Restraint of Trade: M&L Holdings Ltd v. Kuang

Wenyan Kuang has been ordered to stop running his own real estate photography business in South Auckland, in breach of his agreement with franchise Open2view.

In 2018, Mr Kuang signed up with Open2view as a photographer franchisee.  He previously worked as a wedding photographer.   Under the franchise agreement, Open2view provided training in real estate photography and contacts with South Auckland real estate agents. He agreed to a restraint of trade; he was not to run a competing business within two years of finishing with Open2view.

The High Court was told Mr Kuang emailed Open2view in March 2020, announcing he was quitting and that he would work by himself directly with local real estate agents.  Open2view sued.

Justice Campbell issued an interim injunction blocking Mr Kuang from carrying on real estate photography work within fifty kilometres of South Auckland for the next twelve months.  Mr Kuang did not appear in court.  Open2view has an arguable case for an interim injunction to protect goodwill attaching to its customer base, Justice Campbell ruled.

To enforce the agreed two year ban, Open2view has to go back to court providing detailed evidence that a ban extending beyond twelve months is needed to protect the value of its South Auckland customer base.

M and L Holdings (2012) Ltd v. Whenua Productions Ltd & Kuang – High Court (28.09.20)

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Creditor Moratorium: Brauninger & Tololi v. Westend

Attempts by financially-pressed Cambridge horse stud Linwood Park to do a deal with creditors fell apart when news leaked that Stuart Brauninger and Michael Tololi had negotiated a special deal for two creditors who threatened liquidation.

Linwood Park Stud Ltd is currently in receivership and liquidation.  A total of $1.07 million is claimed by eighteen unsecured creditors.  The High Court was told director Stuart Brauninger and associate Michael Tololi worked frantically in mid-2017 to avert Linwood Stud’s immediate liquidation.  Pressing creditors were offered a scheme of arrangement: a moratorium on creditors’ claims, while Linwood management sold down company assets in an orderly sale. Two creditors: PJ & SJ Westend Partnership together with Cambridge Veterinary Services were not interested. To leverage a better deal, they threatened to immediately put Linwood into liquidation.  A side deal was struck.  Each would get immediate payment of $25,000, with Messrs Brauninger and Tololi personally guaranteeing payment of the balance.  The contract included a confidentiality clause; Westend and Cambridge Vet were not to tell any other creditors about their side deal.  Word got out.  Other creditors then refused to join the proposed moratorium.  Linwood Stud spiralled into liquidation.

In the High Court, Messrs Brauninger and Tololi argued their personal guarantees were not enforceable; any breach of confidentiality by Westend or Cambridge Vets nullified the deal.  Justice Campbell ruled there was insufficient evidence either had breached the confidentiality clause.  Silence when challenged about leaking details did not amount to evidence of any breach.

Brauninger & Tololi v. Westend – High Court (24.09.20)

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Reckless Trading: Debut Homes v. Cooper

New Zealand’s ‘do it yourself’ tradition does not extend to corporate turnarounds.  It is a breach of director’s duties to self-manage corporate restructuring where there is no chance of returning to solvency.  Leonard Cooper was ordered to pay $280,000 after completing houses under construction by his insolvent company Debut Homes resulting in increased loss to Inland Revenue.

Inland Revenue forced Auckland residential property developer Debut Homes Ltd into liquidation in March 2014 claiming unpaid GST and penalties totalling $450,000.  Liquidators Deloitte sued Debut Homes director Leonard Cooper alleging Companies Act breaches for reckless trading and trading whilst insolvent.  Mr Cooper claimed he improved the company’s position by finishing projects in hand and getting a better price, rather than quitting which would have resulted in a fire sale of unfinished houses.

Their difference in opinion reached the Supreme Court. It ruled formal mechanisms in company law should be used for workouts by near-death insolvent companies: voluntary schemes of arrangement; statutory schemes of arrangement; and receiverships. In each case, affected creditors get a say and someone independent of the company takes control.  If directors self-manage restructuring of an insolvent company, they must at all times keep creditors’ interests at heart, it said. Self-managed restructuring is not an excuse to ‘rob Peter in order to pay Paul,’ said the court.

