Trust: Christchurch Buildings Trust v. Church Property Trustees

The trust owning earthquake-damaged Canterbury Cathedral must build a new cathedral on the same site using insurance money for the rebuild, the High Court has ruled.  Legal action by concerned citizens seeking to preserve the city’s historic buildings has blocked plans by the Anglican church to use insurance money to build a temporary “cardboard cathedral” offsite.

The Anglican diocese in Christchurch has been in turmoil since earthquakes in 2010 and 2011 severely damaged its iconic cathedral.   The building was insured with insurance recoveries of some $39 million expected.

One group, dismayed by the loss of so many of Christchurch’s historic buildings lobbied to have the cathedral repaired.  The diocesan hierarchy had other plans.  Matters reached a head when government-appointed Canterbury Earthquake Recovery Authority (CERA) issued a “make safe” notice.  The diocese was given ten days to bring the cathedral down to a safe level; failing that CERA would move in and demolish the structure.  The diocese resolved to immediately demolish the cathedral to a safe height of several metres.  No firm decision was made on a rebuild, but indications were that the diocese regarded the insurance proceeds as part of general church funds to be used as it saw fit.

The High Court was told the cathedral site was established by a trust in 1851 as part of an overall plan by colonial settlement company, the Canterbury Association, to transplant part of England in the new colony.  This trust lives on now as Church Property Trustees.

Justice Chisholm said the diocese appeared to misunderstand the purpose of the Cathedral trust, which is to maintain a cathedral on its existing site.  The Trust is governed by the Trustee Act.  The Act specifies that any insurance money received must be used for the purposes of the trust only and can be used for the rebuilding or repair of trust property.

He ruled that the diocese could not proceed with any decision to use the insurance monies for a different purpose, adding that while the Cathedral Trust requires there to be a cathedral on the site, the building does not have to replicate the cathedral as it stood before the earthquakes.

Great Christchurch Buildings Trust v. Church Property Trustees – High Court (15.11.12)

12.038

Financial advisers: Financial Markets Authority v. Ross

Court appointed receivers can take control of a financial adviser’s business where the Financial Markets Authority fears loss of client funds.

The High Court in Wellington appointed receivers to companies run by financial adviser David Robert Gilmour Ross after investors complained to the Financial Markets Authority (FMA) about his dysfunctional management.  His investment business has about 900 clients, claiming to hold investments totalling some $430 million.

The FMA said it had received complaints from nearly 30 clients who had not received payments due.  There were serious concerns about management of the business: a failure to make decisions, failures to implement client investment instructions and inadequate records.  All staff had resigned.

The court was told Mr Ross was unavailable.  Subsequent newspaper reports indicated that Mr Ross was in hospital, suffering a mental illness.

Preliminary investigations by the FMA indicated that investments were held in New Zealand, Australia, North America and the United Kingdom.  Records were incomplete.  Tax returns for the business were two years in arrears.

John Fisk and David Bridgman of PriceWaterhouse Coopers were appointed as receivers to take control of the business.

Financial Markets Authority v. Ross – High Court (6.11.12)

12.039

Mortgagee sale: Hart v. ANZ

The forced sale of properties owned by high profile Auckland barrister Barry John Hart left him with a $20.5 million shortfall.  The High Court dismissed his claim that ANZ National sold the properties at an undervalue.

Mr Hart garnered considerable publicity in his campaign against ANZ Bank alleging the bank failed to act properly in its forced sale of substantial landholdings on Highway 16 in west Auckland.  At the time, Mr Hart owed ANZ in excess of $30 million with interest accruing at $200,000 a month.

The court was told ANZ took action after loan payments fell into arrears.  A “stand still” arrangement gave Mr Hart six months to find a buyer or buyers for the properties.  After that the Bank proceeded with mortgagee sales.

Mr Hart was highly critical of the Bank’s forced sale process, claiming the properties were sold at a gross undervalue.  Properties he claimed were worth in the region of $29 million were sold for $8 million.

Associate Judge Abbott said a mortgagee is required to take reasonable care in the sale process to obtain the best price reasonably obtainable at the time of the sale.  There is no obligation to postpone a sale in the hope of a better price later, or to break up assets and sell in a piecemeal fashion.  Specialist advice should be taken in selling assets with unique characteristics.  Descriptive advertising is required and must reach the largest possible number of potential purchasers.

He ruled that ANZ Bank had acted properly in conducting the sales.  It sought competitive tenders from three real estate agencies asking them to highlight their expertise in selling properties of the type in question and seeking their advice on the best marketing strategies.  The Bank undertook a $55,000 marketing programme spread over six weeks.  The court was told 116 people registered an interest.   Each was invited to tender for some or all of the properties on offer.

Mr Hart’s main criticism centred on the sale prices.

Evidence was given that ANZ Bank first obtained valuations from professional valuers Darroch.  They valued the three main farming blocks being sold at $14.3 million (market value) and $10.1 million (forced sale value).  They in fact sold for some $8 million.

Associate Judge Abbott said the prices obtained were not so widely different from the Darroch forced sale valuation to suggest the sale process was inadequate.  The advice ANZ received was that $8 million represented the best they could receive at the time.

