Richard Yan: Mainzeal Property v. King Facade

Plans by Mainzeal’s Richard Yan for a hotel and vineyard on Waiheke Island hosting Chinese Communist Party officials are at standstill.  Isola Vineyards Ltd is in liquidation with assets of 33,000 bottles of wine, land on Onetangi Road valued at $1.9 million and some $727,500 frozen in a law firm’s trust account.  The High Court ordered $2.16 million damages be paid by Isola to Mainzeal liquidators following 2012 debt restructuring trying to prevent Isola going down with the Mainzeal ship.

Isola is controlled by Mr Yan and his spouse.  The High Court was told purchase of Isola was funded with Mainzeal money, channelled through a related company: King Façade Ltd.  With Mainzeal’s imminent collapse, Isola was at risk.  Mainzeal would want its money back.

In early 2012, Mr Yan arranged a restructuring of King Façade’s debt.  This was to rationalise King Façade’s tax position, Mr Yan told the High Court.  It had the effect of eliminating debt owed to King Façade’s only external creditor, Bank of New Zealand, and increasing the debt owed a related company: Richina Global Real Estate Ltd.  Curiously, this increased debt was structured as a contingent debt; repayable in ten years and then only if Richina Global was profitable. King Façade’s contractual right to a specific sum of money from Isola had been replaced by a King Façade loan to Richina Global of little economic value.

In the High Court, Justice Cooke ruled the debt restructuring prejudiced Mainzeal group.  Its ability to recover $2.16 million from Isola (through King Façade) had been replaced by nothing.  This amounted to a transaction for inadequate consideration, in breach of the Companies Act. Both Richina Global and Isola Vineyards were ordered to pay King Façade damages of $2.16 million.

Mainzeal Property and Construction Ltd v. King Façade Ltd – High Court (26.02.19)

19.050

Reckless Trading: Mainzeal Property v. King Facade

Insolvent for nearly a decade from 2005 through to its collapse in 2013 leaving creditors owed some $110 million, Mainzeal was weakly capitalised relying on related-company promises of financial support; promises which were variously worthless or unenforceable. Changes of auditor, ‘window-dressing’ of Mainzeal financial statements and attempts to disguise the level of irrecoverable loans to companies controlled by entrepreneur Richard Yan came to light in liquidators claim for damages following reckless trading by Mainzeal directors.

Insufficient working capital meant it was problems with one single contract which finally pushed Mainzeal over the precipice, into receivership and then liquidation: a dispute over work jointly undertaken with Siemens on an upgrade of Transpower’s inter-island transmission link.  Mainzeal extracted itself from the dispute in late 2012 at a cost of up to $16 million to its anticipated cashflow.  Short of cash, Mainzeal shut up shop.

The High Court was told of Mainzeal being milked of cash by Yan-controlled Richina Pacific to fund projects in China.  As early as 2005, $20.2 million had slipped out the back door.  Two years later, $39.4 million had gone.  In return, Mainzeal was promised repayment in vague terms; promises never formalised into legally binding agreements enforceable against Yan-controlled companies having any economic substance.

Richina Pacific provided formal ‘letters of support’ in 2008 to then auditors PwC, avoiding an audit ‘going concern’ qualification.  As Justice Cooke pointed out, these audit-related letters of comfort promising future financial support are of no legal effect.  They are not legally enforceable.

To mask the level of Mainzeal loans to Richina Pacific companies, short-term inter-company cash transfers totalling five to six million dollars were made around balance dates during 2010 and 2011.  Mainzeal’s own board papers openly described these cash movements as ‘window dressing’.

PwC was replaced as auditor of Mainzeal by Ernst & Young.  Purely on the grounds of cost, Mr Yan said.  Ernst & Young put up a proposal to deal with the potential problem of Mainzeal loans to Richina Pacific group being uncollectable: Project Citron.  Operating as a ‘pre-paid goods agreement’ Project Citron envisaged the then $42.4 million owed by Richina Pacific companies be used to purchase building materials in China for supply to Mainzeal.  The debt due to Mainzeal would be ‘paid’ in kind.  While this took loans totalling $33.1 million off Mainzeal’s books, it left the company exposed to a single supplier of building materials and the vagaries of a Chinese supply chain.  ‘Payment in kind’ raised tricky issues of whether goods to be supplied equated to the value of loans written off.  ‘Payment’ would take time with supply of $33 million in building materials spread over many years.  Mainzeal liquidators argue the ‘pre-paid goods’ arrangement was of considerably less value than repayment of the loans.

Compounding Mainzeal’s difficulties was a mounting list of ‘leaky building’ claims from 2009 onwards.  In Mainzeal financial statements, directors took into account the legal costs then incurred to date, ignoring any potential final liability: in 2009 only three million dollars was provisioned on notified ‘leaky building’ claims totalling $23 million.   

Justice Cooke ruled Mainzeal directors were liable for reckless trading.  Short of working capital, it was not reasonable for Mainzeal directors to rely on letters of support provided by Richina Pacific in connection with annual audits.  The promised support was not enforeceable and in any event was given by Richina Pacific entities which did not have significant assets.  Loans by Mainzeal were made to Richina Pacific entities which did not themselves have the ability to repay.  Directors reliance on shareholder support was not reasonable in the circumstances, he said.

Damages for reckless trading are at the discretion of trial judges.  Justice Cooke imposed joint liability, awarding Mainzeal damages totalling $36 million: Richard Yan liable for up to $36 million, chair of the board of directors Dame Jenny Shipley up to six million dollars and fellow directors Peter Gomm and Clive Tilby also each liable for up to six million dollars.

Mainzeal Property and Construction Ltd v. King Façade Ltd – High Court (26.02.19)

19.049

Gold Line Taxis: Deep v. Auckland Gold Line Taxis Ltd

Details of an attempted coup by disgruntled members of Auckland’s Gold Line Co-Operative Taxi Society Ltd played out in the High Court.  In May 2017, Kahlon Singh together with four other Co-op members occupied the Society’s office, posted security guards at the entrance and announced Co-op chairman Manmohan Dua had been deposed, the board dismissed and Mr Singh installed as ‘Acting Manager of the Interim Management Committee’.

That afternoon, it was all over.  Following police intervention, Mr Dua was back in control.  Mr Singh was subsequently joined by eleven other disgruntled drivers alleging in the High Court that Gold Line directors had failed to follow Co-op rules and were biased against them.  The High Court was told none of the disgruntled members is currently working for Gold Line, though they claim to still hold shares in Gold Line.  All are now driving for rival companies.  In general, they allege Gold Line’s board is effectively preventing them from earning a living with Gold Line as taxi drivers.  Specific complaints centre on the manner in which access to Auckland Airport taxi rank is allocated and the circumstances in which some drivers were dismissed from Gold Line.

