Security: Davies v. Zhong

 

Storage costs are adding up, with multiple claimants disputing ownership to barrels of honey under control of Oceania Natural’s liquidator.  Three people lay claim to 127 barrels; liquidator Kevin Davies is holding 101.

Justice Anderson ruled the liquidator is free to sell all 101 barrels, having a current market value of some $300,000 and use the proceeds to pay Oceania’s general creditors.

Oceania Natural Ltd has a colourful commercial history.  Set up to export natural health products to consumers in China, the company listed on NZX’s then secondary board: NXT.  It delisted in 2018, with director Wei Zhong subsequently fined $1.33 million for market manipulation in breach of the Financial Markets Conduct Act.

Mr Zhong now claims honey stocks under control of Oceania’s liquidator should be handed over.  He claims to hold security over these assets.

The High Court was told of ‘manuka bonds’ being issued by Oceania’s finance subsidiary back in 2016 to raise working capital, with security offered over Oceania’s stocks of honey.  Debt security agreements recording these arrangements were registered on the Personal Property Securities Register.

This Register provides public notice of secured claims over assets other than land.

The liquidator said no accounting records could be found linking funds raised to any security over identifiable purchases of honey.  The money raised seems to have been used for general operating expenses, including salaries, he said.  Any claim to status as secured creditors had not been ‘perfected,’ he added, because of a failure to specifically identify the barrels of honey supposedly secured by registered financing statements.

Mr Zhong and fellow claimants did not attend court to challenge the liquidator’s request for a ruling on ownership of honey held.

Davies v. Zhong – High Court (18.04.24)

24.096

Subdivision: Lu v. Wila Developments

 

The High Court allowed property developer Kenny Li to cancel contracts and keep $128,000 in deposits received after aggrieved purchasers lodged caveats against head title to a proposed South Auckland subdivision without justification and in breach of a ‘no caveat’ clause.  Purchasers complained a ‘sunset clause’ was being used as leverage to force payment of an increased price.

In August 2018, Wila Developments got Auckland City consent for a 24 lot subdivision at Argento Avenue in Flat Bush.  Over the next year, sections were sold off the plan whilst Wila set about complying with Council engineering and legal requirements for issue of individual titles.  Wila was managed by Guoxiong Li, otherwise known as Kenny Li.

The High Court was told each contract contained a ‘sunset clause:’ either party was at liberty to cancel if individual section titles were not available by end of March 2021.

With a rising market, a number of purchasers on-sold their ownership interest before section titles were available.

Come ‘sunset date,’ Wila Developments cancelled.  A number of purchasers objected, with Wila now offering them first refusal on a new contract for their same section, at an increased price.

They alleged Wila had deliberately delayed satisfying Council requirements, so as to trigger the ‘sunset clause.’

Justice Lang ruled Wila had taken reasonable steps to get individual titles issued within time.  Council staff were under a heavy workload.  Processing delays were exacerbated by downstream effects of the covid-19 pandemic.  Contractors expediting the process on behalf of Wila were in regular contact with Council over perceived delays.  More regular contact might have been beneficial, Justice Lang said, but this criticism has the benefit of hindsight.  Equally, pestering Council staff might have caused antagonism with further delays resulting.

Terms of sale required refund of deposits if cancellation arose because of the ‘sunset clause.’  But further terms allowed Wila to keep deposits paid by any purchasers who lodged a caveat against the head title; a so-called ‘no caveat’ clause.

Justice Lang ruled Wila developments could retain deposits totalling some $128,000 paid by purchasers who did caveat the head title.

Seizing their deposits did not amount to a penalty, otherwise void under contract law.  Rather, it was compensation for costs incurred by Wila; legal fees challenging successive caveats registered without justification and penalty interest Wila was forced to pay second round purchasers when transfer of title to these buyers was delayed because of caveats lodged.

Lu v. Wila Developments (Ormiston) LP – High Court (18.04.24)

24.095

Asset Forfeiture: Commissioner of Police v. Stevenson

 

Claims that cannabis was cultivated for personal therapeutic use only did not prevent the High Court making a proceeds of crime restraining order over some $73,500 cash seized by police and ASX listed shares currently valued at $A30,900.

Paul James Stevenson has prior drug convictions; possessing cannabis for supply (in 1987) and possessing cocaine for supply (1991), plus subsequent cannabis related offences.

