Richard Yan: Mainzeal Property v. King Facade

Plans by Mainzeal’s Richard Yan for a hotel and vineyard on Waiheke Island hosting Chinese Communist Party officials are at standstill.  Isola Vineyards Ltd is in liquidation with assets of 33,000 bottles of wine, land on Onetangi Road valued at $1.9 million and some $727,500 frozen in a law firm’s trust account.  The High Court ordered $2.16 million damages be paid by Isola to Mainzeal liquidators following 2012 debt restructuring trying to prevent Isola going down with the Mainzeal ship.

Isola is controlled by Mr Yan and his spouse.  The High Court was told purchase of Isola was funded with Mainzeal money, channelled through a related company: King Façade Ltd.  With Mainzeal’s imminent collapse, Isola was at risk.  Mainzeal would want its money back.

In early 2012, Mr Yan arranged a restructuring of King Façade’s debt.  This was to rationalise King Façade’s tax position, Mr Yan told the High Court.  It had the effect of eliminating debt owed to King Façade’s only external creditor, Bank of New Zealand, and increasing the debt owed a related company: Richina Global Real Estate Ltd.  Curiously, this increased debt was structured as a contingent debt; repayable in ten years and then only if Richina Global was profitable. King Façade’s contractual right to a specific sum of money from Isola had been replaced by a King Façade loan to Richina Global of little economic value.

In the High Court, Justice Cooke ruled the debt restructuring prejudiced Mainzeal group.  Its ability to recover $2.16 million from Isola (through King Façade) had been replaced by nothing.  This amounted to a transaction for inadequate consideration, in breach of the Companies Act. Both Richina Global and Isola Vineyards were ordered to pay King Façade damages of $2.16 million.

Mainzeal Property and Construction Ltd v. King Façade Ltd – High Court (26.02.19)

19.050

Reckless Trading: Mainzeal Property v. King Facade

Insolvent for nearly a decade from 2005 through to its collapse in 2013 leaving creditors owed some $110 million, Mainzeal was weakly capitalised relying on related-company promises of financial support; promises which were variously worthless or unenforceable. Changes of auditor, ‘window-dressing’ of Mainzeal financial statements and attempts to disguise the level of irrecoverable loans to companies controlled by entrepreneur Richard Yan came to light in liquidators claim for damages following reckless trading by Mainzeal directors.

Insufficient working capital meant it was problems with one single contract which finally pushed Mainzeal over the precipice, into receivership and then liquidation: a dispute over work jointly undertaken with Siemens on an upgrade of Transpower’s inter-island transmission link.  Mainzeal extracted itself from the dispute in late 2012 at a cost of up to $16 million to its anticipated cashflow.  Short of cash, Mainzeal shut up shop.

The High Court was told of Mainzeal being milked of cash by Yan-controlled Richina Pacific to fund projects in China.  As early as 2005, $20.2 million had slipped out the back door.  Two years later, $39.4 million had gone.  In return, Mainzeal was promised repayment in vague terms; promises never formalised into legally binding agreements enforceable against Yan-controlled companies having any economic substance.

Richina Pacific provided formal ‘letters of support’ in 2008 to then auditors PwC, avoiding an audit ‘going concern’ qualification.  As Justice Cooke pointed out, these audit-related letters of comfort promising future financial support are of no legal effect.  They are not legally enforceable.

To mask the level of Mainzeal loans to Richina Pacific companies, short-term inter-company cash transfers totalling five to six million dollars were made around balance dates during 2010 and 2011.  Mainzeal’s own board papers openly described these cash movements as ‘window dressing’.

