Twentieth Century Fox Film Corporation v Dotcom

[2016] NZHC 2497

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-001272 [2016] NZHC 2497

BETWEEN

TWENTIETH CENTURY FOX FILM

CORPORATION, DISNEY ENTERPRISES INC, PARAMOUNT PICTURES CORPORATION, UNIVERSAL CITY STUDIOS PRODUCTIONS LLLP, WARNER BROS ENTERTAINMENT INC

Applicants

AND

KIM DOTCOM First Respondent

intituling contʼd over …

Hearing:

25-28 July 2016

Appearances:

M C Sumpter and L L Fraser for Applicants

R M Mansfield and S L Cogan for First Respondent

S L Cogan for Second Respondent

D J Boldt and J D Slankard for Third and Fifth Respondents J R Hosking and C A Jones for Fourth Respondent and First Interested Party

J E M Lethbridge and B G Frowein for Second Interested Party

M J Gavin for Third Interested Party

Judgment:

19 October 2016

JUDGMENT (NO 2) OF COURTNEY J

This judgment was delivered by Justice Courtney on 19 October 2016 at 4.00 pm

pursuant to R 11.5 of the High Court Rules

Registrar / Deputy Registrar

Date……………………….

TWENTIETH CENTURY FOX FILM CORPORATION & ORS v DOTCOM & ORS (NO 2) [2016] NZHC

2497 [19 October 2016]

BRAM VAN DER KOLK Second Respondent

RSV HOLDINGS LIMITED Third Respondent

COATESVILLE  TRUSTEE  SERVICES LIMITED

Fourth Respondent

MDM CORPORATION TRUSTEE LIMITED

Fifth Respondent

MONA DOTCOM First Interested party

COMMISSIONER OF POLICE Second Interested Party

RECORDING INDUSTRY APPLICANTS IN PARALLEL PROCEEDING

Third Interested Party

Introduction

[1]      In my decision of 19 August 2016 I determined a number of applications arising from the freezing order made in 2014 in favour of the applicant film studios.1

Several applications remained outstanding and in this decision I consider the studios’ application for a declaration that Mr Dotcom assisted the trustee of the Trust Me Trust, Coatesville Trustee Services Ltd (CTSL), to breach the freezing order and thereby committed a contempt of court.

[2]      The  rather  complicated  history  of  the  freezing  order  is  recorded  in  my decision of 19 August 2016.   Briefly, Mr Dotcom’s assets were restrained under a foreign restraining order made in 2012 which expired in 2015.  The freezing order was made in November 2014 in relation to the assets of the Trust Me Trust and subsequently amended to extend to the assets previously subject to the restraining order. The result is that all Mr Dotcom’s personal assets, both here and overseas, and the assets of the Trust Me Trust are frozen pursuant to the amended freezing order.

Contempt by a non-party: general principles

[3]      The law of contempt was described by Lord Reid in Attorney-General v

Times Newspapers Ltd as being:2

… founded entirely on public policy.   It is not there to protect the private rights of parties to a litigation or prosecution.   It is there to prevent interference with the administration of justice and it should, in my judgment, be limited to what is reasonably necessary for that purpose.

[4]      The  breach  of  a  court  order  will  amount  to  contempt  if  the  action  was deliberate though it is not necessary that the contemnor intends to breach the order.3

The standard of proof, even in a case of civil contempt, is the criminal standard,

beyond reasonable doubt.4

1      Twentieth Century Fox Film Corporation & Ors v Dotcom [2016] NZHC 1948.

2      Attorney-General v Times Newspapers Ltd [1974] AC 273 (HL) at 294.

3      Siemer v Stiassny [2007] NZCA 117, [2008] 1 NZLR 150 at [10].

4      Solicitor General v Wellington Newspapers [1995] 1 NZLR 45 at47; Duff v Communicado Ltd

[1996] 2NZLR 89 (HC).

