Credit costs: Commerce Commission v. Sportzone

Retailers looking to create artificially low credit sale prices will be warned off after a Commerce Commission probe: lowering the list sale price and then recouping general business overheads as specific fees in the credit contract is in breach of the Credit Contract and Consumer Finance Act.

The Commerce Commission challenged use of allegedly inflated fees with legal action taken against Sportzone Motorcycles, a Christchurch motorcycle dealer now in liqudation, motor industry financier Motor Trade Finances Ltd and MTF Securities Ltd which securitises Motor Trade’s loan book and onsells these as debt securities.

The Commission alleged they were all in breach of credit law by inflating fees charged when buyers purchased on credit.  Credit law does not limit interest rates charged but it does require clear disclosure in credit contracts of a number of specific items: establishment fees as the cost of setting up the credit contract; maintenance fees for ongoing supervision of the account; prepossession fees for notices on default; and repossession charges.

Credit law limits these specific fees to the dealer’s actual and reasonable costs.

Credit customers buying through Sportzone were charged establishment fees of $390  (Sportzone itself charged $200 and financier Motor Trade charged a further $190); monthly account maintenance fees were eight dollars (Sportzone at five dollars and Motor Trade a further three dollars); with itemised one-off payments for default notices and repossessions (since early 2007, $80 has been charged for both default notices and repossessions).

The Commission said actual and reasonable costs do not extend to general business overheads such as rent, insurance, phone and power, rates, staff training and operation of IT systems.

The High Court ruled that general business overheads are not to be included.   There has to be a close and relevant connection between the cost claimed and the specific fee being charged.  Justice Toogood said an analysis of employee time spent setting up and reviewing credit contracts could justify an apportionment of employee remuneration to establishment fees and maintenance fees for individual credit contracts.

For retailers, general overheads not recoverable by these fees are to be recovered in list prices.  For financiers, overheads are recovered through interest charged on the loan.

The High Court made no ruling as to what would be actual and reasonable costs in this case.  It was left for discussions between the finance industry and the Commerce Commission.  Failing agreement, they could return to court.

Commerce Commission v. Sportzone Motorcycles – High Court (27.09.13)

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Litigation funding: Waterhouse v. Contractors Bonding

With increased use of litigation funding agreements the Supreme Court has set out rules governing third party provision of financial and legal support for other people’s damages claims.

As the adage has it: the courts like the doors of the Ritz Hotel are open to all comers.  But not all can afford to enter.  Impecunious litigants with valuable claims can be blocked by a deep-pocketed defendant who uses pre-trial manoeuvres to exhaust a claimant both financially and emotionally.

Litigation funding agreements are common in the United States.  Investors put up cash to fund litigation and share in any award of damages.  These arrangements have been frowned on in countries like New Zealand who follow the English tradition: it is against public policy to allow outsiders to meddle in litigation in which they have no personal interest.  At its worst, individuals with an ulterior motive would be taking control of someone else’s legal rights for the sole purpose of embarrassing or bankrupting the unfortunate defendant.  The United States courts have taken a more pragmatic view: the right to sue is a valuable economic commodity by itself and if others are willing to pay a price to share in this potential economic benefit then well and good.  The economic argument is buttressed by policy arguments that litigation funding agreements allow financially disadvantaged litigants to pursue their legal rights.

Use of litigation funding agreements in New Zealand reached the Supreme Court when the former owners of Phoenix Brokers Inc., registered in the US state of Georgia, sued New Zealand company Contractors Bonding Ltd.  In 2000, Contractors Bonding had agreed to underwrite Phoenix policies.  When the broking business collapsed, the former owners sued for negligence, deceit and breach of fiduciary duty, alleging they had suffered personal loss because of Contractors Bonding’s actions.  On learning that the litigation was being funded by a third party financier, Contractors Bonding demanded the right to see terms of the funding agreement.

The Supreme Court ruled that disclosure of the full agreement was not required: all that was required was disclosure of the identity and location of the funder and its agreement to abide by the decisions of a New Zealand court.

The court said it was not its job to vet any funding agreement; its job is to rule on the dispute put before the court.

Further inquiry is appropriate should the litigation funder be taking an assignment of the legal action; effectively “taking ownership”.  Outright purchase of another’s legal rights is not permitted.  In deciding whether ownership is being assumed, the court takes into account the level of legal control assumed by the funder and the share of damages to be received.

Waterhouse v. Contractors Bonding Ltd – Supreme Court (20.09.13)

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Freezing assets: Commissioner of Police v. Keen & ors

Jack Chen and May Wang, who hit the headlines with attempts to buy into the New Zealand dairy industry are facing criminal charges in Hong Kong of conspiracy to defraud.  New Zealand assets they are believed to have an interest in have been frozen by court order.

It is alleged Chen Keen (also known as Jack Chen) and May Hao (also known as May Wang) conspired to defraud the Hong Kong Stock exchange and China Jin Hui Mining Corporation/Natural Dairy (NZ) Holdings when attempting to sell 22 dairy farms owned by the Crafar group at an inflated price and without disclosing their interest. 

The two are alleged to have created false accounting statements overstating farm profits by some fifty million dollars.  Jack Chen is alleged to have received $23.5 million and May Wang $201.6 million.  Funds allegedly received dishonestly from Natural Dairy (NZ) are said to have been used to buy four farms along with residential property in Auckland.

In October 2011, Hong Kong authorities placed a restraining order on their property worldwide.  To be effective, such an order needs to be registered in each country where assets are situated.  In New Zealand, the Mutual Assistance in Criminal Matters Act and the Criminal Proceeds (Recovery) Act set out a mechanism for registration of foreign restraining and forfeiture orders.

In the High Court, Justice Courtney approved registration of the Hong Kong order.  The biggest asset frozen is a 142 hectare farm on the Napier - Te Matai roads valued at just over four million dollars.  The Official Assignee takes control of the property.  The court-ordered freeze does not affect the rights of secured creditors to seize mortgaged assets.

Commissioner of Police v. Keen & ors – High Court (2.09.13)

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