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