The High Court was told a February 2022 police search of his home found 460 grams of cannabis, four mature cannabis plants and a room fitted out for cannabis cultivation.  A wooden box concealed in a cabinet contained $73,500 in cash.

An investigation into his financial affairs found declared income averaging only $16,200 over the previous seven years.  Police allege financial assets accumulated during this time amount to proceeds of crime: the $73,500 cash, ASX listed shares registered in his name and $130,000 deposited directly into his credit card account.

Mr Stevenson said he medicates with cannabis since he suffers from both ankolysing spondoliyis and osteoarthritis.  He further said his cash assets are explained in part from an inheritance received in 2007 and cash provided by un-named third parties for investment on their behalf.

Mr Stevenson said some of the cash also came from his entrepreneurial activities in selling whitebait, firewood and garlic together with furniture he had made.  If so, there had been no income declared from these activities, Justice Churchman pointed out. 

Justice Churchman imposed Criminal Proceeds (Recovery) Act restraining orders over the assets seized.  Whether these assets should be forfeit await a later court hearing where the credibility of Mr Stevenson’s explanations can be closely examined.

Commissioner of Police v. Stevenson – High Court (17.04.24)

24.093

Breach of Trust: Venkataswamy v. Kodoor

 

With substantial commercial holdings and expertise in the hospitality industry, Murali Kodoor encouraged California-based Shyla Venkataswamy to invest in a proposed Orewa property development with promises of rich returns juiced up by lack of a capital gains tax in New Zealand, the High Court was told.  Over a decade later, Kodoor and investment partner Geeta Ganesh have been ordered to pay a 300 per cent return on the balance of her USD634,000 investment following their breach of trust.  The Orewa project did not go ahead; they put the money into their other business interests.

Ms Venkataswamy made her intended investment in several tranches though 2010 and 2011.

The High Court was told the initial agreement was for a three year investment.  By mutual agreement, there was a partial repayment before the three years was up, at the request of Ms Venkataswamy.

But Justice Andrew found there was no mutual agreement as to what happened subsequently.  He ruled that both Kodoor and Ganesh were in breach of trust and breach of fiduciary duty by subsequently converting the balance owed to their own purposes, failing to account for use of Ms Venkataswamy’s money.

Allegations and counter allegations about source of Ms Venkataswamy’s funds and whether she had received payment through a counterparty in India were not helped by limited accounting records on all sides.

In a 2023 court ruling, Justice Andrew ruled she was still owed a balance of USD634,641.

It was then back to court with argument how damages should be calculated for breach of trust.

Justice Andrew ruled Ms Venkataswamy was entitled to damages as if the promised commercial development had proceeded.  This required an assessment of the total return on investment in commercial property for the period 2011-2023.

Evidence was given that average commercial property return for the period was 260 per cent, increasing to 368 per cent for industrial commercial property.

Justice Andrew ruled compensation should be calculated on a total return (capital gain and income) of 300 per cent for the period 2011-2023.

This represents the profit that would have been made by Ms Venkataswamy but for the breach of trust that saw her money diverted elsewhere.

Justice Andrew ordered the damages calculation be based on the USD634,600 owed and the resulting figure be both expressed and paid in USD.  It was implicit in their original agreement that the investment would be made in USD and all returns made in USD, Justice Andrew said.

The NZD has depreciated against USD since her original 2011 investment.

In addition, Ms Venkataswamy was awarded NZD50,000 general damages for the financial stress suffered as a result of the long delay in recovering payment.  She was also allowed a fifty per cent increase in the court ordered contribution to her legal costs.  The failure to properly account for use of Ms Venkataswamy’s funds had contributed to the time and expense at trial.

Mr Kodoor was an untrustworthy and unreliable witness, Justice Andrew said.

Vantkatswamy v. Kodoor & Ganesh – High Court (28.03.17 & 17.04.24)

24.094

Liquidation: Grant v. BNZ

 

Left out in the cold after financial restructuring of Rotorua-based wood processor Claymark Group some five years ago, former director and now bankrupt Mark Clayton promises his company will fund an investigation into the restructuring achieved through a BNZ receivership.

The Court of Appeal was asked to rule whether liquidators of certain Claymark subsidiaries were validly appointed, with these appoinments a precursor to proposed forensic examination of BNZ’s receivership.

Whatever his plans five years ago to untangle Claymark from its then financial difficulties, Mr Clayton is contesting the outcome.

The Court of Appeal was told Mr Clayton, as Claymark’s then sole director, asked BNZ in December 2019 to put Claymark Group companies into receivership.  This Group is now known as Ex-CM Group.

