Foreign Investment: Godfrey Hirst v. Commerce Commssion

Merger approval will not be blocked on the sole ground major benefits might flow to foreign investors.  The Court of Appeal upheld Commerce Commission authorisation for the 2014 merger of Cavalier Wool with NZ Wool Services creating a domestic monopoly in wool scouring where 45 per cent of the benefit would flow to Australian investor Lempriere.

Gains for foreign investors can amount to a positive benefit for New Zealand consumers: preserving a domestic particpant in a competitive global market and encouraging foreign investment as part of an open liberal economy.

Carpet manufacturer Godfrey Hirst challenged the 2014 merger.  Post-merger, Lempriere intended to consolidate wool scouring plants in New Zealand reducing operations from five sites to two.  Cost savings were expected from improved economies of scale.  Godfrey Hirst complained creation of a local monopoly for wool scouring reduced competition with the price of scoured wool for carpets likely to increase.

The Court of Appeal said amendments to the Commerce Act emphasised economic benefits could arise on the creation of a monopoly.  Resulting cost minimisation might achieve two benefits: firstly cost savings which could ultimately enable the new monopoly to better compete against off-shore rivals and second a macro-economic benefit of preserving New Zealand’s reputation as an attractive destination for foreign direct investment which will lead later to further inflows of investment capital.  Profits earned by overseas investment in New Zealand are not to be regarded as a drain on the local economy.

Godfrey Hirst v. Commerce Commission – Court of Appeal (30.11.16)

17.004

Charity: Presbyterian Support v. Guardian Trust

Nelson woman Iris Maude Utterson-Kelso left the balance of her estate to four charities including the Green Gables rest home operated by Presbyterian Support.  In a wicked twist of fate, Presbyterian Support sold Green Gables one day before she died.

The Court of Appeal ruled Presbyterian Support could still claim its legacy.  As a general rule, a specific bequest fails if a named individual beneficiary is already dead or a named individual organisation no longer exists at the time a will comes into effect.  A will is ambulatory.  It marches along having no legal effect until the person signing the will dies.  Presbyterian Support had sold Green Gables to a private rest home operator just prior to Mrs Utterson-Kelso’s death.  Normally a gift to Presbyterian Support for the operation of Green Gables would then fail; Presbyterian Suppport no longer owned Green Gables.

Any gift which might otherwise fail can be rescued by the courts if the gift was intended for a charitable purpose, rather than for a specific person or institution.  Mrs Utterson-Kelso’s will stated the bequest was “to be used for the purposes of the Green Gables Home”.  When under the control of Presbyterian Support, Green Gables had provided not only residential care but also outreach services with home visiting and home care.

The Court of Appeal ruled care of the elderly is a charitable purpose and the specific bequest to Green Gables could instead be passed on to Presbyterian Support to benefit elderly in the Nelson region.  The dollar amount of the bequest was not disclosed. 

Presbyterian Support v. Guardian Trust – Court of Appeal (29.11.16)

17.003

Securities: Bannock v. Monaco Management

One third of 37 disappointed purchasers buying units in Nelson’s Monaco Village tourist development have a chance of getting their purchase price back after the High Court ruled developer Scott Sanders is personally liable to refund their money. 

Mr Sanders was sued for $7.4 million following allegations units in Monaco Village sold up to twelve years ago amounted to participatory securities sold without a prospectus in breach of the Securities Act.  While the Monaco Hotel and Resort is up and running, investors complain they are not getting promised returns.

Investors in Monaco were asked to provide working capital; buying individual accomodation units within the development.  A management company was set up to manage holiday lets and to account for revenue received.  Local entrepreneur Mike Gepp was the initial promoter.  He bowed out in 2006, short of cash to finish the project.  Mr Sanders picked up the reins.

