Contract: Smith v. Jones

For him the alias is Smith; for her the alias is Jones: judicial disguises used in the High Court to discreetly hide identities of the successful businessman and the sex worker disputing ownership of a $500,000 advance.

Recently widowed, Mr Smith met Ms Jones at a massage parlour.  Over the subsequent four years their relationship moved from a purely commercial arrangement for sexual services to that of a sugar daddy and his mistress.  The court was told Mr Smith arranged for regular payments into her bank account of between $5000 and $2500 per month.  She accompanied him to social events, the theatre and concerts.  He met her son and paid for mother and son to travel overseas to visit their home country.  He bought her clothes, jewellery and an expensive car.  He paid $50,000 for renovations to her house and made a flat available for her son at a modest rental.  At Ms Jones suggestion, they began looking for a business investment. Ideas canvassed were a business or an investment property to rent out.  The intent was to provide a secure financial future for Ms Jones.  Nothing suitable was found.  Evidence was given that in December 2012 Mr Smith created a $500,000 term deposit in Ms Jones name.  Mr Smith was to describe this deposit as an expression of good faith, as a substitute for the purchase of investment assets originally planned.  Two months later their relationship ended with Ms Jones claiming the $500,000 deposit was a gift; Mr Jones claiming it was a loan.

Justice Andrews ruled that the term deposit was not a gift, it was a conditional loan.  There was an implicit agreement between the two that the loan was conditional on their relationship continuing and in the interim Ms Jones was entitled to interest accruing on the term deposit.  Her entitlement to the money ended when the relationship ended.  Ms Jones was ordered to repay the $500,000 advance together with all interest earned on the term deposit as from April 2013.

Smith v. Jones – High Court (30.10.14)

14.051

Real Estate: Maketu Estates v. Robb

An estate agent’s failure to tell his client that a second potential buyer was interested in a Maketu kiwifruit orchard cost PGG Wrightson $1.1 million; the extra amount the property could have sold for but for the misleading advice given the vendor by the agent.

Maketu Estates Ltd sold its Bay of Plenty 66 hectare kiwifruit orchard in November 2012 for $3.8 million.  It had been a tough two years for the industry and for local real estate agents: PSA bacterial disease had badly affected production, farm incomes and land values.  Kiwifruit packhouses were scrambling to get fruit for their production lines and were buying up orchards to ensure a guaranteed supply of fruit.

Maketu Estates sold to a local packhouse: DMS.  Maketu learnt days after the sale that a rival packhouse MPAC had also been interested.  The High Court was told that hours before DMS shook hands on the deal MPAC was still showing interest as a serious buyer, phoning the Wrightson agent for clarification of what was included in the sale.  MPAC was left with the impression there was no rush, while in fact the agent was at that time meeting with directors of Maketu prior to a final meeting with DMS.  The agent did not tell Maketu’s directors that another buyer was still keen.

Directors of Maketu Estates said at no time were they advised that MPAC was in the market and proposing to make a bid.  Having competing bidders would inevitably push up the price.

Justice Woolford said evidence indicated that Wrightson’s agent told Maketu’s directors DMS was the only buyer.  And not telling MPAC that negotiations were underway between Maketu and DMS was deceptive and misleading, he said.  His Honour surmised that the Wrightson agent held a subconscious bias in favour of DMS.  The agent had a very good relationship with the packhouse, having done a lot of work for the company over the years.  By contrast he had no previous working relationship with the MPAC staffer he spoke to on the phone, had not taken him on an earlier view of the property and did not recognise the significance of his interest in the orchard.

Wrightson and its agent were held liable for a breach of the Fair Trading Act and for a breach of the duties owed a client.  Damages of $1.1 million were the difference between the price paid by DMS and the amount that could have been obtained in a competitive market.  Wrightson’s claim for $88,000 commission on the sale to DMS was dismissed.  Its agent had failed to act in the best interests of Maketu Estates.

Maketu Estates v. Robb – High Court (29.10.14)

14.050

Lawyer/client: Torchlight Fund v. NZ Credit

He was one of law firm Buddle Finlay’s most valuable clients generating fee income in excess of ten million dollars over a fourteen year period.  The knowledge gained about George Kerr was so detailed that the High Court barred the firm from acting for financiers chasing him for $A33.6 million.