Not all receiverships result in death of a business.  Receivership can be a useful legal vehicle to reorganise a business; jettisoning the bad, while setting the good on a new course with fresh funding.

BNZ was owed $64 million by Claymark.  Receivers Calibre Partners recovered some $61 million by repackaging Claymark’s assets and selling to a new consortium.  BNZ is still owed two million dollars.  No payout is expected for unsecured creditors.

Mr Clayton alleges Claymark’s assets were undervalued on sale.

In November 2022, the remaining rump, now known as Ex-CM Group Trustee Ltd, was put into liquidation with Waterstone as liquidator then immediately voting to put a number of its Ex-CM subsidiaries into liquidation.

Receivers from Calibre Partners were on notice.  Any examination of Claymark’s receivership will involve a close examination of Calibre Partners’ work.

BNZ’s security included control over the shareholding and voting rights in these subsidiaries.  BNZ said it was not open for the Ex-CM holding company to exercise these votes.  Consequently, Waterstone was not validly appointed as liquidators, it was argued.

Legal argument reached the Court of Appeal.

BNZ acknowledged that the subsidiaries in question no longer had any economic value (their assets had been sold) but the receivership was not yet complete (Calibre Partners as receivers still intended some legal housekeeping, putting all Ex-CM companies into liquidation, removing them from the active Companies Register).

The Court of Appeal ruled that the effect of receivership is for secured creditors to take control of mortgaged assets, taking away from directors their ability to deal with those assets.

But directors still retain limited control over mortgaged assets to be exercised where it does not ‘interfere’ with a receivership.

In this case, the subsidiaries remained as empty shells with assets sold off.  The empty shells were no longer of any commercial value to BNZ.  BNZ was not prejudiced by any shareholder voting for liquidation of these subsidiaries even where the right to vote was part of BNZ’s security, the court ruled.

Waterstone could continue as liquidator, the court ruled.

Grant v. BNZ – Court of Appeal (12.04.24)

24.092

Maori Land: Boon v. Estate of Niki Tuwhangai

 

The default rule for Maori freehold land is that multiple owners hold their ownership interest as tenant in common, without rights of survivorship.  A dispute over ownership of nearly six hectares of land overlooking Kawhia Harbour reached the Court of Appeal, part of a wider dispute between whanau over a purchase made nearly thirty years ago.

Rori Moke died in 1988.  His widow, as administrator of his estate, agreed to sell his interest in the Kawhia land to Niki Tuwhangai for $11,500.  As the legal steps progressed, he agreed to relative June Ormsby joining him in the purchase.  While not in fact siblings (she was Niki’s first cousin’s daughter), she was treated as a sister.  She paid half the purchase price.

The Court of Appeal was told June’s express wish was that she would eventually build a house on the land.  She never did so.  Niki took up sole occupation, farming the property.

After June Ormsby died, adopted daughter Christine took issue with Niki Tuwhangai’s family claims over ownership of the Kawhia land.

At heart was a dispute whether Christine’s mother’s part ownership of Kawhia was held as tenant in common or joint tenant; an important legal point of difference familiar to lawyers but not widely known in the general community.

The general rule, based on English law, is that property owned by multiple owners is presumed to be held as ‘joint tenants.’  The death of one owner means that person’s interest is then shared between surviving owners; known as rights of survivorship.

If multiple owners explicitly describe their ownership interests as being held as ‘tenants in common,’ then their part interest passes to their estate on death; there is no right of survivorship.

This general rule is reversed in relation to Maori land.  The Te Ture Whenua Maori Act records as a default rule that multiple owners of Maori land take ownership as tenants in common, unless owners agree otherwise.  A presumption of ownership as joint tenants has never existed in Maori land law.

This reversal of the English-based assumption of joint ownership flows from Maori custom that land is a cultural asset reflecting mana and personal standing; land is not an economic asset to be traded.

As a consequence, ownership of Maori land has become splintered amongst multiple generations over time.

Christine Ormsby said the default Maori land law rule meant her late mother’s estate now held title to her mother’s half share of the Kawhia land.

Mr Tuwhangai said there had been clear agreement that their joint purchase at Kawhia was on the basis that June Ormsby would ‘never be able to sell.’  In other words, they were agreeing to ownership as joint tenants, he said.

