Relationship Property: Rose v. Rose

On separation, a wife was able to claim a substantial share of her husband’s business on the basis that her work around the home and her income from selling cosmetics freed up her husband’s time and capital to develop what would otherwise be his separate property.

A Marlborough vineyard was the asset in question, with marital entitlements disputed after a 23 year marriage.  Two blocks of land were in issue: Cloverlea (owned by the husband at the time of the marriage and his separate property) and Poplar (farmed in partnership with relatives).

Generally, business assets held at the time of a marriage are separate property and remain separate property when the relationship comes to an end.  But any increase in the value of separate property attributable to the non-owner spouse is to be divided according to the contribution provided.

The Supreme Court drew a distinction between passive investment assets and a business requiring physical attention and application – such as a farm.

In respect of Cloverlea, the wife did not physically work on the property.  But the court ruled that a spouse could benefit separate property without physically working on it.  Indirect assistance could suffice.  In this case, the work done around the home and the wife’s employment outside the home were assistance.  Her financial contributions helped minimise farm debt.  There was evidence that part of Cloverlea would have been sold to reduce debt, but for her financial contribution.  It enabled the husband to contribute more resources to the farm: his separate property.  It did not matter that the husband in fact provided the greater proportion of cash for household living expenses.

As a result, the court ruled that the wife was entitled to 40% of the increase in value of the Cloverlea business over the period of the marriage.  This amounted to just under $300,000.

As regards Poplar, the husband’s share of the partnership increased during the marriage on inheritance from his father’s estate.  Generally, inherited assets remain as separate property, unless the assets are acquired for the “common use or common benefit” of both spouses.

Finance to develop Poplars into a vineyard was secured over the family home.  The husband had told his wife that “we own half [the vineyard]” indicating that his half share of the vineyard partnership was being treated as a marital asset.  Profits which would otherwise be available for family expenses were ploughed back into developing the vineyard.

The court ruled that the husband’s share of increases in the value of the Poplar partnership from the date of conversion into a vineyard to the end of the marriage was relationship property to be split 50/50.  The wife’s share amounted to $283,000.

Rose v. Rose – Supreme Court (19.05.09)

08.09.008 

Gift Duty: Begg v. Inland Revenue

A deferred gifting programme used by Public Trust clients has survived attack by Inland Revenue in the Court of Appeal.  The programme was designed to strip assets from older clients, circumventing asset testing for state social welfare benefits.

In a test case, the court was asked to rule on liability for gift duty on the deferred gifts.  Whether asset stripping could secure better social welfare benefits was not in issue.

Earlier this decade, the Public Trust offered a standard-form asset stripping trust for elderly clients having substantial equity in their family home.  The trust document recited that an annual gift of $27,000 was made to their children.  The figure chosen ensured each gift was under the threshold for payment of gift duty in any one 12 month period.  But no money was paid out.  Payment of the promised gift was deferred until the parents’ death.

This liability had the effect of reducing client assets by the amount of the promised gifts.

Inland Revenue claimed the supposed gifts were not a completed “disposition” at the time of the gift.  This would mean the accumulated total “gifts” were not treated legally as a gift until the parents’ died and the total sum promised was paid – with the result that the accumulated sum would exceed the 12 month gifting limit and gift duty would be payable.

The court ruled that the gift duty definition of a “disposition” was wide enough to include deferred gifts.  Words of gift in a trust amount to a “disposition”.  If not paid on the parents’ death, children had the right to sue their parent’s estates to recover payment.

Begg v. Inland Revenue – Court of Appeal (30.04.09)

08.09.007 

Maritime: Tasman Orient v. NZ China Clays

Which insurance companies will have to bear insured maritime losses turn on whether reckless navigation increased losses after the Tasman Pioneer ran aground off Japan en route to Busan in Korea.

The vessel from the Tasman Orient Line ran aground in May 2001 in the early hours during a heavy rain storm.  Cargo, including NZ Dairy Board exports, was lost as a result of the grounding and subsequent delayed salvage.

