Legal Advice: Johnson v. Canterbury/Westland Standards Cttee

Lawyer Ronald Bruce Johnson was suspended from practice for three months after failing to give full advice to ill-informed trustees of a Samoan family trust as part of a referral from another lawyer who as fellow trustee was selling property to the trust.

The Hunt Family Trust was established in 2009. Mrs Hunt’s home in the Auckland suburb of Grey Lynn was to be sole Trust asset.  Nominated as trustees were Mrs Hunt, her daughter and a trustee company controlled by their then family solicitor, Mr Ed Johnston.  He has since been struck off.  The High Court was told Mrs Hunt and her daughter never sighted a trust deed.  Son Maurice acted as intermediary bringing only the signature page to them for signing. They had never met Mr Ed Johnston.

Two months after the Trust was established, Mr Johnson received from Mr Ed Johnston an email referral asking him to advise the Hunts on a proposed transaction: Mr Ed Johnston was selling to the Hunt Family Trust a property he owned in Ranui, west Auckland.  Mr Johnson was then a salaried partner in a west Auckland law firm.   The stated price of $297,000 was a few thousand dollars below current rating valuation.  Six years later, Mrs Hunt’s son Matthew complained to the Law Society about the advice given.

Justice van Bohemen confirmed a three month suspension from practice.  He ruled Mr Johnson was negligent, having provided inadequate advice.  His duty as legal adviser went beyond explaining the mechanics of a property sale.  Trustees Mrs Hunt and her daughter were unsophisticated and inexperienced in business. The consequences for the Trust of raising a mortgage for the Ranui purchase should have been canvassed. Consideration of how the purchase would benefit the Trust and its beneficiaries should have been discussed. The fact Mrs Hunt’s daughter as trustee expressed discomfort at the meeting about the proposed purchase should have triggered the need for an in-depth discussion lasting beyond a twenty-minute meeting.  Sons Matthew and Maurice also attended the meeting.

The son’s complaint to the Law Society triggered an audit of Mr Johnson’s trust account.  Inspectors found irregularities in its operation.  Accounting records were not kept up to date.  No client funds had been misappropriated.

Johnson v. Canterbury/Westland Standards Committee – High Court (28.03.19)

19.069

Fraud: R. v. Bublitz, McKay & Blackwood

Convicted of fraud after milking government guarantees put in place after the 2008 global financial crisis: Paul Bublitz was sentenced to three years two months imprisonment; Bruce McKay twelve months home detention; and Richard Blackwood nine months home detention. Their fraud cost taxpayers $3.38 million.

With investments in his Hunter Capital Group underwater following the global financial crisis, Bublitz looked to shelter his losses.  The High Court was told of Viaduct Capital, and later Mutual Finance, being used as vehicles to off-load Hunter Capital assets and to provide loans for further property development.  Bublitz held either direct or indirect control over each finance company.  Both had the benefit of a short-term government guarantee; part of the political response to feared bank-runs during the world-wide banking crisis by investors taking cash out of the financial system.

Rules governing the government guarantee tightly restricted related-party transactions.  The High Court was told of elaborate ruses used by Bublitz to hide his financial interest in Viaduct.  Bublitz used a nominee purchaser to gain control of Viaduct, hiding his involvement. Within months of promising Treasury he would not funnel Mutual Finance cash into Viaduct, he did exactly that. Cash was siphoned out quickly over a five month period in 2010.  Issuing a misleading prospectus to investors and misleading Treasury amounted to fraud. Prosecutors likened Bublitz’ actions to use of the two finance companies as a private piggy bank. 

Government coughed up nine million dollars to compensate Mutual Finance investors.  After recoveries, the final cost was $3.38 million.

Justice Toogood described Bublitz as prime mover and instigator of the fraud, with McKay and Blackwood acting under his direction. Sentences were reduced to reflect personal and financial costs incurred by the three having to face a second trial after the first trial was aborted.  After sitting for nine months, the trial had to be restarted because of a prosecution failure to disclose relevant documents from the outset.

R. v. Bublitz, McKay, Blackwood – High Court (27.03.19)

19.068

Post judgment note: Blackwood's conviction was overturned by the Court of Appeal in August 2019. There was no evidence Blackwood had seen the government guarantee or knew of its terms.

Forestry Rights: OHL Ltd v. Peria Charitable Trust

Owning forestry land near Kaitaia, Maori-owned Peria Charitable Trust is accused of selling the same cutting rights twice over.  A Mark Hotchin controlled company’s claim for damages has been stalled in the High Court; Peria says it is owed damages.

