Family Trust: FAI Money v. Johnston

The fine print in guarantees can be treacherous.  Auckland accountant Richard Johnston was held liable to pay FAI Money $137,000 on a guarantee when his lawyer brother gave false financial information in the loan application.

West Auckland lawyer Edward Johnston was bankrupted after failing to repay FAI Money some $836,000 in 2011.  Funds had been borrowed two years previously to take full ownership of an East Tamaki building he then part-owned.  Included in the security required by FAI was guarantees from the two trustees of family trusts holding title to Edward Johnston’s family home in Swanson.  The trustees were his brother Richard Johnston and his father-in-law Gavin Crawley.

The High Court was told Richard Johnston signed.  Mr Crawley did not sign in person.  He denied ever seeing the documents or being aware of the transaction.  Edward Johnston signed on his behalf, under a power of attorney.  After Edward Johnston was bankrupted, FAI turned to sue the two trustees under their guarantee.  The plain wording of both the loan agreement and the guarantee stated FAI could recover from the trustees only the amount available from selling trust assets.  But the plain wording was then qualified: the trustees were personally liable to the extent that the value of trust assets was reduced by their negligence.

Justice Keane ruled the loan documents together with the guarantee had the effect of having the trustee/guarantors vouching for the accuracy of the financial information provided by Edward Johnston to FAI.  His statement in the loan application claiming a net worth of $11.147 million was untrue.  His statement that the Swanson family home was mortgage free and worth at least $1.5 million was wrong.  There was then $1.1 million owing on a Westpac mortgage over the home.

Justice Keane ruled Richard Johnston was negligent.  As Edward’s accountant, Richard knew of his brother’s circumstances and could have seen at a glance that the financial information provided contained highly material inaccuracies. Justice Keane ruled Mr Crawley was not negligent, knowing nothing of the initial FAI loan and guarantee or of later manoeuvres to keep the Swanson home safe from creditors.

The proved negligence of Richard Johnston meant he was personally liable to FAI for any loss in the value of the family trust asset: the Swanson family home.  As trustee, Richard Johnston had been party to an arrangement having the effect of preventing FAI getting hold of the property. The loss of $137,000 was calculated on a notional sale of the Swanson home: sale at a forced sale price of $1.035 million less the mortgage owed to Westpac.  In fact, the home had been sold to a new family trust in 2012 at a price sufficient to clear the then outstanding Westpac mortgage. Edward Johnston’s wife appears to be the primary beneficiary of the new trust.  The price paid by the new trust was less than the notional forced sale price of $1.035 million. 

FAI Money v. Johnston – High Court (28.08.15)

15.098

Gambling: Sinclair v. NZ Racing Board

Horse racing is under no legal duty to protect victims of fraudsters with a gambling habit.  A woman who lost $141,000 lent to notorious fraudster and problem gambler Leicester Monk failed in her claim against the NZ Racing Board for negligence in letting Monk continue to gamble.

Televison exposure on “Fair Go” of Mr Monk’s modus operandi saw four woman laying complaints with the police about his behaviour in befriending vulnerable women, borrowing money which was then lost betting both on course and through the TAB.

One woman drawn into his net after meeting Mr Monk by chance at a car wash, sued the Racing Board claiming it was under a legal duty to exclude the likes of Mr Monk from betting.  She sued the Racing Board for the $141,080 lent to Mr Monk in some 86 separate loan transactions and further claimed damages for mental distress caused by Mr Monk’s behaviour.

Justice Brown ruled the Racing Board owed no legal duty to Monk’s victim.  The Board had no knowledge of or contact with any of the victims.  It knew nothing of the “loans” Mr Monk had extracted from each victim.  A claim in negligence amounted to a claim that the Racing Board owed a duty of care to any person who might happen to meet Mr Monk and fall victim to one of his schemes.  That amounts to a duty of care supposedly owed to New Zealanders at large.  The Racing Board cannot be held to owe a duty of care to anyone who is at no particular risk as compared with the public generally, Justice Brown said.

Sinclair v. NZ Racing Board – High Court (28.08.15)

15.097

Tax losses: Charter Holdings v. Inland Revenue

Question 24 proved important after making tax losses.  So did the four month time limit to dispute tax assessments.  Losses of over $1.4 million claimed to be carried forward from six prior tax years were dissallowed because a business trading as a management consultancy failed to properly complete its tax returns.

Auckland company Charter Holdings Ltd was told by the High Court it could not get a judicial review of Inland Revenue’s decision to ignore prior year tax losses claimed.  Charter should have completed its tax returns correctly in the first place and when a mistake was identified it should have filed a Notice of Proposed Adjustment within four months of receiving a tax assessment as required by the Tax Administration Act.