Dairy Board losses totalling some $US 498,000 arose when refrigerated reefers were left without power at some unidentified point in the voyage.  If the generators failed prior to the grounding, Tasman Orient accepts liability.  If they failed after the grounding, Tasman Orient says it was not liable, protected by exclusion clauses in its contract of carriage.

Standard international contracts of carriage for shipping exempt the carrier from liability for cargo losses after running aground except where losses arise from reckless management of the vessel.  The actions of the Tasman Pioneer captain in taking a shortcut through the Sea of Japan came before the New Zealand courts.

The court was told the normal route went through the Kanmon Strait.  Compulsory pilotage is required because of strong currents in the narrow strait.

The vessel was behind schedule.  The captain elected to take a shortcut, cutting about 40 minutes off the journey.  Two groundings in quick succession damaged the hull, causing the vessel to list.  Instead of contacting the Japanese coastguard and looking to beach the damaged vessel, the captain steamed at full speed for the main channel in the Strait while the crew pumped water to maintain trim.

Nearly three hours after the grounding, the captain anchored and then alerted the authorities.  Crew were mustered and a story fabricated that the vessel had hit a submerged container.  The ship’s chart was doctored to hide the actual course travelled.

The court ruled that the decision to attempt the shortcut was “unwise”, but the captain had taken this route before, albeit in a smaller vessel.  The claim of reckless navigation arose not from attempting the shortcut, but from the delay in notifying authorities of the grounding.  There was evidence that this delay increased the amount of cargo damage.  Salvage tugs with high capacity pumps would have reached the vessel earlier but for the late notification.

Evidence from the salvors also indicated the Dairy Board reefers were without power during the salvage.  Power cables were cut.  They were hindering the salvage.  There were delays before replacement generators could be put on board.

The Court of Appeal found that the “outrageous” behaviour of the captain in continuing to run at full speed after the groundings and failing to notify the authorities amounted to reckless behaviour such that Tasman Orient could not hide behind the exclusion clause.  It was liable for losses caused by the delay, including losses to the Dairy Board’s refrigerated cargo.

Tasman Orient v. NZ China Clays – Court of Appeal (9.4.09)

08.09.006    

Copyright: Tiny Intelligence v. Resport Ltd

Ripping off merchandise sold to supporters of the Crusaders rugby team cost one entrepreneur $50,000 in payment of profits made.  The Supreme Court refused to award further damages to the true merchandiser as compensation for lost business opportunities.

Back in 2006, a company called Resport Ltd was held in breach of copyright when it produced toy swords and toy trumpets for sale to Crusader supporters.  This merchandise had the status of “artistic works” under copyright law.  A company called Tiny Intelligence Ltd held copyright.

Resport was ordered to hand over all stocks it held and to compensate Tiny Intelligence $50,000 as an assessment of the profit made on the merchandise sold.

There was evidence that Resport copied Tiny’s products not caring whether that amounted to a breach of copyright or not.  Given the flagrant breach, Tiny Intelligence argued it was entitled to more than just an account of profits made.  Lost revenue amounted to an opportunity cost – the cost of expanding its existing business relationships with the potential for new products and a bigger business.

The Supreme Court ruled that any award of additional damages would amount to a penalty or fine – exemplary damages.  This was possible where there had been a flagrant breach of copyright, but by asking for an account of profits Tiny Intelligence was barred from also getting exemplary damages.

The two categories of damages have separate origins.  Exemplary damages come from common law and are intended as a form of punishment and as a warning to others.  An account of profits is derived from equity.  Historically, the two categories of damages are not allowed in tandem.

Tiny Intelligence v. Resport Ltd – Supreme Court (8.04.09)

08.09.005

Resource Management: Kawarau Jet v. Queenstown Lakes

Kawarau Jet Services fought hard to prevent a competitor breaking its monopoly on tourist operations down the Kawarau River near Queenstown.  It successfully challenged approvals given to a rival.

Over the last twenty years, jet boat operations on the Kawarau have been consolidated.  The High Court was told that Kawarau Jet Services has spent over three million dollars to buy out competitors.  The company runs eight boats on the river, and has approval to operate up to 19 boats.

