Dominion Finance & North South Finance: R. Cropp

Paul William Cropp, formerly chief executive officer of the Dominion Finance Group, has been sentenced to two years seven months imprisonment for failing properly to handle investors’ money.  Loans made to related parties in breach of company prospectuses resulted in further losses to investors in Dominion Finance of $700,000 (out of total losses of $233 million) and to investors in North South Finance of $8.4 million (out of total losses of $46 million).

Convicted of theft by a person in a special relationship, Mr Cropp was party to desperate attempts by Dominion Finance executives to fend off a liquidity crisis in March-April 2008. This involved four separate transactions: restructuring loans to a struggling Auckland property development and shifting funds from related finance company North South to an illiquid Dominion Finance.  Each of the four transactions required consent from trustees for debenture holders; they were otherwise prohibited as transactions between related parties.

The High Court was told no prior consents were obtained and in one case Mr Cropp actively tried to disguise the deal as not being a related party transaction.  Justice Lang said failure to get the required trustee consent breached an important investor safeguard.  It did not allow the trustee to exercise any oversight on investors’ behalf.

Justice Lang ruled that the starting point for this offence should be three years four months jail.  A nine month reduction was allowed to reflect evidence of Mr Cropp’s previous good character and expressions of remorse.

R. v. Cropp – High Court (23.05.13)

13.026

Hanover: Hotchin v. Sheppard

Two Hanover directors who allege they have been defamed by shareholder activist Bruce Sheppard obtained a High Court order that the trial be heard before a judge alone, rather then a jury.  Mark Hotchin and Eric Watson allege comments made by Sheppard in 2009 and 2010 were defamatory by painting them as businessmen who had dishonestly misled investors in Hanover, as “crooks” who should be imprisoned, as having participated in a GST fraud and as having misappropriated cash belonging to Hanover.

In his defence, Sheppard says his comments are honest opinion and were made under qualified privilege. 

Justice Cooper ruled that a judge-alone hearing was more appropriate because the trial would require consideration of complex financial transactions entered into over a three or four year period involving a number of businesses.  Complex legal, accounting, insolvency, property, tax and finance issues will arise.

The defamation action has its origins in a debt restructuring proposal put to Hanover investors in December 2008 and the sale by Hanover of its interests in a Queenstown property development.  Hanover froze investor repayments the previous July, affecting more than 16,000 investors owed more than $550 million.  Investors subsequently agreed to a debt restructuring which promised for secured investors 100 per cent repayment spread over five years and for unsecured investors fifty cents in the dollar after four years.

Outcomes have been less satisfactory than investors hoped.

Hotchin and Watson responded to Sheppard’s public criticism by suing for defamation. 

Damages can be reduced, even if comments are found to be defamatory, if it is established that the person defamed has a reputation of little value.

Justice Cooper refused an application by Hotchin and Watson to remove from the court record past instances where they had been separately censured for market irregularities in securities trading:

·         in December 1998, Watson was censured by the Securities Commission for buying more than two million shares in McCollam Print while negotiating its takeover by Watson’s Blue Star Group;

·         in 1998, the US Securities Exchange Commission found Watson had breached US securities law when buying and selling McCollam shares at the same time as negotiating the purchase of McCollam for Blue Star;

·         in 1999, Hotchin breached Securities Commission guidelines on insider trading in relation to the purchase and sale of shares in Pacific Retail Group; and

·         on 17 August 2000, Pacific Retail Group (majority owned by Watson) publically admitted Hotchin had breached Securities Commission guidelines.

 Sheppard says these are specific instances of misconduct relevant to Hotchin’s and Watson’s business reputations and are relevant to any question of damages if defamation is proved.

Hotchin v. Sheppard – High Court (3.05.13)

13.011

Dominion & North South: R. v. Whale, Cropp & another

Paul William Cropp, CEO of both Dominion Finance Group and North South Finance, has been convicted of theft by a person in a special relationship for his involvement in a business rescue which had the effect of reducing by eight cents in the dollar funds available for investors in North South.

Acquitted were director Robert Barry Whale and a senior executive granted name suppression.  Charges against Dominion Finance founder, Terry Butler, were deferred because of ill health.

Justice Lang was to comment that the root cause of the entire problem was funding of a 2004 joint venture intended to separate a Dominion Finance borrower from his failing project.  The Dominion Finance executives charged with criminal offences arising from this business rescue made no personal gain.  When under the pressure of imminent disclosures forced on them by reporting deadlines, steps taken to deal with the issue only compounded their legal problems.  

Both Dominion Finance and North South faced severe liquidity problems in late 2007 and early 2008.  In September 2008, Dominion Finance went into receivership leaving nearly 6000 investors owed some $176 million.   Current estimates have investors recovering less then twenty cents in the dollar.   North South was in receivership two months earlier in July 2008.  First ranking debenture holders received a payout of 55 cents in the dollar over the following two years.

