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Employee share purchase schemes under the Financial Markets Conduct Act 2013

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What is an employee share purchase scheme?

An employee share purchase scheme (“Scheme”) is defined by the Financial Markets Conduct Act 2013 (“FMCA”) as a scheme that is, “established by an entity under which employees or directors of the entity or any of its subsidiaries … may acquire specified financial products … that are issued by the entity”.

Essentially, a Scheme will enable employees, directors, managers and occasionally contractors (“Employee”) of an employer to “buy into” that employer’s business (“Employer”) by purchasing financial products in the Employer, namely equity securities or shares.

Schemes do not have a particular shape or form meaning that Schemes can either be simple and designed to benefit a small number of key Employees (such as directors and managers) for a single issue of shares, or Schemes can be detailed and complex, intended to apply to a wide range and number of Employees over a long period of time and for multiple share issues.  As such, Schemes are diverse and have the potential to encompass any arrangement whereby Employees can acquire shares issued by the particular Employer.

What are the benefits of an employee share purchase scheme?

The benefits of Schemes can be wide-ranging to both the Employer and the participants of the Scheme.

A key advantage is the retention (and attraction) of key Employees.  The general consensus is that where an Employee has a mind-set that he or she is an ‘owner’ of the Employer, that particular Employee’s vested interest in the Employer will be realised in the work he or she does.  International research has reinforced this concept and indicates that Schemes can be conducive to an Employer’s growth and productivity, while at the same time fostering a sense of loyalty amongst its Employees.

Directly related to the retention (and attraction) of key Employees is the incentivisation of those key Employees.  This links in with the concept set out above that where an Employee has a vested interest in the Employer, this interest will be realised in the work he or she does.  Where an Employee stands to experience a gain and/or profit through the success of the Employer, this prospect incentivises that Employee to work harder to realise that gain and/or profit.

Schemes can also be useful for the succession planning of ownership of a particular Employer.  By allowing Employees to slowly buy into the Employer, Employees are able to slowly work their way to a director level, eventually taking over the existing leadership of the Employer and thereby providing for a smooth transition in ownership of the Employer.

Another benefit of a Scheme is that it provides an Employer with a method of rewarding Employee performance that does not negate or reduce the operating cashflow of the Employer.

Employee share purchase schemes under the Securities Act 1978

Reviewing the history of Schemes in New Zealand highlights a general reluctance to implement a Scheme due to the complexity and costs associated with a Scheme’s establishment and maintenance.

Under the Securities Act 1978 (“the Former Act”), Employees of an Employer were generally considered to be members of the public, meaning that Schemes would be caught by the underlying rule of the Former Act which provided that an issuer of securities could only offer securities to the public for subscription where that offer was accompanied by an authorised advertisement, investment statement and/or registered prospectus.

While the Former Act contained particular exemptions that, in particular situations, might exclude a certain Scheme from the required compliance with the underlying rule, it was often found that these exemptions could be difficult to apply with Employers finding that the Scheme may not wholly fit under any one particular exemption.

One such example of an exemption under the Former Act was the Securities Act (Employee Share Purchase Schemes – Unlisted Companies) Exemption Notice 2011 which was introduced to provide relief for unlisted companies.  While the exemption notice did reduce some costs and particular administrative issues, the underlying requirement for a registered prospectus remained and it also introduced a number of restrictive conditions, all of which contributed to an exemption notice that lacked effect.

A further exception to the underlying rule was section 3 of the Former Act, which provided that an offer made only to a ‘close business associate’ could be exempt from the standard disclosure requirements.  However, a review of case law and commentary on the Former Act indicates that a close business associate is viewed as someone who is more than an ordinary worker of the Employer, and is more closely linked to a person who holds a position of leadership, such as a director or manager.  As such, ordinary workers of the Employer were normally unable to come within the exception provided for in section 3.

In light of these (and other) difficulties posed by the Former Act, Employers have largely tended to avoid implementing Schemes.  However, with the replacement of the Former Act by the FMCA in 2014, Schemes have been given a new lease of life, with a specific exemption being included for such Schemes under the FMCA.

Employee share purchase schemes under the Financial Markets Conduct Act 2013?

The introduction of the FMCA has made it easier for Employers to participate in Schemes.  Section 8 of Schedule 1 to the FMCA provides for a specific exemption for Schemes whereby an offer of shares or an option to acquire shares in an Employer or one of its subsidiaries to an Employee under a particular Scheme does not need to comply with the standard FMCA disclosure requirements, provided that certain conditions are complied with.

Those conditions are three-fold and are set out below:

  • The offer must be made to the Employee as part of the Employee’s remuneration, or the offer must be made in connection to the Employee’s employment/engagement;
  • The raising of funds cannot be the primary purpose behind the offer to the Employee; and
  • The number of shares issued in the Employer under all Schemes that the Employer is operating in any 12 month period cannot exceed 10% of the total number of shares in the Employer that are on issue.

In addition, by offering Employees the chance to participate in a Scheme, Employers must still provide Employees with certain information, including:

  • A warning statement in respect of the Scheme which outlines the particular exemption under the FMCA being relied upon by the Employer, and which is intended to explain what the offer is, what the risks of investment to the Employee are, and sets out a general requirement on the Employee to be prudent in his or her investigations of the Scheme;
  • Basic information regarding the Scheme, including the terms and conditions; and
  • Access to the Employer’s most recent annual report and financial statements.
Further considerations

When considering whether or not to establish a Scheme, Employers should also turn their attention to other considerations, which include (without limitation), factors such as:

  • The number of shares able to be offered (in light of the restrictions described above), and consequently the number of shares that will be offered;
  • What price the shares will be offered at, which will dictate what the Employer entity is valued at; and
  • Particular time constraints, such as how long an Employee must first work for the Employer before being able to participate in a Scheme (which can also directly assist with fostering Employer loyalty and incentivise Employees to remain with the Employer).