In 2008, Queenstown Lakes District Council granted to newcomer, Frontier Adventure Tours, a consent to run four commercial sightseeing tours per day on the river.  This consent proved to be unlawful.  By an oversight, the Council did not send details of the application to Kawarau Jet who was entitled to be told as an “affected person”.

Jet boat operations on Queenstown rivers can be dangerous; three people were killed in 2008.

On hearing of the new rival, Kawarau Jet moved swiftly.  It contacted Maritime New Zealand to have Frontier’s consent suspended and asked it to assess safety issues potentially arising with multiple operators on the river.  Maritime New Zealand lifted the suspension after being satisfied that radio protocols between the two companies could prevent collisions.  Frontier then started operations.

The High Court was then asked to rule whether the otherwise unlawful consent granted to Frontier should be validated, or should Queenstown Lakes be required to rehear the application.  

Kawarau Jet argued that its operations were seriously compromised by having Frontier on the river.  It had to reduce the frequency of its trips to minimise the likelihood of collisions and it was unable to exercise the full number of trips allowed by its own consents.

Frontier argued that requiring the Council to rehear its application would close down Frontier’s operations despite Maritime New Zealand having approved the safety protocols.

The High Court ordered that the Council rehear the application.  There were serious safety issues.  There was evidence that Frontier had specifically told the Council that prior written approval from  Kawarua Jet was not required.  And Frontier had decided to push on and purchase a boat after it had been warned that Kawarau Jet would be taking legal action.

Kawarau Jet Services v. Queenstown Lakes – High Court, Invercargill (09.03.09)

08.09.002

Real Estate: Stevens v. Premium Real Estate

Auckland real estate firm Premium Real Estate was ordered to pay $660,000 damages and refund commission of $67,000 for failing to tell its client material information about a prospective purchaser.

During sale negotiations it was impressed on the client that the purchaser had fallen in love with the North Shore cliff-top property and wanted to occupy the home, while the agent knew that the purchaser was looking to make a quick resale at a profit.  After buying for $2.575 million, the purchaser sold five months later for $3.555 million.

The court ruled the agent’s collusion in supporting the purchaser’s buying strategy was a breach of the real estate agent’s duty of loyalty to a client.

Damages were calculated on the difference between the two sale prices, after netting out the commission deducted on each sale.  In addition, the real estate agent was ordered to refund the commission received on the first sale.  The court ruled the agent breached a duty of trust owed to the client by deliberately and dishonestly misleading the client about the purchaser’s motives.

In a subsequent hearing before the Supreme Court, the agent wanted to revisit the calculation of damages.  There had been earlier evidence that the purchaser made improvements to the property before reselling and that in the five month period between sale and resale the market for similar properties was booming, rising at a rate of 15%-16% per annum.

The court refused a further hearing.  The real estate agent had the chance to argue these points at the first Supreme Court hearing, but did not.

Stevens v. Premium Real Estate – Supreme Court (6.3.09 & 3.4.09)

08.09.003

Resource Management: Progressive Ent v. Nth Shore City

Resource management applications and appeals extending over nearly two decades in a commercial dispute between competing supermarkets added weight to arguments for less red tape over planning issues.  It was alleged Progressive Enterprises was using a planning appeal simply to stall the opening of a new supermarket by competitor Pak ‘N Save.

The business complaint is that competitors are using public benefit criteria in resource management legislation to mask their own private benefit.

After preliminary legal skirmishes in the 1990s,  Pak ‘N Save was refused permission by the North Shore Council for a supermarket covering some 6300 square metres.  In 2002, an appeal to the Environment Court was unsuccessful.  The major issue concerned traffic volumes and the difficulty of access off a main road.

Pak ‘N Save revamped its proposal, reducing the size of the proposed supermarket by about 20 per cent.  This, together with changes to the surrounding road network, saw Council approval given to the project.  Progressive appealed to the Environment Court.  It lost.  It then appealed on to the High Court claiming the Environment Court had not properly considered the effect on traffic of this revamped proposal and that giving approval damaged the integrity of the District Plan.  The High Court dismissed the appeal.

