Maori: Takamore v. Clarke

Maori custom came hard up against pakeha practice with the Supreme Court deciding by a narrow margin of 3:2 that the person in charge of a deceased estate has primary authority in deciding where the deceased should be buried.

Recent years have seen a run of distressing instances known colloquially as “body-snatching cases” where extended family have tussled with close relatives of a deceased over funeral arrangements.   Maori custom demands burial at the home urupa.  A surviving spouse and children usually prefer burial closest to the family home.

This sensitive issue came before New Zealand’s highest court following the 2007 death of James Junior Takamore.  His immediate family wanted to have him buried in Christchurch where they had lived for the previous twenty years.  Plans for the Christchurch burial were thwarted when members of Takamore’s hapu from Kutarere in the Bay of Plenty took his body north over the objections of his widow for burial on the home marae.  

The Supreme Court ruled that his widow was entitled to possession of Mr Takamore’s body as executor of his estate.  She was given permission to exhume his body for reburial at a place of her choice.

The five judges sitting in the Supreme Court were not unanimous in their ruling on this cross-cultural dispute.

Three of the judges relied on the traditional pakeha common law rule: those appointed as executors or administrators of a deceased estate have the duty and obligation to dispose of the deceased.  They should take into account the views of close family members and, importantly, take into account any views the deceased made before death.  “Body-snatching” is not the way to deal with differences of opinion.  Those disagreeing with decisions about burial should air their differences in court and have a judge weigh up the conflicting viewpoints.

Two of the judges considered primary responsibility for burial decisions should not lie with the executor or administrator.  Disputes should be put before a court prior to any burial.

The five Supreme Court judges were of the same view on one point: the “might is right” approach of traditional Maori custom which saw disputes settled by force has no place in modern society.

Takamore v. Clarke – Supreme Court (18.12.12)

13.001

Insurance: Insurance Brokers v. Fire Service

A failure by the Fire Service to break down what it considers a commercial rip-off in both composite and “split-tier” insurance contracts came to nought when the High Court ruled these policies are legitimate even where they have the effect of reducing the fire levy payable.  Fire service union members are up in arms as well.  They argue underpayment of fire levies reduces funding for the service and reduces resources available for wages. 

Split-tier policies are used by large commercial operations to manage their risk at reduced cost.  Insurance cover is split out into several policies to separate out cover assessed for fire service funding.  These policies are often combined with composite policies. The commercial reality is that a business with operations nationwide is not going to have all its plant and buildings damaged simultaneously by fire, earthquake or flood. Composite cover for assets nationwide is offered at an expressed indemnity value being only a fraction of the nationwide asset replacement value.  The fire service levy is calculated on this lower indemnity value, not the nationwide replacement value.

The Fire Service has grizzled for years about split-tier and composite policies.   The Insurance Brokers Association, concerned that penalties might be imposed for a failure to comply with the Fire Service Act 1975, bought matters to a head by going to court seeking a ruling that these practices did comply with the Act.

As a test case, the court was asked to consider insurance arrangements implemented since 2008 between Vero and eight New Zealand ports acting together in what is called the NZ Ports Collective.

One single policy covered assets of the eight ports to an aggregate amount of $250 million for fire damage alone.  The fire service levy was calculated and paid on this amount.  Separate policies provided cover totalling an extra $500 million: for fire cover above the indemnity cover, for material damage other than fire and for business interruption cover.  No fire service levy was paid on this extra $500 million cover.

Use of one global composite policy benefitted NZ Ports Collective because they got the cover each wanted at a reduced premium: the premium was apportioned between ports on the value of their respective port assets.  Each port did bear the risk that a large prior claim in any one year by one port could deplete the sum payable under the policy for later claims by another port.   Insurance Brokers said splitting the cover into tiers did comply with the Act and no further levy was payable.  The Fire Service said it was in fact eight separate policies with eight different ports and further levies were payable.

In the High Court Justice Heath ruled that split-tier policies did comply with the Act because a fire levy was payable only on the declared indemnity value.  And as a composite policy the Vero cover also complied with the Act.  While the insurance policy covered different assets owned by different ports it was nevertheless a single policy.

Insurance Brokers Association v. NZ Fire Service – High Court (17.12.12)

13.002

Matrimonial: R. v. Kendall

Auckland businessman and former firefighter, Graeme John Kendall, was sentenced to home detention for perjury after giving false evidence in what was described as a deliberate mis-use of the legal system to inflict considerable harm on his former wife.

The High Court was told that Kendall lived for twelve months in a de facto relationship before marrying his de facto partner in March 2006.  The marriage was at an end within nine months.

Prior to the marriage, his de facto partner decided to buy a residential unit in Takapuna which adjoined a unit she already owned.  He suggested she use one of his many private companies for the purchase.  All the shares in Home Pride Ltd were transferred into her name and this company purchased the unit.  She was assured, as was her solicitor, that Home Pride was a “clean company”: a shell company with no assets and no liabilities.