Another important consideration is the tax consequences for both the Employer and Employee.  Toward the end of 2015, the Inland Revenue Department announced that certain situations might be considered tax avoidance, with Schemes now included as such a situation (whereas they had previously been accepted by the IRD).  The tax consequence of a Scheme arises as a result of Employees being able to purchase shares in the Employer at a discounted price (pursuant to the Scheme).  That discount is the difference between the market value of the shares and the purchase price, which is a taxable benefit to the Employee.

In light of the above, it is clear that setting up a Scheme can be a protracted and complex process with a variety of considerations to pay attention to.  As such, both legal and accounting advice should be sought in order to ensure a Scheme is structured so as to meet an Employer’s particular aims and objectives, while at the same time maintaining attractiveness to Employees.

If you would like further information please contact Laura Monahan on 07 958 7479.

Changing the resource legislation landscape – What is proposed and how has it been received?

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Introduction

The next phase of the Government’s plans to reform the environmental law scene was recently completed, with the public submission period on the Resource Legislation Amendment Bill (the Bill) closing in mid-March.  As expected, the Bill has drawn a great deal of interest from a raft of stakeholders, including district councils, corporations, iwi, professional associations and organisations, community groups, and individuals.  By the end of the submission period, 675 submissions had been received by the Local Government and Environment Select Committee.

Many of the submitters were in support of the purpose and objective of the Bill – namely, to create a resource management system that achieves sustainable management of natural and physical resources in an efficient and equitable way.  Nonetheless, the submissions detail a number of concerns in relation to particular aspects of the Bill, with many claiming that the intended purpose will not be able to be achieved if the Bill is passed ‘as is’.

This article sets out a few of the key concerns raised in the submissions. Please note that the points outlined in this article are not necessarily the views of the author, but merely represent an overview and brief summary of some of the issues raised in relation to the Bill.

Background: Overview of the Bill

Without discussing the details of the Bill, the proposed changes are briefly summarised below:

  • National direction: the Bill includes a number of amendments which are aimed at providing more national control, such as amendments to clarify the content of national environmental standards and national policy statements (referred to as NES and NPS respectively), introduction of a national planning template (or NPT) to ensure consistency of plans, and regulation-making powers for the Minister for the Environment.
  • Plan making: the idea is that plan-making will become faster, more efficient (both in relation to cost and time) and with increased iwi engagement.  The proposed amendments therefore include two new planning processes, the Collaborative Planning Process and the Streamlined Planning Process (CPP and SPP respectively), as well as the introduction of Iwi Participation Arrangements.
  • Consenting process: changes are proposed in relation to timeframes for considering applications, determination of the status of certain activities, requirements for consultation and notification, the scope for imposing consent conditions and, the process for setting consenting fees.
  • Court powers and appeals: the proposed amendments relate to delegation, the timing of certain steps in the process, methods used for determining disputes before the Court, and when the Court has jurisdiction to hear a matter.
  • Process alignment: the Bill proposes that processes and timeframes under different environmental statutes be aligned, that refinements are made to the service process, and that the ability to charge financial contributions is removed.
The main concerns raised

Although a raft of concerns are raised in the 675 submissions, a quick overview identifies three issues as particularly contentious, namely:

  • The introduction of ministerial powers;
  • The structure for increased Māori participation;
  • The limited ability for public participation and reduced appeal rights.
The introduction of ministerial powers

Clauses 103 and 105 of the Bill introduce new ministerial regulation-making powers in sections 360, 360D and 360E.  These relate to measures to exclude stock from water bodies, restrictions on local authority control over certain land use, and limitations in relation to administrative charges.

Comments in relation to clause 103 (amended section 360) include support for a consistent approach across the country, while at the same time concern about the content of such regulations being decided by the government.  Some concern is also expressed in respect of the lack of reference to collaboration with affected parties to ensure that the regulations are fit for purpose.

The overriding worry over proposed new section 360D is that it will effectively provide the Minister with the ability to enact regulations which override local authority control of land use.  Submitters were concerned about the Minister having the ability to require the removal of provisions in District or Regional Plans if the Minister believes that such provisions conflict with the regulations.

Many submitters describe clause 105 as a “Henry VIII clause”, a concept used in the Regulatory Impact Statement prepared for the release of the Bill into Parliament.

Some of the main arguments against the Minister being awarded the proposed powers are:

  • It goes against principles of democracy and the separation of powers;
  • Any wide-reaching and sweeping governmental powers should be subject to adequate monitoring and inspection;
  • The proposed powers go too far and are excessive, particularly bearing in mind the existing framework for governmental input into matters of national importance (e.g. through NPS, NES and the proposed new National Planning Template);
  • The proposed powers undermine the democratic process underpinning our society.

While the above points more or less represent the majority of submissions, particularly from individual submitters, some submitters (largely local authorities) express a general support of the proposed powers, while criticising the broadness of the section and suggesting that some refinement (rather than removal) may be able to rectify the issue.

The point should be made that parts of section 360D will only be applicable for a limited timeframe, as it is intended to be restricted to the period before the adoption of an NPT, and one year thereafter.  The NPT is set to be in place two years after the Act has come into force.

By way of note, most of the Ministerial powers in section 360D are subject to some control, as the Minister is obligated to prepare an evaluation report, notify the public of the proposed new regulations and establish a process whereby the public can be heard.

The structure for increased Māori participation

There are two clear camps in relation to the proposed amendments concerning Māori participation, in particular the introduction of Iwi Participation Agreements (IPAs) as between iwi and local authorities.

One view is that increased Māori participation will benefit the RMA processes in that it will allow Māori the kaitiaki role always intended for tangata whenua.  The opposing view is that neither Māori nor any other group of society should be given preferential treatment in a matter as vital to New Zealand as resource management.

