Solid Energy: Cargill v. Solid Energy

International conglomerate Cargill's attempts to leverage a better payout in the managed sell down of Solid Energy’s assets failed when the High Court dismissed its challenge to the creditors’ agreed scheme of arrangement.

Cargill was part of an unsuccessful joint venture in Solid Energy’s West Coast Spring Creek mine.  Solid Energy went belly up in 2015, crushed by falling coal prices and adverse movements in the USD/NZD cross rate.  Facing returns of fifteen to twenty cents in the dollar on total debt of some $600 million if Solid Energy was put into liquidation, creditors voted for a scheme of arrangement that allowed the company to keep trading while assets are sold down progressively.  Trading creditors were promised 100 cents in the dollar.  Those classed as “participating” creditors anticipate receiving 35 to 40 cents in the dollar. 

Cargill objects to being classed along with the major banks as a participating creditor.

Justice Katz ruled Cargill’s debt is not a trading debt.  Trading creditors were paid in full to maintain ongoing supply of materials and labour, ensuring continuing operation of Solid Energy’s plant and mines during the sell down.

Cargill also challenged the scheme of arrangement as being run by the banks for the benefit of the banks.  Justice Katz said the scheme was approved by a substantial majority of creditors: 94 per cent by value and 99 per cent by number.  There was no objection at the time of bank representatives making up a Participants Committee to manage the sell down process.  Their expertise and experience was seen as assisting in a managed sell down.  Any benefits the banks obtained in managing the sell down did not unfairly prejudice Cargill, Her Honour ruled.  To prove prejudice, Cargill would have to establish it is worse off under the scheme of arrangement than if Solid Energy had instead gone into liquidation.

Cargill v. Solid Energy – High Court (5.08.16)

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Ponzi Scheme: Priest v. Ross Asset Management

Former Forsyth Barr sharebroker Duncan Priest extracted out of Ross Asset Management’s liquidation nearly seven million listed company shares representing holdings in fifteen different companies, reducing further the paltry three cents in the dollar defrauded investors were expecting to receive out of the Ponzi scheme operated by now-convicted fraudster David Ross.

While at Forsyth Barr, Mr Priest channelled personal transactions through Ross Asset Management disguising his own trading and his family shareholdings by having Ross Asset hold shares as a bare trustee on his behalf.

Ross conned investors with promises to generate high returns on their behalf.  While investors received regular investment updates signalling healthy growth in their portfolios, these reports were works of fiction.  Client money was stolen.  When the Ponzi scheme collapsed, investigating accountants found Ross Asset held assets totalling only $10.2 million, including some $59,000 in cash, with investors reported portfolios supposedly valued at $449.6 million.  They are left as unsecured creditors of Ross Asset.

Mr Priest told the High Court he was not a Ross Asset client.  He did not leave money with Ross for discretionary investment.  He made his own investment decisions.  His buy and sell orders were actioned through Ross Asset and purchases were held by Ross Asset on trust for him and his family. 

Evidence was given of Mr Priest getting wind of troubles at Ross Management just weeks before it went into receivership and then liquidation.  He tracked Ross down and had him sign share transfer documents which took 5.5 million shares held in four companies out of Ross Asset control across to an independent custodial trustee.  Mr Priest described these shares as being the most valuable and readily transferable of his share portfolio held by Ross Asset.  Their value was not disclosed by Justice Clifford.

The High Court was asked to rule on ownership of the 5.5 million shares transferred out prior to liquidation together with a further 1.2 million shares held in eleven different companies still recorded in Ross Asset’s books as being held on behalf of Mr Priest and his family.         

Justice Clifford ruled the Priests’ shares were held by Ross Asset as bare trustee.  It held legal title, but Mr Priest and his family were the true owners.  Mr Priest had paid for the specific shares in question.  He was entitled to keep ownership of those shares transferred to another custodial trustee prior to liquidation and was also entitled to recover legal title to the 1.2 million shares still held by Ross Asset.  The court was told Ross left untouched shares he held on behalf of Mr Priest, with one exception; between July 2011 and May 2012, Ross sold about $500,000 worth of Diligent Board Member Services shares without Mr Priest’s authority and without accounting for the proceeds.  Mr Priest stands as an unsecured creditor for this loss.

Priest v. Ross Asset Management – High Court (5.08.16)

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Tax: Edwards v. Inland Revenue

There was no tax evaded by claiming deductions for payments promised to a non-existent captive insurance company when the half-baked scheme fell through because of incompetence and carelessness the High Court ruled in dissallowing Inland Revenue attempts to re-open tax returns outside the four year time limit.

As a general rule, tax assessments cannot be reopened after four years unless the tax return is fraudulent or wilfully misleading.  Inland Revenue alleged Hawkes Bay contractor Brian Donald Edwards was party to fraud claiming deductions of some $859,000 in 2004-2008 tax years for insurance costs relating to two businesses: a farming partnership and a construction company.  Faced with heavy cashflow commitments when paying insurance premiums, Mr Edwards hit upon using a captive insurer.  It was intended a Brisbane business owned by Mr Edwards and his brothers, Craybay Construction Pty Ltd, was to become their insurer with premium payments to Craybay in the form of promissory notes not cash.  The High Court was told Craybay never at any stage complied with Australian law to become an insurer and never declared its five years premium income of $859,000.  At no time did it provide insurance services to Mr Edwards’ businesses.  Continued use of a captive insurer was dropped in 2008 after Mr Edwards had an acrimonious split with his brother Ross.  Business time and resources were then diverted to restructuring the businesses and paying out his brother.  During this process the previous five years’ insurance premiums were reversed in filed tax accounts.

