Family Trust: van Dam v. Went

Family of Ch’i mineral water founder Adriaan Went gained a High Court order to get information about their late father’s business following allegations the new managers are filling their own pockets reducing potential distributions to them as descendants.

The son and daughter of the late Adriaan Went are beneficiaries of the family trust which now owns the Ch’i mineral water business.  Their father started the business in 1987 bottling and selling flavoured spring water.  He set up the Went family trust in 2002.  Since his death in 2011, the business has been controlled by two trustees: former employee David Paul van Dam and chartered accountant Alan Richard Hall.

The High Court was told Adriaan’s children have tried without success to get detailed information about the business.  In particular, they have expressed concern about the restructuring of Ch’i business assets after their father’s death and the involvement of new general manager, former Frucor executive Ray Nicholls. 

Evidence was given that assets were hived off into separate companies with debts of some four million dollars owing for assets transferred.  Mr Nicholls is entitled to 26 per cent of any increase in the value of the business over and above the four million dollar debt.

The trustees asked for a court ruling on whether they were required to disclose Ch’i financial statements to any beneficiaries. While Adriaan’s children are only discretionary beneficiaries of the family trust, Justice Peters said they were entitled to information necessary to satisfy themselves as to the management of trust assets: in this case any valuations obtained for the selldown of trust assets; details of any agreements with Mr Nicholls; annual financial statements for the various Ch’i business entities and a schedule of the fees paid to trustees.

van Dam v. Went – High Court (26.06.15)

15.073

Insurance: AAI Ltd v. 92 Lichfield St

Receivers of a company associated with bankrupt property developer David Henderson forced a Vero subsidiary to pay out $6.5 million, part of promised compensation for insured earthquake damage, by using court winding up procedures.

The High Court was told Vero subsidiary AAI Ltd was negotiating in 2013 with receivers Grant Thornton over payment for earthquake damage to property owned by a Christchurch company in receivership: 92 Lichfield Street Ltd.  A business interruption claim of $675,000 had already been settled.  There were difficulties in agreeing the amount due for property damage.  Evidence was given that Vero made a revised settlement offer in June 2013 of $6.5 million plus claim costs to date together with some $203,000 for protection measures incurred.  Several extensions for acceptance of the offer were granted.  Grant Thornton accepted on the final date before the offer closed against a background of Vero threatening to make a lesser payment of some $4.6 million and closing the file.

Grant Thornton refused to sign off on a seven page release form demanded by Vero which required the receivers to get all the company’s secured creditors agreement to the deal before Vero would pay out.  The receivers issued a Companies Act statutory demand against the Vero subsidiary to force payment.  Associate Judge Osborne ordered payment of $6.5 million within fifteen working days or steps to put AAI Ltd into liquidation would follow.  Judge Osborne ruled the unequivocal June 2013 offer to pay $6.5 million had been accepted, payment was due and Vero could not later introduce new terms into the settlement agreement requiring creditors’ consent.

AAI Ltd v. 92 Lichfield Street Ltd – High Court (23.06.15)

15.071

Money laundering: E-Trans International v. Kiwibank

Major trading banks are closing customer business accounts where they operate third party international money transfers claiming it is to avoid liability under money laundering legislation.  This has the effect of limiting fees competition in the lucrative business of immigrants’ remittances to the Pacific Islands, Asia and elsewhere.

The High Court issued an interim injunction blocking Kiwibank from closing the account of third-party remitter E-Trans International Finance pending a fuller inquiry into banks’ obligations under the Banking Code to act fairly and reasonably.

Evidence was given that eight of the fifteen specialist remittance and currency exchange providers in Auckland had seen their bank accounts unilaterally closed.  Banks say these accounts raise potential liability for them under the Anti-Money Laundering and Countering Financing of Terrorism Act.

Kiwibank says its terms and conditions give it the right to close any account for any reason on 14 days notice.  The court was told E-Trans was convicted in 2004 for eleven offences under the Financial Transactions Reporting Act in relation to five separate transactions.

E-Trans International Finance v. Kiwibank – High Court (23.06.15)

15.072

Ponzi Scheme: Fisk v. McIntosh

Investors getting their money out before losses totalling $439 million surfaced from the collapsing Wellington-based Ponzi scheme operated by David Ross are in the gun to repay fictitious profits received but are likely to keep the dollar amount of their original investment following a test case heard in the High Court.

