Hanover Finance: Financial Markets Authority v. Hotchin

Directors of the Hanover Group being sued for damages following alleged untrue statements when raising funds from the public have failed in attempts to drag New Zealand Guardian Trust and Perpetual Trust into the litigation as trustees for debenture holders.  The trustees’ job overseeing investors’ interests did not extend to liability for any lies told when Hanover raised investment funds from the public.

The Financial Markets Authority is testing new statutory rules in the Securities Act which allows it to sue on behalf of aggrieved investors with any damages recovered distributed amongst harmed investors.  It alleges directors of the Hanover Group misrepresented the Group’s position in various prospectuses, investments statements and advertisements during 2007 and 2008 when raising funds from the public.  In particular, the Authority alleges: there was a failure to disclose adverse information showing deteriorating liquidity and reductions in reinvestment rates; false claims were made regarding the Group’s prudential management techniques; and a failure to disclose various related party transactions.  These issues have yet to be decided in court.

In pre-trial manoeuvering, Hanover directors argued NZ Guardian Trust and Perpetual Trust should be added to the litigation as trustees for the debenture holders.  Securities law requires a third party trustee be appointed when a business borrows money from the public.  The trustee’s job is to exercise oversight on behalf of public investors.  The extent of oversight required is set out in both securities legislation and the contract between the trustee and the borrowing company.

Hanover directors argued that if they were liable, so too were the appointed trustee companies.  The Law Reform Act 1936 allows the court to force into litigation outside parties who might be required to contribute to any order for damages.  The 1936 Act was intended as a tidy-up statute to prevent a multiplicity of legal actions arising out of one set of circumstances.  This procedural statute has seen some creative use as litigants try to reduce their potential liability by dragging others into the litigation.

In this case, Justice Winkelmann ruled that Hanover directors and the trustees did not share co-ordinate liability such that they should both be parties to the same litigation.

Hanover directors are being sued by the Financial Markets Authority for alleged misstatements in company offer documents.  Trustees for debenture holders are under no obligation to check the content and accuracy of these offer documents, said Justice Winkelmann.  That is the directors’ obligation.

The court was told that Hanover directors had previously agreed to indemnify the trustees against any legal claims.  No claim for contribution can be made under the Law Reform Act 1936 where the person making the claim has agreed to indemnify the person they are claiming from.

Claims for contribution against NZ Guardian and Perpetual Trust were struck out.

Financial Markets Authority v. Hotchin – High Court (28.06.13)

13.018

Immigration: Hossain v. Ministry of Business

Financial hardship does not amount to humanitarian reasons for an overstayer to remain in New Zealand.

The High Court was asked to rule on the case of a 29 year old Bangladeshi who came to New Zealand on a student visa in July 2009.  He obtained a certificate in business then worked as a supermarket checkout operator and grocery assistant after being granted a graduate work experience visa.  This visa expired in August 2011.

The Immigration and Protection Tribunal ordered deportation after he overstayed his visa.

Mr Hossain appealed, saying his wages barely covered his living expenses and he had no money to pay for his return to Bangladesh.  He said this financial hardship and the financial hardships being experienced by his father, stepmother and his siblings in Bangladesh meant there were humanitarian reasons for him to stay in New Zealand.   His father was ill.  Mr Hossain said he was the only person in his immediate family who could potentially earn sufficient money to support them all.  His deportation to Bangladesh would jeopardise his own wellbeing and that of his family.

Justice Woodhouse ruled there were no grounds to overturn the deportation order.  The Immigration Tribunal had correctly applied the law.  Financial hardship alone is not an “exceptional circumstance of a humanitarian nature” making it unjust or unduly harsh to order deportation.

Hossain v. Ministry of Business – High Court (19.06.13)

13.013

Dominion Finance & North South Finance: R. v. Butler & Whale

Two directors of finance companies Dominion Finance and North South received sentences of home detention after pleading guilty to charges of issuing a false prospectus and false advertisement: nine months home detention for Ann Kathleen Butler and twelve months home detention for Robert Barry Whale.

At issue were separate prospectuses issued by each company in 2007 (inviting deposits in each finance company) and a follow up letter to investors the following year (which was untrue in that it mis-stated the level of reinvestment by investors and misleading in its description of company liquidity at a time when major shareholders had been forced to inject $300,000 working capital to bridge a liquidity crisis).

Both companies are now insolvent.  To date, Dominion Finance investors have recovered some twelve cents in the dollar, North South investors 65 cents.

Offer documents issued to potential investors in 2007 and 2008 were described as being misleading.  Dominion Finance offer documents failed to disclose related party lending of some $25 million, did not disclose the company’s failure to comply with its own internal lending standards and did not clearly identify the level of loan impairments.  For North South, there was a similar failure to disclose both related party lending and a material deterioration in the company’s overall financial position.

