The recent case of Dorchester Finance Ltd v Ngahuia Ltd and Others (HC, 08/02/10) highlights the risk to trustees of a trust that allows decisions to be made by a majority. In that case, three of the five trustees signed documents committing the trust to acquire some land and develop it in a joint venture with a company which committed the trust to obligations that now exceed $4.5m. One of the questions that had to be addressed in that case was the position of the two trustees who did not sign the documents. As the trust deed allowed decisions to be made by a majority of the trustees, Associate Judge Doogue held that this may mean that those trustees who did not sign the documents were also personally liable to pay the $4.5m if the trustees that signed the documents had validly and collectively bound the trust to the contract. If that was so, then the trustees could not escape liability on the grounds that they did not sign the contract. Associate Judge Doogue made the point that if the majority of the trustees made a decision, it must be the case that the minority trustees are bound by it in all respects. Otherwise those dealing with the trust would be confronted with a situation where some of the owners of the trust property would agree to execute securities affecting the property, but the minority would defeat the contractual obligations of the parties by declining to cooperate. He concluded that once the trust has validly contracted, then unlimited personal liability attaches to all of the trustees, including those that did not sign the documents. The lesson to be learned from this particular case is that no one should be a trustee of a trust that permits majority voting. It should be noted that this firm’s standard family trust document requires all trustee decisions to be unanimous and therefore does not allow for majority rule; 

 

Directors who wish to buy or sell shares need to be aware of section 149 of the Companies Act 1993, which may apply regarldless of any independent agreement. The section prohibits a director from acquiring shares at a less than fair value, or disposing of them at more than fair value, if he or she has information that would not otherwise be available to them, but which is material to an assessment of the value of the shares. In the case of Wong and Fong v Fong & Chong (HC, 16/12/09), the High Court ruled that, despite there being a contract covering an arrangement to buy shares at an unfair discount, section 149 applied to the contract, making it unenforceable on those terms. The defendants were ordered to pay the difference between the contract price and the ‘fair value’ of the shares. The judgment also issues a warning to any director involved in buying or selling shares to take care in keeping their agreements in line with fair trading provisons in the Companies Act;

 

In Taranui Motels vs MacKay (HC, 20/05/2010), a recent High Court case in which this firm was involved, the tenant was seeking relief against the purported cancellation of the lease of motel premises by the landlord who had issued notices under the Property Law Act 2007 (“the Act”) claiming breaches of the lease by the tenant involving the alleged partial removal of a firewall and non-payment of rent.

 

There was a significant history of ongoing disputes between the landlord and tenant which provided the backdrop for the current proceedings. A number of matters in dispute had already been referred to arbitration which stalled late last year. The current High Court proceedings eventuated when matters came to a head with the tenant’s non-payment of rent. The tenant alleged the landlord was responsible for certain maintenance and repair items which the landlord disputed. The tenant decided to set-off the costs it had incurred in carrying out the repair work itself against the rent. In addition, it had come to the landlord’s notice through his insurer that due to certain alterations carried out by the tenant involving the partial removal of a firewall in the premises, it was likely that if the premises were damaged by fire as a consequence of the removal of the firewall then the landlord would not be covered for the insurance risk. Given the significant risk to the landlord, it is not surprising that the landlord issued notices under the Act indicating his intention to cancel the lease should the alleged breaches not be remedied.

 

The Tenant responded and filed proceedings for relief against cancellation of the Lease. Justice Wild in his decision to grant relief to the Tenant held that:

In our view the wider issue which has not been resolved through these proceedings is that, despite the fact that while the parties were in conflict over what had or had not happened when the alterations were carried out and that these matters are still subject to arbitration, the landlord has been left in the invidious position of potentially still not being covered by insurance. The local authority has still not issued a code of compliance for the alterations.

 

Landlords be warned – the Property Law Act right of cancellation will not necessarily solve your problems. It is better to be proactive when managing your leases and ensure that ongoing effective communication lines are established with your tenants and that any issues which have the potential to escalate into major disputes should be addressed early;

The Unit Titles Act 2010 (the “Act”) has been passed into law but is yet to come into force. When it does there will be a number of changes to the current requirements for unit title properties and Body Corporates (“BCs”) which owners should be aware of. The first requirement is that BCs will now be required to hold annual general meetings with the first one being due “ as soon as practicable and in any event within six months”. This is to give BCs the chance to consider the new Act and to change their rules accordingly. There are new provisions for both the BC operational rules and BC duties of repair and maintenance which a BC may adopt, before the requirements become mandatory 15 months after the Act comes into force, by way of a special resolution (75% vote).

  

A number of the default BC rules set out in the Unit Titles Act 1972 (the “old Act”), which were previously able to be amended by special resolution, have now become mandatory and are prescribed in statutory regulations. There are also statutory regulations for some rules which are able to be altered, revoked or added to by special resolution. The remainder of the default rules from the old Act are now found in a section under the heading of “ Body Corporate Operational Rules” which are able to be altered, revoked or added to by ordinary resolution (50% vote). These are not yet available and will be the subject of public consultation before being introduced. BC existing rules will fall into one of 3 categories:

In addition to this, BCs will need to be aware of those new rules under the Act which apply to them.

  

 

Anyone involved in financial markets will need to keep an eye out for the upcoming changes to the industry regulations in the next six to twelve months. Simon Power (Commerce Minister) has expressed his intentions to tighten the regulatory framework in the financial markets in a media statement released on 28 April 2010, which has been sparked by the realisation that too much of investor's money has gone to waste in the absence of a unified regulatory framework. Central to the change is the consolidation by the Financial Markets Authority of regulatory functions that are currently fragmentred over the Securities Commission, the Ministry of Economic Development and the NZX. The new regulations will enforce securities, financial reporting, changes to company law and changes to the regulations of auditiors, trustees, financial advisors and finacncial service providers.

The legislation which will establish the new functions of the Financial Markets Authority is likely to be passed later this year and is expected to be in full operation by 2011. Hopefully we will see greater confidence in New Zealand's financial markets and a safer environment for investors.