The High Court was told Peria first granted rights to plant and harvest trees on its land back in 1996.  These forestry rights have since passed through a string of owners including Elders Finance and Hanover Finance.  In 2010, they wound up on the books of OHL Ltd as part of a Companies Act amalgamation of sundry Hanover group companies.  Mark Hotchin controls OHL Ltd.  In 2016, Peria offered to buy out OHL’s forestry right for $100,000. The offer was later withdrawn. Peria then sold cutting rights elsewhere, claiming the Companies Act amalgamation did not transfer any forestry rights to OHL.

In the High Court, Associate judge Andrew ruled OHL did own the forestry right; it passed  across as part of the amalgamation.  OHL was refused judgment in its favour.  OHL’s claim for damages has to be heard in conjunction with Peria’s counter claim, he said.

Peria alleges it is owed damages because OHL failed to perform its part of the contract when holding the forestry right by failing: to pay rates due; maintain the woodlot and boundary fencing; and ensure proper upkeep of roads, bridges, culverts and firebreaks.

OHL Ltd v. Peria Charitable Trust – High Court (27.03.19)

19.067

Fraud: Acacia Motorhomes Ltd v. Lyn Doc Com Ltd

Facing a seven million dollar penalty for GST and unpaid duty following a customs fraud, Auckland-based vehicle importer Acacia Motorhomes sued customs agent Lyn Doc Com Ltd claiming it should bear the cost.  Lyn Doc says it is an innocent victim of a double-invoicing fraud and cannot be required to check the accuracy of all documents submitted to Customs for import clearance.  The case should go to trial, the High Court ruled. 

The High Court was told a company called Seabrook International Ltd defrauded customs with a double invoicing scam.  Seabrook was briefly registered on the New Zealand companies register: from June 2013 to December 2014.  Director and shareholder, Cosette Mirela Bekkers, variously filed contact addresses for Auckland and London.  The company’s only annual companies office return ever filed was submitted from an address in Belgium.  Evidence was given that Seabrook acted as shipping agent for Acacia Motorhomes Ltd.   Seabrook invoiced Acacia Motorhomes for GST and customs duty calculated on the invoice price paid by Acacia for its off-shore purchase of vehicles. It is alleged Seabrook then sent false documents to Lyn Doc, stating a lower purchase price which was then used for calculating GST and duty payable.  Lyn Doc, based in Tauranga, was processing paperwork for vehicles unloaded in Auckland. Lyn Doc charged fees of $100 for each customs clearance, plus $35 for biosecurity clearance.  Seabrook is alleged to have pocketed the difference between payment received from Acacia for import duties and the duties actually paid.

Lyn Doc said it owed no duty of care to Acacia Motorhomes.  It had no dealings with company; it merely acted on instructions from Seabrook, Acacia’s agent.  Associate judge Andrew ruled a full trial is required.  Allegations that Seabrook payments were made in cash, bypassing Lyn Doc’s usual deferred payment arrangements with Customs could raise suggestions not all was above board, Judge Andrew ruled.  Questions of whether a duty was owed and if owed, breached, should go to a full trial, he said.  Lynne Panettiere, controlling shareholder of Lyn Doc, is also facing allegations she personally is liable for negligence and is in breach of the Fair Trading Act. She denies all claims. Holding customs agents liable for double-invoicing scams perpetrated by others would impose an intolerable burden on the industry, she said.  They cannot be expected to cross-check the accuracy of all documents processed as part of import clearances.

Acacia Motorhomes Ltd v. Lyn Doc Com Ltd – High Court (26.03.19)

19.066

Leaky Homes: Roberts v. Jules Consultancy Ltd

Property manager Jules Consultancy Ltd breached the Fair Trading Act when failing to make full disclosure to potential purchaser Michael Roberts about weathertightness of a Sirocco apartment in central Wellington.  In addition, Jules Leloir, as owner-operator of Jules Consultancy, was held personally liable  

Completed in 1999, the eleven storey Sirocco apartments showed signs of water ingress as early as 2003.  Ms Leloir took over as body corporate manager in 2007, trading through her company Jules Consultancy Ltd.

The High Court was told Mr Roberts agreed in 2014 to buy a Sirocco apartment for $397,000.  His contract was conditional on finance and a satisfactory council LIM report.  Lawyers followed up on a LIM notation which disclosed potential weathertightness issues at Sirocco, recommending potential purchasers contact Sirocco’s body corporate. Mr Roberts said Ms Leloir, when contacted by his lawyer, said weathertightness issues related only to walkways and this had been rectified.  Mr Roberts’ purchase was declared unconditional.  In the previous twelve months, the body corporate had been discussing ongoing problems of water ingress into a number of apartments. This was not disclosed to Mr Roberts. A subsequent building report recommended a complete re-clad for Sirocco.