Within months of the marriage ending, she received a statutory demand claiming that Home Pride owed $64,400 for rent due on a storage unit in Rosebank Road, Avondale.  This was a storage unit where some of her personal property had been stored previously.  If payment was not made it was likely that Home Pride would be wound up by the court and the Takapuna residential unit sold to pay the claimed debt.

She spent $33,000 in legal fees disputing the debt; a debt claimed by one of her former husband’s companies.

It was proved that Kendall had fabricated lease documents to make it appear that Home Pride owed rent for the storage unit.  He was convicted of perjury.  He served three months imprisonment before being convicted again on the same charge following a retrial.  Justice Toogood took this earlier period of imprisonment into account when sentencing him to seven month’s home detention for perjury.  Kendall was also ordered to pay $25,000 to his former wife.

R. v. Kendall – High Court (11.12.12)

12.034

Maori: NZ Maori Council v. Attorney General

The High Court has dismissed out of hand legal action by Maori interests to delay government moves to sell down its stake in electricity generator Mighty River Power.  Some Maori claim ownership of the water which generates electricity by passing through Mighty River turbines.

The High Court did not need to decide who might own water.  It ruled that government plans to sell down its interests in Mighty River Power did not affect rights of water ownership, whoever might own the water.

In June 2012, government altered the legal status of government-owned Mighty River Power, changing it from a state-owned enterprise (SOE) to a mixed-ownership model (MOM) company.  This did not change the government’s ownership of Mighty River, it changed the legal structure under which the company operated.  Government plans to sell down a 49% stake in four of its electricity generation companies: Mighty River Power, Genesis Power, Meridian Power and Solid Energy.

Maori interests claim the proposed sell down may defeat pending Treaty of Waitangi compensation claims.  Once an asset passes from government ownership, no direct Treaty claim can be made against the asset.

In the High Court, Justice Ronald Young refused to block preliminary steps taken by government to achieve the proposed sell down.  Changing a company’s status does not alter the status of assets held by that company.

New Zealand Maori Council v. Attorney General – High Court (11.12.12)

12.035

Insurance: Turvey Trustee v. Southern Response

Christchurch homeowners with AMI “premier house cover” offering full replacement cover for earthquake losses are entitled to a new house of the same style and quality of materials as the house written off but substitute materials or method of construction is permitted where that does not affect the functionality or character of the replacement structure.

The High Court was asked to rule on AMI costs for the replacement of a 1911 Edwardian-style villa at 23 Aynsley Terrace written off after the February 2011 earthquake.  A particular feature of the villa was its use of native timber for flooring and joinery.

All AMI house insurance policies for Christchurch have been hived off into a special government controlled entity with the taxpayer subsidising any shortfall on funds needed to meet earthquake claims.

Turvey Trustee, the owner at Aynsley Terrace, exercised its right under the policy to rebuild on a new site, but there was a dispute as to the extent to which the new construction should mirror the house written off.   In particular, methods of construction and building materials in common use have changed markedly since the original construction in 1911.

Justice Dobson ruled that replacement does not mean replication; it means “as new”, being an equivalence of the old as measured by size, functionality, relative quality and re-creation of character and appearance.

A case from Australia in a dispute over replacement cover in insurance had identified that it would be appropriate to use plaster board for wall lining rather than the plaster and lath previously in use and radiata pine framing timber rather than Oregon pine.

In this case, it was replacement of native timber in use for flooring and joinery which was most in dispute.  Justice Dobson ruled that in those rooms where the floorboards were exposed or covered only by loose carpets, then AMI was obliged to pay for replacement native timber flooring in the new house.  But for those rooms where the timber flooring had been covered by vinyl or tiles, chipboard flooring would suffice.  Similar rules applied to joinery.  Exposed native timber joinery had to be replaced with native timbers.  But joinery which had been painted over could be replaced simply with painted pine.  Hard plaster ceiling features in the 1911 villa could be replaced by use of a polystyrene mould and plaster covering with no material difference in appearance.

Turvey Trustee Ltd v. Southern Response Earthquake Services – High Court (11.12.12)

12.033

Insolvency: re Window Holdings Ltd

Most creditors paid prior to a company liquidation will be able to keep their money thanks to new insolvency rules.  Creditors paid up to two years prior to a debtor company being wound up insolvent can keep the money provided they received payment in good faith, did not know the debtor was insolvent and had provided goods or services to the debtor equal in value to the payment received.

Insolvency law has detailed rules to even out the losses when a debtor company goes into insolvent liquidation forcing some creditors who were paid in full before the liquidation to repay the money received.  They are left to prove as unsecured creditors.  In practice, money recovered is used first to pay the liquidator’s fees.  Frequently, little is left for unsecured creditors as a whole.

Changes to insolvency law in 2006 replaced earlier recovery rules which were widely viewed as being unworkable.

Auckland insolvency specialist Jeff Meltzer challenged these new rules arguing they should be interpreted restrictively: any creditor paid in the two years prior to liquidation and getting 100 cents in the dollar should have to return that money if there are unpaid creditors.

