Insolvency: re Contract Engineering Ltd

Creditors of an insolvent company resisting liquidators’ demands to repay money received in the two years prior to liquidation need to do more than prove they acted in good faith; they must have provided new value at the time payment was made by the insolvent company.   This Court of Appeal ruling will assist creditors supplying further goods or services on credit in return for reduction of an existing debt, but it will not assist those creditors unfortunate enough to have an existing debt simply paid at a time when the company was insolvent in its final two years.

The rule is intended to encourage suppliers to keep working with an insolvent company trying to trade its way out of financial difficulty.  The supplier gets to keep the money paid, but runs the risk that the new debt created may turn out to be a bad debt if the debtor company is later wound up insolvent.

The Court of Appeal was asked to rule on a joint appeal involving two separate company liquidations: liquidators of Contract Engineering Ltd were chasing a creditor paid about $57,800 for concrete and steel foundations constructed on a Wairakei pipeline project; liquidators of the same company wanted $105,400 from a different creditor paid for the manufacture and installation of a silencer on the same project; and liquidators of Window Holdings Ltd sought to recover payments totalling $13,000 made to a creditor for contouring and stabilising work.  In each case, the creditor was paid within the critical two year period at a time when the debtor company was insolvent. 

Insolvency law operates a pari passu rule: unpaid unsecured creditors are paid cents in the dollar on a pro rata distribution out of cash collected in by the liquidator.  Over the centuries, various statutory rules have required creditors paid 100 cents in the dollar prior to liquidation to put their payment back into the pot and prove instead as unsecured creditors.  Not surprisingly, creditors have resisted having to repay: they give up 100 cents and get back less.  Confusion over the payback rules has arisen following a series of amendments to insolvency law over the last twenty years.

The Court of Appeal has clarified the rules: an existing creditor can keep money paid in the two years prior to an insolvent debtor company being wound up insolvent only to the extent that “new value” has been provided in return for the payment made.

The Court of Appeal said “new value” can be provided by the supplier agreeing to resume supply of goods or services, or by agreeing to extend the date on which payment is due for the balance of the existing unpaid debt.

Re Contract Engineering Ltd – Court of Appeal (27.03.13)

13.009

Capital + Merchant: R. v. Ryan, Sutherland & Tallentire

Three directors of finance company Capital + Merchant have been sentenced after pleading guilty to Securities Act offences.  Over two years, investors put $23.4 million into the company on the strength of untrue statements which misrepresented the quality and risks of their investment.  Capital + Merchant went into receivership in 2007 with about 7,000 investors out of pocket.

Colin Gregory Ryan was sentenced to seven months home detention and 300 hours community work.  He agreed to pay $100,000 to the receivers by way of reparations for the loss and damage caused investors.  The court was told Ryan is a 66 year old Australian citizen from Brisbane.  He is a very experienced businessman with law and accountancy qualifications.  He had served on boards of Brisbane’s port company and airport company.  His home detention is to be served at an Auckland address.

Robert Gordon Sutherland was sentenced to six months home detention together with 300 hours community work.  He agreed to pay reparations of $60,000.

Owen Francis Tallentire was sentenced to twelve months imprisonment to be served in addition to a prison term currently being served after his earlier conviction for theft by a person in a special relationship arising out of his dealings as a Capital + Merchant director.

The untrue statements which mislead investors were in prospectuses issued to the public in 2006 and 2007.   That court said both Ryan and Sutherland had an honest belief that the information in the 2006 and 2007 prospectuses was correct, but this belief was not reasonable.  Tallentire was described as being more deeply involved such that he must have been aware critical information was false.

In particular, the prospectuses misrepresented the extent and manner of dealings with related parties; misrepresented the cash flows and future liquidity of Capital + Merchant and did not identify the extent of disputed loans or the fact of unpaid loans being rolled over rather than enforced.  It was incorrect to state that no loans were impaired and that no provision was required for past-due loans when in fact a number of large loans were clearly impaired.

R. v. Ryan, Sutherland & Tallentire – High Court (15.03.13)

13.010

Tax avoidance: Alesco v. CIR

Inland Revenue decisively won round two in a tax avoidance test case centred on use of hybrid securities to finance transactions.  The Court of Appeal disallowed as tax avoidance claimed interest deductions by Alesco (NZ) Ltd because they were a misuse of specific deductibility rules, even though the financing structure used complied perfectly with general principles of financial accounting.  This ruling has implications for ongoing tax disputes with sixteen other taxpayers having $300 million in dispute.

The case has its origins in a 2003 financing transaction between Alesco (NZ) Ltd and its Australian parent.  Alesco (NZ) issued convertible notes to its Australian parent in return for advances totalling $78 million.  The convertible notes were a hybrid security: part debt part equity, with a ten year maturity.

There was no dispute that the $78 million advance represented a real commercial transaction.  The funds were used to purchase existing New Zealand businesses: medical equipment supplier Biolab; and kitchen equipment supplier Robinson Industries.   