Justice Thomas ruled both Jules Consultancy Ltd and Ms Leloir were in breach of the Fair Trading Act.  When answering, Ms Leloir had information that would lead a reasonable person to believe Sirocco suffered from weathertightness problems extending beyond walkways, Her Honour said.  A partial answer was misleading.

The High Court was asked to rule on liability only. Damages were left for later calculation. Mr Roberts says he is potentially out of pocket $468,000 for repair and re-cladding costs.
Roberts v. Jules Consultancy Ltd – High Court (25.03.19)

19.064

Family Arrangement: Huljich v. Huljich

As loving sons, Huljich brothers drew on the $80 million generated from their 1995 sale of Best Corporation to support mother Elizabeth.  Her claims to have been tricked by sons Christopher and Michael were dismissed in the High Court.  Justice Venning described her claims as frivolous and vexatious.  She was ordered to pay her two sons full legal costs of $605,800, an unusual step since winning litigants normally are awarded only a portion of legal costs.

Canvassing evidence given in the week-long trial, Justice Venning said her claims were hopeless, lacking legal merit.  He was particularly critical of fraud allegations made against eldest son Christopher and youngest son Michael with no evidence of fraud ever produced.

The High Court was told of an informal agreement in the 1980s within the Huljich family that sons Christopher, Michael and Paul would financially assist their parents. Matriarch Elizabeth was subsequently funded for regular holidays to Australia, new cars and some renovations to her home.  Mortgages on both her home and investment properties she owned were cleared. Accommodation rentals were also paid for one of Elizabeth’s relatives in financial distress.  At a time when Christopher and Michael were facing a liquidity crisis, in part because Paul had drawn down more than his entitlement from Best Corporation sale they said, Elizabeth assisted with temporary financing.   Paul was facing legal action for unpaid legal fees after an unsuccessful court case in America.  In 1997, bank accounts receiving net proceeds of Best Corporation sale were almost one million dollars overdrawn.  Elizabeth allowed properties she owned personally be used as collateral for temporary banking facilities available for her sons.  The informal nature of this business relationship resulted in a sharp divide within the family: Christopher and Michael on one side; Elizabeth and middle son Paul on the other.  Elizabeth sued sons Christopher and Michael with a long list of complaints: primarily she claimed they owed her money and were in breach of a binding contract promising her financial support; and secondly that son Paul had been hard done by.

There was never any binding legal agreement, Justice Venning ruled.  There was no certainty as to either the terms of any agreement or who were the parties. Promised financial support from Christopher and Michael was an informal family arrangement, unenforceable at law. 

Evidence was given that before Elizabeth sued, Christopher offered to pay the cost of an audit of all family financial dealings and to have any dispute go to arbitration.  When Elizabeth did file legal proceedings, Christopher immediately offered to pay Elizabeth what she demanded, while denying all her claims. This would keep the family name out of the courts.  She did not take up the offer, later adding further claims.  She went public with a media interview.  Attempts at mediation failed.  Elizabeth refused to attend a reconvened mediation.  Multiple offers to settle were all refused.

After hearing the evidence at trial, Justice Venning ruled there was no substance to Elizabeth’s claims against Christopher and Michael.  They did not owe her money.  Accounting evidence established that Christopher and Michael repaid more than they had drawn down on the banking facility guaranteed by their mother.  Paul still owed his mother $268,300, money drawn down, not repaid.  In addition, accounting evidence established Elizabeth still owed Christopher $160,000 promised reimbursement for house renovations.  Christopher had never demanded payment from his mother.

Ordering Elizabeth pay in full the legal costs incurred by Christopher and Michael, Justice Venning said court resources are scarce.  Frivolous and vexatious legal claims not only impact on those having to defend the claims but also draw on scarce court resources, he said.

Huljich v. Huljich – High Court (25.03.19 & 20.12.18)

19.065

Overseas Investment: Land Information v. Agria

First legal action for breach of Overseas Investment Act ‘good character’ rules saw the High Court approve negotiated penalties of $100,000 against Agria Singapore and $120,000 against Agria executive chairman Lai Guanglin following Mr Lai’s run-in with the US Securities Exchange Commission for alleged share price manipulation.

In 2009, Cayman Island-registered Agria Corporation was cleared to buy into New Zealand-based PGG Wrightson Ltd. Political approval was required under the Overseas Investment Act because of the breadth of Wrightson’s land holdings. The Act requires individuals in control of overseas interests be of good character.  In part, this is intended to keep out any person likely to bring New Zealand into disrepute.  