[5]      In this case the action is brought only against Mr Dotcom, who is not a party to the freezing order relating to the Trust Me Trust’s assets.  The learned author of the text Commercial Injunctions explains the basis on which both the party enjoined and a non-party can be liable for contempt through the breach of an injunction:5

If a defendant acts in breach of an injunction restraining him, then he will be in contempt of court. But the effect of an injunction is much wider because of the requirements of due administration of justice. The liability of the non- party for contempt can be based on:

(1) The  non-party  knowingly  aiding  and  abetting  a  breach  of  an injunction. In this situation there has to have been a breach of the injunction by the defendant; or

(2) A non-party with knowledge of the order doing “something which disables the court from conducting the case in the intended manner” and thereby interfering with the due administration of justice. This can  arise  entirely  independently  of  whether  there  has  been  any breach of the injunction.

And later:

A non-party can be guilty of contempt if either he knowingly aids and abets a breach of the order or he intentionally frustrates the achievement of the purpose of the order. A person who has been notified of a Mareva injunction is bound not to take any steps which would constitute a breach of the order if done by the defendant … He will be in contempt of court when he deliberately frustrates the purposes of the order, even when there is no conduct of the defendant which could amount to a breach of the order or a contempt of court.

What is meant by the purpose of the injunction in this context?  It is not the purpose of the litigant in obtaining the order.  It is the purpose of the court in making the particular order, the aim of that order.   How that purpose is formulated is the key to the width of the effect of the injunction on the non- party.

[6]      The principles were summarised by Lord Hoffman in Customs & Excise

Commissioners v Barclays Bank: 6

A freezing order is an injunction made against the putative debtor to which the bank is not a party.   But the existence of the injunction may have an effect upon third parties in two ways.  First it is a contempt of court to aid and abet a breach of an injunction by the party against whom the order was made.  Secondly, it is an independent contempt of court to do an act which

5      Stephen Gee Commercial Injunctions (6th ed, Sweet & Maxwell, London, 2016) at [19-002] and [19-030], citing Attorney-General v Punch [2003] 1 AC 1046 (HL) at [39]–[48], [79], [104]– [105].

6      Customs & Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 (HL) at [29].

deliberately interferes with the course of justice by frustrating the purpose for which the order was made: see Attorney-General v Times Newspapers Ltd [1992] 1 AC 191 and Attorney-General v Punch Ltd [2003] 1 AC 1046 for the general principle Z Ltd v A-Z & AA-LL [1982] QB 558, 578 for an explanation by Everleigh LJ of its application to Mareva injunctions.

[7]      On these principles Mr Dotcom would be in contempt if he either deliberately did an act that assisted CTSL to breach the freezing order or if he intentionally frustrated the purpose of the order.  The studios, however, advanced their case only on the aiding and abetting of CTSL’s breach.   Although it is unnecessary for an action to be brought against CTSL itself, it is axiomatic that a breach by CTSL must be shown in order to prove contempt by Mr Dotcom on that basis.

Factual basis for the application

History of the freezing order

[8]      Allegations by the studios of large-scale copyright breaches by Mr Dotcom (and others) have led to both criminal and civil proceedings against Mr Dotcom in the US.  In 2012 Mr Dotcom’s personal assets were restrained pursuant to a foreign restraining order registered under the Mutual Assistance in Criminal Matters Act

1992.  The studios considered that their positions as prospective judgment creditors were   adequately   protected   by   the   restraining   order,   which   they   assumed encompassed all of Mr Dotcom’s New Zealand assets.

[9]      In 2014, however, the studios formed the view that Mr Dotcom had other assets that were not restrained.   Enquiries showed that he was a discretionary beneficiary and appointor of the Trust Me Trust.  He had the power to appoint and remove trustees and beneficiaries, amend the trust deed and apportion trust assets to beneficiaries (including himself).   Following his and Mrs Dotcom’s separation in May  2014  Mr  Dotcom  replaced  the  then  trustee,  a  company  controlled  by Mrs Dotcom, with CTSL which he controlled.