Concerns raised by the supporters of the introduction of IPAs include:

  • How will the proposed agreements fit alongside existing partnership agreements between Councils and iwi? As it stands, many local authorities have existing agreements and/or understandings with local iwi (sometimes with a number of different iwi) and the concern is that the proposed IPAs will not adequately account for the processes already in place.
  • The proposed agreements are only intended to ensure Māori participation into the planning processes, meaning that Māori have limited opportunities to provide input into other Council processes.  As a result, some submitters claim that the proposed IPAs do not go far enough to ensure that Māori can fulfil their kaitiaki responsibilities in relation to the environment.

Those who oppose the introduction of IPAs raise the following points:

  • A democracy is founded on law-making being delegated to democratically elected representatives.  In allowing non-elected representatives positions of power without the usual ability to remove such representatives if required (such as in cases of abuse of power), the Bill circumvents basic democratic principles.
  • The iwi provisions propose to give a select group of citizens special legal status insofar as the environment is concerned, a concept which is incompatible with the principle of equality of citizens.
  • Positions of power should not be awarded based on race and there is a risk that these provisions will, without intending to do so, create animosity and/or a societal division by fostering racial disharmony.

It seems that local authorities and large organisations are in general support of the introduction of IPAs, mostly noting that the proposed provisions simply formalise current practices and processes for inclusion of Māori.  On the flipside, a large number of individuals raised concerns in respect of the proposed amendments and it seems there is a genuine fear (whether perceived or real) of what this would mean for society as a whole.

Limited ability for public participation and reduced appeal rights

There are a number of provisions in the Bill which limit the ability of the public to participate in both planning and consenting processes.  Examples include:

  • Prescribing which parties are eligible to be notified of different types of consent applications;
  • Widening the ability of local authorities to strike out submissions;
  • Precluding public notification of certain activities;
  • Refining the definition of “affected person” for the purpose of limited notification;
  • Limiting appeal rights in respect of certain decisions.

As with the proposed introduction of IPAs, the provisions in the Bill relating to restrictions on public participation have been met with both positive and negative feedback.

The positive feedback largely focuses on the idea that the proposed amendments will help reduce time, limit costs and improve certainty in a number of identified situations, which is of benefit to all stakeholders.

The negative feedback includes:

  • Public involvement is the cornerstone of the RMA, and any attempt at reducing consultation or removing the ability to appeal to the Environment Court will detrimentally affect the core of existing environmental legislation.
  • The combination of limiting public participation and restricting the ability to appeal decisions will have the effect of drastically reducing the number of stakeholders allowed to take part in any RMA process.  The purpose of ensuring time and cost efficient processes is likely to be able to be achieved with an “either/or” approach.
  • The proposed amendments would, rather than simplify, establish unnecessarily complicated procedures.
  • The opportunities for early stage involvement in plan-making processes do not adequately make up for the proposed constraints on notification and eligibility of submitters in the consenting process.
Conclusion

While this article is not based on a detailed review of all 675 submissions received, even a limited review makes it clear that the majority of the submitters are in general support of the government’s intention to amend existing resource management legislation by way of an amendment Act.  While a small number contend that a complete overhaul is required, the majority seem convinced that the Bill can result in improvements to the current legislation, provided that the Select Committee properly considers the submissions made.

It is equally clear that the Bill as drafted contains a number of rather contentious amendments, primarily in relation to the proposed changes to the RMA.  Time will tell whether the Select Committee will be able to adequately address the concerns raised.

The Select Committee’s report is due on 3 June 2016.

If you would like further information please contact Dale Thomas on 07 958 7428.

Amending your rules – Pitfalls for charities

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Changing the rules of a charity may seem fairly straightforward and in many cases the process is relatively simple.  However there are a number of pitfalls to look out for when changing your rules, particularly when there are members or beneficiaries who are entitled to vote on rule changes.

Getting started

Assuming the entity is a charitable trust, generally the starting point is the trustees deciding that certain provisions of the rules need to be changed.  The rules may be old-fashioned, may no longer be applicable or simply may not work in practice in 2016.  Some of the common rule changes we see are amendments due to changes in technology such as with meeting procedure to allow for electronic or telephonic meetings, and notice requirements being by email instead of by post or by fax.  Once the decision has been made to change the rules, the trustees must look at the process in the current rules.

Check the current rules

Always check your current rules as a starting point.  You must follow the process set out in the then current rules.  This assumes that the current rules are valid.

Follow the process very strictly.  In a recent High Court decision, the trustees learned the hard way about the powers of the court to invalidate rule changes.  In this case the rules were for elections, removal and appointment of trustees, and amendments to a charitable trust deed – the procedures were not followed correctly.  There was animosity between the trustees over the legitimacy of a 2012 trustee election, and a question as to whether the 2010 amendment to the rules was valid.  In 2010, the number of trustees was amended from ten to seven following a postal vote of those eligible to vote.  The early trust deed required a meeting to be held.  The issue for the Court to decide was whether the 2010 amendment could be made by way of a postal vote without holding a meeting, and whether the Court should exercise its discretion to remove the trustees.  The Court declared that:

  • The 2010 amendment was of no legal effect as the correct process was not followed;
  • The 2012 trustee election was invalid because the process in the 2005 rules was not followed; and
  • As a result, the trustees were removed.  The Court, on the basis of a recommendation from the Attorney General’s office, ordered interim and independent trustees to be appointed to arrange new elections.

This case shows the importance of strictly following the procedure in the rules and demonstrates that the High Court has the ability to invalidate historic actions if procedures have not been correctly followed.  The 2010 error led to future actions also being held to be invalid, leaving the organisation in this case in a position where it was unable to operate.