PwC was replaced as auditor of Mainzeal by Ernst & Young.  Purely on the grounds of cost, Mr Yan said.  Ernst & Young put up a proposal to deal with the potential problem of Mainzeal loans to Richina Pacific group being uncollectable: Project Citron.  Operating as a ‘pre-paid goods agreement’ Project Citron envisaged the then $42.4 million owed by Richina Pacific companies be used to purchase building materials in China for supply to Mainzeal.  The debt due to Mainzeal would be ‘paid’ in kind.  While this took loans totalling $33.1 million off Mainzeal’s books, it left the company exposed to a single supplier of building materials and the vagaries of a Chinese supply chain.  ‘Payment in kind’ raised tricky issues of whether goods to be supplied equated to the value of loans written off.  ‘Payment’ would take time with supply of $33 million in building materials spread over many years.  Mainzeal liquidators argue the ‘pre-paid goods’ arrangement was of considerably less value than repayment of the loans.

Compounding Mainzeal’s difficulties was a mounting list of ‘leaky building’ claims from 2009 onwards.  In Mainzeal financial statements, directors took into account the legal costs then incurred to date, ignoring any potential final liability: in 2009 only three million dollars was provisioned on notified ‘leaky building’ claims totalling $23 million.   

Justice Cooke ruled Mainzeal directors were liable for reckless trading.  Short of working capital, it was not reasonable for Mainzeal directors to rely on letters of support provided by Richina Pacific in connection with annual audits.  The promised support was not enforeceable and in any event was given by Richina Pacific entities which did not have significant assets.  Loans by Mainzeal were made to Richina Pacific entities which did not themselves have the ability to repay.  Directors reliance on shareholder support was not reasonable in the circumstances, he said.

Damages for reckless trading are at the discretion of trial judges.  Justice Cooke imposed joint liability, awarding Mainzeal damages totalling $36 million: Richard Yan liable for up to $36 million, chair of the board of directors Dame Jenny Shipley up to six million dollars and fellow directors Peter Gomm and Clive Tilby also each liable for up to six million dollars.

Mainzeal Property and Construction Ltd v. King Façade Ltd – High Court (26.02.19)

19.049

Gold Line Taxis: Deep v. Auckland Gold Line Taxis Ltd

Details of an attempted coup by disgruntled members of Auckland’s Gold Line Co-Operative Taxi Society Ltd played out in the High Court.  In May 2017, Kahlon Singh together with four other Co-op members occupied the Society’s office, posted security guards at the entrance and announced Co-op chairman Manmohan Dua had been deposed, the board dismissed and Mr Singh installed as ‘Acting Manager of the Interim Management Committee’.

That afternoon, it was all over.  Following police intervention, Mr Dua was back in control.  Mr Singh was subsequently joined by eleven other disgruntled drivers alleging in the High Court that Gold Line directors had failed to follow Co-op rules and were biased against them.  The High Court was told none of the disgruntled members is currently working for Gold Line, though they claim to still hold shares in Gold Line.  All are now driving for rival companies.  In general, they allege Gold Line’s board is effectively preventing them from earning a living with Gold Line as taxi drivers.  Specific complaints centre on the manner in which access to Auckland Airport taxi rank is allocated and the circumstances in which some drivers were dismissed from Gold Line.

Gold Line tendered for airport work in the 2016 tender round through a wholly-owned subsidiary: ATS.  The major grizzle is that ATS has permitted drivers who are not Gold Line members to operate off the ATS rank, whilst excluding some Gold Line members. 

Justice Lang ruled drivers’ remedy was to rely on their constitutional right to vote existing Gold Line directors out of office. He ordered Gold Line hold an annual general meeting of Co-op members no later than March 2019.  There has been no annual meeting since 2016.  No financial statements have been provided to members for the last three years.  The court was told co-op members agreed by a ninety per cent majority at a 2016 special general meeting that no further annual meetings or board elections would be held during the currency of Gold Line’s then three year contract with Auckland Airport.  This decision was of no effect, Justice Lang ruled.  Gold Line’s registered constitution requires annual meetings. Departing from its constitution requires more than a resolution of members; to be effective the amended rule must be registered and go on the public record.

Justice Lang advised that members currently subject to disciplinary proceedings are entitled to attend and to vote at the March 2019 annual meeting.  Members who have failed to pay Co-op levies are to receive notice of the meeting, allowing them to make good any arrears and then attend and vote.

