Hawkins: Education v. McConnell Ltd

McConnell Ltd has to pay Ministry of Education $1.1 million as a contribution towards government legal costs in its ‘leaky building’ claim for Botany Downs College in Auckland. McConnell’s insolvent subsidiary Hawkins Construction built Botany Downs but cannot pay $13.5 million damages ordered by the High Court.

Frustrated by Hawkins delaying tactics over the Botany Downs claim, government chased holding company McConnell and two of its directors, David and John McConnell, attempting to recover some of its legal costs.  

Five years after Education sued, Hawkins was put into receivership and then liquidation within weeks of being ordered to pay $13.5 million.  The High Court was told Hawkins did nothing when the claim was first filed in 2013. It did not get lawyers onto the job for two years.  It asked for a delay to allow mediation.  Mediation failed. Four months before a scheduled February 2018 trial date, Hawkins changed lawyers.  Its request for an adjournment was refused.  Things hotted up.  Education offered to settle for $7.1 million; Hawkins countered with $2.1 million.  Days before trial, Education was offering to settle for around $3.2 million; Hawkins lowered its counter-offer to $0.5 million. With a trial looming, Hawkins’ new lawyer, Kensington Swan, was sitting on unpaid billings of just under $700,000. It extracted a guarantee from holding company McConnell Ltd to cover its fees.

It is unusual for someone other than the losing litigant to be ordered to make a contribution to a winning litigant’s legal fees.  Justice Downs ordered McConnell Ltd to contribute.  It controlled Hawkins by having directors in common, had Hawkins defend a clearly hopeless case while refusing reasonable offers of settlement and using threats of Hawkins likely insolvency as a weapon.  Evidence was given of Hawkins deliberately sending mixed messages; stating it was insolvent and could not pay anything whilst still gearing up for a scheduled four week High Court hearing.  Government lawyers were questioning how it could be in Hawkins interest to go to trial when it had no money.  Ministry of Education was forced to incur legal costs of a trial, getting in return a worthless judgment for $13.5 million.

The High Court was told Hawkins had net assets of $45 million as at March 2017, predominately payments owed by other McConnell companies.  The company was being wound down.  It had no staff.  It did not have a bank account; treasury functions were centred elsewhere in the McConnell group.

Claims McConnell directors David and John McConnell were personally liable to contribute towards Education’s legal costs were dismissed.  This turned on questions of whether the two had delayed Hawkins liquidation to protect their own personal interests.  It was alleged they wanted to see Hawkins’ liquidation delayed to beyond April 2018. This would limit the chances of any liquidator setting aside under the ‘two year rule’ securities issued in 2016 giving them status as Hawkins’ secured creditors owed $15.9 million.  Hawkins’ liquidation commenced in May 2018.  Justice Downs said there was no evidence delays were motivated by attempts to protect their standing as secured creditors.

Education v. McConnell Ltd – High Court (26.06.19)

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Fraud: R. v. Ho & Christie

Fictitious trade transactions were concocted by Siu Shun Ho and Christopher John Christie in a ‘money-go-round’ defrauding ANZ bank to get eight million dollars working capital for their importing business, International View Ltd.  Each was sentenced to two years and ten months imprisonment for fraud.

The High Court was told the two perpetrated their fraud over a twelve month period starting mid-2016.  Fake documents were prepared purporting to evidence the importation of computer parts from Asia for sale in New Zealand.  ANZ advanced trade finance against the revenue expected from on-selling the supposedly imported computer parts.  With multiple false transactions, Ho and Christie extracted eight million dollars from ANZ; much of it used to repay earlier fraudulent loans, some siphoned off into their other business interests.  When ANZ asked for detailed financial information as part of a regular customer annual review, the two forged false business records to camouflage their fraud.  When the fraud finally fell apart, ANZ was left $2.3 million out of pocket.

Evidence was given that Ho voluntarily filed for bankruptcy prior to arrest.  His shareholding in Chinese language World TV was described as being worth over $750,000. Christie’s company Computerware Plus is expected to close following his imprisonment.

R. v. Ho, R. v. Christie – High Court (25.06.19)

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Swaps: Bushline Trustees v. ANZ

ANZ Bank faced heavy criticism over its miss-selling of swap contracts to farmers, with the Court of Appeal overriding disclaimer clauses where Bank legalese was in effect saying: ‘Notwithstanding what we promised we would do and what we represented to be true, you have no claim against us even though we did not do what we said we would do and what we represented to you was false’.     

Taranaki dairy farmers Sharon and Bill Coomey sued ANZ over terms of their ANZ business loans, turning down successive offers to settle out of court as their trial date loomed.  ANZ won in the High Court.  The Coomeys won comprehensively in the Court of Appeal.  Questions of damages were deferred at the request of both parties; often a precursor to compensation being settled quietly behind closed doors.

Court of Appeal was told the Coomeys ANZ borrowings reached $11.97 million by 2008; interest charged was a mixture of fixed and floating rates.  Floating rates were hedged with three separate fixed rate swap agreements. Bank staff sold swap contracts to clients as managing interest rate risk: with a swap, floating rates in effect were fixed, they said, with customers still enjoying the benefit of any favourable interest rate movements.  Internal bank documents produced in court showed growing concern at higher levels within the bank about selling tactics; field staff were confused about the product, selling loans and swaps as a package deal when they were in fact two different products with different risk profiles.

During 2008, the Coomeys increased ANZ borrowings to $19.47 million, funding purchase of a run-off.  Existing loans were consolidated with the full amount becoming what was a floating rate loan hedged with an option to swap for a fixed interest rate. Rates moved against the Coomeys following turmoil in capital markets triggered by the US bankruptcy of Lehman Brothers in September 2008.  This led to increases in bank funding costs.

ANZ was held in breach of contract for its misleading representations that adding swaps to a floating rate loan was the same as a fixed rate loan.  Downside risk was not disclosed to the Coomeys.  It also failed to honour promises to hold steady its agreed margin over the bank bill rate.  Contractual promises to ‘monitor’ the Coomeys’ risk were not honoured.  ANZ did not respond to queries from the Coomeys about possible action they could take as the 2008 financial crisis unfolded, and also failed to be pro-active advising the Coomeys about anticipated interest rate movements.  The Coomeys refinanced with another bank in 2013, quitting ANZ after paying $16.3 million. 

