Financial adviser: Armitage v. Church

Poor financial advice is not excused simply by having clients complete a risk profile questionnaire. Financial advisers are still obliged to recommend investments suitable for the client’s risk profile. Financial adviser, Carey Robyn Church, was ordered to pay nearly $60,000 damages to a retired public servant and his family trust for losses arising from negligent financial advice.

The High Court was told that Mr Neil Armitage retired from government employment as a veterinarian with a portfolio of investment properties. In December 2005, he approached Mrs Church for advice regarding the investment of some $350,000 to $370,000 expected after selling one of the properties.

Completion of a risk profile questionnaire saw Mr Armitage ranked as a “conservative” investor. He invested the funds in fixed interest securities on the advice of Mrs Church: a mortgage trust, ING and four finance companies (Bridgecorp, MFS Pacific, Strategic Finance, and North South Finance). All four of these finance companies later became insolvent.

In 2006, he again approached Mrs Church for advice in anticipation of realising some $640,000 on the sale of his remaining investment property. Further risk profile questionnaires were completed by both Mr Armitage personally (now ranking as a “balanced/growth” investor) and on behalf of his family trust (“balanced/moderately aggressive”).

Following her advice, further investments were made in ING products.

Justice Dobson ruled that a financial adviser’s duty to a retail customer included a requirement to ensure both that investments were relevant to a client’s appetite for risk and that cash flow requirements met the client’s need for income.

Justice Dobson ruled that where clients are recommended inappropriately risky investments as part of the fixed interest component in their portfolio, they are entitled to recover losses arising at the time the investment was intended to be realised.

Experts criticised Mrs Church advice for its narrow range of investments, having the effect of exacerbating risk. Her advice saw Mr Armitage holding 67% of his investment funds in three companies and his family trust having 24% exposed to four finance companies, 27% on fixed interest with ING and nearly 47% in other ING funds. No investments were recommended in quality corporate bonds or bonds issued by government or local bodies.

Just over $200,000 in capital losses were suffered because of this negligent advice. The damages awarded were reduced by 25% because Mr Armitage was held partly negligent himself, having pressed for higher paying fixed interest investments than his risk profile warranted. This revised figure for damages payable was reduced again, by 40%, because of evidence that Mr Armitage may not have followed more prudent advice even if given. The court was told Mr Armitage continued later to place funds with finance companies despite his initial losses with a Bridgecorp investment.

Justice Dobson ruled that Mrs Church was not negligent in respect of advice about future cash flows. She was not responsible for cash flow deficiencies suffered. There was evidence that Mr Armitage himself drew up cashflow “budgets” but did not fully recognise the periodic manner in which payments would be received or that withholding tax would be deducted before receipt. Mr Armitage had chosen to retain bank borrowings after the sale of investment properties for reinvestment in fixed interest securities. This cost contributed to his cash flow difficulties. Mrs Church had questioned the wisdom of not paying off bank borrowings.

Armitage v. Church – High Court (27.05 11)

05.11.004

Maori: Haronga v. Waitangi Tribunal

Individual hapu can have property rights which differ from iwi-wide claims. The Waitangi Tribunal has been told to exercise its statutory powers to ensure claimants receive justice. The Supreme Court criticised Tribunal orders which forced Poverty Bay Maori to wait and have their claim to forest assets lumped in with wider iwi claims.

The Tribunal was told to expedite its 2004 report which found that a government 1961 purchase of land in Mangatu State Forest breached the Treaty of Waitangi. Previous Maori owners feared their successful land claim would be diluted by a contemporaneous iwi-wide claim. Rather than make a direct order, the Tribunal had suggested a district-wide negotiation with government to progress the settlement of all local claims with the intent of “increasing the pie” of assets available for compensation.

The court was told 100,000 acres of Mangatu land were vested in local Maori back in 1881. The government purchased a block of nearly 10,000 acres in 1961 for erosion control. This block amounts to about one quarter of Mangatu State Forest, inland from Gisborne. Revenue has been accumulating from logging the forest. Previous Maori owners want access to this revenue, especially since the 2004 Tribunal report supports their claim.

Legislation governing forestry Treaty claims requires that the Tribunal “should” consider return of forest land where a breach of the Treaty has been proved. The Supreme Court ruled that the Tribunal had failed to consider this option. An urgent hearing by the Tribunal was ordered.

Haronga v. Waitangi Tribunal – Supreme Court (19.05.11)

05.11.005

Share offers: Financial Markets Authority v. Carrington Securities

Unsolicited mailshots to small shareholders in listed companies are misleading and deceptive where prominence given to the above-market offer price is not matched by equal prominence given to the fact that payment is deferred, with the buyer receiving all dividends in the interim.

Following an application by securities regulator, the Financial Markets Authority, the High Court has frozen registration of unsolicited share bids made by interests associated with Christchurch entrepreneur Bernard Whimp in listed companies Contact Energy, DNZ Property, Fletcher Building, Guinness Peat, Trust Power and Vector.

Nearly 1200 shareholders responded to Mr Whimp’s offers. His scheme mirrored similar share offers made in Australia.

The Markets Authority argued Mr Whimp’s offers were misleading, in breach of the Securities Markets Act 1988. The front page highlighted an above-market price on offer and generated an air of urgency with emphasis on strict time limits within which to respond. In the fine print on the reverse, it was revealed that only ten per cent of the price would be paid on acceptance with the balance due over the next ten years. Over this decade, sellers would rank as unsecured creditors for payment due and would lose out on dividends paid in the interim.