The dispute centred on a claimed tax deduction for notional interest payable on the convertible notes.   The economic effect of the transaction was that Alesco (NZ) received an interest free loan of $78 million.  On maturity in ten years, the Australian parent had an option: first to convert the notes to shares in Alesco (NZ) (which was of no commercial value since the parent already held all the shares in Alesco (NZ); or to redeem the notes for cash (which would result in an economic loss to the Australian parent because the loan had stood interest free for ten years).

Financial accounting rules require issuers of convertible notes to value separately the equity and debt “components” of the note.  Alesco (NZ) claimed a tax deduction for notional interest payable on the debt component, though no cash was actually payable.  Recognition of notional interest arising on an interest free loan complies with rules for financial reporting.   Inland Revenue argued that use of this financial reporting principle for tax purposes inflated taxable expenses and amounted to tax avoidance.

The Court of Appeal ruled that the financial arrangement rules in tax law were intended to give effect to the reality of income and expenditure – that is, real economic benefits and costs.  A claim for notional interest payable did not fall within the rules as intended by parliament.

Alesco v. CIR – Court of Appeal (5.03.13)

13.006

Tax advisors: Alesco v. CIR

Creative use of tax rules is getting short shrift from the courts with criticism aimed at tax advisors who promote the schemes and then stand in court as supposed independent expert witnesses justifying the tax scheme in dispute.

Accounting firm KPMG came in for stinging criticism from the Court of Appeal for its role in litigation between client Alesco (NZ) Ltd and Inland Revenue in a dispute over the deductibility of interest on an Alesco financing transaction.

In 2003, Alesco’s Australian parent advanced $78 million dollars to finance further expansion in New Zealand with Alesco (NZ) issuing optional convertible notes in return.  Both the High Court and the Court of Appeal were to rule that an interest deduction claimed by Alesco (NZ) on the convertible notes amounted to tax avoidance.  The claimed interest deduction was reversed and penalties of $2.4 million were imposed for what Inland Revenue claimed was Alesco (NZ)’s adoption of “an abusive tax position”.

At trial, supposed expert evidence was given by KPMG partner, chartered accountant  Michael Schubert.  He was described as giving expert opinion on the correct financial reporting treatment of optional convertible notes.  KPMG had provided advice to Alesco from the outset on the most tax effective way of presenting the transaction.

Mr Schubert’s evidence was roundly criticised: his narrow financial accounting approach ignored the economic reality of how the transaction was structured between related parties – Alesco (NZ) and its Australian parent.  The Court of Appeal said Mr Schubert’s analysis launched hypothetical arguments which were unrelated to the facts of the case.  This did not assist the Court and added unnecessary complications.  The Court of Appeal emphasised that an expert witness assists a court by providing specialist non-legal evidence and all expert witnesses have a fundamental obligation to be impartial.  The Court expressed its dismay at the growing trend for expert witnesses to go into battle on behalf of a client.

Alesco v. CIR – Court of Appeal (5.03.13)

13.007

Mighty River Power: Maori Council v. Attorney-General

Maori interests failed to convince the Supreme Court that partial privatisation of Mighty River Power will materially impair government ability to provide compensation for any yet-to-be decided claims to water rights.  This court ruling leaves government free to sell a 49 per cent stake in its state-owned energy companies.

In the North Island, Maori interests claim that control of their rivers and streams was usurped by settler interests after signing of the Treaty of Waitangi.  Government says there is no validity to these claims and sees Maori demands as a means to claim economic rents for a natural resource available to all.

Legislation last century bound the government to provide compensation for any agreed Treaty claims with the return of disputed assets as one form of compensation.

Representatives of Maori with interests along the Waikato River argued that government plans to sell part of its interest in Mighty River Power should be stopped; a sale would diminish assets available to meet Treaty claims over ownership of Waikato water.

The Supreme Court said there is no logical reason why government should be forced to keep, against its will, a minority shareholding in energy generating companies which are unconnected in any meaningful way to underlying Treaty claims.

A partial sell-down of shares does not amount to a sale of the company, Mighty River Power, or to the disposal of assets held by the company.

The Court said that government retention of a 51 per cent shareholding in Mighty River Power and with it majority control of the company means that government retains substantial capacity to provide redress for any Treaty claims.  Government can later issue further shares which can be offered as compensation, or use cash generated from Mighty River dividends to pay compensation.

Maori Council v. Attorney-General – Supreme Court (27.02.13)

13.005

Extradition: Radhi v. Police

An alleged people smuggler wanted in Australia following the deaths of illegal immigrants who drowned when their boat sank off Indonesia cannot be extradited because people smuggling was only a minor offence under New Zealand law at the time of the deaths.  Immigration penalties for people smuggling have since been beefed up.

The High Court was told that Maythem Kamil Radhi (also known as Maytham Kamil Radhi) is wanted in Australia for his alleged involvement in a 2001 attempt to smuggle about 300 illegal immigrants into Australia from the Middle East.  The vessel sank in rough seas off Indonesia and most passengers were drowned.

