Rates: Mangawai Ratepayers v. Kaipara District

Mangawhai ratepayers got sympathy but not much more in their High Court challenge to cost blowouts exceeding $20 million on their local sewage scheme.   The cost overruns stand, the construction loans are still payable and the increased rates stand.  Local councillors responsible have been turfed out of office with government appointed commissioners installed to run Kaipara District until new elections scheduled for October 2015.  Kaipara’s chief executive has departed.

It has been a sorry tale of local body incompetence.  Out of their depth in negotiating and signing a public/private partnership deal to construct and operate a sewage reticulation and treatment system for the Northland seaside town of Mangawhai, district councillors left angry ratepayers carrying the can.  Many ratepayers have suffered stress, anxiety and financial hardship by having to pay rates at a significantly higher level than anticipated.  What for some was the purchase of an idyllic retirement home by the sea at Mangawhai has turned into a nightmare.   A number face a forced sale at a significant capital loss to avoid meeting potentially even higher rates.

Between 2005 and 2007, Kaipara District entered into a series of contracts for a new Mangawhai sewage system.   Initial public consultation documents disclosed a cost of some $35.6 million.  By the time the project was complete the cost had ballooned to $57.7 million, nearly all on borrowed money.  And five years later, with unpaid interest on the debt capitalised, the debt was up to $63.3 million.

A 2013 report by the Auditor-General concluded that Kaipara District “lost control” of the project.  By late 2007, Kaipara District did not know what was being built, what it would cost, how many properties it would service or how it would be funded.

The court was told Kaipara District staff and councillors made a series of catastrophic decisions on the basis of insufficient information.  The contract was signed at a price already in excess of a benchmark figure set by Kaipara District.  Funding was arranged through bankers ABN Amro Bank.  Only after signing contracts for the construction of a sewage treatment plant did Kaipara District realise there was no provision in the contract to deal with treated wastewater.  Twelve months on the scope of the project was doubled, with no public consultation.  Purchase of a farm at a cost of $11.1 million to deal with wastewater added substantially to the increased costs.

In the High Court, Justice Heath was moved to say that it was incomprehensible that a democratically elected council, in conjunction with its executive team, could increase the cost of a major infrastructure project by some $22.1 million without consulting ratepayers.  A consortium of Mangawai ratepayers challenged the validity of rates levied by Kaipara District.

The High Court ruled that Kaipara District failed to give the required public notice necessary for an infrastructure project of this size.  This failure meant the decision to proceed with the project and to levy rates to pay for the project were both unlawful. 

ABN Amro loans financing the unlawful project remain enforceable as a “protected transaction”.  Rules in the Local Government Act enable financiers to get a certificate from borrowing councils stating that all proper procedures have been followed.  These certificates reduce the cost of council borrowing; financiers then do not have to audit the minutae of council projects to make sure all required steps have been taken.  ABN Amro obtained the necessary certificate to support its funding of the Mangawai sewage project.

In December 2013, government passed legislation validating retrospectively the unlawful sewage contract and the otherwise unlawful rates levied.  Ratepayers complained this unjustifiably took away their legal right to challenge what Kaipara District had done.  Justice Heath noted it was common to use validating legislation to legitimise local council mistakes and he ruled that ratepayers’ loss of their legal rights in this case was legitimate in a free and democratic society.

Mangawhai Ratepayers v. Kaipara District Council – High Court (28.05.14)

14.021

Mainzeal: Yan v. Mainzeal Ltd

Insolvency practitioners chasing down funds for creditors of the Mainzeal Group are having their difficulties pinning down Richard Yan, the driving force behind Mainzeal.  Some debts were settled only after liquidation orders were sought against Yan-controlled companies and further recoveries delayed while the legality of Yan-initiated restructuring of Mainzeal funding lines is examined.

