Charity: re Family First

Family First’s narrow emphasis on the ‘traditional family’ did not satisfy the wider ‘public benefit’ test needed for Charities Commission registration, the High Court ruled.  Promoting the benefits of a stable family unit without restrictively defining family would likely be permitted as a charitable purpose, Justice France indicated.

Registration as a charity has tax benefits.  But the rules are tight.  There must be a wide public benefit.  Organisations advocating a law change are refused registration unless the advocacy is directed to public education and promotion of rational debate.

Family First was deregistered by the Charities Registration Board in 2017 on grounds it did not exist solely for charitable purposes.  Family First wants to see political change with legal primacy given the traditional family unit.  It wants: tax and welfare changes to eliminate what it sees as disincentives to marriage; abolition of ‘no fault’ divorce; abortion stopped; continued prohibition on euthanasia, and; promotion of community standards with tighter controls on prostitution and pornography.

Family First appealed de-registration.  It said the purpose of Family First was to ‘advance education’.  This is an accepted charitable purpose.  Justice France said Family First’s primary activity is advocacy.  It is promoting one form of family, rather than promoting the role of families in society generally.  Its activities include holding an annual invitation-only conference and publishing material that contain opinion and information supporting its views.  Any public benefit is not tangible, he said.  ‘Advancement of education’ requires a balanced presentation of information so that readers can form their own views.  Disseminating material which advances one point of view only is not ‘the advancement of education’.

re Family First New Zealand – High Court (31.08.18)

18.176

Fraud: Richards v. Police

Imprisonment was replaced by home detention after serial offender Quentin Kyle Richards paid in full $50,000 stolen from his employer.

The High Court was told Richards ripped off his Christchurch-based employer by diverting customer orders for furniture, having their bespoke marble benchtops manufactured at his employer’s expense and then pocketing the price paid.  When one theft was discovered, Richards lied, saying it was a one off because he was under financial pressure.  When proof of his financial difficulties was demanded, Richards prevaricated, staging a break-in to his own vehicle before saying all documentation had gone missing.

An internal audit, a review of video footage and checks with past customers identified about $50,000 had been stolen in the previous twelve months.  Richards had been with the company for seven years.  Forensic evidence available went back one year only.  After pleading guilty to theft in a special relationship, Richards was sentenced to 17 months’ imprisonment.  He had previously served home detention after stealing from another employer.

On appeal, Richards sentence was amended to six and a half months’ home detention for the benchtop thefts.  The $50,000 proved stolen was repaid out of personal savings together with $38,000 withdrawn from his Kiwisaver account.

Richards v. Police – High Court (31.08.18)

18.175

Liquidation: Just Beverages Ltd v. Horton

Bankrupted in 2016, Shane McKillen engineered appointment of a close business associate as liquidator of his company then known as Waipak Ltd in an apparent attempt to maximise benefits that might flow to shareholding family trusts.  The High Court ordered Insolvency Service replace Chris Horton as liquidator saying Mr Horton lacked independence.

A business relationship between the two stretched back many years; Mr Horton acted as provisional trustee of a part-payment scheme put to creditors by Mr McKillen to stave off bankruptcy.  This proposal was shot down in the High Court.  Related party debts of $23 million voted in favour of the scheme were disqualified from the count.

His company, then known as Waipak Ltd, went into liquidation in August 2017 voluntarily on shareholder vote.  Based in the Hawkes Bay, Waipak manufactured rigid plastic bottles and closures.  Prior to liquidation, Mr McKillen teed up Mr Horton to act as liquidator.  The High Court was told of ongoing antagonism between Mr McKillen and Bruce Keatley, former marketing director and shareholder of Waipak.  Before liquidation, the company name was changed to FUB Ltd.  The name change was a snub to Mr Keatley, with FU Bruce signalling Mr McKillen’s views.  As liquidator, Mr Horton initially rejected liquidation claims by Mr Keatley for unpaid holiday pay and has maintained his rejection of Mr Keatley’s claim for repayment of loans to the company.

Expecting a challenge from creditors, Mr Horton went to court asking for confirmation of his appointment.  Associate judge Sargisson removed him from the job. Under the Companies Act, any person having a continuing business relationship with a company in two years prior to liquidation can be removed as liquidator.  Judge Sargisson said Mr Horton’s allowance of related party votes in Mr McKillen’s failed part-payment scheme and his apparent partiality in dealing with claims in FUB’s liquidation raise concerns about Mr McKillen exerting influence over conduct of the liquidation.   

Just Beverages Ltd v. Horton – High Court (29.08.18)

18.174

Asset Forfeiture: Commissioner of Police v. Fennell

Living in Dublin and allegedly using Irish backpackers as drug mules to smuggle ecstasy and cocaine into New Zealand, Francis Gary Fennell had $73,000 deposited in an ANZ bank account seized as proceeds of crime, part of the $233,500 police claim was generated by New Zealand drug sales.

Fran Fennell is under investigation in Ireland for his alleged involvement in a drug distribution network reaching New Zealand and Australia.  The Fennell drug connection surfaced locally when drug importations were picked up during passenger searches by New Zealand Customs.   