Mr Radhi was accepted into New Zealand from Indonesia as a refugee in 2009.  Australian authorities sought an extradition warrant in 2011 after finding that Mr Rahdi was in this country.  In Australia, Mr Rahdi faces up to 20 years imprisonment if found guilty of people smuggling.  At the time of the deaths, New Zealand immigration law imposed a maximum sentence of three months.  Extradition is not ordered for minor offences.  Before ordering extradition, a judge must be satisfied that the behaviour complained of would be an offence in this country if it were committed in New Zealand and that the maximum penalty on conviction is at least twelve months.

Since June 2002, eight months after Mr Rahdi’s alleged involvement in the ill-fated people smuggling operation, New Zealand law was changed to create specific offences against people smuggling with heavy penalties.

Radhi v. Police – High Court (11.2.13)

13.003

Earthquake: Insurance Council v. Christchurch City

Local councils requiring earthquake strengthening when repairing existing buildings cannot set standards beyond the 34 per cent limit set by regulations under the Building Act.  An attempt by Christchurch City to set the seismic limit at 67 per cent of new building standard was struck down by the High Court as invalid and in excess of its powers.  A 34 per cent limit is the assessed seismic strength required to support a building suffering an earthquake of one-third the intensity that could be borne by a new building erected on that site.

In the aftermath of Christchurch’s earthquakes, the local council has been setting new rules for reinstatement of earthquake-damaged and earthquake-prone buildings.  The Insurance Council, which represents insurers covering some 95 per cent of New Zealand’s insurance cover, objected to new city council rules which required buildings to be brought up to 67 per cent of new building standard.  The Insurance Council said this would increase repair bills by hundreds of million dollars.  The High Court was told that a rebuild of earthquake damaged Canterbury University would cost an extra $140 million if a 67 per cent limit was set rather than 34 per cent.

In practice, building owners want to see their buildings strengthened to a 67 per cent rating.  Not only does this reduce risk, but also improves the building value.  Post-earthquake rebuilds have been on hold while insurers have argued over the level of seismic strengthening required.  The level of danger created by the building, the use to which it will be put and the cost of repairs are weighed by the city council in giving approval to rebuild plans.

Justice Pankhurst said the primary focus in the Building Act is to manage the likely risk of earthquake-prone buildings collapsing causing injury or death.  New buildings are required to meet 100 per cent of the seismic strength required by regulations made under the Act.  When repairing or reinstating existing earthquake-prone buildings, they need only be brought up to 34% of the seismic strength required for new buildings.  Councils cannot impose higher standards than those set under the Building Act.

Insurance Council v. Christchurch City – High Court (4.2.13)

13.004

Maori: Takamore v. Clarke

Maori custom came hard up against pakeha practice with the Supreme Court deciding by a narrow margin of 3:2 that the person in charge of a deceased estate has primary authority in deciding where the deceased should be buried.

Recent years have seen a run of distressing instances known colloquially as “body-snatching cases” where extended family have tussled with close relatives of a deceased over funeral arrangements.   Maori custom demands burial at the home urupa.  A surviving spouse and children usually prefer burial closest to the family home.

This sensitive issue came before New Zealand’s highest court following the 2007 death of James Junior Takamore.  His immediate family wanted to have him buried in Christchurch where they had lived for the previous twenty years.  Plans for the Christchurch burial were thwarted when members of Takamore’s hapu from Kutarere in the Bay of Plenty took his body north over the objections of his widow for burial on the home marae.  

The Supreme Court ruled that his widow was entitled to possession of Mr Takamore’s body as executor of his estate.  She was given permission to exhume his body for reburial at a place of her choice.

The five judges sitting in the Supreme Court were not unanimous in their ruling on this cross-cultural dispute.

Three of the judges relied on the traditional pakeha common law rule: those appointed as executors or administrators of a deceased estate have the duty and obligation to dispose of the deceased.  They should take into account the views of close family members and, importantly, take into account any views the deceased made before death.  “Body-snatching” is not the way to deal with differences of opinion.  Those disagreeing with decisions about burial should air their differences in court and have a judge weigh up the conflicting viewpoints.

Two of the judges considered primary responsibility for burial decisions should not lie with the executor or administrator.  Disputes should be put before a court prior to any burial.

The five Supreme Court judges were of the same view on one point: the “might is right” approach of traditional Maori custom which saw disputes settled by force has no place in modern society.

Takamore v. Clarke – Supreme Court (18.12.12)

13.001

Insurance: Insurance Brokers v. Fire Service

A failure by the Fire Service to break down what it considers a commercial rip-off in both composite and “split-tier” insurance contracts came to nought when the High Court ruled these policies are legitimate even where they have the effect of reducing the fire levy payable.  Fire service union members are up in arms as well.  They argue underpayment of fire levies reduces funding for the service and reduces resources available for wages. 

