Intueri IPO: Fullarton v. Arowana International

High Court authorised a class action against directors and promoters of Intueri Education’s $175 million public float with allegations information about student numbers and revenue streams were misleading, breaching Securities Act and Fair Trading Act.  Parallel attempts to get a quick win with summary judgment on questions of liability foundered when the High Court ruled a full court hearing is needed to canvas all facts.

Intueri Education Group Ltd operated as a private training establishment with emphasis on business, travel and culinary courses. It went public in 2014.  The IPO raised $174.7 million, offering shares at $2.35.  By February 2016, Intueri was advising of ‘enrolment restrictions’ affecting future revenue.  Eighteen months later it was in liquidation.  Teaching stopped.  The oblique reference to ‘enrolment restrictions’ turned out to be government restrictions on how Intueri reported its pass rates and indirectly how it treated fees retained by students who had withdrawn. A substantial part of Intueri’s cash flow had been student fees from students who did not complete courses. Much of this revenue came from government-funded StudyLink student loans.  At time of the IPO, some $14 million Intueri annual revenue was generated from 2600 students no longer attending, according to a subsequent investigation.  This revenue went ‘straight to the bottom line:’ Intueri was receiving revenue for tuition, but not having to provide teaching.

Aggrieved investors sued, alleging they had been misled. Intueri misrepresented the size of business operations, its student success rate and the source of revenue, they claim.  In particular, investors criticise IPO representations of 4628 student enrolments for the 2013 year and a course completion rate of 91 per cent for the previous academic year.  Completion rates were compiled on a different basis to enrolments.  Enrolments were gross enrolments (all who enrolled regardless of whether they dropped out or not); completion rates were calculated on net enrolments (gross enrolments less those who dropped out and did not complete). Investors complain this misleading presentation disguised the fact that a large proportion of annual revenue was derived from fees paid by students who later withdrew and that this business model was at risk if government rules changed.

The High Court was told the content of Intueri’s IPO documents raised concerns within the Tertiary Education Commission; there was a mis-match between student enrolments claimed in IPO documents and government records of numbers enrolled.  A Deloitte investigation followed.  It found that a lacuna in reporting rules enabled private training establishments like Intueri to exploit the timing difference between the deadline within which withdrawing students could claim a refund of their fees and the cut-off point for the start of direct government funding.  It could keep student fees without alerting education authorities that the student had dropped out.  The investigation also found Intueri had a policy of ‘selling’ course places twice over; new students would be found to fill places where an enrolled student had withdrawn outside the time limit to get a refund, allowing Intueri to retain two lots of student fees for one student place while still generating ongoing direct government funding for the continuing student.

Investors argued the facts were clear from documentary evidence; the court could rule on directors’ and promoters’ liability and leave questions of compensation to be dealt with later, they said.  Justice Fitzgerald disagreed.  The Deloitte report was inadmissible hearsay evidence, she said.  Deloitte did not give evidence; the Deloitte report as presented in court by investors was a statement made by someone else.

A full court hearing is needed to establish circumstances of the IPO and the extent to which investors relied on IPO documents. The class action encompasses all those who purchased in the April 2014 Intueri IPO and suffered a loss.

Fullarton v. Arowana International Ltd – High Court (29.04.21)

21.047 

Money Laundering: Arjang v. NF Global Ltd

Customers owed $26 million feature in the first liquidators’ report for NF Global, propelled into liquidation by international customers unable to get their money out of Global’s online payment platform.  Global was happy to accept their money no questions asked, but then alleged money-laundering issues as an excuse to block repayment, they complain.  

Registered in New Zealand with its sole shareholder based in Switzerland and operations run out of London, NF Global Ltd promised customers an efficient online platform for transferring funds internationally coupled with an ability to handle currency conversions.  It did not operate as a bank; client funds were placed temporarily with financial institutions pending further instructions for onward transfer.  Customers based in Hong Kong, Italy, Israel, Romania and the United Kingdom joined forces to have NF Global put into liquidation.  Liquidators PWC report it is proving difficult to identify where customers’ money is held.  NF Global says most customer funds were placed with Ipagoo LLP, one of the first e-banks set up under recent UK legislation.  Regulators in the UK put Ipagoo under administration in August 2019, freezing customer accounts.

In New Zealand, NF Global fiercely contested attempts to put it into liquidation.  Associate judge Bell ruled there was no evidence of money-laundering by NF Global customers.  Even if there were suspicions, he said, New Zealand money-laundering legislation requires the financial institution to end its relationship with the customer and to return the money.  Financial institutions have no right to confiscate the money; that power lies with the police under separate legislation dealing with proceeds of crime.