The court was told forced sale prices commonly range at a discount of 26%-30% below market prices, but can reach discounts of up to 40%.  The discount in this case was 44%.

He dismissed Mr Hart’s claim that the properties were worth $29 million; a valuation obtained from valuers Colliers International in 2010.  This valuation was two years old and was based on an assumption that the farm blocks could be subdivided into residential lifestyle blocks. A subsequent application for a zoning change had been unsuccessful.

Hart v. ANZ National Bank – High Court (29.10.12)

12.040

Leaky homes: "Byron Ave"

In a landmark ruling with huge costs for ratepayers, the Supreme Court has extended council liability for negligent building inspections to include commercial buildings.  The previous legal view was that council liability extended only to residential homes.

Changes to the building code in the 1990s coupled with poor construction techniques has resulted in an avalanche of legal claims for the cost of remedial work on leaky buildings.  Often, a local authority is the only solvent party left standing as property owners sue builders, sub-contractors and the local council for damages.  Potential council liability has arisen where a local authority acted as certifier, signing off code compliance certificates stating that the building does comply with the building code.

Councils have strongly resisted liability.  But a string of New Zealand cases over previous decades have established a rule that owners of residential houses can sue councils for negligence.

A novel question arose with a Takapuna leaky building, being a “mixed use” development: a 23 level building known as Spencer on Byron containing a hotel on the lower floors and residential apartments on the upper floors. 

North Shore City argued there were strong policy reasons to limit council liability to residential homeowners only: homeowners lacked the sophistication to look after their own interests; by contrast, owners of commercial properties were not so vulnerable.

The Supreme Court ruled there were no policy reasons to stop council liability being extended to cover “mixed-use” buildings and purely commercial buildings.  It said not all homeowners are naïve; the wealthy and commercially sophisticated also own homes.  And not all commercial property owners are sophisticated; a first time business owner purchasing a corner dairy in a country town may well lack any business experience.

North Shore City argued the extension of liability to commercial premises will transfer millions, if not billions, of dollars in repair costs from building owners to council ratepayers.  The Supreme Court said this argument overstates the position: ratepayers will pick up any residual liability, but before that councils with insurance cover for negligence will get compensation from their insurer and they will also be earning income in fees for ongoing building inspection work.

Body Corp. No. 207624 (Byron Ave) v. North Shore City – Supreme Court (11.10.12)

12.041

Perpetual Trust: Trustees Executors v. Perpetual Trust

High Court orders have smoothed the way for Perpetual Mortgage Fund to be wound up.  The fund is illiquid.  It cannot honour the 437 redemption requests outstanding as at 11 September 2012 seeking payment of $18.3 million due to investors.

Investors learned in July 2012 that Perpetual was not able to honour Mortgage Fund redemption requests.  A court-ordered moratorium was imposed and two independent observers, Ms Fatupaito and Mr Duffy, were appointed to oversee Fund management.  This followed regulatory concerns about loans totalling $28.2 million made to business interests related to Perpetual.  The loans have since been repaid but investor nervousness about the probity of Perpetual management caused a run on its investment funds.

The Securities Act allows investment funds to be brought under judicial control where there is a significant risk that investors will be harmed.

The High Court was told that Perpetual’s Mortgage Fund is illiquid and cannot meet the avalanche of redemption requests.  Assets held by the fund may be insufficient to repay investors in full.  Short of a winding up, there is a risk some investors will be paid in full while others paid later may not.  This raises the possibility of unequal payouts to Mortgage Fund investors.

The Court was also told of concerns that further related party lending could be sourced from the Perpetual Cash Fund.

Court orders were made streamlining the process for winding up the Perpetual Mortgage Fund and to block any potential related party lending from the Perpetual Cash Fund.

Trustees Executors v. Perpetual Trust – High Court (19.09.12)

12.028

Tax: Tauber v. Inland Revenue

The Court of Appeal has dismissed challenges to search warrants obtained by Inland Revenue for access to private homes of people behind the Honk Group of companies.  Tax investigations allege tax avoidance and false tax returns. 

Inland Revenue must get a search warrant before entering the private home of any taxpayer.  Warrants were obtained to search the homes of David Andrew Tauber and Paul Nigel Webb, entrepreneurs behind the Honk group of companies and also the home of Maree Anne Bockett, a chartered accountant acting as tax agent for the Honk group through her company MB Accountants Ltd.

They argued the warrants were invalid because Inland Revenue had “over-egged the pudding” when applying for the warrants by presenting misleading information and overstating any alleged wrongdoing by the taxpayers.  The Court ruled that even if such flawed information was stripped out of the warrant application there were still grounds for issuing the search warrants.

The Court was told the tax investigation has been underway since 2008.  There had been extensive delays in providing information requested by Inland Revenue.  There were doubts as to the completeness of information provided. 

Inland Revenue was running up against statutory deadlines for issuing tax assessments and suspected the taxpayers were exploiting delays as a deliberate strategy.

