Insolvency: Horton v. McKillen

Creditors successfully challenged a part-payment scheme put up by Shane McKillen, claiming to be broke after the failure of drinks company VnC Cocktails.  Creditors will require a better offer, or he faces bankruptcy.

The High Court refused approval to a scheme offering creditors three cents in the dollar saying that related party family debts totalling more then $23 million should not have been counted in votes approving the scheme and that Mr McKillen should not be able to hide behind family trusts while offering up a minimal return to unpaid creditors.

Personal creditors of Mr McKillen challenged an Insolvency Act part-payment scheme voted by creditors in February 2015.  Mr McKillen claims to have debts of $33.8 million and assets of only $107,500.  His company, VnC Cocktails Ltd, perished following a high profile push into the US market.

Two creditors challenged the 2015 part-payment scheme: Bank of New Zealand claiming $3.6 million and investor Audrey Investments Ltd claiming $2.4 million.  They said the proposal was pushed through with votes from related party debts; family trusts in which Mr McKillen was a discretionary beneficiary or from investment vehicles where he exercised indirect control.  These votes alone gave a voting majority of 73 per cent.  A 75 per cent majority is necessary to approve a part-payment scheme.

Evidence was given that Mr McKillen was offering creditors three cents in the dollar to be paid at the rate of one cent in the dollar each year over three years.  Only external creditors were to share in the payout; related party debts were to be written off. 

Associate judge Doogue ruled the bulk of the related party debt should have been excluded from voting.  This debt arose from personal guarantees given by Mr McKillen and there was no evidence the guarantees had been called up.  Judge Doogue further said he would have refused approval for the part-payment scheme in any event.  As a matter of commercial morality, creditors should not be forced into a part-payment scheme where a debtor creates a complex structure of family trusts providing no clarity as to financial resources available, he ruled.     

Horton v. McKillen – High Court (11.12.15)

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Tax: Michael Hill v. Inland Revenue

Inland Revenue must act consistently, treating taxpayers in the same circumstances similarly, the High Court ruled in a preliminary hearing over Michael Hill Jewellers disputed $35 million tax deductions derived from its trans-Tasman restructuring.

Michael Hill Group transferred its intellectual property and franchising operations to Australia in 2008, using a wholly-owned Australian limited partnership established in Queensland.  Inland Revenue in New Zealand disputes the claimed tax effect of this restructuring which saw Michael Hill claiming tax deductions in both Australia and New Zealand and reducing assessable income in New Zealand.  Tax deductions totalling $35 million for the last six tax years are in dispute.

The High Court was told Michael Hill says it became aware of another taxpayer successfully using the same restructuring template when it applied to Inland Revenue for a binding ruling on part of its proposed restructuring.  Taxpayers can get advice in advance from Inland Revenue on the potential tax effect of a proposed  transaction.  This can provide some certainty for business.  Inland Revenue’s response to Michael Hill’s request for a ruling obliquely referred to another tax file, resulting in the inadvertent disclosure to Michael Hill of another taxpayer getting approval for a similar transaction.

One of the arguments raised by Michael Hill in its $35 million tax dispute is that Inland Revenue must act consistently: taxpayers who have used the same, or similar, tax structures must be treated the same.  In a preliminary hearing, Inland Revenue applied to have this part of Michael Hill’s claim struck out.  Justice Toogood ruled the claim to inconsistency should not be struck out.  There is a legal obligation on Inland Revenue to act consistently.

Whether Inland Revenue did act inconsistently is yet to be decided.  Inland Revenue says there are “significant differences” between the Michael Hill restructuring and the transaction inadvertently disclosed.

Michael Hill Finance v. Inland Revenue – High Court (10.12.15)

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Real Estate: Domb v. Real Estate Agents Authority

The Real Estate Agents Authority can demand those working in real estate  authorise access to more than their criminal conviction record.  Other information held by police can be relevant in deciding whether a person is “fit and proper” to hold a licence.

In a test case, the High Court was asked to rule on the extent of police inquiries necessary to establish if applicants satisfy the “fit and proper” test as part of annual relicensing in real estate.  Agents took exception to the wide-ranging power demanded by the Authority to access a record of their criminal history; not only their criminal record but also any interaction with the police.  This, they said, was an abuse of power and went beyond what was needed to weed out bad behaviour.  Disclosure of crimes involving dishonesty were relevant they said, but not driving offences.