The High Court ruled that the Environment Court’s 2002 decision was not to be treated as a binding precedent in later hearings.  The Environment Court is not bound by its previous decisions.  And, in any event, the facts were different – Pak ‘N Save had put forward a different proposal.  The High Court also ruled that effects on traffic had been properly considered.  While some increased traffic congestion was expected, this was small in magnitude and limited in duration.

Progressive elected not to appeal the High Court ruling.  Pak ‘N Save was then in a position to officially open its supermarket, in a building which had been completed considerable time previously.   

Progressive Enterprises v. North Shore City – High Court, Auckland (25.02.09)

08.09.001

Tax avoidance: Ben Nevis v. CIR (1)

General tax avoidance provisions can be used to hammer taxpayers not party to the tax scheme but who enjoy the benefit, the Supreme Court emphasised in its ruling on the Trinity tax schemes.  Well-heeled taxpayers have had substantial tax deductions disallowed and face penalties of up to 100% of the tax benefits claimed.

What has become known as the Trinity Scheme involved a forestry development in Southland.  Much of the money came from high income earners in the major cities looking to reduce their tax bills.  Trinity offered an attractive tax deferral.  The potential benefits are seen with the tax losses claimed by Dr Garry Muir, the tax lawyer who set up the Trinity scheme: using the scheme he claimed a loss for tax purposes of some $898,000 for the 1997 tax year and $967,000 for the 1998 tax year.

The tax benefits flowing from the Trinity scheme arose from a timing mismatch: the date a liability arose and the date payment was due.

Taxpayers signing up to the scheme became liable to pay in fifty years a premium of just over $2,050,000 per plantable hectare for the right to plant and mill a forest, but payment of this premium was artificially accelerated by having promissory notes signed.  This had the legal effect of discharging the original debt due in fifty years, and replacing it with another debt.

The Court said there was no transfer of real value by substituting one form of obligation for another.  The promissory notes were an artificial payment implemented for tax purposes.

Other features pointed to a lack of commercial reality to the scheme.

The premium was paid for a licence to plant out trees on land.  The tax syndicate had already funded the purchase of the land, by paying over three times its cost as bare land, in return for an option to acquire ownership of the land in fifty years time at half of its then value.

On the available evidence, it was unlikely that a hectare of Douglas fir forest would be worth $2,050,000 in fifty years time.  This figure appears to be the after tax amount the mature forest was expected to yield.

The tax scheme included what was described as risk management insurance, to cover the possibility that values on maturity would be less than $2,050,000 per hectare at a time when the promissory notes fell due.  The insurance premium paid was also claimed by investors as a tax deduction.

This insurance was underwritten by a special, single purpose, company (CSI) based in the British Virgin Islands.  Dr Muir controlled CSI. The Supreme Court said the evidence suggests CSI was not intended to be anything more than a pro forma vehicle for obtaining anticipated tax benefits.  This view was reinforced by the unorthodox treatment of payments made to what was supposedly an independent stand-alone insurer.  Of the $US3.6 million paid to CSI as premium income, ninety per cent found its way back by way of loans to the family trusts of Dr Muir and his then business partner, a Mr Bradbury.

The Supreme Court ruled that the claimed deductions for the licence premium and the insurance premium coupled with the use of promissory notes to alter the incidence of actual payment amounted to a tax avoidance arrangement and were void for tax purposes.

The taxpayers affected did not invest personally; they channelled their investments through “loss attributing qualifying companies” (LAQC).  LAQCs are treated like accounting vehicles with tax benefits and liabilities passing through to the underlying owners.

Having ruled that the Trinity schemes were void for tax purposes, the owners of each investing LAQC faced a reassessment of their personal tax liability on the basis that they were “persons affected by” the void arrangements.  This meant substantial tax losses claimed in each individual’s tax return was disallowed.

In addition, individual investors were held open to penalties calculated at 100% of the tax shortfall in each case for having adopted an “abusive tax position”.  This arises when a taxpayer adopts an “unacceptable interpretation” of tax law which results in the avoidance of tax.