The Maori Land Appeal Court ruled the land was held as joint tenants.  It overturned an earlier decision by the Chief Judge of the Maori Land Court who had revised the title, on Christine Ormsby’s application, to state her late mother held a half interest as tenant in common.

A challenge to this Maori appellate court ruling was dismissed in the Court of Appeal.

Mr Tuwhangai died in 2022.  His direct descendants assume ownership of all six hectares of the Kawhia land.

Boon v. Estate of Niki Tuwhangai – Court of Appeal (12.04.24)

24.091

Estate: Gibson v. Makgill

 

Aged in her seventies, Lynette Gibson was in the High Court challenging terms of her father’s will nearly fifty years after his death and threatening similar challenges would be made against her mother’s estate with her mother still alive and then one year shy of her one hundredth birthday.

Lynette comes from a Waikato farming family.  Her main complaint is the inequity visited on daughters when sons are preferred as inheritor of the family farm.  Sister Gaylene did not join Lynette in her challenge to their late father’s will.

The High Court was told their father Lewis Wait died in 1976, of cancer at age 55.  The family farm at Cambridge was owned 50/50 between Lewis and wife Nellie.

Terms of Lewis’ will left a life interest in his half share of the farm to his widow, with full ownership of his half share passing to son Robert on Nellie’s death.  The other half share remained in Nellie’s ownership on her spouse’s death.  Nellie was well provided for; she would receive all profits from farm operations.

Robert abandoned university studies as his father’s health declined, returning home to manage the farm.  He continued to manage the farm on his death.

The two daughters were named in Lewis’ will as each receiving one twelfth of the value of his half share of the farm, valuation to be taken at the date of his death but payment not made until the death of their mother.  As events transpired, their mother was still alive four decades later.

In 2023, Lynette was in court asking for permission to bring a claim against her late father’s estate under the Family Protection Act.  There are strict time limits.  Claims must be made within twelve months of death.  Her claim was some 45 years late.

Lynette said there were special circumstances.

No claim was made straight after her father’s death because her father had promised a more equitable redistribution of family assets would be made by their mother through terms of her will, she said.

Lynette said her concerns were heightened in 2021 when she learnt her mother had five years previously gifted away her half interest in the family farm, part of deal seeing her half interest transferred into a family trust created by son Robert for the benefit of Robert and his family.  Their mother’s half share was valued in 2016 at $4.5 million.

With her mother giving away her most valuable asset, there would be little chance of a ‘levelling up,’ Lynette said.

The High Court was told Lynette and her sister had received some cash distributions subsequent to their father’s death: $1300 each in 1986 when Robert assumed full ownership of farm livestock as a sharemilker; $520,000 each in 2021 from a Lewis family trust established when their father was alive.

Justice Campbell ruled it was far too late for Lynette to make a Family Protection Act claim against her late father’s estate.  Her chances of a successful claim were weak, he said.  Decades on, it would be impossible to find independent witnesses supporting her claim of a promise to ‘level up’ distribution of family assets between her siblings.  In addition, son Robert would be seriously prejudiced in that he had organised his business affairs through the intervening decades on the assumption that no family claims would be made against his business.

Their mother Nellie died while Lynette’s Family Protection Act application was being considered.

Gibson v. Makgill – High Court (12.04.24)

24.090

Eversons: Stewart v. Eversons International

 

A four year battle to recover two million dollars allegedly spirited across the Tasman by Eversons International director Evan Stewart continues with Eversons’ liquidators claiming Stewart’s failure to front up with a promised one million dollar settlement means he is now liable to pay the full two million.

Christchurch-based Eversons International Ltd enjoyed a brief moment in the sun before retail sale of so-called legal highs was prohibited by government in May 2014.

Four years later, Eversons was in liquidation.

Inland Revenue claims some four million dollars for unpaid taxes and late payment penalties. 

It has taken liquidators from KPMG several trips to court in efforts to get information from director Evan Stewart about what happened to company cash.  Liquidators claim Mr Stewart took some $2.7 million from the company before it went into liquidation.

Legal action against Mr Stewart was settled with an out-of-court agreement.  He acknowledged owing Eversons two million dollars and the liquidators agreed to take one million dollars in full settlement.

Liquidators are now back in court claiming Mr Stewart has defaulted on his promise to pay one million dollars and is in turn now liable to pay the full two million dollars.

Mr Stewart responded by suing KPMG, alleging fraud and false accounting.  In August 2023, Justice Churchman dismissed this claim, saying Mr Stewart appeared to have misunderstood KPMG’s entirely conventional accounting procedures in reconstructing the true state of Eversons financial position.

