Insolvency: re Unka

Understating debts by some eight million dollars meant the High Court refused a part-payment insolvency proposal put forward by guarantors of the financially unsuccessful Raumati Beach shopping village, near Wellington.  This despite unanimous approval from those creditors who voted and favorable comments about the guarantors’ integrity.

Mr Keran Unka, who managed the failed project is bankrupt.  Members of his family, at risk of bankruptcy because they guaranteed project borrowings, put a part-payment proposal to creditors.  His wife and two sons offered to each pay $18,000 in 36 monthly instalments of $500.  If accepted by a majority of creditors and approved by the court, a part-payment scheme under Part 5 of the Insolvency Act wipes the balance due.

The High Court was told the guarantors were jointly liable on debts totalling some $5.2 million.  They have minimal personal assets.  Creditors asked to vote on the part-payment proposal were given less than a week to respond.  All who responded voted in favour.  A number expressed sympathy for the position family members were left in.  It later transpired that not all creditors had been notified; further creditors owed another eight million dollars had not been advised of the proposal.

Associate judge Smith refused approval.  The huge understatement of liabilities and the very short time frame given for only some creditors to consider the proposal meant the court was unwilling to make an order binding on all creditors.  The guarantors may still put a further more accurate Part 5 proposal before the court, he said.

re Unka – High Court (20.05.15)

15.052

Maori: Fenwick v. Naera

Plans to exploit geothermal resources at Tikitere near Rotorua are on the back burner after the Supreme Court ruled a joint venture agreement be referred back to the Maori Land Court because one trustee voting in favour had a conflict of interest.  This ruling affects business decisions being made by the over 5500 ahu whenua trusts holding communally-owned Maori assets.  English law took centuries to create rules governing conflicts of interest within general business relationships; clear rules are yet to be developed for the special characteristics of Maori business.

The Tikitere Trust was set up in 2003.  Trustees have power to develop its 32 hectares as a geothermal tourist park along with authority to establish a geothermal power station.  Tikitere Geothermal (owned by the Tikitere Trust) was set up as a business vehicle to exploit commercial possibilities in the area.  Arguments over a 2008 joint venture agreement between Tikitere and two neighbouring Maori Trusts have been rumbling through the courts with seven beneficiaries of Tikitere Trust objecting to the joint venture.  The Trust has over 1200 beneficial owners.  At a meeting of Tikitere Trust beneficiaries, members voted against the proposed joint venture by a margin of fifty votes: 89 against; 39 for.

The joint venture’s validity was challenged in the Supreme Court on the grounds that three of the Tikitere Trust trustees had failed to protect the interest of beneficiaries by allowing their personal interests to conflict with their duties as trustees.  Equity expects trustees to exercise single-minded loyalty.  Any hint that a trustee may benefit personally will see courts overturn the trustee’s decision.  This is problematic within Maoridom; familial links run deep. 

The Supreme Court ruled one Tikitere Trust trustee did have a disqualifying conflict of interest when agreeing to the joint venture.  She holds approximately two per cent of shares in the Tikitere Trust, personally owns some five per cent of shares in a second trust which is party to the joint venture and her family hold at least 20 per cent of shares in that second trust.  She should not have been involved in negotiating and signing the joint venture.  She had a marked personal interest in the outcome.

The general rule is that the courts cancel any contract tainted by a trustee’s conflict of interest.  The Supreme Court ruled that cancellation was not the only outcome with ahu whenua trusts.  The Te Ture Whenua Maori Act governing ahu whenua trusts supports Maori control of Maori assets.  Inevitably, trustees will be beneficiaries.  The Court ruled that the tenor of the Act is for the Maori Land Court to make a pragmatic decision when faced with a trustee’s serious conflict of interest.  This may involve replacement of those trustees who have a conflict enabling an earlier business decision to be considered afresh.

Fenwick v. Naera – Supreme Court (20.05.15)

15.051

Greymouth Petroleum: GXL Royalties v. Greymouth Gas

Todd Corporation took Greymouth Gas to the High Court chasing access to accounting records in a dispute over royalties payable on a Taranaki project.  There are suspicions Greymouth is padding expenses recoverable before royalties are payable.

Todd subsidiary, GXL Royalties, joined with oil and gas competitor Greymouth Gas in the commercial exploitation of a Taranaki prospect.  GXL gets five per cent of the “output value” after Greymouth Gas has recovered its intitial investment.  GXL is entitled to have an independent auditor verify claimed initial investment costs.

The High Court was told Greymouth calculated these costs at $45.6 million.  In 2013, after a fruitless two years attempting to complete the audit, Ernst & Young told GXL it was refused access to supporting documentation covering major components of these costs.  The auditors flagged the appropriateness of $14.6 million claimed to be incurred by the permit operator, a US-controlled company called Swift Energy, and the amount of $16.51 million claimed spent on drilling rigs supplied by Greymouth Gas related companies.  

