Attempts to tip-toe around overseas investment rules sees company director Jamie Donaldson facing a $400,000 claim from liquidator of Lochar Estate Ltd. Overseas shareholders allege what were supposed to be unsecured advances by them to the company was wrongly used by Mr Donaldson to buy Lochar shares.
Plans by entrepreneurs Jamie Donaldson and Owen Jennings to market a central Otago vineyard to Asian interests fell over when Lochar Estate went into receivership in September 2014. Receivers for FICO Finance Ltd were left with a surplus of some $600,000 after selling off company assets. This surplus was handed on to Lochar’s liquidator. Confusion over who owed what to whom followed.
In the High Court, Associate judge Johnston was to describe Lochar’s financial records as shambolic, failing to reflect the situation accurately. The court was told Lochar agreed in 2010 to purchase an established eighteen-hectare vineyard. The agreed price was $950,000: $550,000 cash upfront; $400,000 satisfied by the vendors taking 420 shares in Lochar. In economic terms, the $400,000 was vendor finance; at law the vendors were part-owner of the new business. The vendors held a put option. At any time in the next three years they could force the other Lochar shareholders to buy their 420 shares at $400,000. Aware the vendors were looking to exercise their put option, Mr Donaldson faced a dilemma. Asian investors who had bought into the venture sat with combined shareholdings below 25 per cent, avoiding the need for Overseas Investment Act consent. If forced to take up further shares through the put option, they would be over the threshold and political approval required. Responding to Mr Jamieson’s call for further capital, their payments were used to buy out the vendors.
Evidence was given that Mr Donaldson told overseas shareholders that while seeking overseas investment approval their increased equity contributions would be treated as unsecured advances to Lochar Estate and he would temporarily take ownership of the 420 vendor shares. It is illegal under the Overseas Investment Act to hold shares as nominee for overseas interests so as to evade the need for approval.
Judge Johnston ruled a full trial was needed to resolve who owed what since company financial records could not be assumed accurate. Overseas shareholders argue Mr Donaldson owes Lochar $400,000 and they are unsecured creditors of the company for the extra ‘equity contributions’ paid in at the time the put option was exercised.
Lochar Estate Ltd v. Donaldson – High Court (29.04.19)
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