A share offer can be misleading while still factually true. In this case, the discounted present value of the share offers were below current market value. Shareholders were being invited to give up an income-producing security in return for an unsecured promise to pay in the future, a promise made by a person with a less than stellar track record. The court was told Mr Whimp has been convicted of burglary and was prohibited from managing any company for a four year period commencing 2006.

Financial Markets Authority v. Carrington Securities – High Court (09.05.11)

05.11.003

Lease: Ingram v. Patcroft Properties

Acting one day too soon cost a landlord dearly. The tenant was entitled to $100,000 from the landlord for destroying its business and was not liable for ongoing rental costs amounting to nearly one million dollars.

The Supreme Court case concerned a bar operating in the basement of a backpacker operation in Lorne Street, central Auckland. There was a history of late payments by the tenant and previous litigation over operation of the lease. The lease allowed the landlord to take possession of the bar if the rent was in arrears for 14 days or more.

In June 2005, the landlord took possession for non-payment, but did so when unpaid rent was 13 days overdue – one day short of the 14 day time limit. As part of this process, the landlord changed the locks, issued trespass notices against the bar owners and seized property in the bar as security for non-payment.

But acting one day early meant the landlord was in breach of the lease. The court ruled that this action amounted to an unlawful action by the landlord, excluding the tenant from continuing operation of the bar.

The Court ruled that because the landlord was in breach, it could not turn round and claim it was entitled to continuing damages over the term of the lease for ongoing rent.

The landlord had claimed damages of $1.6 million from the evicted tenant: the Court ruled the landlord was entitled to only $84,900 – unpaid rent of $5,100 up to the date of eviction and the balance for deferred repairs and maintenance which had been disputed by the tenant.

This meant the tenant was required to pay the landlord some $84,900. But the Court ruled that the tenant was entitled in turn to receive $136,600 damages from the landlord: $100,000 for the loss of its business and $36,600 agreed as overpaid for the tenant’s share of lift maintenance costs.

Ingram v. Patcroft Properties – Supreme Court (10.05.11)

05.11.001

Charities: Greenpeace

While tax advantages flow from having charitable status, agitating for political change does not fit the legal definition of a charity – as Greenpeace has found to its cost.

The Charities Commission denied Greenpeace registration as a charity saying one of the Society’s aims, to achieve disarmament, together with its explicit approval of direct non-violent protest action amounts to political activity.

Because charities enjoy an indirect taxpayer subsidy by receiving their income tax free, the courts have carefully circumscribed who might be treated at law as a charity.

The High Court ruled that over one hundred years of case law defining what is a “charity” was not altered by the Charities Act 2005. Earlier case law decided that any organisation seeking to achieve a political object is not a charity. An educational programme promoting peace could be charitable, but a programme supporting pacifism would not. Peace can be generally preferred to war, but not peace at any price.

Promotion of disarmament and peace are amongst Greenpeace’s primary objectives. The High Court ruled that while these two objectives are worthy pursuits, they have historically been considered political and “not charitable”.

The Court said there is a distinction between education (encouraging rationale debate) which is charitable, and advocacy (promoting a political result) which is not charitable.

The objectives of Greenpeace coupled with its support of protest action amounts to advocacy, not education.

Re Greenpeace – High Court (06.05.11)

05.11.002

Unclaimed money: Westpac v. CIR

The Unclaimed Money Act applies to unpresented foreign currency drafts and bank cheques. Trading banks must hand over to Inland Revenue the face value of any issued drafts or cheques if they are not presented for payment within six years of issue. Westpac, Bank of New Zealand and ANZ National failed in their argument that banks could keep the money.

Unlike many other countries, legislation in New Zealand requires banks to close dormant accounts and hand the money over to Inland Revenue. Any person with a claim on the dormant account applies to Inland Revenue to get payment.

Three trading banks argued the position differed for unpresented bank cheques and foreign currency drafts. They argued the special status of these documents as negotiable instruments took them outside the legislation applying to dormant bank accounts: the funds were not “unclaimed” until the cheques and drafts were presented for payment.

Bank cheques and foreign currency drafts can be a commercially useful method of payment. A seller unsure of a buyer’s solvency can require the buyer to make payment to a bank and get the bank’s cheque or draft in return: the buyer’s suspect credit rating is replaced by the bank’s promise to pay. A small proportion of these bank cheques or drafts never get presented for payment, leaving a windfall for the bank – it has received payment in advance from its customer in return for issuing the cheque or draft, but has not been asked in turn to pay out by the intended recipient.

The Supreme Court ruled that the Unclaimed Money Act 1971 applied to the proceeds, even though the banks’ obligation to pay was technically conditional on the cheques and drafts being presented for payment.

Westpac v. CIR – Supreme Court (07.04.11)

04.11.006

Fraud: Down v. R.

White collar criminals are guilty of “using” a document to defraud when signing documents even if that person does not then physically perpetuate the fraud. The director of a scrap metal company was sentenced to 23 months imprisonment for her part in a $1.16 million fraud.

Carol Margaret Down unsuccessfully appealed her conviction after claiming the jury verdict was inconsistent: she was convicted on four counts of fraud and acquitted on one, when all five frauds used the same method to hoodwink a finance company.