Around 2009, businessman George Kerr established the Torchlight Group.  It specialises in purchasing distressed assets.  In 2012, Torchlight borrowed $A37 million short term through Australian financier Mr John Grill to acquire debt from Bank of Scotland International.

The High Court was told this $A37 million loan was for 60 days only.  Repayment of principal was late, being paid progressively through 2012 and 2013.  The Australian financier is now demanding further payments for interest, fees and penalties accruing at the rate of $500,000 a week – a demand now in excess of $A30 million.  Torchlight has gone on the attack, saying late payment fees claimed are an unenforceable penalty.

Learning that Buddle Finlay was to act for the financier against Torchlight, Mr Kerr applied to have the law firm removed from the case.  He said Buddle Finlay knows all about his personal circumstances and business methods having worked for him for over a decade.  This is confidential information which the law firm should not be allowed to use against him.  Should Torchlight be held liable, it is likely the financier will chase him personally for money due, he said.

The law firm said any possible misuse of confidential information was “fanciful or theoretical”.  Justice Gilbert removed Buddle Finlay from the case.  Disqualification was the only effective way of avoiding any risk of the firm acting against Mr Kerr and his business interests, he said.  The financier argues Torchlight had the benefit of independent legal advice before taking up the short term loan.  This is legal advice provided earlier by Buddle Finlay itself.

Torchlight Fund v. NZ Credit – High Court (17.10.14)

14.049

Family trust: Harre v. Clark

It was the views of an 86 year old matriarch that won out in a dispute over the sale of eleven hectares of valuable land on the outskirts of west Auckland owned by a family trust.  The High Court ruled she did not act improperly when removing her daughter and a local solicitor as trustees following arguments over the method and timing of any sale.

The Harre family established a family trust in 1989 which took ownership of eleven hectares of farm land on Totara Road, Whenuapai.  The land is not economic as a farm, but has been used to run dry stock.  Now worth millions, its value is expected to increase as Auckland expands.

The Trust land is all that remains of a farm which has been in the Harre family since the 1860s.  At age 86, Lois Harre is the oldest living descendant.  Her descendants and their spouses are named as beneficiaries of the Trust.  The court was told there had been a family meeting in late 2009 with general support for a sale.  Dissension followed within the family about what should happen: one daughter looking for an immediate sale; a son looking to wait and subdivide later before selling.

Matters reached a head when two of the trustees, daughter Lynette Clark and solicitor Colin Lucas took steps to market the property and it was listed for auction in March 2012.  The auction was cancelled following objections by matriarch Lois and a son, Roderick.

Evidence was given that Lois then used her power of appointment in the Trust deed to appoint herself and son Roderick as trustees.  Colin Lucas was removed as trustee at the same time.   When daughter Lynette objected, she too was removed as trustee.

The High Court was asked to rule on who were now in charge of the Trust.  The two dismissed trustees claimed to still be trustees and they claimed the appointments of Lois and Roderick were made for improper reasons.  It was alleged that Roderick was attempting to misuse his position as trustee to buy some of the land cheaply.  It was also alleged Lois was angling to continue using the Trust land.  The court was told she lives on an adjoining property.

The power in a trust deed to appoint and remove trustees must be used for a proper purpose, consistent with the purpose of the trust and in the best interests of the beneficiaries as a whole.  Justice Brewer described Lois Harre as a determined and formidable person.  He said the dismissed trustees had failed to prove on the balance of probabilities that the two new trustees had been appointed for an improper purpose.

Harre v. Clark – High Court (16.10.14)

14.048

Sth Canterbury Finance: R. v. Sullivan, White & McLeod

While Allan Hubbard, the autocrat controlling South Canterbury Finance, developed a sainted reputation as benefactor for good causes his finance company was desperately hiding the extent of problem loans by window-dressing its balance sheet.  By moving problem loans off balance sheet prior to balance date and taking them back later, South Canterbury presented a healthier picture than justified.