Dominion Finance and North South shared the same directors but operated in slightly different market niches: Dominion lent to commercial property developers usually taking a second ranked security; North South primarily lent on first mortgage security.  Each company was a “related company” in respect of the other and there were constraints on intercompany lending.

Dominion was not permitted to lend funds to any related party without first obtaining consent from PGG Trust, the trustee for debenture holders.  [Securities law requires a trustee to be appointed when companies borrow from the public, with the trustee exercising any oversight specified in its contract with the borrowing company.]  By comparison, North South could lend to related parties without its trustee’s consent provided the transaction value did not amount in aggregate to more than two per cent of North South’s total tangible assets in any twelve month period.

Criminal prosecutions were launched when it was discovered that the two companies on five occasions made related party deals without getting the required  trustee’s consents.

A big drain on liquidity for Dominion had been a Remuera apartment development initiated by a Mr Mathew Ridge.  Six million dollars had been sunk into the project with progress amounting to no more than a hole in the ground.  By June 2004 it was clear to Dominion that Mr Ridge would be unable to finalise the project.  A rescue package was organised by Mr Butler, Dominion’s founder.  He negotiated a joint venture arrangement with a business acquaintance.  Evidence was given that Dominion was to finance the joint venture with Mr Butler required to underwrite the sale of five of the eleven apartments to be constructed.   This underwrite meant Dominion funding to the joint venture was to become a related party dealing needing prior consent from the trustee, PGG Trust.  No prior consent was obtained.

Justice Lang ruled that Mr Whale was not criminally liable for this initial related party financing because while trustee consent was not obtained Mr Whale did not know consent was needed. 

The court was told the project was plagued with delays and by March 2008 Dominion was owed $8.4 million.  There were still four apartments unsold with sale proceeds likely to be less than the loan balance.  In what was described as a heated Dominion Finance board meeting prior to 31 March balance date, Mr Butler claimed he had no personal liability for the apartment sale underwrite.  He claimed to have acted as agent for Dominion; it was a Dominion Finance commitment.  A commercial crisis loomed.  For a number of board members this was their first knowledge of Dominion’s liability.  If the finance company were liable, then full disclosure of its involvement would be needed in the company’s financial statements for the year ended 31 March 2008.  To deal with the immediate problem, an intermediary company was set up: WAFD Ltd.  WAFD agreed to purchase the four remaining apartments for $8.6 million, being the balance owed to Dominion and this purchase was financed with first mortgage finance from an outside source and a second mortgage of $5.2 million from Dominion.  This reduced Dominion’s total exposure on the project by some $3.35 million, but left undecided whether Mr Butler or Dominion Finance was the owner of WAFD.  Ownership carried liability for the loans.  The court was told Dominion subsequently assumed ownership.       

Mr Cropp and Mr Whale faced trial, each charged with theft following allegations they used Dominion Finance money in a related party transaction without getting prior trustee approval.

Mr Cropp was convicted.  Justice Lang ruled that Cropp assisted completion of this transaction in the knowledge that the trustee’s prior consent was required.  PGG, as trustee, was denied the opportunity to consider whether the transaction would benefit Dominion – regardless of whether Dominion or Mr Butler were to be the ultimate of owner of WAFD, it was a related party transaction requiring consent.  Justice Lang was critical of the way Cropp presented the transaction to Dominion’s credit committee, disguising the fact that it was a loan to a related party and that the loan had already been advanced prior to 31 March balance date.

Mr Whale was acquitted.  Justice Lang ruled there was reasonable doubt whether Whale was aware of the requirement for PGG consent.  It was probable or very likely that Mr Whale was by this date aware of the requirement but there was no documentary evidence to prove this point beyond a reasonable doubt.

Questions of related party lending also arose out of North South liquidity being used to fund Dominion’s second mortgage on the WAFD transaction.  In return for an advance of four million dollars, Dominion signed a security sharing agreement giving North South an interest in Dominion’s second mortgage.  This agreement required the consent of a different trustee, Covenant Trustee Company, since under North South’s rules this related party deal exceeded two per cent of the finance company’s total tangible assets.

Mr Cropp was convicted of theft by a person in a special relationship.  He knew North South needed trustee consent and acted in breach of this.  The court was told that Mr Cropp knew Dominion was going to make a loss on the apartment project.  Once North South became involved, it was going to share in the loss.  It was later resolved that North South could not share in the mortgage proceeds until after Dominion had been paid because of, amongst other legal reasons, the earlier failure to get PGG consent to Dominion’s involvement.

