Fair Trading: Swindle v. Withers

Financiers of the Matakana and Goldridge wine companies were held partly responsible for their own losses of over $2.62 million after the companies went under when the High Court held them fifty per cent to blame in legal action against chartered accountant Mark Withers who had accepted responsibility for overseeing disbursement of loan monies.

The High Court was told US investors provided working capital to the Vegar family’s wine business for some eight years before the businesses closed down in late 2010.  Paul Vegar filed for bankruptcy while Peter and Jean Vegar put a debt compromise to creditors.

Working capital for Matakana’s and Goldridge’s wine business and property developments was funelled through GTF Capital Ltd, an investment bank.  Loans were on a “non-recourse” basis with repayment due after each year’s vintage had matured and been sold.  It was important to GTF that funds advanced each year were applied only to the processing and bottling of that year’s harvest as it had recourse only to that year’s  production for repayment of the year’s advances.

Evidence was given that in March 2008 and again in 2009 Mr Withers signed a letter to GTF stating that he was joint signatory of the relevant funding account and he undertook that the account would be used solely to meet costs of processing the 2008 and later the 2009 harvests.  Mr Withers and his firm Withers Tsang and Co Ltd were primarily responsible for tax work on behalf of the Vegar family.  He was not a signatory to the funding account, members of the Vegar family were.  The court was told funds were rapidly shifted out of the funding accounts and used elsewhere. 

Justice Peters ruled the signed letters amounted to an express statement by Mr Withers that he would oversee how the funds would be applied.  His failure to in fact oversee the disbursement of this working capital was a breach of the Fair Trading Act.  The financiers had been misled or deceived.  Money had been released from the funding accounts which would otherwise be available for repayment to them.

The financiers lost $2.62 million plus accrued interest, but Justice Peters ruled that Mr Withers was liable for only half this loss.  Financial statements provided to the financiers should have put them on enquiry.  They described loan advances being made to related parties, loans which should never exist if the funding was being used as prescribed to pay processing costs.  Also, the financiers did not act quickly when becoming aware the wine company was in financial difficulty.  Nine months prior to default, GTF was told by either Peter or Paul Vegar that liquidity was tight, Justice Peters said.  Then it was another 14 months after a payment due was missed before the financiers appointed a receiver.  They must bear some of the consequences of this delay, Her Honour said.  There was evidence that Matakana and Goldwater had traded at losses in excess of five million dollars over the period 2001-2008.

Mr Withers was ordered to pay damages of $1.31 million plus interest on this half share.  He held professional indemnity insurance with Zurich Australian Insurance.  Justice Peters ruled Zurich was liable for this amount.  

Swindle v. Withers – High Court (30.4.15)

15.040

Directors: Satterthwaite v. Gough Holdings

Decades long differences between two branches of the Gough Family are back in the courts with legal skirmishing over the ongoing appointment of Ben Gough as managing director of Gough Holdings.

Married twice, the founder of the Gough Gough & Hamer business empire left two families in an uneasy alliance as co-owners of Gough Holdings Ltd with the O.T. Gough branch (representing descendants of his first marriage) and the B.T. Gough branch (representing the second).  Gough Holdings deals in heavy industrial machinery and holds some very valuable distributorships including Caterpillar and Hyster brands.

Trustees of the O.T. Gough branch asked the courts to rule on the effect of the Gough Holdings company constitution as it applied to appointing and removing the company’s directors.  This was aimed squarely at Mr Ben Gough, managing director of Gough Holdings and a member of the B.T. Gough branch.    

Evidence was given that the two families dispute whether a co-governing trust structure set up in the late 1980s is still operative.  This dispute goes before the High Court later in 2015.  In a preliminary move, trustees of the O.T. Gough branch asked for a declaratory ruling on the effect of a default constitution which will come into effect if the later court hearing decides the co-ownership trust has come to an end.

There has been bad blood between the two family branches for decades.  The court was told that back in the 1980s family infighting was so bad that Caterpillar threatened to pull its business from Gough unless Gough family members were barred from acting as employee, director or trustee of either of the two co-owning family trusts.  In response, the co-governing trust which is now in dispute was set up. 