The Court of Appeal dismissed ANZ arguments it was protected by a disclaimer of liability in its loan contract.  Courts have power to ignore disclaimers under the Contractual Remedies Act where it is ‘fair and reasonable’ to do so.  The Court of Appeal said it counted against the Bank that its standard form swap contracts were ‘non-negotiable’, were designed for customers not having sophisticated knowledge of derivative contracts and that all customer information came from ANZ marketing its own product.

Bushline Trustees Ltd v. ANZ Bank – Court of Appeal (24.06.19)

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Post Judgment Note: ANZ appealed.  The Supreme Court ruled in July 2020 there was no evidence ANZ promised not to increase its agreed margin, leaving the Coomeys liable to pay a disputed $3.8 million for increased margins charged.  All other issues had been settled out of court, the Supreme Court was told.

Construction: Oceania Football v. Engineered Solutions

FIFA’s Oceania federation was ordered to pay $411,900 due on construction of its Auckland-based training facility while alleging the construction contract was tainted by fraud and corruption.

After a PwC investigation uncovered financial irregularities at Oceania, then president David Chung and secretary general Tai Nicholas both resigned.  A Serious Fraud Office investigation commenced.  Meanwhile, Oceania refused to make progress payments to engineering company Engineered Solutions & Systems Ltd on $3.65 million contract signed in 2017 for construction of a building intended to house Oceania offices, conference rooms, changing rooms and a gym.  Engineered Solutions is owned by Mr Shakti Singh and his wife Nirmala.

The High Court was told of allegations that there had been fraudulent and/or collusive tendering by the main contractors, including Engineered Solutions, and that Engineered Solutions was party to breaches by Mr Chung and/or Mr Nicholas of fiduciary duties they owed their employer Oceania.  Evidence was given of significant property dealings involving a syndicate of investors including Mr Singh, Mr Chung and Mr Nicholas after the $3.65 million contract was signed.  One industry expert expressed surprise at provisions in the construction contract: a substantial up-front payment and the balance payable in ten equal instalments scheduled without the need for certification that work completed justified payment.  The High Court was told investigators have found two signed contracts, with differing key terms.

Associate judge Smith ruled Oceania was required to honour ‘payment claims’ made by Engineered Solutions on its construction contract under the Constructions Contracts Act.  The Act imposes a ‘pay now, argue later’ regime.  Builders can enforce their contractual right to payment, with the merits of any dispute sorted out later.  This rule was introduced to protect contractors’ cash flow.

Oceania said it would create a substantial injustice if ordered to pay; there was a ‘substantial dispute’ as to whether Engineered Solutions was entitled to anything.  Oceania’s investigations have been underway since 2017, Judge Smith said.  Engineered Solutions cannot be expected to wait indefinitely until investigations are complete.  Immediate payment of the claimed amount was required, or Oceania put into liquidation. Engineered Solutions’ contract was terminated in September 2018.

Construction of Oceania’s Auckland headquarters is funded by a ten million dollar interest-free FIFA loan.  Building work is incomplete, with some $1.7 million spent to date.

Oceania Football Confederation Inc v. Engineered Solutions & Systems Ltd – High Court (21.06.19)

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Freezing Order: Mudjaya Corporation v. Chua

Michael Chua Khian Keng, sometime motor racing enthusiast based in Palmerston North, is alleged to have embezzled $26.5 million from Malaysia infrastructure company Mudajaya Corporation. The High Court lifted its freezing order over assets held in New Zealand by Mr Chua and family on grounds a Malaysian court order might prove unenforceable in New Zealand; Mr Chua was not told of the court case against him in Malaysia.

Mudajaya alleges Mr Chua defrauded it of RM72 million over the period 2012-2013, extracting secret profits by over-invoicing contractors.  The High Court in New Zealand was told of extensive Mudajaya interviews with Mr Chua in early 2015, including veiled threats against his children and threats to hand him over to Malaysian police who ‘will beat you until crazy’.  Mr Chua and his family departed Malaysia for New Zealand. A Malaysian court judgment for the amount allegedly stolen was entered against Mr Chua by default.  Mudajaya investigators traced him to Palmerston North through online postings featuring his interest in motor racing.

Mudajaya obtained a New Zealand High Court order freezing Chua family property in New Zealand.  Mr Chua had the freezing order overturned.  Enforcement of overseas court judgments is governed by the Reciprocal Enforcement of Judgments Act.  The overseas judgment must first be ‘registered’ in the New Zealand courts. Registration is refused where the defendant does not have formal or informal notice of the earlier overseas case and not given a chance to appear in the overseas court and challenge the case on its merits.  Malaysian authorities gave notice of legal action against Mr Chua by substituted service; notice in local Malay newspapers.  Justice Fitzgerald said evidence is required that Mr Chua knew legal action had been filed against him in Malaysia.  He claims he was never told.

The court was told Mr Chua is currently under arrest in Malaysia.

Mudajaya Corporation Berhad v. Chua – High Court (21.06.19)

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Price Fixing: Commerce Commission v. GEA Milfos

High Court approved an agreed Commerce Commission settlement having dairy technology firm GEA Milfos pay a $825,000 fine for fixing prices with competitor Dairy Automation over supply of milk sensor and herd management software.  

Milfos offers milk management systems as part of its package deal when installing new milking sheds on dairy farms.  It sources milk sensors from competitor Dairy Automation Ltd.  The High Court was told Milfos shared with Dairy Automation its in-house spreadsheet used as a ‘quote-calculator’ for new installations.  In May 2012, the two competitors agreed to tie their sites together at farming field days and agreed not to quote against each other.  This as a pre-cursor to a proposed exclusive distributorship; it never eventuated.  Meanwhile, the two continued to use the Milfos quote-calculator, minimising price competition.  Price-fixing is in breach of the Commerce Act.

The High Court was told Milfos held a market share of just over twenty per cent for milk testing and herd management systems through the four year period ending May 2015 with sales of under three million dollars. Extent of Milfos’ mark-up on milk testing equipment was supressed by the High Court.

Commerce Commission v. GEA Milfos International Ltd – High Court (20.06.19)

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Fiduciary Duty: Moanaroa v. Ruwhiu

Ordered to pay $545,000 compensation, Vernon Ruwhiu had promised to manage Takangaroa Moanaroa’s retirement savings.  Instead, he used her savings for his and his family’s benefit.  