Police told the High Court Fennell recouped at least $233,500 from drug sales in New Zealand.  Much of the money was shifted offshore using banks, Western Union and couriers.  The High Court ordered $73,000 remaining in Fennell’s ANZ bank account be seized under the Criminal Proceeds (Recovery) Act.

Commissioner of Police v. Fennell – High Court (29.08.18)

18.173

Tax: Commercial Management Ltd v. Inland Revenue

The ghost of John George Russell is returning to haunt Inland Revenue.  Control of the Russell companies has passed to Kawakawa Bay resident Glenda Rogers who now has High Court approval bringing five companies back from the dead to make belated claims for GST refunds.

The late Mr Russell spent more than thirty years pursuing tax claims against Inland Revenue over use of tax-loss companies, mostly without success.  At the time of his death, Mr Russell had an on-going tax dispute with Inland Revenue concerning a company called FB Duvall Ltd.  The High Court had ruled Duvall’s late objection to a GST assessment should be considered.  This GST assessment is still not resolved after seven years negotiations with Inland Revenue.

The High Court was told Ms Rogers identified five defunct companies in the former Russell empire with potentially similar GST claims.  They are no longer on the register, having been removed or struck off between seven and 22 years ago.  She asked the High Court to exercise its Companies Act discretion to reinstate these companies, bringing them back to life and opening up the possibility of further late GST objections.  Inland Revenue is against reinstatement.  The companies have been dead and buried a long time.  Three of them had unpaid taxes, it said.

Associate judge Johnston gave approval.  There is no time limitation on reinstatement. Restoration to the register for the purpose of pursuing a speculative tax claim is not grounds for refusal, he said.

Commercial Management Ltd v. Inland Revenue – High Court (28.08.18)

18.172

Fraud: Zhang v. Yu

Investment adviser Chunglin Yu was ordered to pay immigrants Yihua Zhang and Wei Hu $1.22 million damages being misappropriated funds of $500,000 intended to support their entrepreneur work visa application, costs of retraining for employment in New Zealand, plus interest paid on loans needed to tide them over before getting new jobs.  Media reports have Ms Yu under investigation in China as a ‘major suspect’ in financial crimes. 

Ms Yu was held liable in the tort of deceit. Justice van Bohemen found she had lied about the status of her investment business in New Zealand (it was not registered with the Financial Markets Authority) and she had lied about the destination of their $500,000 investment (funds promised to be invested in bank deposits and other securities were stolen).

The High Court was told Ms Zhang and her husband Dr Hu used the services of Ms Yu and her businesses Finawin Finance Management Jiansu Ltd and Honest Deal Holding Co Ltd, as part of their planned emigration from China to New Zealand in 2015.  They had met Ms Yu previously when on a preliminary trip to New Zealand investigating business opportunities assisting Chinese students to study here.  They borrowed the equivalent of about $500,000 from a Chinese bank.  This was passed on to Ms Yu to be remitted to New Zealand as part of their application for an entrepreneur work visa.  Ms Yu was to invest this money on their behalf pending approval to immigrate.  Ms Yu was to receive thirty per cent of any profit as her service fee.

With their $500,000 stolen, Ms Zhang and Dr Hu no longer qualified for a work visa.  Their visa was cancelled.  They remained in New Zealand on student visas; Dr Hu enrolled for a MBA, Ms Zhang training as a kindergarten teacher.

The High Court was told of reports in Chinese business media of Ms Yu being arrested in China sometime in 2015 for financial crimes. She owns property on Annalong Road in the Auckland suburb of Dannemora.  Rating valuation as at July 2015 was $1.525 million.  There is a freezing order over the property.  There is also an ANZ bank mortgage registered against the title.

Zhang v. Yu – High Court (27.08.18)

18.171

Mahana Estates: Murren v. Schaeffer

Two US investors claiming an interest in Mahana Estates winery based in Upper Moutere sued to have $6.2 million frozen from sale proceeds should the business sell.  It is currently on the market, but not widely advertised.

James Murren and Daniel Lee put about $US2.3 million into the winery, then known as Woollaston Estates, over a seven year period ending 2008 for what they claim is a part share in the business.  Glenn Schaeffer, also a US citizen, introduced them to the investment.  They allege Mr Schaeffer duped them.  They are suing for negligent misstatement, deceit, fraudulent misrepresentation and a breach of the Fair Trading Act.  They have suspicions Mr Schaeffer is selling up on the sly, potentially leaving them out of pocket.  Mr Schaeffer and associated entities control eighty per cent of the business; the Woollaston family, twenty per cent. 

The Court of Appeal imposed a freezing order over Mahana Estate sale proceeds ahead of a full trial later this year, in October. Mr Schaeffer is free to sell the business, but net proceeds after payment of mortgages are frozen up to a total of $6.2 million.  The court was told Mr Schaeffer has recently taken a $22 million mortgage over business assets.  This is not to be repaid ahead of the frozen $6.2 million, the court ruled.  There was also evidence of mortgages in favour of his spouse.

Mr Murren and Mr Lee were alerted to the possibility of Mr Schaeffer removing company assets when he collected one million dollars from a major sale of artwork in October 2017.  The court was told this was used to buy wine produced by Mahana Estates, wine which has since been taken out of the country.