Notice requirements

It is important to ensure that all of those people who are required to be notified of any proposed amendment are correctly notified in accordance with the rules.  Trustees should be alert to those who must be notified of any proposed amendment.  For incorporated societies or charities set up for the benefit of members or iwi groups, it is likely that there is a requirement to notify members or beneficiary groups.

Some rules provide that any changes to rules must be advertised in certain publications.  The trustees should make sure that advertising is carried out in the correct publications and that any required timeframes are met.  Trustees also need to be aware of what is to be included in those notices.  For example, it may be a requirement that the specific proposed rules are included in the notice.

Keep records

Ensure that accurate and detailed minutes are kept which include a record of those people present at any meeting; quorum requirements, including whether the quorum was met; who voted in favour of the rule change and who voted against the rule change.  Where a number of people are voting, record how many people voted in favour of a change and how many people voted against.  A statement as to whether the rule change was passed should also be included.  It is often difficult to prove that a rule change was validly passed if there is no supporting documentation.  Keeping detailed records will assist if any changes are challenged in the future.

Registering rule changes – the paperwork

Assuming the new rules are validly passed, if your entity is an incorporated charitable trust, an incorporated society and/or a registered charity under the Charities Act 2005, the new rules must then be registered.  An incorporated charitable trust or an incorporated society must notify the Registrar of Charitable Trusts/Incorporated Societies of the rule changes.  A registered charity must notify the Charities Board (previously known as the Charities Commission).  If your organisation falls within both categories, the rule change must be notified with both organisations.

Conclusion

Rules of any organisation should be regularly reviewed to ensure that the rules reflect the current reality of that organisation.  Being aware of the required process and following that process is essential.  If in doubt, seek advice from your lawyer.

If you would like further information please contact Jessica Middleton on 07 958 7436.

Preserving our history – Heritage New Zealand Pouhere Taonga Act 2014

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The Heritage New Zealand Pouhere Taonga Act 2014 (“HNZPTA”) is about the identification and preservation of our historic and cultural heritage and replaces the Historic Places Act 1993.  Under the HNZPTA the Historic Places Trust has been renamed Heritage New Zealand Pouhere Taonga (“Heritage NZ”) to better reflect the Trust’s overall purpose.  This is to identify and protect all our cultural and heritage sites for the benefit and enjoyment of all New Zealanders for many years to come.

The changes to the HNZPTA are mainly focused on updating the old legislation and making the heritage consent application process faster and easier to follow.

In light of the Christchurch earthquakes of 2010 and 2011, the HNZPTA has also created an emergency archaeological authority to better manage the protection of our heritage and historic sites, and minimise any delays in decision-making when natural disasters occur.

What does the HNZPTA mean for property owners?

An archaeological site is defined in the HNZPTA as any place in New Zealand (including buildings, structures or shipwrecks) that was associated with pre-1900 human activity, where there is evidence relating to the history of New Zealand that can be investigated using archaeological methods.

When there is an archaeological site it is unlawful to modify or destroy the site without the consent of Heritage NZ.  This is the case even if:

  • The site is recorded by Heritage NZ or not; and
  • The land on which the site is located is:
    • Designated – which means the Council intends to use the land in the future for a particular work or project (i.e. building a road); or
    • The works to be undertaken are permitted under the District or Regional Plan; or
    • A resource or building consent has been granted for the works.

The HNZPTA provides that significant penalties can be imposed for unauthorised destruction or modification of such sites.

The term “modification” includes the following types of work:

  • Earthworks for forestry tracks, planting and harvesting;
  • Earthworks for residential developments, including building platforms, topsoil stripping and access ways;
  • Earthworks for stock races or farm tracks, fencing or landscaping;
  • Trenching for telephone, power, and waste disposal;
  • Road construction;
  • Quarrying; and
  • Building demolition.

If you are developing land and you come across anything on site during earthworks that may potentially be of heritage value, you must notify Heritage NZ and your local Council.  Any earthworks or construction that could affect the site must be stopped until Heritage NZ provides advice on how to proceed.

If you are concerned that your property may contain a heritage site, what should you do?
  • Contact Heritage NZ to see if your property is an historic site on the New Zealand Heritage List;
  • Contact your local Council, as a heritage site may be recorded in the Council’s property information file or LIM report; and
  • Check the title to the property, as Heritage NZ may have registered a heritage covenant or the Council may have registered a consent notice on the title to notify both current and future owners that the property contains a heritage site.

If your property does contain a heritage site that will be affected by any works/development you are planning, then you will need to apply to Heritage NZ for an authority to modify or destroy the site.  See this Heritage NZ webpage for information about obtaining an Archaeological Authority: http://www.heritage.org.nz/protecting-heritage/archaeology/archaeological-authorities

What is the New Zealand Heritage List?

The New Zealand Heritage List identifies New Zealand’s important historical and cultural heritage places and replaces the former Historic Places Register.  The aim of the list is to help better inform and notify owners, the public, community organisations, government agencies and Councils about significant heritage places.

The New Zealand Heritage List is divided into five parts:

  • Historic Places – such as archaeological sites, buildings and memorials;
  • Historic Areas – groups of related historic places, for example a geographical area with a number of properties or sites, a heritage precinct, or a historical and cultural area;
  • Wāhi Tūpuna – places important to Māori for their ancestral significance and associated cultural and traditional values;
  • Wāhi Tapu – places sacred to Māori in the traditional, spiritual, religious, ritual or mythological sense, such as maunga tapu, urupā, funeral sites and punawai; and
  • Wāhi Tapu Areas – areas that contain one or more wāhi tapu.
The role of local and territorial authorities

Councils, along with Heritage NZ, play an important monitoring role in the preservation and protection of heritage sites through District Plan policies and heritage listings under the Resource Management Act 1991.