Gold Line tendered for airport work in the 2016 tender round through a wholly-owned subsidiary: ATS.  The major grizzle is that ATS has permitted drivers who are not Gold Line members to operate off the ATS rank, whilst excluding some Gold Line members. 

Justice Lang ruled drivers’ remedy was to rely on their constitutional right to vote existing Gold Line directors out of office. He ordered Gold Line hold an annual general meeting of Co-op members no later than March 2019.  There has been no annual meeting since 2016.  No financial statements have been provided to members for the last three years.  The court was told co-op members agreed by a ninety per cent majority at a 2016 special general meeting that no further annual meetings or board elections would be held during the currency of Gold Line’s then three year contract with Auckland Airport.  This decision was of no effect, Justice Lang ruled.  Gold Line’s registered constitution requires annual meetings. Departing from its constitution requires more than a resolution of members; to be effective the amended rule must be registered and go on the public record.

Justice Lang advised that members currently subject to disciplinary proceedings are entitled to attend and to vote at the March 2019 annual meeting.  Members who have failed to pay Co-op levies are to receive notice of the meeting, allowing them to make good any arrears and then attend and vote.

Deep v. Auckland Gold Line Co-Operative Taxi Society Ltd – High Court (22.02.19)

19.048

Liquidation: Apollo Bathroom and Kitchen v. Ling

Shan Ling was ordered to repay $400,000 taken from Apollo Bathroom and Kitchen to pay a personal tax bill.  Her claim the money was owed for unpaid salary and commissions was dismissed.  There was no evidence she had an employment contract with Apollo. 

Apollo Bathroom and Kitchen Ltd is insolvent, put into liquidation by Inland Revenue for unpaid taxes.  Five months prior to liquidation in 2017, Ms Ling had Apollo pay her tax bill of $400,000.  Inland Revenue was threatening to bankrupt her.  Liquidators sued.  Diverting company money in payment of personal expenses is in breach of the Companies Act as a ‘transaction at undervalue’. Ms Ling benefitted to the tune of $400,000; the company got nothing in return, they said.

Ms Ling’s husband was formerly director of Apollo Bathroom.  She said she was entitled to payments of $432,841 from the company for her work as a consultant: unpaid wages at $1100 per week, plus $118,000 in unpaid sales commission.  Justice Jagose said other than Ms Ling’s assertions that she was employed by the company, there was no evidence provided of any employment contract.

Her $400,000 tax bill was negotiated down from an Inland Revenue assessment of arrears and penalties totalling $467,000 owing for the 2009-2012 tax years.  Ms Ling had not filed tax returns for any of these years.

Apollo Bathroom and Kitchen Ltd v. Ling – High Court (22.02.19)

19.047

Commerce Act: Commerce Commission v. First Gas

A classic case of the big operator screwing the small guy, seeking to reduce market competition: Commerce Commission intervention saw First Gas Ltd fined $3.4 million for its actions in forcing GasNet out of the Tauranga market.  The size of the fine results in First Gas purchase of ten kilometres of reticulation pipeline in new Papamoa subdivisions being totally uneconomic; the asset will never be profitable over its lifetime. 

Controlled by Whanganui District Council, GasNet Ltd looked to expand during 2016 into Bay of Plenty establishing gas networks alongside new subdivisions in the rapidly expanding Tauranga seaside suburb of Papamoa. There are big cost savings in laying pipes while a subdivision is under development, rather than retro-fitting pipes in an established suburb.

The High Court was told First Gas, with annual revenues in the region of $158 million, looked to elbow GasNet out of the way. At a July 2016 meeting in Whanganui, GasNet was given the message; sell its Papamoa distribution network or life would be made very difficult.  GasNet spurned two offers, before agreeing to First Gas’ third buyout offer.  GasNet says this third offer did not represent fair value nor reflect the true value accruing to First Gas.  This offer was accepted after First Gas began stacking pipes in subdivisions already reticulated by GasNet with First Gas threatening to retro-fit its own distribution network alongside GasNet’s existing lines.  As part of the buyout, Gas Net agreed to a restraint of trade: it would not provide gas distribution services in the Bay of Plenty for the next five years.

Commerce Commission pounced when the two companies, in all innocence, provided details of their deal as part of ongoing Commission calculations of price-setting for the regulated gas distribution business. The High Court confirmed a negotiated fine of $3.4 million and declared the restraint of trade unenforceable.

Commerce Commission v. First Gas Ltd – High Court (21.02.19)

19.046

Contract: Bei v. Wang

Duoyu Bei claims he is owed $1.28 million; Chao Wang claims he is owed $1.1 million.  The two businessmen are at each other’s throats with allegations and counter-allegations over the funding and operation of Zeus nightclub formerly in central Auckland’s Durham Lane. 

Mr Bei alleges he was misled by Mr Wang when buying into Zeus.  The High Court was told he paid $400,000 in 2016 for a fifty per cent stake in the business and he committed to contributing a further $1.1 million for Club renovations.  He alleges handwritten cashflow records provided by Mr Wang evidencing Zeus Club turnover were substantially overstated.  He also alleges money provided for nightclub renovations was improperly diverted to upgrade a property on Paratai Drive, one of Auckland’s most expensive residential streets.  It is alleged Mr Wang has an interest in the property through a family trust.  Mr Wang denies any wrongdoing.  Evidence was given that Mr Wang left for China in early 2017.  Paratai Drive has been sold.  Net sale proceeds of $1.27 million are held in escrow, in a law firm trust account, pending resolution of their dispute.

Mr Wang in turn claims $1.1 million.  He alleges Mr Bei was in breach of their business agreement over the nightclub’s operation.  He claims Mr Bei wrongly demanded immediate payment of $800,000 and threatened to contact Immigration (challenging his immigration status) and Inland Revenue (claiming he was understating income, dealing in cash).  He alleges Mr Bei wrongfully locked him out of the business and claims he is entitled to a share in nightclub profits generated whilst Mr Bei was in sole charge.

Companies Office records show the company operating Zeus nightclub went into liquidation in April 2017 after its business lease was terminated.  A company controlled by Mr Bei has agreed to purchase the building from which Zeus operated. Back in the High Court, the two are arguing over what documents each should disclose to the other, prior to trial.

Bei v. Wang – High Court (21.02.19)

19.045

David Henderson: FTG Securities v. BNZ

Out of the wreckage of South Canterbury Finance, government sold to interests associated with failed property developer David Henderson the right to claim in the insolvency of one of his Christchurch property developments.  In dispute is up to five million dollars currently in the pocket of BNZ.  