Murren v. Schaeffer – Court of Appeal (23.08.18)

18.170

Family Trust: NZ Natural Therapy v. Little

Businessman John Little was held personally liable to pay all debts of the insolvent corporate trustee managing his trading trust after taking cash for personal expenses at a time when the trust was insolvent.  Total debts are yet to be finalised, but likely will be in excess of $300,000.

The High Court was told Mr Little was sole director and shareholder of NZ Natural Therapy Ltd, the corporate trustee for his business: NZ Natural Therapy Trust.  A trust is an accounting entity, but is not a legal entity.  Assets and liabilities of the trading trust lay with Therapy Ltd, the corporate trustee.  Evidence was given of the business being insolvent from 2008.  Mr Little continued trading the business whilst insolvent.  An increase in bank overdraft was negotiated to boost working capital at a time when profitability was decreasing.  Mr Little operated a network of entities and trusts which Justice Brewer said was used for tax advantage.  There was a two-way flow of funds between the trading trust and a second trust (Woodside Trust) which owned property and held shares in another family business. Liquidity considerations governed which way funds flowed.

Deloitte, as liquidator of NZ Natural Therapy Ltd, said it received no co-operation from Mr Little after his company went into liquidation.  Mr Little could not explain what had happened to the detailed accounting records he claimed once existed.  Mr Little complained that trust financial statements he had signed off each year were inaccurate.  Justice Brewer ruled the financial statements signed by Mr Little are to be accepted as correct unless he can provide evidence to the contrary.  The 2012 financial statements showed Mr Little owing his trading trust, and by extension the corporate trustee, a total of $323,148. Mr Little was ordered to repay this money.  Deloitte analysis of bank records indicated much of this money was used for personal expenses, such as school fees and credit card bills.

In addition, Mr Little was held liable for failing in his duties as a director of Therapy Ltd; failing to act in good faith, reckless trading, incurring debts that the company could not perform and failing to keep proper accounting records.  He is personally liable for Therapy Ltd debts and liquidation expenses in excess of the $323,000 borrowings he has been ordered to repay.

Mr Little was criticised for what were called ‘post-liquidation sales’.  This amounted to Mr Little having Therapy Ltd through its trading trust enter into a management contract with another of his companies, Prince and Princess Ltd.  For the 2014 and 2015 financial years his trading trust billed Prince and Princess $166,000 for management services supposedly provided.  The court was told Prince and Princess paid the bill, claiming this as an expense in its tax accounts; the trust didn’t receive any money.  Mr Little could not explain where the money went.  Justice Brewer said this was implausible.  At that time, Mr Little controlled both Prince and Princess Ltd and NZ Natural Therapy Trust.

NZ Natural Therapy Ltd v. Little – High Court (22.08.18)

18.169

Tax: Roberts v. Inland Revenue

Forgiveness of a debt owed by a charity amounts to a charitable ‘monetary gift’ generating a tax benefit for the creditor of 33 cents in the dollar.

In 2007, Mr and Ms Roberts set up the Oasis Charitable Trust for spreading the Christian faith and for helping those in financial difficulty.  They transferred investment assets valued at $1.7 million to the Trust, recording this transfer as a loan.  Over a five year period they signed deeds of forgiveness of debt, progressively forgiving $274,700 dollars of the original loan.  Inland Revenue allowed tax credits totalling $91,500.  The High Court was told Inland Revenue later changed its mind, demanding repayment of the credits.  Mr Roberts had died.  Mrs Roberts contested the tax assessment.

The narrow legal question before the High Court was whether forgiveness of the charity’s debt amounted to a ‘monetary gift’.  Inland Revenue said the tax break applied only to charitable gifts made in money.  Non-monetary gifts to charities create a headache for revenue authorities.  Valuations can be manipulated.

Justice Cull ruled forgiveness of a debt deals with a specific sum of money.  It qualifies as a ‘monetary gift’.  Inland Revenue raised potential concerns over insolvent charitable trusts.  Loans payable by the trust will be worth less than their nominal value at a time when a creditor may attempt to engineer a tax rebate based on the face value of the loan.

Roberts v. Inland Revenue – High Court (21.08.18)

18.168

Mining: L.& M Coal v. Bathurst Resources

Having accommodated Bathurst Resources difficulties when financing its purchase of Buller Coal, L&M Coal Holdings had to sue when Bathurst turned this accommodation upside down, claiming an open-ended option now existed with nothing to pay.  Bathurst was ordered to pay US$40 million.

Bathurst paid $US40 million upfront for its 2010 purchase of Buller Coal with further commitments of ongoing royalty payments and a further $US40 million payable when 25,000 tonnes of coal had been shipped. This further $US40 million was viewed by L&M Coal as part of the purchase price but not payable until mining was operational. 

The High Court was told Bathurst faced difficulty raising capital to finance development of its Escarpment mine on Denniston plateau within the Buller Coal permit area.  Objections to resource consents held up development for some two years. Volatile coal prices compounded difficulties.  Bathurst capital raising was at risk; it would be ‘in default’ with L&M Coal should it fail to pay the further $US40 million at a time when it was seeking capital to help pay that same $US40 million.  Talks with L&M Coal proved fruitful.  L&M Coal agreed a failure to pay would not be treated as a ‘default’ but in turn Bathurst was required to pay increased royalties.  In economic terms, L&M Coal viewed the increased royalty as interest for late payment.