The court was told Debut Homes was in financial difficulty in late 2012.  Mr Cooper decided unilaterally to wind down company activities, completing houses under construction over the next eighteen months before selling them.  Unpaid GST of $300,000 was anticipated.  Proceeds of sale went primarily to paying off secured debt. GST liability increased beyond earlier estimates.  It was left unpaid.  Attempts to do a deal with Inland Revenue over unpaid GST came to nothing.  Of trade debts incurred during the wind-down period, $28,700 were left unpaid.

It is not legitimate for directors to enter into a course of action to ensure some creditors get a higher return where this is at the expense of incurring new liabilities which will not be paid, the court said.  When insolvent liquidation is likely, it is not for directors to carry on trading just to reduce the extent of loss.  This only serves to benefit some creditors at the expense of others.  By continuing to trade, Mr Cooper threw the loss onto Inland Revenue with unpaid GST accumulating, the court said.

Debut Homes Ltd v. Cooper – Supreme Court (24.09.20)

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Insurance: Nestel v. Millar

It was their German Shepherd cross Louis which gave them away.  An Australian insurer chasing Darryl and Linda Millar tracked them down to Invercargill after publicity over their dog attacking a Jack Russell terrier.

The story began in 2010 when John Nestel obtained a New South Wales tribunal order against the Millars for damages following defective building work.  His insurer paid out.  The insurer was left to exercise Mr Nestel’s right to recover from the Millars.

Enforcing these rights of subrogation proved problematic; the Millars had disappeared.  The insurer later learnt the Millars were in Vanuatu.  The Australian court order was enforced in Vanuatu after being registered in the Vanuatu courts.  About $A11,000 was recovered with deductions from Mr Millar’s wages before again the Millars disappeared.  There was no forwarding address.  Two years later, the Millars whereabouts surfaced with news of a 2018 appeal in the Invercargill High Court over a Dog Control Act order for destruction of their dog. To enforce the Australian court order in New Zealand, it first had to be registered in the New Zealand courts under the Trans-Tasman Proceedings Act.  Court approval was required; the insurer was outside a six year time limit prescribed for registration.  Associate judge Lester gave approval for late registration.  The Millars knew of the insurer’s claim.  Their manner of departure from Vanuatu indicated attempts to frustrate further recoveries by the insurer, he said.

In the High Court at Invercargill, Louis was ordered destroyed.  It had attacked other dogs twice in a period of two weeks.

Nestel v. Millar – High Court (24.09.20); Millar v. Invercargill City – High Court (7.03.18)

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Property Development: Downer v. Signature Developments

Signature Developments acted in a high-handed manner when it tried to railroad investor Robert Downer into purchase of a Pukekohe early childhood centre after switching out the previously agreed tenant, the High Court ruled.  Signature was ordered to repay Mr Downer’s $466,000 deposit.

Robert Downer has been investing in commercial property for over thirty years.  In 2017, he was offered a package deal by developer Signature Developments Ltd.  He agreed to pay $4.6 million for an early childhood education centre to be constructed in Kitchener Road, Pukekohe, with a named subsidiary of Auckland Kindergarten Association as long-term tenant.  With net assets in excess of $25 million, the Association was a bankable tenant.

The High Court was told that unbeknown to Mr Downer, the Association’s business model was subsequently revised.  It was drawing back from long-term private lease arrangements like that proposed for Kitchener Road.  A new tenant was required for Pukekohe.  The Educare group, controlled by Alan and Jacqueline Lints, agreed to come in as tenants.  Mr Downer was kept in the dark.  Progress reports on construction gave no inkling of a change of tenant.  Signature claimed Mr Downer had to accept whoever it put forward as tenant.

Justice van Bohemen said wording of the 2017 contract was specific: Mr Downer was purchasing a property with a named Auckland Kindergarten Association subsidiary as long-term tenant.  That was an important term of the contract.  This tenant, coupled with a promised Kindergarten Association rent guarantee, was an attractive commercial proposition.  A change of tenant required Mr Downer’s approval. Signature was in breach of contract by installing a different tenant.  Mr Downer was entitled to cancel and recover his deposit.