Mr Hubbard died in September 2011 following a car crash.  He left behind a finance company under government control following a $1.6 billion bailout and criminal prosecutions against former directors of the company and its chief financial officer.  Poor lines of control within South Canterbury Finance and weak accountability caused evidentiary problems for prosecutors trying to sheet home criminal liability.  A single director, Edward Oral Sullivan, was convicted. On a charge of deception in relation to a 2006 transaction, he was held to have deliberately misrepresented who was the end purchaser of shares in a Hellaby Holdings subsidiary in order to defeat operation of the Takeovers Code.  He was also convicted of Securities Act offences for material non-disclosures of related party lending.

The most serious criminal charge faced by directors was an allegation that they used false financial statements to get a 2008 government guarantee of South Canterbury investors’ deposits.  This charge was dismissed when there was no proof that the government actually relied on the financial statements when admitting South Canterbury to the guarantee scheme.

The then Labour coalition in New Zealand was blindsided in October 2008 when the Australian government suddenly announced a federal guarantee of depositor’s funds.  This was designed to calm investors’ nerves in the face of worldwide banking instability and the threat of a run by depositors on banks.  Two days later, the Labour government announced a similar guarantee scheme for New Zealand deposits to prevent a flight of investor funds to Australia.  Within 48 hours South Canterbury applied to join the scheme.  Approval was given three weeks later.

The High Court was told South Canterbury provided copies of its most recent audited financial statements in support of its application.  It was alleged that the figures had been massaged.  There was evidence that South Canterbury management had a history of window-dressing its balance sheet to hide the extent of asset impairment.  The prosecution described methods used as being “purposefully structured to hide high risk lending” and moving “beyond the cavalier to the dishonest”.  One internal South Canterbury finance memo talked of “cheque-swapping at balance date” and the creation of a “façade”.

Evidence was given that South Canterbury’s parent company, Southbury Group, would acquire problem loans from South Canterbury shortly before balance date.  This removed any need to disclose the impaired loan which was now replaced in South Canterbury’s records with the injection of new funds to replace the non-performing debt.  After balance date the transaction would be reversed.  Asset impairments were understated as a result.  Management had no incentive to manage non-performing loans when they were being hidden from analysts and investors.  Any complaints within South Canterbury about the practice were waved away in autocratic fashion by Mr Hubbard.  Attempts by the auditor to keep tabs on what amounted to related party lending proved ineffective.

One example of window-dressing described in the High Court was false accounting entries made ten days before balance date in 2009 recording a fictitious transaction between Southbury, South Canterbury and Kelt Finance Ltd.  South Canterbury supposedly was advancing $10 million to Kelt Finance which in turn lent $10 million to Southbury which in turn paid $10 million to South Canterbury.  The effect of this fictitious money-go round was to misleadingly reduce related party indebtedness between Southbury and South Canterbury by $10 million and hide the fact that South Canterbury was in breach of loan limits with Southbury.

Justice Heath ruled that even if the financial statements used to obtain a government guarantee of investors’ funds were false, there was no evidence that the government relied on these financial statements before granting the guarantee.

There was evidence that in October 2008 there were such grave concerns about a total financial collapse that finance companies were being admitted to the scheme with minimal prior checks.  Government did not decide which financial organisations would be given a guarantee; that decision was delegated to the secretary of the Treasury.  The court was told applications were sent to the Reserve Bank for analysis.  Bank analysts gave a “negative assurance” in respect of South Canterbury’s application: they had no reason to believe it should not be approved.   The final decision remained with Treasury and was at the discretion of the secretary of the Treasury.  Evidence was given that there was no written record of reasons why the secretary of the Treasury gave approval for South Canterbury to be admitted.  He was not called to give evidence at the trial.

R. v Sullivan, White & McLeod – High Court (14.10.14)

14.047

Lease: Cornwall Park Trust v. Chen

Increased rents demanded by Cornwall Park Trust on its leased properties look to be too high when no bids were received for a Maungakiekie Avenue property abandoned after the annual rental increased 900 per cent.

Cornwall Park Trust Board in Auckland took a hard line against one leaseholder who abandoned her property after a twenty one year rent review raised the annual ground rent to $73,750.  She was liable to pay the cost of refurbishing the property up to standards demanded by the lease.