Deep v. Auckland Gold Line Co-Operative Taxi Society Ltd – High Court (22.02.19)

19.048

Liquidation: Apollo Bathroom and Kitchen v. Ling

Shan Ling was ordered to repay $400,000 taken from Apollo Bathroom and Kitchen to pay a personal tax bill.  Her claim the money was owed for unpaid salary and commissions was dismissed.  There was no evidence she had an employment contract with Apollo. 

Apollo Bathroom and Kitchen Ltd is insolvent, put into liquidation by Inland Revenue for unpaid taxes.  Five months prior to liquidation in 2017, Ms Ling had Apollo pay her tax bill of $400,000.  Inland Revenue was threatening to bankrupt her.  Liquidators sued.  Diverting company money in payment of personal expenses is in breach of the Companies Act as a ‘transaction at undervalue’. Ms Ling benefitted to the tune of $400,000; the company got nothing in return, they said.

Ms Ling’s husband was formerly director of Apollo Bathroom.  She said she was entitled to payments of $432,841 from the company for her work as a consultant: unpaid wages at $1100 per week, plus $118,000 in unpaid sales commission.  Justice Jagose said other than Ms Ling’s assertions that she was employed by the company, there was no evidence provided of any employment contract.

Her $400,000 tax bill was negotiated down from an Inland Revenue assessment of arrears and penalties totalling $467,000 owing for the 2009-2012 tax years.  Ms Ling had not filed tax returns for any of these years.

Apollo Bathroom and Kitchen Ltd v. Ling – High Court (22.02.19)

19.047

Commerce Act: Commerce Commission v. First Gas

A classic case of the big operator screwing the small guy, seeking to reduce market competition: Commerce Commission intervention saw First Gas Ltd fined $3.4 million for its actions in forcing GasNet out of the Tauranga market.  The size of the fine results in First Gas purchase of ten kilometres of reticulation pipeline in new Papamoa subdivisions being totally uneconomic; the asset will never be profitable over its lifetime. 

Controlled by Whanganui District Council, GasNet Ltd looked to expand during 2016 into Bay of Plenty establishing gas networks alongside new subdivisions in the rapidly expanding Tauranga seaside suburb of Papamoa. There are big cost savings in laying pipes while a subdivision is under development, rather than retro-fitting pipes in an established suburb.

The High Court was told First Gas, with annual revenues in the region of $158 million, looked to elbow GasNet out of the way. At a July 2016 meeting in Whanganui, GasNet was given the message; sell its Papamoa distribution network or life would be made very difficult.  GasNet spurned two offers, before agreeing to First Gas’ third buyout offer.  GasNet says this third offer did not represent fair value nor reflect the true value accruing to First Gas.  This offer was accepted after First Gas began stacking pipes in subdivisions already reticulated by GasNet with First Gas threatening to retro-fit its own distribution network alongside GasNet’s existing lines.  As part of the buyout, Gas Net agreed to a restraint of trade: it would not provide gas distribution services in the Bay of Plenty for the next five years.

Commerce Commission pounced when the two companies, in all innocence, provided details of their deal as part of ongoing Commission calculations of price-setting for the regulated gas distribution business. The High Court confirmed a negotiated fine of $3.4 million and declared the restraint of trade unenforceable.

Commerce Commission v. First Gas Ltd – High Court (21.02.19)

19.046

Contract: Bei v. Wang

Duoyu Bei claims he is owed $1.28 million; Chao Wang claims he is owed $1.1 million.  The two businessmen are at each other’s throats with allegations and counter-allegations over the funding and operation of Zeus nightclub formerly in central Auckland’s Durham Lane. 

