Credit Contracts: Real Finance v. Setefano

Judges can jump on the brakes unilaterally to stop money-lenders enforcing consumer credit contracts which might be oppressive, but lenders must be given a chance to justify fees claimed before courts cut back the amount recoverable the High Court ruled.

Concerns that oppressive loan contracts are not being closely policed when money-lenders get default judgments without a court hearing has led District Court registrars to refer debt-collecting files to judges.  Real Finance Ltd challenged this administrative practice, complaining it was in breach of court rules.  District Court debt-collecting rules enable creditors to get a default judgment against debtors who do not respond to claims filed in court.  The High Court was told registrars had expressed general concerns about money-lenders apparently delaying filing, allowing individual debts to escalate dramatically because of high interest rates charged and ongoing fees levied.  

A test case was taken to the High Court on one Real Finance debt collecting action diverted from the District Court default judgment procedure and referred to a judge for formal hearing.  Real Finance had sued to recover $6700 allegedly owing on two loans: the first loan for $3415; the second for $1815.  Interest at 29 per cent was charged, with penalty interest of 39 per cent on default.  Each loan contract had a voluminous schedule of further costs including a mandatory monthly “administration fee” of $60 and further costs for follow-up letters and phone calls on default.  The debtor took no steps to defend. The judge unilaterally deducted from Real Finance’s claim $2900 described as monthly administration fees.  He said these fees were excessive and oppressive.  Of the $6700 claimed: $2900 was for monthly adminstration fees; $3000 for interest arrears and $495 for letters sent on default.  The judge gave no advance warning of his intention to dissallow administration fees and refused an adjournment when Real Finance objected.

In the High Court, Justice Mallon said the Credit Contracts and Consumer Finance Act allows any court to reopen a credit contract on its own initiative if the contract is considered oppressive.  But creditors must be given an opportunity in court to respond to any complaints that elements of a loan are oppressive.      

Real Finance v. Setefano – High Court (27.09.16)

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Trust: Adlam v. Matata Parish 39A

Forced to surrender $11.2 million owed to a Kawerau Maori trust following breach of fiduciary duty, Beverly Adlam argued this money should be shared with a neighbouring Maori trust.  The two trusts do not share all the same beneficiaries. 

Described in court as the Bath Trust and the Farm Trust, these two Bay of Plenty Ahu Whenua trusts operate power generation plants using geothermal steam and waste water from the Kawerau Pulp and Paper Mill.  The Maori Land Court removed Ms Adlam as trustee of the Bath Trust in 2014 after evidence she had duped the Trust out of $11.2 million.  She was the driving force behind Bath’s collaboration with Israeli company Ormat Technologies in developing the geothermal project.  When getting Bath to sign up, Ms Adlam did not mention she had a backdoor deal with Ormat granting an option to buy back shares when the project was finished.  She exercised that option in 2010, onselling to Gisborne-based infrastructure company Eastland Group Ltd at a personal profit of $11.2 million.  She later admitted this was a breach of her fiduciary duty as a Bath trustee: amounting to a conflict of interest, self-dealing and failure to disclose.

Ms Adlam argued some of the $11.2 million should go to neighbouring Farm Trust.  While the geothermal plant is built on Bath Trust land, it uses Farm Trust land to source geothermal energy.  Steam is piped over Farm Trust land and waste water piped back across the same land.  The Court of Appeal ruled the full $11.2 million goes to the Bath Trust.  Her obligation to account for breach of trust was an obligation to account to the Bath Trust.  No claim had been made by the Farm Trust.  She was not a trustee of the Farm Trust.

At earlier Maori Land Court hearings, Ms Adlam was also ordered to repay access fees and royalties on power produced totalling $2.4 million she had wrongly retained and used for her own benefit.  In the Court of Appeal, she accepted liability for interest of $1.54 million on the money taken.  She was refused any allowance for work done on behalf of the Trust because her blatant breach of fiduciary duty was serious and Trust beneficiaries have been deprived of their money for a long time.

Adlam v. Matata Parish 39A Trust – Court of Appeal (22.09.16)

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Insurance: Trustees Executors v. Fund Managers Canterbury

AIG Insurance argued policy exclusions meant it had no liability for allegedly negligent management reports regarding investments by failed Canterbury Mortgage Trust.  At best, investors are left with a potential one million dollars payout from AIG. 

Canterbury Mortgage Trust suspended trading in June 2008, hobbled by bad debts and crippled following a run by unitholders trying to extract their money.  Remaining unitholders have received to date 83 cents in the dollar as the Trust is wound down.  Manager of the Trust’s mortgage portfolio, Fund Managers Canterbury Ltd, is in the gun with allegations it did not comply with lending guidelines.  Nearly forty different loans were found to be in breach of Trust guidelines.  The Trust’s most recent annual report states $21.7 million was written off as uncollectable.