Justice Lang said Cropp knew Dominion needed funds to meet obligations to its investors.  Without the WAFD transaction, Dominion would have been in default and required to give notice to PGG as its trustee, to the Stock Exchange and to the market – with the commercial consequences that would have followed.

Mr Cropp was similarly convicted of theft in relation to further security sharing arrangements put in place in April and June 2008 when North South made further advances to Dominion totalling $7.9 million.

Mr Whale was acquitted of charges of theft in relation to each security sharing transaction.  Justice Lang said in one instance Mr Whale had no direct involvement in the transaction and in others where he was involved there was no contemporaneous evidence that was aware of the restriction on North South lending.

R. v. Whale, Cropp and another – High Court (12.04.13)

13.012

Insurance: O'Loughlin v. Tower Insurance

In a test case on the “repair in red” proposal by one insurance company following the Christchurch earthquakes, the High Court ruled an insurer may choose to pay out on a notional repair even though no repair is intended but it must be a payment based on a realistic assessment of the cost of any repair.  Where a notional repair cost will depend on substantial geotech surveys and a need for stronger earthquake-proof foundations, insurers are likely to opt for a replacement or rebuild elsewhere.

Tower Insurance faced a barrage of adverse publicity when media learnt that the insurer was proposing to pay repair costs rather than replacement costs on homes which were to be abandoned following major earthquakes in Christchurch in 2010 and 2011.

Mr and Mrs O’Loughlin had built an architect designed home on land in Gayhurst Road, Dallington in 1999.  The concrete base slab warped after two severe earthquakes and the building dropped between 0.3 and 0.6 metres after liquefaction affected ground contours.

Their property became part of a government-designated “red zone”: insured property owners were given the option of accepting a government offer for their property; or a government offer for the land alone with the property owner to recover compensation for building damage from their insurer.  The O’Loughlins chose the second option but could not reach agreement with Tower over the level of compensation.  Their insurance cover was described as a Tower Provider House Policy: Maxi Protection .

Justice Asher said red zone designation did not stop a person from getting building consent for a repair or rebuild, did not stop a person from living in the red zone and did not require residents to demolish or repair their homes.  But residents intending to stay have been warned that public utilities like power, water, sewage and roading are unlikely to be maintained or repaired.

The O’Loughlins hired a global claims management company called WorldClaim to negotiate with Tower.  WorldClaim is entitled to 25 per cent of monies recovered from Tower in excess of Tower’s offered $390,000 for repair costs.  WorldClaim assessed repair costs at $1.35 million.

Tower said the O’Loughlin house could be stabilised and then repaired by pumping polystyrene foam under the concrete base slab to fill the voids created by liquefaction.

After hearing evidence from Christchurch City Council, Justice Asher ruled that this proposal was unlikely to get building consent for red zone properties.  A detailed engineering study would probably show new pile foundations would be required.

He said even if building consent were granted, there were apparent risks of the method failing and significant cost overruns resulting.  It was not reasonable to expect Tower to make payment for a notional repair of this type when final costs could not be fixed adequately.

Justice Asher ruled that Tower’s offer of $390,000 for repair costs fell short of its contractual obligations under the insurance policy.

But the court was not able to determine what would be an appropriate payout.

The wording of Tower’s Maxi policy gave Tower the option of repairing the damage or replacement elsewhere.  Justice Asher said Tower had not committed to a repair, it had offered to pay compensation on a notional repair.  It was still open to the insurer to choose compensation based on buying a new home elsewhere or building at an alternative site.  Buying a new home would require finding an existing home elsewhere satisfactory as being in “the same condition and extent” as their red-zoned Dallington home had been when new.  Justice Asher said this does not require Tower to pay for a replacement property which is identical in terms of the position, dimensions, building design and finish as the Dallington property.

Alternatively, Tower could choose to pay for a rebuild.  Justice Asher said this does not require Tower to pay for the cost of a rebuild on the present Dallington site; payment is to be calculated on the cost of a rebuild on an alternative site.

Loughlin v. Tower Insurance – High Court (5.04.13)

13.008

Insolvency: re Contract Engineering Ltd

Creditors of an insolvent company resisting liquidators’ demands to repay money received in the two years prior to liquidation need to do more than prove they acted in good faith; they must have provided new value at the time payment was made by the insolvent company.   This Court of Appeal ruling will assist creditors supplying further goods or services on credit in return for reduction of an existing debt, but it will not assist those creditors unfortunate enough to have an existing debt simply paid at a time when the company was insolvent in its final two years.

The rule is intended to encourage suppliers to keep working with an insolvent company trying to trade its way out of financial difficulty.  The supplier gets to keep the money paid, but runs the risk that the new debt created may turn out to be a bad debt if the debtor company is later wound up insolvent.