Bank of New Zealand appointed receivers of Mainzeal Construction in February 2013 to recover $11 million owed.   Three weeks later Mainzeal shareholders put their company into liquidation with insolvency specialists at BDO appointed liquidators.  BNZ has since been repaid. Liquidators have been realising the remaining Mainzeal assets.  Debts supposedly owed to Mainzeal from other companies controlled by Mr Yan are proving difficult to recover.

The Court of Appeal was told Mr Yan is at the centre of a web of companies, linked by common ultimate shareholdings.  These include Richina Global Real Estate Ltd (a company controlled by Mr Yan through a company registered in the British Virgin Islands and which has been a conduit for Mainzeal funding), Isola Vineyards Ltd (formerly known as Waiheke Vineyards Ltd) and King Facade Ltd (formerly Richina Land Ltd).  Mr Yan had effective control of each of these companies.  Mainzeal Construction did have independent directors on its board, but the court was told Mr Yan retained effective control up to the time Mainzeal was put into receivership.

Liquidators review of Mainzeal’s group financial position as at December 2011 identified that Isola owed some $5.6 million to Richina Global and Isola further owed some $4.4 million to King Facade, part of the Mainzeal liquidation.  Mainzeal unsecured creditors are owed in the region of $100 million.  In order to extract funds out of these related companies, Mainzeal liquidators asked the High Court to liquidate both Richina Global and Isola. 

Liquidation requires proof that the debtor company is insolvent and that the debt is due, but unpaid. 

In respect of Richina Global, Mainzeal liquidators claimed three separate unpaid debts existed.  First: a $136,800 intercompany debt owed by Richina Global.  Richina denied any money was owed.  It was only nine months after Mainzeal demanded payment and filed liquidation proceedings that Mr Yan provided evidence that Mainzeal had been “paid” by Richina Global paying some of Mainzeal’s debts.  Secondly: a debt of $579,800 arising when Mainzeal compensated BNZ for foreign exchange losses incurred by Richina Global.  The Court of Appeal ruled that this debt should be treated as secured in that funds to meet that debt were sitting in a law firm’s trust account earmarked for payment.  The law firm had been instructed to make payment but the funds had been retained in trust pending a court ruling as to who was entitled to receive the money.  Thirdly:  an intercompany debt of $5.78 million owed by Richina Global to King Facade. Mr Yan disputed the debt is due.  He says payment was postponed in a rearrangement of intercompany debt negotiated in December 2012.

In respect of Isola Vineyards, Mainzeal claimed two separate unpaid debts.  First: an intercompany debt of $2.47 million due from Isola to Mainzeal.  The High Court ruled this debt was repaid by payment to Mainzeal receivers.  The receivers used the money to repay BNZ, but Isola had cleared its obligation to pay Mainzeal.  Secondly: an intercompany debt of $4.4 million owed by Isola to King Facade.  Again, Mr Yan said payment of this debt was postponed by the December 2012 debt rearrangement.

Liquidation orders against both Richina Global and Isola Vineyards were refused.  The claimed debts were either not due, secured or genuinely disputed.

The status of the December 2012 debt rearrangement is yet to be resolved.  It was negotiated between related parties.  The effect of the rearrangement is to have Richina Global assume Isola’s $4.4 million debt to King Facade.  And a debt owed by Richina Global to Mainzeal reduced by $15.1 million.  The amended terms for payment are most unusual.   The debt is interest free, due for repayment in 2022 and repayment is conditional on Richina Global being profitable in 2022.

Yan v. Mainzeal Ltd – Court of Appeal (20.5.14)

14.023

Belgrave Finance: R. v. Hamilton

Hugh Edward Staples Hamilton, lawyer and former mayor of Central Hawkes Bay, has been convicted of being party to theft by a person in a special relationship following the 2008 receivership of Belgrave Finance.  Overzealous support of an important client caused Hamilton to cross the line, documenting and facilitating related party lending in breach of Belgrave’s debenture trust deed.