The Ross Group went into receivership, then liquidation in late 2012 when it became apparent manager David Ross was operating a giant Ponzi scheme.  Over 1700 investors placed money with Ross for investment.  Client money was missapropriated.  Ross provided regular investment updates to clients which totally misrepresented their holdings.  Each update highlighted profits made to date.  These profits were entirely fictitious.  At the time the Ponzi scheme collapsed, Ross was reporting to clients investments collectively totalling a purported $449.6 million; only $10.2 million existed.  Liquidators John Fisk and David Bridgman identified the Ross Group had been insolvent since at least 2006.

In a test case, the liquidators chased investor Hamish McIntosh to recover $954,047 paid to him by Ross in November 2011.  This was supposedly a return of the initial investment made plus “profits” earned.  Mr McIntosh had placed $500,000 with the Ross Group for investment some four and a half years previously.

The liquidators sued under insolvency provisions in the Property Law Act and the Companies Act alleging Mr McIntosh received a payment which prejudiced other creditors.  There was an out for Mr McIntosh.  Payment could be kept if it was received in good faith and where it would be unjust to order repayment because his circumstances changed on receiving payment.

Justice MacKenzie ruled Mr McIntosh was entitled to keep $500,000 of the $954,000 received.  This was his original investment.  It was a debt owed to him from the moment Ross stole the money, in breach of his client’s instructions and in breach of trust.  Mr McIntosh was ordered to repay the fictitious profits of some $454,000.

Mr McIntosh argued unsuccessfully that he had altered his financial position to his detriment after receiving payment.  He pointed to an extensive property development he was undertaking at Palliser Road, in the Wellington suburb of Roseneath.  In August 2011 he bought the property next to where he lived for $986,000 and set about redeveloping the two sites: changing the boundary line and commissioning work on the construction of two new dwellings next door.

Justice MacKenzie said Mr McIntosh’s decision to cash in the $954,000 supposedly held in his name with the Ross Group was not motivated by the Palliser Road project.  Forging ahead with this project was the continuation of plans which had been brewing for some time.  In any event the Palliser Road project was not carried out by Mr McIntosh personally; a corporate structure was used for the development.  Mr McIntosh and the company are not one and the same, His Honour said.  The cost of the development borne by a company, was not the same as any costs incurred by Mr McIntosh after he was paid out by the Ross Group.

Calling for a payout from the Ross Group was instead triggered by his earlier decision in July 2011 to buy a property in Queenstown, His Honour said.  The expense of the ongoing Palliser Road project could not be used to justify retention of $454,000 from the payout representing fictitous profits.    

Fisk v. McIntosh – High Court (22.06.15)

15.070

Tax: Inland Revenue v. Trustpower

Obtaining resource consents for new electricity generation is a capital cost the Court of Appeal ruled in a successful Inland Revenue appeal challenging Trustpower’s tax accounts.  This will cost Trustpower over $15 million dollars for a decade of tax arrears according to Trustpower’s latest annual report.   

Inland Revenue challenged Trustpower’s tax treatment of $6.56 million incurred in the 2006-2008 tax years as the cost of obtaining land use consents, water permits and water discharge permits for four possible new generation projects in the South Island: two hydro (at Arnold and Wairau) and two wind farms (at Kaiwera Downs and Mahinerangi).  Trustpower said these costs were incurred as part of its feasibility studies into future projects and should be written off as an expense in the year incurred.  Inland Revenue assessed the disputed expenditure as capital costs, to be depreciated over the life of the asset.

The Court of Appeal ruled resource consents are inherently capital in nature.  They are valuable rights, part of long term future capital works.  It did not matter that Trustpower had not committed to using these resource consents by starting construction.

Trustpower’s 2015 annual report disclosed that an adverse Court of Appeal ruling would likely require the company to pay tax arrears of $15.2 million for the ten tax years 2006-2015: $10.5 million tax arrears and $4.7 million interest.

The Court of Appeal also ordered Trustpower to repay a costs award made in its favour in the High Court.  This requires Trustpower to pay Inland Revenue a further $1.17 million.

Inland Revenue v. Trustpower – Court of Appeal (19.06.15)

15.069