Freezing Order: Qld Maintenance Services v. Zullo

Liquidators for Frank Zullo’s companies had the High Court freeze one million dollars of his New Zealand assets nearly four years after Zullo’s Australian company went into liquidation owing some $A20 million to the Australian tax office.

Frank Zullo’s Queensland Maintenance Ltd in Australia has a colourful history.  It enjoyed a $A110 million maintenance contract for notorious ABC Learning Centres owned by Mr Zullo’s brother-in-law.  Queensland Maintenance went into liquidation in 2012 claiming it is owed $629,341 by Mr Zullo’s New Zealand company: QMS(NZ).  No payment was made.  There are allegations assets in New Zealand companies under Mr Zullo’s control are being spirited away to keep them from Australian liquidators.  QMS(NZ) and its subsidiaries owned four properties in New Zealand valued at some three million dollars, including properties in Wiri and Matamata.

The High Court was told Mr Zullo as director of QMS(NZ) had his company declare a $3.25 million dividend in December 2013 then transferred company properties to pay the dividend.  Liquidators for QMS(NZ) allege fraud.  They claim it was a deliberate scheme to remove all assets from QMS(NZ), leaving nothing for Queensland Maintenance in Australia to seize.

Justice Hinton imposed a freezing order, enabling QMS(NZ) liquidators to recover assets should their claims against Mr Zullo for breaches of his duties as a director of QMS(NZ) succeed at a later trial.  The liquidators asked for a freezing order over all assets previously owned by Mr Zullo’s New Zealand companies.  Justice Hinton limited the freezing order to a value of one million dollars, to cover the debt owed Queensland Maintenance in Australia.  Mr Zullo was invited to nominate which assets are to be frozen.  Failing that, the court will decide.     

Queensland Maintenance Services (NZ) v. Zullo Property Group – High Court (29.07.16)

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Loan: Carolan v. NZ Real Estate Credit

After falling out with close business associate Michael Carolan, merchant banker George Kerr asked Carolan to arrange repayment of $1.16 million funding the purchase of a five million dollar Eastbourne Road home at Remuera in Auckland.  The High Court dismissed his claim that it was a non-recourse loan.

Mr Carolan left Macquarie bank in 2007 to join Mr Kerr at his Equity Partner group of companies.  Mr Kerr had been best man at Mr Carolan’s wedding and was godfather to one of his children.  Prospects at Equity Partner looked rosy.

The High Court was told Mr Carolan’s new base salary at $300,000 was slightly higher than his previous salary at Macquarie.  A $1.5 million bonus was anticipated with a proposed capital raising to create a media fund.  Recently remarried, Mr Carolan was looking to buy in Eastbourne Road as his new family home but was short of ready cash.  Mr Kerr advanced $480,000 for the deposit.  A four million dollar BNZ loan finalised the purchase.

Mr Kerr later advanced more money to clear interest due on Mr Carolan’s BNZ loan.  When a $185,000 BNZ interest payment fell due in February 2008, Mr Carolan could rustle up only $27,500 in cash.  His shift to Equity Partners just prior to the 2008 global recession coincided with lean times for merchant bankers. The expected fruitful media capital raising had not gone ahead.    

Evidence was given that Mr Kerr and Mr Carolan fell out mid-2014 when Mr Carolan blocked appointment to an Equity Partner subsidiary of a director favoured by Mr Kerr.  By this time, Mr Carolan had been the beneficiary of $1.16 million used to fund his Eastbourne Road residence.  There was no written agreement governing the money.  Everything had been settled on a handshake between business mates.

Justice Fogarty ruled there was no dispute there had been a loan of $1.16 million.  At issue was the terms of the loan.  Mr Kerr said it was repayable on demand and demand was made in late 2014.  Mr Carolan said it was a non-recourse loan.  It was not expected to be paid off, but instead worked off with credits from successful business deals.  To the extent there was no bonus income following the global economic recession, the loans were to be written off, he said.

Justice Fogarty said there was no evidence the loans were ever to be written off or forgiven.  The loan contracts could not be re-opened for a failure to make disclosures required by the Credit Contracts and Consumer Finance Act.  The Act applies to consumer credit.  Justice Fogarty said a handshake deal between two mutual friends does not amount to a consumer transaction.   He ordered repayment of $1.165 million together with interest at 7.5 per cent running from October 2014.

Carolan v. NZ Real Estate Credit – High Court (29.07.16)

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Tax: Trustpower v. Inland Revenue

Preparatory work for major infrastructure projects is not tax deductible the Supreme Court decided when ruling against Trustpower’s claim to deduct $6.56 million spent obtaining resource consents for proposed generation projects.  These are capital costs.  Only general overhead business costs unrelated to any particular project are immediately deductible.