Under the new Act, Heritage NZ must maintain, and supply Councils with, a list of all entries in the New Zealand Heritage List and heritage covenants that apply to their governing areas.  Councils, in turn, are required to make the list available for public inspection and should include heritage covenants and known heritage sites on the LIM reports for the affected properties.

How can we help?

The HNZPTA is an important piece of legislation that has changed the way heritage sites are managed in New Zealand.  If you require any further information about dealing with heritage sites or making an application to Heritage NZ please contact our Resource Management or Property teams.

If you would like further information please contact Dale Thomas on 07 958 7428.

Dying without a Will

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Introduction

When a person dies without a Will, administration of the estate is more complicated than if the person had left one.  Dying without a Will is called “dying intestate”.  Due to the complex nature of dealing with an intestate estate, additional information is required throughout the process which can cause significant delays in administering the estate.  In many cases this will delay the distribution of the estate.

Letters of Administration

Where the deceased did not leave a Will (died intestate), the estate is small, there is no interest in land and there are no assets worth more than $15,000, the deceased’s next of kin is able to deal with the estate.  However, if the deceased died intestate and owned land or assets exceeding the value of $15,000 then Letters of Administration are required to administer the estate.

Letters of Administration is a similar process to an application for Probate (where the deceased left a Will), in that the administrators need to apply to the High Court to be appointed as administrators.  However, the Letters of Administration process takes much longer than the Probate process.  Firstly, it must be established that the deceased did not have a will and enquiries must be made to ascertain whether a deceased person has left a will.  The solicitor acting for the estate usually advertises in Law Talk (the leading New Zealand legal magazine).  The size of the estate must then be established to determine whether an application for Letters of Administration is required.

The Administration Act 1969 governs who may apply to be appointed as an administrator of an estate.  The High Court Rules specify the order of priority as to who can apply to be administrator(s). The descending priority is as follows:

  • The surviving spouse;
  • The children of the deceased;
  • The parent(s);
  • Brothers and sisters;
  • Grandparents;
  • Uncles and aunts.

Once it has been decided who is going to apply, consent must be obtained from those with an equal or greater right to apply.  For example, if the person did not have a spouse/partner but did have children, if one or more of them want to apply to be administrator(s) of the estate then all of the other children would need to consent to the application.

A Status of Children search will also need to be carried out by the Department of Internal Affairs and a certificate showing the results of the search must be attached to the application for Letters of Administration.

Once Letters of Administration has been granted by the High Court, the deceased’s estate will be administered in a similar way as with Probate.  However, as the deceased did not leave a Will, the Administration Act 1969 determines who is entitled to a share of the estate and the size of that share.

Distribution in accordance with the Administration Act 1969

Under the Administration Act 1969, an estate does not pass to the surviving spouse.  If there is a surviving spouse and surviving children, the spouse will inherit the first $155,000 of the estate, chattels and a third of the balance of estate.  Two thirds of the estate is inherited by the surviving children in equal shares.  Where there are no children, the spouse would receive the first $155,000 of the estate, chattels and two thirds of the residue.  The deceased’s parents would receive one third of the residue.  The Administration Act 1969 provides for every possible scenario in order to determine who is entitled to receive a share of an estate and the size of that share. In essence, where a person dies without a Will, the government decides how assets are to be divided between family members.

Letters of Administration with Will annexed

Letters of Administration with Will annexed are applied for where the deceased did leave a will but the executors named in that will either died before the deceased or are unwilling or unable to act as executors.  The Will is attached to the Letters of Administration application and once the administrator has been appointed by the High Court, he/she must administer the estate in accordance with the terms of the will.

Resealing of Letters of Administration grants in New Zealand

Dying without a Will where the deceased owned overseas assets can also be extremely complex and cause significant delay.  Letters of Administration must be granted in the country where the original Will is held.  The original copy of those Letters of Administration must then be filed in the High Court of New Zealand together with an application asking the High Court to reseal the grant of Letters of Administration.

The sealed Letters of Administration has the same force, effect and operation in New Zealand as if originally granted by the New Zealand High Court, and the administrator must perform the same duties and be subject to the same liabilities as if the grant had originally been made in New Zealand.   However, because the grant must first be obtained in another country, this creates delay in allowing the administrator to deal with the overseas assets owned by the deceased.

Conclusion

Dying without a Will can be a messy and costly business for those left behind.  The Administration Act 1969 determines who can apply for Letters of Administration to administer an estate and also how assets are to be divided between family members.  This may not be in accordance with the deceased’s wishes, which highlights the importance of having a Will in place to ensure a more simple way of giving effect to ones wishes.

If you would like further information please contact Amanda Hockley on 07 958 7451.

Tidal Energy decision and the potential impact on New Zealand banking practices

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Tidal Energy Limited v Bank of Scotland [2014] EWCA CIV 1107 considered the role of banking practice when payments are executed through the clearing house automated payment system (“CHAPS”).  The English Court of Appeal by majority held that banks are not required to check that the account name aligns with the account number when processing payments.  Loss from any errors will fall squarely on the customer.  This article assesses the Court of Appeal’s decision, and provides a warning for lawyers and clients alike.

Facts

Tidal Energy Limited (“Tidal”) had an obligation to pay one of its suppliers, Design Craft Limited (“Design Craft”) the sum of £217,781.57.  A third party, holding themselves out as a representative of Design Craft, contacted Tidal and supplied payment details so Tidal could repay the required amount.  Tidal, by CHAPS transfer, effected the payment to what Tidal thought was Design Craft’s account by completing the four boxes on the electronic CHAPS transfer form:  sort code, account number, bank and branch name, and account name.

