Chief Executive of Land Information New Zealand v FFG Investment Ltd
[2019] NZHC 3293
•13 December 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-2115
[2019] NZHC 3293
BETWEEN THE CHIEF EXECUTIVE OF LAND INFORMATION NEW ZEALAND
Plaintiff
AND
FFG INVESTMENT LIMITED
First Defendant
GRAND SKY LIMITED
Second Defendant
Hearing: 11 December 2019 Appearances:
K R A Muirhead and B S Rorrison for Plaintiff E Tonkin and G Holm-Hansen for Defendants
Judgment:
13 December 2019
JUDGMENT OF LANG J
[on civil penalties imposed under the Overseas Investment Act 2005]
This judgment was delivered by me on 12 December 2019 at 11 am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date……………
CHIEF EXECUTIVE OF LAND INFORMATION NEW ZEALAND v FFG INVESTMENT LTD [2019] NZHC
3293 [13 December 2019]
[1] The plaintiff, the Chief Executive of Land Information New Zealand, is the Regulator appointed under s 30 of the Overseas Investment Act 2005 (the Act) to administer and supervise the operation of the Act.
[2] The two defendants in this proceeding have acknowledged their liability for breaches of their obligations under the Act by acquiring interests in sensitive land without the consent of the Overseas Investment Office (OIO). The parties have reached agreement regarding the civil penalties to be paid by the defendants to reflect these breaches. The Court is now required to be satisfied that the agreed penalties are within the proper range.
Background
[3] The factual basis on which the civil penalties are to be assessed is contained in an agreed summary of facts provided to the Court for that purpose. The factual summary below is drawn from that document.
The parties
[4] The first defendant, FFG Investment Limited (FFG), was incorporated in New Zealand in September 2013. At all material times Mr Yuntao Cai and his wife Yijun Feng, both of whom are New Zealand residents, have owned 60 per cent of the shares in FFG.
[5] Mr Fei Wen held the remaining shares in FFG. He is a Chinese National resident and is not ordinarily resident in New Zealand. Mr Wen is therefore an “overseas person” for the purposes of the Act. The fact that Mr Wen held 40 per cent of the shares in FFG meant that FFG was also an overseas person for the purposes of the Act. A company will be an overseas person for the purposes of the Act if more than 25 per cent of its shares are held by an overseas person.1
[6] The second defendant, Grand Sky Limited (Grand Sky), was incorporated in New Zealand in October 2015. Until 13 January 2016 the shares in the company were held by Mr Wen, Mr Cai and Ms Feng in the same proportions as they held shares in
1 Overseas Investment Act 2005, s 7(2)(c)(i).
FFG. This meant that, until 13 January 2016, Grand Sky was also an overseas person for the purposes of the Act because Mr Wen held more than 25 per cent of the shares in the company.
[7] On 14 January 2016, Mr Wen reduced his shareholding in the company to 24 per cent and Mr Cai and Ms Feng increased their joint shareholding to 76 per cent. This resulted in Grand Sky ceasing to be an overseas person for the purposes of the Act as from that date.
Purchase of the property
[8] On 2 June 2013 Mr Cai entered into an agreement to purchase 2.8734 hectares of residential land in Birkenhead (the property). The property is deemed to be “sensitive land” under the Act because it adjoins the Kauri Glen Scenic Reserve. That reserve is listed both in the Reserves Act 1977 and the list kept by the Regulator under s 37 of the Act. Any overseas person wishing to acquire the property was required to obtain consent to the acquisition in the manner prescribed by the Act.2
[9] The purchase price for the land was initially $4.9 million. On 14 June 2013, however, the agreement for sale and purchase was declared unconditional on the basis that the purchase price to be paid for the property was reduced to $4.76 million.
[10] Mr Cai had the right under the agreement for sale and purchase to nominate a purchaser to settle the agreement. On 10 September 2013, he entered into a deed of nomination with FFG under which he nominated FFG to settle the agreement for sale and purchase. FFG duly completed the purchase of the property on 2 October 2013.