Mr Bei alleges he was misled by Mr Wang when buying into Zeus.  The High Court was told he paid $400,000 in 2016 for a fifty per cent stake in the business and he committed to contributing a further $1.1 million for Club renovations.  He alleges handwritten cashflow records provided by Mr Wang evidencing Zeus Club turnover were substantially overstated.  He also alleges money provided for nightclub renovations was improperly diverted to upgrade a property on Paratai Drive, one of Auckland’s most expensive residential streets.  It is alleged Mr Wang has an interest in the property through a family trust.  Mr Wang denies any wrongdoing.  Evidence was given that Mr Wang left for China in early 2017.  Paratai Drive has been sold.  Net sale proceeds of $1.27 million are held in escrow, in a law firm trust account, pending resolution of their dispute.

Mr Wang in turn claims $1.1 million.  He alleges Mr Bei was in breach of their business agreement over the nightclub’s operation.  He claims Mr Bei wrongly demanded immediate payment of $800,000 and threatened to contact Immigration (challenging his immigration status) and Inland Revenue (claiming he was understating income, dealing in cash).  He alleges Mr Bei wrongfully locked him out of the business and claims he is entitled to a share in nightclub profits generated whilst Mr Bei was in sole charge.

Companies Office records show the company operating Zeus nightclub went into liquidation in April 2017 after its business lease was terminated.  A company controlled by Mr Bei has agreed to purchase the building from which Zeus operated. Back in the High Court, the two are arguing over what documents each should disclose to the other, prior to trial.

Bei v. Wang – High Court (21.02.19)

19.045

David Henderson: FTG Securities v. BNZ

Out of the wreckage of South Canterbury Finance, government sold to interests associated with failed property developer David Henderson the right to claim in the insolvency of one of his Christchurch property developments.  In dispute is up to five million dollars currently in the pocket of BNZ.  

The High Court was told Mr Henderson was adamant Bank of New Zealand were not to be told of his renewed involvement in Tuam Ventures Ltd when FTG Securities Ltd, having his wife Kristine Buxton as director, paid government $100,000 to buy up a second ranking security over 179 Tuam Street; Tuam Ventures main asset.  Tuam is in receivership and liquidation, insolvent.    Mr Henderson is prohibited by court order from having any role in managing a business until December 2022.

Byzantine funding arrangements for development of 179 Tuam Street were spelt out in court.  Back in 2005, Tuam Ventures as part of Mr Henderson’s then property empire, borrowed from Canterbury Finance Ltd giving it a first mortgage security over 127 Tuam Street in central Christchurch.  Canterbury Finance conceded priority to BNZ after a further funding was required in 2007; a deed of subordination and priority promoted BNZ to first ranking security with priority for the sum of $7.5 million plus two years’ interest. Canterbury Finance agreed to rank second for the next ten million dollars plus interest.  The priority deed prohibited each financier from transferring its interest without agreement.  Since then: Canterbury Finance’s second-ranking interest was transferred, without BNZ agreement, to government as part of the 2008 taxpayer bailout of South Canterbury Finance Ltd and then on-sold to FTG Securities for $100,000, again without BNZ agreement, as government looked to sort out the mess; 179 Tuam Street was savaged by the collapse of Mr Henderson’s property empire then the series of Christchurch earthquakes; and BNZ collected over twelve million dollars from its mortgagee sale of 127 Tuam Street and earthquake insurance payments.  FTG Securities alleges BNZ has taken up to five million dollars more than its entitlement under the priority deed.  This belongs to FTG Securities, it claims.

The Court of Appeal ruled FTG Securities has no standing to sue.  Failure to get approval as required by the deed of priority for its purchase of what was Canterbury Finance’s interest in Tuam Ventures was fatal.  This is not just a technical point, the Court of Appeal said.  Commercial players are free to prohibit assignment if they wish, it said.  It is open for FTG Securities to seek BNZ approval to stand in the place of Canterbury Finance before taking legal action to enforce its claimed rights against BNZ.  The priority deed says approval by BNZ cannot be unreasonably withheld.