Downer v. Signature Developments Ltd – High Court (23.09.20)

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Autoterminal: Auto Net v. Tyler

Used-car importer Auto Terminal’s restructuring in 2009 was triggered by a scheme to hide its true financial position; a restructuring which resulted in Inland Revenue disallowing six million dollars in past tax losses and is now resulting in worldwide litigation over control.

Robert Stone and Hohua Hemi built up a lucrative used car trade, exporting vehicles from Japan for the New Zealand market. Their Japanese registered company IBC Japan Ltd hoovered up used cars in Japan; Auto Terminal New Zealand Ltd on-sold them in New Zealand.  That was before Mr Stone and Mr Hemi fell out.  The High Court was told Auto Terminal had a net worth of some $43 million as at September 2019.  Ownership is fiercely disputed.    

Auto Terminal’s financial position was not always so rosy.  The High Court was told Auto Terminal had negative equity of some fifteen million shortly after the 2008 global financial crisis.  The corporate structures used by Mr Stone and Mr Hemi had Auto Terminal one hundred per cent foreign owned.  It would have to file financial statements with the Companies Office, auditors told them. This would disclose Auto Terminal’s parlous financial position to both creditors and customers.  A scheme was hatched, giving Auto Terminal the appearance of a locally-owned company no longer required to file financial statements. Auto Terminal’s shareholding was transferred to Hamilton resident Mike Tyler.

This change of ownership triggered tax issues for Auto Terminal.  Trading in tax loss companies is discouraged; tax rules prohibit carrying forward tax losses following a change in ownership.  A 2014 Inland Revenue audit disallowed $15 million in tax losses Auto Terminal claimed for the 2009 tax year, a tax assessment later amended to six million dollars tax losses disallowed.

Mr Tyler acknowledges he holds his Auto Terminal shares in trust, but disputes terms of this trust.  There is nothing signed.  Mr Hemi pushed the issue.  In the High Court, Mr Tyler acknowledged he holds the shares on trust for a Cayman Island company: Auto Net.  He said returning the shares to Auto Net requires approval from both Mr Stone and Mr Hemi.  Mr Stone told the High Court he wanted the shares to remain with Mr Tyler until all ongoing disputes with Mr Hemi are sorted out.  Mr Tyler also said he is entitled to keep control of the shares as security to meet legal expenses.

Associate judge Smith dismissed Auto Net’s immediate demand to regain control of Auto Terminal.  A full court hearing is needed to establish clearly the terms of trust on which Mr Tyler controls Auto Terminal.  The Trustee Act allows Mr Tyler to recover his legal expenses from the value of Auto Terminal shares under his control, Judge Smith ruled.  But this indemnity relates only to legal action over the terms of trust on which he holds the shares; it does not extend to legal expenses incurred defending other legal proceedings Mr Hemi has currently underway.  Mr Hemi alleges Mr Tyler is in breach of directors’ duties in management of several companies within the Stone/Hemi corporate empire.

Auto Net v. Tyler – High Court (21.09.20)

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Penguin Group: Milk New Zealand (Shanghai) Ltd v. Miraka Ltd

 Taken to arbitration after defaulting on long-term UHT milk purchase agreements, Chinese-owned Pengxin Group was ordered to pay Miraka Milk $5.9 million damages.

Able to process 250 million litres of raw milk each season, Maori-owned Miraka operates dairy plant at Mokai, north of Taupo.  In 2013, Miraka teamed up with Pengxin subsidiary Milk New Zealand (Shanghai) Ltd.  Shanghai agreed to take minimum quantities of Miraka processed UHT milk each season; Miraka in turn committed to increasing output with costly extensions to production facilities.  Their agreement required disputes go to arbitration.   

The High Court was told Miraka successfully took Shanghai to arbitration in 2018 after Shanghai failed to take up its required minimum purchases for two consecutive seasons.  Terms of the agreement were not made public by the court.  The arbitrator awarded damages totalling $5.9 million.

Shanghai’s appeal against this arbitration award was dismissed.  Shanghai said damages should be capped at a specified percentage of the agreed price. Both the arbitrator and the High Court assessed damages against prevailing market prices.

