McAlister v Lai - [2017] NZHC 791

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-2839 [2017] NZHC 791

UNDER the Fair Trading Act 1986

BETWEEN

GREGORY JOHN NEALE MCALISTER Plaintiff

AND

JEFFREY KENG YEW LAI First Defendant

ANDERSON CREAGH LAI LIMITED Second Defendant

Hearing: 20, 21, 22, 23 March 2017

Appearances:

R J Hollyman and T F Cleary for Plaintiff
A M Challis and MA Cavanaugh for Defendants

Judgment:

27 April 2017

JUDGMENT OF FOGARTY J

This judgment was delivered by Justice Fogarty on
27 April 2017 at 10.00 a.m., pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar
Date:

Solicitors:
Spencer Legal, Auckland
McElroys, Auckland

MCALISTER v LAI [2017] NZHC 791 [27 April 2017]

Introduction

[1] Orcon Ltd is a telecommunications company. It provides a variety of telecommunications services, such as broadband, internet hosting and voice solutions to residential, business and wholesale customers.

[2] The setting of this case is in April 2013. Orcon had experienced significant growth from June 2010 through to June 2012, however a decline had been experienced from January 2013. It was owned by a company called Kordia, which in turn was wholly-owned by the Crown. Kordia had wished to sell Orcon for some time.

[3] A businessman, Mr Warren Hurst, was inclined to purchase Orcon. He, and a consortium of other investors, entered into a contract to purchase Orcon for $38 million. Mr Hurst eventually managed to negotiate a $22 million finance loan from ASB Bank. Kordia was prepared to offer a $10 million loan as vendor financing. That left $6 million to find.

[4] The remaining $6 million proved problematic. The consortium missed two closing dates on the contract. The third, and likely final, opportunity to purchase the company was a closing set for 12 April 2013. By 19 March 2013, the company formed to buy Orcon, called Orcon Holdings Ltd (OHL), was attempting to raise funds to achieve its largely debt-driven purchase. Its internal documents show that on 12 April it still needed to find $1 million to settle. The funds flow statement at
1.36 pm on that day allocated:

$22 million – ASB

$10 million – Kordia

$1 million – Shareholders’ funds

$4 million – “already settled”

$37 million

[5] The “already settled” figure comprised $3,250,000 from a working capital facility belonging to Orcon, as well as $750,000 in cash from a “sweep” of Orcon’s operating account. Those cash assets were agreed by representatives of both vendor and buyer, to belong to the buyer.

[6] The working capital facility was known as “CPE Finance”. It was in the nature of the business of Orcon that when it won a new customer it would deliver to and fit on the premises of the customer modems/routers, known as customer premises equipment or CPE. Without these, the customer was not able to receive Orcon’s services. CPE Finance was a bank facility to raise working capital for the business, through a sale and lease-back arrangement. CPE could not be used for any other purposes than working capital without…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading McAlister v Lai

Details

AGLC: McAlister v Lai [2017] NZHC 791
Case: [2017] NZHC 791
Decision Date: 27 April 2017

CaseChat Overview and Summary

The plaintiff, Mr McAlister, brought proceedings against Mr Hurst’s solicitor, Mr Lai, and his incorporated law firm, ACL, under the Fair Trading Act 1986 (the Act) claiming he was misled into investing in the acquisition of Orcon Ltd by false representations of equity in the transaction. Mr McAlister claimed that there was $6 million of equity in the transaction when there was none. Instead, the sum of $3.25 million was obtained through CPE financing. The plaintiff claimed that Mr Lai was aware of the lack of equity and authorised the payment of the $200,000 deposited by Mr McAlister into his law firm’s trust account. The plaintiff also pleaded alternatively that Mr Lai was a party to misrepresentations made by Mr Hurst. The plaintiff sought an order under s 43 of the Fair Trading Act directing Mr Lai and/or ACL to repay the plaintiff plus interest under s 87 of the Judicature Act 1908 and costs.

Mr Lai and ACL denied liability, pleading that at no time could Mr Lai recall there was a mention of “equity” and that he did not personally refer to the $6 million funding gap. The defence pleaded that Mr Hurst considered the value of Orcon to be higher than the $38 million purchase price, so neither Mr Hurst nor Mr Lai would have considered there was $6 million equity in any event. Mr Hurst valued the transaction over $38 million because he was proposing to amalgamate a company he owned, Vivid Networks Ltd (VNL), into the Orcon group. He valued VNL at $2.5 million and therefore considered the value of the purchase of Orcon to be correspondingly greater than $38 million.

The court found that Mr Hurst’s conduct, considered objectively, was capable of misleading a reasonably sophisticated investor like Mr McAlister. When business persons talk naturally about the equity in a company they are talking about the value of the company after repayment of debts. But where one is talking about the purchase of a business and equity in that context, such persons are usually identifying the difference between the purchase price and the funding of the purchase. The representation is material to assessment of risk of the investment. The greater that equity, the easier it is to service the company’s liabilities and the more attractive the investment becomes to a long term investor.

The court found that Mr Lai used at least part of the total equity of $8.5 million, probably the $6 million quantum, when deriving and/or agreeing to the percentage of 2.85 per cent. The failure to caution contributed to Mr Hurst’s misleading conduct, in breach of s 9. The court found that Mr McAlister had suffered a loss by the misleading conduct of Mr Hurst and Mr Lai. The court found that Mr McAlister would not have advanced the $200,000 in the conditions that existed if he had known the true facts about the equity in the transaction. The court found that Mr Lai’s conduct, considered objectively, was capable of misleading Mr McAlister. The court found, however, that it was not satisfied that Mr Lai was directly or indirectly knowingly concerned in or party to a contravention of s 9 of the Fair Trading Act. The court exercised its discretion not to award a remedy under s 43 of the Fair Trading Act. The plaintiff’s claim failed against Mr Lai and against his firm. There was judgment for the first and second defendants. Costs were reserved. The court was inclined to favour costs on a 2B basis.

Orders