The High Court was told Agria ‘fessed up to a breach of the Act’s good character requirement when applying for clearance to make further investments in New Zealand.  It disclosed Mr Lai had been under investigation by US securities regulators.  US regulators alleged Agria Corporation concealed losses through fraudulent accounting; materially underreporting losses and inflating value of shares acquired. Mr Lai was alleged to have manipulated Agria share prices through publication of misleading press releases.  Both Agria Corporation and Mr Lai paid fines to US regulators, without admitting liability.

Justice Gordon agreed fines payable to New Zealand authorities be discounted to recognise their early admission of liability, co-operation provided and steps taken to promote future compliance.  Mr Lai agreed to stand down from the Wrightson board until at least December 2023.  Agria Singapore committed to ensuring Wrightson board’s audit committee have a majority of independent directors.

Land Information New Zealand v. Agria (Singapore) Pte Ltd – High Court (21.03.19)

19.063

Conversion: Superthriiler Jet Sprint v. Coggan

Mark Coggan, joint owner of Superthriller Jet Sprint operating out of Manukau in south Auckland, has been ordered to hand over all Superthriller property in his possession following a bust up between owners.

Fellow investors Teresa Ciprian and Danny Chan allege Mr Coggan is liable in conversion, refusing to surrender company plans, dies, moulds and casts.  Superthriller promises thrills and spills racing purpose-built jet boats on a circuit at Colin Dale Motorsport Park.  Mr Coggan has expertise manufacturing propulsion units for jet boats.  The High Court was told he was joined in 2006 by Ms Ciprian and Mr Chan as investors in Superthriller.  The two put in $600,000 as working capital; Mr Coggan put up intellectual capital of equivalent amount and agreed to a restraint of trade, promising not to set up in competition.  In early 2018, Mr Coggan wanted out.  He offered to sell his one-third stake in the business at $32.60 per share; valuing his one-third interest in Superthriller at $656,000.  His fellow investors countered; offering $4.60 per share.  No deal.  Mr Coggan resigned as director.

Ms Ciprian and Mr Chan allege Mr Coggan has failed to hand over Superthriller property.  He is being sued for conversion; an allegation Superthriller is being denied access to its own assets.

They also allege Mr Coggan misrepresented cost of developing a replacement propulsion unit for Superthriller craft.  Damages are claimed.

Claims of conversion and misrepresentation are yet to go to a full hearing.  In the interim, Justice Toogood ordered Mr Coggan hand over company assets in his possession.  Mr Coggan says he is owed money by Superthriller.

Superthriller Jet Sprint Ltd v. Coggan – High Court (21.03.19)

19.062

Capital + Merchant: Gibson v. Official Assignee

Insolvency Service has to bear the cost of a potential $2.41 million GST lability arising from its $18.5 million settlement with auditors of failed finance company Capital + Merchant.  Insolvency Service cannot dip into funds otherwise payable to investors, the High Court ruled. 

Finance company Capital + Merchant went into liquidation a decade ago.  As liquidator, Insolvency Service negotiated an out-of-court settlement with auditors BDO Spicers for alleged negligence.  Much of this money went to Capital + Merchant’s secured creditors. Sitting on the sideline was insolvency specialist Korda Mentha acting on behalf of some 7500 retail investors demanding repayment.  To speed up payment to investors, Korda Mentha cut a deal with Insolvency Service in 2015; $2.34 million could be retained by Insolvency Service for payment of costs and expenses with the balance handed over to Korda Mentha.  The High Court was told anticipated payments to secured creditors proved to be less than expected, leaving Insolvency Service holding an unexpected pot of some two million dollars.  Learning that Inland Revenue is demanding $2.41 million for GST on the out-of-court settlement, Insolvency Service refused to hand over the surplus.

Justice Jagose ruled Korda Mentha is entitled to the money.  The two had agreed how much Insolvency Service could retain.  It was not entitled to a ‘second bite at the cherry’ holding money back to cover its own negligence.  The High Court was told Insolvency Service could not claim it made a mistake when negotiating the 2015 agreement with Korda Mentha.  It had assumed Capital + Merchant was not GST registered since it was providing financial services.  In fact it was GST registered; a reflection of its mix of business activities. The out-of-court settlement with auditors described the agreed payment as ‘inclusive of GST, if any’.  This should have alerted Insolvency Service of potential GST liability.

Insolvency Service is currently disputing with Inland Revenue whether at law GST is payable on the settlement with Capital + Merchant auditors.

Gibson v. Officlal Assignee - High Court (21.03.19)

19.061

Fair Trading: Ballance Agri-Nutrients v. Quin Environmentals

Quin Environmentals breached the Fair Trading Act by linking its superphosphate fertiiser to Fertmark accreditation when it did not comply with testing specified to satisfy that accreditation, competitor Ballance alleges.

