Zespri: Shanghai Neuhof v. Zespri International

The High Court dismissed claims by Chinese importer Shanghai Neudorf that Zespri was obliged to compensate it for fines totalling eight million dollars imposed by Chinese authorities for deliberate underpayment of kiwifruit import duties.  Shanghai Neudorf was the guilty party.  Courts will not support litigants where their claim is based on illegal or immoral behaviour.

Chinese authorities raided Shanghai Neudorf’s offices in June 2011 investigating underpayment of duty.  In China, evasion of duties is treated as a smuggling offence.   The company was convicted and fined.   Its managing director, Mr Liu, was also convicted and jailed.  Zespri suspended kiwifruit exports to China while the investigation was underway.  It later terminated its relationship with Shanghai Neudorf, appointing a new importer.

The court was told an assessment of duty payable is not straightforward because the final price is not known until product is sold in the Chinese market.  Zespri and Shanghai Neudorf fixed a value for imports, described as an Agreed Assessable Value.  It was for Shanghai Neudorf to pay customs duty based on this value.  Adjustments were made later on the basis of actual sales and a final liability for import duties determined.

The Shanghai People’s Court found that Shanghai Neudorf was liable for payment of import duties.  It was the purchaser of Zespri’s product.  Shanghai Neudorf was not selling on consignment as Zespri’s agent.

After conviction, Shanghai Neudorf sued without success in the New Zealand courts alleging Zespri was liable to indemnify it for the $8 million fine.  Justice Courtney said it could not recover.  The claim fell foul of the ex turpi causa rule: as a matter of public policy the courts will not enforce any claim based on a wrongful act.

The amount of unpaid duty totalled approximately $7.5 million.  Zespri is defending a separate claim by Shanghai Neudorf that Zespri is liable for this amount.

Shanghai Neuhof v. Zespri International – High Court (26.09.14)

14.044

EQC: Michalik v. Earthquake Commission

It was a dispute over repairs to only part of a small Wellington retaining wall but the Earthquake Commission poured a lot of resources into the case to entrench a rule that depreciated replacement cost not current replacement cost is the measure of compensation for wall collapses.

Mr Michalik took on the Earthquake Commission over compensation for damage following the partial collapse of a 1.5 metre high retaining wall at his Highbury home after heavy rain in July 2012.  The wall had been built in the 1970s from hollow triangular concrete blocks cemented in place.  It was not reinforced.  There is no drainage.  The wall does not comply with current Building Act requirements.

The Commission accepted liability as natural disaster damage.  Mr Michalik argued he was entitled to “new for old”: repair up to current building code requirements. 

Under the Earthquake Commission Act, retaining walls within 60 metres of a home are covered for indemnity value.  The Commission assessed the value of the land affected by the landslip at $4050 and the value of the damaged retaining wall at $3130 – collectively $7180.  Replacement cost for repair to current code requirements was estimated at over $18,000.

The High Court ruled that $3130 was the correct figure as compensation for damage to the wall .

It can be difficult to establish a value for a retaining wall alone.  Where a retaining wall is a substantial feature of a building construction, a separate value for the wall can be obtained by establishing a market value for the property with and without a wall in place.  In most cases a retaining wall is too small a part of an overall valuation to be separately valued.  In these instances, depreciated replacement cost is the appropriate methodology, Justice Williams said.

For Mr Michalik’s wall, determining depreciated replacement cost was a three step process.  First: the cost was estimated of building a retaining wall as close as possible to the damaged wall in materials and design (even though such a wall would not comply with current code requirements).  Secondly: depreciation was deducted.  A retaining wall has an assumed life of 80 years.  Mr Michalik’s wall was built in the 1970s.  Depreciation at 46% was deducted.   Thirdly: GST was added to the depreciated value.

On the figures before the court, it will cost Mr Michalik at least an extra $15,000 above the $3000 received from the Commission  to reinstate his damaged retaining wall.

Michalik v. Earthquake Commission – High Court (17.09.14)

14.043

Feltex: Houghton v. Saunders

The over three thousand disgruntled Feltex investors who joined a class action demanding compensation after the 2004 public float were left bereft after a High Court ruling that the float prospectus was not materially misleading as to content or omissions and that even if it were no compensation would have been payable since the share price did not drop noticeably immediately after the float.

Shareholders buying into Feltex in 2004 saw the share price drop by two-thirds over the next two years, with Feltex then going into liquidation.  A class action followed, claiming investors were misled when investing.

The 2004 public float enabled Credit Suisse First Boston to sell down its interest in carpet manufacturer Feltex.  While the prospectus identified numerous risks facing the business it generally portrayed an improving financial position for the company.  The issue price at $1.70 per share implied a gross dividend yield of 9.6%.  Six months after the float, directors reported trading results that were up on the previous period, announcing an interim dividend 15% higher than the interim dividend projected in the prospectus.  Then two months later, directors warned of a profit downgrade.  The quoted share price all but halved over the next two days trading.

