Debt: Tolstikov v. Ivanov

 

With eleven shops across the North Island then trading as ‘Top Catch,’ investors Sergey Tolstikov and Igor Ivanov fell out with Tolstikov now suing to recover his $2.2 million invested.

Top Catch sold fishing tackle and bait.

The High Court dismissed claims by Mr Ivanov that his obligation to refund the $2.2 million was conditional on his finding finance.  Payment was due now.  If there was a finance condition, it would have been written into the former business partners’ termination agreement, Justice Robinson said.

The court was told the two went into business together in July 2019, falling out some eighteen months later with disagreements over liquidity; both the amount of cash Mr Ivanov was drawing from the business and the amount of cash each respectively needed to contribute as working capital.

Mr Toltstikov had put in over two million dollars.  His equity interest was disguised.  Mr Ivanov held a 72 per cent stake on trust for Toltstikov.

Their December 2020 termination agreement required Mr Ivanov to pay $2.22 million within a week; repayment of cash Mr Tolstikov had put into the business.  With Mr Ivanov unable to find the cash in such a short time, the two subsequently agreed to payment by instalments with interest running at fifteen per cent on unpaid balances.  Evidence was given that interest only was paid over the next five months, then nothing.

Getting nervous about repayment, Mr Tolstikov began demanding access to Topcatch’s financial records.

In the High Court, Mr Ivanov was ordered to pay in full immediately the $2.2 million due.  There had never been any agreement that payment by Mr Ivanov was subject to first raising a loan.

Justice Robinson further ruled that the requirement to pay interest on the unpaid balance was not Mr Ivanov’s responsibility; interest payable was a debt of their business, Topcatch Ltd.  The rescheduling agreement, while nominally an oral agreement between the two personally, did decide that Topcatch would pay the later imposed interest, Justice Robinson said.  Mr Ivanov, as Topcatch director, agreed as agent for Topcatch that Topcatch was liable.  

Companies Office filings show Topcatch Ltd went into liquidation in 2023.  Liquidators sold all the business assets.  There is nothing left in the kitty to pay unsecured creditors.

Tolstikov v. Ivanov – High Court (28.03.24)

24.077

Fraud: Smith v. Police

 

One plus one can mean more than two the High Court decided in an unsuccessful appeal against sentence on a further conviction for fraud offences.

In June 2022, Casey John Smith was sentenced to twelve months home detention for a raft of dishonesty offences committed over two years previously: stealing some $39,500 through fraudulent use of a stolen credit card and bank card.  The sentencing judge described this as a lenient sentence, particularly since Smith had previous convictions for dishonesty.

Unbeknown to this judge, Smith was on the hook for further charges, after a fraud spree during covid-19 lockdown.  Sentencing for this criminal behaviour came before the courts at a later date.

In March 2024, Smith was in the High Court challenging a two year three month prison sentence imposed for his lockdown frauds and separate frauds involving use of a forged driver’s licence.

Smith made multiple fraudulent applications seeking government covid-19 subsidies for wage payments and essential worker support schemes, exploiting government’s ‘high trust’ model enabling money to be delivered quickly to affected businesses with a minimum of paperwork.  Some of his fraudulent applications were identified at time they were submitted, others following a subsequent audit.

The court was told Smith made applications both in his own name and in the names of others where he had knowledge of their IRD tax numbers.  Out of 43 fraudulent applications, five were successful, netting some $27,000.

Nearly half this money was paid into a Westpac bank account which Smith had hijacked.  Using information in a stolen wallet, Smith doctored the owner’s driver licence by having his photo added to a facsimile of the licence, using this to reactivate the real customer’s closed Westpac account.

Other frauds attempted or perpetrated using a doctored driver’s licence included: making online application to Heartland Bank for a loan to purchase a BMW (foiled when Heartland followed up on the application by contacting the person named on the licence, only to learn no loan application had been made), and; to get access to a bank account stealing about $50,000 (with Smith fraudulently requesting a replacement SIM card at a 2 Degrees outlet and then having the victim’s bank send a temporary password to a phone now controlled by Smith.)

On appeal, Smith said the two year three month prison sentence on his later conviction was too harsh; a second sentence of twelve months home detention was more appropriate, he said.

