was that he pleaded guilty, agreed to give evidence against his fellow directors and offered to pay $200,000 to Nathans receivers’ for the benefit of investors. This would usually merit a substantial reduction in the period of imprisonment. In this case, Justice Lang ordered eleven months home detention, coupled with 200 hours community work and ordered reparation of $200,000.

R. v. Hotchin – High Court (04.03.11)

04.11.003