Facing a forced sale of property she part-owned at Whenuapai in west Auckland, Mrs Moanaroa met Mr Ruwhiu at a 2003 seminar about mortgagee sales.  Aged 65, she was looking for investments enabling her to retire.

The High Court was told Mr Ruwhiu promised to manage her money for her benefit so she could retire by 2006 and buy a Whangarei retirement property.  At Mr Ruwhiu’s behest, $223,300 derived from the sale of her Whenuapai property, together with $60,00 of her savings, were paid across to a trust he established: the Kaiawhina Family Trust.  Mr Ruwhiu was a trustee.  He and his children were named as beneficiaries, as was Mrs Moanaroa.  The money was used to buy a Whangarei property, in the name of the Trust.  Mrs Moanaroa was installed as tenant; she thought she was the owner.  She was evicted in 2015 when the Whangarei property was sold in a mortgagee sale.

Justice Whata ruled that Mr Ruwhui breached fiduciary duties owed Mrs Moanaroa: he did not act in good faith and acted for his own benefit.  He and Denise Ruwhiu were liable for ‘knowing receipt’; as trustees of the Kaiawhina Trust they both knew the money taken was meant to be used for the sole benefit of Mrs Moanaroa.  Instead it was used to purchase an asset they could convert to their own use.  They were ordered to repay the money misused together with interest totalling $267,300 for the fifteen year period they had wrongly deprived Mrs Moanaoroa of her money. 

Mr Ruwhiu’s sister Bonnie was ordered to pay $145,200 of any shortfall Vernon and Denise Ruwhiu are unable to pay.  She knew the Whangarei property was more properly an asset of Mrs Moanaroa at a time when she bailed out her brother by refinancing the Whangarei purchase.

All three were held jointly liable to pay an extra $25,000 general damages to mark the distress caused Mrs Moanaroa.  They did not contest her legal action.

Moanaroa v. Ruwhiu – High Court (19.06.19)

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Contract: M2 NZ Ltd v. The Phone Company

It all turned on placement of a comma. Was The Phone Company entitled to a one per cent commission in perpetuity on all telco M2’s net receipts, or just on revenue generated through its ‘piggyback’ deal with Vodafone? 

In 2015, M2 purchased Orcon, Slingshot and Flip for $250 million, later merging with Vocus Communication.  This telco consolidation caused Phone Company Ltd to reconsider the wisdom of its earlier exit from a marketing alliance with M2.  The Court of Appeal was told Australian-based M2 sought assistance from Phone Company to establish a dealer network and operational capability when pushing into the New Zealand market in 2005.  Phone Company facilitated a ‘piggyback’ deal enabling M2 to operate over the Vodafone network.  It became entitled to a share of future M2 net revenues, in perpetuity. In mid-2012, Phone Company triggered contractual rights to take a lump sum payment and surrender its rights to future payments.  Three years later, the M2-Vocus deal went public.  Phone Company sued.  M2 misrepresented the position when negotiating the early lump sum buy out, it claims.

At a preliminary hearing, Phone Company and M2 were in court arguing over the interpretation of their original agreement. Phone Company said wording entitled it to in perpetuity payments regardless of which carrier or carriers M2 piggybacked on. M2 said the deal applied only to Vodafone.  At the time the deal was struck, M2 was using only the Vodafone network.

The Court of Appeal pulled apart wording in their 2005 agreement.  Placement of a comma tied Phone Company’s commission rights to net revenue earned using only the Vodafone network.

M2 NZ Ltd v. The Phone Company Ltd – Court of Appeal (19.06.19)

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Property: Jacks Point Village v. Long Capital Holdings

Chinese investor Long Capital Holdings forfeited deposits totalling $2.61 million after pulling the plug on plans to build part of Queenstown’s Jacks Point subdivision.  Compliance with Jacks Point’s detailed scheme plan made the project uneconomic.

In June 2017, Long Capital paid deposits totalling $2.61 million after signing a $26.1 million deal to develop five hectares at the upmarket Jacks Point subdivision.  The contract was conditional on Long Capital submitting a development plan satisfactory to Jacks Point’s owners.  It never did submit a plan, demanding return of its deposit.

Associate judge Johnston ruled Jacks Point could keep the deposit.  The High Court was told Long Capital carried out extensive feasibility studies, to the extent a development plan was prepared.  But no plan was ever submitted.  Potential planning delays and rising construction costs caused Long Capital to back off.  It feared the project would be uneconomic.  Long Capital could not rely on its own failure to submit plans as proof that the contract was at an end, Judge Johnston ruled. 

Jacks Point Village Holdings No.2 Ltd v. Long Capital Holdings NZ Ltd – High Court (19.06.19)

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Estate: re Vugler

A $190,000 gift made eighteen months before death was treated as an advance on a daughter’s legacy, deducted from her share as a beneficiary of her late mother’s estate. 

Marie Vulger died in 2015.  Her estate, currently valued at about $880,000, is to be divided equally amongst her seven children.  Questions arose over $249,000 paid to daughter Helen Mary Erceg in the eighteen months prior to her death; one large payment of $190,000 and multiple smaller payments of several thousand dollars each.  Ms Erceg was an authorised signatory to her mother’s bank account during this time.  She was her mother’s primary caregiver.

The High Court was asked to rule on how the $249,000 should be treated.  Ms Erceg made no appearance; accepting the court ruling.   The doctrine of ‘satisfaction’ presumes children are not to receive ‘double portions’; gifts in advance of a legacy and the legacy itself. This usually applies to large sums paid without explanation, rather than small sums paid by way of allowance. Justice Jagose said there was no evidence of any clear intention by Marie Vulger that the $190,000 was to be a standalone gift.  It was to be treated as an advance on her daughter’s legacy, deducted from Ms Erceg’s share of the final distribution.

re Estate Marie Josephine Vugler – High Court (19.06.19)

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AGM: NZ Electrical Institute v. Westpac

Arguing over control of a $40,000 bank balance; a bitter battle between Electrical Institute factions based separately in Auckland and Wellington has seen a $40,000 Westpac balance run down to $200, chewed up by legal expenses. 

Wellington members objected to an Auckland ‘takeover’ of branch funds.  Auckland was not validly appointed as Institute executive and had no grounds to disband Wellington branch, the High Court ruled.  The Institute was founded in 1940.  Regional branches were established, with members paying a branch fee together with a capitation figure forwarded to ‘head office’.  It describes itself as a non-profit industry body providing training and support. The Institute is currently managed by the Horan family, out of Pukekohe.