The High Court was told Mr Adrian Padfield had an interest in Charter Holdings for the tax years in question.  At the turn of the century, the company was dealing in swimming pools.  After going through a period of receivership, the company later commenced trading as a management consultancy.  Its 2000 tax return declared a small loss of just under $13,000.  The 2001 return declared a larger loss of about $150,900.  Question 24 of the 2001 tax return asked: Can the company claim net losses brought forward?  No answer was given.  Mr Padfield said he left it blank.  There was no profit, no tax to pay, so no need to disclose claimed losses from a previous year as a set off, he presumed.  This pattern continued in tax returns for subsequent years.  As company profitability improved in later years, Mr Padfield did answer Yes to the tax return question regarding previous tax losses.  But he inserted an amount for losses carried forward for that year equal to the amount of total income for that year.  Justice Moore said Mr Padfield was apparently wrongly of the view that Inland Revenue maintained a record of losses for past years.  He did not realise the company, as the taxpayer, was required to add together all previous losses carried forward into a total figure and note this in each year’s tax return.

Matters reached a head in July 2014 when Inland Revenue demanded $850,523 from Charter Holdings: $306,460 in tax arrears; the rest being penalties and interest.  The undisclosed tax losses from previous years could not be carried forward.

Justice Moore ruled Charter Holdings could not use judicial review proceedings to circumvent its failure to properly follow rules for filing returns and challenging tax assessments.  Taxpayers have an obligation to correctly self-assess their liability.  They bear the risk of failing to do so or failing to take the prescribed steps to correct it.  Taxpayers can apply for an extension of time for filing corrected tax returns under section 89K of the Tax Administration Act if there are “exceptional circumstances”.

Charter Holdings Ltd v. Inland Revenue – High Court (27.08.15)

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Relationship Property: Dixon v. Kingsley

Justice Kos was brutally critical of Family Court discovery rules which can hamper attempts by the poorer and less well informed spouse seeking to extract financial information from the wealthier and better informed spouse.  He said orders for discovery need to be more focussed, reflecting 2012 reforms made for the High Court.

In a relationship dispute over assets tied up in an un-named multimillion dollar company, he ordered targeted discovery of information about specific company transactions.  Names of the spouses were supressed: described anonymously as Mr Dixon and Ms Kingsley.

The High Court was told Ms Kingsley held a thirty per cent interest in the company when the 18 year marriage ended.  It was not disputed these shares are relationship property.  At issue is the status of a further ten per cent shareholding Ms Kingsley acquired from three shareholder/employees after her marriage ended.  She denied these shares are relationship property.

Justice Kos ordered specific disclosure by the company of circumstances surrounding the employees departure and details of agreements to transfer the shares.  Copies are to be made available only to Mr Dixon and his advisers.

Justice Kos said the discovery regime operating in the Family Court is seriously outdated.  Designed for an era before digital communications and the retention of endless marginally relevant ephemera, changes are needed to fit with the Relationship (Property) Act which requires disputes to be resolved as inexpensively, simply and speedily as possible, he said.

Dixon v. Kingsley – High Court (27.08.15)

15.096

Franchise: Mike Pero (NZ) Ltd v. Heath

Mortgage broking franchise Mike Pero (NZ) had the High Court enforce a two year restraint of trade against a Christchurch franchise holder looking to set up in opposition after fifteen years with the franchise.

Franchise holder James Heath and his de facto spouse Gina Smith were stopped in their tracks when setting in place a rival mortgage broking business called James Heath Mortgages Ltd.

The High Court was told Mr Heath had signed a restraint of trade when taking on a Mike Pero (NZ) franchise in May 2000 which prohibited  him on leaving from setting up a rival business anywhere in New Zealand within six months of his departure or anywhere in Canterbury within two years.  Ms Smith had been an employee of Mr Heath, commencing in 2008.  Her employment contract contained a restraint of trade prohibiting her from competing with Mike Pero (NZ) only whilst employed by the franchise.

As a general rule, the courts refuse to enforce restraints of trade.  Restraints are considered anti-competitive, reducing consumer choice, and can have the effect of preventing a person from using their trade or professional skills.  But a restraint of trade is valid if reasonable: it protects a property interest such as business goodwill and is not too wide in geographic area or too long in time.

Justice Moore ruled that the restraints imposed by Mike Pero (NZ) were reasonable to protect its franchise manual and its customer base.  Evidence was given that Mr Heath earned net commissions of $50,200 and then $106,600 in his first two years with the franchise.  Revenue had increased to over $350,00 per year over the last two years of his fifteen year association with the franchise.  Fee levels earned indicates that it takes about two years for a new Christchurch business in mortgage broking to reach a profitable equilibrium.  On these figures, a two year restraint of trade appears reasonable, Justice Moore ruled.

Mr Heath said an injunction enforcing the restraint of trade and preventing him from working as a mortgage broker would cause serious financial harm, probably forcing a sale of the family home.  Justice Moore said Mr Heath was aware of the restraint of trade when leaving the franchise, bringing these financial consequences on himself.  He declined to grant an injunction prohibiting Ms Smith from starting a mortgage broking business, pointing out that Mr Heath was blocked from involvement in any mortgage broking business in Christchurch for the next two years and could not assist Ms Smith in any way. 

Mike Pero (NZ) Ltd v. Heath – High Court (27.08.15)

15.095