Ben Nevis v. Commissioner of Inland Revenue – Supreme Court (19.12.08)

03.09.001           

Tax avoidance: Ben Nevis v. CIR (2)

Scalpel or sledgehammer?  Judges in the Supreme Court are divided on how anti-avoidance rules in tax law should apply.

While the general anti-avoidance provision in tax law is expressed broadly, says the Supreme Court, its purpose cannot be to strike down arrangements which involve no more than appropriate use of specific provisions.  What amounts to an “appropriate use” of a specific tax provision can be difficult to discern.

Two judges, a minority in the five-judge Supreme Court, were more cautious.  In their view, it is too wide to determine appropriate use by looking at the scheme of the Act as a whole.  Instead, they look at statutory tax allowances as little mini-codes within tax legislation.  If the use (or misuse) of a specific tax provision falls outside its intended scope in the scheme of the Act, then its use is not authorised within the meaning of the specific provision.

The effect of this subtle twist is that the tax authorities could simply disallow a new tax dodge as not being within the scope of a claimed statutory provision, without needing to use the heavy sledge hammer which is the blanket anti-avoidance rule.

The Trinity tax case centred on depreciation claimed on a capital asset: a licence paid to use land for forestry.  The High Court disallowed the depreciation claimed as a deduction.  The Court of Appeal and the Supreme Court both allowed the deduction, but then set aside the tax benefits under the general anti-avoidance rules in tax law.

Ben Nevis v. Commissioner of Inland Revenue – Supreme Court (19.12.08)

03.09.002  

Business Reconstructions: Elders v. PGG Wrightson

Company reconstructions using the court supervised Part 15 procedure risk legal challenges if there is a failure to fully disclose details of who is affected, the Supreme Court warns.

The 2005 merger of Wrightson with Pyne Gould Guiness reached the Supreme Court when Elders New Zealand argued that the merger triggered its right to take full ownership of 13 stock saleyards.  Control of saleyards is valuable as they can represent a local monopoly over stock sales.

The court was told Wrightson and Elders jointly owned the yards, with each side having rights of pre-emption: a right of first refusal should either joint owner wish to sell.  Elders argued the merger with Pyne Gould Guiness operated like a sale and triggered its right of first refusal.

The case centred on the legal interpretation of reconstruction rules in the Companies Act 1993.  The Part 15 procedure requires a court application; procedures using Parts 13 or 14 do not.  Legal advisers have choices: what can be achieved under Parts 13 and 14 can also be achieved under Part 15.  The Part 15 procedure is far more costly.

Wrightson’s merger in 2005 used the Part 15 procedure, though a Part 13 reconstruction was a possibility.

Elders agreed that a Part 13 merger would not trigger its rights of pre-emption, but argued that the Part 15 procedure is fundamentally different and did trigger these rights.

The Court ruled that while the procedures were different, the effect was the same and that Elders could not enforce its right of pre-emption.

But Part 15 does not require a compulsory disclosure to major investors of the proposed reconstruction, unlike Part 13.  It is for lawyers putting the Part 15 procedure in place to ensure that there is provision for proper disclosure to affected investors.

The Court warned that any failure to make proper disclosures could mean a subsequent reconstruction or merger is challenged and overturned.

There was no question of any lack of disclosure in this case as the Court ruled Elder’s rights of pre-emption continued after the merger, while not being triggered by the merger.

Elders v. PGG Wrightson – Supreme Court (5.12.08)

01.09.001

Maritime: Birkenfeld v. Kendall

The judicial system does not operate to further personal crusades into maritime accidents once a wrong has been remedied.  So ruled the Court of Appeal in long-running litigation following an accident at the yachting venue prior to the Athens Olympics.

The Court was told that US Olympic windsurfer, Kimberly Birkenfeld, was seriously injured while training prior to the Athens Olympics after a collision between her craft and a support boat skippered by Bruce Kendall, part of the New Zealand yachting squad.  She was left partly paralysed and would have drowned but for Mr Kendall’s quick rescue.