In the 1990s, Federated Farmers established the Fertmark scheme to assist farmers in judging quality of farm products offered for sale.  In respect of superphosphate fertiliser, product Fertmark-labelled as RPR (reactive phosphate rock for direct application) must satisfy a specified solubility test.  The test is carried out with product in rock format, not in the granulated form as applied to pasture.  It is generally accepted that this test is outdated, but it remains the current test for Fertmark RPR branding.

Ballance Agri-Nutrients Ltd objected when competitor Quin Environmentals (NZ) Ltd advertised 15,000 tones of superphosphate imported from Algeria as simply ‘the best all-round RPR in the world’.  No direct mention was made of Fertmark.  Ballance said the implication for farmers was clear; the product was Fertmark compliant.  It did not comply with the specified RPR Fertmark test. It did comply with what Dr Bert Qunin of Quin Environmentals described as ‘straight RPR’ being a modified solubility test he considered more appropriate.

Justice Fitzgerald said it is not for the court to determine the efficacy of solubility tests, but to rule on whether a false and misleading impression is given when the Quin advertised product does not comply with the Fertmark RPR testing protocol.  It was potentially a breach of the Fair Trading Act to market the Quin product as ‘RPR’ without explaining this is not RPR as defined by the Fertmark standard. An interim injunction was issued to block future RPR advertising by Quin Environmentals unless accompanied by a suitable qualification.

Whether Quin Environmentals was in breach of the Fair Trading Act requires a full court hearing.

Ballance Agri-Nutrients Ltd v. Quin Environmentals (NZ) Ltd – High Court (19.03.19)

19.060

Relationship Property: Oldfield v. Oldfield

With trustees of Oldfield Family Trust estranged and deadlocked, the High Court removed husband and wife appointing New Zealand Guardian Trust as trustee in their place.

Hamilton-based Oldfield Trust owns substantial assets: a home in Lakeview Crescent; a holiday home in Raglan; a controlling interest in Demolition Traders Ltd and some $1.3 million in cash.  Spouses: Dorothy and David Oldfield are trustees.  They separated in in 2015, after 44 years together. The High Court was told their relationship has become increasingly acrimonious and unpleasant.  David occupies the Lakeview home rent free; Dorothy has been lodging with their daughter.  Dorothy alleges her husband is obstructing attempts to release trust assets for use by other members of the family.  Trust resolutions require agreement of both.  Board appointments to Demolition Traders similarly require mutual agreement.  Mediation was unsuccessful.  They are deadlocked.

Four years after they separated and with a Family Court relationship property hearing over six months away, Dorothy sought High Court assistance to free up Trust assets.

Justice van Bohemen removed both as trustees of their family trust, appointing NZ Guardian Trust as sole trustee.  The fundamental breakdown of trust between the two meant neither could be relied on to act impartially, he said.  NZ Guardian Trust was instructed to use the Trust’s free cash to buy a replacement home for Mrs Oldfield and to advance trust money to each of them to meet outstanding debts.

Oldfield v. Oldfield – High Court (19.03.19)

19.059

Insolvency: re Sandford

With unsecured debts of $566,800 and declared assets of only $3000, John David Sandford’s part-payment Insolvency Act proposal was refused High Court approval.  Attempts to free his elderly spouse from joint debts at the same time was fatal to his personal proposal.

Mr Sandford offered to pay creditors ten cents in the dollar in full satisfaction.  Creditors owed 95 per cent of his unsecured debt by value voted in favour; ANZ Bank and Diners Club voted against.  With High Court approval, a part-payment scheme is binding on all creditors, including those voting against.

Associate judge Smith refused approval.  The part-payment scheme was personal to Mr Sandford and his debts.  His personal proposal could not extinguish debts owed by others, regardless of how many creditors voted in favour.  It made no difference that those creditors agreeing to part-payment indicated informally after the vote that they would not chase his wife for full payment where there was joint liability.  Seeking to discharge her joint liability as part of her husband’s proposal was not possible.  Mr Sandford can start again and offer a fresh part-payment proposal to creditors covering liability for his debts alone, Judge Smith said.

re Sandford – High Court (15.03.19)

19.058

Intellectual Property: Solar Bright v. Martin

Established to commercialise ice-warning devices for roads, Christchurch-based Solar Bright recovered company assets from founders Patrick and Nicola Martin after a High Court ruling intellectual property was improperly stripped out of the company.