Creditors demanding repayment of $16.8 million jointly asked the High Court to put NF Global into liquidation on grounds it was insolvent and could not pay its debts.  NF Global produced a letter of support from shareholder Starboard Capital SA promising to stand behind its company.  Starboard was given six weeks grace to find the cash.  When no payments were forthcoming, NF Global was put into liquidation.

Arjang v. NF Global Ltd – High Court (9.03.21 & 23.04.21)

21.073

Wanaka Airport: Wanaka Stakeholders v. Lakes District

Plans by Queenstown Airport, part-owned by Auckland International Airport, to pre-empt Christchurch International Airport’s development of a second international airport for central Otago stalled when the High Court ruled Lakes District’s one hundred year lease giving Queenstown Airport control of Wanaka airport was unlawful; Queenstown Lakes District Council failed to properly carry out full public consultation.

Best known nationally for its regular ‘Warbirds over Wanaka’ air show, Wanaka Airport sits close to Luggate in central Otago.  The sealed airstrip no longer carries scheduled domestic flights.  It requires lengthening and extensive strengthening before being able to carry heavy jets bringing tourist traffic from Australia and elsewhere in New Zealand. Competitive pressure for control of Wanaka Airport mounted following rumours of Christchurch International’s plans to develop an international airfield nearby at Tarras.

Currently, Queenstown airport carries all central Otago domestic and international air traffic.  It is New Zealand’s fourth busiest airport by passenger numbers.  Queenstown’s position, nestled in an alpine valley, restricts aircraft movements.     

In March 2018, Lakes District granted Queenstown Airport a one hundred year perpetually-renewable lease over Wanaka Airport, and with it control of all airport facilities.  This was challenged by the Wanaka Stakeholders Group; a grouping of some 3500 individuals and businesses living around Wanaka and upper Clutha Valley.

Lakes District Council holds a majority shareholding in Queenstown Airport.  In granting the one hundred year Wanaka lease to Queenstown Airport, Lakes District was giving to itself, in the guise of Council-controlled Queenstown Airport, control of future development of a second international airport in the region. Through 2016 and 2017, prior to the lease agreement, Queenstown Airport had bought up land surrounding Wanaka Airport suitable for runway extension at a total cost of $12.3 million.

In the High Court, Justice van Bohemen was moved to say it strained credulity to accept that the one hundred year lease would have been negotiated without a shared understanding between Lakes District and Queenstown Airport about Wanaka Airport’s future development.  Such public consultation as there was, did not indicate Lakes District was contemplating a one hundred year time frame in determining plans for Wanaka Airport.  It was a breach of the Local Government Act to grant a long-term lease over a strategic asset like Wanaka Airport without full public consultation.

Queenstown Airports’s one hundred year lease over Wanaka was declared unlawful.  Some ninety sub-leases negotiated between Queenstown Airport and Wanaka Airport tenants were consequently invalidated.  Lakes District Council resumes as their landlord.

Wanaka Stakeholders Group Inc v. Queenstown Lakes District – High Court (21.04.21)

21.072 

Environment: Trent v. Canterbury Region

Challenges to resource management fines imposed for a 2018 ammonia leak killing aquatic life in Christchurch’s Kaputone Creek were dismissed.  Polarcold Ltd, now known as Emergent Cold Ltd, was fined $145,350; manager Russell William Trent fined $97,000.

Trent said his fine was excessive, given that the maximum fine for corporates is set at a figure twice that the maximum for individuals: $600,000 for corporates; $300,000 for individuals.

Ammonia leaked into Kaputone Creek when Trent was supervising the decommissioning of Polarcold compressors.  Some 1780 dead fish, mainly eel, were found along a five kilometre stretch.  When prosecuted under the Resource Management Act, both Polarcold and Trent pleaded guilty. There had been no prior breaches of the Act.

Trent appealed his fine, saying it was out of kilter with the fine imposed on his employer Polarcold.  His fine was 32 per cent of the maximum allowed under the Act; Polarcold’s fine was 24 per cent of its maximum.

Sentencing does not require fines to equate in a proportionate way, the Court of Appeal said.  Culpability of joint offenders is not always equal.  And the maximum penalty for individuals is not solely a maximum fine of $300,000, it said.  Individuals are also potentially liable for up to two years imprisonment. Corporates, by comparison, cannot be sent to prison.