Confirming the sentence imposed, Justice Becroft said the sentence should reflect the totality of all Smith’s offending.  Given the nature and number of offences involved, an initial sentence of home detention followed by two years three months imprisonment for the later sentence, when added together, are not wholly disproportionate, he said.

Smith v. Police & Ministry of Social Development – High Court (27.03.24)

24.076

 

Addendum: In passing, Justice Becroft expressed concern at media’s misleading use of the phrases ‘starting point’ and ‘discount’ when reporting on length of sentences.

‘Starting point’ is not the sentence that would be imposed but for any ‘discount’ applied; it is merely the first step required by the Sentencing Act when determining a sentence.

The ‘starting point’ for any sentence is not the maximum penalty set down by law; it is the level of penalty commonly imposed in the past for similar fact offending.

And a ‘discount’ is not a special deal on offer as found in a supermarket, Justice Becroft said.  Rather, it reflects a statutory procedure in the Sentencing Act requiring specific criteria to be taken into account as mitigation, necessary to reach an appropriate sentence. 

 

Franchise: One New Zealand v. Knox

 

Seven years after their Vodafone franchise was terminated following allegations of dishonesty, Grant and Linda Knox were in court unsuccessfully seeking damages in a claim that Vodafone did not act reasonably when terminating their franchise.

They claim Vodafone jumped the gun with termination less than four months into their franchise, allegedly acting at the behest of interests associated with former franchise holder GSM Retail Ltd seeking to recover its franchise.

The High Court was told GSM Retail previously held franchise rights for Vodafone stores at major airports: Auckland, Wellington, Christchurch and Queenstown.  Vodafone his since re-branded as One New Zealand.

With GSM’s rights up for renewal in 2017, Vodafone signed up Grant and Linda Knox as replacement franchisees.  At the time, they were GSM employees.  Within weeks, GSM management contacted Vodafone reporting allegations of theft by Linda Knox; misuse of GSM Prezzy cards.

Evidence was given of Ms Knox contacting Vodafone, confessing to having ‘fucked up’ while working for GSM and tearfully exonerating her spouse from any involvement.

At a subsequent meeting between Vodafone and the Knoxes, she did not deny the earlier thefts.  A pre-prepared letter was handed over, immediately terminating their Vodafone franchise.  Interests associated with GSM were appointed as replacement franchisee.

Ms Knox was subsequently convicted of theft.

Associate judge Taylor ruled immediate termination was justified.  The franchise agreement allowed termination for any fraudulent or unethical behaviour.

Ms Knox said her criminal behaviour was unrelated to their Vodafone franchise; it was an employment matter between her and former employer GSM.

Judge Taylor ruled Vodafone had not acted unreasonably or in bad faith.

Ms Knox’ prior dishonesty was relevant to her ongoing suitability as a franchise holder.

One New Zealand Group v. Redfone Ltd & Knox – High Court (22.03.24)

24.073

Construction: CPB Contractors v. WSP New Zealand

 

For over a million Auckland residents, upgrading the city’s southern motorway between Manukau and Papakura created years of traffic disruption and continual frustration.  Construction is now in the courts, with Canadian-owned Opus International ordered to pay Australian-managed head contractor CPB Contractors $5.3 million for cost overruns resulting from Opus’ failure to properly model project requirements for motorway paving and subsurface.

The High Court was told CPB and Opus worked hand-in-hand preparing a tender for the project even before Waka Kotahi officially called for tenders in 2015.  Contractors were well aware of the intended motorway upgrade; Waka Kotahi holds regular ‘workshops’ with the main players, signalling what work is in prospect.

As is common practice, Waka Kotahi entertained requests for variations to the motorway upgrade as part of its tender process, variations which may or may not be approved, provided they do not depart from the main purpose of the contract.

A request by Opus for a variation to pavement design and depth on the southern motorway project was not approved.  Evidence was given that a failure in communication between Opus and CPB meant that part of CPB’s contract pricing was calculated on what was Opus’ unapproved variation but was submitted as pricing for pavement design and depth as specified by Waka Kotahi.