In court, the PATeye and DATAeye inventions were described as ‘the brain children’ of Mr Martin.  He took out patents and trademarks to protect his inventions. Solar Bright Ltd shareholders put in over $2.3 million over four years to commercialise the product.  Patents and trademarks were transferred to the company. Revenue flows were disappointing; between $20,000 - $40,0000 yearly.

Mr Martin resigned from Solar’s board in late 2017. Three weeks later, his spouse Nicola Martin signed a document as managing director of Solar Bright transferring all company intellectual property back to her husband.  No price was put on the value of intellectual property transferred.  Ms Martin said it was difficult to value, given product was still in research and development phase.  And in any event, both she and her husband were owed considerable sums in unpaid wages together with un-reimbursed expenses incurred in the company’s name, she said.

Solar Bright’s shareholders approved a Companies Act resolution nullifying the sale: transactions with directors and those associated with directors can be set aside within three months if the deal was not at fair value.

Justice Osborne ruled it was for the Martins to prove a fair price was paid.  They failed to do so, he said.  The document evidencing the asset transfer did not state any price.  The Martins claim to a set off against unpaid wages did not stand up given they were suing in the Employment Relations Authority for backpay.  And even if the intellectual property was valued at book value of $110,000, their claim for unpaid wages was less than that figure.

Both were ordered to deliver up all Solar Bright property in their possession including storage devices and documents, to surrender domain names and to disclose access passwords.  Mr Martin was ordered to re-transfer patent rights.

Solar Bright Ltd v. Martin – High Court (15.03.19)

19.057

BlackfortFX: Graham v. Tyler

To date, the nearly one thousand investors snared in BlackfortFX’s Ponzi fraud have got back thirty cents in the dollar. The High Court has now ordered John Emrys Tyler and his company Chipmunk One Ltd repay $652,500 for distribution by BlackfortFX’s liquidators.

BlackfortFX, registered as Arena Capital Ltd, was in liquidation a little over a year after its 2014 incorporation.  BlackfortFX was a scam, used by Lance Ryan and Jimmie McNicholl to perpetrate a Ponzi fraud.  Both have been convicted of fraud offences.  Funds supposedly placed for investment were stolen.

BlackfortFX liquidators are chasing down investors’ money. Legal action was taken against John Tyler and his company.  Companies Office records show Mr Tyler now living in Blenheim.  He did not defend liquidators’ claims.  Justice Osborne ordered Mr Tyler personally repay $317,500 (plus interest totalling $42,000) and his company Chipmunk repay $259,000 (plus interest of $34,000).  Liquidators told the court Mr Tyler opened BlackfortFX accounts in the middle of 2014.  Mr Tyler paid no money into BlackfortFX; Chipmunk did put in some money.  BlackfortFX payments to both Mr Tyler and Chipmunk were in breach of the Property Law Act as payments made with intent to defeat investors, the liquidators said.

Graham v. Tyler – High Court (13.03.19)

19.056

Defamation: Cato v. Manaia Media

Lawyer Kristin Cato alleges Horse & Pony magazine defamed her in published comments subsequent to a private mediated settlement which smoothed over antagonism between team members of a senior New Zealand equestrian team competing in Australia in early 2017. 

Ms Cato, also known as Kristin Manson, was lawyer acting for complainants.  Details of the rift between team members were never made public.  Following mediation: team chef d’equipe Jeff McVean agreed to a life ban from Jumping New Zealand with all complaints withdrawn; daughter, Olympian Katie Laurie, acknowledged unacceptable behaviour and apologised. Mr McVean has represented Australia at Olympic level.

Ms Cato alleges a subsequent article in Horse & Pony was defamatory; labelling her behaviour as unethical and unprofessional.  This followed a press release being published on the website of iSpyHorses, a media outlet controlled by Ms Cato’s mother.

At a pre-trial hearing in the High Court, Justice Hinton was asked to rule whether Horse & Pony’s article was at law capable of having a defamatory meaning to the extent it suggested Ms Cato was responsible for releasing a statement that was damaging to Mr McVean and Ms Laurie.  At law, it was, Justice Hinton ruled.  Whether in fact it was defamatory has not been decided.

Justice Hinton rejected Ms Cato’s claim that Horse & Pony also defamed her by suggesting she ‘misused’ her position as lawyer for the complainants, acting unethically in releasing a public statement to her mother about the private mediation for publication on iSpyHorse’s rival website.  To complain another publication ‘scooped’ the story is not defamatory, Justice Hinton ruled.  This was a case of ‘sour grapes’ by Horse & Pony.  Lawyers distribution of media releases does not have to be impartial as between media outlets.

Cato v. Manaia Media Ltd – High Court (13.03.19)

19.055

Tax Avoidance: Cullen Group v. Inland Revenue

Eric Watson’s Cullen group use of tax provisions intended for genuine overseas third party lenders amounted to tax avoidance the High Court ruled, imposing increased taxes of $112 million on Cullen with tax penalties yet to be assessed.