FTG Securities Ltd v. BNZ – Court of Appeal (20.02.19)

19.044

Liquidation: Installer Services (Hutt Valley) Ltd v. Colson

Andrew and Sue Colson put their company Installer Services (Hutt Valley) Ltd into liquidation under threat of legal action for payment of disputed franchise fees.  The High Court ordered they pay $19,900 damages for taking drawings from the company at a time when fees potentially due threatened company solvency. 

Services (Hutt Valley) provided mobile technology such as phones, car stereos and band expanders.  Under franchise from Installer Services (Group) Ltd, the company was required to pay annual fees calculated at five per cent of annual turnover.  Having paid fees for six years to 2008, Services (Hutt Valley) stopped making payments.  Communications from Christchurch-based Services (Group) were disrupted for a time by the series of Canterbury earthquakes.  By April 2012, Services (Group) was back in business.  It was pressing for payment of franchise fees.

The High Court was told the Colsons put Services (Hutt Valley) into liquidation when Services (Group) sued.  It was not economic to defend any court action, Mr Colson said, while claiming he had a good defence.  He alleges Services (Group) agreed franchise fees were to be payable only for referred work.  Services (Group) got judgment by default against Services (Hutt Valley) for claimed fees.  Liquidators for Services (Hutt Valley) later sued Mr and Mrs Colson to recover company losses. The most recent liquidators’ report lists creditor claims at $168,900.  Services (Group)’s claim is in excess of $100,000.

Liquidators sued to recover cash benefits received by the Colsons from their company in the two years prior to liquidation: $44,800 in ‘shareholder salaries’ and $81,000 for ‘drawings’.  Justice Grice ruled the salaries could be kept; these payment were reasonable remuneration for the time spent on company business.  It did not matter that the Colsons did not follow required Companies Act procedures for approving director payments.  Neither Mr nor Mrs Colson had written employment contracts with their company.  $19,900 of drawings taken in the 2012 year had to be repaid.  Drawings were in the nature of ‘distributions’ to shareholders. Distributions cannot be made when a company is insolvent; creditor interests come first.  Taking into account Services (Group)’s disputed claim to franchise fees as a contingent liability at a time when drawings were taken would have left the company insolvent.  In making its repayment calculation, the court discounted the amount then claimed by Services (Group) by fifty per cent to reflect the fact it had not at that time proved its claim. 

Installer Services (Hutt Valley) Ltd v. Colson – High Court (20.02.19)

19.043

Fraud: Reid v. R.

The High Court confirmed on appeal a sentence of two years and five months imprisonment for Auckland lawyer Bruce Harvey Reid struck off after stealing $357,800 from clients.

The court was told Reid misappropriated money from multiple clients: from one client following a property sale, disguising the theft by overstating the amount required to repay a mortgage following sale; from a family trust funding private hospital care for a trust beneficiary with dementia; and from monies held on behalf of a deceased estate and another family trust.

Reid, aged 68, said imprisonment prejudiced his life partner who suffers epilepsy, anxiety and depression relying on him for practical and emotional support.  The trial judge took this into account, Justice Thomas said.  A three month reduction in sentence allowed by the trial judge for reparations paid by Reid was in line with previous fraud cases, Justice Thomas said.

Clients have been compensated with Reid making good some $214,600 from family sources; the balance covered by the Law Society Fidelity Fund.  Reid’s sentence included an order to pay the Law Society Fidelity Fund $139,700 for compensation paid clients.

Reid v. R. – High Court (20.02.19)

19.042

Charitable Trust: re Eliza White Charitable Trust

With residential care for vulnerable children costing $80,000 to $100,000 per child each year, the High Court approved changes to a century old trust deleting a requirement funds be used exclusively for residential care.  Administered by the Roman Catholic Church, the Eliza White Charitable Trust may now assist vulnerable children in the community without taking them into care.  