The High Court was told Mr Henderson was adamant Bank of New Zealand were not to be told of his renewed involvement in Tuam Ventures Ltd when FTG Securities Ltd, having his wife Kristine Buxton as director, paid government $100,000 to buy up a second ranking security over 179 Tuam Street; Tuam Ventures main asset.  Tuam is in receivership and liquidation, insolvent.    Mr Henderson is prohibited by court order from having any role in managing a business until December 2022.

Byzantine funding arrangements for development of 179 Tuam Street were spelt out in court.  Back in 2005, Tuam Ventures as part of Mr Henderson’s then property empire, borrowed from Canterbury Finance Ltd giving it a first mortgage security over 127 Tuam Street in central Christchurch.  Canterbury Finance conceded priority to BNZ after a further funding was required in 2007; a deed of subordination and priority promoted BNZ to first ranking security with priority for the sum of $7.5 million plus two years’ interest. Canterbury Finance agreed to rank second for the next ten million dollars plus interest.  The priority deed prohibited each financier from transferring its interest without agreement.  Since then: Canterbury Finance’s second-ranking interest was transferred, without BNZ agreement, to government as part of the 2008 taxpayer bailout of South Canterbury Finance Ltd and then on-sold to FTG Securities for $100,000, again without BNZ agreement, as government looked to sort out the mess; 179 Tuam Street was savaged by the collapse of Mr Henderson’s property empire then the series of Christchurch earthquakes; and BNZ collected over twelve million dollars from its mortgagee sale of 127 Tuam Street and earthquake insurance payments.  FTG Securities alleges BNZ has taken up to five million dollars more than its entitlement under the priority deed.  This belongs to FTG Securities, it claims.

The Court of Appeal ruled FTG Securities has no standing to sue.  Failure to get approval as required by the deed of priority for its purchase of what was Canterbury Finance’s interest in Tuam Ventures was fatal.  This is not just a technical point, the Court of Appeal said.  Commercial players are free to prohibit assignment if they wish, it said.  It is open for FTG Securities to seek BNZ approval to stand in the place of Canterbury Finance before taking legal action to enforce its claimed rights against BNZ.  The priority deed says approval by BNZ cannot be unreasonably withheld.

FTG Securities Ltd v. BNZ – Court of Appeal (20.02.19)

19.044

Liquidation: Installer Services (Hutt Valley) Ltd v. Colson

Andrew and Sue Colson put their company Installer Services (Hutt Valley) Ltd into liquidation under threat of legal action for payment of disputed franchise fees.  The High Court ordered they pay $19,900 damages for taking drawings from the company at a time when fees potentially due threatened company solvency. 

Services (Hutt Valley) provided mobile technology such as phones, car stereos and band expanders.  Under franchise from Installer Services (Group) Ltd, the company was required to pay annual fees calculated at five per cent of annual turnover.  Having paid fees for six years to 2008, Services (Hutt Valley) stopped making payments.  Communications from Christchurch-based Services (Group) were disrupted for a time by the series of Canterbury earthquakes.  By April 2012, Services (Group) was back in business.  It was pressing for payment of franchise fees.

The High Court was told the Colsons put Services (Hutt Valley) into liquidation when Services (Group) sued.  It was not economic to defend any court action, Mr Colson said, while claiming he had a good defence.  He alleges Services (Group) agreed franchise fees were to be payable only for referred work.  Services (Group) got judgment by default against Services (Hutt Valley) for claimed fees.  Liquidators for Services (Hutt Valley) later sued Mr and Mrs Colson to recover company losses. The most recent liquidators’ report lists creditor claims at $168,900.  Services (Group)’s claim is in excess of $100,000.

Liquidators sued to recover cash benefits received by the Colsons from their company in the two years prior to liquidation: $44,800 in ‘shareholder salaries’ and $81,000 for ‘drawings’.  Justice Grice ruled the salaries could be kept; these payment were reasonable remuneration for the time spent on company business.  It did not matter that the Colsons did not follow required Companies Act procedures for approving director payments.  Neither Mr nor Mrs Colson had written employment contracts with their company.  $19,900 of drawings taken in the 2012 year had to be repaid.  Drawings were in the nature of ‘distributions’ to shareholders. Distributions cannot be made when a company is insolvent; creditor interests come first.  Taking into account Services (Group)’s disputed claim to franchise fees as a contingent liability at a time when drawings were taken would have left the company insolvent.  In making its repayment calculation, the court discounted the amount then claimed by Services (Group) by fifty per cent to reflect the fact it had not at that time proved its claim. 

Installer Services (Hutt Valley) Ltd v. Colson – High Court (20.02.19)

19.043

Fraud: Reid v. R.

The High Court confirmed on appeal a sentence of two years and five months imprisonment for Auckland lawyer Bruce Harvey Reid struck off after stealing $357,800 from clients.

The court was told Reid misappropriated money from multiple clients: from one client following a property sale, disguising the theft by overstating the amount required to repay a mortgage following sale; from a family trust funding private hospital care for a trust beneficiary with dementia; and from monies held on behalf of a deceased estate and another family trust.

Reid, aged 68, said imprisonment prejudiced his life partner who suffers epilepsy, anxiety and depression relying on him for practical and emotional support.  The trial judge took this into account, Justice Thomas said.  A three month reduction in sentence allowed by the trial judge for reparations paid by Reid was in line with previous fraud cases, Justice Thomas said.

Clients have been compensated with Reid making good some $214,600 from family sources; the balance covered by the Law Society Fidelity Fund.  Reid’s sentence included an order to pay the Law Society Fidelity Fund $139,700 for compensation paid clients.

Reid v. R. – High Court (20.02.19)

19.042

Charitable Trust: re Eliza White Charitable Trust

With residential care for vulnerable children costing $80,000 to $100,000 per child each year, the High Court approved changes to a century old trust deleting a requirement funds be used exclusively for residential care.  Administered by the Roman Catholic Church, the Eliza White Charitable Trust may now assist vulnerable children in the community without taking them into care.  

The High Court was told the Trust has total assets of $7.6 million.  Annual income, net of expenses, is $232,000.  The Trust was established as a charitable trust in 1909 on the death of Eliza White.  In today’s terms, her charitable bequest was valued at over five million dollars.  She specified funds were to be used to establish and run an orphanage primarily for disadvantaged girls.  Following a later special act of parliament and a subsequent court-approved variation to the Trust, this morphed into funding residential facilities for vulnerable children, with priority given those following the Roman Catholic faith.  The Church quit all its Eliza White residential facilities in 2013.  Full-time care had become uneconomic; the cost of housing each child was so high charitable funds were being run down with very few children benefitting.