Up to late 2016, Bathurst acknowledged in its financial statements that coal extraction at Escarpment attracted further payments once 25,000 tonnes were mined.  In December 2016, a different view emerged; their contract said payment was due once the agreed tonnage was ‘shipped’ and none had been shipped.  ‘Shipped’ meant exported, Bathurst said.  Bathurst was supplying domestic users only, primarily Holcim cement works then operating on the West Coast.  Earlier in 2016, Bathurst had suspended mining at Escarpment subsequently taking a controlling interest in BT Mining, which had purchased mining concessions on the break-up of government-controlled Solid Energy.

L&M Coal management was incensed.  Bathurst was refusing to pay the additional $US40 million for coal already mined and was no longer paying royalties for future extraction because mining at Escarpment had ceased.  L&M Coal is registered in Belize.  Its business is run from Hong Kong.

Justice Dobson ruled ‘shipped’ in the contract meant ‘transported’.  Domestic sales counted.  Suspension of any obligation to pay the disputed $US40 million operated only ‘so long as’ royalties were still being paid, he ruled.

L.& M. Coal Holdings Ltd v. Bathurst Resources Ltd – High Court (17.08.18)

18.167

Capital + Merchant: Gibson v. Official Assignee

Insolvency Service is desperately hanging on to nearly two million dollars held in the name of unpaid Capital + Merchant investors as it tries to resolve with Inland Revenue an alleged GST stuff up.  If found to have got its GST calculations wrong, Insolvency Service wants to use investors’ money rather than its own money to clear up the mess.

Insolvency specialists Korda Mentha are acting on behalf of some 7500 retail investors in Capital + Merchant left unpaid after the finance company went belly-up in 2007.  Insolvency Service is liquidator of Capital + Merchant.  It negotiated an $18.5 million out of court settlement with auditors BDO Spicers.  Much of this money went to secured creditors: Perpetual Trust Ltd and Fortress Credit Corporation (Australia) II Pty Ltd.  Insolvency Service booked $2.34 million for its liquidation fees and costs.  By agreement, a balance of $1.75 million was to go to Korda Mentha as receiver acting on behalf of unpaid investors. This agreement was filed in court, gaining the status of a court order.  

After the court filing, Insolvency Service woke up to the fact GST might be payable on some or all of the $18.5 million settlement with the auditors.  This issue is not yet resolved.  When Korda Mentha demanded the agreed $1.75 million be handed over for payment to investors, Insolvency Service asked the High Court to refuse enforcement. Justice Courtney ordered a stay of enforcement.  Investors will not be seriously disadvantaged by any delay, she said.  The funds are being held by Insolvency Service on term deposit earning tax-free interest.

In a separate legal action, Korda Mentha is suing Insolvency Service alleging negligence, claiming it should bear the cost of any GST mistake, not investors.

Gibson v. Official Assignee – High Court (16.08.18)

18.166

Feltex: Houghton v. Saunders

Feltex investors claiming losses following its 2004 public float need not have read the prospectus to claim damages for any loss suffered provided they did read the short-form investment statement, the Supreme Court ruled.  It is back to the High Court for some 3000 aggrieved investors after a Supreme Court ruling forecast revenue in the prospectus was misleading.   

Investors buying into Feltex at $1.70 a share took legal action after Feltex went into liquidation in just over two years.  The Supreme Court ruled a prospectus forecast of revenue for the year ended June 2004 was misleading.  A ‘forecast’ is expected to reflect the most probable outcome. Total operating revenue of $335.4 million was forecast for the 2004 year.  This forecast was prepared on the basis of actual sales for the first nine months of the 2004 financial year combined with forecast sales for the remaining three months. This three month forecast proved to be out by ten per cent and was known by Feltex directors to be incorrect at the time Feltex shares were later issued to investors.  Prospectus figures were not updated.

The Supreme Court ruled Securities Act liability arose from the fact this revenue forecast was untrue and misleading.  There was no need to prove materiality.  Rules governing public floats are now in the Financial Markets Conduct Act.

Credit Suisse and the then directors of Feltex face liability for any proved loss resulting from this misleading statement. The Supreme Court signalled likely arguments will be that the issue was overpriced.  Investors need not have read the prospectus.  Most will have worked only from the abbreviated offer document: the Feltex investment statement.  By law, investment statements make reference to a full prospectus being ‘available’. A prospectus is assumed to have been ‘distributed’ to a potential investor reading the investment statement even if it has not been asked for or received.  Claims under the Fair Trading Act are also open.  Double jeopardy, with liability under both the Fair Trading Act and securities legislation, was closed off by government legislation for future claims with effect from 2008.  It remains open for Feltex claimants the Court ruled.

Houghton v. Saunders – Supreme Court (15.08.18)

18.165

Fraud: Quirke v. Police

Charged with unlawfully taking $1.4 million, Edward James Quirke and Claire Elizabeth Quirke were refused name suppression.  Police allege the funds were stolen from Mrs Quirke’s mother.  Her mother was against name suppression; she wants details made public.