Wellington branch members took legal action after a September 2016 edict that their branch was disbanded; all funds were to be transferred to Auckland.  Justice Cooke ruled the Auckland-based executive had not been validly elected at a previous annual general meeting.  They had declared themselves re-elected, without the need for either re-nomination, or a vote.

In addition to not having executive authority to deal with Wellington branch, Justice Cooke ruled the Auckland faction failed to comply with natural justice.  It did not give Wellington a proper opportunity to respond.  Complaints Wellington branch had failed to file tax returns were invalid; tax filing was a ‘head office’ responsibility. Allegations about misuse of Branch funds had no substance.  The Auckland executive also ignored its own rules; if a branch were disbanded, branch funds had to be held in trust for five years before coming under Institute control, pending a possible revival of branch activities.

The Institute’s financial statements to March 2019 disclose accumulated funds totalling $9900, down from some $135,000 three years previously.  Legal action over control of the $40,000 Westpac account was described by Justice Cooke as being totally uneconomic.

NZ Electrical Institute Inc v. Westpac – High Court (19.06.19)

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Mortgagee Sale: Epsom Woods Ltd v. Waitakere Farms Ltd

Multiple attempts by Peter Mawhinney and interests allegedly associated with him to frustrate the mortgagee sale of a forestry block on Anzac Valley Road in west Auckland have been dismissed by the courts, including an attempt to argue the forest was a residential property protected by the Residential Tenancies Act.    

In March 2017, Waitakere Farms Ltd became owner of the 51 hectare forestry lot paying $1.65 million following a mortgagee sale. The effect of a mortgagee sale is to clear the title of all interests subordinate to the mortgage.  Rights of lower ranking mortgages and rights of the previous owner are stripped off the title.

Waitakere Farms’ interest as new owner of Anzac Valley was challenged by a company called Epsom Woods Ltd.  It claimed a forestry right over trees on the land and further claimed a residential tenancy existed with rights of occupation running to 2040. Epsom Woods, controlled by former bankrupt Andrew Bond, was incorporated in June 2018.  It is alleged the company is a front for Peter Mawhinney, currently bankrupt.  Mr Mawhinney owned the forestry block prior to its mortgagee sale, both in his own name and through a series of trusts.  He gained notoriety for long-running legal battles with first Waitakere City Council and later Auckland City in unsuccessful attempts to subdivide Anzac Valley. Council frustrations led to a 2016 High Court order blocking Mr Mawhinney from mounting any more litigation for a period of five years.

The High Court was told it took four years to finalise a forced sale of Anzac Valley to Waitakere Farms; Mr Mawhinney was regularly in court challenging the right of the mortgagee to sell and the manner of the sale.

Waitakere Farms than faced a claim Epsom Woods owned cutting rights to the trees.  This was evidenced by an assignment of cutting rights signed by Mr Mawhinney as trustee of the Anzac Valley Trust and by Mr Bond of Epsom Woods.  Both their signatures were witnessed by a Paul Graeme Alexander described by Associate judge Bell as a person who has made his own contributions to case law on bankrupts and insolvents.  Mr Alexander has been bankrupted more than once. Judge Bell ruled Epsom Woods had no greater right to the trees than did Mr Mawhinney and Mr Mawhinney’s claimed cutting rights were lost following the mortgagee sale.

The claim Waitakere Farms was bound by a residential tenancy running to 2040 was also dismissed.  The court was told there is no residential accommodation on site; just converted containers used for storage and a site office.  The Tenancy Tribunal ruled that the Residential Tenancies Act does not apply to Anzac Valley; there is no residential accommodation on site.  Named as supposed residential tenant at Anzac Valley was Anthony Mawhinney, brother of Peter Mawhinney.

Waitakere Farms is controlled by Hunterville-based Joe Duncan.

Epsom Woods Ltd v. Waitakere Farms Ltd – High Court (17.6.19)

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Bankruptcy: Memelink v. Official Assignee

Annulment of Harry Memelink’s bankruptcy was refused by the High Court while he protested lawyers and judges were ganging up on him. 

A regular visitor to the courts, Wellington-based Mr Memelink was propelled into bankruptcy in August 2018 on a court costs judgment of some $122,000 owed a Lower Hutt law firm.  His attempts to cancel bankruptcy were refused by Associate judge Lester.

Mr Memelink alleged the judge ordering him bankrupt was biased; he was related to one of Mr Memelink’s creditors.  Judge Lester said the judge imposed bankruptcy following non-payment of a sealed court order.  There is no bias in forcing performance of a court order.  Mr Memelink also alleged the bankruptcy judge was biased because he had been involved in earlier Memelink litigation as lawyer, before becoming a judge.  When giving advice as a lawyer, the bankruptcy judge was acting for Mr Memelink, not against him, said Judge Lester.

Mr Memelink further said if his bankruptcy were annulled, he would release assets from a family trust to meet creditor claims.  There were vague promises of financial support from family members.  Justice Lester said Mr Memelink hinted at $600,000 being made available but made no promises as to amount.  Mr Memelink still disputes amounts due to specific creditors.  It is now for Insolvency Service to determine how much Mr Memelink owes, Judge Lester said.

In court papers filed earlier, Mr Memelink admitted to: debts totalling $5.55 million; $6000 in assets.

Memelink v. Officlal Assignee – High Court (14.06.19)

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AGM: re Fiji Community Association

Factional fighting within Auckland-based Fiji Community Association saw vice president Adi Aseneca Uluiviti removed from the executive committee with effect from August 2018 after she failed to attend three consecutive meetings.

The Association’s main asset is the Bula Centre, an early childhood care centre in Mangere East.  Bula’s poor financial management resulted in an adverse Ministry of Education report.  Subsequent High Court litigation between competing Fiji Community factions was settled out of court with an agreement to start again with a ‘clean slate’; a June 2018 meeting of members was to vote in a new executive.  An election did not stop in-fighting: Ratu Isoa Soqosoqo Koromako was elected president with Ms Uluiviti vice president, each by a margin of only two votes.  There was no appointment for secretary or for treasurer; votes were tied.  Objecting to Ratu Koromako’s choices as co-opted members to fill the un-filled vacancies, Ms Uluiviti boycotted subsequent executive committee meetings.  Under terms of the Association constitution, her failure to attend three meetings without adequate explanation meant she automatically ceased being a member of the committee.

