NZX: NZX Ltd v. Ralec Commodities

Enthusiasm outran reality with former NZX chief executive Mark Weldon’s plans to mirror Bloomberg’s success in monetising securities data by NZX becoming an antipodean agri-Bloomberg selling agricutural data.  The subsequent ill-fated purchase of an embryonic Australian grain trading platform turned nasty with High Court evidence of Weldon bullying Australian staff and claims NZX failed to properly support the project. 

NZX and Australian-based Ralec Commodities fought out a nil-all draw after three months of argument in the High Court canvassing who was at fault over a poorly performing 2009 joint venture.  Neither side had performed as promised but neither side was entitled to damages.

Justice Dobson described the deal as a case of Clear Grain Exchange owner Ralec Commodities being a very willing seller and NZX being a very willing buyer.  Mark Weldon as CEO of NZX envisaged the project growing quickly into a mini-Bloomberg worth at least $750 million to one billion; part of a strategic expansion labelled IMI: information/markets/infrastructure.

NZX agreed to buy from Ralec Commodities its online commodity dealing platform.  It was still a work-in-progress as Ralec sought to exploit commercial possibilities arising from the Australian Wheat Board’s then recent loss of monopoly control over bulk grain exports.  NZX agreed to pay Ralec A$7 million upfront, with later payments if specified performance targets were met.  NZX promised to sufficiently resource and finance the project to enable these earn-out targets to be achieved.

Justice Dobson ruled that while considerable resources were poured into the project, there was no evidence of the NZX board giving specific consideration to the level of resources required to achieve levels of turnover triggering Ralec’s earn-out.  The board left Mark Weldon with a wide level of discretion to implement the deal.  There was no evidence he specifically considered what might be needed to achieve Ralec’s earn-out.  Almost from the outset, NZX was very disillusioned with Clear Grain’s performance compared with that promised.  Trading levels proved to be only 14 per cent of projections.  NZX questioned the competence of senior staff at Clear Grain.  There was evidence of Mr Weldon bullying Clear Grain staff.  One senior staff member was fired.  NZX did not defend legal action taken to recover promised severance benfits.

Justice Dobson ruled Ralec was not entitled to damages despite NZX’s failure to specifically consider appropriate levels of resourcing.  Trading levels were so far below projections it was reasonable to defer further significant expenditure.

Ralec was in turn held liable for misrepresentations during the negotiations: representing grain trader GrainCorp would be putting one million tonnes through the Clear Grain Exchange next season when there was no realistic prospect of that happening (because of interpersonal rivalries within the industry); claims Clear was well supported by the grain industry (based on a minscule increase in trading volumes over the previous season with large buyers trying the new platform on a trial basis only); claims costs were reasonable (Clear was charging a higher transaction charge than its competitors and was requiring payment clearance within five days whilst the industry norm was 30 days).  NZX was not awarded damages.  It was a high-risk investment by NZX.  Clear Grain had accumulated losses of $4.2 million at the time of the purchase.  There were too many uncertainties about future profitability to determine damages.  Clear Grain was a start-up business, with a limited trading history and facing a wide range of possible commercial outcomes.  Most of the $A7 million paid was for software and access to Clear’s online trading platform.        

NZX Ltd v. Ralec Commodities – High Court (15.11.16)

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Tax: Gt North Motor v. Inland Revenue

Tax deductions and losses totalling nearly $22 million claimed for fifteen tax years by a John George Russell controlled company were disallowed in the High Court and a 100 per cent penalty confirmed for taking an abusive tax position.  Justice Downs described as deliberate and cynical steps taken by Mr Russell to bring Great North Motor Company Ltd out of liquidation only after waiting four years in an attempt to bar Inland Revenue from reopening its tax file. 

Mr Russell has a thirty year history of grappling with Inland Revenue over tax avoidance.  His tax niche lies in attempting to exploit tax loss companies and tax losses carried forward.  He was bankrupted in 2015 after losing a dispute over his own tax returns.

One year later he was back in court defending losses claimed by Great North Motor Company Ltd, a company he controlled as receiver: $19.9 million for interest deductions and $1.7 million for tax losses brought forward from 1995.

The High Court was told Gt North Motor was struck of the register of companies in 1996, reinstated the following year and then put into liquidation in June 1998.  Mr Russell was in charge of the company’s tax accounts throughout this period.  Nothing happened until May 2005 when Mr Russell appointed himself receiver of Gt North Motor's assets using a debenture issued to Glen Eden Holdings, another company he controlled.  Gt North Motor was struck off the register of companies three days later.  Undeterred, Mr Russell proceeded to file Gt North Motor tax returns for ten years covering 1996-2005.  Claimed losses were disputed by Inland Revenue.  Mr Russell was playing a long game.  He waited until 2010 before applying to reinstate Gt North Motor to the company register.  Then in a 2011 tax return claimed losses for Gt North Motor of $22 million for the period 1996-2011 arguing this could not be challenged; Inland Revenue was time barred from questioning tax losses given the four years elapsing since Gt North Motor had been struck off.

Justice Downs ruled the time bar commences only once a company is restored to the register.  Prior to that, there is no taxpayer Inland Revenue can deal with.  Removal from the register of companies means a company as a legal entity no longer exists.  Reinstatement brings a company back to life.