The 1200 investors in Belgrave Finance have received just under ten cents in the dollar from the receivership.  Investigations identified that some $12.5 million of Belgrave’s $30.7 million loan portfolio were related party dealings as loans to entities associated with a Mr Raymond Schofield.  Schofield was not a director of Belgrave, but was the driving force behind the finance company.  The High Court was told Schofield negotiated the purchase of Belgrave, arranged the funding, selected the directors and developed Belgrave’s ownership structure which saw Schofield ultimately control the finance company.

Evidence was given that Belgrave’s named directors did as they were told.  If Schofield told them to jump, they would probably jump, Hamilton told investigators.  The prospectus issued by Belgrave Finance promised potential investors that any lending to related parties would not exceed two per cent of tangible assets.   By providing legal assistance, Hamilton intentionally facilitated steps taken by Schofield to circumvent this limitation the High Court ruled.

Evidence was given that Hamilton did not participate in loan approval procedures within Belgrave Finance, but he did implement loan instructions coming from the company.  He completed the necessary documentation, at times backdating documents at the request of directors to disguise the fact that funds had already been advanced to interests associated with Schofield. In some instances, loan funds passed through Hamilton’s trust account with instructions for on payment.

Justice Faire ruled that Hamilton knew Schofield was a related party.  Hamilton was familiar with the related party rules in the Belgrave prospectus.  Back in 2005 he had emailed Schofield a summary of “dos’ and don’ts’” warning him that he was a related party in respect of Belgrave Finance.  Schofield was an important client for Hamilton and Hamilton knew from their ongoing relationship that Schofield effectively controlled Belgrave and its lending decisions.  Many legal documents regarding Belgrave were sent direct to Schofield, rather than to the company’s directors. 

Justice Faire said Hamilton’s motive for his actions may have been financial in the form of continuing legal fees or may have been to appease an important client, but the effect of his actions was to intentionally facilitate the theft from Belgrave Finance by providing legal assistance.

R. v. Hamilton – High Court (16.05.14)

14.022

Hanover Finance: Hotchin v. KA No.4 Trust

The FMA acted properly and in the public interest when intervening in legal arguments over how much Hanover Finance director Mark Hotchin could recover from the sale of an Auckland waterfront property, even though this intervention resulted in a potential reduction of recoveries for Hanover investors the High Court ruled.

The Financial Markets Authority (FMA) defended its actions in the High Court when Hotchin and interests associated with him demanded the FMA pony up for their legal costs.

Along with other directors of Hanover, Hotchin is being sued for alleged wrongdoing in the operation of failed finance company, Hanover Finance.  His assets have been frozen pending argument over the level of damages he must pay, if any.

One contentious asset is a substantial private residence then under construction on Auckland’s Paratai Drive.  The property was then owned by KA No.4 Trust, a family trust associated with Hotchin and his family.  While he did not own the property personally, Hotchin poured some $12 million dollars into its construction with the intent that on completion the property would be a family home.  The court was told Hotchin ultimately abandoned plans to live there.  At this time, there were no formal records of his status as a creditor, despite having part-financed the property’s construction.

When it was decided to sell, there was confusion over whether Hotchin personally was entitled to any money from the sale.   The FMA took an interest.  The asset freezing order covered any share Hotchin might receive from the Paratai Drive sale.

With High Court approval, the FMA was admitted as a party to argue on behalf of Hotchin as to his entitlement.

Justice Winkelmann ruled those first to be paid out of the sale proceeds were third party lenders: ASAP Finance Ltd and KA No.3 Trust (a separate trust related to KA No.4 Trust).  Next to be paid was KA No.4 Trust for the value of the land.  Hotchin stood third in line, having to bear the loss on sale out of his claimed $12 million.

As it turned out, this ruling left the FMA in a worse position that if it had accepted a last minute offer made on the first day of the trial which would have split the loss on sale between KA No.4 Trust and Hotchin.  Both KA No.4 Trust and Hotchin demanded the FMA contribute to their legal costs – costs of a trial would have been avoided if the FMA had accepted the earlier, better offer.

