Insolvency: Allied Concrete v. Meltzer

In deciding who should be the winners and who the losers when a company goes belly-up, the Supreme Court decided it would follow the Australian rules.  That is what parliament intended even if it is not what New Zealand insolvency legislation says exactly.

A company wound up insolvent does not have enough to pay every creditor in full.  There is a conflict: collective realisation sees assets realised and creditors sharing; but this conflicts with the need for individual justice – a business paid up to two years previously could see the liquidator demanding back money received.  Creditors squeal when a liquidator seeks to recover money received well in the past, money which has been applied for business purposes and is not sitting in a bank account readily available.

Insolvency rules governing voidable payments have been in a state of flux for the last two decades with several major changes to legislation.  Each change has met with howls of protest that the rules lack certainty and disrupt business.

In a test case involving payments made by three different insolvent companies, the Supreme Court was asked to provide some clarity.  Current rules allow the liquidator of an insolvent company to recover payments made in the previous two years.  To resist repayment, a creditor must prove three things: at the time payment was made (1) it acted in good faith; (2) it did not suspect the debtor company was insolvent, and (3) it gave value.  Arguments have raged over the phrase “gave value”.  The Court of Appeal ruled that this was limited to new benefits given to the debtor company in return for the payment now under attack.  This interpretation meant creditors who had supplied goods and services in the past on credit could not claim they had provided “value” when later paid.  If this later payment was made inside the two year time limit they were out of pocket, having to pay back the cash received.

Rather than looking closely at the wording of the insolvency rules, the Supreme Court concentrated on the policy reason behind the rules deciding that giving “value” could include payment made for goods and services delivered in the past.  The court emphasised that these creditors would still have to also prove that they acted in good faith and did not suspect the debtor company was insolvent when making payment – significant requirements, not easily met, said the court.

Allied Concrete v. Meltzer – Supreme Court (18.2.15)

15.008

Gambling: Pub Charity v. Internal Affairs

Pub Charity has been accused of gaming the legal system, using a legal subterfuge when trying to wriggle out of a one day suspension of its operations imposed as a penalty way back in 2011 for breaching its gaming licence.  The High Court has ordered Pub Charity serve its one day penalty on 30 March 2015.

Pub Charity was set up in 1987.  By 2008 it was operating over 1700 gaming machines at nearly 180 pubs and clubs.  The High Court was told Pub Charity had gross revenue of over $69 million for the year ending September 2008, making donations of more than $25 million to community groups.

Under its gaming licence, Pub Charity is required to limit venue costs to 16 per cent of its profits.  Gaming legislation seeks to maximise net proceeds for distribution to community groups, minimising operating costs. Internal Affairs took an interest when Pub Charity overshot this limit by $286,200 for the twelve month period ending July 2009.  This overspend breached the limit by 0.46 per cent.  Pub Charity said in its defence that it was difficult to monitor expenditure centrally when it operated from so many venues.  Evidence before the court indicated that Pub Charity’s business approach is to maximise venue costs up to the allowed limit, not to reduce expenditure as much as possible.

Internal Affairs imposed a one day suspension of Pub Charity gaming machines as penalty.  Penalties of up to six months suspension can be ordered. Pub Charity’s one day suspension was to have occurred in July 2011.  No suspension took place while Pub Charity fought a series of appeals through the Gambling Commission, the High Court and the Court of Appeal.  Internal Affairs won the final round.  The Court of Appeal sent the case back to the Gambling Commission to set the penalty.  Pub Charity promptly withdrew from the field of battle, declaring it had withdrawn from the case.  There were no longer any legal proceedings on foot, and Pub Charity challenged Internal Affair’s ability to reset a suspension date.

Back in the High Court, Pub Charity was arguing it was off the hook: first because the earlier litigation had collapsed and secondly because Internal Affairs had issued a written warning which Pub Charity said served as a substitute for the ordered suspension.  In June 2013, Internal Affairs had placed on record with Pub Charity a formal warning in respect of three breaches: the overspend of $286,200; a grant of $220,000 for the running of the Queenstown National Sevens Tournament as not being a grant for a charitable purpose; and costs of some $52,500 for what was considered unnecessary building alterations at four gambling venues.

Justice Mallon ruled that Internal Affairs could set a new date for the suspension, regardless of Pub Charity deciding to abandon its appeal.  She said the date for suspension would be Monday 30 March 2015, unless Pub Charity and Internal Affairs agree to a different date.  Evidence was given that Mondays are the quietest days for gambling.  Justice Mallon suggested Internal Affairs remove from its files the Pub Charity warning letter.  This avoids any suggestion that Pub Charity is receiving both a suspension and a warning in respect of the same breach.

Pub Charity v. Internal Affairs – High Court (17.02.15)

15.006

Copyright: Jeanswest v. G-Star

Retailer Jeanswest was punished by the Court of Appeal with a further penalty of $50,000 for trying to hide the fact that it had blatantly copied G-Star’s iconic biker jean.

G-Star is proud of its biker jean, having sold over 13 million pieces since launching the product in 1996 at the Cologne clothes fair.  The jean is modelled on the distinctive creased look occurring when wet trousers are moulded to a motorcyclist’s legs.

G-Star sued in 2013, alleging breach of copyright by Jeanswest in selling similarly styled jeans through its chain of 27 outlets in New Zealand.   The High Court ruled there had been a breach of copyright.  Damages of $325 only were awarded; the profit margin on 62 pairs sold.