Separately, Mr Stewart claimed he was fully complying with terms of the out-of-court agreement.  Evidence was given that some, but not all, of his required scheduled $80,000 payments had been made.  As at late 2022, Mr Stewart had paid $280,000.

A court hearing for the liquidators’ claim seeking recovery of the full two million dollars was delayed multiple times, with Mr Stewart saying he was taking a private prosecution against KPMG.  The Court of Appeal was told there is no evidence of a private prosecution ever being filed.

High Court hearings were hampered by the fact Mr Stewart was acting for himself and had filed court papers described as ‘making little sense.’  With liquidators saying the High Court had ruled against Mr Stewart and that he owed Eversons two million dollars, Mr Stewart set about filing an appeal.  This appeal was filed sixteen days out of time.

The Court of Appeal ruled Mr Stewart was entitled to his day in court.  Liquidators were not prejudiced by a sixteen day delay.

To be decided on appeal is whether Mr Stewart had failed to comply with the one million dollar settlement and, if so, were the liquidators then entitled to sue for the full two million.

Stewart v. Eversons International Ltd – Court of Appeal (11.04.24)

24.089

Post Judgment Note:  The Court of Appeal ruled in November 2024 that Mr Stewart had complied with ongoing terms of the one million dollar settlement at the date liquidators sought to recover the two million dollar debt claimed. 

Construction: Lynch v. FCL CL Ltd

 

Increased costs are not a force majeure event justifying a Queenstown developer’s cancellation of pre-sold residential units, purchasers complain, with developer Dean Franklin looking to resell with price increases of between twenty and thirty per cent.  Giving existing purchasers some negotiating leverage, the High Court drove a bus through developers’ imposition of ‘no caveat’ clauses commonly used to limit purchasers’ rights. 

The High Court was told of Mr Franklin’s FCL CL Ltd running short of funds to complete its three separate apartment blocks under construction on McAdams Drive at Jacks Point, Queenstown.  Construction got underway in early 2021.  He said money ran out because of downstream consequences from the covid-19 pandemic: construction delays, supply shortages, delivery delays and price increases for building materials.

As is common, apartments had been sold off the plan, providing comfort to financiers that there will be sufficient sales income to repay loans put up to finance construction.  However, the finance committed proved insufficient to cover unbudgeted increased construction costs.

A July 2022 email to purchasers requested a twelve month extension beyond agreed completion date.  One year later, purchasers were asked for a further twelve month extension and also asked to pay an increased purchase price.

Purchasers of two units did not agree to the proposed increase: an extra $299,000 on a  $795,000 purchase in one case; an extra $247,000 on a $1.3 million purchase for the other.

When told their contracts to buy had been cancelled, they each lodged a caveat against head title to the development to protect their claimed interest as apartment purchasers.

FCL CL Ltd said they had no right to lodge a caveat.  Each apartment sale contained a ‘no caveat’ clause, prohibiting purchasers from disrupting the legal process of subdividing title on completion of the project.

Associate judge Paulsen ruled the right to lodge a caveat is a right given by statute and a contract-derived ‘no caveat’ clause cannot override the court’s discretion to decide whether a caveat should be upheld.

Judge Paulsen ruled the purchasers have an arguable case that FCL CL Ltd had no valid grounds to cancel on grounds of force majeure.  The caveats remain, with the merits of their case argued in court at a later date.

A force majeure clause in a construction contract operates when performance of the contract according to its terms becomes impossible because of some specified external event.

The purchasers say there has been no external event preventing performance.  Rather, the construction contract has become expensive to perform and that is a loss for the developer to carry.

Lynch v. FCL CL Ltd – High Court (9.04.24)

24.087

Family Arrangement: McNaughton v. McNaughton

 

After Richard McNaughtons’ parents purchased his Masterton property, he turned around and claimed they held in trust for him profits of some $350,000 generated by its redevelopment.  A convoluted legal dispute followed, hinging in part on whether Richard’s former wife would make a relationship property claim over the profits.

The High Court ruled Richard was bound by an agreement reached with his parents at a judicial settlement conference settling the dispute and he could not use arguments about the manner in which his former wife was asked for her views to derail his previously agreed settlement.

Jim and Janet McNaughton were faced with a full-court press from son Richard alleging fraud, mistake, and misrepresentation, amidst other claims, following their purchase and later sale of a property in Pownall Street, Masterton.