The High Court approved a variation to Eliza White’s bequest under the Charitable Trusts Act.  This Act allows court-approved variations where changes achieve, as close as is reasonably possible, terms of the original trust.  The Church said it did not intend to resume offering residential care.  A strategic review advised Trust resources were better used by putting capital from the sale of Church residential homes into an investment trust for the support of vulnerable children.

re Eliza White Charitable Trust – High Court (15.02.19)

19.041

Arrest: Maori Trustee v. Smith

More than a year after the Maori Land Court ordered former leaseholders leave Gisborne Maori land, the High Court issued arrest warrants against members of the Smith whanau following their failure to quit.

Bruce Smith and immediate family claim rights of occupation to a homestead and farming land known as Rautawhiri Station on Seymour Road, Inner Kaiti, Gisborne.  The Station straddles two properties:  Waipaoa 5A2 Block, which is Maori land administered by the Maori Trustee as an ahu whenua trust with over five hundred beneficiaries; and a block of general land owned by the estate of Francis Guthrie.    

The High Court was told Mr Bruce Smith is a beneficiary of both the Waipaoa ahu whenua trust and the Guthrie estate.  He had previously leased Waipaoa through a Guthrie estate-owned company.  When this lease came to an end, he and his family refused to leave.  Notices to quit were ignored.  A locked gate was placed on a public bridge on a road passing through the Station.  Police intervention was met with what was described as ‘aggressive and belligerent behaviour’.  Mr Smith and his family issued trespass notices purporting to trespass the Maori Trustee from Waipaoa.  Attempts to talk through the issues came to nothing; Mr Smith claims rights to the land and refused to give up possession.  His whanau claim mana whenua; they invested in the land, worked it and lived on it, they said.

The Maori Trustee’s right to possession of Waipaoa had been decided by the Maori Land Court, Justice Grice said.  Smith family appeals to the Maori Appellate Court were dismissed.  Court orders were issued for the arrest of Bruce Smith, his wife and two of his children. Enforcement was suspended for six weeks to give Smith whanau time to reconsider.

Maori Trustee v. Smith – High Court (14.02.19)

19.040

Employment: Neil's Auto Centre Ltd v. Bowman

Waiuku mechanic Neil Cathcart first learnt business tax payments were in arrears when lawyers advised that Inland Revenue was taking legal action to wind up his business, Neil’s Auto Centre Ltd, claiming core unpaid taxes of $259,000 plus penalties and interest. Attempts to recover from former employee Genevieve Elizabeth Bowman for alleged embezzlement has run into procedural hurdles.

The High Court was told Mr Cathcart borrowed money and also sold property he owned to pay in full the $571,700 owed Inland Revenue by his company.  It is alleged Ms Bowman, who started as office manager in 2010, began diverting business tax payments from late 2015 and then supressed Inland Revenue correspondence chasing overdue taxes.  Mr Cathcart sued Ms Bowman for $301,500, seeking summary judgment in the High Court alleging deceit.  Summary judgment is a fast-track procedure where it is argued there is no defence to a claim.  The $301,500 consisted of $142,900 it is alleged Ms Bowman stole from the company plus $158,600 for legal and accounting fees incurred sorting out the unpaid tax plus a portion of the penalties and interest paid Inland Revenue.

Associate judge Bell said allegations of dishonesty at the heart of Mr Cathcart’s claim in deceit require evidence of the date and the substance of dishonest statements made.  Ms Bowman made no statements in the course of her daily work about stealing from the company, or of supressing Inland Revenue correspondence. She made no confession until April 2018, after Mr Cathcart agreed personally to settle with Inland Revenue.  Her earlier silence could not amount to deceitful statements.

Judge Bell pointed out that claims by Mr Cathcart’s company for breach of the employment contract with Ms Bowman should be heard by the Employment Relations Authority.  As a general rule, the employer has to carry any loss where employees are simply slack in performing their duties, causing financial loss.  Employees become personally liable where they deliberately or maliciously cause loss.  Detailed proof is required.

Neil’s Auto Centre Ltd v. Bowman – High Court (13.02.19)

19.039

Insolvency: re Ashok Maharaj

It was not in the public interest to approve a part-payment scheme of arrangement keeping Auckland builder Ashok Maharaj from bankruptcy, the High Court ruled.  His history of trading whilst insolvent and lack of substance to offers of paying creditors fifteen cents in the dollar in full settlement led to court refusal. 

Mr Maharaj traded as a builder through his company Victory Builders and Developers Ltd.  Victory is in liquidation, insolvent.  To avoid personal bankruptcy, Mr Maharaj offered his personal creditors an Insolvency Act part payment deal.  A binding deal requires approval of creditors by a majority in number representing three-quarters of debt by value, plus court approval.  Associate judge Smith refused approval.  With personal creditors claiming in excess of $515,000, promises to pay fifteen cents in the dollar over twelve months would require in excess of $75,000.  Mr Maharaj claimed to have assets totalling only $450.  He said payment would be funded by relatives plus income earned as a builder.  There was no evidence of relatives’ willingness to contribute, Judge Smith said. Vague promises were not enough.  There were also doubts over Mr Maharaj’s ability to earn sufficient income as a builder.  The court was told Mr Maharaj was suspended in 2018 for six months by the Licensed Building Practitioners Board after complaints of negligent and incompetent work.  His evidence before the Board was both evasive and inconsistent with documentation and other evidence before it, Judge Smith said.

It is not in the public interest to approve the part-payment scheme, Judge Smith ruled.  Evidence indicated Mr Maharaj had been trading whilst insolvent for up to a decade.  This arose from personal loans he took out at a default interest rate of 46 per cent and having never paid interest on the loans.   

re Ashok Maharaj – High Court (12.02.19)

19.038

Asset Forfeiture: Commissioner of Police v. Sulusi

Convicted Hawkes Bay methamphetamine distributor Leatitla Luckie Sulusi, also known as Laki Sulusi, had five motor vehicles seized as proceeds of crime to satisfy police claims of $456,300 received from criminal activity.

The High Court approved an out-of-court settlement under the Criminal Proceeds (Recovery) Act.  Ordered sold were a Ford Falcon utility, Ford Fairlane, Holden Commodore, Mazda Atenza and Big Dog Pit Bull motorcycle.  Three of the vehicles were registered in the names of individuals other than Sulusi.  It was agreed Sulusi had a financial interest in all three.  In November 2016, Sulusi was sentenced to four years six months imprisonment.  A discount was allowed for health issues; Sulusi requires regular dialysis treatment. Police said he had been involved in meth distribution through Hawkes Bay over the previous five years.