Young Xin Chen has been in dispute with Cornwall Park Trust after annual rent for her property jumped in 2009 from $8300 to $73,750.  She purchased the property at 21 Maungakiekie Avenue, Epsom in 2005 for $450,000 when the lease had four years to run before the next rent review.  Many properties in the area are owned by the Trust and leased on perpetually renewable, long-term ground leases known as “Glasgow” leases.  Leaseholders enjoy rights of occupation, while the Trust has residual ownership: in economic terms, the lessor’s interest is like a bond secured over the land with the value of the bond reset with each 21 year rent review.  Rentals are recalculated with each rent review at five per cent of the freehold property value excluding the value of improvements to the property.

The court was told Mrs Chen disputed the increased rental, retaining possession of the property for the next two years before surrendering the keys.

The Maungakiekie Avenue home was put up for auction by the Trust.  Terms of the lease entitled Mrs Chen to compensation for the value of the house and garage situated on the land if the property sold at auction.  No bids were received.

Evidence was given that the Trust subsequently refurbished the property to what it called “executive standard”, then rented out the property at a rate which is about two-thirds the $73,750 annual rental demanded of Mrs Chen.

The Trust Board sued Mrs Chen claiming lease payments at the new higher rate for the two years she remained in possession following the rent review and also claiming costs of repairs to the house.

Justice Ellis ruled that Mrs Chen was liable for two years rent at the old rate only.  Her Honour did not accept the Trust’s arguments that the lease required Mrs Chen to pay two year’s rental at the new higher rate and that she had lost her entitlement to compensation for the value of the house and garage.

Justice Ellis ruled that Mrs Chen was liable to pay some $119,000 for the Trust Board’s costs in getting the property to good order and condition.  Mrs Chen was in breach of lease terms requiring her to maintain the property in good condition and to repaint the house every five years.  The house was built in the 1920s.  It was no defence for Mrs Chen to say the house was in poor condition when she purchased it.  There was evidence that Mrs Chen had stripped from the house vanity units, doors and the stove before surrendering possession to the Trust Board.

The Trust Board did not seek to recover from Mrs Chen its cost in refurbishing the property above and beyond that required by the lease in order to have the house fitted out to an executive standard.

Cornwall Park Trust Board v. Chen – High Court (8.10.14)

14.046

Tax: Accountants First Ltd v. Inland Revenue

Wellington accounting firm Accountants First Ltd has been removed from the list of Inland Revenue approved tax agents after convictions for tax evasion.

Owned by Mr Imran Kamal and his wife, Accountants First has been in business since 2005.  The High Court was told that through 2006-2008 Mr Kamal was implicated in a tax scheme involving use of false invoices raised for non-existence IT services.  These invoices were used to support fraudulent GST claims.   The fraud came to light following criminal prosecutions against promoters of the false invoicing scheme: a Mr Anderson and a Mr Gilchrist.

In December 2011, ten months after Inland Revenue had commenced a tax investigation into both Accountants First and Mr Kamal, he elected to make a voluntary disclosure to Inland Revenue, arranging to repay tax due with interest and penalties.   Tax evaded by Accountants First totalled some $55,700.

In February 2013, Mr Kamal was sentenced to three months home detention and 150 hours community work after conviction on six counts of tax evasion.  Accountants First was convicted and discharged.

Accountants First challenged Inland Revenue’s decision to remove it from the list of approved tax agents.  Status as an approved tax agent gives considerable commercial advantages to tax accountants.  With client approval they have online access to client information at Inland Revenue.  This speeds up tax work, improving business efficiency. Evidence was given that Accountants First currently employs up to ten staff and handles about 1100 clients.

Justice Collins ruled that Inland Revenue followed the correct procedure: it had provided reasons and it had given Accountants First a chance to respond.

Inland Revenue said convictions for tax evasion were evidence of behaviour that undermined the integrity of the tax system.  Retaining Accountants First on the list of approved tax agents would undermine confidence in the system.

Pleas by Mr Kamal that he was remorseful and would be unlikely to offend again were prejudiced by his later behaviour when seeking name suppression on grounds that publicity would affect his wife’s health.  Evidence was given that Mr Kamal filed an affidavit stating that his wife was taken by ambulance to hospital following an overdose of sleeping pills.  Inquiries revealed there was no evidence of Mrs Kamal being at the hospital on the day in question.  When challenged, Mr Kamal stated he had taken his wife to the hospital, but they left without seeing anyone.

Accountants First Ltd v. Inland Revenue – High Court (6.10.14)

14.045