Neither director personally prepared the offer documents but Justice Dobson said securities legislation required them to check the accuracy of the information provided before it was released to the public.  Their failure to do this job properly amounted to gross negligence.  Deliberate dishonesty does not have to be proved.

In mitigation, Robert Barry Whale provided numerous testimonials as to his previous good character and his being a valuable member of the Auckland legal community and wider city community.  Justice Dobson said he was troubled by one clear instance of apparent dishonesty where Mr Whale had lied to company auditors about the existence of one of the related party transactions.

Mr Whale was sentenced to twelve months home detention together with 250 hours community work and required to pay $75,000 reparations.  Justice Dobson said Mr Whale’s offer of $75,000 reparations appears “underwhelming”.

Ann Kathleen Butler said she was absent from New Zealand for two months in mid-2008 and was then not in a position to exercise the oversight properly required of a director.  She had been the companies’ chief financial officer for some years but in 2005 stood down from her day-to-day role in company operations, retaining an involvement as non-executive director.  During 2008 she was caring for her late husband who was then receiving treatment for cancer.  She offered reparations of $300,000 but said her future financial position was dependent upon trustees of a family trust making provision for her.  The court was told that she and her late husband had previously transferred assets totalling some $10.5 million into family trusts.

Mrs Butler was sentenced to nine months home detention (with provision for visits to her elderly mother), 80 hours community work and payment of $300,000 reparations.

R. v. Butler & Whale – High Court (14.06.13)

13.014

Pricefixing: Commerce Commission v. Air NZ

After long denying complicity in price-fixing for air cargo rates, Air New Zealand capitulated pleading guilty to Commerce Commission charges.   The High Court fined Air New Zealand $7.5 million and ordered it pay $560,000 towards the Commission’s investigation and legal costs.

The court was told Air NZ collected extra revenue totalling $4.2 million over various cargo routes during the period 2000-2006 for fuel and security surcharges considered anti-competitive because they were the result of secret agreements with competitors on the same cargo routes.

In mitigation, Air NZ said these anticompetitive arrangements were not struck in New Zealand: they were the work of an independent sales agent in Malaysia and regional company managers in Australia and Japan.  Air NZ’s board and senior executives were not aware of what had been done in the company’s name until after the event.  In Japan and Malaysia, local transport authorities had approved the surcharges.  Air NZ said it was not aware that its failure to get similar approval in New Zealand would amount to a breach of the price-fixing provisions in the Commerce Act.

Air NZ emphasised its previous clean record, not previously being found in breach of the Act.

Commerce Commission v. Air NZ – High Court (13.06.13)

13.015

Belgrave Finance: R. v. Smith

Stephen Charles William Smith was sentenced to four years imprisonment after pleading guilty to charges under the Crimes Act and Securities Act for his actions as director of failed finance company: Belgrave Finance.

Belgrave went into receivership in May 2008 with debenture holders likely to lose 90% of their investment.  Mr Smith, formerly a senior bank manager, was a director of Belgrave for the three years prior to its collapse.

The court was told Mr Smith colluded with two others to buy into Belgrave in 2005 and they then dishonestly misrepresented the company’s proposed lending policies to attract investment from the public, used the funds procured for a series of related party dealings in breach of the limits set out its prospectus and then lied to the trustee for these debenture holders about the level of related party dealings.

Of the company’s losses totalling some $18.4 million, $13.2 million arose from dishonest related party lending.

Justice Toogood said the pattern of dishonesty was set from Mr Smith’s first introduction to the company.  With two others, Mr Smith was party to an arrangement which saw $3.175 million borrowed from Australian finance companies to complete the purchase of Belgrave shares.  Belgrave guaranteed repayment of the loan with directors keeping the fact of the guarantee hidden.  This had the economic effect of passing the risk of the acquisition across to Belgrave’s debenture holders.

In mitigation, Mr Smith said he poured about $400,000 of his own money into the company over the six months prior to receivership in an attempt to keep it afloat.  Justice Toogood said these steps were hardly altruistic.  They were motivated less by a concern for debenture holders than a desperate attempt to prevent a financial collapse which would expose his prior criminal behaviour.

Following an August 2012 guilty plea in a separate prosecution, fellow director Shane Buckley was sentenced to three years imprisonment.  Justice Toogood said Mr Buckley was entitled to a lesser penalty because he acknowledged his responsibility when first interviewed by the Serious Fraud Office and pleaded guilty at the first opportunity.

Also involved in Belgrave Finance was a Mr Raymond Schofield.  He was described by Justice Toogood as a man with a significant degree of control over the company’s operations: a shadow director though not actually appointed as director.  A family trust associated with Mr Schofield has an 80% interest in Belgrave.  The court was told criminal proceedings against Mr Schofield were on hold because of his terminal illness.

R. v. Smith – High Court (07.06.13)

13.016