Evidence was given that UDC Finance was conned into paying out $1.16 million to finance non-existent business equipment. Bins, a baling press and an excavator supposedly purchased for a scrap metal business were a fiction. The business used false sales invoices as evidence of the supposed purchases. Ms Down, as sole director, signed off on UDC loan applications to finance the fictitious purchase of the non-existent equipment.

Money from UDC passed through the scrap metal business bank account before being withdrawn in cash and disappearing without trace. Ms Down was co-signatory on the account.

In her defence, Ms Down argued that she was just a pawn in the fraud, being manipulated by two men who were the real managers of the business – one of the managers had been director of a failed company who was banned from acting as a company director.

The Court of Appeal ruled there was sufficient evidence for a jury to find that Ms Down knew the loan applications were based on false invoices, making her a party to the fraud. The fact the jury acquitted her on one charge (of five) could be explained as the jury accepting that Ms Down did not fully understand the true nature of the fraud when she signed the first loan application, but that she could not remain ignorant when there were subsequent loan applications based on assets the company did not have and resulting in substantial sums of money sloshing through the business.

Down v. Queen – Court of Appeal (06.04.11)

04.11.005

Defamation: Siemer v. Stiassny

In what is a record damages award for defamation, the Court of Appeal left untouched damages totalling $900,000 awarded in favour of well-known insolvency practitioner Michael Stiassny and his firm, Korda Mentha. Businessman, Vincent Ross Siemer, was ordered to pay damages after a prolonged and vociferous campaign attacking Mr Stiassny’s integrity.

The court was told legal issues followed a shareholder dispute within a company called Paragon Oil Systems. Mr Siemer was managing director and a shareholder. This shareholder dispute was eventually resolved in the High Court in Mr Siemer’s favour.

While this dispute was being litigated, Mr Stiassny and his firm Korda Mentha were appointed as caretaker managers to control Paragon Oil and maintain the status quo. Mr Siemer took exception to how the caretaker job was carried out and to the level of fees charged.

Korda Mentha negotiated an agreed settlement with Mr Siemer and Paragon in which Korda Mentha wrote off $20,200 in fees claimed while Mr Siemer and his company agreed they would make no further comment about their differences of opinion on the conduct of the caretaker job.

Matters did not rest there. Evidence was given that Mr Siemer then proceeded to lay complaints with the Institute of Chartered Accountants , the NZ Shareholder Association, the Serious Fraud Office and the majority shareholder in Vector Ltd (where Mr Stiassny sits on the board of directors). Mr Siemer set up a website setting out his complaints and advertised the existence of this website with a billboard standing next to another billboard featuring Vector advertising.

In the High Court, content on the advertised website was held to be deliberately defamatory. Content accused Mr Stiassny of lying, giving perjured evidence in court, carrying out dishonest and deceptive accounting practices, having amassed a huge fortune through acting dishonestly, guilty of criminal conduct, and likened Mr Stiassny both to executives in the Enron scandal and to Saddam Hussein.

Trespass notices were served on Mr Siemer after concerns for the safety of Mr Stiassny’s home and family.

Court-ordered arrest warrants were issued to stop Mr Siemer continuing with his campaign of public vilification and Mr Siemer was briefly imprisoned for contempt of court.

The High Court ruled that Mr Siemer’s behaviour was a deliberate and calculated defamation intended to bring Mr Stiassny and his firm into disrepute. Mr Stiassny was awarded damages for defamation totalling $825,000, Korda Mentha damages of $75,000 for defamation and further damages of $20,000 for the breach of their agreement to make no further comment about their past business relationship.

The court prohibited Mr Siemer from appealing his liability to pay damages, given his flagrant disregard of court orders to stop publication. But he was permitted to challenge the amount of damages awarded. In what was an unusual turn of events, Korda Mentha took it upon itself to file papers in the Court of Appeal challenging the amount of damages payable so that the case could be disposed of. Mr Siemer complained that he no longer had the necessary paper work needed to file an appeal.

The Court of Appeal declined to reduce the damages awarded by the High Court ruling that the damages were not excessive. No worse case of defamation could be found in those countries having a legal system similar to New Zealand. Of particular concern in this case was the content and extent of the defamatory comments.

Siemer v. Stiassny – Court of Appeal (30.03.11)

04.11.001

Blue Chip: Hickman v. Turn & Wave Ltd

Blue Chip investors have been held to agreements for the purchase of Auckland inner city apartments. Any representations by sales staff that agreements would not be enforced counted for nothing. Blue Chip investors facing heavy losses after signing up for overpriced apartments bought off the plan are required to complete their purchases, following a Court of Appeal ruling.

Many investors had not counted on having to front up with any money on completion of the apartments, having been told during sale negotiations that Blue Chip would see them right when construction was complete either by taking the apartment off their hands or by finding tenants to fund mortgage payments. When neither happened, investors have been financially embarrassed.

The court ruled that developers could enforce the agreements to buy. Investors must complete their purchases, having made an unconditional personal promise to buy when signing the agreements. Representations to the contrary made by sales staff were not made on behalf of the property developers, companies not related to Blue Chip.

The complicated chain of legal relationships surrounding Blue Chip investments became clear to some investors far too late. Investors dealt face to face with sales staff. Behind the sales programme was a shifting chain of obligations. Many of the sales staff were acting in a dual capacity: acting for Blue Chip in some respects, the property developer in others.