Not surprisingly, investors considered they had been stung: the company’s prospects had been oversold in the float prospectus.  The Securities Commission investigated.  In a 2007 report, it concluded that the Feltex prospectus was not misleading in any material respect.

Justice Dobson reached the same conclusion after an eleven week hearing in the High Court.  In their class action, investors alleged the prospectus was misleading under a number of broad headings: undisclosed adverse trading trends; misstatements or omissions as to business risks; misleading or unreasonable assumptions as to future financial performance; misleading presentation of financial data; misstatements regarding management’s equity incentive plan; discrepancies between descriptions of how the final price would be set and how the book build did take place; and misrepresenting share value by painting Feltex in a more positive light than was justified.

Justice Dobson said the test as to whether a prospectus is misleading is through the eyes of a prudent non-expert who at least has a basic understanding of the narrative.  A prudent non-expert who does not understand a material part of any prospectus is obliged to get clarification before proceeding.  Content does not have to be “dumbed down” for less sophisticated readers.  The Feltex prospectus was 148 pages long.

There is some sympathy for investors where cautionary signals and descriptions of risk are buried near the end of a long document, His Honour said, but this was not such a case.  The Feltex prospectus signalled potential risks upfront.

In the investment statement headed “What are my risks?” Feltex included an extensive disclaimer cautioning potential investors not to place undue reliance on forward-looking statements.  Justice Dobson said this disclaimer removed the basis for any claim that investors were entitled to rely on prospectus projections.

While there were justifiable criticisms of some content in the prospectus, he said, none of the criticised content was material.

Relying on expert evidence regarding efficient market theory, Justice Dobson said no damages would be payable even if there had been material misstatements or omissions in the prospectus.  Efficient market theory stipulates that the market price for publically traded shares will quickly assimilate the price effect of new information.  Once a less than fully informed market becomes fully informed, the impact of new information is very quickly reflected in the share price.

Feltex said since the share price exhibited no significant drop post-float until nine months after the prospectus was issued then any misstatement or omission in the prospectus was, nine months later, no longer relevant to the market price.

Investors had the opportunity to sell into the market at any time, rather than waiting until Feltex went into liquidation and then attempt to recover the price paid.

Houghton v. Saunders – High Court (15.09.14)

14.042

Belgrave Finance: Belgrave Finance v. Schofield & Buckley

Masterminds behind a commercial fraud against investors in Belgrave Finance have been ordered to pay $8.6 million dollars damages following action taken by insolvency specialists KordaMentha.

Belgrave Finance went into receivership in 2008.  Subsequent investigations found at least thirty per cent of the finance company’s loans were advanced to parties associated with Belgrave, a lending policy grossly in breach of the finance company’s trust deed which limited related party lending to two per cent.  Two Belgrave directors and Belgrave’s legal adviser were jailed for their part in the fraud.  Criminal penalties might give some satisfaction to investors, but that alone does not put money back in their pocket.

KordaMentha, acting as both receiver and liquidator of Belgrave Finance took civil action to recover compensation for funds lost.  A detailed investigation by KordaMentha identified that a Mr Raymond Schofield was the driving force behind Belgrave Finance.  Whilst not a director, he “pulled the strings” controlling company management.  Through a web of companies and a discretionary trust, Mr Schofield was the ultimate owner of Belgrave.  Over thirty per cent of Belgrave loans went to Mr Schofield and businesses associated with him.  The court was told many of these loans had unclear or inadequate documentation, and in some cases no documentation at all.  Accounting records were fudged to hide the fact that Mr Schofield was the borrower.

Justice Fogarty ruled that Mr Schofield was personally liable to pay damages for his part in dishonestly assisting Belgrave directors with the improper transactions.

Belgrave director, Mr Shane Buckley was also ordered to pay damages.  Justice Fogarty said Mr Buckley was in breach of his duties to the company by making the Schofield loans and actively concealing them.

Mr Schofield and Mr Buckley were held jointly liable to pay $8.6 million.  The court was told Mr Buckley was adjudicated bankrupt just after the High Court hearing.

Legal action by KordaMentha against Mr Stephen Smith, another Belgrave director, was suspended because Mr Smith became bankrupt prior to the hearing.

Belgrave Finance Ltd v. Schofield & Buckley – High Court (12.09.14)

14.041

Insurance: QBE Insurance v. Wild South

Where an insurance policy provides for automatic reinstatement of cover following loss then cover does continue without a break.  If an insurance company subsequently gives notice cancelling cover, it must pay for any losses arising in the interim prior to cancellation.