Living in Christchurch, the Quirkes face trial sometime late 2019.  They pleaded not guilty to accessing a computer system for dishonest purposes and have elected trial by jury.  Police allege they dishonestly accessed bank accounts in the names of ‘Robin B Milligan’ and ‘Milligan’s Radio (1972) Ltd’ without authority 92 times over a sixteen month period ending December 2017.  Robin Milligan is Mrs Quirke’s late father.  Mrs Quirke’s mother is the sole executor and beneficiary of Robin Milligan’s estate.  The allegedly wrongful withdrawals began soon after Mr Milligan died.  Police identified that Mr Quirke spent approximately $569,000 of this money gambling and $122,800 purchasing assets, with a further $566,750 transferred to other accounts and $121,900 withdrawn from ATMs.

The Quirkes said interim name suppression was necessary to protect their business interests.  Mr Quirke operates a pest control business; Mrs Quirke an online marketing company under the name QEC Holdings Ltd.  Justice Gendall ruled neither met the threshold of ‘extreme hardship’ necessary for name suppression.

Quirke v. Police – High Court (14.08.18)

18.164

Tax: Krasniqi v. Inland Revenue

Inland Revenue is pursuing Ethnik Krasniqi for $2.9 million tax covering six tax years on assessed income of $7.8 million.  Mr Krasniqi has a colourful commercial career being bankrupted twice and subsequently claiming to be living variously in both New Zealand and Australia but paying no tax in either country.

Inland Revenue interest in Mr Krasniqi arose when investigating the tax affairs of a business associate, Roy Brown.  It spent four years reconstructing their business relationship.  Inland Revenue tracked payments from Mr Brown and associated entities into bank accounts owned by Mr Krasniqi, members of his family and family trusts.  Inland Revenue also identified assets purchased with funds from undisclosed sources and living expenses funded again from undisclosed sources.

The High Court was told Mr Krasniqi was bankrupted in 1993, following the failure of a family manufacturing business.  He later worked as a consultant, continuing to do so even whilst bankrupt again in 2003.  His work included advising on property developments, primarily for his father Mazhar Krasniqi and two childhood friends: Roy Brown and Murray Smith.

When assessed as receiving undeclared income totalling $7.8 million, Mr Krasniqi claimed to be an Australian tax resident. Inquiries of the Australian Tax Office identified he was paying no tax in Australia, but brought to light payments into Australian bank accounts which were assessed as taxable in New Zealand. Amongst the assets Inland Revenue said were purchased out of undeclared income was a Range Rover and a property at Remuera in Auckland.  When challenged, Mr Krasniqi said the Remuera property was a family home, an about-turn on his claim to be resident in Australia.  The property was sold eighteen months after purchase, generating a profit of some $135,000.  This was taxable since Mr Krasniqi was in business as a property developer.  He provided no evidence that he or his family had ever lived at the address.  He said the Range Rover was on loan, owned by Mr Brown.  The $105,000 cost was treated as undeclared income.  Mr Krasniqi provided no evidence the vehicle was on loan.         

By the time his tax dispute came to a hearing, Mr Krasniqi admitted he was a New Zealand tax resident for the years in dispute, claiming the money received was repayment of loans made to Mr Brown. Justice Wylie said Mr Krasniqi provided no evidence of the fact or the terms of any loans.  Inland Revenue’s investigation covered six tax years ending 2011.

Krasniqi v. Inland Revenue – High Court (14.08.18)

18.163

Voluntary Administration: FMA v. Jackson

Listed companies in voluntary administration do not have to comply with NZX continuous disclosure rules, the High Court ruled in a test case involving CBL Corporation.  Current CBL shareholders are left in the dark.

CBL went into voluntary administration last February following an arm-wrestle with the Reserve Bank which alleges a failure to comply with Bank directions.  Trading in CBL shares is suspended.  Korda Mentha is acting as administrator.  Shareholders are getting no information regarding plans by two CBL directors to restructure the company.

Financial Markets Authority asked the High Court whether Korda Mentha is required to provide market updates.  NZX listing rules require listed companies to make immediate disclosure of all information having ‘a material effect’ on the price of quoted securities.

Justice Venning ruled the Companies Act voluntary administration rules alone govern disclosure.  These rules require administrators to file six monthly reports at the Companies Office.  The reports narrate what administrators have done; they do not provide details of any price-sensitive negotiations.  NZX continuous disclosure obligations are intended to preserve the integrity of the market.  Since voluntary administration imposes a freeze on trading, there is no need for continuous disclosure, Justice Venning decided.

Voluntary administration suspends directors’ powers to run a company, allowing creditors time to decide the way forward at what is called a ‘watershed meeting’.  The High Court was told CBL’s first watershed meeting in May resulted in a voting deadlock. Subsequent meetings have been continually postponed.  The next watershed meeting is scheduled for later this year, in November.

Financial Markets Authority v. Jackson – High Court (13.08.18)

18.162

Fraud: re Ross Asset Management Ltd

The 640 investors with $125 million caught in a Ponzi scheme engineered by Wellington’s David Ross look to receive a total of fourteen cents in the dollar following High Court approval of liquidators’ pragmatic proposals for unwinding the long-running fraud.