The Association alleges Ms Uluiviti refuses to hand back office equipment in her possession.

re Fiji Community Association of Auckland Inc – High Court (6.06.19)

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Christina Domecq: JCCL Global Pty Ltd v. Foundry Innovations Ltd

Formerly a director of both Tourism Holdings and Harmoney, Christina Domecq has been held liable on debts exceeding $13.2 million with interest running at up to sixty per cent per annum on one loan.

Ms Domecq personally guaranteed bridging finance as part of Fulcrum Group’s proposed float on ASX.  The float never eventuated; start-up costs crippled what was touted as the next big thing in data analytics.  The High Court was told of Fulcrum’s increasing indebtedness resulting in ploys to keep loans ‘off the books’, designed to present a more attractive picture to prospective investors.  Instead of Fulcrum borrowing in its own name, Ms Domecq had Fulcrum funding pass through a company she controlled: Foundry Innovations Ltd.  Ms Domecq guaranteed Foundry’s borrowing.  The funds were passed on to Fulcrum.  Foundry, as Fulcrum’s majority shareholder, expected to recover this money handsomely following Fulcrum’s public offering.  When listing plans fell over, both Foundry and Ms Domecq were left exposed.  In addition, Ms Domecq guaranteed working capital provided by Heartland Bank to companies she controlled.   

Three financiers successfully sued Ms Domecq on her guarantees: Heartland Bank owed $12.8 million; JCCL Global Pty Ltd owed $A250,000 plus interest running at forty per cent; Spofforth Pty Ltd $A130,000 plus interest running at sixty per cent.  Associate judge Bell ruled these high interest rates were not ‘unfair’ as defined by Australian credit legislation.  The loans were short-term and unsecured.  Rates charged reflected the commercial risk taken.

The court was told her debt to Heartland Bank was reduced in part following the $404,100 sale of a property at Makora Avenue, Waiheke.

JCCL Global Pty Ltd v. Foundry Innovations Ltd; Spofforth Pty Ltd v. Foundry Innovations Ltd – High Court (4.06.19); Heartland Bank Ltd v. Domecq – High Court (7.06.19).

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Post judgment note: Ms Domecq filed for bankruptcy on 10 June 2019.

Duress: Dold v. Murphy

It was not economic duress for lawyer Peter Murphy to play hardball, refusing to sign off on a $A112 million business sale unless fellow investors gave him a larger share of the pie.

The end of nearly three decades of co-operation between Peter Murphy, Roger Dold and Chris Jacobs running charter cruises in the Bay of Islands, Fiji and Queensland played out in the High Court at Auckland.

The court was told of growing tensions in 2014 between the three over construction of a passenger terminal at Port Airlie, Queensland.  Mr Jacobs was expected to oversee the project. He fell seriously ill.  Mr Murphy took over management, becoming increasingly annoyed at the time and management pressures which followed.  The job was completed in early 2015, leaving simmering discontent still bubbling away.  Their entire business, Cruise Whitsundays Pty Ltd, was put up for sale.  An indicative offer of $A35 million was not accepted. Accounting firm Deloitte was appointed to handle potential sales.  It attracted an offer from Quadrant Private Equity: $A110 million; far beyond what the three investors ever expected to get.  Negotiations pushed the price up to $A112 million.  Mr Dold and Mr Jacobs expected net proceeds of sale would be divided according to the ratio of their respective shareholdings: Dold (46.9 per cent); Jacobs (46.9 per cent) and Murphy (6.2 per cent).  At this point, Mr Murphy refused to sign off on the deal unless he was paid a greater proportion; reward for the extra work he had done getting the business ready for sale, he said.  A furious Mr Dold said a pistol was being held to their heads, holding them to ransom.  Without Mr Murphy’s signature, the entire $A112 million deal might fall over.  The two grudgingly agreed to pay Mr Murphy an extra four million dollars, with each reserving their rights.  Mr Dold later sued, seeking reimbursement of the two million he contributed.

Justice Edwards dismissed his claim of economic duress. Duress requires proof of illegitimate pressure being applied, causing the victim to enter into a contract. There was no illegitimate pressure, she said.  Mr Dold had ample time to consider his position, and did so, getting legal advice before paying the extra two million dollars.  Mr Murphy’s initial demand for an extra five million dollars was bargained down to four million dollars.  Negotiating the level of payment is the antithesis of duress, Her Honour said.  By his own admission, Mr Dold was selling at a price beyond his wildest dreams at $A112 million.  Agreeing to Mr Murphy’s demand was not economic duress; it was a calculated and considered commercial decision after weighing all the options.

Dold v. Murphy – High Court (31.05.19)

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Restraint of Trade: Mainland Digital v. Willetts

Taking up employment with Canterbury real estate firm Bayleys was not in breach of a two-year restraint of trade written into their previous Open2view franchise agreement said photographers Paul Willetts and Rachel von Nordeck Meyers.  The High Court refused an interim injunction blocking their continued employment with Bayleys, pending trial.  

The High Court was told Willetts and Meyers Open2view franchise agreement came to an end in March 2019.  It operated as a sub-franchise from Mainland Digital Marketing Ltd, controlled by Tim and Janetta Perry.  Mr Willetts and Ms von Nordeck Meyers hold a minority interest in Mainland Digital. Their sub-franchising agreement entitled them to 55 per cent of gross revenue generated within the Canterbury franchise area.  Bayleys was a major client.  Having no agreement with the Perrys over their continuing a Open2view franchising relationship through Mainland Digital, they took up an offer of employment with Bayleys as in-house photographers; each receiving a base annual salary of $18,400 for twenty hours work per week.

The court was told they are left owed $69,000 unpaid by Mainland Digital.  The fate of their 25 per cent stake in Mainland was left hanging.  Mainland Digital sued, alleging employment with Bayleys breached a restraint of trade clause in their earlier sub-franchise agreement.

Courts frown on restraints of trade; they limit business activity.  Wording of any restraint is closely examined.  If there is any ambiguity, it is construed against the person seeking to enforce the restraint; the contra proferentem rule.

Justice Nation said there was no wording in the sub-franchise agreement that clearly prohibited Mr Willetts and Ms von Nordeck Meyers from providing photographic services as employees for a former Open2view client.  Whether restraint wording indirectly prohibits such employment requires a full trial.