Trent v. Canterbury Regional Council – Court of Appeal (21.04.21)

21.071

Fraud: Farina v. R.

With fourteen previous convictions for fraud-related offences, Begum Samuels Farina gained work as an accounts clerk for Horizon Radiology under a false name and then proceeded to steal from her new employer.  The High Court confirmed her sentence of ten months home detention and an order for $21,000 reparations.

The High Court was told Farina started work with Horizon’s Auckland Parnell office in September 2016.  She had authority to access Horizon’s online banking and to action client refunds.  Within six months she had on some twenty separate occasions diverted client refunds into her personal bank account.  Further refund money continued to pass into Farina’s bank account after she resigned because her bank details had not been purged from Horizon’s client bank account database.  The trial judge described her as a ‘fundamentally … dishonest person.’

Farina appealed her sentence, claiming it was excessive given the amount stolen.  Justice Toogood confirmed the period of home detention and order for reparations, for what he described as a premeditated theft by calculated means committed by a person in a position of trust.  One hundred hours community service included by the trial judge as part of Farina’s original sentence was quashed.  Community service is not commonly imposed in conjunction with sentence for a long period of home detention, Justice Toogood said.

Farina v. R. – High Court (15.04.21)

21.070

Erceg: Sain v. Erceg

Brother and sister Ivan Erceg and Vinka Sain each claim ownership of an Auckland Epsom property on Withiel Drive with a rating valuation of $5.7 million previously occupied by their late mother, Millie.  Ivan says he inherited under his mother’s will; Vinka says it was never Millie’s to give away, it was held in trust for her.

Withiel Drive was purchased by their sibling Michael in 2004, for $1.7 million.  The following year, Michael died tragically in a helicopter accident.  He died a wealthy man, after sale of Independent Liquor at a price rumoured in excess of one billion dollars.

Circumstances surrounding purchase of Withiel Drive played out in the High Court after Millie’s death in 2019.  Michael put up the cash for purchase of Withiel Drive in 2004, with title put in name of his mother Millie.  Vinka says her brother Michael made it clear at time of purchase that ownership passed to her on Millie’s death.  There is evidence supporting this: conversations Michael had with Vinka, her husband, their son and a builder who carried out renovations on Withiel Drive together with comments made by Millie herself when alive.  Vinka says that while title to Withiel Drive was in Millie’s name, Millie held the property in trust for her.

An initial court hearing saw argument over technical legal issues.

Without directly challenging evidence of a trust, Ivan claims any trust over Withiel claimed by Vinka is not enforceable.  Recent rules in the Property Law Act 2007 require a trust involving land to be in writing and signed by the person creating the trust. There was no document signed by Michael creating a trust over Withiel Drive. Associate judge Bell said the new rules did not apply; Withiel was purchased in 2004, before the 2007 rules came into effect.  The Limitation Act 2010 requires claims for breach of trust to be filed within three years of any breach.  Associate judge Bell said there are no time limits where the complaint is that a trustee wrongly converted trust assets to their own use.  There was no legal bar on Vinka bringing her claim for breach of trust.

Ivan was ordered to file a formal statement of defence.

Sain v. Erceg – High Court (14.04.21)

21.069 

Bankruptcy: Memelink v. Haines

The concurrent bankruptcy imposed on litigious Wellington debtor Harry Memelink in March 2020 was set aside because debts allegedly due were not formally proved in court.  The court hearing shone a light on tangled stratagems by Quentin Haines, Memelink’s former legal adviser, seeking to avoid forced sale of his own home.

Mr Memelink’s commercial behaviour has kept the courts busy for many years with multiple legal actions over disputed debts.  He was bankrupted in August 2018 after failing to pay a court costs order imposed following his unsuccessful negligence claim against his then lawyers: Collins and May.

Whilst bankrupt, he was bankrupted again in March 2020, this time on the application of another lawyer formerly acting for him: Quentin Haines.  This concurrent bankruptcy was set aside by the Court of Appeal; Mr Memelink’s earlier 2018 bankruptcy still stands.