Files seized had been embargoed while validity of the search warrants was argued in court.  The Court of Appeal ruled that Inland Revenue could use the information seized.  Honk Airport Trustees Ltd and Honk Land Trustees Ltd, two companies in the Honk group, are already involved in disputes before the Taxation Review Authority.  Inland Revenue said it took special care in both planning the investigation and carrying out the search and seizure to ensure it did not take any documents relevant to this litigation.

Tauber v. Inland Revenue – Court of Appeal (7.09.12)

12.042

Proceeds of crime: Solicitor-General v. Field

Disgraced member of parliament Philip Hans Field has been ordered to pay $27,480 being the assessed value of work carried out on his properties by immigrants providing free labour in the hope of getting a New Zealand visa.  This payment is in the nature of a fine, paid to the government not the immigrants personally.

Sentenced to six years imprisonment in 2009 after being convicted of bribery and attempting to pervert the course of justice, Field was sued under proceeds of crime legislation.  These rules are designed to stop offenders benefitting from crimes committed.

A number of Thai immigrants worked on five properties owned by Field: four properties in New Zealand and a house under construction in Samoa.  The work involved tiling, plastering and painting.  Evidence for the government priced the value of the “free” labour at $58,000.  Some of the work was described as being of a low standard and “pretty shoddy”.  Field said there is a difference between a thorough job and a quick job; he valued the labour at approximately $15,500.

The High Court fixed the penalty payable at $27,480.

Evidence was given that the four New Zealand properties were sold at an aggregate profit of $387,500 after being owned on average for a period of 18 months.

Solicitor-General v. Field – High Court (3.09.12)

12.025

Price-fixing: Commerce Commission v. Visy Board

With packaging company Visy Board fined $36 million in Australia for market rigging, the Commerce Commission is pursuing the company alleging similar market manipulation in this country.  The Court of Appeal ruled there is jurisdiction to prosecute an Australian company for market manipulation in New Zealand.

The court was told Visy Board and competitor Amcor Australia secretly decided in 2000 to carve up between them the Australian market for corrugated packaging after a debilitating price war through the 1990s.  They agreed at a top level to fix prices and divide the market between themselves.  Each supposed competitor put in uncompetitive tenders for nominated supply contracts.   When the whistle was blown, Visy Board agreed to a fine of $36 million and one of its senior executives was fined $500,000 for breaches of the Australian equivalent of the Commerce Act.

In New Zealand, corrugated packaging is used for the bulk supply of commodities like fresh meat, fruit and vegetables.  It is also used in secondary packaging of manufactured goods like beverages and processed foods.

The Commerce Commission alleges market manipulation by Visy Board and Amcor Australia extended to New Zealand.  As an example, a bulk supply tender to Mainland Meats saw Amcor prices significantly below Visy Board’s tender, and the reverse in tenders for Tip Top packaging.  Fonterra contacted Amcor saying the tender pricing for Tip Top looked suspicious when Amcor prices came in at twenty per cent higher than Visy Board.

When sued by the Commerce Commission, Visy Board said it was an Australian company operating out of Australia and could not be sued in the New Zealand courts for any alleged breach of the Commerce Act.

Both Visy Board and Amcor operate New Zealand subsidiaries of their Australian businesses.

The Court of Appeal ruled that the High Court rules gave jurisdiction for New Zealand courts to consider wrongful conduct carried out in New Zealand and the Commerce Act specifically covers decisions made outside New Zealand to the extent that those decisions affect the New Zealand market.

Commerce Commission v. Visy Board – Court of Appeal (31.08.12)

12.032

Capital + Merchant: R.v.Douglas, Nicholls & Tallentire

Directors of failed finance company Capital + Merchant were described as being driven by self-interest and greed when sentenced to long terms of imprisonment following convictions for theft.  For the theft of $19.7 million, Wayne Leslie Douglas and Neal Medhurst Nicholls were sentenced to seven and a half years jail; Owen Francis Tallentire five years jail for the theft of $12.1 million.

Each found guilty of theft as a person in a special relationship, the three directors used Capital + Merchant funds to finance personal business projects.  When the finance company went into receivership six of the company’s outstanding loans were to interests linked to the three directors: in number this amounted to just over ten per cent of the company’s loan investments.  In total the three directors had borrowed some $37 million dollars from their company.  Evidence was given that only $200,000 has been recovered.

Capital + Merchant was funded by public investors.  At the date of receivership there were some 7000 investors, many of them elderly and solely dependent upon Capital + Merchant for investment income.  The company prospectus and debenture trust deed said related party lending, such as loans to directors, was very severely restricted.

Justice Wylie said the directors intentionally breached these restrictions to advance their own interests.  The offending was sophisticated, requiring significant planning and premeditation using convoluted legal structures.  Particularly cynical was the use of Capital + Merchant funds when directors could not raise personal loans from outside sources.

Each director said he was not in a position to offer any reparations.

Douglas said he has no personal assets.  The family home is held in a trust.  Nicholls said he is the part-owner of an investment property which has no equity since it is heavily mortgaged.  The family home is owned by a family trust established by his father-in-law.  Tallentire said he has no savings. 