G-Star appealed the level of damages awarded.  The Court of Appeal ordered Jeanswest to pay a further $50,000 damages.  These were exemplary damages to punish Jeanswest for its behaviour.  The court said there was blatant copying by Jeanswest amounting to a flagrant infringement of G-Star’s copyright in the style of jean. 

Fashion houses get irate over copying.  G-Star emphasised that knock-off artists do not bear the design costs.  They latch on to a hot-selling style and steal it.  The copier gains an incalculable benefit at little cost while the uniqueness of the copied brand is diminished.

The Court of Appeal was also very critical of the way Jeanswest acted at the High Court trial.  During the pre-trial discovery process, Jeanswest was very late in handing over a copy of the sample order sent to China for the manufacture of the disputed jeans.  This sample order was a critical document in determining whether there had been copying.  Jeanswest manipulated the court hearing date by stating that a material witness was pregnant and would not be available at a later date.  She was not a material witness.  She didn’t work for Jeanswest at the time the disputed jean went into production.  In any event, Jeanswest did not call her as a witness in the High Court.  The court also highlighted the glaring inconsistency between Jeanswest’s persistent denial of copying on the one hand, while on the other hand failing to call witnesses who could be in a position to provide proof of this denial.

Jeanswest v. G-Star – Court of Appeal (17.02.15)

15.007

Transpower: Vector v. Transpower

Transpower has benefited from some double dipping.  Auckland power utility Vector failed in its argument that Transpower owed it a refund of $3.2 million for charges levied while a new main transmission line was pushed through central Auckland.  At issue was the question of who bears transmission costs during the staged development of Transpower infrastructure.

The High Court ruled that Transpower could levy all users for the cost of a transmission grid upgrade while at the same time charging an individual power utility for using part of the upgrade while still under construction.

During 2013-2014 Transpower strengthened its Northland network by constructing a new transmission line from Penrose to Albany through central Auckland.  Transpower’s income is derived from transmission charges levied against those drawing down from the grid.  The main grid is an “interconnection asset”.  Power can flow in either direction through the grid   Costs are “socialised”.  The cost of building and maintaining the grid interconnection is spread across all lines companies and a few major electricity users since supply to individual recipients cannot be easily metered.   By contrast, users at the end of a spur line are charged individually for power taken.  Power flows only one way and can be metered.    

The High Court was told Transpower socialised proposed costs of the Penrose/Albany interconnection on the assumption that this upgrade would go live as one completed project.  Because of construction delays, one section across part of Auckland’s North Shore went live nine months before completion of the entire project.  Vector was sole user of this section of the project for these nine months.  Transpower treated this stage of the link as a spur and billed Vector $3.2 million for power carried during the period of Vector’s sole use.

Having paid the $3.2 million invoice, Vector demanded repayment.  It was being asked to pay twice for a transmission upgrade: first as its share of the “socialised” interconnection construction costs; and secondly for its nine months usage prior to commissioning of the final project.

Justice Williams ruled no refund was required.  A 2010 participation code forming part of the Electricity Industry Act defines what is an interconnection asset and what is a spur.  The code speaks in the present tense and recognises that a particular transmission link can change at any given time between interconnection asset and spur.  For the nine months in question, Vector’s use of the first commissioned stage of the planned interconnection link was use of the link as a spur.

The Electricity Authority says individual utilities can negotiate with Transpower over transmission charges to be levied on interim use of those parts of a staged development which are temporarily operating as a spur.

Vector v. Transpower – High Court (24.12.14)

15.005

Land: Western Park Village v. Baho

Failing to disclose during negotiations for the sale of a Parnell residential unit that a threat of potential legal action had been made against the body corporate cost the vendor damages of $50,000.

In May 2007, Western Park Village Ltd agreed to purchase a residential unit at 30 Augustus Terrace, Parnell in Auckland from Mr Baho at a price of $1.225 million.  It later used a failure by Mr Baho to disclose legal problems faced by the Augustus Terrace body corporate as grounds to try and escape the contract.
To finance the purchase, part of the price was left in secured by a mortgage back to Mr Baho. Remaining payments were due in two lump sums.  The Court of Appeal was told Western Park defaulted on payment of the second instalment.  Discussions over rescheduling this debt failed.  Western Park then sought to cancel its purchase, alleging breaches of contract by Mr Baho.  By the time the case reached the Court of Appeal, the central issue was liability for rock and debris falling down a cliff from the Augustus Terrace property on to buildings below.

Evidence was given that rockfall debris had been an ongoing problem for at least a decade.  A geo-textile net had been installed to catch rocks falling, but this was damaged in a substantial slip. In 2006, the body corporate controlling the Augustus Terrace development received a letter from the neighbour’s solicitors requiring specified remedial work on the cliff face to commence without delay.  This was coupled with a warning that legal action would be taken otherwise.

Western Park said it was not told of this threat when buying the following year.  Within months of this purchase, the Augustus Terrace body corporate was sued in nuisance for damage caused by the ongoing rockfall.  The court was told the dispute was settled out of court with Western Park paying some $33,600 as its share of the body corporate’s remediation costs.

The Court of Appeal said the failure by Mr Baho to disclose the fact of the ongoing dispute was a breach of a specific clause in the agreement for sale of purchase where he stated he had no knowledge of the possibility of any proceedings being issued against the body corporate.

A prospective purchaser made aware of this threatened legal action would make inquiries about the likely cost of necessary remediation work and deduct this figure from the price offered, said the court.  Damages of $50,000 were awarded to Western Park.  This sum was to be set off against the $204,070 owed to Mr Baho for the still unpaid second instalment on the mortgage back.

Western Park Village v. Baho – Court of Appeal (19.12.14)

15.004