The Court of Appeal was asked to rule on a joint appeal involving two separate company liquidations: liquidators of Contract Engineering Ltd were chasing a creditor paid about $57,800 for concrete and steel foundations constructed on a Wairakei pipeline project; liquidators of the same company wanted $105,400 from a different creditor paid for the manufacture and installation of a silencer on the same project; and liquidators of Window Holdings Ltd sought to recover payments totalling $13,000 made to a creditor for contouring and stabilising work.  In each case, the creditor was paid within the critical two year period at a time when the debtor company was insolvent. 

Insolvency law operates a pari passu rule: unpaid unsecured creditors are paid cents in the dollar on a pro rata distribution out of cash collected in by the liquidator.  Over the centuries, various statutory rules have required creditors paid 100 cents in the dollar prior to liquidation to put their payment back into the pot and prove instead as unsecured creditors.  Not surprisingly, creditors have resisted having to repay: they give up 100 cents and get back less.  Confusion over the payback rules has arisen following a series of amendments to insolvency law over the last twenty years.

The Court of Appeal has clarified the rules: an existing creditor can keep money paid in the two years prior to an insolvent debtor company being wound up insolvent only to the extent that “new value” has been provided in return for the payment made.

The Court of Appeal said “new value” can be provided by the supplier agreeing to resume supply of goods or services, or by agreeing to extend the date on which payment is due for the balance of the existing unpaid debt.

Re Contract Engineering Ltd – Court of Appeal (27.03.13)

13.009

Capital + Merchant: R. v. Ryan, Sutherland & Tallentire

Three directors of finance company Capital + Merchant have been sentenced after pleading guilty to Securities Act offences.  Over two years, investors put $23.4 million into the company on the strength of untrue statements which misrepresented the quality and risks of their investment.  Capital + Merchant went into receivership in 2007 with about 7,000 investors out of pocket.

Colin Gregory Ryan was sentenced to seven months home detention and 300 hours community work.  He agreed to pay $100,000 to the receivers by way of reparations for the loss and damage caused investors.  The court was told Ryan is a 66 year old Australian citizen from Brisbane.  He is a very experienced businessman with law and accountancy qualifications.  He had served on boards of Brisbane’s port company and airport company.  His home detention is to be served at an Auckland address.

Robert Gordon Sutherland was sentenced to six months home detention together with 300 hours community work.  He agreed to pay reparations of $60,000.

Owen Francis Tallentire was sentenced to twelve months imprisonment to be served in addition to a prison term currently being served after his earlier conviction for theft by a person in a special relationship arising out of his dealings as a Capital + Merchant director.

The untrue statements which mislead investors were in prospectuses issued to the public in 2006 and 2007.   That court said both Ryan and Sutherland had an honest belief that the information in the 2006 and 2007 prospectuses was correct, but this belief was not reasonable.  Tallentire was described as being more deeply involved such that he must have been aware critical information was false.

In particular, the prospectuses misrepresented the extent and manner of dealings with related parties; misrepresented the cash flows and future liquidity of Capital + Merchant and did not identify the extent of disputed loans or the fact of unpaid loans being rolled over rather than enforced.  It was incorrect to state that no loans were impaired and that no provision was required for past-due loans when in fact a number of large loans were clearly impaired.

R. v. Ryan, Sutherland & Tallentire – High Court (15.03.13)

13.010

Tax avoidance: Alesco v. CIR

Inland Revenue decisively won round two in a tax avoidance test case centred on use of hybrid securities to finance transactions.  The Court of Appeal disallowed as tax avoidance claimed interest deductions by Alesco (NZ) Ltd because they were a misuse of specific deductibility rules, even though the financing structure used complied perfectly with general principles of financial accounting.  This ruling has implications for ongoing tax disputes with sixteen other taxpayers having $300 million in dispute.

The case has its origins in a 2003 financing transaction between Alesco (NZ) Ltd and its Australian parent.  Alesco (NZ) issued convertible notes to its Australian parent in return for advances totalling $78 million.  The convertible notes were a hybrid security: part debt part equity, with a ten year maturity.

There was no dispute that the $78 million advance represented a real commercial transaction.  The funds were used to purchase existing New Zealand businesses: medical equipment supplier Biolab; and kitchen equipment supplier Robinson Industries.   

The dispute centred on a claimed tax deduction for notional interest payable on the convertible notes.   The economic effect of the transaction was that Alesco (NZ) received an interest free loan of $78 million.  On maturity in ten years, the Australian parent had an option: first to convert the notes to shares in Alesco (NZ) (which was of no commercial value since the parent already held all the shares in Alesco (NZ); or to redeem the notes for cash (which would result in an economic loss to the Australian parent because the loan had stood interest free for ten years).