Split-tier policies are used by large commercial operations to manage their risk at reduced cost.  Insurance cover is split out into several policies to separate out cover assessed for fire service funding.  These policies are often combined with composite policies. The commercial reality is that a business with operations nationwide is not going to have all its plant and buildings damaged simultaneously by fire, earthquake or flood. Composite cover for assets nationwide is offered at an expressed indemnity value being only a fraction of the nationwide asset replacement value.  The fire service levy is calculated on this lower indemnity value, not the nationwide replacement value.

The Fire Service has grizzled for years about split-tier and composite policies.   The Insurance Brokers Association, concerned that penalties might be imposed for a failure to comply with the Fire Service Act 1975, bought matters to a head by going to court seeking a ruling that these practices did comply with the Act.

As a test case, the court was asked to consider insurance arrangements implemented since 2008 between Vero and eight New Zealand ports acting together in what is called the NZ Ports Collective.

One single policy covered assets of the eight ports to an aggregate amount of $250 million for fire damage alone.  The fire service levy was calculated and paid on this amount.  Separate policies provided cover totalling an extra $500 million: for fire cover above the indemnity cover, for material damage other than fire and for business interruption cover.  No fire service levy was paid on this extra $500 million cover.

Use of one global composite policy benefitted NZ Ports Collective because they got the cover each wanted at a reduced premium: the premium was apportioned between ports on the value of their respective port assets.  Each port did bear the risk that a large prior claim in any one year by one port could deplete the sum payable under the policy for later claims by another port.   Insurance Brokers said splitting the cover into tiers did comply with the Act and no further levy was payable.  The Fire Service said it was in fact eight separate policies with eight different ports and further levies were payable.

In the High Court Justice Heath ruled that split-tier policies did comply with the Act because a fire levy was payable only on the declared indemnity value.  And as a composite policy the Vero cover also complied with the Act.  While the insurance policy covered different assets owned by different ports it was nevertheless a single policy.

Insurance Brokers Association v. NZ Fire Service – High Court (17.12.12)

13.002

Matrimonial: R. v. Kendall

Auckland businessman and former firefighter, Graeme John Kendall, was sentenced to home detention for perjury after giving false evidence in what was described as a deliberate mis-use of the legal system to inflict considerable harm on his former wife.

The High Court was told that Kendall lived for twelve months in a de facto relationship before marrying his de facto partner in March 2006.  The marriage was at an end within nine months.

Prior to the marriage, his de facto partner decided to buy a residential unit in Takapuna which adjoined a unit she already owned.  He suggested she use one of his many private companies for the purchase.  All the shares in Home Pride Ltd were transferred into her name and this company purchased the unit.  She was assured, as was her solicitor, that Home Pride was a “clean company”: a shell company with no assets and no liabilities.

Within months of the marriage ending, she received a statutory demand claiming that Home Pride owed $64,400 for rent due on a storage unit in Rosebank Road, Avondale.  This was a storage unit where some of her personal property had been stored previously.  If payment was not made it was likely that Home Pride would be wound up by the court and the Takapuna residential unit sold to pay the claimed debt.

She spent $33,000 in legal fees disputing the debt; a debt claimed by one of her former husband’s companies.

It was proved that Kendall had fabricated lease documents to make it appear that Home Pride owed rent for the storage unit.  He was convicted of perjury.  He served three months imprisonment before being convicted again on the same charge following a retrial.  Justice Toogood took this earlier period of imprisonment into account when sentencing him to seven month’s home detention for perjury.  Kendall was also ordered to pay $25,000 to his former wife.

R. v. Kendall – High Court (11.12.12)

12.034

Maori: NZ Maori Council v. Attorney General

The High Court has dismissed out of hand legal action by Maori interests to delay government moves to sell down its stake in electricity generator Mighty River Power.  Some Maori claim ownership of the water which generates electricity by passing through Mighty River turbines.

The High Court did not need to decide who might own water.  It ruled that government plans to sell down its interests in Mighty River Power did not affect rights of water ownership, whoever might own the water.

In June 2012, government altered the legal status of government-owned Mighty River Power, changing it from a state-owned enterprise (SOE) to a mixed-ownership model (MOM) company.  This did not change the government’s ownership of Mighty River, it changed the legal structure under which the company operated.  Government plans to sell down a 49% stake in four of its electricity generation companies: Mighty River Power, Genesis Power, Meridian Power and Solid Energy.

Maori interests claim the proposed sell down may defeat pending Treaty of Waitangi compensation claims.  Once an asset passes from government ownership, no direct Treaty claim can be made against the asset.

In the High Court, Justice Ronald Young refused to block preliminary steps taken by government to achieve the proposed sell down.  Changing a company’s status does not alter the status of assets held by that company.

New Zealand Maori Council v. Attorney General – High Court (11.12.12)

12.035

Insurance: Turvey Trustee v. Southern Response

Christchurch homeowners with AMI “premier house cover” offering full replacement cover for earthquake losses are entitled to a new house of the same style and quality of materials as the house written off but substitute materials or method of construction is permitted where that does not affect the functionality or character of the replacement structure.