It has been a six year job for insolvency specialists at PriceWaterhouseCoopers untangling legal and accounting confusion left by fraudster David Ross.  He fooled clients into believing he was a financial wizard capable of earning above-market returns.  Money flooded in, much of it stolen by Ross.  He is currently serving a ten year jail term for fraud.

Ross Asset Management Ltd and Dagger Nominees Ltd were the corporate vehicles used for his Ponzi fraud.  On  liquidation, investors were holding statements declaring investments held on their behalf amounting in total to some $450 million.  These were a complete fiction.  The liquidators tracked down trust assets totalling about fourteen million dollars.  A dizzying array of accounting and legal complications followed.  About 860 investors are affected.  One investor successfully prised a substantial number of securities out of liquidators’ hands by arguing his was a special case; the shares were held by Ross in trust specifically for him.  This left a reduced pool of assets claimed by differing categories of investor: ‘overpaid investors’ still owed money according to their fictitious statements but having been paid out more by Ross than they had paid in, and; ‘shortfall investors’ paid either nothing or less than they put in. Early court rulings decided investors paid out during the course of the multi-year fraud were liable only to refund payments received in excess of what they had placed for investment.  The liquidators are pursuing ‘overpaid’ investors. A total of $19.5 million has been recovered to date, according to the liquidators’ most recent report.     

Recoveries from overpaid investors, successful claims against Ross and members of his immediate family plus interest on money held means liquidators are now ready to make a distribution.  Ignoring the fantasy figures used by Ross when reporting profits to investors, money placed with Ross for investment but not repaid totals some $125 million.  The individual most affected left three million dollars with Ross.

In the High Court, Associate judge Johnston ruled the assets and liabilities of Ross Asset Management and Dagger Nominees be pooled together in the liquidation.  Accounting records did not clearly differentiate between the two companies. Investors who have already received back the dollar amount of their investment get no liquidation payout. They cannot claim for fictitious profits reported to them but unpaid.  Trade creditors, owed $68,100, get the same payout as investors.  Claims by ‘shortfall investors’ are to be adjusted for inflation given differing sums were paid in and out at different times. This recognises the time-value of money.        

Investors planning to sue for fraud can do so said Judge Johnstone, but any award of damages will rank behind returns of capital for investors.  With investors not being repaid in full, any damages award for fraud will be worthless.

Judge Johnstone commented a liquidation code designed to order priorities between creditors does not fit comfortably with frauds where trust assets are involved.  A pro-rata distribution across trade and trust creditors was the only pragmatic solution.  Government is currently investigating rule changes to deal with Ponzi frauds.

re Ross Asset Management Ltd – High Court (8.08.18)

18.161

Relationship Property: Hopkins v. Whitehead

Having division of relationship property and future payments for maintenance negotiated as a ‘job lot’ restricts later demands for changes to maintenance obligations.  One spouse argued she had compromised her claims to property in order to increase entitlements to maintenance.

A partner in a large international accounting firm looked to reduce his agreed commitment to pay about $20,000 per month in maintenance to his former spouse and their four children.  Fictitious names were used for court proceedings.  The High Court was told the two separated after fourteen years marriage.  A 2016 mediation resulted in a comprehensive agreement.  Property was divided. Ongoing maintenance was agreed on a sliding scale: initially $11,900 per month with future adjustments for inflation and reductions by twenty per cent as each child reached age 18.  All payments are to stop when the youngest turns eighteen in 2029.

Ten months after the agreement came into effect, the husband reduced monthly maintenance payments to $7000.  This after applying to Inland Revenue for a formula assessment of child support.  When his former wife sued successfully for the shortfall, he applied for a maintenance variation.  The High Court upheld a Family Court ruling that the Family Proceedings Act limits circumstances in which relationship property agreements can be varied if this affects the interests of a child.  Maintenance can be reviewed only if maintenance commitments are severable, being negotiated separate from relationship property division.  The husband said the two issues were negotiated sequentially at their mediation, property division first and maintenance second, but were then included in one single final agreement.  Justice Dobson said the two issues were intertwined.  It was not a case of two discrete agreements being bundled together into one document for convenience.  There was no agreement over a valuation of the husband’s share of his accounting practice.  Valuations ranged between $270,000 and $750,000.  The wife specifically agreed not to dispute the value in return for the maintenance provisions agreed.  The husband’s application for a review of maintenance was struck out.

The court was told their 2016 agreement includes a process for future reviews of maintenance ‘to take into account any significant change in the incomes of either party’.  The husband did not take up his former wife’s invitation to seek a review using this provision.

Hopkins v. Whitehead – High Court (7.08.18)

18.160

Finance: Kenny v. Business Innovation & Employment

Financiers selling repossessed vehicles are dealers requiring registration under the Motor Vehicle Sales Act or otherwise must sell though a registered dealer.

In a test case, former Rotorua district councillor Geoff Kenny asked the High Court whether his Wellington finance company selling repossessed cars made him a motor vehicle dealer.  His business MTF Lower Hutt sells around one hundred repossessed cars a year on TradeMe.