Financial accounting rules require issuers of convertible notes to value separately the equity and debt “components” of the note.  Alesco (NZ) claimed a tax deduction for notional interest payable on the debt component, though no cash was actually payable.  Recognition of notional interest arising on an interest free loan complies with rules for financial reporting.   Inland Revenue argued that use of this financial reporting principle for tax purposes inflated taxable expenses and amounted to tax avoidance.

The Court of Appeal ruled that the financial arrangement rules in tax law were intended to give effect to the reality of income and expenditure – that is, real economic benefits and costs.  A claim for notional interest payable did not fall within the rules as intended by parliament.

Alesco v. CIR – Court of Appeal (5.03.13)

13.006

Tax advisors: Alesco v. CIR

Creative use of tax rules is getting short shrift from the courts with criticism aimed at tax advisors who promote the schemes and then stand in court as supposed independent expert witnesses justifying the tax scheme in dispute.

Accounting firm KPMG came in for stinging criticism from the Court of Appeal for its role in litigation between client Alesco (NZ) Ltd and Inland Revenue in a dispute over the deductibility of interest on an Alesco financing transaction.

In 2003, Alesco’s Australian parent advanced $78 million dollars to finance further expansion in New Zealand with Alesco (NZ) issuing optional convertible notes in return.  Both the High Court and the Court of Appeal were to rule that an interest deduction claimed by Alesco (NZ) on the convertible notes amounted to tax avoidance.  The claimed interest deduction was reversed and penalties of $2.4 million were imposed for what Inland Revenue claimed was Alesco (NZ)’s adoption of “an abusive tax position”.

At trial, supposed expert evidence was given by KPMG partner, chartered accountant  Michael Schubert.  He was described as giving expert opinion on the correct financial reporting treatment of optional convertible notes.  KPMG had provided advice to Alesco from the outset on the most tax effective way of presenting the transaction.

Mr Schubert’s evidence was roundly criticised: his narrow financial accounting approach ignored the economic reality of how the transaction was structured between related parties – Alesco (NZ) and its Australian parent.  The Court of Appeal said Mr Schubert’s analysis launched hypothetical arguments which were unrelated to the facts of the case.  This did not assist the Court and added unnecessary complications.  The Court of Appeal emphasised that an expert witness assists a court by providing specialist non-legal evidence and all expert witnesses have a fundamental obligation to be impartial.  The Court expressed its dismay at the growing trend for expert witnesses to go into battle on behalf of a client.

Alesco v. CIR – Court of Appeal (5.03.13)

13.007

Mighty River Power: Maori Council v. Attorney-General

Maori interests failed to convince the Supreme Court that partial privatisation of Mighty River Power will materially impair government ability to provide compensation for any yet-to-be decided claims to water rights.  This court ruling leaves government free to sell a 49 per cent stake in its state-owned energy companies.

In the North Island, Maori interests claim that control of their rivers and streams was usurped by settler interests after signing of the Treaty of Waitangi.  Government says there is no validity to these claims and sees Maori demands as a means to claim economic rents for a natural resource available to all.

Legislation last century bound the government to provide compensation for any agreed Treaty claims with the return of disputed assets as one form of compensation.

Representatives of Maori with interests along the Waikato River argued that government plans to sell part of its interest in Mighty River Power should be stopped; a sale would diminish assets available to meet Treaty claims over ownership of Waikato water.

The Supreme Court said there is no logical reason why government should be forced to keep, against its will, a minority shareholding in energy generating companies which are unconnected in any meaningful way to underlying Treaty claims.

A partial sell-down of shares does not amount to a sale of the company, Mighty River Power, or to the disposal of assets held by the company.

The Court said that government retention of a 51 per cent shareholding in Mighty River Power and with it majority control of the company means that government retains substantial capacity to provide redress for any Treaty claims.  Government can later issue further shares which can be offered as compensation, or use cash generated from Mighty River dividends to pay compensation.

Maori Council v. Attorney-General – Supreme Court (27.02.13)

13.005

Extradition: Radhi v. Police

An alleged people smuggler wanted in Australia following the deaths of illegal immigrants who drowned when their boat sank off Indonesia cannot be extradited because people smuggling was only a minor offence under New Zealand law at the time of the deaths.  Immigration penalties for people smuggling have since been beefed up.

The High Court was told that Maythem Kamil Radhi (also known as Maytham Kamil Radhi) is wanted in Australia for his alleged involvement in a 2001 attempt to smuggle about 300 illegal immigrants into Australia from the Middle East.  The vessel sank in rough seas off Indonesia and most passengers were drowned.