Mainland Digital Marketing Ltd v. Willetts – High Court (30.05.19)

19.105

Family Trust: MA Payne Family Trust v. Maloney-Coles

Sixteen years after Mark Payne died in a Taranaki quad bike accident, distant relatives tried without success to claim a share of his estate arguing they were wrongly cut out of a deal involving his family trust as estate beneficiary.

At the time of his death, Mark owned an Oakura dairy farm milking 120 cows.  With him on the farm was his de facto spouse of some six months, Sheree McNeill and her two children from a previous relationship.  Mark’s will left all personal belongings to Sheree as his ‘spouse’ and the farm to his MA Payne Family Trust.  Named as Trust beneficiaries are Mark and his children, with other blood relatives as discretionary beneficiaries.  The High Court was told when setting up the Trust, Mark indicated Trust funds should be used primarily to support any spouse and children, failing that his parents Bernard and Nancy.  Mark had no children at his death.

On Mark’s death, the farm now owned by the MA Payne Family Trust was transferred to a new trust: the Bernard and Nancy Family Trust, naming Mark’s parents together with Sheree and her children as beneficiaries. This was achieved with a Family Court consent order engineered as part of a Family Protection Act claim, with the agreement of lawyers acting separately for Sheree and Mark's parents.

Sixteen years later, some of Mark’s cousins learnt they were discretionary beneficiaries of the original MA Payne Family Trust.  Trust assets, now held by the Bernard and Nancy Trust were valued at some two million dollars in 2018.  The cousins sued, seeking to overturn the earlier Family Court order and demanding compensation from lawyers who acted.  As discretionary beneficiaries of the MA Payne Trust, they should have been given notice of the proposed deal, they said.

Justice Ellis ruled there were sufficient grounds for making the Family Court order.  Trustees of the MA Payne Trust were under no obligation to give notice to distant relatives; they had no direct interest in Trust assets, only the right to such assets the trustees may choose to transfer to them.  In any event, lawyers could have achieved the same result by resettling the Payne Trust assets on a new trust like the Bernard and Nancy Trust without notice to discretionary beneficiaries, she said.

MA Payne Family Trust v. Maloney-Coles –High Court (30.5.19)

19.104

Relationship Property: Pisidia Holdings v. Darby

Relationship property claims against a spouse’s company are claims against the company’s value, not a direct claim against company assets, the High Court ruled when ordering relationship property claims registered by Kristen Darby against Glenorchy real estate be lifted.

Kristen claims an interest in estranged husband John Darby’s Glenorchy property development at the head of Lake Wakatipu. Mr Darby is a high-profile property developer with a history of completed projects across central Otago. She says her marital support during their relationship entitles her to a Property (Relationships) Act share in profits from the Glenorchy development.  Lots at Glenorchy are currently offered for sale. Kristen lodged notices of claim against title to seven lots; two of them under contract.  Notices have the practical effect of blocking any sale.

The High Court was told sales are being made in the name of a company: Pisidia Holdings Ltd.  Ultimate owner of Psidia is a trust allegedly controlled by John Darby. Kristen complains she has been refused access to the trust deed for her estranged husband’s Karearea Trust. 

Any relationship property claim Kristen may have to Glenorchy profits amounts to a claim against Mr Darby’s company, Associate judge Lester ruled.  She has no direct claim against assets owned by Psidia.  Her notices of claim against Psidia assets were ordered removed.

Pisidia Holdings Ltd v. Darby – High Court (30.05.19)

19.106

AGM: re Tamaki Estuary Protection Society

The last annual meeting of the Tamaki Estuary Protection Society in Auckland ended in uproar with chairman Patrick O’Meara and his allies walking out.  Those remaining voted in a new executive.  The High Court ordered a new meeting. 

Meanwhile the Society’s bank account remains frozen. Patrick O’Meara and secretary Denny Thompson were ordered to hand to a lawyer for safekeeping all Society records in their possession.  The Society last filed financial statements in 2008, recording $75,400 in its bank accounts.

Tamaki Estuary was formed in the 1970s with the aim of improving aquatic life in and around the waterway.  Its last annual meeting was called in September 2017 by notice in the NZ Herald and on the Society’s website.  There was no quorum.  A new meeting was fixed for the following month.  Described as a ‘fiery meeting’ there were arguments about alleged ‘vetting’ of members, refusals to allow a vote by those paying membership fees on the day and the content of the meeting agenda.  Comments by Mr O’Meara, in the chair, that the current executive remained in office because advance notice had not been given of any new nominations led to an uproar.  He walked out.  Those remaining voted in a new executive committee.  Stalemate followed.

Justice Edwards ruled notice of the disputed meeting failed to accurately specify what was on the agenda and what procedure was required for nomination to the executive committee.  Neither the ‘old’ committee, nor the ‘new’ committee was validly elected. A new election was ordered.

re Tamaki Estuary Protection Society – High Court (29.05.19)

19.103

Bankruptcy: Worldclear Ltd v. Whitham

Ordered to repay $4.5 million stolen from Hamilton-based Worldclear Ltd and now on bail in Singapore facing criminal charges, Richard James Whitham did not contest legal action to bankrupt him in New Zealand.

In May 2018, Whitham with his family suddenly left for Singapore, hiding departure plans from his then employer Worldclear Ltd and blocking Worldclear from client accounts.   He had been responsible for effecting foreign exchange transfers on behalf of Worldclear. Prompt action by Worldclear saw him arrested in Singapore where he currently awaits trial.  The Singapore Supreme Court issued injunctions freezing assets Whitham may hold in Singapore.  It ordered Whitham repay Worldclear $4.5 million.

As first step to recover its money, Worldclear filed in the New Zealand courts to have Whitham bankrupted on the grounds he ‘departed New Zealand with intent to defeat his creditors’.  Bankruptcy was ordered.  ‘Departing with intent to defeat creditors’ is sometimes used in conjunction with an Insolvency Act arrest warrant to have fleeing debtors arrested at an airport on departure.  In this case, bankruptcy was ordered with the debtor already overseas and unable to return whilst on bail.

Evidence was given that Whitham has moved some of the stolen funds out of Singapore.

