Financial Markets Authority v Hotchin HC Auckland CIV 2010-404-8082

[2011] NZHC 1987

SUPPRESSION ORDERS IN ACCORDANCE WITH PARAGRAPH 24 & 25

OF THIS JUDGMENT

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-8082

UNDER  The Securities Act 1978 and Part 18 of the

High Court Rules 2009

IN THE MATTER OF     an application under section 65A of the

Securities Act 1978

BETWEEN  THE FINANCIAL MARKETS AUTHORITY

Plaintiff

ANDMARK STEPHEN HOTCHIN First Defendant

ANDKA NO 4 TRUSTEE LIMITED Second Defendant

ANDKA NO 3 TRUSTEE LIMITED Third Defendant

Hearing:         26 September 2011

Appearances: K McDonald QC, P Courtney, G Allan for plaintiff

R B Stewart QC and N Gedye for first defendant
J Long and S Bonney for second and third defendants

Judgment:      1 December 2011

JUDGMENT OF WINKELMANN J

This judgment was delivered by me on 1 December 2011 at 10 am pursuant to

Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

FINANCIAL MARKETS AUTHORITY V HOTCHIN HC AK CIV 2010-404-8082 1 December 2011

[1]      The first defendant, Mr Mark Hotchin, applies to vary or rescind interim asset preservation orders made in my judgment of 6 May 2011.  Those orders continued earlier orders made in December 2010 in response to an application brought by the Financial Markets Authority (FMA).  The interim orders were made for the purpose of ensuring that the rights of “aggrieved persons”, as defined in the Securities Act

1978, were not frustrated through the assets, the subject of the orders, being dealt with in a way that renders them unavailable to meet claims against Mr Hotchin by aggrieved persons.

[2]      The application for rescission is brought on the basis that circumstances have changed significantly since the orders were made, so that it is no longer necessary, desirable,1  or indeed just, to maintain the orders.   Mr Hotchin says that the FMA investigation into possible breaches of the Securities Act by Mr Hotchin  in his capacity as a director of Hanover Group companies, has taken far longer than originally anticipated.   He expressly does not seek rescission of the orders on the grounds of excessive delay by the FMA, because he is concerned that the FMA not be pressured into rushing its investigation by such an application.  Rather he wants

the FMA to take the time to consider all of the material he places before it, and if it does he believes that should answer the FMA’s concerns.  However he says that the delay is material when measuring how proportionate the orders are to the risk.  The delay has meant that Mr Hotchin has remained subject to intrusive orders for nearly a year, all because of the prospect, rather than the certainty, of proceedings ever being issued against him.

[3]      Mr Hotchin says that the existing orders are preventing him from conducting business because of the stigma that attaches to him while the orders remain in place. Although he accepts that existing assets,2  subject to the preservation orders, should remain subject to some sort of restraint, he suggests that this should be achieved by him providing undertakings to the Court and the FMA, rather than by court orders. Moreover,  he  seeks  permission  to  sell  or  pledge  all  of  those  assets  (with  the

exception of any interest he has in a property in Paratai Drive, Auckland) to raise sufficient money to pay current creditors [suppressed material].   Once those debts are paid, his net asset position will be such that there is no point in maintaining the orders.  This is so even if his interest in the Paratai Drive property is included, as much of the money he spent on that property came from a family trust, and is money he must repay.

[4]      Mr Hotchin also argues that the existing orders only attach to assets held or controlled by him at the time the orders were made, and that they do not cover future acquired property and money.   He seeks clarification by way of confirmation that this is the effect of the orders.   If he is incorrect in that interpretation, he seeks a variation  to  the  orders  or  undertakings3   to  exclude  future  acquired  income  or property, to enable him to earn and keep income to support himself and his family.

[5]      Mr Hotchin has filed affidavits in which he has described the effect of the existing orders on him and his family.  The family remains subject to the stresses that are also described in earlier affidavits and which are outlined in my May judgment. Mr Hotchin says that the orders have prevented him from earning income as no one wishes to deal with him whilst he remains subject to them.   Because of this, the family’s financial resources have been exhausted, with almost nothing remaining of an Australian bank account which is outside the scope of the orders, and which the family have been using for their expenses. Mr Hotchin has been forced to rely upon family for financial support.   The existing orders allow him living expenses of

$1,000 per week.  Earlier when he made an application for an increase in the amount allowed for living expenses, private details in relation to his family’s living expenses detailed in his affidavit were reported by the media.  Therefore, although he knows that he can apply to increase the amount of the allowance, he has not done so.