R.v. Douglas, Nicholls & Tallentire – High Court (31.08.12)

12.026

Hanover: KA No.4 v. Financial Markets Authority

Assets held in family trusts set up by Hanover director, Mark Hotchin, remain frozen following a Court of Appeal ruling.  It is alleged that one trust is a sham with Mr Hotchin remaining in control of the assets and that a second trust holds assets on his behalf.

Legal action against Mr Hotchin is proposed by the Financial Markets Authority for alleged wrongdoing in his management of Hanover.  In the interim, it obtained High Court orders seizing control of assets held by two family trusts: KA3 Trust and KA4 Trust.  Asset preservation orders can be made under the Securities Act to seize assets held “on behalf of” any person (or an associated person of anyone) under investigation by the Financial Markets Authority.

Interests associated with Mr Hotchin complained that insufficient evidence was put before the High Court to justify any asset seizures.

KA3 Trust was set up in 1999 with Mr Hotchin and immediate family as discretionary beneficiaries.  It was argued that discretionary beneficiaries have no absolute entitlement to trust assets; trust assets could not be said to be held “on their behalf”.  The trustee decides which beneficiaries, if any, receive a benefit.  Since April 2010 the trustee of KA3 Trust has been under control of Mr Hotchin’s accountant: Mr Tony Thomas.

The Court of Appeal ruled that the purpose of Securities Act asset preservation orders is to cast a very wide net in taking control of assets prior to trial.  This caught assets held on behalf of discretionary beneficiaries.

The court was told that KA4 Trust was set up in May 2003 with Mr Hotchin’s children (but not Mr Hotchin himself) named as discretionary beneficiaries.  Initially, Mr Hotchin was the sole trustee.  Since May 2010 Mr Thomas exercised control as trustee.

The Financial Markets Authority alleges KA4 Trust is a sham with trust assets being treated as if they were owned by Mr Hotchin personally.  There are examples where the Trust appeared to act purely in Mr Hotchin’s interests, seemingly at his discretion: land transactions on Waiheke Island benefitting Mr Hotchin and the construction of an expensive residence on Auckland’s waterfront Paratai Drive.  Mr Hotchin put $12 million of his own money into the Paratai Drive construction.

While confirming the asset freeze on KA4 Trust assets, the Court of Appeal indicated that some KA4 assets currently frozen might later be released if it could not be established that the Trust did operate as a sham throughout its operation.

KA No.4 Trustee Ltd v. Financial Markets Authority – Court of Appeal (17.08.12)

12.031

Extradition: US v. Kim Dotcom

Extradition to the United States requires prima facie evidence that the suspect has committed a crime.  New Zealand judges are proving to be no pushover in attempts by US authorities to extradite entrepreneur Kim Dotcom for trial on charges of breach of copyright, conspiracy and money laundering.

US authorities allege Kim Dotcom and others illegally distributed copyrighted material through their Megaupload website.  In a screenplay worthy of a Hollywood production, helicopters and armed police swooped on Mr Dotcom at his rented Coatesville mansion, bringing him before the courts for extradition to the United States.

Procedures on extradition differ depending on the country seeking extradition.  The simplest procedure is for extradition to Australia and the United Kingdom.  A fast-track abbreviated procedure is justified given the shared legal tradition in these countries.  For countries such as the United States, it is necessary to establish that the accused is “eligible” for surrender: this means proof that the accused would have faced trial in New Zealand if the conduct in question had occurred in New Zealand.  An extradition hearing proceeds as if it were a committal hearing before trial in New Zealand.   It is not for the New Zealand court to decide guilt; merely that there is enough evidence to proceed to a trial.

US authorities seeking extradition are required to produce a “record of the case”: a summary of the evidence against the accused.  Kim Dotcom complained that the “record of the case” against him was too brief.  It was not clear how he may have transgressed.  US authorities told the court: “trust us”; Kim Dotcom will get a fair trial in the US with all the safeguards of the US legal system and in any event US legal procedure does not allow us to release all the file without court approval.

In the High Court, Justice Winkelmann emphasised that New Zealand courts and New Zealand lawyers have their own legal rules which they are bound to follow.  At issue was the extent of disclosure required by the Extradition Act before extradition to the United States.  She ruled that Kim Dotcom was entitled to all the benefits of the Bill of Rights that a New Zealand accused would have to ensure a fair trial if facing a committal hearing in New Zealand.

US authorities were ordered to disclose all evidence held to support the charges of breach of copyright and money laundering.  The amount to be disclosed might be substantial, but as Justice Winkelmann observed, that reflected the complexity of the case.

United States v. Kim Dotcom – High Court (16.08.12)

12.030

Blue Chip: Hickman v. Turner & Waverley Ltd

In a ruling with implications for proportionate sales of commercial property, a substance-over-form approach has been adopted by the Supreme Court in the interpretation of Blue Chip investment contracts.  Blue Chip’s financing construction of inner city apartments were in the form of contracts for the sale of land which are exempt from securities law but were held to be in substance debt securities unenforceable because Blue Chip did not issue a prospectus.