Mr Radhi was accepted into New Zealand from Indonesia as a refugee in 2009.  Australian authorities sought an extradition warrant in 2011 after finding that Mr Rahdi was in this country.  In Australia, Mr Rahdi faces up to 20 years imprisonment if found guilty of people smuggling.  At the time of the deaths, New Zealand immigration law imposed a maximum sentence of three months.  Extradition is not ordered for minor offences.  Before ordering extradition, a judge must be satisfied that the behaviour complained of would be an offence in this country if it were committed in New Zealand and that the maximum penalty on conviction is at least twelve months.

Since June 2002, eight months after Mr Rahdi’s alleged involvement in the ill-fated people smuggling operation, New Zealand law was changed to create specific offences against people smuggling with heavy penalties.

Radhi v. Police – High Court (11.2.13)

13.003

Earthquake: Insurance Council v. Christchurch City

Local councils requiring earthquake strengthening when repairing existing buildings cannot set standards beyond the 34 per cent limit set by regulations under the Building Act.  An attempt by Christchurch City to set the seismic limit at 67 per cent of new building standard was struck down by the High Court as invalid and in excess of its powers.  A 34 per cent limit is the assessed seismic strength required to support a building suffering an earthquake of one-third the intensity that could be borne by a new building erected on that site.

In the aftermath of Christchurch’s earthquakes, the local council has been setting new rules for reinstatement of earthquake-damaged and earthquake-prone buildings.  The Insurance Council, which represents insurers covering some 95 per cent of New Zealand’s insurance cover, objected to new city council rules which required buildings to be brought up to 67 per cent of new building standard.  The Insurance Council said this would increase repair bills by hundreds of million dollars.  The High Court was told that a rebuild of earthquake damaged Canterbury University would cost an extra $140 million if a 67 per cent limit was set rather than 34 per cent.

In practice, building owners want to see their buildings strengthened to a 67 per cent rating.  Not only does this reduce risk, but also improves the building value.  Post-earthquake rebuilds have been on hold while insurers have argued over the level of seismic strengthening required.  The level of danger created by the building, the use to which it will be put and the cost of repairs are weighed by the city council in giving approval to rebuild plans.

Justice Pankhurst said the primary focus in the Building Act is to manage the likely risk of earthquake-prone buildings collapsing causing injury or death.  New buildings are required to meet 100 per cent of the seismic strength required by regulations made under the Act.  When repairing or reinstating existing earthquake-prone buildings, they need only be brought up to 34% of the seismic strength required for new buildings.  Councils cannot impose higher standards than those set under the Building Act.

Insurance Council v. Christchurch City – High Court (4.2.13)

13.004

Maori: Takamore v. Clarke

Maori custom came hard up against pakeha practice with the Supreme Court deciding by a narrow margin of 3:2 that the person in charge of a deceased estate has primary authority in deciding where the deceased should be buried.

Recent years have seen a run of distressing instances known colloquially as “body-snatching cases” where extended family have tussled with close relatives of a deceased over funeral arrangements.   Maori custom demands burial at the home urupa.  A surviving spouse and children usually prefer burial closest to the family home.

This sensitive issue came before New Zealand’s highest court following the 2007 death of James Junior Takamore.  His immediate family wanted to have him buried in Christchurch where they had lived for the previous twenty years.  Plans for the Christchurch burial were thwarted when members of Takamore’s hapu from Kutarere in the Bay of Plenty took his body north over the objections of his widow for burial on the home marae.  

The Supreme Court ruled that his widow was entitled to possession of Mr Takamore’s body as executor of his estate.  She was given permission to exhume his body for reburial at a place of her choice.

The five judges sitting in the Supreme Court were not unanimous in their ruling on this cross-cultural dispute.

Three of the judges relied on the traditional pakeha common law rule: those appointed as executors or administrators of a deceased estate have the duty and obligation to dispose of the deceased.  They should take into account the views of close family members and, importantly, take into account any views the deceased made before death.  “Body-snatching” is not the way to deal with differences of opinion.  Those disagreeing with decisions about burial should air their differences in court and have a judge weigh up the conflicting viewpoints.

Two of the judges considered primary responsibility for burial decisions should not lie with the executor or administrator.  Disputes should be put before a court prior to any burial.

The five Supreme Court judges were of the same view on one point: the “might is right” approach of traditional Maori custom which saw disputes settled by force has no place in modern society.

Takamore v. Clarke – Supreme Court (18.12.12)

13.001

Insurance: Insurance Brokers v. Fire Service

A failure by the Fire Service to break down what it considers a commercial rip-off in both composite and “split-tier” insurance contracts came to nought when the High Court ruled these policies are legitimate even where they have the effect of reducing the fire levy payable.  Fire service union members are up in arms as well.  They argue underpayment of fire levies reduces funding for the service and reduces resources available for wages. 