The narrow legal question before the Court of Appeal was the application of a rule in the Gough Holdings constitution which states “no person shall be appointed director” who is a Gough family member unless all shareholders agree.  Any one shareholder has a right of veto.  The Court was asked does “appoint” mean only the initial appointment of a director or does it extend to the term of appointment.  Could a shareholder veto both a proposed appointment and an existing appointment?  The Court of Appeal ruled the right of veto applies only to the act of appointing a director.  It cannot be used to remove an existing director should the default constitution become operative. 

Satterthwaite v. Gough Holdings – Court of Appeal (29.04 15)

15.039

Family Trust: Powell v. Powell

The Court of Appeal upheld the decision to remove a father as trustee of a family trust and his replacement with an independent trustee after father and son literally came to blows over operation of the trust.

The court was told Daniel Powell, a trustee of the Daniel Powell Family Trust assaulted his father John, a co-trustee, during a heated dispute over how the trust was being run.  Daniel was subsequently discharged without conviction on charges of intentional damage and assault with intent to use a weapon.  Animosity between the two was running so high they could not co-operate as trustees of the Trust.  The High Court removed John as trustee, replacing him with an independent trustee.  His son Daniel was left in office as a trustee.  John appealed, without success, to the Court of Appeal. 

The Trust was established in 1998 with its main asset being a commercial cool store in Christchurch.  By 2014, the Trust had an estimated net worth of $11.2 million.  Named as beneficiaries of the Trust are Daniel, his spouse, their children and his sister and her children.  Daniel was appointed trustee in 2007 when he returned from a sojourn overseas.  A similar “mirror” trust was also established in the name of Daniel’s sister and this trust is controlled by her.

Evidence was given that Daniel understood the Trust to be his “inheritance”.  He understood his father intended to pass on the remainder of his assets to charities on his death.  Major differences of opinion between Daniel and his father surfaced in 2011 when John reacted with surprise to news that Daniel’s spouse was being paid a salary out of Trust resources.  Allegations of fraud were made.  Despite John’s expressed surprise at the news, there was evidence of email correspondence dating back to 2008 where payment of a salary was discussed and apparently approved.  The court was told John subsequently queried both delays in producing financial statements and the Trust’s dividend policy.  John became uncooperative when asked to sign off on PAYE and ACC payments for the Trust.  A refusal to release funds from the Trust to buy a replacement home after Daniel’s family home was damaged in the Christchurch earthquakes added to the friction. Amidst all this, Daniel went around to his parents’ home and assaulted his father.

John applied to the High Court asking his son Daniel be removed as a trustee alleging Daniel’s behaviour and mental state  made him unfit to be a trustee.  Instead, the court removed John as trustee, a decision affirmed in the Court of Appeal.

The Court of Appeal said the overiding consideration in removing a trustee is consideration of the beneficiaries’ welfare.  While Daniel and his father had proved unable to work together as trustees, there was evidence that Daniel had continued to work in a professional manner with other parties involved in Trust activities.  There was no evidence that in future Daniel would fail to act properly in respect of Trust beneficiaries, the Court said.  Appointment of an independent trustee as co-trustee meant Daniel would not be acting on his own as trustee and it was even more unlikely that beneficiaries’ interests would be overlooked.

Powell v. Powell – Court of Appeal (24.4.15)

15.037

Insolvency: Timberworld v. Levin

The Court of Appeal has ruled against the “peak indebtness rule”, the rule favoured by liquidators attacking payments made through a running account because it claws back from creditors the maximum amount possible.

Liquidators challenging preferential payments meet heavy resistance from creditors of an insolvent company fortunate to be paid prior to liquidation.  Creditors paid in full do not want to repay money received in return for a minimal or non-existent payment out of the unsecured creditor pool.

In 2006, company law was amended to deal with the issue of “running accounts”: the commercial practice where supplier and customer run a current account with no clear delineation between charges for goods or services supplied and subsequent payments.  Should the customer later go into liquidation insolvent, it is difficult to identify which payments should be clawed back as a preferential payment.  Insolvency law seeks to equalise payments to unsecured creditors, permitting a liquidator to claw back payments made prior to liquidation and made at a time when the customer was insolvent.  Liquidators can claw back payments made up to two years prior to liquidation.