The High Court was told the Trust has total assets of $7.6 million.  Annual income, net of expenses, is $232,000.  The Trust was established as a charitable trust in 1909 on the death of Eliza White.  In today’s terms, her charitable bequest was valued at over five million dollars.  She specified funds were to be used to establish and run an orphanage primarily for disadvantaged girls.  Following a later special act of parliament and a subsequent court-approved variation to the Trust, this morphed into funding residential facilities for vulnerable children, with priority given those following the Roman Catholic faith.  The Church quit all its Eliza White residential facilities in 2013.  Full-time care had become uneconomic; the cost of housing each child was so high charitable funds were being run down with very few children benefitting.

The High Court approved a variation to Eliza White’s bequest under the Charitable Trusts Act.  This Act allows court-approved variations where changes achieve, as close as is reasonably possible, terms of the original trust.  The Church said it did not intend to resume offering residential care.  A strategic review advised Trust resources were better used by putting capital from the sale of Church residential homes into an investment trust for the support of vulnerable children.

re Eliza White Charitable Trust – High Court (15.02.19)

19.041

Arrest: Maori Trustee v. Smith

More than a year after the Maori Land Court ordered former leaseholders leave Gisborne Maori land, the High Court issued arrest warrants against members of the Smith whanau following their failure to quit.

Bruce Smith and immediate family claim rights of occupation to a homestead and farming land known as Rautawhiri Station on Seymour Road, Inner Kaiti, Gisborne.  The Station straddles two properties:  Waipaoa 5A2 Block, which is Maori land administered by the Maori Trustee as an ahu whenua trust with over five hundred beneficiaries; and a block of general land owned by the estate of Francis Guthrie.    

The High Court was told Mr Bruce Smith is a beneficiary of both the Waipaoa ahu whenua trust and the Guthrie estate.  He had previously leased Waipaoa through a Guthrie estate-owned company.  When this lease came to an end, he and his family refused to leave.  Notices to quit were ignored.  A locked gate was placed on a public bridge on a road passing through the Station.  Police intervention was met with what was described as ‘aggressive and belligerent behaviour’.  Mr Smith and his family issued trespass notices purporting to trespass the Maori Trustee from Waipaoa.  Attempts to talk through the issues came to nothing; Mr Smith claims rights to the land and refused to give up possession.  His whanau claim mana whenua; they invested in the land, worked it and lived on it, they said.

The Maori Trustee’s right to possession of Waipaoa had been decided by the Maori Land Court, Justice Grice said.  Smith family appeals to the Maori Appellate Court were dismissed.  Court orders were issued for the arrest of Bruce Smith, his wife and two of his children. Enforcement was suspended for six weeks to give Smith whanau time to reconsider.

Maori Trustee v. Smith – High Court (14.02.19)

19.040

Employment: Neil's Auto Centre Ltd v. Bowman

Waiuku mechanic Neil Cathcart first learnt business tax payments were in arrears when lawyers advised that Inland Revenue was taking legal action to wind up his business, Neil’s Auto Centre Ltd, claiming core unpaid taxes of $259,000 plus penalties and interest. Attempts to recover from former employee Genevieve Elizabeth Bowman for alleged embezzlement has run into procedural hurdles.

The High Court was told Mr Cathcart borrowed money and also sold property he owned to pay in full the $571,700 owed Inland Revenue by his company.  It is alleged Ms Bowman, who started as office manager in 2010, began diverting business tax payments from late 2015 and then supressed Inland Revenue correspondence chasing overdue taxes.  Mr Cathcart sued Ms Bowman for $301,500, seeking summary judgment in the High Court alleging deceit.  Summary judgment is a fast-track procedure where it is argued there is no defence to a claim.  The $301,500 consisted of $142,900 it is alleged Ms Bowman stole from the company plus $158,600 for legal and accounting fees incurred sorting out the unpaid tax plus a portion of the penalties and interest paid Inland Revenue.

Associate judge Bell said allegations of dishonesty at the heart of Mr Cathcart’s claim in deceit require evidence of the date and the substance of dishonest statements made.  Ms Bowman made no statements in the course of her daily work about stealing from the company, or of supressing Inland Revenue correspondence. She made no confession until April 2018, after Mr Cathcart agreed personally to settle with Inland Revenue.  Her earlier silence could not amount to deceitful statements.