After winning the tender, CPB learnt its $192 million price came in $67.5 million below the next lowest tender.  It lost some $42 million on the project.  Extra paving costs to satisfy contract requirements amounted to about fifteen per cent of total costs.

Opus and CPB locked horns in court arguing over who should shoulder costs incurred laying paving to contract specification when this work had been priced on a different basis.

Justice Johnstone ruled Opus was liable for both breach of contract and negligence.  Damages were calculated at what should have been the increased tender price: $5.3 million.

CPB Contractors Pty Ltd v. WSP New Zealand Ltd – High Court (22.03.24)

24.075

Construction: Kitchener & Co v. Concrete Solutions

 

Disputed payment of a $26,000 Christchurch construction debt is being fought out between an Australian owned property developer and local division of US multinational Aegion Corporation with developer David Stewart Henderson a central figure unsuccessfully disputing personal liability as guarantor.  

Kitchener & Co (1989) Ltd is owned and controlled by Australian-based Tony Henderson.  His New Zealand-based father David took the lead in an apartment earthquake remediation on Christchurch’s Bealey Avenue.

Aegion’s Concrete Solutions Ltd was contracted in 2019 to carry out seismic strengthening with the epoxy application of fibre reinforced sheets and injection of resin into cracks. 

The High Court was told Kitchener fell behind on progress payments.  A separate payment agreement was signed in March 2020.  Kitchener agreed to meet rescheduled dates for payments, with interest running at 1.5 per cent per month on all payments outstanding.  David and son Tony signed as guarantors.

In turn, Concrete Solutions agreed to resume work and finish the job.

On completion, $26,000 was left unpaid.  David Henderson said the job had not been done properly, itemising alleged defects.

Justice Osborne ruled a ‘no set-off’ clause in their March 2020 payment agreement meant full payment was due regardless of any dispute about quality of the work.  It was analogous to the ‘pay now, argue later’ rule contained in the Construction Contracts Act.

He dismissed out of hand Kitchener’s argument that there had been a ‘total failure of consideration’ such that the payment agreement could not be enforced.  Courts have refused to enforce contracts where one side had failed totally to deliver what was promised.  In this case, Concrete Solutions had done the work, albeit with a dispute over quality of the work done.

Henderson father and son were both held liable on their guarantees, with Justice Osborne commenting there was ‘not a skerrick of injustice’ in holding them to the guaranteed payment agreement.

The court was told some $96,500 is now owed, with accruing interest added to the original $26,000 debt.

Mr Henderson (snr) was banned in 2023 from managing any company for three years expiring March 2025 for his mismanagement of the earthquake remediation, leaving creditors unpaid.  

Kitchener & Co (1989) Ltd & Henderson v. Concrete Solutions Ltd – High Court (22.03.24)

24.074

 

Note: David Stewart Henderson, referred to in this blog post, is not to be confused with South Island property developer and serial bankrupt David Ian Henderson.

Restraint of Trade: Harcourts Paremata v. Cardno

 

A mass exodus of sales staff from Harcourts Wellington Paremata office to rival Bayleys resulted in a High Court order blocking them from local real estate work for a period of three months.  Legal argument centred on whether real estate ‘leads’ as compared with ‘listings’ counted as Harcourts’ confidential information.

In early December 2023, Paremata senior sales manager Tony Fitzimons gave notice.  Harcourts paid out his employment entitlements and he left immediately.  He gave no indication of future plans.

A fortnight later, fellow staff members Martin Cardno, Tanya Davis, Ralph Kindl and Holly Williams followed him out the door.  These sales staff were independent contractors, not employees.

The High Court was told a new Bayleys office opened the following month within several hundred metres of Harcourts Paremata branch.  Advertised on its website were the former Harcourts staff together with listings of properties offered for sale.

Harcourts market share for local sales fell from some 67 per cent to 36 per cent in the period immediately after the mass exodus.

Harcourts sued.  It alleged Bayleys’ new listings could only have been generated from contacts made whilst its staff previously worked for Harcourts, and as such was a misuse of Harcourts’ confidential information.

Evidence was given that Harcourts requires its sales staff to log information about potential leads: details of properties potentially coming on the market together with information about vendors; whether they are price sensitive plus personal and family information relevant to marketing.