Relevant Principles

[6]      In deciding this application for variation or rescission, the issue is broader than the question of whether the orders should be varied or rescinded.  The nature of the orders is such that the continued need for them must be the subject of regular review.   The starting point then is not whether Mr Hotchin has made a case for variation of the orders, but rather whether it remains necessary and desirable that the existing orders be continued in their present form, or varied, or whether instead, they should be rescinded.   This application provides a good opportunity for review, particularly  in  light  of  the  changed  circumstances  described  in  Mr  Hotchin’s affidavit.

[7]      The relevant principles in determining whether it is necessary and desirable that interim orders be made are set out in the May judgment, and I do not propose to repeat them here.4     However, particularly relevant to this application are the following.

[8]      If the jurisdictional conditions for the making of an order are met the Court then undertakes an evaluative exercise to determine whether it is necessary or desirable to make the orders sought.  The factors that should be taken into account in that exercise may differ from case to case, but it is clear that there is an element of risk management or risk assessment involved in determining whether it is necessary or desirable that orders be made.5     The jurisdiction is not to be exercised for a disciplinary purpose.  Any orders made must be made for the purpose of preserving assets that could be available to meet any judgment ultimately entered against Mr

Hotchin.  For this reason, if orders are made, the Court must ensure that the orders are no more intrusive than required to preserve the assets.

[9]      There is no requirement that the FMA demonstrate a prima facie case of liability on the ground of Mr Hotchin.  Nevertheless, in the case of an application brought on the grounds of an existing investigation, the FMA must at least show that

good grounds exist for the investigation.  The nature and seriousness of the breaches under investigation are relevant to the exercise of the discretion, as well as the number of aggrieved persons and the quantum of Mr Hotchin’s potential liability.

[10]     There is no requirement that the FMA show that Mr Hotchin’s assets are about to be dissipated.  It is sufficient if there is the potential for dissipation of the assets. Although a risk of dissipation of assets is not a pre-requisite to the making of orders, given the policy objectives of the section, such a risk is likely to be a powerful discretionary factor.

[11]     In determining that the orders should be continued in May, I weighed that there were good grounds for the FMA to continue to investigate the statements made in the prospectuses and extension certificates, that there was substantial potential for dissipation of assets and a particular risk of dissipation.  Taking those matters into account, I was satisfied that the orders made were necessary and desirable for the purpose of protecting aggrieved persons.

Discussion

[12]    The FMA has filed material updating the Court on the progress of its investigation, including the affidavit of Ms Peden, a forensic accountant with the FMA.  Mr Hotchin also addressed various aspects of the merits of the issues under investigation by the FMA, although accepting that “current assets” must remain available to the FMA.  On the basis of that material, it seems that there continue to be legitimate grounds for the FMA to pursue its investigation in respect of statements in the prospectuses, and Mr Hotchin’s role and knowledge in relation to those statements.

[13]     It is certainly the case that the investigation has taken much longer than originally estimated by the FMA, but there is no evidence of any time wasting or unjustifiable delay by the FMA in pursuing its investigations.    Part of the delay to date  is  due  to  discussions  with  Mr  Hotchin  and  others  also  the  subject  of investigation, and I note that Mr Hotchin does not claim that there has been any unjustifiable delay on the part of the FMA.

[14]     Mr Hotchin has argued that the existing orders do not extend to future assets in the sense of future income.  However the orders are clearly enough expressed to extend to income and other assets of Mr Hotchin which are situated in New Zealand, whether  acquired  before  or  after  the  making  of  the  orders.    This  is  of  course consistent with the intention to preserve assets to meet any judgment against Mr Hotchin, should proceedings be issued against him.  For this reason, I also decline to amend the orders to expressly exclude future acquired property, as Mr Hotchin had invited me to if I came to the view that in their present form the existing orders caught such property.