The money was successfully transferred from Tidal’s account with the Bank of Scotland to the Barclays account details that Tidal had been provided with.  However the account did not belong to Design Craft; the account was in the name of a fraudster, “Child Freedom Limited”.  Barclays signalled to the Bank of Scotland that it had received the money and payment was completed, and therefore debited £217,781.57 from the Bank of Scotland.  The Bank of Scotland then debited £217,781.57 from Tidal’s account.

One week later, Tidal became aware it had been the victim of a fraud when Design Craft informed Tidal it had not received payment.  By this time, all of the money had been withdrawn by the fraudster.

The issue for the Court of Appeal to consider was whether the Bank of Scotland had the authority to debit Tidal’s account, given that the account name provided by Tidal did not match the account number provided.

Ruling

The majority by 2-1 held that the Bank of Scotland had the authority to debit Tidal’s account despite the payment details on the transfer form being incorrect.

The purpose of the CHAPS system is to achieve rapid, same day payment (usually in less than 90 minutes according to expert evidence in the case).  CHAPS is most commonly used in settlement transactions.  The majority held that as the purpose of CHAPS is to achieve rapid payment, and if account names had to be manually checked each time a CHAPS payment was made, this would not be possible.  Because Tidal contracted with the bank to execute the payment using CHAPS, and it was banking practice that the account name was not checked in CHAPS transfers, the responsibility was on Tidal – the customer – to ensure all of their details were correct.

This case reinforces the rule established in the nineteenth century case of Hare v Henty that “A man who employs a banker is bound by the usages of bankers”, even if that practice is unknown to the customer.  The customer therefore, by execution of the CHAPS form, authorised the bank to make the transfer in accordance with usual banking practice.  As Lord Dyson MR pointed out, the court should avoid a construction of the form which is inconsistent with business common sense; such a construction cannot have been said to be the intention of the parties.

Discussion

Great difficulties would arise if banks were only authorised to make payments when there was correspondence with all four unique identifiers.  For example, if “A B Smith” was entered in account name instead of “Adam Brian Smith” which was the name on the bank’s record, the bank would not be authorised to make the payment, even if the person referred to was clearly correct.  This could have significant consequences for commercial transactions, and may cause parties to fail to meet settlement deadlines.

However, the practice should be made known to customers when transactions are entered into.  Currently the banking practice that banks will not check account names is not made known to the customer when submitting details into the form, nor is there anything in the form or the admissible background to alert the reasonable customer to this practice.  It may be prudent for banks to update their electronic payment forms to ensure that customers take extra care when making payments, as it is clear from this case that it is the customer that will bear the loss of any mistakes or inaccuracies.

Warning for lawyers and clients

This case should act as a warning for both lawyers and clients in New Zealand alike when using electronic payment mechanisms, in particular CHAPS or an alternative.  As Tidal found out, for banks it is only sort codes and account numbers that matter;  therefore these must be the focus for both lawyers and clients.  Mistakes must be avoided.  Before any payment is made, it is the responsibility of the customer, and not the bank, to ensure the unique identifiers align.  If there are errors, it is the party making the payment that will bear the loss; the bank is not going to be double-checking account names.

A second warning from the case is that clients need to ensure payment details come from a trusted source.  Have you ever dealt with the party holding themselves out as the company before?  If not, care must be taken.

For lawyers, this case provides an incentive to review internal payment systems, and to ensure that adequate mechanisms are in place to avoid loss.  This could involve checking with the bank that the account specified relates to the name that you have been given, in particular if making a payment to a new client.

If you would like further information please contact Laura Monahan on 07 958 7479.

Contract and negligence claims – How late is too late?

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Every time a lawyer is approached by a client about a dispute that they need assistance with, one of the first questions that should be asked is whether or not there are any limitation periods that may apply.  A limitation period can be an absolute defence, which could either prevent a plaintiff from making a claim or get a defendant out of a claim.

There are various limitation periods to consider.  The main “go tos” for civil matters are the Limitation Act 1950 (“1950 Act”) and the Limitation Act 2010 (“2010 Act”).  In contract claims or tort claims (e.g. negligence) the Act that will apply will depend on when the act or omission the claim is based on occurred.  If it occurred on or before 31 December 2010 then it will be the 1950 Act that will apply.  If it occurred on or after 1 January 2011, the 2010 Act will apply.  Determining which Act will apply is a key first step as there are certain advantages to a plaintiff of having a claim fall under the 2010 Act.

1950 Act

Under the 1950 Act, the limitation period for contract or tort claims is six years “from the date on which the cause of action accrued”.  The date the cause of action accrued is different in each case.  For example, for a claim based on breach of contract, the period starts from the date of breach, regardless of whether or not any loss has been suffered at that date.  With negligence, however, the limitation period starts from the date damage is caused as a result of a breach of duty.

There are limited exceptions under the 1950 Act.  Except in the case of specific acknowledgements or part payments that may have been made, the only exception in the 1950 Act is in the case of fraud or mistake.  If fraud or mistake is proven, the limitation period does not begin to run until the plaintiff has discovered the fraud or the mistake, “or could with reasonable diligence have discovered it”.  It is difficult to prove fraud or mistake to the extent necessary for the limitation period under the 1950 Act to be extended – there is a high test to meet.  Fraud, in particular, is a serious allegation, which should not be made without strong evidence.

2010 Act

With the 2010 Act, however, although the limitation period is still six years for claims in contract and tort, the Act also includes a “late knowledge date”, which is the date on which the claimant “gained knowledge … or ought reasonably to have gained knowledge of” certain facts.  These include the fact that the relevant act or omission has occurred, and that either the defendant was responsible in some way, or involved.  If the late knowledge date applies, this will be the case even if the six year limitation period has expired.  There is, however, a 15 year longstop limitation period, which means that a claim cannot be brought after 15 years have passed from the date of the relevant act or omission (“2010 Act longstop”).