In the High Court, Justice Toogood applied the plain wording of the new rules.  Creditors can keep their 100 cents in the dollar provided, at the time of payment, they acted in good faith, had no knowledge that the debtor company was insolvent and had provided monies worth in goods or services to the debtor company.

re Window Holdings Ltd (in liquidation) – High Court (5.12.12.)

12.037

Charities: Greenpeace

Greenpeace has moved away from the pacifist underpinning of its original constitution by offering to change its rules in order to gain charitable status.  Tax advantages available to charities prohibit them from engaging in overt political activity.  The Court of Appeal directed that Internal Affairs reconsider Greenpeace’s application for charity registration.

Registration as a charity was initially refused on the basis that amongst its charitable aims Greenpeace stated as objects the promotion of “peace” and “disarmament”.  These objects can be considered political in nature.  Greenpeace subsequently offered to change its constitution to include the promotion of “peace, nuclear disarmament and the elimination of all weapons of mass destruction.”

The Court ruled that this alteration significantly altered the nature of Greenpeace’s objects: from a non-violent “peace at all costs” political stance to a stance broadly accepted as being for the public benefit of the community as whole.   New Zealand treaty obligations support both nuclear disarmament and prohibitions on the development, use or stockpiling of biological and chemical weapons.  Nuclear disarmament and a prohibition on weapons of mass destruction have broad public support as being beneficial to society generally.

But registration as a charity for Greenpeace is not a foregone conclusion.  The Court warned Greenpeace that it will have to convince Internal Affairs that it is not involved in direct political lobbying in pursuit of its aims or that it has not been involved in any illegal activity.  The fact that Greenpeace banners are sometimes seen at environmental protests when activists trespass on industrial sites raises doubts about the legality of some Greenpeace activities.

re Greenpeace – Court of Appeal (16.11.12)

12.036

Trust: Christchurch Buildings Trust v. Church Property Trustees

The trust owning earthquake-damaged Canterbury Cathedral must build a new cathedral on the same site using insurance money for the rebuild, the High Court has ruled.  Legal action by concerned citizens seeking to preserve the city’s historic buildings has blocked plans by the Anglican church to use insurance money to build a temporary “cardboard cathedral” offsite.

The Anglican diocese in Christchurch has been in turmoil since earthquakes in 2010 and 2011 severely damaged its iconic cathedral.   The building was insured with insurance recoveries of some $39 million expected.

One group, dismayed by the loss of so many of Christchurch’s historic buildings lobbied to have the cathedral repaired.  The diocesan hierarchy had other plans.  Matters reached a head when government-appointed Canterbury Earthquake Recovery Authority (CERA) issued a “make safe” notice.  The diocese was given ten days to bring the cathedral down to a safe level; failing that CERA would move in and demolish the structure.  The diocese resolved to immediately demolish the cathedral to a safe height of several metres.  No firm decision was made on a rebuild, but indications were that the diocese regarded the insurance proceeds as part of general church funds to be used as it saw fit.

The High Court was told the cathedral site was established by a trust in 1851 as part of an overall plan by colonial settlement company, the Canterbury Association, to transplant part of England in the new colony.  This trust lives on now as Church Property Trustees.

Justice Chisholm said the diocese appeared to misunderstand the purpose of the Cathedral trust, which is to maintain a cathedral on its existing site.  The Trust is governed by the Trustee Act.  The Act specifies that any insurance money received must be used for the purposes of the trust only and can be used for the rebuilding or repair of trust property.

He ruled that the diocese could not proceed with any decision to use the insurance monies for a different purpose, adding that while the Cathedral Trust requires there to be a cathedral on the site, the building does not have to replicate the cathedral as it stood before the earthquakes.

Great Christchurch Buildings Trust v. Church Property Trustees – High Court (15.11.12)

12.038

Financial advisers: Financial Markets Authority v. Ross

Court appointed receivers can take control of a financial adviser’s business where the Financial Markets Authority fears loss of client funds.

The High Court in Wellington appointed receivers to companies run by financial adviser David Robert Gilmour Ross after investors complained to the Financial Markets Authority (FMA) about his dysfunctional management.  His investment business has about 900 clients, claiming to hold investments totalling some $430 million.

The FMA said it had received complaints from nearly 30 clients who had not received payments due.  There were serious concerns about management of the business: a failure to make decisions, failures to implement client investment instructions and inadequate records.  All staff had resigned.

The court was told Mr Ross was unavailable.  Subsequent newspaper reports indicated that Mr Ross was in hospital, suffering a mental illness.

Preliminary investigations by the FMA indicated that investments were held in New Zealand, Australia, North America and the United Kingdom.  Records were incomplete.  Tax returns for the business were two years in arrears.

John Fisk and David Bridgman of PriceWaterhouse Coopers were appointed as receivers to take control of the business.

Financial Markets Authority v. Ross – High Court (6.11.12)

12.039

Mortgagee sale: Hart v. ANZ

The forced sale of properties owned by high profile Auckland barrister Barry John Hart left him with a $20.5 million shortfall.  The High Court dismissed his claim that ANZ National sold the properties at an undervalue.