Mr Watson claims Cullen Group restructuring in 2002 was no more than a legitimate reorganisation of his business affairs when relocating to London.

The High Court was told of an avalanche of tightly-drafted contracts having the effect of replacing Mr Watson’s equity interest in Cullen with debt.  This was debt with a twist.  Mr Watson retained a very high level of control over Cullen group through a Cayman Islands trust structure.  The level of control retained by Mr Watson was that usually seen with equity ownership, rather than debt, Justice Palmer said.  Mr Watson was on both sides of the restructuring.

Evidence was given of Cullen owing Mr Watson $291 million after the 2002 restructuring.  Interest set at sixteen per cent was nominally payable to Cayman Island trusts over which Mr Watson had no legal control.  He retained the right to control ultimate destination of these cashflows.  

Cullen group deducted withholding tax at the ‘approved issuer levy’ rate of two per cent.  Inland Revenue said withholding tax should have been deducted at fifteen per cent: the non-resident withholding tax rate.  Justice Palmer ordered payment of $51.5 million (the difference between the two rates as uncollected withholding tax) together with $60.5 million (‘use of money’ interest calculated to August 2018).  Inland Revenue argues the New Zealand tax base was eroded by not deducting the higher rate.     

Cullen group said it complied with every full stop and comma required by tax law for use of the lower two per cent rate.  Justice Palmer ruled tax law requires that taxpayers must comply not only with the black-letter law, but that exemptions claimed must come within purposes ‘contemplated’ by parliament.

A two per cent ‘approved issuer levy’ was introduced following a 1991 tax policy paper published by National government ministers: Ruth Richardson and Wyatt Creech.  This reduced rate was aimed at off-shore lenders who would commonly only lend to New Zealand businesses if they were compensated for withholding taxes deducted. There is a painful opportunity cost for off-shore lenders having to file New Zealand tax returns and to work around double tax treaties.  They made New Zealand businesses pay, loading the full withholding tax into the cost of the loan.  With the approved issuer levy, a lower two per cent rate added to interest rates had the effect of reduced loan costs for New Zealand businesses borrowing off-shore.

Cullen group restructuring introduced no new investment funds into New Zealand.  It merely converted existing equity into debt.  Such an arrangement was not within parliament’s intended purpose of the reduced withholding rate regime, Justice Palmer ruled.

Cullen Group Ltd v. Inland Revenue – High Court (12.03.19)

19.054

Mortgage: Haines v. Memelink

On home detention, Otaki lawyer Quentin Haines gained a High Court injunction blocking a forced sale of his property by Harry Memelink seeking to recover monies he claims is owed. Wellington-based Memelink, described as a very active litigant, is frequently in court on the other side, resisting creditors’ claims against him.

Haines is serving a sentence of home detention after pleading guilty to breaches of the Prostitution Reform Act.  The High Court was told of a complicated business relationship between Haines and Memelink.  Mr Haines lifestyle property at Manakau, near Levin, is owned by his family trust.  The purchase was funded in part with finance from Fico Finance Ltd.  Mr Memelink and interests associated with him guaranteed repayment of this loan together with further loans advanced by Bright Enterprises Ltd.  Mr Memelink used part of the Fico funding to buy a boat: the Katherine Johnston.  Mr Haines lent Mr Memelink money to pay pressing creditors.  Mr Haines alleges there was an oral agreement that Mr Memelink would pay his debt servicing costs as a set-off against legal fees owed.

Evidence was given that Mr Memelink took control of the Fico loan after paying off the finance company’s loan to Mr Haines. Taking over Fico’s legal rights as mortgagee, Mr Memelink attempted to sell up Mr Haine’s lifestyle block.  It is alleged Mr Memelink is attempting to consolidate other loans into the Fico security; something prohibited by the Property Law Act, Justice Grice pointed out.

Mr Memelink was blocked from enforcing the Fico mortgage until he provided details of how much was owed and how it is calculated. Debtors have a statutory right to know how much is owing, giving them a chance to challenge the amount or make payment and avoid a forced sale.

The court was told Mr Memelink is bankrupt.  He has applied to have his bankruptcy annulled.

Mr Haines surrendered his lawyer’s practising certificate in 2018.  His claim to be owed $1.15 million in legal fees is subject of a Law Society complaint by Mr Memelink.