Justice Downs dissallowed interest deductions of $19.9 million ruling the manner in which deductions arose amounted to tax avoidance.  What was initially a debt of $380,200 was by 2012 a debt of supposedly $20.7 million.  The loan contract lacked arms-length commerciality, His Honour said.  Entities controlled by Mr Russell were both creditor and debtor.  Interest was payable at any rate set by the creditor.  Interest was not payable until demanded.  The default interest rate was 28 per cent.  Gt North Motor had no means to service interest payments.  The company has not traded since 1993.  Gt North Motor has never paid a cent of interest, nor will it, and it is most unlikely it was intended to, Justice Downs said.          

Great North Motor Company v. Inland Revenue – High Court (11.11.16)

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Fraud: Proctor v. Police

Two year five months jail for Rebekah Laura Proctor after defrauding Victoria University of $481,000 was reduced on appeal to twelve months home detention plus 100 hours community service.

Proctor pleaded guilty to fraud after discrepancies discovered by a senior manager led to an audit.  She had created 106 false invoices over three years billing the University for non-existent contracts.  Proctor appealed the severity of her jail sentence.

Justice Cull said the sentence failed to take fully into account mitigating factors.  Proctor repaid $250,000 after selling the family home, family car and emptying her bank account.  The sentencing judge did not have a psychiatric report identifying Proctor as suffering from depression prior to the offending.  Further depressive illnesses arose during the offending triggered by the stresses and demands of her work, financial pressure and a young family all compounded by an unexpected pregnancy.  The fact Proctor had already served four months imprisonment prior to the appeal was also taken into account.  

Proctor v. Police – High Court (7.11.12)

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Employment: NZ Basing v. Brown

Two Cathay Pacific pilots living in Auckland failed to overturn compulsory retirement rules in their Hong Kong-based employment contract with their call to enforce New Zealand age discrimination rules.  Employment contracts governed by foreign law will be enforced in this country said the Court of Appeal, unless they breach a New Zealand statute or contain terms that would shock the conscience of a reasonable New Zealander.

Cathay pilots David Brown and Glen Sycamore challenged their compulsory retirements at age 55.  The Court of Appeal was told they flew A340 and A330 aircraft between Auckland and Hong Kong employed by NZ Basing Ltd, a Hong Kong subsidiary of Cathay Pacific.  Cathay has over 3000 pilots worldwide with NZ Basing employing its New Zealand-based crew.  From 2004, many airlines began raising retirement ages extending retirement to age 60 for pilots in command and age 65 as co-pilot.  As part of this international trend, Cathay Pacific raised its retirement age from 55 years to 65 but with a lower pay scale for this ten years of service.  Messrs Brown and Sycamore declined to take up the new terms on offer, saying they were not going to bargain down their salary in order to work longer.  With retirement for them looming at age 55 they challenged the retirement rule arguing it breached in New Zealand the Employment Contracts Act and the Human Rights Act.

The Court of Appeal said the modern world of peripatetic employment has raised new conceptual and practical difficulties for private international law – the rules governing cross-border contracts.  As a general rule, courts are willing to enforce the country’s rules contracting parties have agreed is the “proper law” governing their relationship.

Messrs Brown and Sycamore signed employment contracts with Hong Kong law named as the “proper law”.  Hong Kong does not have laws prohibiting age discrimination. 

There is a need for certainty and confidence in recognising and enforcing agreements which regulate transnational activities, said the Court.  NZ Basing’s forced retirement at age 55 was enforceable.  It did not breach New Zealand law the Court of Appeal ruled: breaching neither the Employment Contracts Act (section 238 which prohibits “contracting out” does not override rules of private international law) nor was it contrary to public policy (rules on retirement age are flexible reflecting a range of fiscal, social and cultural factors).

NZ Basing Ltd v. Brown – Court of Appeal (4.11.16)

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Asset Forfeiture: Commissioner of Police v. Burgess

A west Auckland lifestyle property and $20,000 cash together with a John Deere tractor and 1980 Corvette were forfeited to the Crown as proceeds of crime to satisfy a $2.03 million High Court order against Rob and Llannys Burgess implicated in fencing stolen jewellery as second-hand dealers. 

Rob Burgess was convicted in 2014 of receiving stolen property.  Mrs Burgess was convicted of offences under the Secondhand Dealers and Pawnbrokers Act and held subsequently in the High Court to be well aware of her husband’s illegal activity.  Assets controlled by the two were confiscated following a Criminal Proceeds (Recovery) Act hearing.  The court was told stolen gold and jewellery were purchased for cash with the gold then melted down at their lifestyle property in Henwood Road, Taupaki.  Police identified that they received $2.03 million over a six year period from melting down stolen gold.  Their declared income over the same period averaged less than $7300 per year. 

Justice Venning ordered forfeiture of assets proved to be purchased with the proceeds of crime.  The major asset forfeited is Henwood Road, purchased in 2006 for $1.05 million.  Mrs Burgess was held entitled to keep $372,000 from the proceeds of sale (being a half share of the equity in Henwood Road when purchased) and their son Karl Burgess was entitled to $42,000 (as compensation for time spent upgrading and extending buildings at Henwood Road).  There was no evidence that Karl Burgess was aware of any criminal activity by his father prior to arrest.

Commssioner of Police v. Burgess – High Court (2.11.16)

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