Worldclear Ltd v. Whitham – High Court (28.05.19)

19.101

Avgas: Air NZ v. BP Oil Ltd

Air NZ’s attempt to have Z Energy bear losses the airline incurred during the two week disruption of Auckland avgas deliveries in September 2017 was dismissed.  Z Energy was under no obligation to provide Air NZ with the full volume of fuel demanded; it was only required to take all reasonable endeavours to supply, the High Court ruled.     

Avgas, designated as Jet A1, is delivered to Auckland airport from Marsden Point refinery along a 160 kilometre pipeline. A pipe rupture prevented fuel deliveries for two weeks.  As airport stocks ran down, fuel supplied to airlines was rationed, flights cancelled and airlines ‘tankered in’ fuel with Auckland-bound aircraft taking on extra fuel at other airports.

Air NZ sued suppliers BP Oil and Z Energy alleging breach of contract; they failed to supply avgas as needed, it said.  The claim against BP Oil was settled out of court. The Z Energy claim went to trial. Air NZ said Z Energy was obliged to provide an ‘unqualified supply’.  Their contract, concluded by an exchange of emails, said nothing about levels of supply. It merely specified the period of supply and a formula for fixing price.  Justice Venning ruled past practice created an implied term that Z Energy was obliged only to take all reasonable endeavours to supply fuel required.  Disruptions to fuel supply at Sydney airport in 2003 and from Christchurch airport after the series of Canterbury earthquakes saw industry protocols developed for fuel rationing.  These protocols formed an implied term in the Z Energy supply contract with Air NZ.  Z Energy said it alone had suffered losses totalling five million dollars with the 2017 Auckland disruption.

The court was told an industry study in 2003 had highlighted the vulnerability of avgas supply to Auckland.  Airlines did not support construction of extra storage at the airport.  This would increase the cost of fuel supplied.

Air NZ Ltd v. BP Oil NZ Ltd & Z Energy Ltd – High Court (28.05.19)

19.102

Estate: re Estate of Sprott

Children of the late Jim Sprott are at loggerheads over time taken to sell the family home in Combes Road, Remuera, Auckland.  Daughter Lindsay is demanding damages, complaining she lost the opportunity to buy into Vancouver’s booming real estate market because of brother Adrian’s delays.

Industrial chemist Jim Sprott famously provided scientific evidence leading to Arthur Allan Thomas’ acquittal for the 1970 Crewe murders.  Dr Sprott subsequently fronted high-profile campaigns in relation to topics as varied as road safety and cot death.  Dying in 2014, his will provided for sale of the Remuera family home with proceeds divided amongst his three children.  Lindsay alleges her brother Adrian as executor has delayed unreasonably in selling. Five years on, the property remains unsold.  She says her intended purchase of a property in West Vancouver fell over in 2016 because of delays in receiving her inheritance.  She states she lost the chance to buy a Vancouver property at $1.8 million; a property now worth $2.8 million.  Adrian told the High Court a sale was delayed because of the chance of getting a better price: first, when changes to Auckland City rules made it possible to remove a large tree on the property; later when further rule changes opened up the possibility of subdivision.

At a preliminary High Court hearing, criteria were established to calculate changes in value of Combes Road over time and to clarify legal details of Lindsay’s intended Vancouver purchase.

Re Estate of Thomas James Sprott – High Court (27.05.19)

19.100

Family Trust: Evans v. AW Builders Ltd

A builder selling his home to a family trust then immediately forgiving payment due when facing potential liability in a building dispute was an attempt to dissipate assets and become ‘judgment proof’ the High Court ruled, imposing a freezing order over the family home. 

Auckland builder AW Builders Ltd and its sole director/shareholder Anthony Williamson is being sued for about $800,000 following a dispute over earthworks and construction of a home at Whitford for Oliver Evans.  Within six months of being fired from the Whitford building contract, Mr Williamson had his Cockle Bay family home transferred to a family trust.  Mr Williamson and his spouse are two of the three trustees. Their contract specified a price of $1.2 million.  The debt owed by the trust to Mr Williamson was immediately forgiven.

Mr Evans asked the High Court to freeze the Williamsons’ Cockle Bay home.  Justice Davison ruled there is sufficient prima facie evidence supporting Mr Evans claim for damages to justify a freezing order, pending trial.  While Mr Williamson said the property transfer was simply part of an estate planning exercise underway for at least a year, Justice Davison said the timing of the transfer and the fact a transfer was made for nil consideration demonstrated it was undertaken to frustrate enforcement of any judgment against him. The court has yet to rule whether Mr Williamson is liable for damages.

Evans v. AW Builders Ltd – High Court (24.05.19)

19.099

Fraud: FM Custodians Ltd v. R. & Smith

Defrauded by Hokitika accountant Lindsay Beckett Smith, FM Custodians Ltd lost $784,000 lent on behalf of investors in its NZ Mortgage Income Trust (No. 2) Fund.

FM Custodian lost a High Court battle to recover $648,100, proceeds of land sold at Blue Spur subdivision near Hokitika. This money potentially goes to Michael and Lilian Ross, ruined financially by Smith’s dishonesty.

The High Court was told of a 2013 FM Custodians loan made supposedly to business interests associated with Mr Ross and Smith. Mr Ross knew nothing of the loan. Smith forged Mr Ross’ signature to three documents: a loan application, a mortgage and a guarantee over the Ross family home.  Smith subsequently pleaded guilty to forgery and was sentenced to over two years imprisonment.  FM Custodian appealed a District Court order that it forfeit the benefit of its loan. The Sentencing Act allows forfeit of legal rights where a benefit is derived from illegal activity.  FM Custodians protested; it was a victim, not the perpetrator, it said.

Evidence was given of Fund Managers Otago Ltd acting as fund manager for FM Custodians in processing Smith’s loan application for funding to develop Blue Spur.  Otago sent instructions to a law firm in Hokitika to act as FM Custodian’s agent in getting signatures to the loan documents and guarantee.  Unbeknown to each of FM Custodian, Otago and the law firm, Smith forged Mr Ross’ signature to all the documents.  Whilst not itself guilty of fraud, FM Custodian must accept responsibility for the illegal acts of Smith, Justice Nation ruled.  The Hokitika law firm, acting as agent for FM Custodian, had certified the signatures as being that of Mr Ross, without actually seeing him sign.  In the alternative, said Justice Nation, Smith acting as agent for the law firm when asked to get Mr Ross’ signature became also an agent for FM Custodian.  FM Custodian’s rights as mortgagee were forfeit. Proceeds from sale of the mortgaged land are now held by the Official Assignee.  The court was told Mr and Mrs Ross are currently $670,200 out of pocket from their original investment in Blue Spur.