Harcourts alleged both Ms Williams and Mr Kindl downloaded parts of its client contact database shortly before their departure.

Mr Fitzimons returned his company laptop on departure cleaned, following a factory reset.  Harcourts expressed suspicions that confidential information had been accessed before being wiped.

In the High Court, Justice Isac ruled it was arguable that ‘leads’ do amount to confidential information Harcourts was entitled to protect.

Mr Fitzimons’ employment contract contains no restraint of trade clause.  He was free to set up in opposition to Harcourts immediately on his departure.  Employment law does prohibit former employees from misusing confidential information gained during employment.  This is an issue for Harcourts to take up with the Employment Relations Authority should it choose to do so, Justice Isac said.

The other four sales staff had signed contracts prohibiting them from misusing confidential information and further prohibiting them from selling real estate within Harcourt’s Paremata area (from Tawa to Pukerua Bay) for six months after leaving Harcourts.  They were not prohibited from immediately starting elsewhere in the wider Wellington area.

Justice Isac ruled these four sales staff had to surrender or destroy any confidential information taken from Harcourts and further ordered not to sell real estate in Harcourts’ Paremata area for a period of three months.

Evidence was that progression from a lead to a listing usually occurs within a three month period.  A six month restraint period was excessive and likely to be ruled unreasonable, Justice Isac said.

Harcourts Paremata v. Cardno – High Court (14.03.24)

24.072

Joint Venture: Shiu v. Luo & Yip

 

Learning that fellow investor Annie Shiu had fraudulently claimed real estate commissions were levied on their joint venture purchases, Robert Luo and Ang Yip upped the ante claiming this dishonesty extended to her failure to include them in a neighbouring development.  There was no evidence they were to share, the Court of Appeal ruled, reversing a High Court order that Ms Shiu pay $2.6 million damages.

Ms Shiu, also known as Annie Chen, started in 2016 assiduously buying up undeveloped land at Pokeno on Auckland City’s southern boundary with plans for residential subdivision.

She entered into separate joint venture agreements with different individuals for the purchase of contiguous blocks of land, having these individuals stump up cash for the various purchase prices in return for interest payable on the risk capital advanced and a promised share in profits on subdivision.  Mr Luo and Ms Yip were attracted to these proposals.  Unknown to each other, they separately entered into joint venture arrangements with Ms Shiu to buy land at separate addresses on Henslee Road.     

Ms Shiu lied to both of them, taking several hundred thousand dollars from funds advanced as supposed reimbursement of real estate commissions paid.  No commission had been charged. Their complaint to the Serious Fraud Office in late 2018 led to Ms Shiu’s conviction for obtaining money by deception.  She repaid the money stolen.

Subsequently, Mr Luo and Ms Yip sued alleging they had been cut out of potential profits from Ms Shiu’s overarching subdivision plans.

The Court of Appeal was told Ms Shiu had paid extravagantly to assemble a portfolio of undeveloped land, all contiguous but yet to receive subdivision consent.  Some purchases were funded with family money, others by joint venture investors such as Mr Luo and Ms Yip.  All were aware it was a long-term project, risky in that subdivision consent might not be granted.

In the High Court, Mr Luo was awarded $1.04 million damages; Ms Yip’s investment company $1.6 million: damages for their potential share in expected development profits.  The trial judge ruled Ms Shiu misrepresented that the two would share in overall development profits.

The Court of Appeal said there was no proof of a promise to pool profits.

There was no third party evidence of Ms Shiu making such promises.  Mr Luo’s and Ms Yip’s extensive joint venture documentation made no mention of pooling profits from the whole development, only profit shares on development of the single purchase each had separately funded.  It was not plausible, the court said, that Mr Luo and Ms Yip would have entertained a pooling arrangement having them share risk with others over whom they had no control, particularly without detailed written documentation.

There was no causal link between Ms Shiu’s lack of honesty in lying about commission payments and any suggestion she had lied about pooling profits, the Court of Appeal ruled.  This single lack of honesty was not reflected in terms of the joint venture relationships actually entered into.