Commissioner of Police v. Sulusi – High Court (8.02.19)

19.037

Reckless Trading: re Bankruptcy of Edward Harman

It was more lucky dip than logical calculation as liquidators of Edward John Harman’s failed investment companies squared off against Insolvency Service handling Harman’s personal bankruptcy.  Company creditors claim some $26.1 million; bankruptcy creditors $19.3 million.  At stake: $4.03 million held by Insolvency Service.

Mr Harman was bankrupted in 2009.  He left in his wake some angry unpaid investors.  His promises of wise investments had come to nothing.  By his own admission, he had assumed complete control of the Fairthorne Investment group, ignored fellow directors, failed to properly record investor transactions and mixed the funds of separate investment companies.  In 2008, these companies went into liquidation.  Other directors ponied up three million dollars in an out of court settlement acknowledging their breach of directors’ duties.  Fairthorne liquidators sued Mr Harman for a catalogue of directors’ duties allegedly breached, primarily reckless trading.  Insolvency Service required proof of reckless trading before it would accept the liquidators’ claim in Harman’s bankruptcy.  Then both parties were off to court to assess a value for claimed damages.  Damages for reckless trading are ultimately at the discretion of a judge.  Any payment to Fairthorne liquidators has the effect of reducing the pool of cash payable for Mr Harman’s personal creditors.  A complicating factor was that some 48 per cent of Mr Harman’s personal creditors are also Fairthorne company creditors; he had guaranteed repayment to some investors of loans they made to the Fairthorne group.

The High Court grappled with questions of when the Fairthorne group became insolvent and to what extent investors losses might have been increased by Mr Harman’s reckless trading.  Fairthorne liquidators were dealing with ghosts; a lack of proper accounting records hampered attempts to identify at what point Fairthorne companies became insolvent and to what extent decisions made by Mr Harman from that date caused further creditor losses.  Having no concrete accounting evidence at its disposal, Fairthorne liquidators were forced to accept Insolvency Service assertions as to when the Fairthorne group became insolvent.  Damages for reckless trading were agreed at $10.1 million.  Associate judge Smith reduced the sum further to $6.42 million; making allowance for both the risk investors were assumed to have accepted given the high interest rates on offer and the possibility that market conditions rather than Mr Harman’s recklessness may have contributed, in part, to investor losses.

Creditors claiming in Mr Harman’s bankruptcy are likely to receive less than twenty cents in the dollar.

re Bankruptcy of Edward Harman – High Court (7.02.19)

19.036

Latter Day Saints Trust Board v. Inland Revenue

Donations required by Latter-Day Saints Church when adherents leave for mission service overseas are not eligible for a tax credit as a charitable gift if the donation is made by the missionary personally or a parent or grandparent, but are eligible for tax credits if made by wider extended family, the High Court ruled.  The ruling turned on questions of who benefitted from donations.

To spread its faith, the wider Church currently has some 70,000 young members undertaking 18-24 months missionary service worldwide; about three hundred of them from New Zealand.  Families are expected, but not forced, to contribute financially when a child is ‘called to service’.  For missionaries from New Zealand, expected donations are currently about $5700 per year.  This money is not used directly to support the family member whilst overseas.  It is paid to the Church in New Zealand and used to support overseas missionaries in this country.  Individuals are provided with food and accommodation, plus a subsistence allowance. New Zealanders on missionary service overseas are funded similarly by the church in their host country.

The High Court was asked to rule on the tax status of donations made to the Church in New Zealand by families of missionaries heading overseas.  It does not pay any of the missionary expenses for people travelling from New Zealand; the New Zealand Church pays for missionaries who come here.  The Church said the donations qualified as charitable giving for religious work done in New Zealand.

Justice Hinton ruled that while the annual payment was voluntary, there was an indirect benefit to immediate family.  No tax credit was available for them.  By making payment as requested, family knew and anticipated the person on whose behalf they were paying would go on overseas service and correspondingly would receive financial support from the host country church. There was a link between the two. Parents and grandparents benefitted by seeing ‘their child’ extend life education by being able to travel, live overseas and experience being a missionary abroad.  This benefit did not extend to other relatives such as siblings and extended family, Justice Hinton ruled.  Unlike parents and grandparents, they do not generally feel the same sense of obligation. Their donations did qualify for a tax credit as charitable giving.

Church of the Latter-Day Saints Trust Board v. Inland Revenue – High Court (1.02.19)

19.035

Post judgment note: In May 2020 the Court of Appeal ruled all relatives, including parents and grandparents could claim a tax credit for donations made when a family member is 'called to service.' Their donations are received by the New Zealand Church and used for charitable works in New Zealand.  Parents and close relatives do not gain a material benefit from the donation; they gain the spiritual and moral satisfaction of supporting Church work.

Embezzlement: Sharma v. Mundath

Early 2018, accountant Mujeeb Rahiman Mundath left New Zealand for Sydney.  He has not returned.  Former employer, the Sharma Group having interests in hotels, motels and restaurants, alleges he embezzled at least $5.4 million from the group.  Freezing orders have been imposed on assets both in New Zealand and Australia.

In the New Zealand High Court, Associate judge Bell ordered Mr Mundath pay $4.69 million; the amount Sharma Group incontrovertibly proved Mr Mundath embezzled.  Claims for the balance allegedly taken require a full court hearing. Mr Mundath alleges the Sharma group is party to immigration fraud and tax fraud.  

The High Court was told the Sharma group is a mix of companies and trusts associated with the families of three brothers: Rakesh Sharma, Ashok Sharma and medical practitioner Dr Vinod Sharma.  They say Mr Mundath was employed by them at an annual salary of $75,000.  They trusted him.  He handled the group’s financial accounting and tax affairs.  He has a commerce degree.  He started, but did not complete, his professional accountancy exams.

Mr Mundath left for Sydney when his honesty was questioned; an unusual payment of $394,800 was queried.  A forensic accountant was called in.  She made a painstaking analysis of some 2800 financial transactions involving Mr Mundath covering eight years he was with Sharma group.  These transactions totalled $9.2 million; all but $104,900 was paid into bank accounts under the control of Mr Mundath including accounts in his name and his wife’s name.  Mr Mundath claimed these were reimbursements for payments he made on behalf of the Group.  Some were in fact reimbursement, but not all, the forensic accountant said.