[15]     Mr Hotchin says that since all assets, with the exception of any interest he has in the Paratai Drive property, have been or will be utilised in paying tax bills and other outgoings, there is little purpose to continuing the orders – they are a gross intrusion, while delivering little potential benefit for aggrieved persons.  If it is true that the assets listed in his statement of assets and liability are now or shortly to be expended, the existence of the orders nevertheless continues to restrain dealings with the interest in the Paratai Drive property, and any also assets that come into Mr Hotchin’s control in the future which are subject to the order, whether those derive from his own efforts, or from distributions from family-controlled entities.   Other than a reducing stock of assets there is nothing in the evidence to suggest that the assessment of potential for and risk of dissipation of assets set out in the earlier judgment has altered significantly.

[16]     Mr Hotchin asks that the orders be discharged because the existence of the orders  is  damaging  his  ability  to  earn  a  living,  and  in  that  sense  is  counter- productive.  It is difficult to see how the situation he describes will be improved by the   substitution   of   undertakings   in   terms   identical   to   the   existing   orders. Undertakings will also provide a less satisfactory protection for aggrieved persons. If an undertaking is breached, the FMA would have to seek an order compelling compliance.   If it were too late for that, proceedings for contempt of court would likely be the best remedy.  In contrast, there is very real sanction for breach of orders made under the Securities Act 1978.  A person who breaches an order made under s

60H or s 60I commits an offence under s 60K of the Act and is liable on conviction

on indictment to imprisonment for a term not exceeding 3 years or to a fine not exceeding $100,000, or both.

[17]     Having weighed these various considerations, I have determined that it is necessary and desirable that the restraining orders continue in their existing terms against Mr Hotchin.

Related Applications

[18]      Mr Hotchin seeks leave to sell or grant security over assets in order to meet his tax liability [suppressed material], and to pay his sundry creditors.   Since this application, orders have been made to allow payment of some of these creditors and to allow sale of a boat to enable payment of tax.

[19]     As I have previously noted, Mr Hotchin is entitled to meet his ordinary living expenses out of the frozen assets.    The jurisdiction is not punitive.  The difficulty with the application for living expenses is that there is currently an amount  in place for living expenses.   Mr Hotchin withdrew an earlier application to increase the level.   Mr Hotchin now says that amount is too little, and he has no means with which to pay these amounts.  I consider that there is sufficient evidence to establish that the existing amount provided for living expenses is insufficient, and that these expenses should be paid.  The existing arrangements in place for sale or pledging of assets should be followed to allow sale of assets to meet any remaining tax liability, and the remaining debts referred to in Mr Hotchin’s affidavit of 19 September 2011. I expect counsel to be able to agree these for a draft order.

[20]     Future payment of living expenses should be made on the basis of a realistic amount allowed for such expenses.   I note Mr Hotchin’s reluctance because of concerns about lack of confidentiality in relation to earlier affidavits.   If there are such concerns, confidentiality orders can be sought, and of course there is no automatic right for the public or the media to search interlocutory applications and supporting affidavits.

[21]     I  note  that  there  was  also  an  argument  at  the  hearing  in  relation  to  an application by the second defendant to vary the interim preservation orders to allow the Paritai Drive property to be used as security to borrow up to [suppressed material].  The application was brought on the grounds that completing the property would increase its value and be recovered once the property is sold.  This application was subsequently dealt with on a consent basis.  For this reason I do not address it.

Result

[22]     The application to revoke existing orders is declined.

[23]     Existing orders are varied to allow the sale of assets to meet payment of tax liability and identified sundry creditors.   Future payment of sundry creditors will need to be met from the amount allowed for living expenses, which I am satisfied is currently set at too low a level.   Mr Hotchin has leave to apply to increase the amount allowed for living expenses.

[24]     Having received submissions from counsel I am satisfied that it is appropriate that there be suppression of private information relating to Mr Hotchin in this judgment as follows:

(a)       Paragraph 3 – the last two words of the third sentence.

(b)      Paragraph 18 – the amount of the tax liability which appears after the

words “tax liability”.

[25]     I   also   consider   that   there   should   be   suppression   of   the   following commercially sensitive material; paragraph 21, the words at the end of the first sentence which follow after the words “up to”.

Winkelmann J

Solicitors:

Crown Law, Wellington

Lee Salmon Long, Auckland
Chapman Tripp, Auckland

Counsel:

Bruce Stewart QC, Auckland