Mr Hart garnered considerable publicity in his campaign against ANZ Bank alleging the bank failed to act properly in its forced sale of substantial landholdings on Highway 16 in west Auckland.  At the time, Mr Hart owed ANZ in excess of $30 million with interest accruing at $200,000 a month.

The court was told ANZ took action after loan payments fell into arrears.  A “stand still” arrangement gave Mr Hart six months to find a buyer or buyers for the properties.  After that the Bank proceeded with mortgagee sales.

Mr Hart was highly critical of the Bank’s forced sale process, claiming the properties were sold at a gross undervalue.  Properties he claimed were worth in the region of $29 million were sold for $8 million.

Associate Judge Abbott said a mortgagee is required to take reasonable care in the sale process to obtain the best price reasonably obtainable at the time of the sale.  There is no obligation to postpone a sale in the hope of a better price later, or to break up assets and sell in a piecemeal fashion.  Specialist advice should be taken in selling assets with unique characteristics.  Descriptive advertising is required and must reach the largest possible number of potential purchasers.

He ruled that ANZ Bank had acted properly in conducting the sales.  It sought competitive tenders from three real estate agencies asking them to highlight their expertise in selling properties of the type in question and seeking their advice on the best marketing strategies.  The Bank undertook a $55,000 marketing programme spread over six weeks.  The court was told 116 people registered an interest.   Each was invited to tender for some or all of the properties on offer.

Mr Hart’s main criticism centred on the sale prices.

Evidence was given that ANZ Bank first obtained valuations from professional valuers Darroch.  They valued the three main farming blocks being sold at $14.3 million (market value) and $10.1 million (forced sale value).  They in fact sold for some $8 million.

Associate Judge Abbott said the prices obtained were not so widely different from the Darroch forced sale valuation to suggest the sale process was inadequate.  The advice ANZ received was that $8 million represented the best they could receive at the time.

The court was told forced sale prices commonly range at a discount of 26%-30% below market prices, but can reach discounts of up to 40%.  The discount in this case was 44%.

He dismissed Mr Hart’s claim that the properties were worth $29 million; a valuation obtained from valuers Colliers International in 2010.  This valuation was two years old and was based on an assumption that the farm blocks could be subdivided into residential lifestyle blocks. A subsequent application for a zoning change had been unsuccessful.

Hart v. ANZ National Bank – High Court (29.10.12)

12.040

Leaky homes: "Byron Ave"

In a landmark ruling with huge costs for ratepayers, the Supreme Court has extended council liability for negligent building inspections to include commercial buildings.  The previous legal view was that council liability extended only to residential homes.

Changes to the building code in the 1990s coupled with poor construction techniques has resulted in an avalanche of legal claims for the cost of remedial work on leaky buildings.  Often, a local authority is the only solvent party left standing as property owners sue builders, sub-contractors and the local council for damages.  Potential council liability has arisen where a local authority acted as certifier, signing off code compliance certificates stating that the building does comply with the building code.

Councils have strongly resisted liability.  But a string of New Zealand cases over previous decades have established a rule that owners of residential houses can sue councils for negligence.

A novel question arose with a Takapuna leaky building, being a “mixed use” development: a 23 level building known as Spencer on Byron containing a hotel on the lower floors and residential apartments on the upper floors. 

North Shore City argued there were strong policy reasons to limit council liability to residential homeowners only: homeowners lacked the sophistication to look after their own interests; by contrast, owners of commercial properties were not so vulnerable.

The Supreme Court ruled there were no policy reasons to stop council liability being extended to cover “mixed-use” buildings and purely commercial buildings.  It said not all homeowners are naïve; the wealthy and commercially sophisticated also own homes.  And not all commercial property owners are sophisticated; a first time business owner purchasing a corner dairy in a country town may well lack any business experience.

North Shore City argued the extension of liability to commercial premises will transfer millions, if not billions, of dollars in repair costs from building owners to council ratepayers.  The Supreme Court said this argument overstates the position: ratepayers will pick up any residual liability, but before that councils with insurance cover for negligence will get compensation from their insurer and they will also be earning income in fees for ongoing building inspection work.

Body Corp. No. 207624 (Byron Ave) v. North Shore City – Supreme Court (11.10.12)

12.041

Perpetual Trust: Trustees Executors v. Perpetual Trust

High Court orders have smoothed the way for Perpetual Mortgage Fund to be wound up.  The fund is illiquid.  It cannot honour the 437 redemption requests outstanding as at 11 September 2012 seeking payment of $18.3 million due to investors.

Investors learned in July 2012 that Perpetual was not able to honour Mortgage Fund redemption requests.  A court-ordered moratorium was imposed and two independent observers, Ms Fatupaito and Mr Duffy, were appointed to oversee Fund management.  This followed regulatory concerns about loans totalling $28.2 million made to business interests related to Perpetual.  The loans have since been repaid but investor nervousness about the probity of Perpetual management caused a run on its investment funds.

The Securities Act allows investment funds to be brought under judicial control where there is a significant risk that investors will be harmed.

The High Court was told that Perpetual’s Mortgage Fund is illiquid and cannot meet the avalanche of redemption requests.  Assets held by the fund may be insufficient to repay investors in full.  Short of a winding up, there is a risk some investors will be paid in full while others paid later may not.  This raises the possibility of unequal payouts to Mortgage Fund investors.