Evidence was given of Mr Mundath arranging cash payments for contractors and suppliers.  Mr Mundath said he was then instructed to record the payment against other accounts so that tax deductions could be claimed.  There was evidence of business invoices paid twice; the second payment going into an account controlled by Mr Mundath.  Mr Mundath said Vinod Sharma and Rakesh Sharma told him to pay business GST refunds into bank accounts he controlled to hide from other family members that personal expenses were being run through business accounts. Mr Mundath set up fictitious payroll records, recording additional wages for existing employees and also wages for ‘ghost’ employees, with payments into bank accounts he controlled.  He alleges these transactions were company policy, designed to cover an immigration fraud run by the Sharma group where immigrants without work visas were taken on and where others with work visas were paid less than their employment contract stated.  The Sharma brothers deny any involvement in tax fraud or immigration fraud. The forensic investigation identified that most of the payments made into bank accounts controlled by Mr Mundath used a false payee description to disguise the fact payment was going to him.

Mr Mundath owed a fiduciary duty to the Sharma group not to take unauthorised personal benefits when arranging payments.  It is implausible to say the millions of dollars unaccounted for were reimbursement for Sharma debts he had paid in cash, Judge Bell said.

Even if the Sharma group were involved in tax fraud and immigration fraud, said Judge Bell, Mr Mundath is still liable to repay money taken.

Sharma v. Mundath – High Court (24.01.19)

19.034

Credit Contract: Watherstone v. PGW Rural Capital Ltd

The High Court struck out attempts by north Canterbury farmer Richard Watherson to re-open PGW Rural loan contracts for charging allegedly excessive interest rates.  A one year time limit applies to interest rate challenges against financiers calling up current account loans.

Financially over-extended with redevelopment plans for a 2900 hectare north Canterbury property known locally as The Doone, Mr Watherston’s properties at both The Doone and Rocky Peaks were put into receivership by PGW Rural Capital Ltd in May 2013.  The High Court was told PGW Capital suffered losses of some $1.8 million. Five years after the receivership commenced, Mr Watherston challenged interest rates PGW Capital charged.  He wanted interest rates reduced under the Credit Contracts and Consumer Finance Act.  He alleges the rates charged were above market rates, contrary to representations made at the time of the loan.  He claims a reduced interest rate would have enabled successful redevelopment of The Doone.

The High Court was told PGW demanded Mr Watherston repay his current account debt in May 2013, the day receivers were appointed. The date demand was made to repay all advances became the date on which ‘the last obligation had to be performed under the credit contract’ Justice Dunningham ruled.  Unlike a term loan, a current account debt does not have a due date for payment until demand is made.  Mr Watherston had twelve months from the date repayment was demanded to challenge terms of the contract.  Suing five years from that date was outside the twelve month time limit set by the Act. Being under a contractual obligation to also pay PGW Capital’s enforcement costs, which were incurred later in the course of the receivership, did not push out the start point for calculating time limits.

Watherstone v. PGW Rural Capital Ltd – High Court (23.01.19)

19.032

Tenders: Rintoul Group v. Robson

Suing former council engineer Jacqueline Robson, contractor Rintoul Group alleges she maliciously blocked it from getting any infrastructure contracts over a two year period before she left Far North District Council in 2017. 

Ms Robson’s application to strike out the claim was refused; Rintoul’s allegations now get a full court hearing.  Okaihau-based Rintoul alleges Ms Robson acted with targeted malice when it was unsuccessful for all seventeen of its bids for infrastructure contracts between 2015 and 2017: to build parts of the Twin Coast cycle trail, repair roads and carry out upgrades.  In separate litigation, Rintoul was paid an undisclosed sum in an agreed settlement with Far North in a dispute over the award of contracts for four sections of the cycle trail.

Successful claims for misfeaseance in public office are rare.  Allegations of malice require a very high standard of proof; akin to allegations of fraud.  Ms Robson says she followed the rules.  She did not evaluate tenders.  She did no more than act on the recommendation of council tender evaluation teams, she says. A former Far North civil engineer, now living in Queensland, says it was not that straightforward.  He alleges Ms Robson could and did influence how contracts were awarded: on occasions she picked the team members for tender evaluations; she did not always approve recommendations made by tender evaluation teams; and she did refer teams’ recommendations back for further review. It is alleged on one occasion Ms Robson sent back a recommendation with the comment Rintoul was not going to be given another contract.  Associate judge Bell ruled a full court hearing was necessary to resolve these clear conflicts in the evidence.

As an alternative, Rintoul claims Ms Robson failed to act in good faith and did not award tenders on merit.

Rintoul claims compensation for contracts not awarded. It also wants exemplary damages.  Ms Robson now works in the private sector.

Rintoul Group Ltd v. Robson – High Court (23.01.19)

19.033

Honey: Te Tumu Miere Ltd v. Zealande Ltd

An industry-wide problem of widespread theft of both bees and honey surfaced in litigation between Te Tumu Miere Ltd, owned by the Maori Trustee, and apiarist Zelande Ltd.  Zealande refuses to hand over hives until paid its management costs.  

Having oversight of some 100,000 hectares of Maori-owned land, the Maori Trustee set up Te Tumu Miere Ltd as a service company to link owners of Maori land with the honey industry, helping Maori generate income through honey collected from their land.  The project was not a commercial success.  Te Tumu is in liquidation.  The liquidators’ initial report states that Te Tumu directors blame its failure on unsustainable losses and an ‘incorrigible management contract’.

In the High Court, Te Tumu sued Auckland-based apiarist Zealande Ltd demanding possession of 1500 hives purchased from Zelande. Zealande claims a lien over the hives for unpaid management fees.  Te Tumu does not know where the hives are located.  Evidence was given that hive location is a carefully guarded commercial secret.  With hives commonly situated in remote rural areas, theft is rife.  Within the industry, employee poaching is commonplace. A new employee brings not only industry skills, but also knowledge of competitor’s hive locations.

Zelande’s management contract with Te Tumu was due to run until 2022.  Zealande says it cancelled its management contract with effect from September 2018. Te Tumu liquidators want possession of the hives to be on-sold as a company asset; Zealande says biosecurity legislation requires oversight of the hives by qualified staff, which it offered to provide at a fee of over $100,000 until handover in late April at the end of the season.

Justice Jagose refused Te Tumu’s request for a third party to assume management of the hives.  Te Tumu was lax in taking steps to get possession, he said.  There is nothing unjust in Zealande demanding payment for management costs; it was left to manage the hives by default when the relationship with Te Tumu broke down.

