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