Partnership: Gardner v. Gardner

Business assets purchased using partnership funds and recorded in partnership accounts are partnership assets, even where they are registered in the name of one partner only.

The High Court was asked to rule on ownership of a north Canterbury irrigation water consent as part of a family dispute over a farming partnership at Emu Plains, Waiau.  Ian Gardner farmed in partnership with his son Andrew but claims the partnership is now dissolved.  The High Court has been asked to rule on who owns what proportion of the business.  In a preliminary skirmish, ownership of rights to irrigation water was at issue.  Andrew claims the resource consent for water is his own personal property.  He made application for the consent, the consent was issued in his name and he says this right to water is part of his long-term business strategy for the farm.  Associate Judge Osborne ruled the water consent is a partnership asset.  It was paid for out of partnership funds and is recorded in the farm accounts as a partnership asset.  While son Andrew did the leg-work, the resource consent was purchased for the benefit of the farming partnership, not Andrew personally.

Gardner v. Gardner – High Court (25.08.15)

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Pollution: Auckland Waterfront v. Mobil

Mobil Oil has been ordered to bear the ten million dollar cost of remediating contaminated land in the Wynyard Quarter on Auckland’s waterfront.

The Court of Appeal overturned an earlier High Court ruling which had put the cost on Auckland’s ratepayers.  At issue was the effect of a 1985 lease agreement covering Mobil’s bulk oil storage facilities on the waterfront.  Predecessor companies in the Mobil group had been leasing the site since 1925.  Mobil left in 2011. Auckland Waterfront Development Agency owns the land.  Mobil and the Agency agreed it would cost ten million dollars to decontaminate the site.  They could not agree on who should pay.  It was acknowledged that the land had become so contaminated from oil spills that by the 1970s complete remediation was required.  Mobil said a “clean and tidy” clause in its 1985 lease required remediation of the land surface only; it did not have to clear up contaminants which had seeped into the sub-surface.

The Court of Appeal went back to prior leases for the site in place since 1925 to identify liability for ground contamination.  It said the pre-1985 leases did not allow spillage as a necessary incidence of storing bulk oil.  At the time of signing the 1985 lease, Mobil was presumed to be aware of its potential liability for contamination from prior spillages.  This liability was to be read on into the 1985 lease, the Court said.  Land law assumes rights of possession to an area of land extend from the sky above to the centre of the earth.  Mobil was leasing not just the land surface, but also the sub-surface below.  Mobil’s bulk oil facilities required building foundations into and running pipelines through this sub-surface.  Having a right to use the sub-surface meant Mobil was liable under the “clean and tidy” clause to remediate not only the surface but also to remove contaminants which had seeped from the surface into the sub-surface.

Auckland Waterfront v. Mobil – Court of Appeal (25.08.15)

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Witness Immunity: EBR Holdings v. McLaren Guise

Witnesses immunity from legal action extends to those examined under oath by liquidators, the High Court ruled.

Any person giving evidence in court enjoys legal immunity from civil action whether or not the evidence given was true or false, or given in good faith or with malice.  The immunity rule rule is not designed to encourage lying, but to protect witnesses from vexatious litigation like threats of defamation actions intended to discourage them from giving evidence.  The immunity rule does not protect witnesses from criminal prosecution for perjury: deliberately giving false evidence.

In a landmark case, the High Court ruled witness immunity extends to court-like procedures such as a liquidator’s statutory power to demand information about insolvent companies.  The Companies Act empowers liquidators to summon witnesses, put them on oath and force answers to questions about a company in liquidation.

Questions about the extent of witness immunity followed the liquidation of EBR Holdings Ltd.   Attempts to sue its shareholders for current account debts recorded in the company’s financial records foundered when Mr Nigel Harrison, a chartered accountant from west Auckland acting for the company intervened, stating in an affidavit that the shareholder current account debts had been substantially repaid.  The liquidators subsequently questioned Mr Harrison under oath.  They allege Mr Harrison’s evidence was incorrect and further that he knew it was incorrect.  The shareholders’ current account debts with the company were claimed to be repaid by way of a set off against debts owed by the company to third parties.  The liquidators sued Mr Harrison and his accounting practice claiming damages for the time and money spent on the earlier aborted debt recovery action against the company’s shareholders.

Justice Brewer ruled witness immunity applied to Mr Harrison’s evidence in respect of both the original debt collecting action against EBR shareholders and the subsequent statements made under oath at the liquidators’ examination.  The liquidators could not sue to recover their wasted time and costs, even if Mr Harrison’s evidence was wrong.