[11] The fact that FFG was deemed to be an overseas person for the purposes of the Act meant it was required to obtain consent under the Act before it acquired the land. It failed to do so and thereby breached s 42 of the Act when it executed the deed of nomination and when it became the legal owner of the land following settlement.
2 Overseas Investment Act 2005, s 10(1).
[12] Between October 2013 and May 2015 FFG undertook the development of a 27 lot subdivision on the property. The development was subject to significant cost overruns and delays. This ultimately led FFG to offer to terminate the agreements it had entered into for the sale of sections in the proposed subdivision. All but two purchasers accepted the termination of their agreements and obtained refunds of their deposits. The purchasers of two sections did not accept the offer of termination and those agreements remained on foot.
[13] On 18 December 2015 Grand Sky entered into an agreement to purchase the property from FFG for $7.5 million. The fact that Grand Sky was an overseas person for the purposes of the Act meant it was required to obtain consent under the Act before it acquired the property from FFG. Grand Sky had not obtained such consent when it agreed to buy the property from FFG and thereby acquired an equitable interest in the land. Grand Sky completed the purchase of the property from FFG on 27 January 2016. By the stage it was no longer an overseas person for the purposes of the Act because of the rearrangement of the company’s shareholdings that was undertaken on 14 January 2016.
Approach to fixing civil penalties
[14] Where the Court is satisfied a person has contravened the requirements of the Act, it may make a variety of orders. These include an order requiring the person in breach to dispose of rights or interests in the property in question.3 The Court may also order the person in breach to pay a civil penalty.4
[15]Section 48(2) of the Act states that a civil penalty must not exceed:
(a) $300,000, or
(b)Any quantifiable gain (for example, the increase in the value since acquisition) by the person in breach in relation to the property for which a consent should have been obtained; or
3 Overseas Investment Act 2005, s 47.
4 Overseas Investment Act 2005, s 48.
(c)The cost of remedying the breach of the condition; or
(d)The loss suffered by a person in relation to a breach of condition.
[16] There have now been several cases in which the Court has been required to fix civil penalties under s 48 of the Act. These include Chief Executive of Land Information New Zealand v Carbon Conscious New Zealand Ltd (Carbon Conscious), Chief Executive of Land Information New Zealand v Tang, Chief Executive of Land Information New Zealand v BCH Investments Ltd, Chief Executive of Land Information New Zealand v Agria (Singapore) PTE Ltd and Chief Executive of Land Information New Zealand v Hong.5
[17] In each of these cases the Court has adopted an approach similar to that used to fix pecuniary penalties under the Commerce Act 1986. This requires the Court to fix a starting point by assessing the seriousness of the breach taking into account relevant aggravating and mitigating factors that are specific to the breach. The Court then has regard to any factors specific to the defendant that may warrant an uplift in, or discount from, the starting point.6
[18] The primary purpose of civil penalties imposed under the Act is deterrence of both the person in breach and those who might be tempted to breach the requirements of the Act in a similar way in the future.7
The Regulator’s assessment
[19] The Regulator accepts that the two breaches in the present case occurred as part of the same property development. It is nevertheless a significant aggravating
5 Chief Executive of Land Information New Zealand v Carbon Conscious New Zealand Ltd [2016] NZHC 558, Chief Executive of Land Information New Zealand v Tang [2018] NZHC 382, (2018) 19 NZCPR 460 [Tang], Chief Executive of Land Information New Zealand v BCH Investments Ltd (BCH) [2019] NZHC 1630 [BCH], Chief Executive of Land Information New Zealand v Agria (Singapore) PTE Ltd [2019] NZHC 514 [Agria] and Chief Executive of Land Information New Zealand v Hong [2019] NZHC 1561 [Hong].
6 This adopts the approach taken in Commerce Commission v Alstom Holdings Ltd SA (2009) NZCCLR 22 (HC) at [14].
7 Carbon Conscious, above n 5, at [24]; Tang, above n 5, at [19]; Agria, above n 5, at [40] and Hong,
above n 5, at [19].
feature that entities controlled by the same parties failed on two separate occasions to obtain the required OIO consent.