The court indicated Mr Luo and Ms Yip had assumed they were intended to share in overall project profits only after a local real estate agent highlighted Ms Shiu’s foresight in combining adjacent properties to her economic advantage.  This real estate agent had no knowledge of any conversations Ms Shiu may have had with her fellow investors.

The fact that it was two years after court action was underway before Mr Luo first raised the question of pooling profits, further raised doubts whether any such promise had been made, the court said.

Shiu v. Luo & Yip – Court of Appeal (7.03.24)

24.071

Insurance: IAG v. Degen

 

Insurance companies have drawn the line on Christchurch property owners gaming insurance payouts for earthquake damaged homes by now refusing to make upfront lump sum payments for owners opting to manage their own repairs; reimbursement will be made only as and when invoices are submitted for repairs completed.

Settlement of Mr Degen’s NZI insurance claim was much delayed with a dispute whether his property could be repaired or required demolition and a rebuild.  Their dispute reached the Canterbury Earthquakes Insurance Tribunal, set up in 2019 to provide a speedier and more flexible judicial forum to settle insurance disputes.

A 2022 Tribunal ruling found in favour of NZI: Mr Degen’s house could be repaired; a rebuild was not necessary.

But NZI objected to the Tribunal’s ruling that NZI’s owner, IAG Insurance, make a lump sum payment as soon as Mr Degen had signed a building contract for repair.

The insurance industry has faced a pattern of property owners gaming upfront payouts for owner-managed repairs.  A promised repair contract might be cancelled or heavily amended after a cash payout is made, or no repairs made at all.  Christchurch property marketing campaigns frequently advertise properties selling on an ‘as is, where is’ basis; often a case of the vendor having taken a cash payout for owner-managed earthquake repairs, undertaking little or no repairs, then later selling.

In the High Court, Justice Hinton ruled IAG was not required to make an upfront cash payout on Mr Degen’s claim.  Payment was due only after Mr Degen had incurred costs of repair, had submitted invoices and IAG was satisfied the costs are reasonable and relate to the risk insured.

It is implicit in any insurance contract promising ‘cover’ for insured risks that any payment must relate to making good the loss, Justice Hinton ruled.

In passing, the High Court was asked to consider the legal effect of wording in the Fair Insurance Code requiring insurers to ‘settle all valid claims quickly and fairly.’  Justice Hinton emphasised the key word is valid.  No valid claim requiring ‘quick’ payment exists where there is an ongoing dispute with the insurer over the extent of coverage and the amount to be paid.

IAG New Zealand Ltd v. Degen – High Court (6.03.24)

24.069

Minimum Wage: Mt Cook Airline v. E Tu

 

Salaried staff working a part-time roster have their salaries pro-rated against full time salaries for that position, the Court of Appeal ruled; avoiding a Minimum Wage Act claim by union E Tu which could potentially see a salaried Mt Cook Airline cabin crew member on a twenty per cent load earning five times per hour that of a colleague working full time.

The employment law dispute centred on application of the 2021 Minimum Wage Order to Mt Cook’s 2019 Collective Agreement.

As with most airlines, Mt Cook’s cabin crew are predominately female.  Since 2012, it has allowed salaried cabin crew to work part-time, a practice welcomed by staff as allowing flexible work options.     

E Tu claimed wording of the 2021 Wage Order meant part-time salaried staff were entitled to a minimum of $1600 per fortnight, even where their salary pro-rated for the number of hours worked for a particular eighty-hour fortnight failed to reach this figure.

Mt Cook said this would result in ridiculous anomalies.

Requiring employers to pay a minimum fixed amount to salaried part-time employees regardless of how many hours they had actually worked per fortnight could distort the relativity between part-time and full-time employees, the Court of Appeal said.  This would potentially discourage employers from offering part-time roles and could disadvantage employees seeking part-time work; students, employees looking to take on secondary employment, staff returning to the workforce, and those with childcare commitments.     Payment for salaried part-time staff is to be calculated pro-rata to the appropriate full-time salary according to the number of hours worked, the court ruled.  This is consistent with the statutory purpose of minimum wage legislation, it said.

Evidence was given that Mt Cook’s collective agreement allowed cabin crew to work a two-thirds roster: six rostered days per fortnight instead of nine.