The High Court was asked to rule on AMI costs for the replacement of a 1911 Edwardian-style villa at 23 Aynsley Terrace written off after the February 2011 earthquake.  A particular feature of the villa was its use of native timber for flooring and joinery.

All AMI house insurance policies for Christchurch have been hived off into a special government controlled entity with the taxpayer subsidising any shortfall on funds needed to meet earthquake claims.

Turvey Trustee, the owner at Aynsley Terrace, exercised its right under the policy to rebuild on a new site, but there was a dispute as to the extent to which the new construction should mirror the house written off.   In particular, methods of construction and building materials in common use have changed markedly since the original construction in 1911.

Justice Dobson ruled that replacement does not mean replication; it means “as new”, being an equivalence of the old as measured by size, functionality, relative quality and re-creation of character and appearance.

A case from Australia in a dispute over replacement cover in insurance had identified that it would be appropriate to use plaster board for wall lining rather than the plaster and lath previously in use and radiata pine framing timber rather than Oregon pine.

In this case, it was replacement of native timber in use for flooring and joinery which was most in dispute.  Justice Dobson ruled that in those rooms where the floorboards were exposed or covered only by loose carpets, then AMI was obliged to pay for replacement native timber flooring in the new house.  But for those rooms where the timber flooring had been covered by vinyl or tiles, chipboard flooring would suffice.  Similar rules applied to joinery.  Exposed native timber joinery had to be replaced with native timbers.  But joinery which had been painted over could be replaced simply with painted pine.  Hard plaster ceiling features in the 1911 villa could be replaced by use of a polystyrene mould and plaster covering with no material difference in appearance.

Turvey Trustee Ltd v. Southern Response Earthquake Services – High Court (11.12.12)

12.033

Insolvency: re Window Holdings Ltd

Most creditors paid prior to a company liquidation will be able to keep their money thanks to new insolvency rules.  Creditors paid up to two years prior to a debtor company being wound up insolvent can keep the money provided they received payment in good faith, did not know the debtor was insolvent and had provided goods or services to the debtor equal in value to the payment received.

Insolvency law has detailed rules to even out the losses when a debtor company goes into insolvent liquidation forcing some creditors who were paid in full before the liquidation to repay the money received.  They are left to prove as unsecured creditors.  In practice, money recovered is used first to pay the liquidator’s fees.  Frequently, little is left for unsecured creditors as a whole.

Changes to insolvency law in 2006 replaced earlier recovery rules which were widely viewed as being unworkable.

Auckland insolvency specialist Jeff Meltzer challenged these new rules arguing they should be interpreted restrictively: any creditor paid in the two years prior to liquidation and getting 100 cents in the dollar should have to return that money if there are unpaid creditors.

In the High Court, Justice Toogood applied the plain wording of the new rules.  Creditors can keep their 100 cents in the dollar provided, at the time of payment, they acted in good faith, had no knowledge that the debtor company was insolvent and had provided monies worth in goods or services to the debtor company.

re Window Holdings Ltd (in liquidation) – High Court (5.12.12.)

12.037

Charities: Greenpeace

Greenpeace has moved away from the pacifist underpinning of its original constitution by offering to change its rules in order to gain charitable status.  Tax advantages available to charities prohibit them from engaging in overt political activity.  The Court of Appeal directed that Internal Affairs reconsider Greenpeace’s application for charity registration.

Registration as a charity was initially refused on the basis that amongst its charitable aims Greenpeace stated as objects the promotion of “peace” and “disarmament”.  These objects can be considered political in nature.  Greenpeace subsequently offered to change its constitution to include the promotion of “peace, nuclear disarmament and the elimination of all weapons of mass destruction.”

The Court ruled that this alteration significantly altered the nature of Greenpeace’s objects: from a non-violent “peace at all costs” political stance to a stance broadly accepted as being for the public benefit of the community as whole.   New Zealand treaty obligations support both nuclear disarmament and prohibitions on the development, use or stockpiling of biological and chemical weapons.  Nuclear disarmament and a prohibition on weapons of mass destruction have broad public support as being beneficial to society generally.

But registration as a charity for Greenpeace is not a foregone conclusion.  The Court warned Greenpeace that it will have to convince Internal Affairs that it is not involved in direct political lobbying in pursuit of its aims or that it has not been involved in any illegal activity.  The fact that Greenpeace banners are sometimes seen at environmental protests when activists trespass on industrial sites raises doubts about the legality of some Greenpeace activities.

re Greenpeace – Court of Appeal (16.11.12)

12.036

Trust: Christchurch Buildings Trust v. Church Property Trustees

The trust owning earthquake-damaged Canterbury Cathedral must build a new cathedral on the same site using insurance money for the rebuild, the High Court has ruled.  Legal action by concerned citizens seeking to preserve the city’s historic buildings has blocked plans by the Anglican church to use insurance money to build a temporary “cardboard cathedral” offsite.