The Court was also told of concerns that further related party lending could be sourced from the Perpetual Cash Fund.

Court orders were made streamlining the process for winding up the Perpetual Mortgage Fund and to block any potential related party lending from the Perpetual Cash Fund.

Trustees Executors v. Perpetual Trust – High Court (19.09.12)

12.028

Tax: Tauber v. Inland Revenue

The Court of Appeal has dismissed challenges to search warrants obtained by Inland Revenue for access to private homes of people behind the Honk Group of companies.  Tax investigations allege tax avoidance and false tax returns. 

Inland Revenue must get a search warrant before entering the private home of any taxpayer.  Warrants were obtained to search the homes of David Andrew Tauber and Paul Nigel Webb, entrepreneurs behind the Honk group of companies and also the home of Maree Anne Bockett, a chartered accountant acting as tax agent for the Honk group through her company MB Accountants Ltd.

They argued the warrants were invalid because Inland Revenue had “over-egged the pudding” when applying for the warrants by presenting misleading information and overstating any alleged wrongdoing by the taxpayers.  The Court ruled that even if such flawed information was stripped out of the warrant application there were still grounds for issuing the search warrants.

The Court was told the tax investigation has been underway since 2008.  There had been extensive delays in providing information requested by Inland Revenue.  There were doubts as to the completeness of information provided. 

Inland Revenue was running up against statutory deadlines for issuing tax assessments and suspected the taxpayers were exploiting delays as a deliberate strategy.

Files seized had been embargoed while validity of the search warrants was argued in court.  The Court of Appeal ruled that Inland Revenue could use the information seized.  Honk Airport Trustees Ltd and Honk Land Trustees Ltd, two companies in the Honk group, are already involved in disputes before the Taxation Review Authority.  Inland Revenue said it took special care in both planning the investigation and carrying out the search and seizure to ensure it did not take any documents relevant to this litigation.

Tauber v. Inland Revenue – Court of Appeal (7.09.12)

12.042

Proceeds of crime: Solicitor-General v. Field

Disgraced member of parliament Philip Hans Field has been ordered to pay $27,480 being the assessed value of work carried out on his properties by immigrants providing free labour in the hope of getting a New Zealand visa.  This payment is in the nature of a fine, paid to the government not the immigrants personally.

Sentenced to six years imprisonment in 2009 after being convicted of bribery and attempting to pervert the course of justice, Field was sued under proceeds of crime legislation.  These rules are designed to stop offenders benefitting from crimes committed.

A number of Thai immigrants worked on five properties owned by Field: four properties in New Zealand and a house under construction in Samoa.  The work involved tiling, plastering and painting.  Evidence for the government priced the value of the “free” labour at $58,000.  Some of the work was described as being of a low standard and “pretty shoddy”.  Field said there is a difference between a thorough job and a quick job; he valued the labour at approximately $15,500.

The High Court fixed the penalty payable at $27,480.

Evidence was given that the four New Zealand properties were sold at an aggregate profit of $387,500 after being owned on average for a period of 18 months.

Solicitor-General v. Field – High Court (3.09.12)

12.025

Price-fixing: Commerce Commission v. Visy Board

With packaging company Visy Board fined $36 million in Australia for market rigging, the Commerce Commission is pursuing the company alleging similar market manipulation in this country.  The Court of Appeal ruled there is jurisdiction to prosecute an Australian company for market manipulation in New Zealand.

The court was told Visy Board and competitor Amcor Australia secretly decided in 2000 to carve up between them the Australian market for corrugated packaging after a debilitating price war through the 1990s.  They agreed at a top level to fix prices and divide the market between themselves.  Each supposed competitor put in uncompetitive tenders for nominated supply contracts.   When the whistle was blown, Visy Board agreed to a fine of $36 million and one of its senior executives was fined $500,000 for breaches of the Australian equivalent of the Commerce Act.

In New Zealand, corrugated packaging is used for the bulk supply of commodities like fresh meat, fruit and vegetables.  It is also used in secondary packaging of manufactured goods like beverages and processed foods.

The Commerce Commission alleges market manipulation by Visy Board and Amcor Australia extended to New Zealand.  As an example, a bulk supply tender to Mainland Meats saw Amcor prices significantly below Visy Board’s tender, and the reverse in tenders for Tip Top packaging.  Fonterra contacted Amcor saying the tender pricing for Tip Top looked suspicious when Amcor prices came in at twenty per cent higher than Visy Board.

When sued by the Commerce Commission, Visy Board said it was an Australian company operating out of Australia and could not be sued in the New Zealand courts for any alleged breach of the Commerce Act.

Both Visy Board and Amcor operate New Zealand subsidiaries of their Australian businesses.

The Court of Appeal ruled that the High Court rules gave jurisdiction for New Zealand courts to consider wrongful conduct carried out in New Zealand and the Commerce Act specifically covers decisions made outside New Zealand to the extent that those decisions affect the New Zealand market.