Haines v. Memelink – High Court (11.03.19)

19.053

Reckless Trading: Cooper v. Debut Homes Ltd

Decisions by the director of an insolvent property company to box on and complete houses under construction to sell for a better price were made in good faith and did not amount to reckless trading ruled the Court of Appeal, overturning a High Court order that Auckland property developer Leonard Cooper pay $280,000 damages. 

Debut Homes Ltd is in liquidation, insolvent. Liquidators allege Mr Cooper’s 2012 decision to trade-on prejudiced Inland Revenue which is owed some $450,000 for unpaid GST plus interest and penalties.  The court was told Debut Homes was in financial difficulty by the end of 2012.  It had four properties under construction on Auckland’s North Shore.  The options were: sell the part-completed houses, put the company into liquidation resulting in forced sales by Debut Homes mortgagees, or complete the properties selling them for a better price.  Mr Cooper decided to finish the houses.  Extra liquidity was provided by $380,000 of family money lent to the company, most of this an inheritance received by his wife Tracey, a fellow shareholder in Debut Homes.  Mr Cooper completed the construction work for no agreed wage or salary.  The four properties were sold on completion. Financial returns were less than budgeted because of unanticipated cost overruns.  The family advance of $380,000 was not repaid in full; $200,000 was left outstanding.  GST on sales was left unpaid.

The Court of Appeal ruled decisions to trade-on did not prejudice Inland Revenue.  GST would fall due immediately if the four properties had been sold in late 2012, partly finished.  Continuing construction did increase Debut Homes GST liability, but equally a higher sale price for finished homes had the potential to improve returns to creditors, including Inland Revenue.  Completing the houses was a reasonable commercial decision, the Court of Appeal said. Costing made at the time could not be criticised.  Commercial decisions should not be judged with the benefit of hindsight, the court said. The fact that Mr Cooper worked for some eighteen months without wages and the further fact that family money was put in to improve liquidity all showed Mr Cooper acted in good faith.

While not paid wages, Mr Cooper did take $34,100 in cash drawings from the company.  Drawings amount to unsecured borrowing.  The court ordered repayment.

Cooper v. Debut Homes Ltd – Court of Appeal (8.03.19)

19.052

Estate: Monk v. Burgess

Legal fees on all sides totalled over four million dollars.  Of that, fees totalling $1.26 million incurred by estate executors defending unsuccessful legal action by Warwick Burgess as a disappointed beneficiary of his late mother’s estate are an estate expense, the High Court ruled, not to be deducted directly from his share of her estate.

This ruling reduced by $440,000 a bequest payable to fellow estate beneficiary, his brother.  Estate executors argued the unsuccessful legal action was for Mr Burgess’ personal benefit and costs should not fall on his brother.  

Mr Warwick Burgess pursued a long and expensive legal campaign over his claimed rights to a family farm and forestry holdings at Tihoi on the western shores of Lake Taupo.  His expectation had been to inherit his parents’ land holdings on the death in 2007 of his widowed mother Molly.  He didn’t inherit.  Estate executors sold the land.  Mr Burgess sued.  By the time his claims against Molly’s executors and the farm purchasers came to trial, Mr Burgess had already personally spent over $1.5 million in legal fees. The trial involved 32 days of evidence. His claims were dismissed, described by the trial judge as ‘built on flimsy assumptions rather than sound factual allegations’.

Defending Mr Burgess’ claims cost Molly’s executors $1.26 million.  They said these costs should come out of Mr Burgess’ share of Molly’s estate; the unsuccessful legal action was solely for his benefit and it would be inequitable for his brother as the other beneficiary to have his share reduced in payment of these legal costs.  Justice Davison ruled the executors were bound by the terms of Molly’s will: the residue of her estate was to be split 60:40 between Mr Burgess and his brother after payment of ‘testamentary expenses’.  Legal fees defending Mr Burgess’ claim were ‘testamentary expenses’. These expenses had to be taken into account before the cash balance was divided between the two brothers.  Mr Burgess’ greater share at 60 per cent was in recognition of the work done around the farm whilst his parents were alive.

Mr Burgess’ brother died before the 32-day trial. After deduction of Molly’s executors’ legal costs, his 40 per cent final payout is reduced by $440,000 to $298,000. This money goes to his estate. Both brothers received interim payments as advances on their entitlement to Molly’s estate prior to the 32-day trial.  Mr Burgess’ final payment of his 60 per cent share is $649,000, down from the final payment of $1.3 million he would have received but for the legal bill run up defending his claim.  The court was told this $649,000 is his only asset. Mr Burgess is personally liable for legal costs of $1.13 million incurred by other defendants he sued unsuccessfully in the 32-day trial.  A home he previously owned in Paeroa valued at about $550,000 was sold at auction in late 2018.

Monk v. Burgess – High Court (1.03.19)

19.051