It has been a long battle for Blue Chip investors who signed up for over-priced apartments to be constructed in Auckland’s central business districts.  Led to believe they were lending money to finance the construction of apartment blocks, they later discovered they were committed to buying a finished apartment and at risk of losing their own debt-free homes to meet their commitment.

Newspaper reports have indicated that deals have been struck by some investors allowing them to stay in their own homes with Blue Chip apartment debts deferred until their death, to be paid out of their estate.

Blue Chip sought money from public investors to finance the construction of three Auckland inner city projects.   The primary funder in each case was Westpac Bank.  A specified level of pre-sales was a condition of bank funding being released.  Blue Chip agreed to underwrite the pre-sales.  Sales levels were achieved by making sales to short-term investors with the intention that second purchasers would take out the original buyer when each development was completed over the next eight to nine months.  When the market collapsed, these short-term investors were left as the only “buyer” and committed to paying the purchase price.

Both the High Court and the Court of Appeal dismissed investor arguments that their contracts were securities governed by the Securities Act, being void and unenforceable because Blue Chip did not issue a prospectus for the securities offered to the public.

Each investor had signed up to a web of contracts which included a sale and purchase agreement for a specified apartment.  Both Courts ruled the sale and purchase agreement was the primary contract and exempt from Securities Act requirements because contracts for the sale of land do not require a prospectus.

The Supreme Court took a different view.

In substance, each of the web of transactions put in front of an intending investor amounted to a debt security offered to the public.  Blue Chip was offering to pay money to investors who signed contracts and stumped up with the deposit for an apartment.  Investors were offered reimbursement for the deposit paid and promised a return for the money invested.  This created a debt payable by Blue Chip.  The sale and purchase agreements were secondary to the creditor/debtor relationship.  Rights of repayment were the primary feature of the web of transactions.  This was not an ordinary apartment purchase with the buyer intended to take ownership and possession.

The Supreme Court ruled that sales of real estate become securities governed by the Securities Act when accompanied by collateral arrangements intended to provide a return to investors based on the efforts of others.  Examples can arise in proportionate sales of agricultural and commercial properties where shares in a property-based business are offered to the public for investment.

In the case of Blue Chip contracts, the Supreme Court ruled that each Blue Chip investor needed to return to the High Court to prove the circumstances of their individual case before their contract was invalidated.  Those investors signing agreements for sale and purchase at the same time or after signing up to a Blue Chip financing package will have their agreements ruled unenforceable as being in breach of the Securities Act.  But those investors who signed an agreement for sale and purchase before being introduced to Blue Chip must prove in their individual case that the transactions were linked in such a way as to be an issue of debt securities in breach of the Act.

Hickman v. Turner & Waverley Ltd – Supreme Court (9.08.12)

12.020

Chrisco Hamper: Symons v. Wiltshire Investments

Investors backing the Chrisco Hamper business looked to have fallen out with allegations of secret side deals surfacing in litigation between investors.  One investor being sued claims he was fired as director of an associated company to keep hidden from him details of an out of court settlement which might affect how much he owes.

Chrisco Hamper attracted adverse publicity in February 2012 with fines of $175,000 for breaches of the Fair Trading Act after misleading customers about their cancellation rights when paying for Christmas hampers on layby.

Behind the scenes there has been a long-running dispute between investors over the operation of Chrisco’s finance company: Hopscotch Money Ltd.  This reached boiling point in April 2008 when ASB Bank pulled funding to Hopscotch investors Opus Fintek Ltd and Fibroin Initiatives Ltd; funding guaranteed in part by a Gregory and Robert Symons on one side and an Alan Wiltshire on the other.

The court was told that interests associated with Mr Wiltshire repaid ASB and in return took over all the bank’s rights under its security documents and guarantees.

When Mr Wiltshire gave notice that the Symons owed some $3.5 million as their share of the ASB debt, the Symons demanded details as to how this figure was calculated.  There was evidence that interests associated with Mr Wiltshire had extracted funds exceeding one million dollars from a Chrisco subsidiary in an out of court settlement.  The Symons demanded to see the settlement terms arguing it could affect how much they would have owed to ASB.  They were told it was confidential.  To ensure he did not learn of the details, Gregory Symons was removed as director of an Opus Fintek subsidiary prior its board agreeing to the settlement.

Wiltshire interests used rights assigned from ASB to sue the Symons, claiming some $1.9 million in High Court summary judgment proceedings.  The beauty of summary judgment proceedings is that there is no contested court hearing provided the claim is for a fixed amount and the defendant has no possible defence.

The Symons stated they might have a defence to all or part of the money claimed; they needed to see details of the secret out of court settlement.  They said Wiltshire may not have disclosed all the money received.

Wiltshire interests said terms of the out of court settlement were not relevant to the amount owed by the Symons and need not be disclosed.

The Supreme Court expressed disquiet about the haphazard way in which Wiltshire interests had progressively reduced how much they claimed from the Symons and agreed that excessive secrecy about the out of court settlement and benefits received under it raised suspicions.  The court said this shadowy impression might be unfair to the Wiltshire interests, but they had only themselves to blame.  In the circumstances, they should have disclosed the agreement.  Summary judgment was refused.  It was for Wiltshire interests to prove the Symons had no arguable defence and they had failed to do so by not disclosing the agreement.