Evidence was given that Blue Chip entered into “underwriting agreements” with property developers with success fees payable if a certain level of apartment sales were achieved in respect of a particular development. For the developer, a minimum level of unconditional sales off the plan were needed before project finance became available to commence the project.

Investors were sold the dream of a solid investment in central city property. To help them, Blue Chip was offering a complete package with a fully-furnished apartment to be completed in 18 to 24 months and all financing sewn up. The only immediate financial commitment required was a deposit of some ten to fifteen per cent of the final price.

In respect of the apartment purchase, sales staff were acting for the property developer. A written agreement for sale and purchase was signed for a specific apartment as delineated on a plan. The written contract specified that all the relevant purchase terms were in writing, in the agreement. That made it difficult for investors to argue that separate promises were made that the contract would not be enforced.

In respect of financing the purchase, the same sales staff were also acting for Blue Chip offering various Blue Chip financing “packages”. This is not unusual in the commercial world: a car dealer can act on behalf of a franchisee in selling a new car and at the same time act on behalf of a finance house in arranging funding for the purchase.

The financing packages varied. One was an undertaking to re-sell on completion and divide up any capital gain – described within Blue Chip as the chance to sell the same apartment twice-over.

The financing promises were very persuasive. Some Blue Chip sales staff themselves signed up for the deals on offer, tempted in part by Blue Chip promises that part of the underwriting fee payable to Blue Chip on reaching a minimum level of sales would be rebated back to the staff member signing up to buy an apartment.

The Court of Appeal ruled the agreements for sale and purchase were enforceable as they stood. They had not been modified by any collateral or unwritten term making the agreements unenforceable. The court also ruled against a separate legal argument that the agreements were unenforceable because no prospectus was issued as required by securities legislation. The Securities Act 1978 does not apply to sales of land.

Hickman v. Turn & Wave Ltd – Court of Appeal (29.03.11)

04.11.004

Whitcoulls: re WGL Retail

Creditors’ claims against Whitcoulls and other REDgroup companies have been frozen for an extended period after administrators claimed a longer moratorium is needed to prepare the business for sale. Administrators have six months, until September 2011, to put a repayment scheme to unpaid creditors.

REDgroup, which includes the Whitcoulls, Borders and Bennetts franchises is in financial difficulty. Sydney insolvency specialist, Ferrier Hodgson, has been appointed administrator. Companies Act rules give them control of the group while creditors claims are frozen. Generally, creditors get to vote within one month on any proposal to sort out the difficulty: common options are to make part payment of debts or to put the company into liquidation. The creditors’ vote can be delayed, with court approval.

Ferrier Hodgson said the REDgroup administration is particularly complicated. Company operations are spread across New Zealand, Australia and Singapore. There are 96 different retail sites in New Zealand. Thirteen of the stores are in Christchurch and seven of these are affected by the February earthquake.

Present plans are to sell the entire business as a going concern. Creditors can then vote on a distribution of the proceeds. Any sale will require an extended period to advertise the business and negotiate with interested parties.

In Australia, the court granted REDgroup administrators a moratorium extension to September in respect of the Australian arm of the business. The High Court in New Zealand granted a similar extension for New Zealand. Ferrier Hodgson have until September 2011 to put a proposal to unpaid creditors.

re WGL Retail – High Court (16.03.11)

04.11.002

Nathans Finance: R. v. Hotchin

John Lawrence Hotchin escaped a jail term after pleading guilty in a plea bargain prior to trial for securities offences in relation to fundraising by Nathans Finance NZ Ltd. He is expected to be a crown witness in the later trial against fellow directors who have pleaded not guilty to similar Nathans Finance charges.

Nathans Finance went into receivership in August 2007, owing about $174 million to over 7000 investors. To date, receivers have repaid investors less than four cents in the dollar.

Hotchin accepted that Nathans Finance breached securities legislation in 2006 and 2007 when raising money from the public. In particular, it was alleged Nathans Finance misled investors about the level of related party dealing, the extent of bad debts and the finance company’s liquidity.

The court was told Nathans directors had detailed discussions with the company’s lawyers about the extent of disclosure required for its lending to a related company: VTL. At this point, $79.6 million of Nathans’ assets were tied up with VTL; 46.2% of its loans. Directors wanted to fudge disclosure of this level of loan concentration.

Wording settled on for the Nathans prospectus said a “significant portion” of its loans were with VTL, but added that these loans were made “on a commercial arms length basis”. Investors had been warned there was a substantial level of related party lending, but the court was told that the second statement was not accurate. There was a long list of sloppy commercial practice in relation to VTL loans: security for advances being taken years after the event, sums advanced in excess of an agreed loan facility and funds advanced after a loan facility had expired.

There was also criticism of statements in the prospectus that Nathans had an “unblemished record of bad debts written off”. This was literally true, but misleading. It was alleged tens of millions owed by VTL and its affiliates were seriously impaired at the time of the prospectus and the commercial reality was that repayment was not going to be made in full. The practice of capitalising interest to loan advances meant no hard decisions need be made about bad debts and future profitability necessary to fund repayment was assessed on the basis of five year and twenty year budgets supported by what were called flawed assumptions.

References to Nathans liquidity were also misleading. For the year to June 2006, Nathans received in cash $4.9 million from those loans where interest was not capitalised. Over the same period, it was paying interest to investors totalling $9.1 million. The company was dependent on renewed funding from the public to get sufficient cash to pay interest to public investors. Nathans business was not generating sufficient cash to pay investors. It was illiquid with significant negative cash flow.