The court was told Mr Kenny’s business was careful to signal it was not a registered motor vehicle dealer with prominent notices displayed: on his MTF Lower Hutt website offering car finance, on shopfront advertising and on TradeMe listings.  Only some five per cent of MTF Lower Hutt financing deals see borrowers default.  Mr Kenny said registered dealers are nervous of selling repossessed vehicles on behalf of finance companies; vehicle history is unknown and often vehicles have been poorly maintained.  Mr Kenny had used Turners Car Auctions, which is a registered dealer.  He preferred TradeMe.  Unlike Turners, it does not charge a fee to both buyer and seller. In addition, there are GST benefits. He said there is ample consumer protection rules in the Credit Contracts and Consumer Finance Act which govern MTF Lower Hutt’s repossession sales.

Justice Mallon ruled registration was required for MTF Lower Hutt under the Motor Vehicle Sales Act because selling ‘more than six vehicles in a twelve month period for the primary purpose of gain’ is by definition dealing.  MTF Lower Hutt looked to make a 'gain'.  While Credit Contracts legislation requires financiers to take reasonable care to get the best price possible on repossessions, this does not negate the fact MTF Lower Hutt was seeking to ensure it made ‘a gain’ on its loan exposure in each repossession sale, Justice Mallon ruled.

Kenny v. Business Innovation & Employment – High Court (6.08.18)

18.158

Real Estate: Pangani Properties v. Lloyd

Two Manawatu real estate agents ordered to pay $813,000 damages kept client David Olsen’s Pangani Properties in the dark while promoting a business opportunity for ‘an acquaintance’ described as someone met casually from time to time for coffee.  Grant Robert Lloyd and Philip James Leslie Nevill went on to make commissions of $331,150 brokering a string of deals for a Malden Street industrial site in Palmerston North.  

In 2010, CEO David Olsen was mulling over future plans for Pagani Property Ltd’s Malden site.  He could sell, or expand by purchasing a neighbouring site. Negotiations with the neighbour came to nothing.  A sale listing was removed after four months.  No offers were received.

The High Court was told Mr Lloyd, trading as Tremain Commercial Palmerston North Ltd, approached Mr Olsen in 2013 offering to market his property.  An agency agreement was signed.  Unbeknown to Mr Olsen, Tremain also signed up the neighbour.  Mr Olsen was to later learn Tremain Commercial brokered negotiations behind his back.  In September 2013, Mr Nevill was in discussions with NZ Post about potential industrial sites available for lease.  Six weeks later, he negotiated a conditional sale of Pagani Properties Malden Street site. The buyer, Zambora Projects Ltd was owned by Garry Doyle, a local Subway franchise holder who had previously run a second-hand car parts business.  Mr Lloyd was to describe him as a casual acquaintance.  Evidence was given of feverish negotiations brokered by Tremain Commercial between Mr Doyle, NZ Post and the owner of the neighbouring Malden Street site to put together a long-term leasing deal satisfactory to NZ Post using both sites. Potentially having all his ducks in a row, Mr Doyle went unconditional on the Pagani Properties purchase.  This earned Tremain Commercial commission of $63,150.  Tremain earned further commissions totalling $268,000 on the sale of the neighbouring site to Mr Doyle’s company, the lease to NZ Post and Mr Doyle’s subsequent sale of the project to a new buyer after he struggled to complete the NZ Post redevelopment within the tight timeframe demanded.

Justice Ellis ruled Mr Nevill and Mr Lloyd as agents failed in their fiduciary duties to their principal Pangani Properties in five respects: they prevaricated over Mr Doyle’s background, not disclosing his true motivation for buying Malden Street; they did not tell Pangani Properties about NZ Post’s interest in Malden Street, with detailed interest having arisen weeks before Malden Street went unconditional and at a time when Pangani Properties could have withdrawn Malden Street from sale as Mr Doyle was seeking a time extension for his unconditional contract; they preferred their own interests over Pangani Properties getting an extra commission by having Mr Doyle buy and then lease to NZ Post rather than missing a sale and having Pangani Properties itself conclude a lease with NZ Post; they advanced the interests of Mr Doyle’s Zambora Projects over their duty to Pangani Properties by not disclosing NZ Post’s interest, and; they prejudiced Pangani Properties position by signing up the neighbour at a time when they knew Pangani’s Mr Olsen was still looking to acquire the neighbouring site with his own intention to expand.

In general, the two real estate agents failed to disclose material information to their principal, Pangani Properties, and they allowed their interests and the interests of third parties to conflict with Pangani without Pangani’s consent.  Failing to act in the best interests of client Pangani Properties meant a lost opportunity to achieve a different outcome. Justice Ellis said.

Pangani Properties was awarded $813,150 damages: recovery of its commission paid on sale to Zambora Projects ($63,150); compensation for the loss of a chance to secure NZ Post as its own tenant on the expanded site ($650,000), and; compensation for investigation costs ($100,000) including the hire of private detectives to unravel what had happened.

In addition, Mr Nevill and Mr Lloyd were both censured by the Real Estate Agents Complaints Committee and each fined $8000.