They thought Pownall Street was theirs, having bought out their son.  He was to later claim they held the property as trustees and had to account for profits from their onwards sale.

A full court hearing was deferred, with all parties attending a judicial conference chaired by Associate judge Lester.  His notes of the meeting recorded their agreement that an independent accountant determine after-tax profits accruing following sale of Pownall Street with the after-tax balance to be divided sixty per cent to Richard, forty per cent to his parents.  Potential tax liability was a live issue.

Also recorded in the Judge’s notes was a proviso that this agreement was conditional on Richard’s former wife agreeing that she would not bring a relationship property claim against Jim’s and Janet’s forty per cent share of Pownall Street profits.

It was not plain sailing from there.

Richard subsequently told the appointed tax accountant to stop investigating the tax position and went back to court challenging the earlier 60:40 agreement.  Richard said the agreement was cancelled.

He said the proviso requiring clearance from his former wife had not been satisfied.

Richard objected to his parents’ lawyer contacting his former wife’s lawyer, getting acknowledgement there would be no claim against Richard’s parents.  Richard said it was for him to make contact and seek agreement.

Back in the High Court, Associate judge Skelton said there was no express term at the judicial conference mandating that it was for Richard personally to make the approach.  It could not be implied that it was Richard’s job alone; all that was necessary was that one of the warring parties, or their lawyer, make contact and get approval.

The 60:40 agreement remained in place, requiring completion of the tax report before final distribution of Pownall Street sale proceeds.

McNaughton v. McNaughton – High Court (9.04.24)

24.086

Exports: A-Ward Ltd v. Raw Metal Corp

 

Exporter A-Ward Ltd has been forced into the Australian courts in a customer’s dispute over machinery supplied, despite their contract stating New Zealand courts have ‘exclusive jurisdiction’ in dealing with any dispute.  It is the first New Zealand case dealing with legislation designed to streamline New Zealand/Australia commercial disputes: the Trans-Tasman Proceedings Act.

Complementary legislation was enacted on both sides of the Tasman after a political decision in 2008 to improve resolution of cross-Tasman commercial disputes.

There can be ‘home game’ advantage in fighting a dispute in home courts.

With contracting parties in different countries, they may be operating under similar rules, but these rules will rarely be identical.

Fighting in a foreign court means not only fighting under foreign rules, but at a greater cost with extra legal fees; your own domestic lawyers and the cost of foreign representation in an off-shore court.

Auckland-based A-Ward specialises in machinery handling shipping containers.  In 2018, it sold three Mi-Tilt machines to Queensland scrap metal dealer Raw Metal Corp Pty Ltd.  Raw Metal alleges the machinery is defective.  A-Ward counters that any issues were caused by Raw Metal’s misuse of the equipment.

Raw Metal sued in Queensland, alleging A-Ward was liable for misleading and deceptive conduct in breach of Australia’s Competition and Consumer Act.  The New Zealand equivalent is the Fair Trading Act.  There is one major point of difference between the two: in New Zealand, there is a limited ability to contract-out of some of the Act’s provisions; not so in Australia.

In New Zealand, A-Ward filed an ‘anti-suit’ claim against Raw Metal, seeking a court order Raw Metal be prohibited from taking legal action in Australia.  Their contract specifies any dispute has to be heard in New Zealand courts, it says.   

Justice O’Gorman ruled the Trans-Tasman Proceedings Act prohibited ‘anti-suit’ claims against Australian litigants.

The essence of the Act is that each country acknowledges its confidence in the other’s judicial process, she said.

In Queensland, A-Ward previously filed, and then later abandoned, an application to have the Australian hearing put on hold, arguing that the dispute should be heard in New Zealand.

A-Ward Ltd v. Raw Metal Corp Pty Ltd - High Court (9.04.24)

24.088

Insurers: re CBL Insurance

 

CBL Insurance liquidators have a High Court order that Danish insurer Alpha Insurance A/S repay EUR 25 million received just seven days before CBL was put into interim liquidation in 2018.  Alpha itself followed CBL into liquidation several months later.

Alpha’s attempt to avoid repayment saw Alpha’s lawyers attempting legal somersaults around business concepts of what is a debt. 

CBL’s EUR 25 million clawback relied on Companies Act rules requiring all payments made in a six month period prior to liquidation be repaid, unless the recipient can prove the company now in liquidation was solvent when making payment.