Justice Lang said in determining an appropriate sentence for Mr Hotchin, the starting point should be three years imprisonment, being the benchmark in similar cases for breaches of securities legislation. In Mr Hotchin’s favour was that he pleaded guilty, agreed to give evidence against his fellow directors and offered to pay $200,000 to Nathans receivers’ for the benefit of investors. This would usually merit a substantial reduction in the period of imprisonment. In this case, Justice Lang ordered eleven months home detention, coupled with 200 hours community work and ordered reparation of $200,000.

R. v. Hotchin – High Court (04.03.11)

04.11.003

Discrimination: Smith v. Air NZ

Service industries are permitted to discriminate against customers with special needs where it is not reasonable to provide the service without charging extra. Air New Zealand was held justified in charging a passenger for use of supplementary oxygen when flying.

The Human Rights Act 1993 seeks to reduce discrimination, but it is not designed to force suppliers to cater for the needs of the disabled.

An Air NZ passenger alleged the airline was in breach of the Act by requiring her to organise and pay for her own oxygen support on domestic flights and to pay for oxygen supplied on international flights.

She required oxygen when flying because of a muscle weakness limiting the capacity to draw in enough air. Airlines carry supplementary oxygen as a safety measure on all flights and this should be made available to her free of charge, she argued.

In respect of domestic flights, Air NZ said any passenger requiring supplementary oxygen was in the same position as a disabled passenger who required a travelling companion – it was reasonable that she be required to provide her own oxygen equipment (of a certified type and standard) and pay for a supplementary seat to accommodate the equipment.

As regards international flights, international transport safety regulations prohibit individual passengers from bringing their own oxygen equipment on board. Air NZ did provide oxygen in these cases, charging a flat rate of US$75 per sector flown. The Court of Appeal ruled that this charge was reasonable as it was some 20% of the real cost of providing a separate supplementary oxygen supply to one passenger.

Smith v. Air New Zealand – Court of Appeal (18.02.11)

02.11.002

Minimum wage: Idea Services v. Dickson

Service industries will be re-doing their sums after a Court of Appeal ruling that staff on call overnight are entitled to at least the minimum hourly pay rate, even while asleep in the absence of a callout. Expect some quick footwork as levies are imposed for use of sleeping facilities in order to claw back some of the extra pay demanded.

While the Court of Appeal case concerned community care workers caring for the intellectual handicapped, it potentially affects a wide swathe of employment including watchman and emergency personnel.

The Court was told care workers staffed accommodation for intellectual handicapped in residential care. Those rostered for “sleepovers” carried out a supervisory role overnight. They dealt with any incidents which arose and maintained security. Supervisors could not receive visitors, could not consume alcohol or other drugs and could not leave the premises without first arranging for cover but otherwise were free to sleep when no direct supervision was required.

The Court ruled that this level of constraint on a supervisor’s choice of action amounted to “work” for the entire period of each sleepover.

Supervisors received a flat rate payment of $34 for each sleepover, topped up by further payments of $17.66 per hour for time logged actively tending to the needs of residents overnight.

The Court ruled that a flat rate payment was in breach of the Minimum Wage Act 1983. It amounted to about four dollars per hour for the working period covered by a sleepover.

Supervisors were entitled to backpay as compensation for hours worked at less than the minimum wage during sleepovers.

Idea Services Ltd v. Dickson – Court of Appeal (16.02.11)

02.11.001

Hanover: Securities Commission v. Hotchin

Exercising its new powers to make pre-emptive strikes, the Securities Commission has gained a court order freezing the New Zealand assets of Hanover Finance director, Mark Stephen Hotchin. This was done without first warning Mr Hotchin that legal action was underway.

The Commission is investigating Hanover Group, in particular net borrowings from the public of some $32 million from early 2008 up to the collapse of the Group. It is alleged prospectuses issued to support this borrowing did not comply with the Securities Act and that Mr Hotchin is responsible.

The Court was told that many of Mr Hotchin’s New Zealand assets were for sale and it appeared that Mr Hotchin was taking steps to shift overseas. News media investigations tracked Mr Hotchin and his family to Queensland.

Freezing orders apply to New Zealand assets only. They don’t apply to assets held outside the country.

Subsequent to the freezing order, Mr Hotchin asked the terms be varied. In particular, he wanted sufficient funds to pay pressing bills and meet weekly outgoings stated to be approximately six and half thousand dollars weekly. He also asked that personal possessions in Auckland including a Mercedes and a Porsche Cayenne be released for shipping to Queensland.

Asked by the Court to list his assets and liabilities, Mr Hotchin said this would be difficult to complete quickly, particularly since his accounting advisers, Ernst & Young, were not willing to assist because he had not paid the firm for previous work done.

Mr Hotchin did disclose some offshore bank accounts: $A240,000 held in Australia and a few thousand pounds in a UK bank account.

The Court allowed clothes, photographs and personal effects to be shipped. But the motor vehicles, furniture, art works and jewellery were to remain in New Zealand pending a more detailed court hearing in February 2011.

The court refused to release frozen funds. Outstanding bills and weekly expenses could be met out of money held by Mr Hotchin in Australia.

Securities Commission v. Hotchin – High Court (21.12.10)

01.11.002

Leaky homes: North Shore City v. Sunset & Byron

Local councils must accept responsibility for negligent inspection of leaky homes, ruled the Supreme Court.