Pangani Properties Ltd v. Lloyd and Nevill – High Court (6.08.18)

18.159

Fraud: R. v. Xu, Chen & Jiang

Kickbacks totalling $498,600 were paid to two bank employees willing to turn a blind eye to fraudulent mortgage applications when pushing them through bank approval systems, all part of a $54 million dollar mortgage fraud.

Peter Cheng, employed by ANZ, fled the country when the frauds were exposed.  Zonglian Jiang, employed by BNZ at the time of the frauds, received $240,000 in bribes. He was sentenced to four years nine months imprisonment.  Lawyer Gang Chen, described as the middleman in the fraud and ‘the glue’ holding the entire scheme together, was sentenced to six years imprisonment.

The fraud was a stratagem to reduce financing costs for property developer LV Park controlled by Kang Huang.  Properties under construction were ‘sold’ to dummy buyers, enabling home-owner mortgage rates to be charged on mortgage advances rather than higher commercial rates.  Over a two year period ending late 2013, a total of 57 fraudulent mortgage applications raised some $54 million in working capital for LV Park.  The named dummy purchasers either did not exist, or knew nothing of the loan application made in their name or willingly lent their name having been told it was a ‘re-financing’ arrangement undertaken by LV Park.  False purchasers unwittingly used were LV Park employees and relatives of Kang Huang including his parents and parents-in-law.  Elaborately forged paper trails supported the loan applications. This included forged Chinese bank statements purporting to show cash available, fictitious employment records supposedly evidencing an ability to service the mortgage loan coupled with a record of salary payments having been received.  This involved care to ensure bank entries of salary payments received, funded in fact by LV Park, reconciled with salaries recorded in applicants’ false employment letters.  In one case a false passport was obtained from Hong Kong in the name of one Shou Zhang and mortgages taken out in the name of this fictitious person: BNZ advanced $767,500; ANZ $1.2 million.

Justice Katz was particularly critical of Chen’s offending.  As a lawyer, Chen played a pivotal role signing off documentation he knew to be fraudulent.  He engineered payment of LV Park’s bribes to Cheng and Jiang, washing payments through bank accounts of his aunt and his sister in an attempt to disguise their origin. He obtained the false Shou Zhang Hong Kong passport. 

Kang Xu was sentenced to twelve months home detention. She was found responsible for forging false Chinese bank statements.  She told the court she was only acting as a dutiful wife under instructions of her husband, Kang Huang owner of LV Park.  There was evidence of Xu remonstrating with her husband over the potentially perilous consequences of his fraudulent scheme and also evidence of her signature being forged to some of the mortgage applications.  At an earlier court hearing, Huang was sentenced to four years seven months jail for fraud.

The High Court was told Huang and Xu do not have successfully track records as property developers.  Previous projects had failed.  They were both undischarged bankrupts for a good part of the time that the fraudulent mortgage scheme was operating.  LV Park was a high-risk borrower using mortgage fraud to masquerade as a low-risk home borrower.  Few of the fraudulent loans resulted in a loss.  A rising real estate market ensured the banks were repaid.

R. v. Xu, Chen, Jiang – High Court (3.08.18)

18.157

Bankruptcy: Helsby-Knight v. Official Assignee

Serial fraudster Michael Helsby-Knight, now known as Mike Lafferty, was refused High Court approval to carry on a business.  He has remained bankrupt since 2001.

Mr Lafferty has an extensive history of criminal offending stretching back to 1985.  He has been bankrupted twice in Australia and any automatic discharge from bankruptcy in New Zealand is barred.  He has been banned indefinitely in New South Wales from being involved in any business. Bankruptcy restricts Mr Lafferty’s business opportunities.  He is barred from running a business.  He was convicted in 2005 for breaching this rule.  Mr Lafferty has a history of scams involving sales promotions centred on travel, timeshares and immigration.  Work as an employee requires prior Insolvency Service approval.  In 2008, Insolvency Service refused his renewed employment with immigration agency Wealand International NZ Ltd after allegations of immigration scams within the company.

Mr Lafferty challenged in the High Court refusals by Insolvency Service to approve two proposed business opportunities.  He claims it is biased against him.  The first related to a door-knocking venture in which Mr Lafferty intended to approach home-owners asking if they required any home maintenance or intended to sell.  He would then put them in touch with appropriate providers.  Insolvency Service said there was a risk Mr Lafferty would prey on elderly homeowners, taking deposits without any service being provided.  This despite Mr Lafferty’s promises that he would not be collecting deposits.  The second intended business was an online business re-selling second hand goods obtained from garage sales and charity shops. Insolvency Service said the risk is too high that Mr Lafferty will not deliver goods after receiving payment or will make false representations about their quality and authenticity.  The fact that Mr Lafferty has changed his name by deed poll from Helsby-Knight was a complicating factor.  Customers would not be aware of his backstory.

Justice Gordon refused approval.  Insolvency Service had valid concerns, she said. 

Evidence was given that Insolvency Service did approve Mr Lafferty’s request to take up employment as an Uber driver.  This was subject to conditions which were not disclosed.  Mr Lafferty objects to one of the conditions.

Lafferty aka Helsby-Knight v. Official Assignee – High Court (1.08.18)

18.156