As a last-minute compromise, Te Tumu offered to pay into court the fees demanded by Zelande provided Zelande delivered the hives to an agreed site within six weeks.  The two warring parties need to work out the mechanics of such an arrangement if they want it incorporated into a court order, Justice Jagose said.

Te Tumu Miere Ltd (in liquidation) v. Zealande Ltd – High Court (4.01.19)

19.031

Private Equity: Malthouse Ltd v. Rangatira Ltd

The Court of Appeal ordered private equity investor Rangatira pay a $920,000 ‘top up’ fee following its divestment of Tuatara Breweries four years after buying in 2013.  Failure to set a ‘sunset date’ when buying Tuatara left Rangatira exposed to demands from Tuatara’s founding shareholders for a share of Rangatira’s profit.

Hard-nosed negotiations between Rangatira and Tuatara’s founders, Sean Murrie and Carl Vasta, saw a formula devised in 2013 to accommodate their differing views over Tuatara’s value.  Shareholders valued their business at $16.6 million; Rangatira said it was worth no more than $12 million.  Rangatira agreed to compensate shareholders with a ‘top up’ fee if subsequent events proved Tuatara was worth more than $12 million.  A top up was payable on the occurrence of any one of two defined ‘exit events’.  One event was a subsequent sale for more than $12 million.  Claims for a ‘top up’ were made after Tuatara was sold to DB Breweries in 2017 for an undisclosed price, but a figure well in excess of $12 million.

Rangatira refused to pay.  It said this exit event was time-limited to two years from its Tuatara purchase; the same time limit their contract specified for another exit event, the need to achieve a specified earnings level.  Reaching a value of $12 million in two years is a very different return on investment from reaching a value of $12 million in ten or fifteen years, Rangatira said.

The plain meaning of the 2013 contract had a two year exit event time limit applying only to achievement of a specified earnings target, the court ruled.  It did not apply to the alternative exit event triggered by a subsequent sale to DB Breweries.

Malthouse Ltd v. Rangatira Ltd – Court of Appeal (20.12.18)

19.030

Overseas Investment: Jun Li v. 110 Formosa (NZ) Ltd

Chinese investors disputing ownership of Auckland’s Formosa Golf Club were very guarded in the High Court when giving evidence both about their source of funds for the purchase and potential breaches of the Overseas Investment Act.  The High Court ruled Jun Li, whose mother is a former governor at a branch of the Bank of China, is part-owner of Formosa.  Fellow investor Meng Wang had tried to cut him out, saying Mr Li was only a conduit used to bring funds for purchase of Formosa into New Zealand for other investors.

Mr Li said he personally put $4.8 million into the 2014 purchase of Formosa; money borrowed from his mother, Na Li.  Mr Wang said that money came from Wang family sources, co-ordinated by his mother, named as Mrs Zhou.  Justice Fitzgerald commented neither Mr Li nor Mr Wang were the ‘main players’ in the golf club purchase.  Rather, each were acting largely at the direction of their respective mothers.   

The High Court was told of several false starts through 2014 as a consortium of Chinese investors looked to buy the Formosa Golf Club. It was intended to subdivide land around the golf course.  A March 2014 agreement to buy at $38.9 million fell over; conditions as to finance were not satisfied.  Mr Li was listed as one of the purchasers, as nominee for his mother.  An April 2014 agreement to buy at $36 million, which did not include Mr Li as a purchaser, also collapsed.  Mr Li was re-introduced to the consortium several months later following concerns some of the prospective investors might cause Overseas Investment Act complications.  They had spent so much time outside New Zealand they might no longer satisfy residency requirements.

Evidence was given of Mr Li being offered a 32 per cent stake in the venture with profit shares and equity interests to be determined on the proportion each investor eventually put in.  Purchase of Formosa was finally clinched in September 2014 at a price of $38 million; five million dollars upfront and the balance in instalments over the next twelve months.  Cash totalling $4.8 million paid by Mr Li to Mr Wang’s lawyer at Mr Wang’s request was used to pay the deposit.  Mr Li was to later discover he was not credited as a part-owner of Formosa and that Mr Wang claimed to ‘own’ the $4.8 million.  Mr Wang’s mother said Mr Li was only added as an investor to cover any investigation by the Overseas Investment Office. It was claimed money was brought into New Zealand though Mr Li’s bank account to camouflage who was the actual investor, deflecting any Overseas Investment Act inquiry.  Having to untangle over one month of evidence given in the High Court, Justice Fitzgerald said much of it was unsatisfactory on key issues, failing to comply with the Evidence Act and High Court rules.

Justice Fitzgerald said the evidentiary presumption is that the $4.8 million funded by Mr Li came from his own money, lent to him by his mother.  Her Honour ruled that Mr Li was entitled to a choice of two remedies against Mr Wang: the return of his $4.8 million for breach of contract, or an equity stake in Formosa Golf Club based on his $4.8 million contribution to the purchase price. The High Court was told progress on golf club re-development has stalled, blocked by a caveat lodged against the title in 2015 to protect Mr Li’s claim for an equity interest in the property.

Jun Li v. 110 Formosa (NZ) Ltd – High Court (19.12.18)

19.029

Fraud: Young v. R

Hamilton-based Matthew John Young’s four years and eleven months’ sentence for dishonesty and fraud was confirmed by the Court of Appeal, describing the sentence as stern but not manifestly excessive. 

Victims of Young’s offending lost $269,070 following what was described as persistent deceit, abuse of trust and blatant dishonesty. He initially faced more than forty charges. Young pleaded guilty to thirteen, four of which were committed whilst on bail after arrest on earlier fraud charges.  He committed the fraud offences whilst bankrupt, following his July 2011 bankruptcy.

The court was told Young’s dishonesty included: using doctored screenshots and falsified e-banking receipts as purported evidence of payments supposedly made under a tenancy agreement; further doctored screenshots of payments from an Australian bank as supposed evidence of an ability to fund lease payments on a commercial tenancy; opening utility accounts for power and phone but making no payments; buying two high-end cars in the name of a company knowing the company had no means to pay;  deceiving his partner’s mother by promising to pay for renovations at her home but then leaving her with the bill; and fraudulently carrying on business as a nightclub owner arranging for renovations when he did not own the business and had no intention of meeting contractors’ bills.

Young v. R. – Court of Appeal (18.12.18)

19.027

Intellectual Property: Lookman Family Trust v. Design Electronics

Michael Lookman is suing Nelson acquaintance Warwick Jones after sinking $1.8 million dollars into development of SenSys; technology facilitating remote real-time access to workplace data.  Mr Lookman says promises to develop legally enforceable patent rights and trademarks have come to nothing; Mr Jones says the intellectual property is ‘inside his head’ and that Mr Lookman is disrupting efforts to commercialise SenSys. 