North Shore City, now part of Auckland City, failed in a concentrated attack against a legal principle holding it liable for repair costs when a negligent council inspection fails to identify that a residential building under construction might in the future leak.

This legal principle arose from a 1990s court case against Invercargill City Council.

North Shore’s primary argument was that liability applied only to the construction of “modest” stand-alone residential dwellings, not high-rise apartments and not multi-unit dwellings.

The Supreme Court ruled there was no good reason to depart from the 1990s rule. Home-owners should expect the rule would apply and not be retrospectively overturned. Councils owe a duty to take care when inspecting homes in the course of construction.

It did not matter that the leaky residential building is a stand-alone house or part of a block of apartments.

Not only is the first buyer entitled to sue, but also subsequent purchasers who have to bear the cost of repairs.

The multi-million cost of repairing leaky homes will fall on ratepayers to the extent that a local authority did not have insurance cover for its losses or was not able to recover a contribution from architects, engineers or builders held partly to blame in particular cases.

North Shore City v. Sunset Terraces & Byron Avenue – Supreme Court (17.12.10)

01.11.003

Share valuation: Fong v. Wong

Company directors purchase of shares from other shareholders are required to be at “fair value”. A discount to the price may be appropriate where shareholders bought out hold a minority interest, but this is unlikely where it is a closely-held company.

Multiple court hearings followed inter-generational dissension within an Asian family about future direction for their companies: a son-in law wanted to borrow heavily for further expansion; his father-in-law didn’t. To avoid an impasse it was agreed that the older generation would buy out the younger generation, leaving them cashed up to pursue their own interests, with a debt of $500,000 owed to the father-in-law to be deducted from the price paid.

Pave Capital Ltd held their collective investment interests, with the younger generation holding a 32 per cent interest. A buy-out valuation could not be agreed.

Company law requires the father-in-law as a director of Pave Capital to pay “fair value” when buying out other shareholders.

The father-in-law argued that normal valuation principles should be applied to establish fair value: the minority holding should be reduced in value because the younger generation’s 32 per cent shareholding did not give any measure of voting control.

The court did not agree. This was a closely-held family company with a small number of shareholders: it operated like a partnership. In these cases, no minority discount should be applied.

Without a minority discount, the younger generation’s shareholding is worth more – estimated at an extra $600,000.

Fong v. Wong – Supreme Court (13.12.10) & Court of Appeal (16.07.10)

01.11.001

Blue Chip: GE Custodians v. Bartle

Just because a commercial transaction runs at loss doesn’t mean that it is an “oppressive” transaction justifying court intervention. And it is not for lenders to investigate the commercial wisdom of a borrower taking out a loan, particularly where the borrower has received independent advice.

In what is a test case on the legality of funding lines set up to finance investments promoted by the Blue Chip Group, the Supreme Court has ruled mortgages securing loans can be enforced. This will result in elderly investors losing their family homes following the collapse of prices in the Auckland CBD apartment market.

Blue Chip targeted asset rich/cash poor elderly investors in what it described as joint venture development projects. Investors were encouraged to mortgage their family homes, buying into deals whereby they financed the construction of inner city Auckland apartments. The “profit-share” formula buried in the fine print saw Blue Chip entitled to some 90% of any realised capital gain on the sale of finished apartments, while not sharing in any capital losses.

Blue Chip sales staff smoothed the way for investors by helping complete loan applications for funding from independent third party financiers and by steering investors towards a legal adviser who was recommended as “understanding” the Blue Chip way of completing property developments.

Touted apartment valuations proved to be grossly optimistic. There was evidence of completed apartments selling for less than 50 per cent of pre-construction valuation. Realisations did not cover loans raised by investors to fund the construction. As a result, investors’ homes were forced into mortgagee sales.

The Supreme Court was asked to reopen loan contracts under the Credit Contracts and Consumer Finance Act 2003 on the basis that the loans were “oppressive”. This required evidence that the loans did not measure up to reasonable standards of commercial practice.

In particular, it was argued that it was not reasonable to enforce contracts where elderly pensioners on limited income had taken out substantial mortgages for terms of 25 to 30 years.

The Supreme Court, in this case, ruled there was no evidence of oppressive behaviour. Asset based financing (as distinct from cash flow based financing) is a perfectly legitimate form of financing. There was nothing in the documentation supplied to GE Finance in this case which signalled that the transaction was anything other than a normal commercial application from an investor seeking to profit from a real estate development.

The Supreme Court said there is no obligation on a financier to go beyond the information provided to investigate the commercial soundness of the proposed development or the personal circumstances of the borrower. To do so, said the court, would be economically inefficient.

GE Custodians v. Bartle – Supreme Court (03.12.10)

12.10.001

Bankruptcy: Williams v. Simpson

First use of legislation enacting cross-border insolvency rules shows you can run but not hide: a Lloyd’s name bankrupted in England has been traced to New Zealand with gold bullion and foreign currency valued in excess of two million dollars seized to pay his creditors.

The High Court was told that London psychiatrist, Alan Geraint Simpson, was forced into bankruptcy in England over his failure to pay a debt plus accrued interest of some £242,000. This followed losses on insurance underwriting. So-called “names” at Lloyd’s form part of underwriting syndicates that act like insurance companies. Individual names can be personally liable for insurance losses.