The Court of Appeal was told of complicated legal manoeuvres that led to the second bankruptcy application.  Mr Haines became embroiled in Mr Memelink’s business affairs when Mr Haines took out a second mortgage over his Levin property in favour of Fico Finance.  Part of this Fico loan was advanced to Mr Memelink.  Loan repayments were guaranteed by Mr Memelink’s family trust. Following a subsequent dispute over liability for interest, Mr Memelink had his family trust buy up the Fico second mortgage and threatened to sell up Mr Haines’ Levin home.  A forced sale was blocked by court order, pending resolution of the argument between Mr Haines and Mr Memelink.  The Court of Appeal was told Mr Haines then arranged to break Mr Memelink’s family trust’s hold over the Levin property as second mortgagee.  Mr Haines had a prior first mortgage over the Levin property bought out by friendly allies and the property then sold in an arrangement which allowed Mr Haines to lease back his Levin home.  This sale by the replacement first mortgagee did not raise enough to repay the second mortgage now held by Mr Memelink’s family trust.  It was left as an unsecured creditor; the mortgage was valueless as security.

Mr Haines was then back in court seeking to bankrupt Mr Memelink on a court costs order, part of their dispute over the Fico mortgage. The Court of Appeal ruled the High Court had no grounds to bankrupt Mr Memelink.  First: the costs order claimed was incorrectly claimed as a debt owed by Mr Memelink personally; it was not, it was a debt owed by Memelink’s family trust and his trust in turn was owed a greater amount in another costs order against Mr Haines’ family trust.  Secondly: debts allegedly owed by Mr Memelink personally to other creditors which had arisen since his first bankruptcy and left unpaid were not proved in court.  It was not enough for Mr Haines lawyer to state in court that other creditors wanted to see Mr Memelink bankrupted a second time.  These debts were levies imposed by three separate body corporates.  Mr Memelink has a history of disputing levies imposed by body corporates.  The body corporates had to separately apply to court for Mr Memelink’s further bankruptcy.

Memelink v. Haines – Court of Appeal (14.04.21)

21.066

Property Sale: Ma v. Li

Yang Li claims the amended price on an agreement to sell her south Auckland rental for $1.14 million was simply a ploy to drive up the price in future negotiations.  Not so, the High Court ruled.  It led to a binding sale at that price.

Ms Li appointed LJ Hooker as agents to sell her rental property on Bremner Road, Karaka, at an asking price of $1.35 million. Close friend Eric Fang worked for Hooker.  In August 2020, he presented a signed offer from Congmei Ma, offering $1.08 million. Any increase in offer price from Ms Ma was unlikely, he said.

The High Court was told Ms Li amended the offer price to $1.14 million, initialled the amendment, and signed as vendor.  This was a ploy to attract interest from other buyers at a higher price, she said.  She had no expectation that the $1.14 million counter-offer would be presented to Ms Ma.  The counter offer was agreed and signed by Ms Ma when Mr Fang presented her with the amended sale agreement.  Ms Li denied there was a binding contract.  Mr Fang had no authority to present the $1.14 million counter offer to Ms Ma, she said.

Associate judge Andrew ruled the contract enforceable at $1.14 million.  Mr Fang acted within terms of Hooker’s listing agreement by presenting the counter-offer to Ms Ma.  Her acceptance of this counter-offer created an enforceable contract.

Ma v. Li – High Court (14.04.21)

21.067 

Family Trust: Reany v. Reaney

First use of new powers allowing receivers to take control of deadlocked family trusts was put on hold by the High Court.  In the absence of pressing commercial necessity, all affected parties must be given a chance to present their side of the story in court.

The Reaney Family Trust owns property in Pukekohe, south Auckland.  Husband and wife Anthony and Jennifer Reaney are trustees, together with Jennifer’s mother Diane.  The High Court was told all three lived together on the property; but Anthony and Jennifer are now estranged and Diane plans a move into a retirement village.  Jennifer and her mother are looking to sell the Pukekohe property.  Anthony refuses to sell, saying he will only agree once Jennifer resumes their relationship.

A February 2021 sale at an above-market valuation fell through after Anthony refused to sign the contract.  Jennifer and her mother took to the High Court, asking the court to exercise new powers in the Trusts Act to remove Anthony as trustee and appoint a receiver to take control of the Trust’s only asset: the Pukekohe property.  Anthony was given no notice of the court application.

Justice Jagose ruled a ‘without notice’ application will be heard only if absolutely necessary.  Giving Anthony notice and allowing him to give evidence would not cause ‘undue delay or prejudice,’ he ruled.  There was no evidence of a pressing commercial need to remove Anthony as trustee, expediting a sale.

Reaney v. Reaney – High Court (14.04.21)

21.068 

Sofitel Auckland: Een v. Body Corporate 384911

Disgruntled investors owning apartments in the same building as Sofitel Auckland Viaduct Harbour Hotel failed to overturn body corporate rules forcing them to contribute towards building security, part of their ongoing dispute with the Pandey family over hotel operations.