There was no dispute that CBL Insurance was insolvent when it paid across the EUR 25 million, part of a rescue deal to prop up the then failing Danish insurer.  CBL needed Alpha to stay alive, otherwise CBL was at risk of being dragged under.  It had provided reinsurance cover for Alpha’s insured risks.

The Reserve Bank, as insurance industry regulator for New Zealand insurers, was raising concerns about CBL’s solvency as far back as 2016.

Alpha’s argument in the High Court that it could not be forced to repay the EUR 25 million centred on legal definitions of insolvency and in particular what amounted to a ‘debt due’ in the context of the insurance industry.  At law, a business is insolvent if it cannot ‘pay its due debts.’

Insurers are typically cash rich.  Customers pay premiums upfront.  Claims come later.  The number of claims and the amount claimed in respect of annual premiums are not known for months, and in many cases years.  Payments ‘due’ on a claim can take a long time to come home to roost.

Alpha Insurance said CBL had ample liquid assets at the time it paid across EUR 25 million.  It could pay its debts.  Potential future claims were no more than contingent debts, not ‘debts due,’ Alpha said.

Justice Becroft ruled actuarial assessments of future claims must be taken into account by insurance companies in assessing the ability to meet ‘due debts.’

Reserve Bank regulations require insurers to hold a capital buffer against potential future claims; a ‘solvency ratio’ determined by an assessment of the insurer’s potential future claims.

Potential liability for claims yet to eventuate and claims yet to be reported are calculated by actuaries using both historical trends and trends in current aggregated data.  Long-range weather forecasts enjoy an exaggerated importance in the insurance industry; storm forecasts presage increased claims.

Professional accounting standards require insurers to report their outstanding claims assessment as a balance sheet liability.

Treating the actuarially assessed outstanding claims liability as a ‘due debt’ is the only way to reliably establish whether an insurer is cash flow solvent, able to pay its debts as they fall due, Justice Becroft ruled.

To decide otherwise would mean liquidation clawback rules would never apply to insolvent insurers, he said.  Cash and cash equivalent assets would become the sole measure of solvency with the inevitability of future claims ignored.

re CBL insurance Ltd – High Court (8.04.24)

24.083

Debt: Binxi Foods NZ Ltd v. Progressive Meats

 

Hastings based Progressive Meats has been dragged unwillingly into customer Binxi NZ’s internal management dispute with Binxi’s Chinese owners alleging its New Zealand management has been siphoning profits into their own pockets with Progressive’s knowledge. 

As part of routine debt-collecting by Progressive, the High Court was told Binxi alleges some $23.3 million was lost through the dishonest activities of Binxi’s former senior management.

Binxi delivered stock to Progressive’s killing chain, paying a fee per carcass processed.

Details of Binxi’s internal ructions surfaced in the High Court when Progressive applied to put Binxi into liquidation for $208,700 unpaid processing fees.  Binxi in turn claimed it was owed money by Progressive; at least $11.2 million in profits diverted.

Binxi has legal action currently underway against former senior managers Arron Hoyle and Gerard Brier alleging a company they controlled, Kereru Foods Ltd, was inserted into Binxi’s sale chain for the purpose of creaming off profits from onwards sale of processed product.  They were stood down from Binxi in July 2023.

Binxi alleges Progressive was wise to use of Kereru Foods to divert Binxi profits.  It claims Progressive is potentially liable to pay damages.

Progressive says it had no knowledge of the commercial arrangements between Binxi and Kereru Foods and that it is entirely speculative that Progressive is in any way liable.

The High Court was told of a July 2020 email exchange between Binxi’s Mr Brier and Progressive changing their mutual accounting procedures, diverting ownership of processed meat to Kereru Foods while leaving killing charges with Binxi.

Progressive says it had no reason to question the bona fides of this request.  It had dealt with Mr Brier and Mr Hoyle as Binxi management contacts for the previous six years.  The fact Binxi kept paying Progressive invoices for the subsequent three years meant there was no reason to question these new arrangements.

Associate judge Skelton ruled Progressive could continue its liquidation claim against Binxi for unpaid processing fees.  Binxi was given 14 days to pay the $208,700 claimed, or face liquidation.

Judge Skelton ruled the Binxi could not resist payment of its current $208,700 debt on grounds of what was a speculative counter claim against Progressive contingent on the outcome of its current dispute with former Binxi management.