Symons v. Wiltshire Investments – Supreme Court (9.08.12)

12.027

Matrimonial property: Burgess v. Beaven

Property values in relationship disputes are to be fixed as at the date of the first court hearing.  Long-running litigation following a twelve month marriage saw a court order for the woman to pay her former husband a total of some $30,000.

Married in May 2002 and separated in May 2003, it was not until 2012 that some finality was reached in a relationship property dispute between Mr Burgess and Ms Beaven.

Plans to develop a vineyard and homestay business on a rural property at Medbury in North Canterbury had come to nothing.  Each had sold their house in Christchurch to fund the proposed business.

Initially, the Family Court had taken the view that Ms Beaven’s contribution had been “clearly disproportionately greater” ordering a 65:35 split in her favour later amended to 62:38.  Ms Beaven was held entitled to $36,250 which Mr Burgess paid.

A series of appeals reached the Court of Appeal which ruled that an uneven split was not correct, ordering instead the standard 50:50 split of relationship property.  Both parties brought roughly the same equity to the marriage and there had been no material difference between their financial contributions to the date of separation.  Property values were assessed as at the date of separation in 2003.

The Supreme Court ruled that this valuation date was incorrect.  Where there is a dispute, the Property (Relationships) Act requires property to be valued as at the date of the first court hearing.  This was the Family Court hearing in 2007, some four years following separation.  Adjustments can be made for work done increasing the value of relationship property between the date of separation and the first court hearing.

From date of separation up to the Family Court hearing, Mr Burgess was adjudged to have increased the value of Medbury property assets by some $35,100 by keeping up maintenance and paying mortgage, rates and insurance costs after separation.  Medbury was subsequently sold in a mortgagee sale.

Reworking the valuation figures and including a refund of the $36,250 previously paid by Mr Burgess resulted in a court order that Ms Beaven pay Mr Burgess $30,046 in satisfaction of his share of the relationship assets.

Burgess v. Beaven – Supreme Court (9.08.12)

12.024

Redundancy: Service & Food Workers Union v. OCS Ltd

Business restructuring can result in a new employer taking over existing employment contracts.  Transferring employees might negotiate new terms but the new employer is not obliged to depart from their pre-existing employment contract.

Cleaners at Massey University who are members of the Service and Food Workers Union failed in their attempt to get redundancy provisions from their new employer when their pre-existing employment contract specifically excluded any right to redundancy.

The problem arose after Massey University put its cleaning contracts out to tender in early 2010.  OCS Ltd won the new contract and a number of cleaners transferred to OCS as their new employer.  These transfers were treated as continuous employment with the cleaners joining a new employer on their pre-existing contract terms.

The court was told OCS then told transferring staff they would no longer be employed unless they agreed to a new contract less favourable than their pre-existing contract.  For those not willing to accept the new terms, questions of redundancy arose.

The Supreme Court ruled that provisions of the Employment Relations Act dealing with redundancy in this case are clear: the pre-existing contract dictates what is due.  If the pre-existing contract expressly excludes redundancy (as it did in this case) then there is no entitlement to redundancy.  The employees’ position gets no better on transfer to the new employer.

Service & Food Workers Union v. OCS Ltd – Supreme Court (9.08.12)

12.029

Crafar Frams: Tiroa E Trust v. Land Information

Government encouragement for inwards capital investment has been boosted by a broad Court of Appeal interpretation of what amounts to appropriate business experience when seeking official approval.  Proven general business experience will suffice; it is not necessary that intending investors have detailed experience in the business activity to be purchased.

The Overseas Investment Act requires political consent for foreign purchases of New Zealand farmland.  A consortium backed by businessmen Sir Michael Fay and David Richwhite sought to block the sale of sixteen dairy farms to a Hong Kong registered company, Milk NZ, which had bid for the farms put up for sale by receivers of Crafar Farms.

The Fay consortium, having bid a lower price for the Crafar assets, argued owners of Milk NZ did not have the necessary farming experience to manage the farms.  The Act requires intending purchasers to have “business experience and acumen relevant to” the business.

The Court of Appeal ruled that it is sufficient in this case for the foreign investor to have experience in managing large investments as an on-going business enterprise.

Mr Jiang, the successful Chinese investor and entrepreneur backing Milk NZ, has experience in agribusiness generally.  It is proposed that day to day management of the farms will be contracted out to New Zealand based operators with industry specific experience, such as government-owned Landcorp.

Tiroa E & Te Hape B Trusts v. Land Information – Court of Appeal (7.08.12)

12.023

Perpetual Trust: Trustees Executors v. Perpetual Trust

Pyne Gould Corporation is winding down its public borrowing through Perpetual Trustee after getting its hand smacked following allegations that funds were being siphoned off to further the private interests of Pyne Gould’s majority owner, George Kerr.