The Anglican diocese in Christchurch has been in turmoil since earthquakes in 2010 and 2011 severely damaged its iconic cathedral.   The building was insured with insurance recoveries of some $39 million expected.

One group, dismayed by the loss of so many of Christchurch’s historic buildings lobbied to have the cathedral repaired.  The diocesan hierarchy had other plans.  Matters reached a head when government-appointed Canterbury Earthquake Recovery Authority (CERA) issued a “make safe” notice.  The diocese was given ten days to bring the cathedral down to a safe level; failing that CERA would move in and demolish the structure.  The diocese resolved to immediately demolish the cathedral to a safe height of several metres.  No firm decision was made on a rebuild, but indications were that the diocese regarded the insurance proceeds as part of general church funds to be used as it saw fit.

The High Court was told the cathedral site was established by a trust in 1851 as part of an overall plan by colonial settlement company, the Canterbury Association, to transplant part of England in the new colony.  This trust lives on now as Church Property Trustees.

Justice Chisholm said the diocese appeared to misunderstand the purpose of the Cathedral trust, which is to maintain a cathedral on its existing site.  The Trust is governed by the Trustee Act.  The Act specifies that any insurance money received must be used for the purposes of the trust only and can be used for the rebuilding or repair of trust property.

He ruled that the diocese could not proceed with any decision to use the insurance monies for a different purpose, adding that while the Cathedral Trust requires there to be a cathedral on the site, the building does not have to replicate the cathedral as it stood before the earthquakes.

Great Christchurch Buildings Trust v. Church Property Trustees – High Court (15.11.12)

12.038

Financial advisers: Financial Markets Authority v. Ross

Court appointed receivers can take control of a financial adviser’s business where the Financial Markets Authority fears loss of client funds.

The High Court in Wellington appointed receivers to companies run by financial adviser David Robert Gilmour Ross after investors complained to the Financial Markets Authority (FMA) about his dysfunctional management.  His investment business has about 900 clients, claiming to hold investments totalling some $430 million.

The FMA said it had received complaints from nearly 30 clients who had not received payments due.  There were serious concerns about management of the business: a failure to make decisions, failures to implement client investment instructions and inadequate records.  All staff had resigned.

The court was told Mr Ross was unavailable.  Subsequent newspaper reports indicated that Mr Ross was in hospital, suffering a mental illness.

Preliminary investigations by the FMA indicated that investments were held in New Zealand, Australia, North America and the United Kingdom.  Records were incomplete.  Tax returns for the business were two years in arrears.

John Fisk and David Bridgman of PriceWaterhouse Coopers were appointed as receivers to take control of the business.

Financial Markets Authority v. Ross – High Court (6.11.12)

12.039

Mortgagee sale: Hart v. ANZ

The forced sale of properties owned by high profile Auckland barrister Barry John Hart left him with a $20.5 million shortfall.  The High Court dismissed his claim that ANZ National sold the properties at an undervalue.

Mr Hart garnered considerable publicity in his campaign against ANZ Bank alleging the bank failed to act properly in its forced sale of substantial landholdings on Highway 16 in west Auckland.  At the time, Mr Hart owed ANZ in excess of $30 million with interest accruing at $200,000 a month.

The court was told ANZ took action after loan payments fell into arrears.  A “stand still” arrangement gave Mr Hart six months to find a buyer or buyers for the properties.  After that the Bank proceeded with mortgagee sales.

Mr Hart was highly critical of the Bank’s forced sale process, claiming the properties were sold at a gross undervalue.  Properties he claimed were worth in the region of $29 million were sold for $8 million.

Associate Judge Abbott said a mortgagee is required to take reasonable care in the sale process to obtain the best price reasonably obtainable at the time of the sale.  There is no obligation to postpone a sale in the hope of a better price later, or to break up assets and sell in a piecemeal fashion.  Specialist advice should be taken in selling assets with unique characteristics.  Descriptive advertising is required and must reach the largest possible number of potential purchasers.

He ruled that ANZ Bank had acted properly in conducting the sales.  It sought competitive tenders from three real estate agencies asking them to highlight their expertise in selling properties of the type in question and seeking their advice on the best marketing strategies.  The Bank undertook a $55,000 marketing programme spread over six weeks.  The court was told 116 people registered an interest.   Each was invited to tender for some or all of the properties on offer.

Mr Hart’s main criticism centred on the sale prices.

Evidence was given that ANZ Bank first obtained valuations from professional valuers Darroch.  They valued the three main farming blocks being sold at $14.3 million (market value) and $10.1 million (forced sale value).  They in fact sold for some $8 million.

Associate Judge Abbott said the prices obtained were not so widely different from the Darroch forced sale valuation to suggest the sale process was inadequate.  The advice ANZ received was that $8 million represented the best they could receive at the time.

The court was told forced sale prices commonly range at a discount of 26%-30% below market prices, but can reach discounts of up to 40%.  The discount in this case was 44%.