Evidence was given that Mr Simpson claimed after his bankruptcy to have no personal assets of any significance and said he was being provided with a car and house in Hamilton by a trust called the BV Adams Trust. He was proving evasive, giving as his UK contact address a Citizens Advice Bureau in Hertfordshire.

UK authorities suspected he was hiding substantial assets in New Zealand. In particular, there were rumours that Mr Simpson was heavily involved in speculative bullion trading.

Using the Insolvency (Cross-border) Act 2006, UK authorities asked for a court order to search Mr Simpson’s Hamilton residence.

The 2006 Act puts into New Zealand law an international treaty designed to assist the cross-border pursuit of assets held by bankrupt individuals: a United Nations-brokered Model Law on Cross-border Insolvency.

The High Court issued a search warrant under strict terms: officers of the New Zealand insolvency service were authorised to enter Mr Simpson’s residence, in the presence of a police officer, to search for and seize any gold bullion or precious metals found there, with the process to be videotaped in its entirety.

Their subsequent report to the court disclosed safes and secret compartments holding bullion and foreign currency valued at over two million dollars. On the court’s order, these liquid assets are being held in safekeeping at the Westpac Bank in Auckland.

Subsequent to the search and seizure, the High Court instructed the New Zealand insolvency service to act as if Mr Simpson had been bankrupted in New Zealand, in particular to establish the extent of his assets and liabilities in New Zealand. Inland Revenue in particular is expected to have an interest in any taxable profits made by Mr Simpson.

Once the extent of New Zealand creditors has been determined, the High Court will be asked to rule on the distribution of the assets held by Westpac.

Williams v. Simpson – High Court (17.09.10 & 12.10.10)

10.10.001

Receivership: Low v. Body Corporate 384911

Receivership of Lighter Quay, the company leasing Auckland waterfront property to Westin Hotel, resulted in an arm wrestle for control of income received by Lighter Quay from operation of the hotel. Investors who funded construction of the hotel are trying to put a court-appointed administrator in charge.

Appointment of an administrator was put on hold pending a meeting of investors.

Westin Hotel’s rights to operate its hotel sits at the end of a complicated chain: freehold title to the land is held by a company called Viaduct Harbour; a lease over the land is held by Melview Viaduct Harbour; this leasehold interest is subdivided into residential units which have been sold to investors; and the units are sub-leased to a company called Lighter Quay which in turn contracted Westin to operate the hotel.

Many of the individual investors are offshore, particularly from Singapore and Malaysia. Their collective interest is represented by a Body Corporate, in which investors have voting rights much like a company.

Investors complain of getting a poor deal from the start of the project. They were promised a guaranteed rental for the first three years of their investment. By July 2010, overdue guaranteed rentals were in the region of $3.5 million. A group of 92 investors got together, getting a court order to cancel their sub-leases to Lighter Quay. This would allow them to take personal control of their rooms then in use for the Westin Hotel.

Events moved quickly with Lighter Quay put into receivership by a secured creditor.

The Body Corporate was at risk because ground rentals due to Viaduct Harbour were $150,000 in arrears. Insurance cover was at risk of lapsing because the annual premium was unpaid. These bills were unpaid because investors were unwilling to pay levies due to the Body Corporate. Instead, they paid the money into their solicitors’ trust accounts claiming they didn’t trust those in charge of the Body Corporate to pay the money across. Investors have two representatives only on the five member Body Corporate management committee.

Justice Heath said the case looked to be an instance of high level brinkmanship: with investors and the Lighter Quay receivers tussling over income from the continuing operation of the Westin Hotel.

He ruled it was premature for the court to intervene when the parties still had a chance to resolve their differences through a forthcoming annual meeting of Body Corporate investors.

Justice Heath warned that he would have no hesitation in appointing an administrator to handle Body Corporate affairs if the annual meeting was disrupted by technical arguments about meeting procedure.

Low v. Body Corporate 384911 – High Court (02.09.10)

09.10.002

Telecoms: Commerce Commission v. Telecom

Telecom holds a dominant position in the telecommunications industry, but it is allowed to fight its corner as fiercely as any other telecoms provider. Provided it uses strategies available to any non-dominant supplier, Telecom cannot be said to be abusing its market position in breach of the Commerce Act.

The Commerce Commission lost its long-running litigation against Telecom in which it alleged Telecom’s 1999 introduction of the 0867 prefix to control internet usage was a misuse of its dominant position.

The Supreme Court ruled there was no evidence that Telecom’s behaviour was any different to that expected of a non-dominant supplier responding to market dynamics.

Evidence was given that tensions between suppliers grew as Clear Communications began to expand its services. Internet penetration meant shorter residential phone calls were being replaced by much longer internet dialup connections.

This upset the revenue balance between Clear and Telecom because most of the residential internet callers were on the Telecom network and their traffic to service providers on the Clear network was not only causing congestion on Telecom’s lines but also resulting in substantial “termination” charges from Telecom to Clear. “Termination” charges arise because the network on which a call originates must pay a per minute charge to the network on which the call is received (or terminated).

Clear exploited these changing dynamics by sharing its increasing volume of termination charges with internet service providers on its network, reducing costs to users and encouraging them to log on for even longer periods – to Telecom’s further cost.