Judge Bell pointed out that claims by Mr Cathcart’s company for breach of the employment contract with Ms Bowman should be heard by the Employment Relations Authority.  As a general rule, the employer has to carry any loss where employees are simply slack in performing their duties, causing financial loss.  Employees become personally liable where they deliberately or maliciously cause loss.  Detailed proof is required.

Neil’s Auto Centre Ltd v. Bowman – High Court (13.02.19)

19.039

Insolvency: re Ashok Maharaj

It was not in the public interest to approve a part-payment scheme of arrangement keeping Auckland builder Ashok Maharaj from bankruptcy, the High Court ruled.  His history of trading whilst insolvent and lack of substance to offers of paying creditors fifteen cents in the dollar in full settlement led to court refusal. 

Mr Maharaj traded as a builder through his company Victory Builders and Developers Ltd.  Victory is in liquidation, insolvent.  To avoid personal bankruptcy, Mr Maharaj offered his personal creditors an Insolvency Act part payment deal.  A binding deal requires approval of creditors by a majority in number representing three-quarters of debt by value, plus court approval.  Associate judge Smith refused approval.  With personal creditors claiming in excess of $515,000, promises to pay fifteen cents in the dollar over twelve months would require in excess of $75,000.  Mr Maharaj claimed to have assets totalling only $450.  He said payment would be funded by relatives plus income earned as a builder.  There was no evidence of relatives’ willingness to contribute, Judge Smith said. Vague promises were not enough.  There were also doubts over Mr Maharaj’s ability to earn sufficient income as a builder.  The court was told Mr Maharaj was suspended in 2018 for six months by the Licensed Building Practitioners Board after complaints of negligent and incompetent work.  His evidence before the Board was both evasive and inconsistent with documentation and other evidence before it, Judge Smith said.

It is not in the public interest to approve the part-payment scheme, Judge Smith ruled.  Evidence indicated Mr Maharaj had been trading whilst insolvent for up to a decade.  This arose from personal loans he took out at a default interest rate of 46 per cent and having never paid interest on the loans.   

re Ashok Maharaj – High Court (12.02.19)

19.038

Asset Forfeiture: Commissioner of Police v. Sulusi

Convicted Hawkes Bay methamphetamine distributor Leatitla Luckie Sulusi, also known as Laki Sulusi, had five motor vehicles seized as proceeds of crime to satisfy police claims of $456,300 received from criminal activity.

The High Court approved an out-of-court settlement under the Criminal Proceeds (Recovery) Act.  Ordered sold were a Ford Falcon utility, Ford Fairlane, Holden Commodore, Mazda Atenza and Big Dog Pit Bull motorcycle.  Three of the vehicles were registered in the names of individuals other than Sulusi.  It was agreed Sulusi had a financial interest in all three.  In November 2016, Sulusi was sentenced to four years six months imprisonment.  A discount was allowed for health issues; Sulusi requires regular dialysis treatment. Police said he had been involved in meth distribution through Hawkes Bay over the previous five years.

Commissioner of Police v. Sulusi – High Court (8.02.19)

19.037

Reckless Trading: re Bankruptcy of Edward Harman

It was more lucky dip than logical calculation as liquidators of Edward John Harman’s failed investment companies squared off against Insolvency Service handling Harman’s personal bankruptcy.  Company creditors claim some $26.1 million; bankruptcy creditors $19.3 million.  At stake: $4.03 million held by Insolvency Service.