Ms Birkenfeld sued for compensation.  She claimed $15 million general damages.  The accident occurred outside New Zealand and was not covered by accident compensation.  In the High Court, she was awarded damages of just over $560,000, based on the no-fault formula for compensation calculated  under the Marine Transport Act 1994 together with an international convention governing liability for marine accidents.  This limits liability for damages to a sum fixed by the weight of the vessel involved in the accident; in this case the vessel was a lightweight rigid inflatable boat being used by Yachting New Zealand.

Yachting New Zealand immediately offered to pay some $743,000 to Ms Birkenfeld.  It was willing to pay extra immediately in order to finalise all litigation.

This led the High Court to order a stay of proceedings on the basis that Ms Birkenfeld was receiving all she was entitled.  Ms Birkenfeld declined the offer.  The Court of Appeal was told that the money has since been paid to the Public Trust to be held in trust on her behalf.

Ms Birkenfeld appealed to the Court of Appeal seeking a ruling that Mr Kendall caused the collision due to his negligence.  Liability is disputed.

Ms Birkenfeld claims she was run down while stationary with her sail in the water.  Mr Kendall  claims she hit him from behind at speed while he was trying to take evasive action.  There do not appear to be any independent witnesses to the collision.

Apart from the question of compensation, Ms Birkenfeld said the public interest requires a ruling as to who was negligent in order to provide lessons for the future.

The Court ruled that it was not for the judicial system to decide negligence in these cases of marine accidents.  Legislation provides a formula for compensation with limitations on liability and also establishes a system of enquiries into the cause of maritime accidents, if such an enquiry is considered necessary.  It was not necessary for a parallel system of enquiry to operate through the courts using judges who have no maritime experience.

Birkenfeld v. Kendall – Court of Appeal (4.12.08)

01.09.002

Family finances: Busch v. Zion Wildlife

Litigation is an expensive way to settle family arguments over money.  The High Court recommended that Whangarei “Lion Man”, Craig Busch, try mediation in a financial dispute with his mother.

Their dispute followed over $1.7 million in financing provided by Mrs Busch in July 2006 to rescue her son’s wildlife park at Kamo, near Whangarei.  The court was told that Craig Busch had been under extreme emotional and financial pressure culminating in a charge of assault against his former partner and a falling out with his business partner at the wildlife park.

His mother’s $1.7 million loan was used to refinance business operations.  As security, Mrs Busch was given control of the business with Craig Busch entitled to resume control once the debt was repaid.

One potential source of repayment was revenue from film and television rights over future wildlife programmes – Craig Busch having earned his reputation as the “Lion Man” on the basis of earlier media exposure.  However, future film rights required use of business assets now under his mother’s control.  The earlier financing agreement was extended with a supplementary agreement in 2007 to cover filming rights: copyright and intellectual property rights.

The 2007 agreement stated that filming rights remained with the business under Mrs Busch’s control, but the approval of Craig Busch was required should the business enter into joint ventures for the production or distribution of filmed material.  This was designed to protect Craig Busch’s position.  The 2007 agreement provided that two-thirds of the net income from film productions would go in reduction of the money owed Mrs Busch, and the remaining one-third was payable to Craig Busch as a “bonus”.  Any joint venture arrangement would have the effect of reducing the pot to be divided two-thirds:one-third.

Craig Busch went to court after learning that a joint venture company had been set up, without his approval, for a future series of The Lion Man.  He asked the High Court for orders removing his mother from overall control and the appointment of independent directors.  The Court was not willing to remove Mrs Busch from control without there first being an extended court hearing with full evidence.  She had provided a substantial sum in emergency financial aid to rescue the business and was entitled to remain in control as protection for her investment until the case could be fully argued.

Justice Heath went on to suggest continuing the litigation was not the best course of action.  He said there were three ways out of the impasse: first for Mrs Busch to buy out her son’s remaining shareholding in the business and to assume complete control; second, for Craig Busch to refinance the business and buy out his mother; and third, for the business to be sold as a going concern to a third party.  The value of the business would be dependent on Craig Busch being willing to participate in any film ventures.