Limitation periods in construction matters

Aside from determining which Limitation Act applies, there can also be issues with reconciling the general limitation periods under the Limitation Acts with limitation periods prescribed in other Acts.  For example, in construction matters, there are two other relevant additional limitation periods to consider – the 10 year longstop limitation period in the Building Act (“the Building Act longstop”) and the 10 year eligibility period in the Weathertight Homes Resolution Services Act.

The Building Act specifically states that the 2010 Act applies to civil proceedings arising from “building work” and the performance of a function under the Building Act (or a previous Act) relating to building work.  Therefore, on the face of it, the limitation periods for contract and negligence claims of this nature are no different to other types of contract and negligence claims – six years from the date of breach/the date of damage (depending on late knowledge, which, as noted, extends the limitation period for up to 15 years after the date of the relevant act or omission).  What is not clear from the Building Act, however, is how that fits with the Building Act longstop provision.  That is the provision in the Building Act that “no relief may be granted in respect of civil proceedings relating to building work if those proceedings are brought against a person after 10 years or more from the date of the act or omission on which the proceedings are based”.

Essentially, the New Zealand Courts have applied a “reasonable discoverability” test to negligence claims involving latent building defects.  With those claims, because they are to do with economic loss, time runs from the date that the defect or damage is discovered, or should reasonably have been discovered.  That is because that is when the value of the building is affected.  The Building Act longstop was created to put a limit on how late a claim could be made based on the reasonable discoverability test.  The 2010 Act longstop does not affect this.

Finally, there is also the 10 year eligibility period under the Weathertight Homes Resolution Services Act (“WHRS Act”).  This is essentially to do with whether or not a leaky building claim can be brought in the Weathertight Homes Tribunal – a specialist tribunal set up to resolve leaky building claims faster than possible in the Courts.   To be eligible, the dwellinghouse/unit, for example, must have been “built” (or the relevant alterations must have been made) before 1 January 2012, and within 10 years before an application for a WHRS assessor’s report is made (which is the first step in the Tribunal process).

There has been much debate around when a property is “built” for the purposes of the WHRS Act.  This has resulted in numerous WHRS Act applications being denied, at least initially, resulting in the need for further submissions/litigation in order to get claims accepted.  However, the Supreme Court has recently determined that the eligibility period under the WHRS Act should only exclude claims that are barred by the longstop period.  This will result in fewer issues around eligibility.

Conclusion

As can be seen from this article, figuring out which limitation period(s) apply to a particular matter is not necessarily straightforward.  Whether you think you may have a claim or a claim has been made against you, we recommend that you seek legal advice to make sure there are no limitation periods that apply.  We can assist with this and also guide you through making or defending claims under the Building Act and WHRS Act.

If you would like further information please contact Daniel Shore on 07 958 7477.

Is it time to wind up the family trust?

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Introduction

Despite increasing enquiries from clients as to whether trusts still work, the short answer is “yes”, but what are the reasons to keep one?

You may have established your trust to protect assets against potential claims by creditors or to provide on-going financial support to a disadvantaged family member?  Another reason may have been to minimise your personal assets so that you could increase the possibility of receiving a residential care subsidy in the future?  Whatever the reason, it may no longer be relevant due to changes in the law, as well as changes in your individual circumstances.

Reasons to keep a trust

Trusts are still very much a relevant tool used to protect assets from unwanted claims.  Despite changes to the law over the years there are still many benefits in keeping a family trust and/or establishing a family trust.  Some of these reasons are as follows:

  • Protection of assets against claims from creditors – for example, to protect the family home from the potential failure of a business venture;
  • To help to save or to set aside money for specific purposes, such as a child or grandchild’s education;
  • To manage the finances of a family member who may not be able to do so themselves (perhaps due to health issues);
  • To ensure your children (and not their partners) are protected in relationship property disputes and to keep separate any property that they are inheriting;
  • Protecting children that either have been, or are at risk of being, declared bankrupt.  This will allow the trustees to delay distribution of that child’s share until after the child is discharged from bankruptcy;
  • Securing “testamentary freedom”.  Although wills are important, a will-maker has no ultimate control over his/her estate (no matter how carefully the will is drafted) due to the provisions of the Property (Relationships) Act 1976 that apply to wills and also the Family Protection Act 1955.

A change in personal circumstances may diminish the need for a family trust and the on-going maintenance it requires may seem like an unnecessary expense.  However, winding up your trust may expose your assets to risk and the protection gained from establishing the trust in the first place may be lost.

Some risks and responsibilities associated with trusts

There are numerous responsibilities associated with establishing and maintaining a family trust, in particular if you remain as a trustee, such as meeting regularly with the other trustees, keeping minutes and general trust administration.

If a trust is not set up correctly or for a legitimate purpose there is a risk that a trust may be declared a sham and potentially “busted open” by the courts.  At the very least it will be more susceptible to unwanted claims.  A trust may be declared a sham when the settlor retains too much control over the trust property.  This is because the purpose of creating the trust is to vest ownership of property in the trustees.

Additionally, a trust will not necessarily protect against claims under the Property (Relationships) Act 1976.  Property that is disposed of into a trust during the relationship or in contemplation of the relationship will still be considered “relationship property” under the Property (Relationships) Act 1976.  That property will then be subject to the equal sharing rule.  The court has additional power under the Property (Relationships) Act 1976 to look past a trust if the effect of the dispositions is to defeat the rights of one of the parties under the Act.

Winding up a trust

When trusts are wound up, the general drivers seem to be that the trust is no longer required as administration costs are too high relative to the recognised benefits, and more recently the anticipated residential care subsidy is not available and so a “trust reversal” is being undertaken before a new application is made.  Other reasons a trust may no longer be useful are as follows:

  • There are no longer tax advantages that were prevalent at the time when the trust tax rate was lower than the highest personal tax rate;
  • The purposes of setting up a trust in the first place was creditor protection and the apparent risk no longer exists;
  • Settlors/trustees are emigrating and there is concern about double taxation.