The Court of Appeal has definitively settled the effect of automatic reinstatement clauses in insurance contracts.   Operation of these clauses was at issue after successive earthquakes in Christchurch during 2010 and 2011.  Insurance companies argued they had an unspecified time within which to decide whether there had been “automatic” reinstatement of cover and that they could retrospectively cancel cover after a later earthquake had caused further loss to insured buildings.

The Court of Appeal ruling followed consolidated appeals by three different insurance companies: QBE Insurance, Vero Insurance and Lloyds.

The Court ruled that where there is an “automatic reinstatement” clause, cover resumes immediately following an insured loss.  Where cover is subsequently cancelled, notice of cancellation operates prospectively, not retrospectively.  A further or increased premium can be levied following automatic reinstatement.

QBE Insurance v. Wild South – Court of Appeal (10.09.14)

14.038

Ports of Auckland: Ziegler v. Ports of Auckland

A High Court challenge failed to overturn a trespass notice issued by Ports of Auckland against a former employee it alleges was disrupting port operations.  In addition, notice barring a union delegate from Port premises was upheld. 

In recent years, industrial unrest on the Auckland waterfront has received considerable media attention.  Ports of Auckland management say productivity must improve.

In November 2013, a trespass notice was given to former employee Kenneth Ziegler warning him to stay out of the Port.  He had been dismissed two months previously after allegations he had threatened to kill Port of Auckland’s general manger (operations).  He said a trespass notice prevented him from working for a private stevedoring company operating at the Port.

Ports of Auckland conceded that the waterfront area is a “quasi public space”.  Several thousand people access the Port daily: employees of the Port, staff from government departments and private contractors, as well as seamen crewing vessels docked in port.  Justice Woolford ruled there were no grounds for the court to review this trespass notice.  Issuing a trespass notice was not a public issue justifying judicial review; it was a private matter between Mr Ziegler and his former employer.  The fact that Mr Ziegler now cannot access the port to work for a private stevedoring company or to crew a vessel is an unfortunate but inevitable consequence of his previous behaviour, His Honour said.

In January 2014, Ports of Auckland advised union delegate David Phillips that he was barred from the Port.  He previously enjoyed unfettered port access assisting members of the Maritime Union and inspecting vessels on behalf of the International Transport Federation.  Two months later, Mr Phillips resigned as union delegate with the intention of working on the waterfront part-time as a stevedore.  The court was told access was denied following blog posts written by Mr Phillips labelling non-union labour as scabs, saying they should “live every day fearing a backlash and looking over their shoulders”.  Mr Phillips said refusal of access was in breach of his Bill of Rights entitlement to freedom of movement.  Justice Woolford said the Bill of Rights does not apply to commercial operations run by Ports of Auckland.  He ruled Ports of Auckland acted within the law by taking steps to protect both its commercial operations and the interests of its employees.

Ziegler v. Ports of Auckland – High Court (10.09.14)

14.039

Tax: ASB Bank v. Inland Revenue

ASB Bank is under investigation for tax avoidance over investments in Japanese bonds.  Following a preliminary court hearing, the High Court refused ASB access to Inland Revenue internal files about the investigation.

Inland Revenue alleges tax avoidance in respect of foreign exchange losses arising on ASB investments in Japanese government bonds.  In particular, the Revenue is looking closely at the purpose and effect of hedging arrangements used by ASB.  The Bank denies any wrongdoing.

ASB told the High Court there was no tax avoidance, but if there was then no penalties should be imposed because it did not take an “unacceptable tax position” when filing its tax returns.  The Bank was seeking Inland Revenue internal documents to find departmental views which might support its argument that no penalties should be imposed.

The extent of tax avoidance alleged by Inland Revenue was not made public at the preliminary High Court hearing. 

There can be genuine differences of opinion between tax specialists as to the tax effect of a particular transaction.  Even if later found to be in the wrong, a taxpayer can be excused penalties if the tax position taken was “likely or not to be correct”.  This requires evidence that there was objective support for the tax position taken, even if it later proved wrong.

ASB Bank wanted Inland Revenue to hand over all emails, meeting notes and minutes relating to the investigation.  This would include the musings and debates of all staff: senior and junior.

Inland Revenue said there are strong public interest arguments against making disclosure.  Fair and frank exchanges of view between staff would be discouraged if they knew their comments would be disclosed.

Justice Asher ruled against the Bank.  Informal internal expressions of view can only be understood in context.  There may be a myriad of qualifying factors.  Comments may have been based on a lack of knowledge about the subject, or made with a misunderstanding of the background facts, or a particular internal document may be drafted as a contrary view taking the stance of a devil’s advocate.

ASB Bank Ltd v. Inland Revenue – High Court (10.09.14)

14.040