Busch v. Zion Wildlife – High Court (3.12.08)

01.09.003

Discrimination: Falun Dafa v. Auckland Christmas Parade

While it was possibly discriminatory to refuse permission for the Divine Land Marching Band associated with Falun Gong to take part in Auckland’s Christmas Santa Parade, the High Court dismissed a last minute application for its inclusion in the 2008 parade.

It was left open for Falun Gong to participate in future years, should it establish a detailed case following a full court hearing.  But the court was not willing to make a last minute order on the basis of what was described as a relatively weak case.

For several years, the Falun Gong band has applied to take part in Auckland’s annual Santa parade.  The parade has a long history.  Founded by one the city’s major retail stores, Farmers’ Trading, it is now organised through a charitable trust.  The Trust board has representatives from not only Farmers, but also the city council and the Radio Network.

Falun Gong told the Trust board it was not a political organisation and claimed that its band would be appropriate entertainment as part of the parade.  The board did not agree.  It claimed there was a political agenda which was inappropriate as family entertainment.

While it does protest against what it says is persecution by the Chinese Communist Party, Falun Gong describes itself as a spiritual group.

In the High Court, Justice Randerson emphasised it is not the role of the Court to decide who may take part in the parade.  That is the role of the Trust board.  The Court’s job is to ensure that any decision taken by the Board is in accordance with the law.

It was not clear whether the Trust board did carry out any “public functions” such that the New Zealand Bill of Rights Act 1990 applied to decisions over who could take part.

The Court ruled there is very weak case for arguing that the need to apply to the city council for a permit to hold the Santa parade on public streets could amount to a “public function”.  If so, Falun Gong would need to prove the decision to exclude its band from the parade was discriminatory, in breach of the Act.  In 2006, the Divine Light Brass Band was invited to take part in the Santa Parade, but approval was quickly overturned by the Trust board on learning that it was associated with Falun Gong.

Falun Dafa v. Auckland Children’s Christmas Parade Trust – High Court (27.11.08)

01.09.004

Business Reconstructions: Paris v. Hanover

Attempts to postpone investor meetings for the Hanover Group were sidelined when the High Court refused to intervene.   It was not for the court to pre-emptively intervene when it was within the power of investors to vote for an adjournment.

In July 2008, Hanover Finance suspended trading.  About 17,000 investors are affected.  Existing deposits were frozen and company management spent some months formulating debt restructuring proposals.  These were put to investors in early December 2008, proposing that unpaid principal be repaid in full to some (but not all) investors over a five year period.  Investor approval was required under the terms of the trust deed governing Hanover’s public borrowing.

Media commentators poured scorn on the commercial reality of Hanover’s repayment proposals.  One investor took court action to postpone the meeting of investors.  She alleged information provided to investors prior to the meeting was inadequate.

In particular, it was alleged that management had misrepresented a proposed injection of $40 million dollars into Hanover from companies associated with Hanover’s owners: the Axis property group.  This transfer was designed to provide liquidity for the promised repayments.  The complaint was that the value and liquidity of the Axis properties were unknown.

Hanover argued investors had been advised that the worth of the Axis properties had been explained to investors, telling them that worth depended on prices at later realisation, not current market values.  Justice Heath ruled that investors had been fairly informed of the position.  He did not see any benefit in requiring a delay to enforce disclosure of current market values.

He further ruled that investors had power to adjourn the meeting if there were sufficient numbers aggrieved by any perceived lack of information.  The trust deed governing investor meetings required any adjournment to be approved by 51% of those voting in person or by proxy.

Justice Heath said those at the meeting holding proxies for absentee investors were required to take care in exercising a proxy vote on any adjournment proposal.  They had to consider carefully any arguments put for or against the proposal, and to exercise their proxy vote in good faith and not for any private or personal benefit.

Paris v. Hanover – High Court (8.12.08)

12.08.003

Internet: Internal Affairs v. Atkinson

Heavy penalties can be expected for those caught spamming.  A light slap on the wrist amounts only to a marginal increase in the cost of doing business.

A Canterbury spammer offering customers the opportunity to buy adult sex toys along with what were coyly described as pharmaceutical products has surrendered to the authorities after Internal Affairs commenced a prosecution for spamming.