These are just some examples of ways in which life and the law can change and in doing so, mean that a trust is not as useful as it once was.  However, the costs involved in winding up a trust can be significant and will depend on what is required based on individual circumstances.  There may also be tax implications for winding up the trust.

Whatever the reason for keeping a trust or alternatively winding up the trust, it is important to keep asset protection arrangements under review and update these arrangements for fairness, the passage of time and important events in one’s life, such as marriage, having children, and getting divorced (just to name a few!).  Reviewing asset protection arrangements regularly will ensure that a trust remains fit for its purpose, whatever that purpose may be.

If you would like further information please contact Phil Harris on 07 958 7425.

Non-party discovery and the implications of the Vector Gas decision

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General overview of discovery

Discovery is a significant part of the litigation process in which the parties disclose relevant information to each other prior to the commencement of the trial.  Although parties are often unwilling to provide information that will be useful for the other side, their discovery obligations will usually compel them to disclose it, as there are limited categories of documents that are exempt from being disclosed.  Part of our role as lawyers is to ensure that these discovery obligations are clearly understood by our clients.

In a High Court proceeding, discovery obligations are imposed on the parties to a dispute by way of a discovery order issued by a Judge under the High Court Rules (“HCR”).  Under a standard discovery order, obligations will include making a reasonable search for documents, taking early steps to preserve relevant documents and co-operating with other parties to ensure the burden and cost of discovery is proportionate to the issues at stake.  It is important to ensure that the discovery order is complied with satisfactorily, as failure to meet the obligations may result in documents being ruled inadmissible or parties being held in contempt of court.

When non-party discovery is typically required

Although the discovery obligations are intended to apply only to the parties to a proceeding, sometimes a party will struggle to articulate their claim or defend their position without having access to documents which are held by somebody who is not a party to the proceeding.

Non-party discovery is a useful tool for obtaining relevant information from somebody that is not a party to the dispute.  Although non-party discovery represents an intrusion on the privacy of the non-party, who is just a bystander to the proceeding, it is an intrusion that is necessary in order to enable litigants to present their case effectively.  The costs for the non-party of producing the information are typically met by the party effecting the order.

It is common in overseas jurisdictions for non-party discovery to occur by way of subpoena, however in New Zealand non-party discovery can also be provided for by an order for discovery both before proceedings are commenced or after proceedings are commenced.  The test under HCR 8.21 is whether the material would be discoverable if the non-party was in fact a party to the proceeding.  In other words, would the information be considered relevant and therefore discoverable if it were held by a party to proceedings?

Case summary

It is often upsetting to be the recipient of a non-party discovery order, particularly when the non-party is forced to disclose information that is particularly valuable or private.

Vector Gas and Ors v Contact Energy Limited and Ors [2014] NZHC 3171 was a case where a non-party discovery order was made that related specifically to sensitive information about market prices in the energy generation industry.

The applicants were all parties to the Kapuni Gas Contract (the “Contract”) and the respondents were other participants in the gas market in New Zealand.  The Contract provided for price adjustments and the applicants, being unable to agree on a price, appointed arbitrators to set a fair and reasonable price instead.  An application was made pursuant to the Arbitration Act 1996, which imported the test under HCR 8.21, to have the respondents reveal the prices which they had set in analogous contracts (the “Information”). Unsurprisingly, the respondents opposed this application.

Re Dickinson [1992] 2 NZLR 43 was the leading New Zealand case on non-party discovery which saw the Court unanimously decide in favour of disclosure, despite the information being sensitive.  In applying this reasoning to an order under HCR 8.21, Justice Kos emphasised that Re Dickinson was intended to create principles of general application and as such could not be confined to its own context.

Justice Kos also read into NCR 8.21 an implied qualification that the disclosure must be necessary.  In other words, available sources must be incomplete or unreliable and the documents sought must make a real difference as opposed to a marginal one.

The “apparent relevance” test from Santos Ltd v Pipelines Authority of South Australia (1996) 66 SASR 38 (SCSA) was then applied to the Information.  The premise of this test is that when considering an application for non-party discovery, the Judge will often not be in a position to determine the ultimate question of relevance and can only assess the apparent relevance of the documents sought through reference to the issues in the dispute and by taking into account the competing contentions of the parties.

Finally, adequate confidentiality measures must be put in place before an order will be made.  Justice Kos considered that as long as each individual permitted to view the Information was recorded as an approved person and compelled to sign a confidentiality undertaking that restricted discussions about, or dealings with, the Information, this would be adequate protection.

Justice Kos concluded that each of the tests for non-party discovery was satisfied and that an order should be made.  Any remaining confidentiality risks must be tolerated in the interests of justice.

Practical tips for people that are not a party to proceedings

This case demonstrates that the apparent relevance test adopted in New Zealand applies equally to information sought by way of an order under HCR 8.21 as it does to information sought by way of subpoena, even when the court’s role is only to assist in an arbitration.

From a more global perspective, the New Zealand courts have demonstrated a consistent approach in making sensitive, yet necessary, information held by a non-party discoverable, provided the information is protected by adequate confidentiality protocols and the burden it would impose on the non-party is not unreasonable.

Non-parties should remain vigilant of the wide scope of an order made under HCR 8.21 and avoid contesting an order simply as a knee-jerk response.  Conversely, this case highlights that non-party discovery is an avenue of discovery that litigants should consider to ensure that they have all relevant information before putting forward their case at trial.  Both litigants and non-parties should bear in mind that the information sought must be necessary and that the costs of discovery must be proportionate to the issues at stake.

If you would like further information please contact Daniel Shore on 07 958 7477.

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