Mount Cook Airline Ltd v. E Tu Inc – Court of Appeal (6.03.24)

24.070

Relationship Property: Kemp v. Kemp-Upton

 

Six years after their property assets were divided as part of a relationship property agreement the two are back in court; there was no written agreement as to division of joint liabilities, in particular a $1.7 million Westpac mortgage.

Jan Kemp and Andre Kemp-Upton separated in 2014 after a 32 year marriage.

The High Court was told at that time they had joint control of five Auckland properties and a property in Fiji, all held through a family trust.  With the assistance of their then accountant, a schedule of joint assets and liabilities was drawn up and agreement in principle reached on division of assets and liabilities.  Seeking to avoid the need to make any cash adjustments, it was agreed the properties would be valued and then parcelled out between the two; Andre took two Auckland properties and their interests in Fiji, Jan the remaining three Auckland properties.

A formal relationship property agreement signed three months later agreed transfer of the properties but made no specific reference to liabilities, other than joint liability for their personal credit card debts at time of separation.

In 2021, Andre sued, claiming he had paid more than his half share of their joint liabilities.  He demanded payment of some $136,000 to square their obligations.

Jan took the fast-track summary judgment route, claiming there was never any agreement to share liabilities.  Provision for existing mortgage liabilities was dealt with in net asset valuations for the properties since shared out, she says.  Her former husband’s current claim suggests their previously agreed property valuations were skewed in his favour she says.  In addition, there had never been any valuation made or credit given for her share of Andre’s business, Our Space Architecture Ltd, which was agreed to be a relationship asset, she states.

Disputed facts cannot be dealt with in fast-track summary judgment applications, Justice Robinson said.  It needs a full court hearing.

It is for Andre to establish how the original property valuations were calculated and to explain why their relationship property agreement failed to state liabilities were to be shared equally as he now claims, Justice Robinson ruled.

Kemp v. Kemp-Upton – High Court (1.03.24)

24.065

Loan: Chen v.Tawa Trade Finance

 

Auckland property investor Liyun Chen was ordered to pay $1.1 million as guarantor after her company defaulted on a loan refinancing properties in Auckland suburb Flat Bush.  This amount will increase, with interest running at 28 per cent until payment.

The High Court was told Ms Chen misled financier Tawa Trade Finance Ltd by signing a loan contract as guarantor for her company LC1521319 Development Co Ltd promising Tawa Finance would have first mortgage security when rights to a first mortgage over Flat Bush had already been promised to General Finance.     

The Tawa Finance loan was a short-term six month loan dated June 2022, rolled over for six months at her request.  Security was offered over multiple Flat Bush properties.

Unable to refinance at end of the roll-over period, Ms Chen raised a raft of legal reasons why Tawa Finance could not force repayment, variously alleging: promises of a further extension had been made; Tawa was in breach of the Credit Contracts and Consumer Finance Act; there had been a failure to comply with the Anti-Money Laundering and Countering Financing of Terrorism Act; there were breaches of the Fair Trading Act, and; that Tawa Finance had failed to get the best price when selling up the Flat Bush properties.

Associate judge Taylor dismissed all these claims.  LC Development was in breach of contract from the start because it was never in a position to give Tawa Finance the promised first mortgage security.

Evidence was given that Tawa Finance was owed some $2.5 million subsequent to the discovery it did not have first mortgage security, instead ranking behind General Finance.  It first had to account to General Finance before claiming monies from forced sale of the Flat Bush properties.

General Finance’s right to first mortgage security was contained in an agreement to mortgage, later protected by a caveat registered against title to the Flat Bush properties.

Ms Chen claimed Tawa Finance sold the properties at below market values.  Tawa said Ms Chen was incorrectly using as her benchmark market values as at 2021.  Market prices had fallen since.

Ms Chen said Tawa Finance had unreasonably rejected a conditional sale she herself had organised.  Judge Taylor said Tawa was under no obligation to accept a conditional offer and further was under no obligation to accept a deal on offer whereby $100,000 of the price was to go to Ms Chen’s former partner.

Ms Chen also complained that Tawa Finance was delaying sale of one property so as to accrue more penalty interest, wiping out any equity in the property.