Telecom responded by introducing its “0867 package”. Customers who did not use either the 0867 prefix for internet dialup, or did not use Telecom’s own internet service provider (Xtra), were required to pay two cents per minute for internet usage beyond a free allowance of ten hours connection per month. Use of the 0867 prefix was justified as a means of managing internet traffic.

The Commerce Commission acknowledged that Telecom was justified in taking steps to manage internet traffic on congested lines, but claimed that the method used was anti-competitive and amounted to abuse of its dominant position as owner of the fixed line network.

The Supreme Court said that the Commerce Act prohibits uses of market power that damage competition, not market power that damages competitors. Nothing in the Act prohibits vigorous legitimate competition by a dominant firm which may damage competitors but does not damage competition.

The Commerce Commission had failed to prove that because of a fear of losing retail customers, Telecom would not have introduced the 0867 prefix if it had not been dominant.

Commerce Commission v. Telecom – Supreme Court (1.09.10)

10.10.002

Bridgecorp: Davidson v. Registrar of Companies

The High Court ruled that directors of a finance company must have some degree of financial literacy as it upheld a two and half year prohibition order made against Bridgecorp director, Auckland lawyer, Bruce Nelson Davidson, preventing him from acting as company director or charity trustee.

Described as naïve and trusting, Mr Davidson claimed he was hoodwinked by managing director Rod Petrecivic. Bridgecorp collapsed in mid-2007 owing some $486 million. Investors might expect a return of ten cents in the dollar.

Bridgecorp suffered a punishing liquidity crisis over its final twelve months, with declining investment renewals, falling gross margins and growing loan impairments.

There was evidence that senior management became selective in repaying term deposits on maturity, favouring those due to clients of investment advisers who would probably recommend reinvestment. Litigation has followed allegations that Mr Petrecevic took company resources without authority and that substantial related party lending benefited executive directors to the company’s detriment.

Securities Act charges have been commenced against all directors, including Mr Davidson, alleging Bridgecorp issued misleading prospectuses when borrowing from the public.

Mr Davidson, amongst other directors, was banned by the Registrar of Companies from acting as a director. Power to ban is an administrative power, designed to stop incompetent directors from continuing in business.

Mr Davidson challenged use of the ban against him, saying he acted honourably throughout but was misled by fellow Bridgecorp directors.

Upholding the ban, Justice Miller said Mr Davidson is a man of integrity with an admirable record of community service but had acted unwisely.

The court ruled that power to prohibit is intended to set standards of performance for company directors as well as protection of the public.

Justice Miller said Mr Davidson was unwise to rely on more financially literate directors, particularly when evidence of insolvency mounted and the unreliability of Mr Petrecivic became apparent.

Davidson v. Registrar of Companies – High Court (27.08.10)

09.10.003

Pollution: Thurston v. Manawatu-Wanganui Regional Council

Described as polluting for profit, a landowner was fined nearly $175,000 after pouring industrial waste into a local river. This after signing a lease where he agreed to accept responsibility for waste management from the property but then found that cost of disposal was exceeding the rent coming in.

The court was told the main problem concerned waste from a meat processing plant based at Longburn, near Palmerston North. The plant was leased to a Goodman Fielder subsidiary. The terms of the lease, which runs to 2035, required the landowner to bear the cost of waste removal. The landowner’s company received monthly rent of $12,300, but was having to pay between $20,000 and $30,000 per month to truck industrial waste to a treatment plant run by a local council.

Council staff became suspicious when deliveries to the treatment plant stopped. On investigation, council staff found raw waste was being dumped illegally into an old pipe leading to the Manawatu River.

At council’s insistence, the landowner has had to build a five kilometre pipeline, at a cost of some $2.6 million, to transport waste direct to the local treatment plant.

In the District Court, the landowner and his company were convicted and fined for illegal waste discharges from both the Longburn plant and a dairy farm operated by the landowner personally.

On appeal, the High Court refused to reduce the fines.

Justice Miller described the case as a clear example of polluting for profit; the landowner was criticised for the calculated nature of the offending, the attempt to evade accountability by misleading council staff and failure to respond to abatement notices.

Thurston v. Manawatu-Wanganui Regional Council – High Court (27.08.10)

09.10.001

Leaky homes: Auckland City v. McNamara

Local councils bear no responsibility for leaky homes when developers choose to use independent building certifiers rather than paying for a council inspection. This applies even where the independent certifier has failed to comply with the prescribed rules when assessing for weather tightness. A council is not obliged to check on a registered certifier’s competence.

Litigation followed the purchase of an Auckland property after purchasers, the McNamara Family Trust, found it leaked. Built in 2004, the developer contracted Approved Building Certifiers to complete certification of the property as then required by the Building Act 1991.

After repairing leaks, the Trust sought to recover its loss suing some 18 defendants for negligence, including the Council.

The Council took legal action to be struck out of the case, saying it had no liability.

The Court of Appeal agreed. It said the Building Act gave house builders a choice between the use (in whole or in part) of a private certifier or the use (in whole or in part) of the relevant local authority. Where a private certifier is chosen, a council assumes no responsibility for the work. A council merely carries out the administrative act of recording the fact that a compliance certificate has been issued.

In this case, Approved Building was listed as an approved certifier on a register maintained by the Building Industry Authority. As from December 2002 the standard applying to weather tightness was strengthened. It was alleged that Approved Building issued a compliance certificate when the building did not comply with this tougher standard.

Auckland City v. McNamara – Court of Appeal (03.08.10)

08.10.001