Commerce Commission v. Visy Board – Court of Appeal (31.08.12)

12.032

Capital + Merchant: R.v.Douglas, Nicholls & Tallentire

Directors of failed finance company Capital + Merchant were described as being driven by self-interest and greed when sentenced to long terms of imprisonment following convictions for theft.  For the theft of $19.7 million, Wayne Leslie Douglas and Neal Medhurst Nicholls were sentenced to seven and a half years jail; Owen Francis Tallentire five years jail for the theft of $12.1 million.

Each found guilty of theft as a person in a special relationship, the three directors used Capital + Merchant funds to finance personal business projects.  When the finance company went into receivership six of the company’s outstanding loans were to interests linked to the three directors: in number this amounted to just over ten per cent of the company’s loan investments.  In total the three directors had borrowed some $37 million dollars from their company.  Evidence was given that only $200,000 has been recovered.

Capital + Merchant was funded by public investors.  At the date of receivership there were some 7000 investors, many of them elderly and solely dependent upon Capital + Merchant for investment income.  The company prospectus and debenture trust deed said related party lending, such as loans to directors, was very severely restricted.

Justice Wylie said the directors intentionally breached these restrictions to advance their own interests.  The offending was sophisticated, requiring significant planning and premeditation using convoluted legal structures.  Particularly cynical was the use of Capital + Merchant funds when directors could not raise personal loans from outside sources.

Each director said he was not in a position to offer any reparations.

Douglas said he has no personal assets.  The family home is held in a trust.  Nicholls said he is the part-owner of an investment property which has no equity since it is heavily mortgaged.  The family home is owned by a family trust established by his father-in-law.  Tallentire said he has no savings. 

R.v. Douglas, Nicholls & Tallentire – High Court (31.08.12)

12.026

Hanover: KA No.4 v. Financial Markets Authority

Assets held in family trusts set up by Hanover director, Mark Hotchin, remain frozen following a Court of Appeal ruling.  It is alleged that one trust is a sham with Mr Hotchin remaining in control of the assets and that a second trust holds assets on his behalf.

Legal action against Mr Hotchin is proposed by the Financial Markets Authority for alleged wrongdoing in his management of Hanover.  In the interim, it obtained High Court orders seizing control of assets held by two family trusts: KA3 Trust and KA4 Trust.  Asset preservation orders can be made under the Securities Act to seize assets held “on behalf of” any person (or an associated person of anyone) under investigation by the Financial Markets Authority.

Interests associated with Mr Hotchin complained that insufficient evidence was put before the High Court to justify any asset seizures.

KA3 Trust was set up in 1999 with Mr Hotchin and immediate family as discretionary beneficiaries.  It was argued that discretionary beneficiaries have no absolute entitlement to trust assets; trust assets could not be said to be held “on their behalf”.  The trustee decides which beneficiaries, if any, receive a benefit.  Since April 2010 the trustee of KA3 Trust has been under control of Mr Hotchin’s accountant: Mr Tony Thomas.

The Court of Appeal ruled that the purpose of Securities Act asset preservation orders is to cast a very wide net in taking control of assets prior to trial.  This caught assets held on behalf of discretionary beneficiaries.

The court was told that KA4 Trust was set up in May 2003 with Mr Hotchin’s children (but not Mr Hotchin himself) named as discretionary beneficiaries.  Initially, Mr Hotchin was the sole trustee.  Since May 2010 Mr Thomas exercised control as trustee.

The Financial Markets Authority alleges KA4 Trust is a sham with trust assets being treated as if they were owned by Mr Hotchin personally.  There are examples where the Trust appeared to act purely in Mr Hotchin’s interests, seemingly at his discretion: land transactions on Waiheke Island benefitting Mr Hotchin and the construction of an expensive residence on Auckland’s waterfront Paratai Drive.  Mr Hotchin put $12 million of his own money into the Paratai Drive construction.

While confirming the asset freeze on KA4 Trust assets, the Court of Appeal indicated that some KA4 assets currently frozen might later be released if it could not be established that the Trust did operate as a sham throughout its operation.

KA No.4 Trustee Ltd v. Financial Markets Authority – Court of Appeal (17.08.12)

12.031

Extradition: US v. Kim Dotcom

Extradition to the United States requires prima facie evidence that the suspect has committed a crime.  New Zealand judges are proving to be no pushover in attempts by US authorities to extradite entrepreneur Kim Dotcom for trial on charges of breach of copyright, conspiracy and money laundering.

US authorities allege Kim Dotcom and others illegally distributed copyrighted material through their Megaupload website.  In a screenplay worthy of a Hollywood production, helicopters and armed police swooped on Mr Dotcom at his rented Coatesville mansion, bringing him before the courts for extradition to the United States.

Procedures on extradition differ depending on the country seeking extradition.  The simplest procedure is for extradition to Australia and the United Kingdom.  A fast-track abbreviated procedure is justified given the shared legal tradition in these countries.  For countries such as the United States, it is necessary to establish that the accused is “eligible” for surrender: this means proof that the accused would have faced trial in New Zealand if the conduct in question had occurred in New Zealand.  An extradition hearing proceeds as if it were a committal hearing before trial in New Zealand.   It is not for the New Zealand court to decide guilt; merely that there is enough evidence to proceed to a trial.