Binxi Foods NZ Ltd v. Progressive Meats Ltd – High Court (8.04.24)

24.085

Employment: Caisteal An Ime Ltd v. Labour Inspector

 

Owner of Akaroa Village Inn failed in his challenge to a labour inspector’s powers to make unannounced inspections of wage records and a resulting $7500 fine imposed on his company Caisteal An Ime Ltd for failing to provide evidence of subsequent compliance with the Employment Relations Act, Holidays Act and Wages Protection Act.

The Court of Appeal heard that differences between Caisteal director Darren Angus and unnamed Akaroa Village staff had previously gone to mediation.  Business, Innovation and Employment was later informed of ongoing staff complaints.  

An unannounced labour inspection visit to Akaroa Village in August 2020 was met with a hostile reception from Mr Angus demanding to know who had laid a complaint.

The inspector interviewed five employees and required Mr Angus to forward nominated employment records.  Delivery by email failed; attachments containing the requested records could not be opened.

A follow-up investigation identified multiple breaches of employment legislation.  Subsequently, Mr Angus signed an enforceable undertaking on behalf of his company agreeing to take remedial action.  This undertaking required written proof within the following three months of remedial steps taken.

Taking the view insufficient evidence had been provided, the labour inspector then required copies of wage records, time records, holiday and leave records plus employment agreements for all staff employed at Akaroa Village Inn for the three years Mr Angus had been running the business.

Mr Angus’ antagonism ratcheted up.  An earlier Official Information Act request for the detailed complaints made to Business, Innovation and Employment resulted in him receiving these details, with names of the complaining employees redacted.

His refusal to provide the three years of information requested resulted in his company being fined $7500 by the Employment Relations Authority.

His subsequent appeal that the investigation process and subsequent fine were an ‘abuse of process’ in breach of the Bill of Rights Act, Privacy Act, Official Information Act, Employment Relations Act and the Universal Declaration of Human Rights was dismissed.

In general, Mr Angus claimed he was denied natural justice because he was never given names of employees whose complaints triggered the initial investigation.

The Court of Appeal said the issue on appeal was more narrowly about his company being fined for a failure to perform its agreed enforceable undertaking to take remedial action.  Tangential issues about human rights and natural justice were not relevant to this prosecution.

Caisteal An Ime Ltd v. Labour Inspector – Court of Appeal (8.04.24)

24.084

Partnership: Bary v. Bary

 

Twenty years after their acrimonious fallout, Dave Bary was in court claiming unsuccessfully that brother Aron had wrongly taken control of his half share in a Nelson house.

Each put up initial capital of $20,000 to build a ‘spec’ home on Maire Street.  The project, started in 1997, was plagued with problems, not getting a code of compliance certificate until 2021.

The High Court was told a local builder agreed to carry out construction on a ‘labour only’ basis.  Dave and Aron were expected to assist with construction as part of the deal.  This was complicated by the fact Aron spent months away at sea.  

Building plans were re-drafted on the hoof as the two brothers later decided to excavate into the hillside section, creating a new bottom storey.  Geotech issues and stop-start construction meant the job never got properly finished for years.

In the interim, both Dave and Aron and their respective partners lived at the property for various periods of time, paying rent.

Their partnership was never profitable.  Building costs, interest on a bank loan and property outgoings meant their respective rental payments were never enough to cover costs; each was still having to top up the kitty each month.

Evidence was given of matters reaching a head in early 2002, with Dave vacating the house telling his brother their relationship had ‘turned to custard’ and that he was not going to put any more money into their venture.

Fast forward twenty years: Dave learnt Aron had Maire Street on the market.  Dave alleged he was still part-owner of Maire Street, looking to claim a half share of its current net value.

Justice Grice ruled their earlier partnership came to an end back in 2002, evidenced by Dave’s conduct in walking away from the partnership.  The partnership was insolvent at that point.  He left brother Aron with costs of getting the house code compliant and taking sole responsibility for property outgoings and bank interest.

Manner of their partnership dissolution meant Dave was excused from all partnership debts and Aron took full ownership of its one asset: the house.

Dave had no claim to the property.

From the outset of their business partnership, registered title to Maire Street and liability on the bank loan were in the name of Aron only, for reasons not explained in court.  The fact that an asset is registered in the name of one partner alone does not, by itself, stop that asset being a partnership asset.

Justice Grice ruled Maire Street was initially a partnership asset held in Aron’s name, but he gained full ownership rights when their partnership ended.

Bary v. Bary – High Court (3.04.24)

24.082