Judge Taylor ruled Tawa Finance had acted properly, taking advice from reputable real estate agents in how to best market the Flat Bush properties.

Chen v. Tawa Trade Finance Ltd – High Court (1.03.24)

24.067

Joint Venture: Chen v. Huang

 

A relationship beginning as friends ended with allegations of dishonesty in handling Chinese investment in the New Zealand wine industry.  Xiaolin Chen was ordered to repay $1.2 million and Waihopai Valley Vineyard Ltd ordered to repay $1.17 million; money advanced to take Waihopai Valley Vineyard out of receivership in 2013.  Chen interests subsequently sold Waihopai assets without accounting for the proceeds.

It was a friendship between their respective spouses that saw Xiaolin Chen, also known as Chris Chen, join forces with Hongzhao Huang back in 2006 with plans to develop vineyards in New Zealand.  A New Zealand citizen since 2001, Mr Chen promoted New Zealand wines in China though franchised outlets branded as Chateau Kiwi.  Mr Huang lived in China.

The Court of Appeal was told their joint business interests first commenced with plans to buy land in Matakana, north of Auckland, intending to develop a lifestyle subdivision within a vineyard.  Ownership at Matakana was taken in the name of Mr Chen.  Mr Huang stayed in the background; lacking New Zealand citizenship, he needed Overseas Investment Office consent before surfacing as an owner.

The Matakana purchase adjoined land owned by the Vegar family.  They introduced Mr Chen to another business opportunity, developing a further vineyard in Marlborough; a proposal which eventually became Waihopai Valley Vineyard Ltd.  The Vegars were to develop and manage this project on his behalf.

By 2013, the Marlborough project as in deep financial trouble: contractors unpaid; crop yields down; and a dispute with the Vegars over payments due for the current harvest.  ASB Bank appointed receivers to protect its mortgage security over the vineyard and its current crop.

Mr Chen’s relationship with Mr Huang then got a lot more complicated.  At a time when their Matakana business relationship was underway, Waihopai needed rescuing.

Mr Chen floated the idea of having ASB repaid by merging Matakana and Waihopai, with Huang interests putting in cash and taking an equity interest in the Marlborough vineyard.

The two were later in court arguing over the status of Mr Huang’s $2.3 million cash injection used to repay ASB.

Mr Huang claimed it was a loan, as yet repaid.  Mr Chen said it was an equity investment.  Mr Chen had some explaining to do, Mr Huang said.

The Court of Appeal was told Mr Chen sold off Waihopai assets after the company came out of receivership, distributing the $7.4 million proceeds to Chen interests, with nothing for Mr Huang.  He learnt of the asset sales months after the event.

Litigation centred on Chinese cultural norms of guanxi, the importance of maintaining ongoing relationships unfettered by any need for written documentation, a practice most commonly seen with intra-family financial arrangements.

The Court of Appeal ruled this was not a case where guanxi was relevant.  The two had a business relationship stretching back years.  In their business dealings, the practice had been to formalise their relationship with legally-drafted contracts.

Mr Huang’s $2.3 million Waihopai cash injection was a loan, not an equity investment, the court ruled.

There was no evidence of an agreed integration of the Matakana and Waihopai businesses, such that Mr Huang was an equity investor in Waihopai.  Both sides had circulated various merger options.  These were no more than ‘suggestions’.  Shareholdings were never decided, being dependent on further due diligence and asset valuations.

One stumbling block in their Waihopai merger negotiations had been Mr Huang’s demand to see copies of Waihopai’s financial statements, copies which Mr Chen never handed over.  It was later discovered Mr Huang’s cash advances were recorded in Waihopai’s financial statements as loans, albeit as ‘shareholder loans.’

In addition, Mr Chen had confirmed to the Overseas Investment Office in 2018 that the $1.2 million he received from Mr Huang was a loan.  This at a time when the Office was suspicious that Mr Chen had been improperly acting as trustee for Mr Huang, potentially part of a scheme to end-run overseas investment rules requiring Mr Huang to first get approval before making equity investments in New Zealand land.

The court ruled Mr Chen was personally liable to repay the $1.2 million received from Mr Huang.  Waihopai was liable to repay $1.17 million it received direct from Mr Huang.