US authorities seeking extradition are required to produce a “record of the case”: a summary of the evidence against the accused.  Kim Dotcom complained that the “record of the case” against him was too brief.  It was not clear how he may have transgressed.  US authorities told the court: “trust us”; Kim Dotcom will get a fair trial in the US with all the safeguards of the US legal system and in any event US legal procedure does not allow us to release all the file without court approval.

In the High Court, Justice Winkelmann emphasised that New Zealand courts and New Zealand lawyers have their own legal rules which they are bound to follow.  At issue was the extent of disclosure required by the Extradition Act before extradition to the United States.  She ruled that Kim Dotcom was entitled to all the benefits of the Bill of Rights that a New Zealand accused would have to ensure a fair trial if facing a committal hearing in New Zealand.

US authorities were ordered to disclose all evidence held to support the charges of breach of copyright and money laundering.  The amount to be disclosed might be substantial, but as Justice Winkelmann observed, that reflected the complexity of the case.

United States v. Kim Dotcom – High Court (16.08.12)

12.030

Blue Chip: Hickman v. Turner & Waverley Ltd

In a ruling with implications for proportionate sales of commercial property, a substance-over-form approach has been adopted by the Supreme Court in the interpretation of Blue Chip investment contracts.  Blue Chip’s financing construction of inner city apartments were in the form of contracts for the sale of land which are exempt from securities law but were held to be in substance debt securities unenforceable because Blue Chip did not issue a prospectus.

It has been a long battle for Blue Chip investors who signed up for over-priced apartments to be constructed in Auckland’s central business districts.  Led to believe they were lending money to finance the construction of apartment blocks, they later discovered they were committed to buying a finished apartment and at risk of losing their own debt-free homes to meet their commitment.

Newspaper reports have indicated that deals have been struck by some investors allowing them to stay in their own homes with Blue Chip apartment debts deferred until their death, to be paid out of their estate.

Blue Chip sought money from public investors to finance the construction of three Auckland inner city projects.   The primary funder in each case was Westpac Bank.  A specified level of pre-sales was a condition of bank funding being released.  Blue Chip agreed to underwrite the pre-sales.  Sales levels were achieved by making sales to short-term investors with the intention that second purchasers would take out the original buyer when each development was completed over the next eight to nine months.  When the market collapsed, these short-term investors were left as the only “buyer” and committed to paying the purchase price.

Both the High Court and the Court of Appeal dismissed investor arguments that their contracts were securities governed by the Securities Act, being void and unenforceable because Blue Chip did not issue a prospectus for the securities offered to the public.

Each investor had signed up to a web of contracts which included a sale and purchase agreement for a specified apartment.  Both Courts ruled the sale and purchase agreement was the primary contract and exempt from Securities Act requirements because contracts for the sale of land do not require a prospectus.

The Supreme Court took a different view.

In substance, each of the web of transactions put in front of an intending investor amounted to a debt security offered to the public.  Blue Chip was offering to pay money to investors who signed contracts and stumped up with the deposit for an apartment.  Investors were offered reimbursement for the deposit paid and promised a return for the money invested.  This created a debt payable by Blue Chip.  The sale and purchase agreements were secondary to the creditor/debtor relationship.  Rights of repayment were the primary feature of the web of transactions.  This was not an ordinary apartment purchase with the buyer intended to take ownership and possession.

The Supreme Court ruled that sales of real estate become securities governed by the Securities Act when accompanied by collateral arrangements intended to provide a return to investors based on the efforts of others.  Examples can arise in proportionate sales of agricultural and commercial properties where shares in a property-based business are offered to the public for investment.

In the case of Blue Chip contracts, the Supreme Court ruled that each Blue Chip investor needed to return to the High Court to prove the circumstances of their individual case before their contract was invalidated.  Those investors signing agreements for sale and purchase at the same time or after signing up to a Blue Chip financing package will have their agreements ruled unenforceable as being in breach of the Securities Act.  But those investors who signed an agreement for sale and purchase before being introduced to Blue Chip must prove in their individual case that the transactions were linked in such a way as to be an issue of debt securities in breach of the Act.

Hickman v. Turner & Waverley Ltd – Supreme Court (9.08.12)

12.020

Chrisco Hamper: Symons v. Wiltshire Investments

Investors backing the Chrisco Hamper business looked to have fallen out with allegations of secret side deals surfacing in litigation between investors.  One investor being sued claims he was fired as director of an associated company to keep hidden from him details of an out of court settlement which might affect how much he owes.

Chrisco Hamper attracted adverse publicity in February 2012 with fines of $175,000 for breaches of the Fair Trading Act after misleading customers about their cancellation rights when paying for Christmas hampers on layby.

Behind the scenes there has been a long-running dispute between investors over the operation of Chrisco’s finance company: Hopscotch Money Ltd.  This reached boiling point in April 2008 when ASB Bank pulled funding to Hopscotch investors Opus Fintek Ltd and Fibroin Initiatives Ltd; funding guaranteed in part by a Gregory and Robert Symons on one side and an Alan Wiltshire on the other.