EBR Holdings Ltd v. McLaren Guise – High Court (21.08.15)

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Insurance: Southland Indoor Leisure Centre v. Invercargill City

IAG Insurance is getting back $16.9 million dollars from Invercargill City after paying out for damage to the Southland Indoor Leisure Centre following a catastrophic roof collapse in 2010.

The Leisure Centre roof collapsed in September 2010 after heavy snow.  Engineering investigations found snow was not the cause of the collapse; roof trusses were not welded correctly to specification and had been signed off without proper checks.  Leisure Centre insurers IAG paid for the rebuild, then exercised its rights of subrogation to sue the Council and the project engineer for negligence.  Having paid on a claim, insurers have a legal right to stand in the shoes of the insured client and exercise the client’s legal right to sue any person responsible for the loss.

Invercargill’s massive indoor stadium was built with local money.  The High Court was told concerns were raised during construction in 1999 that the roof trusses were sagging.  Remedial work was ordered.  Evidence was given that the remedial work was not properly carried out, the contract engineer signed off the work without inspecting it and the Council issued a building code compliance certificate without first getting all the necessary paper work.  The Council’s building inspector didn’t agree to the code compliance certificate being released.  It appears a junior staff member expedited the certificate’s release on her own initiative to enable a liquor licence application to be made for the Leisure Centre.

Justice Dunningham ruled the Council was negligent in issuing a compliance certificate for the roof truss repair when it had no information before it to reasonably conclude the work complied with the building code.  Local engineer, Mr Tony Major, was consulting engineer for the project.  He was held ninety per cent to blame for the consequent damage.  Mr Major had primary responsibility to monitor the remedial work, ensuring it complied with specifications and the building code.  Justice Dunningham said Mr Major did not so much as undertake the monitoring negligently, he simply did not undertake it at all, relying on the steel fabricator’s word that the work was done correctly.  Mr Major’s insurers fronted with one million dollars as part compensation for the damage.

Southland Indoor Leisure Centre v. Invercargill City – High Court (20.08.15)

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Share valuation: Burnett v. Patterson

By cheekily offering to sell their shares in a closely-held company to a minority shareholder at a price well in excess of what they considered the shares’ true value in order to settle a shareholder dispute, majority shareholders gave the High Court ammunition to justify a better payout for the departing minority shareholder.

Alexandra Burnett sued in the High Court to settle the value of her forty per cent minority shareholding in SciMed Ltd, supplier of high-tech scientific equipment to research laboratories and district health boards.  She claimed to have been frozen out of a management role within the company by majority shareholders: father and son, Denholm and Sean Patterson.

The court was told SciMed started business in 2009, taking over a valuable agency agreement with PerkinElmer Inc.  Listed in the US, PerkinElmer sells and services scientific equipment.  SciMed generated 98 per cent of its revenue through the PerkinElmer agency.  Each SciMed shareholder was also a director, with Ms Burnett responsible for sales and support.  After her business relationship with the other two directors broke down, she was removed as director.

Justice Gendall ruled that the majority shareholders acted in an “unfairly prejudicial” manner towards Ms Burnett by removing her as director.  As a forty per cent shareholder in a closely-held company there was an expectation she would be involved in management.  Under the Companies Act, she was entitled to be bought out by the remaining shareholders at fair market value.  Assessing “fair value” is difficult in closely-held companies; there is no open market.

A valuer for Ms Burnett valued the company at about $1.5 million dollars and her forty per cent interest at $537,500.  Majority shareholders valued the company at $400,000 and the minority interest at $160,000.  Justice Gendall said the million dollar valuation was too high.  This was valuing SciMed as if it were a listed conglomerate like PerkinElmer when in fact SciMed ran an agency.  Just prior to the High Court hearing, the majority shareholders made an open offer to Ms Burnett: they would buy her out at a price of $160,000 paid immediately with two further annual payments of $15,000 conditional on Sci Med keeping the PerkinElmer agency, or in the alternative they would sell to her their majority shareholding at $450,000.  They emphasised that they did not wish to sell and considered the $450,000 offer to be in excess of the shares’ worth, but only made the sell offer as a means of settling the dispute.  Justice Gendall said a $450,000 sell offer being made by two shareholders holding a majority and who were intimately involved in the business gave an indication of the true market value for SciMed shares.  His Honour fixed the price to be paid Ms Burnett to buy out her forty per cent holding at $290,000 – an increase of $100,000 over the $190,000 offered by the majority shareholders prior to the High Court hearing.

Burnett v. Patterson – High Court (19.08.15)

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