Action is being taken against Chen interests to recover cash stripped out of Waihopai following the Waihopai asset sales.

Chen v. Huang – Court of Appeal (1.03.24)

24.068

Fraud: re Cryptopia Ltd

 

Liquidation costs to date exceed $23 million for Cryptopia liquidators Grant Thornton chasing down cryptocurrency assets hacked in a 2019 online attack and seeking both to identify Cryptopia customers and to reconcile customer accounts.  The High Court has set out rules for customer repayments with a December 2024 deadline for claims.

Based out of Christchurch, Cryptopia Ltd was supposedly a secure custodian for nearly one million account holders from some 180 countries storing hundreds of different cryptocurrencies.

The hack targeted ‘hot wallets’ on Cryptopia’s servers used to meet requests for outgoing cryptocurrency.  Currencies stolen were only Bitcoin, or cryptocurrencies readily exchangeable for Bitcoin.  Liquidators’ report that nine per cent of Cryptopia’s Bitcoin holdings were stolen.  Those responsible have never been identified.  Seventeen Cryptopia Bitcoin were later recovered in the United States by the FBI.  The true owner could not be identified; this Bitcoin had been put through ‘the mixer.’

Four years into liquidation, Grant Thornton applied to the High Court for directions on distribution of assets held.

They told the court all cryptocurrencies held at date of liquidation had been moved to a secure server and accounts frozen.

Liquidators are separately holding $855,000 on behalf of 12,000 depositors; crypto currencies paid into Cryptopia for safekeeping subsequent to the widely publicised 2019 hack and apparently in ignorance of advice not to make further deposits.  Individual depositors are known.  These funds are to be returned.

More complicated is allocation of losses between Cryptopia depositors as at date of the hack.

The High Court ruled each type of cryptocurrency on the books is to be treated as a separate class.  Depositors for each currency prove against Cryptopia holdings of that crypto asset.  Liquidators can ignore low account balances where nominal value due for repayment is less than that account holders share of liquidation costs.  They are to be written off.

The High Court approved a ‘soft cut-off date’ and a ‘hard cut-off date.’

Grant Thornton has set up a claims portal to interact with account holders.  Some 25 per cent are based in the United States.

Liquidators told the High Court that as at November 2023, over eighty per cent of account holders had opened their email advising of the portal.  Only thirteen per cent had completed the registration and identification process.  Liquidators said this low response rate was typical of overseas cryptocurrency frauds.  Account holders may suspect the process is an ‘exit scam’ seeking to steal more money, or may have been hiding illicit proceeds from money-laundering or fraud, or have already written off any claim as not worth pursuing.

The proposed ’soft-cut off’ date is 90 days from the date liquidators email account holders advising claims procedure is closing.  This provides a window within which account holders are told what is the liquidators’ assessment of funds held on their behalf.  Account holders can challenge this calculation, providing evidence to the contrary.

The ‘hard cut-off’ date is 31 December 2024.  Account holders who have not engaged with the liquidators by this date are presumed to have abandoned any claim.  Account holders with valid claims will then be paid out.

After deduction of liquidators’ costs from each class of cryptocurrency, the crypto assets held by the liquidator will be returned pro-rata to account holders in that class.  There may be instances where there is a surplus; a lack of claims in one cryptocurrency class might mean there are enough crypto assets to achieve a full return to those account holders who do claim, with cryptocurrency left over. 

Liquidators told the High Court there are complications in making in specie cryptocurrency distributions to account holders in some countries.  They identified ten countries, including China and Vietnam, where it is illegal to deal in cryptocurrencies.  Liquidators said Cryptopia has some 1,100 account holders in these ten countries with holdings between them valued in excess of USD two million.  The High Court approved payment to these account holders in cash, following sale of their cryptocurrency holding.

The High Court signalled liquidators can return to court after their distribution to customers to decide how any surplus might be distributed.

Still standing in line are Cryptopia’s unsecured trade creditors, currently owed $2.9 million.  Cryptocurrency account holders not repaid in full will probably join them.

re Cryptopia Ltd (in liquidation) – High Court (1.03.24)

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