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)

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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)

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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

Crafar Frams: Tiroa E Trust v. Land Information

Government encouragement for inwards capital investment has been boosted by a broad Court of Appeal interpretation of what amounts to appropriate business experience when seeking official approval.  Proven general business experience will suffice; it is not necessary that intending investors have detailed experience in the business activity to be purchased.

The Overseas Investment Act requires political consent for foreign purchases of New Zealand farmland.  A consortium backed by businessmen Sir Michael Fay and David Richwhite sought to block the sale of sixteen dairy farms to a Hong Kong registered company, Milk NZ, which had bid for the farms put up for sale by receivers of Crafar Farms.

The Fay consortium, having bid a lower price for the Crafar assets, argued owners of Milk NZ did not have the necessary farming experience to manage the farms.  The Act requires intending purchasers to have “business experience and acumen relevant to” the business.

The Court of Appeal ruled that it is sufficient in this case for the foreign investor to have experience in managing large investments as an on-going business enterprise.

Mr Jiang, the successful Chinese investor and entrepreneur backing Milk NZ, has experience in agribusiness generally.  It is proposed that day to day management of the farms will be contracted out to New Zealand based operators with industry specific experience, such as government-owned Landcorp.

Tiroa E & Te Hape B Trusts v. Land Information – Court of Appeal (7.08.12)

12.023

Perpetual Trust: Trustees Executors v. Perpetual Trust

Pyne Gould Corporation is winding down its public borrowing through Perpetual Trustee after getting its hand smacked following allegations that funds were being siphoned off to further the private interests of Pyne Gould’s majority owner, George Kerr.

In July 2012, the High Court appointed two individuals from accounting firm WHK to the board of Perpetual Trust as minders to oversee promised repayments by interests associated with George Kerr.

This followed evidence that Perpetual Trust funds had been used to refinance the Torchlight fund, another investment vehicle controlled by Kerr.  Some $28.6 million had been siphoned off to Torchlight.  It was to later come out in court that a Mr Tinkler, also a senior executive at Pyne Gould, had received $3.3 million from Perpetual; supposedly a loan but there was no written application for the loan and no security had been given for the advance.

Any continued need for observers on the Perpetual board was reviewed by the High Court in August 2012. 

The court was told the advances both to Torchlight and Mr Tinkler had been repaid.  Further evidence was given that the public arms of Perpetual Trust’s business were to be wound up.

Perpetual’s Cash Management Fund is to stop making any further loans and to stop borrowing from the public.  It is intended that existing public investors will be paid on maturity from new funds borrowed by Perpetual from private sources.  Investor repayments will be dependent upon timely realisation of Cash Management assets and Perpetual’s ability to refinance from private sources. 

Another investment vehicle, the Perpetual Mortgage Fund, is to be liquidated.  Repayments to investors have been frozen since early July.

High Court orders were made to have the two observers remain at Perpetual Trust to oversee the wind down of Perpetual Cash Management.  

Trustees Executors v. Perpetual Trust – High Court (3.08.12)

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