He dismissed Mr Hart’s claim that the properties were worth $29 million; a valuation obtained from valuers Colliers International in 2010.  This valuation was two years old and was based on an assumption that the farm blocks could be subdivided into residential lifestyle blocks. A subsequent application for a zoning change had been unsuccessful.

Hart v. ANZ National Bank – High Court (29.10.12)

12.040

Leaky homes: "Byron Ave"

In a landmark ruling with huge costs for ratepayers, the Supreme Court has extended council liability for negligent building inspections to include commercial buildings.  The previous legal view was that council liability extended only to residential homes.

Changes to the building code in the 1990s coupled with poor construction techniques has resulted in an avalanche of legal claims for the cost of remedial work on leaky buildings.  Often, a local authority is the only solvent party left standing as property owners sue builders, sub-contractors and the local council for damages.  Potential council liability has arisen where a local authority acted as certifier, signing off code compliance certificates stating that the building does comply with the building code.

Councils have strongly resisted liability.  But a string of New Zealand cases over previous decades have established a rule that owners of residential houses can sue councils for negligence.

A novel question arose with a Takapuna leaky building, being a “mixed use” development: a 23 level building known as Spencer on Byron containing a hotel on the lower floors and residential apartments on the upper floors. 

North Shore City argued there were strong policy reasons to limit council liability to residential homeowners only: homeowners lacked the sophistication to look after their own interests; by contrast, owners of commercial properties were not so vulnerable.

The Supreme Court ruled there were no policy reasons to stop council liability being extended to cover “mixed-use” buildings and purely commercial buildings.  It said not all homeowners are naïve; the wealthy and commercially sophisticated also own homes.  And not all commercial property owners are sophisticated; a first time business owner purchasing a corner dairy in a country town may well lack any business experience.

North Shore City argued the extension of liability to commercial premises will transfer millions, if not billions, of dollars in repair costs from building owners to council ratepayers.  The Supreme Court said this argument overstates the position: ratepayers will pick up any residual liability, but before that councils with insurance cover for negligence will get compensation from their insurer and they will also be earning income in fees for ongoing building inspection work.

Body Corp. No. 207624 (Byron Ave) v. North Shore City – Supreme Court (11.10.12)

12.041

Perpetual Trust: Trustees Executors v. Perpetual Trust

High Court orders have smoothed the way for Perpetual Mortgage Fund to be wound up.  The fund is illiquid.  It cannot honour the 437 redemption requests outstanding as at 11 September 2012 seeking payment of $18.3 million due to investors.

Investors learned in July 2012 that Perpetual was not able to honour Mortgage Fund redemption requests.  A court-ordered moratorium was imposed and two independent observers, Ms Fatupaito and Mr Duffy, were appointed to oversee Fund management.  This followed regulatory concerns about loans totalling $28.2 million made to business interests related to Perpetual.  The loans have since been repaid but investor nervousness about the probity of Perpetual management caused a run on its investment funds.

The Securities Act allows investment funds to be brought under judicial control where there is a significant risk that investors will be harmed.

The High Court was told that Perpetual’s Mortgage Fund is illiquid and cannot meet the avalanche of redemption requests.  Assets held by the fund may be insufficient to repay investors in full.  Short of a winding up, there is a risk some investors will be paid in full while others paid later may not.  This raises the possibility of unequal payouts to Mortgage Fund investors.

The Court was also told of concerns that further related party lending could be sourced from the Perpetual Cash Fund.

Court orders were made streamlining the process for winding up the Perpetual Mortgage Fund and to block any potential related party lending from the Perpetual Cash Fund.

Trustees Executors v. Perpetual Trust – High Court (19.09.12)

12.028

Tax: Tauber v. Inland Revenue

The Court of Appeal has dismissed challenges to search warrants obtained by Inland Revenue for access to private homes of people behind the Honk Group of companies.  Tax investigations allege tax avoidance and false tax returns. 

Inland Revenue must get a search warrant before entering the private home of any taxpayer.  Warrants were obtained to search the homes of David Andrew Tauber and Paul Nigel Webb, entrepreneurs behind the Honk group of companies and also the home of Maree Anne Bockett, a chartered accountant acting as tax agent for the Honk group through her company MB Accountants Ltd.

They argued the warrants were invalid because Inland Revenue had “over-egged the pudding” when applying for the warrants by presenting misleading information and overstating any alleged wrongdoing by the taxpayers.  The Court ruled that even if such flawed information was stripped out of the warrant application there were still grounds for issuing the search warrants.

The Court was told the tax investigation has been underway since 2008.  There had been extensive delays in providing information requested by Inland Revenue.  There were doubts as to the completeness of information provided. 

Inland Revenue was running up against statutory deadlines for issuing tax assessments and suspected the taxpayers were exploiting delays as a deliberate strategy.

Files seized had been embargoed while validity of the search warrants was argued in court.  The Court of Appeal ruled that Inland Revenue could use the information seized.  Honk Airport Trustees Ltd and Honk Land Trustees Ltd, two companies in the Honk group, are already involved in disputes before the Taxation Review Authority.  Inland Revenue said it took special care in both planning the investigation and carrying out the search and seizure to ensure it did not take any documents relevant to this litigation.