In July 2012, the High Court appointed two individuals from accounting firm WHK to the board of Perpetual Trust as minders to oversee promised repayments by interests associated with George Kerr.

This followed evidence that Perpetual Trust funds had been used to refinance the Torchlight fund, another investment vehicle controlled by Kerr.  Some $28.6 million had been siphoned off to Torchlight.  It was to later come out in court that a Mr Tinkler, also a senior executive at Pyne Gould, had received $3.3 million from Perpetual; supposedly a loan but there was no written application for the loan and no security had been given for the advance.

Any continued need for observers on the Perpetual board was reviewed by the High Court in August 2012. 

The court was told the advances both to Torchlight and Mr Tinkler had been repaid.  Further evidence was given that the public arms of Perpetual Trust’s business were to be wound up.

Perpetual’s Cash Management Fund is to stop making any further loans and to stop borrowing from the public.  It is intended that existing public investors will be paid on maturity from new funds borrowed by Perpetual from private sources.  Investor repayments will be dependent upon timely realisation of Cash Management assets and Perpetual’s ability to refinance from private sources. 

Another investment vehicle, the Perpetual Mortgage Fund, is to be liquidated.  Repayments to investors have been frozen since early July.

High Court orders were made to have the two observers remain at Perpetual Trust to oversee the wind down of Perpetual Cash Management.  

Trustees Executors v. Perpetual Trust – High Court (3.08.12)

12.022

Tax fraud: R. v. Rowley & Skinner

Fraudulent GST invoices totalling $9.5 million which generated personal benefits exceeding $2.3 million for two Wellington tax agents resulted in convictions for Barrie James Skinner and David Ingram Rowley, trading as Tax Planning Services Ltd.

This followed a raid on Tax Planning’s offices in April 2010 by a dozen Inland Revenue officers.  They spent twelve hours searching through the company’s records and took copies of computer hard drives.

Inland Revenue suffered an initial loss of $3.1 million because of the scam, but recovered most of these losses after reversing the deductions and GST input credits claimed by Tax Planning clients.  Skinner and Rowley were convicted of multiple offences for dishonest use of documents to obtain a pecuniary advantage, perverting the course of justice and knowingly providing false information to Inland Revenue.

The High Court in Wellington was told Mr Shaan Stevens, a former chartered accountant with Guinness Gallagher Accounting Ltd, was jointly charged with Skinner and Rowley in respect of 13 charges of dishonest use of a document for which he received kickbacks totalling $8500.  Stevens pleaded guilty before trial to these 13 offences, together with others, and was sentenced in November 2011 to ten months home detention, 150 hours community work and ordered to pay reparations of $121,850.

Evidence was given that the tax fraud was engineered by Skinner and Rowley using tax clients who were looking to minimise tax payable.  Clients typically had a large tax bill to pay but no cash to meet the liability.  Over a five year period, Skinner and Rowley issued false invoices to 27 tax clients for fictitious “consultancy” or “sub-contracting” work supposedly done at the client’s request.  These false invoices inflated taxable expenses for clients, driving down taxable income and also supported a GST refund.  Tax clients were assured that the transactions were a legitimate method of tax reduction.  Most clients had no understanding of tax accounting and went along with what Tax Planning was recommending.  Those clients seeking some explanation of what was happening were usually told that they had purchased a tax loss business or third party debts as part of a scheme to reduce their taxable income.

In a typical transaction, the client received a tax invoice for services (which were never to be provided) and then paid the face value of the invoice, usually into Tax Planning’s trust account.  Within a couple of days, about two-thirds of this payment was rebated back to the client.  The remaining one-third went to Skinner and Rowley or interests associated with them.

Tax Planning then adjusted the tax client’s tax returns to claim the full value of the invoice for income tax and GST purposes.  The scheme benefitted Tax Planning clients because the combined economic effect of the income tax deduction and the GST input credit exceeded the amount of cash Skinner and Rowley retained.

Skinner and Rowley were convicted for dishonest use of documents arising from the false invoice scam.

When Skinner and Rowley became aware that Inland Revenue was approaching clients investigating tax irregularities they set about trying to convert the false invoices into legitimate transactions: clients were approached and told the invoices related to work done on the client’s behalf for the purchase of apartments or car park licences.  Dummy contracts, held unsigned, were generated to support a story that there was a concrete transaction behind each consultancy invoice.  Forensic analysis of Tax Planning computers identified that the dummy contracts were created years after the date of the supposed transaction – this despite attempts by Rowley to manipulate the computer’s master clock tracking transactions.  Tax Planning clients expressed surprise and bemusement when learning they had supposedly purchased interests in Wellington apartments or car park licences.

These attempts to concoct legitimate consulting transactions led to convictions for perverting the course of justice.

Skinner and Rowley were also convicted of knowingly providing false information when filing their personal tax returns. 

The court was told that Rowley under-declared his income by some $296,000 for the five year period 2006-10; Skinner by some $1.06 million for the same period.  At a time when Skinner had declared income of only $390,000 he had spent just over two million dollars on his credit cards, including nearly $725,000 on overseas travel and over $550,000 on food and accommodation whilst overseas.