In 2011, most unit holders agreed to lease their apartments to Pandey-controlled CP Group enabling an Accor branded hotel to then operate from the site.  Revenue from hotel operations was fed back to those apartment owners agreeing to lease. This arrangement came to an end with the covid-19 pandemic and collapse of inbound tourism.

After a $4.2 million refit, CP Group then relaunched hotel operations on site as Sofitel Auckland Viaduct.  New leases were required for those unit owners wishing to have their apartments used in hotel operations.  A minority of apartment owners, between them owning 45 per cent of residential units, refused the deal on offer.

There is a decades long back-story of bad blood between CP Group and Viaduct apartment owners, many of them from Singapore and Malaysia.  Back in 2010, when the building was also under control of CP Group, apartment owners were in a legal tussle over rental arrears totalling some $3.5 million.  In 2020, Prakash Pandey had a CP subsidiary acting as the hotel apartment-leasing agent put into liquidation.  The then existing apartment hotel leases were disclaimed by the liquidator; the leases came to an abrupt end, leaving apartment owners with no revenue.  A 45 per cent minority have refused to agree new terms for use of their apartments by the hotel.  Pandey family is improperly loading hotel costs on to them through body corporate levies, they allege.  Part of a campaign to force them into signing up to new hotel lease terms, they complain.

Back in court, disgruntled apartment owners challenged a body corporate resolution forcing them to share the cost of building security.  Up to July 2020, cost of a security presence 24/7 in the hotel’s main lobby was a cost born by the hotel.  On the hotel’s re-opening, two carefully-crafted resolutions were put to body corporate apartment owners.  The first required 75 per cent support.  It stated lobby security would be resumed at no direct cost to the body corporate. This resolution did not pass; the disgruntled minority voted against, telling the High Court this resolution was perceived as a back-door attempt to force them into a leasing arrangement with the hotel on Pandey family terms.  The second resolution required only fifty per cent support.  It required the body corporate pay security costs.  The disgruntled minority did not have the votes to block this resolution.  They went to the High Court challenging this resolution under the Unit Titles Act as being unjust and inequitable.

Justice Gordon dismissed their claim.  All apartment owners get the benefit of security provided 24/7, she ruled.  The resolution was not discriminatory in its application.  The cost of about $151 per month for each apartment owner was reasonable, she said.

Een v. Body Corporate 384911 – High Court (1.04.21)

21.064 

 

Post Judgment Note: The Court of Appeal subsequently set aside the second resolution as invalid.  The resolution was unjust.  It forced hotel-level security costs for 24/7 security on a minority who did not want or need this level of security.  Security costs for residential apartments would be a fraction of this level.

Treaty Settlement: Poutu v. Attorney-General

Clumsy legal drafting saw government mistakenly write in a ten million dollar discount on price of properties being purchased by Te Atiawa as part of its $87 million Treaty settlement.  A court order was needed to correct the error, with Te Atiawa protesting government should be held to its written word.

Tribal members of Te Atiawa live primarily in Taranaki and Wellington.  In a 2014 Treaty claims settlement, Te Atiawa agreed to $87 million government compensation with 52 government owned ‘landbanked’ properties made available as part-payment in kind.  It was agreed these properties were available for purchase by Te Atiawa at market price with one exception: a twenty per cent reduction in price would apply to any purchase of the New Plymouth Courthouse; a symbolic acknowledgement of the wrongs suffered by Te Atiawa at the hands of a colonial legal system.  In negotiations however, it was clear government was looking to minimise this financial loss by requiring a twenty per cent discount on market rents when Te Atiawa leased the site back to government.

The High Court was told a drafting error in their Treaty settlement agreement saw the twenty per cent purchase discount being available not just for the Courthouse, but on purchase of all 52 landbanked properties.  Representatives of both Te Atiawa and government signed, unaware of the mistake. Four years later, government recognised the error and contacted Te Atiawa.  Government should be held strictly to terms of the contract it had signed, Te Atiawa said.

In the High Court, Justice Clark ordered the contract be rectified to correctly express their prior agreed terms.  Te Atiawa had neither noticed nor relied on the mistake, she said.  The document did not accurately reflect what all parties had agreed in pre-settlement negotiations.

The court was told that prior to the High Court hearing, Te Atiawa had already purchased most of the landbanked properties, paying market price.  But these purchases were made on the basis that it would get money back if the court ruled Te Atiawa was entitled to the stated discount.

Pouto v. Attorney-General – High Court (1.04.21)

21.065