The court was told that interests associated with Mr Wiltshire repaid ASB and in return took over all the bank’s rights under its security documents and guarantees.

When Mr Wiltshire gave notice that the Symons owed some $3.5 million as their share of the ASB debt, the Symons demanded details as to how this figure was calculated.  There was evidence that interests associated with Mr Wiltshire had extracted funds exceeding one million dollars from a Chrisco subsidiary in an out of court settlement.  The Symons demanded to see the settlement terms arguing it could affect how much they would have owed to ASB.  They were told it was confidential.  To ensure he did not learn of the details, Gregory Symons was removed as director of an Opus Fintek subsidiary prior its board agreeing to the settlement.

Wiltshire interests used rights assigned from ASB to sue the Symons, claiming some $1.9 million in High Court summary judgment proceedings.  The beauty of summary judgment proceedings is that there is no contested court hearing provided the claim is for a fixed amount and the defendant has no possible defence.

The Symons stated they might have a defence to all or part of the money claimed; they needed to see details of the secret out of court settlement.  They said Wiltshire may not have disclosed all the money received.

Wiltshire interests said terms of the out of court settlement were not relevant to the amount owed by the Symons and need not be disclosed.

The Supreme Court expressed disquiet about the haphazard way in which Wiltshire interests had progressively reduced how much they claimed from the Symons and agreed that excessive secrecy about the out of court settlement and benefits received under it raised suspicions.  The court said this shadowy impression might be unfair to the Wiltshire interests, but they had only themselves to blame.  In the circumstances, they should have disclosed the agreement.  Summary judgment was refused.  It was for Wiltshire interests to prove the Symons had no arguable defence and they had failed to do so by not disclosing the agreement.

Symons v. Wiltshire Investments – Supreme Court (9.08.12)

12.027

Matrimonial property: Burgess v. Beaven

Property values in relationship disputes are to be fixed as at the date of the first court hearing.  Long-running litigation following a twelve month marriage saw a court order for the woman to pay her former husband a total of some $30,000.

Married in May 2002 and separated in May 2003, it was not until 2012 that some finality was reached in a relationship property dispute between Mr Burgess and Ms Beaven.

Plans to develop a vineyard and homestay business on a rural property at Medbury in North Canterbury had come to nothing.  Each had sold their house in Christchurch to fund the proposed business.

Initially, the Family Court had taken the view that Ms Beaven’s contribution had been “clearly disproportionately greater” ordering a 65:35 split in her favour later amended to 62:38.  Ms Beaven was held entitled to $36,250 which Mr Burgess paid.

A series of appeals reached the Court of Appeal which ruled that an uneven split was not correct, ordering instead the standard 50:50 split of relationship property.  Both parties brought roughly the same equity to the marriage and there had been no material difference between their financial contributions to the date of separation.  Property values were assessed as at the date of separation in 2003.

The Supreme Court ruled that this valuation date was incorrect.  Where there is a dispute, the Property (Relationships) Act requires property to be valued as at the date of the first court hearing.  This was the Family Court hearing in 2007, some four years following separation.  Adjustments can be made for work done increasing the value of relationship property between the date of separation and the first court hearing.

From date of separation up to the Family Court hearing, Mr Burgess was adjudged to have increased the value of Medbury property assets by some $35,100 by keeping up maintenance and paying mortgage, rates and insurance costs after separation.  Medbury was subsequently sold in a mortgagee sale.

Reworking the valuation figures and including a refund of the $36,250 previously paid by Mr Burgess resulted in a court order that Ms Beaven pay Mr Burgess $30,046 in satisfaction of his share of the relationship assets.

Burgess v. Beaven – Supreme Court (9.08.12)

12.024

Redundancy: Service & Food Workers Union v. OCS Ltd

Business restructuring can result in a new employer taking over existing employment contracts.  Transferring employees might negotiate new terms but the new employer is not obliged to depart from their pre-existing employment contract.

Cleaners at Massey University who are members of the Service and Food Workers Union failed in their attempt to get redundancy provisions from their new employer when their pre-existing employment contract specifically excluded any right to redundancy.

The problem arose after Massey University put its cleaning contracts out to tender in early 2010.  OCS Ltd won the new contract and a number of cleaners transferred to OCS as their new employer.  These transfers were treated as continuous employment with the cleaners joining a new employer on their pre-existing contract terms.

The court was told OCS then told transferring staff they would no longer be employed unless they agreed to a new contract less favourable than their pre-existing contract.  For those not willing to accept the new terms, questions of redundancy arose.

The Supreme Court ruled that provisions of the Employment Relations Act dealing with redundancy in this case are clear: the pre-existing contract dictates what is due.  If the pre-existing contract expressly excludes redundancy (as it did in this case) then there is no entitlement to redundancy.  The employees’ position gets no better on transfer to the new employer.

Service & Food Workers Union v. OCS Ltd – Supreme Court (9.08.12)

12.029