Tauber v. Inland Revenue – Court of Appeal (7.09.12)

12.042

Proceeds of crime: Solicitor-General v. Field

Disgraced member of parliament Philip Hans Field has been ordered to pay $27,480 being the assessed value of work carried out on his properties by immigrants providing free labour in the hope of getting a New Zealand visa.  This payment is in the nature of a fine, paid to the government not the immigrants personally.

Sentenced to six years imprisonment in 2009 after being convicted of bribery and attempting to pervert the course of justice, Field was sued under proceeds of crime legislation.  These rules are designed to stop offenders benefitting from crimes committed.

A number of Thai immigrants worked on five properties owned by Field: four properties in New Zealand and a house under construction in Samoa.  The work involved tiling, plastering and painting.  Evidence for the government priced the value of the “free” labour at $58,000.  Some of the work was described as being of a low standard and “pretty shoddy”.  Field said there is a difference between a thorough job and a quick job; he valued the labour at approximately $15,500.

The High Court fixed the penalty payable at $27,480.

Evidence was given that the four New Zealand properties were sold at an aggregate profit of $387,500 after being owned on average for a period of 18 months.

Solicitor-General v. Field – High Court (3.09.12)

12.025

Price-fixing: Commerce Commission v. Visy Board

With packaging company Visy Board fined $36 million in Australia for market rigging, the Commerce Commission is pursuing the company alleging similar market manipulation in this country.  The Court of Appeal ruled there is jurisdiction to prosecute an Australian company for market manipulation in New Zealand.

The court was told Visy Board and competitor Amcor Australia secretly decided in 2000 to carve up between them the Australian market for corrugated packaging after a debilitating price war through the 1990s.  They agreed at a top level to fix prices and divide the market between themselves.  Each supposed competitor put in uncompetitive tenders for nominated supply contracts.   When the whistle was blown, Visy Board agreed to a fine of $36 million and one of its senior executives was fined $500,000 for breaches of the Australian equivalent of the Commerce Act.

In New Zealand, corrugated packaging is used for the bulk supply of commodities like fresh meat, fruit and vegetables.  It is also used in secondary packaging of manufactured goods like beverages and processed foods.

The Commerce Commission alleges market manipulation by Visy Board and Amcor Australia extended to New Zealand.  As an example, a bulk supply tender to Mainland Meats saw Amcor prices significantly below Visy Board’s tender, and the reverse in tenders for Tip Top packaging.  Fonterra contacted Amcor saying the tender pricing for Tip Top looked suspicious when Amcor prices came in at twenty per cent higher than Visy Board.

When sued by the Commerce Commission, Visy Board said it was an Australian company operating out of Australia and could not be sued in the New Zealand courts for any alleged breach of the Commerce Act.

Both Visy Board and Amcor operate New Zealand subsidiaries of their Australian businesses.

The Court of Appeal ruled that the High Court rules gave jurisdiction for New Zealand courts to consider wrongful conduct carried out in New Zealand and the Commerce Act specifically covers decisions made outside New Zealand to the extent that those decisions affect the New Zealand market.

Commerce Commission v. Visy Board – Court of Appeal (31.08.12)

12.032

Capital + Merchant: R.v.Douglas, Nicholls & Tallentire

Directors of failed finance company Capital + Merchant were described as being driven by self-interest and greed when sentenced to long terms of imprisonment following convictions for theft.  For the theft of $19.7 million, Wayne Leslie Douglas and Neal Medhurst Nicholls were sentenced to seven and a half years jail; Owen Francis Tallentire five years jail for the theft of $12.1 million.

Each found guilty of theft as a person in a special relationship, the three directors used Capital + Merchant funds to finance personal business projects.  When the finance company went into receivership six of the company’s outstanding loans were to interests linked to the three directors: in number this amounted to just over ten per cent of the company’s loan investments.  In total the three directors had borrowed some $37 million dollars from their company.  Evidence was given that only $200,000 has been recovered.

Capital + Merchant was funded by public investors.  At the date of receivership there were some 7000 investors, many of them elderly and solely dependent upon Capital + Merchant for investment income.  The company prospectus and debenture trust deed said related party lending, such as loans to directors, was very severely restricted.

Justice Wylie said the directors intentionally breached these restrictions to advance their own interests.  The offending was sophisticated, requiring significant planning and premeditation using convoluted legal structures.  Particularly cynical was the use of Capital + Merchant funds when directors could not raise personal loans from outside sources.

Each director said he was not in a position to offer any reparations.

Douglas said he has no personal assets.  The family home is held in a trust.  Nicholls said he is the part-owner of an investment property which has no equity since it is heavily mortgaged.  The family home is owned by a family trust established by his father-in-law.  Tallentire said he has no savings. 

R.v. Douglas, Nicholls & Tallentire – High Court (31.08.12)

12.026