Split-tier policies are used by large commercial operations to manage their risk at reduced cost.  Insurance cover is split out into several policies to separate out cover assessed for fire service funding.  These policies are often combined with composite policies. The commercial reality is that a business with operations nationwide is not going to have all its plant and buildings damaged simultaneously by fire, earthquake or flood. Composite cover for assets nationwide is offered at an expressed indemnity value being only a fraction of the nationwide asset replacement value.  The fire service levy is calculated on this lower indemnity value, not the nationwide replacement value.

The Fire Service has grizzled for years about split-tier and composite policies.   The Insurance Brokers Association, concerned that penalties might be imposed for a failure to comply with the Fire Service Act 1975, bought matters to a head by going to court seeking a ruling that these practices did comply with the Act.

As a test case, the court was asked to consider insurance arrangements implemented since 2008 between Vero and eight New Zealand ports acting together in what is called the NZ Ports Collective.

One single policy covered assets of the eight ports to an aggregate amount of $250 million for fire damage alone.  The fire service levy was calculated and paid on this amount.  Separate policies provided cover totalling an extra $500 million: for fire cover above the indemnity cover, for material damage other than fire and for business interruption cover.  No fire service levy was paid on this extra $500 million cover.

Use of one global composite policy benefitted NZ Ports Collective because they got the cover each wanted at a reduced premium: the premium was apportioned between ports on the value of their respective port assets.  Each port did bear the risk that a large prior claim in any one year by one port could deplete the sum payable under the policy for later claims by another port.   Insurance Brokers said splitting the cover into tiers did comply with the Act and no further levy was payable.  The Fire Service said it was in fact eight separate policies with eight different ports and further levies were payable.

In the High Court Justice Heath ruled that split-tier policies did comply with the Act because a fire levy was payable only on the declared indemnity value.  And as a composite policy the Vero cover also complied with the Act.  While the insurance policy covered different assets owned by different ports it was nevertheless a single policy.

Insurance Brokers Association v. NZ Fire Service – High Court (17.12.12)

13.002

Matrimonial: R. v. Kendall

Auckland businessman and former firefighter, Graeme John Kendall, was sentenced to home detention for perjury after giving false evidence in what was described as a deliberate mis-use of the legal system to inflict considerable harm on his former wife.

The High Court was told that Kendall lived for twelve months in a de facto relationship before marrying his de facto partner in March 2006.  The marriage was at an end within nine months.

Prior to the marriage, his de facto partner decided to buy a residential unit in Takapuna which adjoined a unit she already owned.  He suggested she use one of his many private companies for the purchase.  All the shares in Home Pride Ltd were transferred into her name and this company purchased the unit.  She was assured, as was her solicitor, that Home Pride was a “clean company”: a shell company with no assets and no liabilities.

Within months of the marriage ending, she received a statutory demand claiming that Home Pride owed $64,400 for rent due on a storage unit in Rosebank Road, Avondale.  This was a storage unit where some of her personal property had been stored previously.  If payment was not made it was likely that Home Pride would be wound up by the court and the Takapuna residential unit sold to pay the claimed debt.

She spent $33,000 in legal fees disputing the debt; a debt claimed by one of her former husband’s companies.

It was proved that Kendall had fabricated lease documents to make it appear that Home Pride owed rent for the storage unit.  He was convicted of perjury.  He served three months imprisonment before being convicted again on the same charge following a retrial.  Justice Toogood took this earlier period of imprisonment into account when sentencing him to seven month’s home detention for perjury.  Kendall was also ordered to pay $25,000 to his former wife.

R. v. Kendall – High Court (11.12.12)

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Maori: NZ Maori Council v. Attorney General

The High Court has dismissed out of hand legal action by Maori interests to delay government moves to sell down its stake in electricity generator Mighty River Power.  Some Maori claim ownership of the water which generates electricity by passing through Mighty River turbines.

The High Court did not need to decide who might own water.  It ruled that government plans to sell down its interests in Mighty River Power did not affect rights of water ownership, whoever might own the water.

In June 2012, government altered the legal status of government-owned Mighty River Power, changing it from a state-owned enterprise (SOE) to a mixed-ownership model (MOM) company.  This did not change the government’s ownership of Mighty River, it changed the legal structure under which the company operated.  Government plans to sell down a 49% stake in four of its electricity generation companies: Mighty River Power, Genesis Power, Meridian Power and Solid Energy.

Maori interests claim the proposed sell down may defeat pending Treaty of Waitangi compensation claims.  Once an asset passes from government ownership, no direct Treaty claim can be made against the asset.

In the High Court, Justice Ronald Young refused to block preliminary steps taken by government to achieve the proposed sell down.  Changing a company’s status does not alter the status of assets held by that company.