The Real Estate Agents Act is consumer protection legislation.  It bars any person convicted of a dishonesty offence is the previous ten years, or convicted of specified Fair Trading Act offences in the last five years.

Justice Collins ruled the Authority could demand access to more than applicants’ convictions.  It was also entitled to details of both charges pending and discharges without conviction where the offence recorded is relevant to questions of being a “fit and proper” person.

His Honour said applicants are still entitled to the benefit of the Clean Slate Act: offences more than seven years old need not be disclosed provided no jail term was imposed for that offence,  there has been no further offending in the subsequent seven year period and any fines or reparations ordered have been paid.

Domb v. Real Estate Agents Authority – High Court (10.12.15)

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Cheques: Byrne v. Rose

Use of cheques to settle business debts are falling out of favour but they still have benefits for suppliers.  A fast track court procedure for getting judgment on a bounced cheque is far quicker than having to sue on a disputed unpaid debt.

Golden Bay farmer Carolyn Rose was ordered to pay local builders $176,818 as the amount of two cheques offered in partial payment of a new dairy shed on her Takaka farm after the two cheques were dishonoured by her bank for lack of funds.

A cheque by itself is a written promise to pay, independent of the underlying debt.  A dishonoured cheque is stark evidence of a failure to perform this written promise to pay.  A fast track summary judgment procedure can be used to get a quick court judgment for the amount unpaid.  It is for the debtor to prove there is an adequate defence for not honouring the cheque.

The High Court was told Mrs Rose initially expected her new dairy shed to cost no more than $150,000.  Someone else applied for a building consent from Tasman District Council, estimating the likely building cost at $250,000.  Armed with a buillding consent, Mrs Rose arranged for a local firm of builders to construct the shed apparently without first getting an estimate or a quote.  The final bill came in at over $500,000.  The builders sued for $450,480 being the unpaid balance.

Mrs Rose disputed the bill.  She alleges the shed is not “Fonterra-compliant”, and that there are problems with the roof height, drainage channels and sumps.  She says the shed floor is too slippery and will cost $18,700 to remediate.  One cow had to be put down after slipping over.

Associate judge Matthews ruled Mrs Rose was liable immediately for $176,818 unpaid on the two dishonoured cheques.  She had no tenable defence for not honouring these promises to pay.

The balance payable on the final construction bill requires a full court hearing to determine whether Mrs Rose’s complaints about the standard of final construction justify any reduction.

Byrne v. Rose – High Court (10.12.15)

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Earthquake: Attorney-General v. IPENZ

The High Court ruled engineer Alan Reay could not argue the merits of his professional disciplinary dispute with IPENZ in the middle of government litigation trying to force the professional engineering body to hear complaints about Dr Reay’s alleged involvement in designing the CTV building which collapsed in the 2011 Christchurch earthquake killing 115 people.

In 2012, two complaints were made to the Institution of Professional Engineers (IPENZ) about Dr Reay’s alleged involvement in the CTV building’s design.  One was a private complaint made on behalf of families affected; the other laid by the Ministry of Business and Employment.  Membership of IPENZ is voluntary.  When Dr Reay resigned as a member, IPENZ decided it no longer had jurisdiction to consider the complaints.  While a subsequent High Court hearing decided IPENZ could still deal with complaints arising from Dr Reay’s professional activities whilst he had been a member, IPENZ decided its job was done and it would not reopen the disciplinary hearing.

Government lawyers have now sued, requesting a court order that IPENZ reconsider the Ministry’s complaint.  This case has yet to be heard.  As part of the litigation, Dr Reay seeks to have the government application dismissed.  He filed papers alleging IPENZ had acted in an unfair and unreasonable manner in its earlier investigation and had breached his rights to natural justice.

Justice Brown ruled Dr Reay could not argue the merits of any IPENZ investigation in the middle of a case narrowly about whether IPENZ should undertake a disciplinary investigation.  These are arguments to be dealt with later, should there be another IPENZ investigation.

Attorney General v. IPENZ – High Court (9.12.15)

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