Milk New Zealand (Shanghai) Co Ltd v. Miraka Ltd – High Court (23.10.19); Court of Appeal (21.09.20)

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Price-fixing: Commerce Commission v. Lodge & Monarch

Hamilton based Lodge Real Estate and Monarch Real Estate have been ordered to pay price-fixing penalties nearly double that of competitors who pleaded guilty earlier to price fixing: Lodge fined $2.1 million; Monarch $1.9 million.

Commerce Commission clamped down after discovering a group of Waikato real estate firms jointly decided in 2013 to boycott Trade Me’s then plans to restructure pricing for property listings.  Acting as a cartel, they agreed to withdraw all listings from Trade Me; further listings to be vendor funded only.  As an agreement not to compete on price, this amounted to price fixing in breach of the Commerce Act.

Success Realty Ltd (fined $900,000), Lugtons (one million dollars) and Online Realty ($1.05 million) ‘fessed up.  They then provided supporting evidence for Commerce Commission legal action against Lodge Real Estate and Monarch Real Estate. There was evidence that Lodge’s Jeremy O’Rourke initiated discussions on a local response to Trade Me’s proposed pricing; Monarch’s Brian King offered his boardroom as a venue for everyone to meet.

Lodge and Monarch hotly denied they participated in price fixing, fighting unsuccessfully all the way to the Supreme Court.  It was back to the High Court to fix penalties. Both Lodge and Monarch said they each avoided paying Trade Me listing fees of less than $150,000 during the period vendors were forced to pay.  Any penalty should be minimal, they said.  Money saved is not the criteria, Justice Jagose ruled.  It is the extent to which price fixing may achieve structural change in market share.  Fines are intended as a deterrent; penalties must be set at a level to deter those business tempted to offend.

Lodge Real Estate was ordered to pay $2.1 million, Monarch Real Estate $1.9 million.  Commerce Commission also asked for fines against Lodge’s Jeremy O’Rourke and Monarch’s Brian King.  Justice Jagose declined. They did not set out to enforce the price fixing agreement. And the two were in no different position from directors at other Hamilton real estate firms who also participated at the price fixing meeting but had not been sued as individuals by Commerce Commission.

Commerce Commisssion v. Lodge Real Estate Ltd & Monarch Real Estate Ltd – High Court (8.09.20)

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Constructive Trust: Patterson v. Alsaloom

Potentially liable for fire damage to a rented Auckland property, tenant Kevin Patterson claims his landlord agreed that his money as tenant spent restoring the damage entitled him to part-ownership.  The fact repair costs were funded through a jointly controlled bank account raises a strong presumption there was an agreement, Associate judge Smith ruled.

Rafad Alsaloom owned a property on Sommerville Road, in Howick.  Kevin Patterson was tenant for over five years.   It was badly damaged in a September 2018 fire.  Unbeknown to the landlord, Mr Patterson shared the house with a number of flatmates paying him rent.  One flatmate set fire to the property after an argument with Mr Patterson.  The property was uninsured; the landlord had let cover lapse.

Mr Alsaloom told Mr Patterson he had legal advice that Mr Patterson as tenant on the tenancy agreement was liable.  This led to discussions, later disputed.

The High Court was told Mr Patterson’s version was that they both agreed it was a ‘waste of time and money’ to get lawyers involved; Mr Patterson would make good the loss, plus paying Mr Alsaloom whatever extra amount was needed to equate with half the pre-fire property value with Mr Patterson then credited with a half interest in the property.  In the months prior to the fire, Mr Patterson had made a $1.15 million offer to buy the property outright, but had got no response.

Mr Alsaloom denied there was any agreement.  Mr Patterson was paying for the repair because otherwise he was going to be sued, he said.  After contributing about $180,000 towards repair costs, Mr Patterson became concerned that there was trouble ahead; Mr Alsaloom was refusing to sign any paperwork documenting Mr Patterson’s understanding of the deal and waved away his concerns indicating it was best to wait until the job was finished.  Mr Patterson lodged a caveat against title to the Howick property, claiming an interest under a constructive trust; Mr Alsaloom had title, but Mr Patterson claimed to be part-owner.

Associate judge Smith ruled against removal of the caveat.  Mr Patterson has an arguable case that a constructive trust exists, he said.  The fact the two of them opened a joint bank account to manage the repair with each having signing authority indicated agreement on something had been reached, Judge Smith said.  A full trial is needed to determine what was agreed.