Trustpower has to pay some $15 million for a decade of tax arrears after losing a tax dispute over the costs of obtaining land use consents, water permits and water discharge permits for four potential South Island generation projects.  Tax legislation treats resource consents as capital assets: intangible property.  Trustpower said resource consents are not capital assets until such time as the taxpayer is “committed” to a specified project.  The Supreme Court said a commitment test is too subjective.  It is under the taxpayer’s control: board minutes and board papers can fudge the date of final commitment.  By deferring any “commitment” a taxpayer could claim prior feasibility studies and set-up costs are deductible expenses.

Trustpower said there is a problem of wasted costs where resource consents are obtained but a particular project does not go ahead.  The Supreme Court pointed out these consents can be sold on.  Trustpower did field inquiries about selling consents and technical data for two proposed wind farms: Kaiwera Downs and Mahinerangi.

Tax legislation in 2007 has allowed some wasted capital expenditure to be written off for tax purposes.  These rules were not in effect for the tax years Trustpower disputed.

Trustpower v. Inland Revenue – Supreme Court (27.07.16)

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Pollution: Mobil v. Development Auckland

Housekeeping rules in leases requiring commercial properties to be kept in a “clean and tidy” condition do not extend to liability for contamination the Supreme Court ruled.

Commercial development of Wynyard Quarter on Auckland’s waterfront requires some $50 million in remediation stripping out contaminated soil from reclaimed land polluted by industrial waste.  Rubbish tipped into the site as part of the original reclaimation last century contributed to some of the problem.  The rest was caused by leakage and spillage of petroleum products stored on site by both Shell and Mobil.

Development Auckland, part of Auckland Council, sued Mobil Oil demanding a $10 million dollar contribution to the clean-up.  Soil to a depth of 3.5 metres needs to be scraped off the 2.5 hectare site.  Mobil’s lease came to an end in 2011.  Auckland said the lease required Mobil to contribute.

The Supreme Court ruled lease terms requiring Mobil to keep the site in “good order” and “clean and tidy” applied to surface contamination only.  It did not include transforming the character of the land by removing all contaminants.

Auckland argued there was an unwritten term implied into the lease requiring Mobil to minimise contamination and to remediate any hydrocarbon pollution.  The Supreme Court said implied terms can be read into contracts to give them business efficacy.  These are terms which are so obvious “as to go without saying”.  That was not the case here, it said.  The lease agreement was perfectly effective without any implied term regarding contamination.  In fact, any implied term as to remediation both went beyond and contradicted Mobil’s simple written obligation to keep the site “clean and tidy” said the Court.  

Mobil v. Development Auckland – Supreme Court (20.07.16)

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Litigation Funding: PwC v. Walker

Accountants PwC failed to block litigation funders bankrolling a $334 million negligence claim arising from the collapse of David Henderson’s Five Mile Holdings property development at Frankton in Queenstown.  PwC says the liquidator should be acting for unsecured creditors but any benefits will instead be passed on to secured creditor Allied Farmers and the litigation funders.

Liquidators of Five Mile Holdings parent company, Property Ventures Ltd, signed up to a litigation funding agreement with a special purpose company called SPF No.10 Ltd.  The liquidators allege negligence by PwC as auditor of  Property Ventures arguing losses for the property group would have been up to $302 million less if PwC had done its job properly.  PwC denies negligence.  The court was told it was not the liquidators who took the initiative in arranging litigation funding.  This was negotiated by receivers of Property Ventures acting on behalf of secured creditor Allied Farmers Investments.   Allied Farmers received from SPF $100,000 cash and a promise of five per cent of any recoveries; SPF pays the costs of litigation (estimated at up to five million dollars), keeps for itself the balance owed Allied Farmers before paying anything left over to Property Ventures’ liquidators.

PwC challenged the funding agreement.  New Zealand law limits the circumstances in which outsiders can barge in and get involved in someone else’s legal claims.  The Court of Appeal ruled the funding agreement could stand.  It was not entered into for an improper reason.  There was some potential benefit to Property Ventures’ unsecured creditors, though the extent of this benefit would depend upon the the complexities of the claim and the extent of recoveries, if any.

PwC took exception to SPF taking an assignment of Allied Farmer’s security.  This security included rights to pursue any legal claims Property Ventures might have including claims for alleged negligence SPF itself was looking to enforce.  New Zealand law generally prohibits trading in tort actions such as negligence.  The Court of Appeal said there were sound commercial reasons for SPF taking over the security.  It was a “defensive move” to protect the funding agreement since David Henderson was then bidding to purchase the same Allied Farmers security.   

PriceWaterhouseCoopers v. Walker – Court of Appeal (19.07.16)

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