R. v. Rowley & Skinner – High Court (20.07.12)

12.017

Capital + Merchant: R. v. Douglas & Nicholls

Two directors of Capital + Merchant Finance, Wayne Leslie Douglas and Neal Medhurst Nicholls, have been acquitted of criminal charges laid in respect of loans to a Palmerston North development known as The Hub.  It was alleged they had a close personal involvement in the development which was kept hidden from investors.   Capital + Merchant went into liquidation in 2009.  Some 7500 investors are unlikely to see any return on their $167 million invested.

Douglas and Nicholls were jointly charged with theft of $14.4 million of investors’ funds and with deceit by issuing a false prospectus.  The High Court was told the charges arose from loans made by Capital + Merchant during the period 2002-05.  The two directors owned Capital + Merchant through a chain of other companies and trusts.

The court was told that in 2002 a financier called National Mortgage Nominee Co Ltd had taken possession of a seven storey building in central Palmerston North, later to become part of The Hub.  The building owner had “done a runner” owing about three million dollars.  Messrs Douglas and Nicholls were directors of National Mortgage, a contributory mortgage company which pooled investors funds into property loans.  The two directors were keen to sell the building and recover the money due.  There was some suggestion that they had personally guaranteed repayment.  A partner in Stace Hammond, the law firm acting for Capital + Merchant, introduced them to a Mr Stokes as a man with some business experience in rural and commercial real estate who might be able to assist.

In a series of transactions over the next few months, interests associated with Mr Stokes purchased the seven storey building in question plus an adjoining property – all with funding provided by Capital + Merchant.  The purchases were entirely debt-funded.  The intent was that both properties would be redeveloped into accommodation, then sold to repay Capital + Merchant.

Evidence was given that Capital + Merchant funded costs of the redevelopment.  There were delays and substantial cost overruns.  As the development neared completion rooms were let to tenants.  Demand was poor. The buildings are old.  The cost of heating and maintenance were high, meaning revenue was insufficient to pay interest on the Capital + Merchant debt let alone contribute towards repayment of the loans advanced.  In the end, Capital + Merchant purchased the development and sold to another buyer.

Justice Wylie ruled that Douglas and Nicholls were not guilty of theft because while they did control Capital + Merchant, loans made to The Hub were not in breach of the company’s lending obligations set out in the trust deed required of all companies borrowing from the public.  It was argued that loans to The Hub were “related party loans” with Mr Stokes merely being the “front man” for the “real” borrowers: Douglas and Nicholls.  Related party loans by Capital + Merchant were prohibited by its trust deed.  While there are grounds for suspicion that Douglas and Nicholls were the real borrowers, this was not established beyond reasonable doubt, Justice Wylie said.

Criminal convictions for deceit in relation to Capital + Merchant’s issue of a prospectus also depended on The Hub loans being non-disclosed related party transactions.  Justice Wylie said prospectus disclosure rules at the time of the loans were governed by regulations under the Securities Act.  Douglas and Nicholls had no legal or beneficial interest in the companies and trusts fronted by Mr Stokes when the loans were made.  There was no obligation to separately disclose The Hub loans as Douglas and Nicholls were not related parties.

R. v. Douglas & Nicholls – High Court (19.07.12)

12.019

Perpetual Trust: Trustees Executors v. Perpetual Trustees

Perpetual Trustee has been forced to accept independent minders monitoring its board.  This after allegations that interests associated with George Kerr, who ultimately controls Perpetual Trustee, were siphoning off investment funds to support their own private business interests.

Perpetual is the financing arm of listed company Pyne Gould Corporation.  It raises funds from the public and like all public borrowers has a trustee corporation appointed to act on behalf of these investors.  Trustees Executors as appointed trustee expressed concern that investor interests were at “significant risk” because of alleged related party dealings between Perpetual Trustee and the Torchlight Fund, a further fund involving interests associated with George Kerr. 

Concerns centred on a $21.6 million loan made to Torchlight in February 2012.  Perpetual board approval was not given until after the funds had been advanced with the necessary paperwork to follow.  Funds advanced ballooned beyond the total approved to reach $28.2 million.

After learning of the transaction, Trustees Executors reported its concerns to the Financial Markets Authority.   Fearing damage to Perpetual Trustees’ reputation with the investing public, Pyne Gould commenced closed door negotiations with the Financial Markets Authority, promising to refinance Torchlight’s borrowings and repay Perpetual.  

Concerns about both financial management within Pyne Gould and the liquidity of Perpetual Trustees became public in May 2012 with the resignation of Pyne Gould’s auditor KPMG.

Subsequently the High Court appointed Ms Vivian Fatupaito and Mr Christopher Duffy as observers to attend meetings of the Perpetual Trustee investment fund board meetings with authority to see all information available to the board and to ask questions relevant to the funds advanced to Torchlight.

Pyne Gould has said that it “expected” to repay the Torchlight advances by the end of July 2012.

Perpetual Trust v. Financial Markets Authority – High Court (26.6.12) & Trustees Executors v. Perpetual Trust – High Court (12.7.12)

12.021