Fund Managers’ directors Alexander Donald McBeath, Paul Ernest McEwan, Alan William Prescott, Geoffrey Read Thomas, Andrew Hendra Young and Oliver Roderick Matson together with senior manager Graeme Main are being sued for alleged negligence.  In a preliminary hearing, The High Court was asked to rule on the status of AIG insurance policies covering Fund Managers and its management.   

AIG underwrote two policies: a professional indemnity policy and separate directors’ and officers’ cover.  AIG denies liability.  It says an exclusion in the directors’ and officers’ insurance excluded cover for negligence when providing “professional services for others for a fee”.  Fund Managers received an annual fee of 1.5 per cent of the Trust assets.  Management’s provision of quarterly certificates and confirmations amounted to performance of professional services to a third party [the trustee of Canterbury Mortgage Trust] for a fee, Justice Ellis said.  AIG is not liable to indemnify Fund Managers or its management for any proved negligence under the directors’ and officers’ policy in respect of Fund Managers’ quarterly reports.

This ruling left open the possibility there would be no cover for directors under the AIG professional indemnity policy as well.  Justice Ellis said this outcome could not be countenanced.  The parties must have intended directors would have effective insurance cover through a combination of the two policies.  AIG’s liability under the professional indemnity policy is limited to one million dollars in respect of loans made after quarter ending December 2006.    

Trustees Executors v. Fund Managers Canterbury – High Court (16.09.16)

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Kawarau Falls: Ho v. Peninsular Road

Investors buying into stage one of ill-fated Kawarau Falls development in Queenstown do not have to pay up the Court of Appeal ruled because the full development was not completed as promised.  Refunds were ordered for deposits totalling $10 million dollars.  Creditors funding the project are now forced to resell apartments at prices below original sale values.

Funding issues have plagued the grandiose Kawarau Falls development which promised nearly one thousand extra tourist rooms, boosting Queenstown accommodation by nearly thirty per cent.  It was marketed as a three stage development with promised hotel and conference facility, luxury apartments and serviced apartments.  Seventy overseas buyers signed up for stage one each paying a ten per cent deposit.  Most buyers came from Singapore or Malaysia; none from New Zealand.

Sundry companies in control of the development are now in receivership, or liquidation, or both.  With insufficient working capital to complete the whole project, stage one and its seventy associated sale contracts were hived off into a series of separate companies in 2007 and then 2010 as extra funding was needed.  With stage one completed in April 2011, developers demanded buyers settle up on their purchases.  They refused.

The Court of Appeal ruled buyers are entitled to cancel their contracts and recover deposits paid.  It was an essential term of sale that all three stages of the development be completed, the Court said.  Pricing included a premium of up to 25 per cent to reflect the extensive facilities being available to buyers in a completed development.  With no progress on stages two and three the developers were in breach of contract.

A December 2010 court order prevented any deposits being released to developers before investors had their day in court.  Evidence was given that market values for stage one luxury apartments and serviced rooms have fallen since the original buyers signed up.

Ho v. Peninsular Road – Court of Appeal (9.09.16)

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Debt Compromise: Advicewise v. Trends Publishing

Voting manipulations by directors of financially troubled Trends Publishing caused the High Court to set aside a Part 14 scheme intended to force a debt compromise on creditors.

Media company Trends Publishing suffered a severe downturn in business following the global financial crisis in 2009.  Attempts to source new working capital with a $17.2 million Callaghan Innovation grant has fallen flat with Callaghan alleging fraud and demanding repayment of grant money advanced to date.  A Serious Fraud Office investigation commenced in late 2014 resulted in Trends losing clients and some 60 per cent of its staff leaving.

The High Court was told Trends management implemented a Companies Act Part 14 debt compromise scheme in May 2015 to ease cashflow problems.  If approved by a majority holding 75 per cent of affected debt, a Part 14 scheme is binding on creditors.  Creditors allege they were forced into the scheme with Trends management David Johnson, Paul Taylor and Louise Messer including “insider” creditors in the voting pool to achieve 75 per cent approval.

Evidence was given that debts totalling $3.23 million included in the vote comprised debts owed to Trends management personally or to an associated company controlled by them.  These votes amounted to 75.53 per cent of votes cast, enough to approve the Part 14 scheme on their own.  The Trends Part 14 proposal promised an upfront payment of one hundred cents in the dollar for the first $1000 owed all affected creditors with the balance paid by instalments.  Further working capital was to be injected by an unnamed third party. Justice Heath was told no payments have in fact been made under the Part 14 scheme, despite scheme approval by creditors’ in May 2015.

His Honour set aside the scheme.  There was a deliberate manipulation of the voting system, he said.  The insider creditors should have voted in a different poll separate from other creditors.  Insider creditors had a different interest in the outcome to other creditors.  The High Court was told insider creditors had elected not to participate in any distributions from the proposed Part 14 scheme but nevertheless “reserved the right” to vote. 

Advicewise v. Trends Publishing – High Court (7.09.16)

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