The Court of Appeal was told liquidators have been using what is called the “peak indebtedness rule”.  This involves looking at the state of the current account between customer and creditor for the entire period the customer was insolvent, going back up to two years.  Having identified the point within this time period when the amount owed was at its highest (the peak indebtdeness), liquidators then treat any reduction below this peak up to the point of liquidation as being a preference having to be repaid.  Creditors criticise the peak indebtedness rule as being totally arbitrary and being designed to maximise the amount clawed back.

The Court of Appeal said liquidators have been wrong in using the peak indebtedness approach.  Instead, liquidators must identify the first point when a company was insolvent and use as their starting point for recovering payments as preferential the later of: two years prior to liquidation (if the company was then insolvent) or the start date of the business relationship if this relationship commenced during the two year period (again presuming the debtor company was then insolvent).  Only if there is a reduction in indebtedness between this starting point and date of liquidation are there grounds to claim there was a preferential payment.   

The court said the peak indebtedness rule is in conflict with the plain wording of the Companies Act.  The Act was applied in two cases heard together on appeal.

Timberworld Ltd was challenging a claw back demanded by the liquidator of an insolvent customer, Northside Construction Ltd.  Northside was proved to be insolvent in the two years prior to liquidation and had carried on trading whilst insolvent.  Northside operated a running account with its supplier, Timberworld.  During the two year period, indebtdness with Timberworld peaked at $95,569.  On liquidation Northside still owed $47,650.  Using the peak indebtedness rule, the liquidator claimed $47,963.  The Court of Appeal ruled the liquidator could recover only $29,490 as a preference: the reduction in the current account calculated between the start and the finish of the two year period.

In a second case, liquidators of Tarsealing 2000 Ltd unsuccessfully appealed a High Court ruling that Z Energy was not required to repay $293,555 received for bitumen supplied.  Tarsealing had a trade account with Z Energy for a 17 month period before being put into liquidation by Inland Revenue.  The trading account opened with a zero balance due, peaked at $293,555 and dropped to a zero balance when the debt was paid in full before the company went into liquidation.  The starting point within the two year period was zero when the trade account was opened, and was again zero at liquidation.  With a net difference of zero between the two points there was nothing for the liquidator to claw back.

Timberworld Ltd v. Levin – Court of Appeal (24.4.15)

15.038

Maintenance: Police v. Dotcom

Kim Dotcom is allowed $170,000 per month out of assets blocked by restraining orders to meet household living expenses following a High Court review of his financial position.

Currently facing an extradition hearing over allegations of copyright infringement in the United States, Kim Dotcom told the High Court he is running out of ready cash.  His assets worldwide are subject to restraining orders.

The High Court was told his legal bills have been substantial.  To December 2014, he has spent over ten million dollars on legal fees with two million still owing.  Mr Dotcom estimates ongoing legal fees will come to between two and four million dollars.  He also has substantial living costs to meet.  His current home on a lifestyle block at Coatesville north of Auckland is leased until February 2016 at an annual rental of one million dollars (about $80,000 per month).  He has the shared care of five children, two of whom are autistic requiring additional care.  Employment costs for eight staff were running at $35,000 per month.  

His assets restrained include ten million dollars in New Zealand government bonds.  Following a court hearing in 2012, Mr Dotcom was permitted to use these bonds as security for borrowing $5.4 million to meet ongoing legal and living expenses.

Back in court, he was asking for the remaining $4.6 million in government bonds to be released.  Justice Courtney ruled he could draw down $170,000 per month to meet legal fees and living expenses until such time as the Coatesville lease expired.  This figure was calculated on monthly expenses of rent ($80,000), staff costs ($25,000), household expenses ($15,000) and security ($15,000).

Police, with the support of US film studios, unsuccessfully opposed the application for funds to be released.  They claim Mr Dotcom has access to assets not caught by the world-wide restraining orders held a a trust called the Trust Me Trust.  The Trust’s major asset is a shareholding in Mega Ltd, said to be worth more than $30 million.  Mr Dotcom said shares in Mega Ltd cannot be sold prior to a proposed public listing.  Justice Courtney was unwilling to rule on the status of the Trust Me Trust at this stage.  The hearing was an application for access to funds for living expenses and legal expenses, not a hearing to decide who is the beneficial owner of Mega Ltd.

Police v. Dotcom – High Court (23.4.15)

15.035