Financial Statements: Prain and Schroeder v. Financial Markets Authority

Apple Fields directors’ convictions for failing to file audited financial statements were overturned on appeal.  They were powerless to demand information from a “deemed” subsidiary required for Apple Fields’ consolidated financial statements.  Without consolidation, accounts complying with the Financial Reporting Act could not be finalised or audited.

Mark Schroeder and Justin Prain challenged convictions for failing to file Apple Fields’ financial statements for the 2011, 2012 and 2013 financial years.  They had taken all reasonable and proper steps to comply, they said.  Apple Fields ran into problems with a 254 lot residential subdivision in Yaldhurst, Christchurch.  It is being developed with joint venture partner Noble Investments Ltd.  A profit share agreement with Noble resulted in Noble becoming a “deemed” subsidiary of Apple Fields.  Noble’s management refused point-blank to allow Apple Fields’ auditors access to financial information.

Apple Fields directors acted reasonably by relying on professional accounting advice that consolidation was required, the Court of Appeal ruled.  They also acted reasonably by not bothering to seek legal advice over whether Noble could be forced to provide financial information, the Court ruled.  Apple Fields had no control over Noble management.  There was no evidence of any contractual right in joint venture documentation giving Apple Fields a right to access Noble’s financial records.

Prain and Schroeder v. Financial Markets Authority – Court of Appeal (30.06.16)

16.100

Domain Names: Yellow Holdings v. Eurobelt

Overseas-owned Yellow Holdings sued for an interim injunction to crush the negotiating position of Johanna Klos who is looking to sell the domain name www.yellow.net.nz following the death of her husband.

Husband Henk registered the domain name in 1998.  He died in 2016.  The domain name has never been used, lying dormant.  Yellow Holdings has been unable to register the recently available .nz domain without the Henks’ consent because yellow.nz is considered too similar to yellow.net.  Negotiations to sell yellow.net to Yellow Holdings failed. No agreement could be reached on price.  Yellow Holdings then sued alleging fraud and passing off.  It said there was a risk that activating the yellow.net site could confuse the 1.7 million customers who access Yellow Holdings online directories every month.

Justice Brewer ruled it is unlikely the Henks acted improperly back in 1998 when registering yellow.net.  While the words Yellow Pages were established by then as a brand, the word Yellow alone was not.  But now that Yellow as a brand is established there is potential confusion should the yellow.net site be activated.  An interim injunction was granted blocking Mrs Klos’ use of the domain name.  Few buyers will be interested in purchasing the yellow.net domain with a legal threat from Yellow Holdings lurking in the background.  It is the only likely buyer.  The price depends on how much Yellow Holdings is willing to pay for yellow.net in order to get access to yellow.nz.     

Yellow Holdings Ltd v. Eurobelt Ltd – High Court (29.06.16)

16.098

Blue Chip: BEMA Property v. Body Corporate 366611

Backwash from the Blue Chip collapse continues with owners of an Auckland investment managed by Blue Chip unable to recover $89,000 in lost rentals because no steps were taken to resume possession.

Through a company called BEMA Property Investments Ltd, Berkie Kapa and Aneta Heke bought into a student apartment block in Whitaker Place, Auckland, with management of the apartment leased to a Blue Chip company: Auckland Residential Tenancies Ltd.  Another Blue Chip company arranged student lets, paid costs and sent the net balance monthly to BEMA.  Blue Chip managed about 200 units in the 300 unit apartment.

The High Court was told BEMA received no further rentals from late 2007 after companies in the Blue Chip group came tumbling down.  With Auckland Residential in liquidation, the building’s manager Theta Management offered BEMA a replacement management lease; a lease which gave Theta the right to vote on BEMA’s behalf at Body Corporate meetings.  BEMA did not sign.  Several years of intermittent contact followed between Theta Management and Mr Kapa with Mr Kapa seeking to get electronic card access to BEMA’s apartment so he could arrange replacement tenants.  Theta Management stalled, demanding that its new lease be signed.  Over five years passed without Mr Kapa having access.  He then learnt that other apartment owners in the building, who were not part of the Blue Chip controlled scheme, had fought all the way to the Supreme Court successfully suing Theta Management for trespass in denying them access to their apartments.