New Zealand Maori Council v. Attorney General – High Court (11.12.12)

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Insurance: Turvey Trustee v. Southern Response

Christchurch homeowners with AMI “premier house cover” offering full replacement cover for earthquake losses are entitled to a new house of the same style and quality of materials as the house written off but substitute materials or method of construction is permitted where that does not affect the functionality or character of the replacement structure.

The High Court was asked to rule on AMI costs for the replacement of a 1911 Edwardian-style villa at 23 Aynsley Terrace written off after the February 2011 earthquake.  A particular feature of the villa was its use of native timber for flooring and joinery.

All AMI house insurance policies for Christchurch have been hived off into a special government controlled entity with the taxpayer subsidising any shortfall on funds needed to meet earthquake claims.

Turvey Trustee, the owner at Aynsley Terrace, exercised its right under the policy to rebuild on a new site, but there was a dispute as to the extent to which the new construction should mirror the house written off.   In particular, methods of construction and building materials in common use have changed markedly since the original construction in 1911.

Justice Dobson ruled that replacement does not mean replication; it means “as new”, being an equivalence of the old as measured by size, functionality, relative quality and re-creation of character and appearance.

A case from Australia in a dispute over replacement cover in insurance had identified that it would be appropriate to use plaster board for wall lining rather than the plaster and lath previously in use and radiata pine framing timber rather than Oregon pine.

In this case, it was replacement of native timber in use for flooring and joinery which was most in dispute.  Justice Dobson ruled that in those rooms where the floorboards were exposed or covered only by loose carpets, then AMI was obliged to pay for replacement native timber flooring in the new house.  But for those rooms where the timber flooring had been covered by vinyl or tiles, chipboard flooring would suffice.  Similar rules applied to joinery.  Exposed native timber joinery had to be replaced with native timbers.  But joinery which had been painted over could be replaced simply with painted pine.  Hard plaster ceiling features in the 1911 villa could be replaced by use of a polystyrene mould and plaster covering with no material difference in appearance.

Turvey Trustee Ltd v. Southern Response Earthquake Services – High Court (11.12.12)

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Insolvency: re Window Holdings Ltd

Most creditors paid prior to a company liquidation will be able to keep their money thanks to new insolvency rules.  Creditors paid up to two years prior to a debtor company being wound up insolvent can keep the money provided they received payment in good faith, did not know the debtor was insolvent and had provided goods or services to the debtor equal in value to the payment received.

Insolvency law has detailed rules to even out the losses when a debtor company goes into insolvent liquidation forcing some creditors who were paid in full before the liquidation to repay the money received.  They are left to prove as unsecured creditors.  In practice, money recovered is used first to pay the liquidator’s fees.  Frequently, little is left for unsecured creditors as a whole.

Changes to insolvency law in 2006 replaced earlier recovery rules which were widely viewed as being unworkable.

Auckland insolvency specialist Jeff Meltzer challenged these new rules arguing they should be interpreted restrictively: any creditor paid in the two years prior to liquidation and getting 100 cents in the dollar should have to return that money if there are unpaid creditors.

In the High Court, Justice Toogood applied the plain wording of the new rules.  Creditors can keep their 100 cents in the dollar provided, at the time of payment, they acted in good faith, had no knowledge that the debtor company was insolvent and had provided monies worth in goods or services to the debtor company.

re Window Holdings Ltd (in liquidation) – High Court (5.12.12.)

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Charities: Greenpeace

Greenpeace has moved away from the pacifist underpinning of its original constitution by offering to change its rules in order to gain charitable status.  Tax advantages available to charities prohibit them from engaging in overt political activity.  The Court of Appeal directed that Internal Affairs reconsider Greenpeace’s application for charity registration.

Registration as a charity was initially refused on the basis that amongst its charitable aims Greenpeace stated as objects the promotion of “peace” and “disarmament”.  These objects can be considered political in nature.  Greenpeace subsequently offered to change its constitution to include the promotion of “peace, nuclear disarmament and the elimination of all weapons of mass destruction.”

The Court ruled that this alteration significantly altered the nature of Greenpeace’s objects: from a non-violent “peace at all costs” political stance to a stance broadly accepted as being for the public benefit of the community as whole.   New Zealand treaty obligations support both nuclear disarmament and prohibitions on the development, use or stockpiling of biological and chemical weapons.  Nuclear disarmament and a prohibition on weapons of mass destruction have broad public support as being beneficial to society generally.

But registration as a charity for Greenpeace is not a foregone conclusion.  The Court warned Greenpeace that it will have to convince Internal Affairs that it is not involved in direct political lobbying in pursuit of its aims or that it has not been involved in any illegal activity.  The fact that Greenpeace banners are sometimes seen at environmental protests when activists trespass on industrial sites raises doubts about the legality of some Greenpeace activities.

re Greenpeace – Court of Appeal (16.11.12)

12.036

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)

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