The High Court was told Mr Sanders was aware Mr Gepp had earlier run foul of the Securities Act by having unit purchasers sign a pooling agreement, having Village revenue pooled for division across all unit holders.  This amounted to a participatory security.  Mr Sanders took a different approach:  subsequent purchasers took title to each unit subject to a lease.  The lease gave management rights to a company controlled by Mr Sanders.  Sales of land do not fall within the Securities Act.  Each unit holder was to receive revenue earned by their unit alone; there would be no pooling.  The High Court subsequently ruled this arrangement was also a participatory security which required a prospectus before sale.  Justice Dunningham said lease terms meant investors took a considerable business risk without having a degree of control over their property in the way an owner of conventional commercial property would.  They had no control over who would be tenants or the terms of holiday lets.  They had no right to terminate the management company’s thirty year lease.  Resource consent for the Village meant the property could be used for tourist accommodation only.  This was not an ordinary purchase of real estate, Justice Dunningham said.  It was a participatory security in a hotel business.  A prospectus was required to inform potential investors of inherent risks prior to purchase.

Since no prospectus was issued, investors were entitled to their money back, with interest.  The Securities Act holds Mr Sanders personally liable for refunds since he was a director of the company selling securities without a prospectus.

Of the 37 investors who sued, eleven are entitled to repayment.  One was denied repayment as a close business associate of Mr Gepp.  He advanced money for the development and built part of the Village.  The remaining investors denied repayment were those who sued out of time, or were subsequent purchasers having bought from a prior purchaser.      

Bannock v. Monaco Management – High Court (28.11.16)

17.002

Tax: Commissioner of Police v. Jiang

The High Court upheld a proceeds of crime restraining order lodged against Christchurch properties owned by a brothel owner suspected of tax evasion

Fan Jiang unsuccessfully challenged interim restraining orders imposed on five properties she owns in England Street, Regalwood Close and Nursery Road.  A challenge to police seizure of $71,640 cash from her England Street brothel also failed.

The High Court was told Inland Revenue suspects Ms Jiang failed to declare at least $799,200 income from brothel earnings and rental income.  For the five tax years ending March 2014 Ms Jiang’s declared income averaged $13,100 per year.  That of her late husband averaged $16,700 per year.  Ms Jiang said the Criminal Proceeds (Recovery) Act was never intended for use in tax cases.  She alleges the interim restraining orders are a tactic to force a confession.  She has not been charged with any offences under the Tax Administration Act.  Justice Mander ruled tax evasion can amount to significant criminal activity justifying procceds of crime restraining orders.

Ms Jiang was convicted in December 2015 and fined $10,000 for breaching the Resource Management Act after operating her business outside permitted hours and then ignoring an abatement notice.    

Commissioner of Police v. Jiang – High Court (21.11.16)

17.001

Investment Fraud: Lifestyles Investment v. Coral Investments

Sixty investors alleging director of Coral Investments Ltd Tony Lusby stole over $12.3 million they invested in his investment scheme have been told to refile their legal claim in Australia.  Investors claim Macquarie Bank should make good their losses.

Tony Lusby set up Coral Investments in 2007.  At investment seminars throughout New Zealand he encouraged investors to pay into an Australian Macquarie bank account he controlled.  They were told 75 per cent of their money would be placed on deposit with Macquarie, the rest used to purchase listed Australian securities.  Over $12 million passed through the account.  The High Court was told the Macquarie account is now empty.  Mr Lusby transferred the funds to offshore accounts around the world.  He is believed to be in Chile now.

Aggrieved investors sued in the High Court at Auckland, claiming against Mr Lusby, Coral Investments and Macquarie Bank.  Associate judge Sargisson said the case should be heard in Sydney.  That is where the money was.  Investors allege Macquarie Bank failed to properly supervise the account and is liable for “knowing assistance” in not stopping Mr Lusby emptying the account.  Macquarie denies liability.  Judge Sargisson ruled Australian courts are the better venue for assessing Macquarie’s liability, if any.  Australian courts are more familiar with rules governing banking practice in that country. 

Lifestyles Investment Group v. Coral Investments – High Court (15.11.16)

16.158