Mr Kapa decided to follow the same route and sue both the Body Corporate and Theta Management for 68 months of rentals, agreed to be $89,026, for the period BEMA was unable to access its apartment.

Justice Wylie ruled against BEMA’s claim for past rentals.  It was not in the same position as the earlier successful apartment owners.  They had a proved right of possession to their apartments.  BEMA had leased management of its apartment to a Blue Chip company: Auckland Residential, now in liquidation.  The liquidator had never disclaimed the lease.  It was still a Blue Chip asset.  BEMA had taken no steps to go into possession or otherwise end the management lease after Auckland Residential’s liquidation.  With no proved right to possession BEMA had no claim in trespass for the value of unpaid rentals.

The Court was told BEMA has eventually gained access to its apartment, receiving rentals from January 2015. 

BEMA Property v. Body Corporate 366611 – High Court (29.06.16)

16.099

Negligence: Owens v. Shaw

Directors of glazier and aluminium joinery company Aluminium Plus Wellington Ltd were ordered to pay $125,800 damages for negligence after favouring beneficiaries of their own family trust over claims by company creditors when they abandoned a funding agreement.

The High Court was told Ian Alexander Shaw and Angela Claire Shaw had traded as the Shaw Family Trust first in a farming venture and then since 2007 as a glazing company under the name Aluminium Plus.  Most suppliers were comfortable dealing with the Shaws as a Trust, but major supplier CSR Viridian demanded invoices be charged to a corporate.  The Shaws set up Alumnium Plus Wellington Ltd as a shell company to process Viridian invoices.  Viridian product was delivered to the Trust, invoices went to Aluminium Plus Wellington Ltd and the Trust made payment out of its own bank account.  Unpaid for deliveries in late 2013, Viridian sued, eventually putting Aluminium Plus Wellington Ltd into liquidation.  The liquidators sued Mr and Mrs Shaw as the company’s directors for negligence.  Their company was solvent provided funding arrangements with the Trust had continued.  Justice Brown ruled the Shaws as directors were negligent in cancelling the funding arrangement agreed with themselves as trustees of their family Trust.  They were held liable for all the company’s unpaid debts, including costs of the liquidation.   

Owens v. Shaw – High Court (24.06.16)

16.097

Relationship Property: Roberts v. Henderson

Passing a Taranaki farm from parents to son was carefully structured with the result he was $1.8 million better off after his marriage subsequently foundered.   A loan back to the parents’ family trust when purchasing farming assets was later gifted to the son and remained his separate property.

The identity of husband and wife was disguised in a High Court relationship property dispute to preserve their anonymity with each given an alias.  The court was told the two were married for fifteen years, working hard to acquire and build up a dairy farm.  In 2008, some 112 hectares was purchased by their family trust from the husband’s parents in two separate transactions.  The price payable was secured by two mortgages: one for just over $1.7 million; the other for $1.8 million.  His parents then gifted the $1.8 million mortgage to the husband personally.  As debtors under this mortgage, the husband’s and wife’s family trust owed $1.8 million.  This money was now owed to the husband as new owner of the mortgage.

At the time the marriage ended there was very little by way of relationship property.  The farm was heavily mortgaged.  The wife argued she was entitled to a share of the $1.8 million mortgage now owned by her former husband.  She said this mortgage was transferred to the husband alone in order to defeat her rights under the Property (Relationship) Act.  Justice Dunningham said the Act enables recovery of relationship assets removed from the asset pool or diverted from becoming relationship property.  In this case, the wife had no proved entitlement to share in ownership of the mortgage, she said.  It was the husband’s separate property and had never lost this status.  Separate property can become relationship property if intermingled with relationship assets. 

Roberts v. Henderson – High Court (22.06.16)

16.096