Mr Harman was bankrupted in 2009.  He left in his wake some angry unpaid investors.  His promises of wise investments had come to nothing.  By his own admission, he had assumed complete control of the Fairthorne Investment group, ignored fellow directors, failed to properly record investor transactions and mixed the funds of separate investment companies.  In 2008, these companies went into liquidation.  Other directors ponied up three million dollars in an out of court settlement acknowledging their breach of directors’ duties.  Fairthorne liquidators sued Mr Harman for a catalogue of directors’ duties allegedly breached, primarily reckless trading.  Insolvency Service required proof of reckless trading before it would accept the liquidators’ claim in Harman’s bankruptcy.  Then both parties were off to court to assess a value for claimed damages.  Damages for reckless trading are ultimately at the discretion of a judge.  Any payment to Fairthorne liquidators has the effect of reducing the pool of cash payable for Mr Harman’s personal creditors.  A complicating factor was that some 48 per cent of Mr Harman’s personal creditors are also Fairthorne company creditors; he had guaranteed repayment to some investors of loans they made to the Fairthorne group.

The High Court grappled with questions of when the Fairthorne group became insolvent and to what extent investors losses might have been increased by Mr Harman’s reckless trading.  Fairthorne liquidators were dealing with ghosts; a lack of proper accounting records hampered attempts to identify at what point Fairthorne companies became insolvent and to what extent decisions made by Mr Harman from that date caused further creditor losses.  Having no concrete accounting evidence at its disposal, Fairthorne liquidators were forced to accept Insolvency Service assertions as to when the Fairthorne group became insolvent.  Damages for reckless trading were agreed at $10.1 million.  Associate judge Smith reduced the sum further to $6.42 million; making allowance for both the risk investors were assumed to have accepted given the high interest rates on offer and the possibility that market conditions rather than Mr Harman’s recklessness may have contributed, in part, to investor losses.

Creditors claiming in Mr Harman’s bankruptcy are likely to receive less than twenty cents in the dollar.

re Bankruptcy of Edward Harman – High Court (7.02.19)

19.036

Latter Day Saints Trust Board v. Inland Revenue

Donations required by Latter-Day Saints Church when adherents leave for mission service overseas are not eligible for a tax credit as a charitable gift if the donation is made by the missionary personally or a parent or grandparent, but are eligible for tax credits if made by wider extended family, the High Court ruled.  The ruling turned on questions of who benefitted from donations.

To spread its faith, the wider Church currently has some 70,000 young members undertaking 18-24 months missionary service worldwide; about three hundred of them from New Zealand.  Families are expected, but not forced, to contribute financially when a child is ‘called to service’.  For missionaries from New Zealand, expected donations are currently about $5700 per year.  This money is not used directly to support the family member whilst overseas.  It is paid to the Church in New Zealand and used to support overseas missionaries in this country.  Individuals are provided with food and accommodation, plus a subsistence allowance. New Zealanders on missionary service overseas are funded similarly by the church in their host country.

The High Court was asked to rule on the tax status of donations made to the Church in New Zealand by families of missionaries heading overseas.  It does not pay any of the missionary expenses for people travelling from New Zealand; the New Zealand Church pays for missionaries who come here.  The Church said the donations qualified as charitable giving for religious work done in New Zealand.

Justice Hinton ruled that while the annual payment was voluntary, there was an indirect benefit to immediate family.  No tax credit was available for them.  By making payment as requested, family knew and anticipated the person on whose behalf they were paying would go on overseas service and correspondingly would receive financial support from the host country church. There was a link between the two. Parents and grandparents benefitted by seeing ‘their child’ extend life education by being able to travel, live overseas and experience being a missionary abroad.  This benefit did not extend to other relatives such as siblings and extended family, Justice Hinton ruled.  Unlike parents and grandparents, they do not generally feel the same sense of obligation. Their donations did qualify for a tax credit as charitable giving.

Church of the Latter-Day Saints Trust Board v. Inland Revenue – High Court (1.02.19)

19.035

Post judgment note: In May 2020 the Court of Appeal ruled all relatives, including parents and grandparents could claim a tax credit for donations made when a family member is 'called to service.' Their donations are received by the New Zealand Church and used for charitable works in New Zealand.  Parents and close relatives do not gain a material benefit from the donation; they gain the spiritual and moral satisfaction of supporting Church work.