Ernst & Young was refused access to the primary accounting records.  GXL is suing Greymouth, alleging the auditor was misled.  Justice Gilbert ordered access.  The royalty agreement did not state that Greymouth’s accounting records for the initial investment were confidential.  Access is necessary to complete the audit envisaged by the parties earlier royalty agreement, he said.

GXL Royalties Ltd v. Greymouth Gas – High Court (20.5.15)

15.054

Maori: Bidois v. Leef

Disaffected members of Bay of Plenty iwi Ngati Ranginui failed in attempts to identify historical possession of land as a separate hapu entitling it to specific compensation within the iwi’s $38 million Treaty settlement.

Ngati Ranginui settled compensation with the Crown in 2014 for nineteenth century land confiscations in the Tauranga region.  The iwi had decided that 30 per cent of its Treaty settlement would be shared equally amongst hapu with the balance divided on a formula proportionate to land wrongly confiscated.  Pirirakau, with its 1273 registered adult members, was recognised as one of eight hapu within the iwi.  Ngati Taka, with 306 members, also claimed to be a separate hapu and was accorded this status over the objections of Pirirakau; the two hapu share a common ancestor in paramount chief Te Ua Maungapohatu.  Matters reached a head over distribution of the 70 per cent as direct compensation for loss of land.  Between Pirirakau and Ngati Taka about eight million dollars is at stake.  Pirirakau said it held mana whenua over the land during the period of confiscations: 1840 to 1865.  Ngati Taka then held no separate status as a hapu, it said  The two hapu agreed to go to arbitration.  The arbitrators found for Pirirakau.  Ngati Taka appealed, claiming the arbitration process was flawed: due process was not followed and one arbitrator was biased.

The Court of Appeal was told Mr Kuku Wawatai, head of Maori Studies at Bay of Plenty Polytechnic, together with retired Maori Land Court judge Mr Heta Hingston were appointed arbitrators.  At the outset Mr Hingston disclosed his spouse has links to Pirirakau.  The two hapu agreed the process to be followed for their arbitration.

The Court of Appeal stated that the process actually followed could not in any sense be regarded as a model arbitration, but the two hapu did follow the arrangements agreed upon.  The process could not be said to have prevented a fair hearing.  Mr Hingston’s links to Pirirakau had been disclosed and there were no allegations of actual bias.  The result of the arbitration stood. 

Bidois v. Leef – Court of Appeal (18.05.15)

15.050

Estate: McKeown v. Small & Geary

Brother was set against sisters in a dispute over who carried investment losses incurred in their parents’ estates.  Emotions were coloured by their mother’s actions in the last year of her life disinheriting her son.

The High Court ordered two sisters to pay $93,126 plus accrued interest to their brother James McKeown as compensation for an incorrect division of their father’s estate after investment losses in South Canterbury Finance and Dominion Finance were wrongly apportioned.

Evidence was given that their parents signed mutual wills in 2002 recording that their three children would ultimately share their estates equally.  Their father died first.  His widow died six years later.  In the interim she changed the terms of her will with the effect of disinheriting son James.  In an accompanying note she explained her reason: James had received “help” when purchasing the family farm in the Totara Valley near Timaru while her daughters had not received similar benefits. 

James did not inherit from his mother’s estate or receive any capital from a family trust set up by his parents.  He did not challenge these outcomes but did take issue with the way investment losses had been calculated when valuing his father’s estate.  Along with his two sisters, he received a one third share of his father’s estate.  These funds did not become available until after his mother’s death in 2008.  James claimed his father’s estate was valued at $944,300; his sisters said it was $661,500 – the difference being who bore investments losses in the six years between each parent’s death.  Rules governing business partnerships were applied. 

The court was told their parents had been in a farming partnership called PS & HM McKeown.  While in partnership, they placed money with South Canterbury Finance and Dominion Finance.  Investors in these companies were later to suffer substantial losses. Funds for these investments came from the farming partnership.  Partnership law states that assets purchased with partnership money belong to the partnership, unless partners agree otherwise.  Partnership law also states that a partnership ends automatically on the death of a partner unless the partnership agreement provides otherwise.  Justice Gendall ruled that on death the father’s estate did continue in partnership with his widow because his will specifically authorised his trustees to do so.  This meant the failing investments continued to be held by the partnership since it continued beyond his death.  As a result, investment losses fell on the partnership and ultimately on all three of the children who inherited.

Tax advisers acting for the estate had contributed to the confusion by assuming the South Canterbury and Dominion Finance investments had been the father’s personal investments.  This led to the investment losses being incorrectly allocated solely to the father’s estate, directly impacting on James’ limited inheritance.

Justice Gendall was critical of accounting records maintained for the partnership, especially given the oddity that the father was recorded as receiving a salary for some time after his death.

McKeown v. Small & Geary – High Court (18.05.15)

15.049