Patterson v. Rafad Alsaloom & RMC Trust Co Ltd – High Court (4.09.20)

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Estate Expenses: Kellerman v. Kellerman-Thornton

Margaret Kellerman-Thornton was removed as executor of her late father’s estate after improperly charging personal expenses to the estate including multiple business class return airfares from London for herself and her husband plus over a month of hotel accommodation and restaurant meals in Taupo.  Two lawyers from Wellington law firm Greg Kelly Law were appointed as replacement with power to recover all inappropriate payments.

John Kellerman lived in Taupo.  He died in 2018.  His will appointed daughter Margaret as executor with Margaret and her two brothers to share equally the balance of his estate.  Margaret lived in London, working as an executive assistant. She now describes herself as a ‘practitioner’ helping people improve lifestyle choices.

The High Court was told brother Brendan had been estranged from his father for over twenty years.  He did not get on with sister Margaret either.  There had been bad blood since she sued to get a greater share of their mother’s estate.  After their father’s death, Brendan sued his sister.  She was claiming unreasonable expenses for handling the estate and was not properly detailing expenses incurred, he said.

Charging four business class return airfares from London was unreasonable, Justice Cooke ruled.  Her father knew she lived overseas when appointing her executor. Two return air flights charged at ordinary rates could be justified at most, he said.  There was no legal justification in claiming three business class return airfares for her husband, Justice Cooke said.  Margaret said he was needed to help clear her father’s Taupo properties ready for sale.  This job could have been done by local contractors at less cost, Justice Cooke said. He was also critical of the way cost of her husband’s air fares was buried in estate records; there was no itemised disclosure, his air fares were hidden under ‘property clearance.’ Further, there was no legal justification for charging 44 days accommodation at the Hilton Hotel Lake Taupo for both herself and her husband plus over one month of restaurant meals. Cheaper accommodation was available, Justice Cooke said.

The High Court was told estate expenses currently total about $179,000, of which some $67,000 relates to airfares, food and accommodation.  Estate assets total $561,000.

Justice Cooke instructed Greg Kelly Law make inquiries about John Kellerman’s sale of a Taupo property in Heuheu Street to Margaret in the months prior to his death.  It was not clear what happened to sale proceeds.

Kellerman v. Kellerman-Thornton – High Court (4.09.20)

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Tax: Inland Revenue v. Frucor Suntory

 Structured financial transactions used to finance purchase of Frucor Beverages by French food and drinks giant Danone in 2003 were struck down by the Court of Appeal as tax avoidance, reducing Frucor’s claimed tax deductions by $55 million.

The Court of Appeal was told of investment banks falling over themselves in the early 2000s offering customers funding deals with a side serving of juicy tax benefits.  Danone went with Deutsche Bank and the deal on offer for its $294 million purchase of then-listed Frucor.  Deutsche Bank was so keen to get the work that it cut its margin to nearly zero and let Danone set the Bank’s fee: $1.8 million.

Funding for Frucor’s purchase came from Danone Singapore. Inland Revenue challenged tax deductions claimed by Frucor.  It said what was in effect a five year Deutsche Bank $204 million loan at 6.5 per cent was dressed up as an equity investment through use of a convertible note issue.  Nominally, Deutsche Bank was agreeing to take an equity stake in Frucor.  In fact, it had had already onsold these shares in a forward sale to Danone.  A banking expert said in evidence this was a ‘pretend’ convertible note transaction.  No corporate head office in its right mind would be completing an acquisition by taking shares in its target acquisition with an intermediary investment bank acting as conduit being the holder of convertible notes issued by the company being acquired.  The deal made no commercial sense, other than tax benefits accruing.

The Court of Appeal ruled the transaction was ineffective for tax purposes.  Deutsche Bank’s purchase of convertible notes to finance Danone’s acquisition of the company issuing the convertible note was contrived and artificial.  Convertible notes are commonly used to raise working capital.

Frucor is required to redraw its tax accounts for the five year period of the Deutsche Bank convertible note.  Danone sold Frucor to Japan’s Suntory in 2009.

Inland Revenue v. Frucor Suntory New Zealand Ltd – Court of Appeal (3.09.20)

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