Lance Thomas Atkinson admitted breaching the Unsolicited Electronic Messages Act 2007 following email spamming which saw some two million messages sent over a three month period in late 2007.

The High Court was told that Atkinson acted in conjunction with a company based in Mauritius, receiving commissions amounting to some 50% of sales generated.  Three months of spamming earned Atkinson about $1.6 million, some of which was paid on to un-named affiliates acting on his behalf.

When prosecuted, Atkinson approached Internal Affairs through his solicitor agreeing to co-operate.  He promised to stop spamming operations.

The High Court was asked to set the level of an appropriate fine.  The maximum penalty under the Act is $200,000 for any individual.  A fine of $100,000 was imposed.  Justice French said the starting point should be high, but Atkinson was entitled to a substantial discount for two reasons: first the Act was not in force when Atkinson began spamming, but he did continue after the law changed, and; Atkinson had co-operated fully when prosecuted.

Internal Affairs v. Atkinson – High Court (19.12.08)

12.08.002

Internet: R. v. Standard 304 Ltd

Website advertising can be illegal in New Zealand even if the business intends to target consumers overseas.

A Hamilton business ran foul of New Zealand legislation governing medical advertisements even though it operated through a Fiji conduit supplying prescription medicines to overseas buyers.

The Court of Appeal was told that the Ministry of Health prosecuted a Mr Wallace Waugh for operating an internet website selling medicines.  He consolidated orders received, getting an Auckland pharmaceutical wholesaler called ZZ Pharmacy to ship the bulk order to Fiji.  Mr Waugh’s son ran the Fiji operation, parcelling individual orders off to customers.

The Medicines Act strictly controls the content of medical advertisements in New Zealand.  Mr Waugh argued he had not breached these rules since his customers were overseas.  The Court of Appeal disagreed.   Consumers in New Zealand could access the website.  Nothing prevented New Zealand customers placing orders.

R. v. Standard 304 Ltd – Court of Appeal (18.12.08)

12.08.001

GST: Glenharrow Holdings v. CIR

There was an Alice in Wonderland feel about a GST claim for one-ninth of the $45 million claimed to have been paid for a speculative mining licence in Westland.  The Supreme Court ruled that the tax authorities could dismiss the transaction as being designed to “defeat the intent” of GST legislation, while allowing a GST refund for the deposit paid on the licence.  The deposit amounted to a mere $80,000.

The court was told that a company called Glenharrow Holdings purchased the mining licence in 1997 from a Mr Michael Meates.  The licence had three years to run.  It gave the right to mine for serpentinite and bowenite.

Strict terms governed any mining.  It could only be carried out by hand.  This on a 80 hectare prospect, 1200 metres above sea level with access only by helicopter.  Previous mining operations on the prospect had closed down during World War One.

The licence had changed hands in 1993 (at a price of $5000), again in 1994 (for $100) before being acquired in 1996 by Mr Meates at a cost of $10,000.  The licence was now valued at $45 million for the sale to Glenharrow.

The court was told that Glenharrow paid a deposit of $80,000 and delivered a cheque for the balance due of $44,920,000.  Mr Meates in turn made a loan of $44,920,000 to Glenharrow taking security over the mining licence and all assets of the company.  The loan was to be repaid without interest by three annual instalments.

For GST purposes, a mining licence is treated as secondhand goods.  The purchaser can claim an input credit on the price paid.  In this case that amounted to a claimed refund of $9.75 million by Glenharrow.

On the other side, Mr Meates had no GST liability as vendor since he was not registered for GST.

The court ruled that the artificial nature of the transaction meant the claimed GST refund was totally disproportionate to the economic obligations undertaken by Glenharrow.  This was amplified by the fact that Glenharrow was minimally capitalised, had no assets other than the mining licence and had no realistic prospect of making sufficient mining profits within the remaining years of the licence in order to repay the $44.9 million loan.

Glenharrow Holdings v. Commissioner of Inland Revenue – Supreme Court (19.12.08)

06.09.001