The High Court was told the two joined forces in December 2016.  Through a family trust, Mr Lookman agreed to provide capital for development of Mr Jones ideas.  Funding of up to $2.1 million was promised in reimbursement of expenses incurred.  Mr Lookman was to handle finances, with an option to later take an equity stake in the Wellington-based business: Design Electronics Ltd.  Monthly management meetings were scheduled, with business information shared through a Dropbox account.  By late 2017, Mr Lookman was concerned about the lack of progress; no patents had been applied for, or trademarks sought.  Their 2016 agreement gives Mr Lookman security over SenSys’ intellectual property. Their business relationship unravelled in an acrimonious fashion.  Mr Lookman’s access to financial data was blocked when Mr Jones removed all files from the Dropbox account.  Monthly reporting and monthly management meetings stopped.  Mr Lookman sued, seeking repayment.  The court was told Design Electronics cannot pay.  Enforceability of a guarantee given by Mr Jones is before the courts.

Associate judge Mathews said their 2016 agreement is an executory contract; both parties have continuing obligations under the contract. It runs until 2021.  He ordered Mr Lookman be given access to SenSys’ electronic accounting system, as required by the 2016 agreement.

Lookman Family Trust v. Design Electronics Ltd – High Court (18.12.18)

19.028

Post Judgment Note: A further court hearing in May 2020 determined Mr Jones had failed to provide ongoing financial information as required by the funding agreement with Mr Lookman.

Financial Statements: re General Electric International

The Companies Office misapplied filing rules when demanding US listed company General Electric prepare and file audited financial statements for subsidiary General Electric International at an annual estimated cost of US$500,000.  Bureaucrats asked themselves the wrong question: can the company afford to pay rather than does the information demanded provide any useful benefit?   

Incorporated in the United States, General Electric International Inc is a wholly-owned subsidiary of General Electric.  It does not have to file audited financial statements in the US, instead having its financial position consolidated into financial statements for parent General Electric.  GE International provides support services in New Zealand for power utilities, oil and gas.  In 2015, it earned $16 million from its New Zealand operations; chicken feed compared with the US$13 billion GE International earned through 2015 in some 120 other countries around the world.  Since 2014, New Zealand has been the only country demanding GE International file audited financial statements.  New Zealand companies legislation requires overseas corporates to publish financial information with the Companies Office.  This is a creditor-protection issue.  Creditors dealing with overseas interests need to know if they are dealing with a customer of substance; if it all goes belly-up, they need a sense of what assets might be available in this country to pay debts.  It is prohibitively expensive to chase debtors around the world trying to get payment.  In the past, filing in the New Zealand Companies Office copies of overseas parent company financial statements, or group accounts, has sufficed.  Companies Office says legislation changed the rules with effect from 2014.  Staff demanded GE International prepare and file audited financial statements and a cash flow statement, all complying with NZ international accounting standards.  An offer to file financial information for GE International prepared as part of General Electric’s US consolidated accounts was refused.  This did not satisfy a requirement to comply with NZ accounting rules.

Justice Mallon ruled Companies Office staff had failed to properly consider GE International’s request.  The 2014 rules permit exemptions, as did the previous rules, when it would be ‘unduly onerous or burdensome’ to prepare and file financial statements not complying with NZ accounting rules.  Companies Office staff had incorrectly concentrated on whether GE International could afford to do the extra work, rather than identifying whether there was any advantage in so doing.  Accounting experts said US accounting rules are robust and will suffice for filing in New Zealand.  Companies Office was ordered to reconsider GE International’s request for an exemption. The intent of the 2014 law change was to reduce compliance costs where costs imposed provide little of benefit to users.  Financial statements for parent General Electric are on the public record; New Zealand filing is required under the Financial Markets Conduct Act since employees here participate in an employee share purchase scheme.

re General Electric International Incorporated – High Court (17.12.18)

19.026

Joint Venture: Detection Services Ltd v. Pickering

Both were described as having strong and determined personalities.  Steve Simmons and Chris Pickering spent an expensive week in the High Court fighting over ownership of technology used to detect water leaks in high pressure pipes. Justice Woolford ruled both were in breach of their joint venture arrangement and neither were entitled to damages. 

What started out in 2007 as a strong personal friendship ended as a bitter employment dispute in the Employment Court and a property dispute in the High Court.

The High Court was told the two collaborated on development of a leak detection system for use in both Australia and New Zealand, by a business trading under the name Detection Solutions.  Previously with an office furniture company, Mr Pickering was employed by Mr Simmons in early 2010 as general manager of Detection Services. The following year they had fallen out over ownership of the leak detection technology developed. Equipment for detecting leaks was built in New Zealand; engineering quotes from New Zealand firms were markedly lower than Australian.   Mr Simmons fired Mr Pickering for not handing over the developed product.  The Employment Court ruled Mr Pickering had been unjustifiably dismissed; development of the leak detection system was not part of his employment contract.  Questions of ownership moved to the High Court.  Justice Woolford ruled development of the technology was a joint venture: they shared ideas; Mr Pickering contributed his computer skills and Mr Simmons his engineering knowledge.  While the leak detection system in its final form was put together after Mr Pickering was employed as general manager, it remained a product of their prior joint venture.  Their falling out was triggered over compensation payable to Mr Pickering for work he had done developing the leak detection system.  When it came to the crunch, Mr Pickering said he was owed $257,100. Mr Simmons claimed $3.1 million for what he said was the cost of re-engineering the system from scratch after Mr Pickering failed to hand over the finished product.  Meanwhile, the product of Mr Pickering’s work lies crated up in storage, the court was told.

Justice Woolford ruled a joint venture between the two for the design and construction of a leak detection system for Detection Services came into existence by at least late 2008.  The joint venture relationship meant each owed duties of trust and confidence to the other.  They were required to act in good faith.  Both failed to act in good faith and instead acted in their own interests by failing to negotiate and settle the terms of payment to Mr Pickering for his work on the project, Justice Woolford said.  Mr Pickering took the stance he alone owned the leak detection equipment. He failed to clearly itemise how he reached his claimed figure of $257,100.  For his part, Mr Simmons incorrectly elevated a joint venture dispute about price to an employment dispute.

Detection Services Ltd v. Pickering – High Court (14.12.18)

19.025

Post judgment note: The Court of Appeal held Mr Pickering was in breach of their joint venture agreement by not handing over the developed product together with invoices for development costs incurred.  Mr Simmons was ready and able to make payment of invoices provided.  The case was referred back to the High Court for assessment of damages.