FM Custodians Ltd v. R. & Smith – High Court (22.05.19)

19.097

Family Trust: Re J.J. Enright Trust

Cut out of their father’s will, four of Jack Enright’s children were awarded damages totalling $1.7 million from their youngest brother having been wrongly denied fourteen years income from their father’s family trust.

In 2014, Jack Enright died in Australia, near his youngest son Tony.  Tony has five siblings.  Questions were asked about circumstances in which Tony became sole beneficiary of their father’s family trust owning Dunstan Burn Station at St Bathan’s in central Otago.  Covering over 10,000 hectares, Dunstan Burn runs sheep along with some cattle and deer.

The J.J. Enright Trust was created in 1974 with a rental property in Athol Street, Queenstown, settled on the trust. Subsequently, Athol Street was sold, the funds used to subdivide properties at Wye Creek and these profits used to buy Dunstan Burn.  It was a matter of pride for Jack to buy back Dunstan Burn; the farm, previously owned by his forebears, had passed out of family hands following financial difficulties.

Evidence was given of Jack progressively falling out with all of his children, bar Tony.  Jack was variously described as forceful, strict and dominating.  The children were unaware of any entitlement as beneficiaries under Jack’s 1974 family trust.  Terms of the trust deed specified net income in each tax year was to be distributed according to the unanimous decision of the trustees, failing that it was to be appropriated each year equally between the six children. The court was told no trustee decisions were in fact made.  No provision was made in trust annual accounts for the required allocation of income. Over a fourteen year period to 2008, trustees failed to properly appropriate a total of $2.2 million to the children as beneficiaries.  In 2007, Jack transferred all trust assets, then valued at $2.5 million, to Tony despite legal advice this was not permitted by the trust deed.  Two years later, these trust assets were valued at $11.5 million.

Justice Palmer ordered Tony compensate siblings Cathie, Wayne and Shell, together with the estate of deceased sibling Adrian, a total of some $1.7 million out of trust assets he had wrongly received; the money to be divided equally between the four.  Fellow sibling Terry receives no payment.  He was aware back in 2008 of his right to sue but was now out of time to take legal action.  Tony was described as born in 1965, qualified with a PhD in medical research and now living in Brisbane.

Re  J.J. Enright Trust – High Court (22.05.19)

(19.098)

Post Judgment Note: The Court of Appeal ruled in October 2020 that Terry was also entitled to compensation.  His claim was not out of time.

Security: Brown v. Heartland Bank

Heartland Bank is thrashing out creditor security rights in respect of current assets: accounts receivable and work in progress.  The High Court has left hanging the question of when secured creditors can lay claim to the proceeds of client invoices issued before liquidation but collected later.  

Accounts receivable and work in progress can make up a large chunk of business current assets.  Financiers lending on security of current assets want certainty they can collect if their client goes belly-up.

Stages Civil & Electrical Ltd went into liquidation insolvent in 2015.  It was working as sub-contractor to a company then known as Transfield Services installing fibre optic cabling in Hamilton.  At the date of liquidation, Stages owed Heartland Bank $1.2 million.  The bank held an all-encompassing security over Stages’ assets. Nearly $900,000 was recovered after selling Stages plant and equipment.  Claims to security over accounts receivable and work in progress were disputed.

The High Court was told Heartland agreed a ‘whole turnover factoring’ agreement with Stages.  Every receivable generated by Stages was instantly ‘owned’ by Heartland with Stages appointed as Heartland’s agent for collection of the debt. Heartland installed proprietary software within Stages’ accounting system which tracked the issue of all invoices and payment receipt.  Whilst legal documentation described Heartland as ‘owner’ of each receivable, the Personal Property Securities Act qualifies this ownership; employees and Inland Revenue as preferential creditors on liquidation can take priority.

Associate judge Smith questioned whether Heartland took priority for the value of invoices totalling $188,100 issued before liquidation, but not collected until after Stages went into liquidation.  Under the Personal Property Securities Act this turned on whether Heartland provided ‘new value’; whether Heartland allowed Stages further credit on gaining ‘ownership’ of the invoices in question. Further evidence was called for.

Other issues were straightforward.  Judge Smith ruled that $20,000 liquidators recovered from Stages’ shareholder as a current account debt goes to pay preferential creditors; the debt was not payable until liquidators made demand after liquidation. A $105,300 invoice issued by liquidators for work in progress completed, but unbilled, at the time of liquidation belonged to Heartland Bank; this invoice quantified the value of work in progress which was an asset covered by the Bank’s security at the time of liquidation.

Brown v. Heartland Bank Ltd – High Court (21.05.19)

19.096

Due Diligence: Sullivan v. Wellsford Properties Ltd

Failure to disclose material information during due diligence on sale of his Wellsford service station and adjoining food court cost Garry Hannam and his company $424,300.  Operating expenditure invoiced to one tenant was in dispute. 

Peter Sullivan fronted for a group of investors negotiating in 2014 to buy a Wellsford commercial property leased to seven tenants: a service station and food outlets.  Negotiations resulted in sale at a price of $5.05 million; an implicit yield of 7.6 per cent.  The contract included a due diligence period.  Wellsford Properties Ltd was obliged to allow ‘full access to the property’ and provide any ‘relevant information’.  With commercial property values determined by net rental income, purchasers’ enquiries zeroed in on operating expenses which could be charged back to tenants: rates and utility charges.  Wellsford Properties was unwilling to hand over financial statements, but it undertook to provide certified details of rents and actual operating expenditures for the previous three years.  It did not disclose that a Caltex service station on the site had challenged an invoice for some fifty per cent of power used across the seven tenancies; it was separately metered for power it said.  Under-recovery of operating expenditure fed through to reduced net income from the tenancies.  After their purchase, the new owners renegotiated Caltex’s lease obligations. 

The Court of Appeal ruled purchasers were entitled to damages of $424,300 from Wellsford Properties, representing the reduced amount they would have paid if full disclosure had been made of net rental income paid.  In addition, Mr Hannam was held personally liable under the Fair Trading Act.  He was directly involved in the sale process and specifically involved in Wellsford Properties responses to requests for information about operating expenses.

Sullivan v. Wellsford Properties Ltd – Court of Appeal (20.05.19)

19.095