[20] The Regulator also accepts, however, that the breaches were not deliberate and that neither defendant made any quantifiable monetary gain from either transaction. I assume this is because the cost of the subdivision ultimately exceeded the sums received from the sale of sections. Furthermore, Grand Sky was no longer deemed to be an overseas person by the time it acquired legal title to the land. Its culpability lay in the fact that it acquired an equitable interest in the land as purchaser without first obtaining consent under the Act.
[21] In addition, the property that the defendants acquired is not deemed to be sensitive land because of its own qualities or significance. Rather, it has that status solely because it is situated adjacent to land having particular significance.
[22] Taking these factors into account the Regulator has suggested a starting point of $103,000 for FFG and a starting point of $54,000 for Grand Sky.
[23] Neither defendant has committed earlier breaches of the Act and there are no other reasons to justify any uplift of the starting point to reflect aggravating factors personal to the defendants.
[24] Both defendants are, however, entitled to rely on several mitigating factors. The most significant of these is that both have cooperated fully in the Regulator’s investigation. They have also acknowledged liability at an early stage and agreed not only to the summary of facts but also to the penalties they should receive. Furthermore, both defendants have complied with all requests by the Regulator for information and documents relevant to the impugned transactions. Mr Cai also voluntarily attended an interview in Wellington to assist in the Regulator’s investigation and he facilitated the investigation by arranging for Mr Fei Wen to be interviewed in China.
[25] Finally, Grand Sky is entitled to additional credit for the fact that Mr Cai entered into an enforceable undertaking on its behalf under which Grand Sky agreed
to retain sufficient funds in trust from the sale of its sections to enable it to meet any civil penalty that might be imposed by the Court. Taking those factors into account the Regulator suggests that a discount of 20 per cent is appropriate in the case of FFG and that Grand Sky should receive a discount of 25 per cent. These would produce an end civil penalty of $80,500 in the case of FFG and $40,500 for Grand Sky.
[26] Counsel for the defendants does not question either the methodology used by the Regulator in assessing the quantum of the civil penalty or the end result.
Decision
[27] Any comparison between starting points selected in other cases is necessarily of limited value because the selection of a starting point is a fact specific exercise. Counsel nevertheless agree that the overall nature and gravity of the breaches in the present case justify a starting point sitting between those selected in Carbon Conscious and Tang. A starting point of $80,000 was selected in Carbon Conscious whilst starting points between $130,000 and $270,000 were adopted in Tang.
[28] The breaches in the present case are more serious than those in Carbon Conscious because the value of the land in the present case is greater. The culpability of the defendant in Carbon Conscious was also reduced by the fact that it had taken legal advice before entering into the transaction. The breaches in the present case are less serious than those in Tang because the value of the land in that case was greater and the fact that the land in question was coastal land meant it was sensitive land in its own right. Taking all these factors into account I accept that the starting points of
$103,000 for FFG and $54,000 for Grand Sky are within the appropriate range.
[29] Similarly, the discounts suggested for both defendants sit comfortably alongside those applied in other cases to reflect mitigating factors of a similar type. There can be no dispute that the defendants have co-operated fully both in the Regulator’s investigation and in resolving the present proceeding in the most economical and efficient way. Furthermore, Grand Sky is entitled to additional discount for the efforts it has made to ensure funds will be available from which its civil penalty can be paid. Discounts of 20 and 25 per cent respectively are amply justified having regard to these factors.
[30] It follows that I find the end civil penalties to be within the available and appropriate range.
Result
[31] FFG is ordered to pay a civil penalty in the sum of $82,500 and Grand Sky is ordered to pay a civil penalty in the sum of $40,500.
Costs
[32] The parties have agreed that the defendants will be jointly and severally liable to pay costs to the Regulator in the sum of $10,000. I make an order accordingly.
Lang J
Solicitors:
Crown Solicitor, Auckland Hesketh Henry, Auckland
5
4
1