Justice Winkelmann said there would be no order for costs.  Everyone got what they set out to achieve.  Hotchin and KA No.4 Trust got legal certainty as to how the sale proceeds should be divided.  And because the FMA intervened this would not have to be relitigated later should there be arguments over any contribution Hotchin may have to make to investors in Hanover Finance.

It was reasonable for the FMA to reject the offer made on the first day of the trial, she said.  It was made after four o’clock in the afternoon of the first day and did not give the FMA sufficient time to properly consider the offer, especially since the offer came from two closely related parties: Hotchin and his family trust.

Hotchin v. KA No.4 Trustee Ltd – High Court (12.05.14)

14.020

Lombard Finance: Graham et al v. R

Home detention imposed by the Court of Appeal on former directors of Lombard Finance has been set aside by the Supreme Court.  Sentences of community service imposed by the High Court now stand.

Former politicians Sir Douglas Graham and Mr William Jeffries together with Mr Michael Reeves and Mr Lawrence Bryant stood trial for breaches of the Securities Act following the 2008 collapse of Lombard Finance.  Lombard was left insolvent with debts of some $125 million.  Debenture holders are unlikely to receive back more than fifteen to twenty cents in the dollar.

Lombard financed property developers.  Limited diversification in its loan book contributed to Lombard’s demise.  Six major loans to five developers represented 68% of its loan book.  Lombard was borrowing short-term from the public to finance these longer-term loans and was required to regularly update its prospectus, setting out the company’s position.

The High Court said prospectus statements as to future liquidity were misleading.  The Court of Appeal ruled that the misstatements were of sufficient gravity to justify imprisonment, to be served as home detention in this instance.

Supreme Court judges considered the Court of Appeal had taken an unnecessarily harsh view of the directors’ culpability.  The Supreme Court said evidence at trial in the High Court painted a picture of directors acting honestly.  The directors had not acted dishonestly, despite media reporting implying the contrary.  The directors were guilty of misjudgement at a time when Lombard was under financial pressure.  They had taken professional advice on wording in the prospectus.  Warnings about the potential fragility of future liquidity had been highlighted in bold type in the prospectus.

The Supreme Court said that disproportionately severe punishment would deter competent people from taking on company directorships.

The Lombard directors stand convicted of Securities Act offences with Mr Jeffries and Mr Reeves each sentenced to 400 hours community work and Sir Douglas Graham and Mr Bryant each sentenced to 300 hours community work and ordered to pay reparations of $100,000.

Graham, Reeves, Jeffries & Bryant v. R. – Supreme Court (7.05.14)

14.019

Historic places: Lambton Quay Properties v. Wellington City

It is easy to spend money when it is other people’s money: a maxim exemplified by the Historic Places Trust claiming domain over earthquake-risk properties in Wellington.

Lambton Quay Properties, owner of the Harcourts building in downtown Wellington, is in a bind.  The City Council has ordered the building be either earthquake-strengthened or demolished in the next 25 years.  Left in its present condition, the building is a safety risk in the event of a major earthquake.

The High Court was told that Lambton Quay applied to Council for a demolition permit after finding strengthening costs were so high as to be uneconomic.  Council refused permission on heritage grounds.  The Harcourts building is listed as a category one heritage building under the Historic Places Act.

Faced with the Kafkaesque dilemma of one arm of Council saying the building should be demolished and another arm of Council saying demolition is not permitted, Lambton Quay appealed to the High Court.

One ground of appeal was the complaint that heritage designations impose a burden on building owners without any contribution from the public who are the supposed beneficiaries.  Justice Collins said such economic considerations are a matter for parliament and legislative policy.  It was not something a judge could rule on.

Lambton Quay was successful on other grounds of appeal. 

The High Court returned the case to the Environment Court for a rehearing.  In particular, the Environment Court is required to consider demolition if there is no reasonable alternative and is also required to consider risks to public safety if the Harcourts building remains as it is.

The Historic Places Trust was ordered to contribute to Lambton Quay’s appeal costs.

Lambton Quay Properties Ltd v. Wellington City – High Court (2.05.14)

14.018