Inland Revenue became suspicious of the whole deal when undertaking a three year tax audit starting in 2010.  No record of the promissory notes could be found, though they were eventually discovered stored in a warehouse, there was no evidence of an insurance contract between Mr Edwards’ businesses and Craybay the supposed captive insurer and no insurer appeared to exist.  Craybay had not registered with the appropriate authorites in Australia nor put up the required statutory insurance bond.  Claiming deductions for non-existent insurance amounted to fraud, Inland Revenue said.

Justice Williams said Mr Edwards was grossly careless rather than fraudulent.  He had taken specialist tax advice about setting up a captive insurer, but had never properly implemented the scheme.  The improper deductions were later reversed without the prompting or threat of a possible Inland Revenue tax audit.

Penalties of some $52,000 imposed by Inland Revenue for tax evasion were overturned.         

Edwards v. Inland Revenue – High Court (5.08.16)

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Enforcement: MW & Partners v. Sinclair

Oil.  From the freezing steppes of Kazakhstan, disputes over ownership of shares in Max Petroleum and allegations of shady dealing have reached New Zealand via London and the Bahamas.  The forced sale of a Wellington property owned by Bahrain resident Thomas Sinclair was ordered by the Court of Appeal to help recover a three million dollar costs order imposed on Mr Sinclair by courts in the Bahamas and England.

Arguments over ownership of Max Petroleum have been fought for years through courts in the United Kingdom, United States, Australia and the Bahamas.  Max’s value has steadily declined.

With offices in central Asia, consulting firm Michael Wilson & Partners set the ball rolling with a 2010 London arbitration alleging former employee John Emmott ripped them off making secret profits on Max shares they said he held as trustee.  Control of Max shares was frozen by a London court until the dispute was sorted out.  Meanwhile, Mr Sinclair sued in the Bahamas claiming ownership of the disputed Max Petroleum shares.  With Mr Emmott as his ally, Mr Sinclair tried but failed to get MW & Partners joined into the Bahamian litigation.  Mr Sinclair was ordered to pay MW & Partners some three million dollars in costs for the failed Bahamian joinder and related litigation in the English courts.

MW & Partners transferred the costs judgments to New Zealand for enforcement under the Reciprocal Enforcement of Judgments Act.  The Court of Appeal said the Act transforms a foreign court judgment into a debt recoverable in New Zealand, ordering a forced sale of Mr Sinclair’s Wellington property to recover payment.  There was evidence that Mr Sinclair has about one million dollars equity in a Wellington house. The Court said it has no discretion when enforcing overseas court orders to consider ancillary offshore disputes between litigants.  The 2010 London arbitration decided Mr Sinclair owned the disputed Max Petroleum shares.  He is suing MW & Partners claiming losses allegedly suffered since the freezing order was imposed.  MW & Partners allege the 2010 London arbitration award was obtained by fraud.      

Michael Wilson & Partners v. Sinclair – Court of Appeal (5.08.16)

Post Judgment Note: Legal action by Mr Sinclair to block his bankruptcy in New Zealand by Michael Wilson & Partners was dismissed by the High Court in July 2020.

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Passing Off: Red Bull v. Drink Red

Drinks company Red Bull took rival Drink Red off the market after discovering a marketing company doctored court evidence to hide Drink Red’s branding motives.   

When Red Bull failed last March to get a High Court injunction stopping Drink Red from selling its rival product under the name Red (with the letter R reversed), it immediately got a court order for access to business records of Strategy Design and Advertising, the marketing company advising Drink Red.  It found Strategy Design had produced two separate marketing reports for its client.  The first, dated June 2014, recommended branding with colour and styling designed “to tap into Red Bull’s equity” and emphasised that adoption of a name similar to Red Bull’s products had commercial advantages.  A revised report, dated May 2015, was used in court to support Drink Red’s claim that its choice of name and branding was not driven by any intent to rip off the existing Red Bull brand.  The May 2015 report stated Drink Red’s branding was chosen after exhaustive research to find a name simple and attractive for its target audience.

Drink Red, controlled by Scott McCormick, launched its non-alcoholic Red Energy in November 2015, reportedly spending $422,000 to launch its brand.  It was up against Red Bull with approximately $40 million annual sales since 2010.  Mr McCormick had plans to break into the market for RTD alcoholic beverages.

Red Bull alleges the branding chosen is a blatant attempt to cause confusion in the market and rip off its product.  Lawyers for Red Bull canvassed bars in Auckland, Wellington and Christchurch finding that staff at nearly twenty per cent of some 100 bars thought Drink Red’s drinks were Red Bull products.  In two bars, Drink Red’s product was stored inside Red Bull branded fridges.

With a full trial timetabled for later in the year, Red Bull asked the High Court to block Drink Red’s product from the market in the interim as it had potential to harm sales.  The High Court refused.  Justice Brewer said an interim injunction would put Drink Red out of business.   He said Drink Red had a serious question to answer but there was no evidence it deliberately intended to cause confusion.  After learning that deliberately misleading marketing evidence was put before the High Court, the Court of Appeal granted an injunction, pulling Drink Red’s product from the market.          

Red Bull v. Drink Red – Court of Appeal (4.08.16)

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