[10]     For most of 2014 the Trust Me Trust’s assets included a substantial amount of

cash and just over 16% of the shares in Mega Ltd, which Mr Dotcom founded in

2013 to provide an alternative source of income for his family and which had proved extremely profitable.   Concern over Mr Dotcom’s apparent dissipation of the cash

led to the 2014 freezing order over the trust’s assets.7   Custodians, Neale Jackson and Grant Graham, were appointed in respect of the remaining assets.  The terms of the freezing order included:

Until further order of the Court, any assets held by [Mr Dotcom, Mr van der Kolk, RSV Holdings Ltd, Coatesville Trustee Services Ltd or MD Corporate Trustee Ltd] in their capacity as trustee, former trustee, or, in the case of [Mr Dotcom] as beneficiary or appointor of the “Trust Me Trust” may not be diminished in value, disposed of or dealt with by [Mr Dotcom, Mr van der Kolk,  RSV  Holdings  Ltd,  Coatesville  Trustee  Services  Ltd  and  MD Corporate Trustee Ltd] …

[11]     By the time the freezing order was made nearly all the trust’s cash had gone. In addition, Mr Dotcom and Mrs Dotcom had agreed that Mr Dotcom would relinquish his position as a discretionary beneficiary of the trust and his control of CTSL.  Pursuant to an agreement between them Mr Dotcom was removed as both appointor and discretionary beneficiary.

[12]     By that stage Mr Dotcom had ceased his involvement in Mega.  Mega’s new majority shareholders were planning a “back door listing” through a shell company, TRS Investments Ltd.  If that proceeded Mega shareholders, including the Trust Me Trust, would receive shares in TRS.  The terms of the freezing order were drafted so as to allow for that process and for any subsequent sale of TRS shares acquired, with the proceeds to be subject to the freezing order.

The 2015 Mega rights issue

[13]     The “back door listing” did not proceed.   By mid-2015 Mega was battling financial difficulties and in 2015 undertook three rights issues to raise fresh working capital.   Each rights issue had a dilutive effect on the existing shareholders.   The first, in July 2015, was a 2:1 offer.  CTSL did not participate in that.  The second rights issue, in October 2015, was a 50:1 offer.  By then CTSL’s shareholding was just over 7 per cent.   CTSL participated in the second  rights  issue in order to

maintain that level of shareholding. That is the basis for the present application.8

7      Recorded in minute of Courtney J dated 26 November 2014.

8      There was a third rights issue in December 2015 which was the subject of an unsuccessful application by Mr Dotcom for leave to vary the freezing order so as to use a frozen asset as security for borrowing to enable CTSL to participate: Twentieth Century Fox Film Corporation

& Ors v Dotcom [2016] NZHC 88.

[14]    Although no longer involved in Mega, Mr Dotcom still considered it a worthwhile investment.   He borrowed money from his solicitors Anderson Creagh Lai Ltd (ACL) for the purpose of enabling CTSL to participate in the rights issue.  In an affidavit sworn on 9 November 2015 Mr Dotcom explained his concern that if CTSL did not participate its shareholding would be seriously diluted.  He regarded the Mega shareholding as a “nest egg” for his children and considered that it would be in their best interests if CTSL were to participate in the rights issue.  However, CTSL did not have the funds to subscribe for the rights issue.  Nor did Mr Dotcom himself have access to any funds for that purpose.  Mr Dotcom said that:

Out of desperation, I approached my solicitors to see whether they would be prepared to loan sufficient money for the Trust to subscribe for the rights issue and preserve the relativity of my children’s shareholding in Mega. They agreed.

In essence:

(a)	ACL has, from its own funds, loaned me the subscription amount for the Mega rights issue ($227,818.50).
(b)	I have settled that money on the trust in order to enable the trust, for the benefit of my children, to take up the Mega rights issue and thereby keep its proportionate shareholding.
(c)	This loan is interest free and repayable by me if I am able to obtain the release of any restrained assets for this purpose in New Zealand or elsewhere or otherwise access funds I can lawfully use to repay the loan.
[15]	The	circumstances  described  by  Mr  Dotcom  were  confirmed  by	the

managing director of ACL, Jeffrey Lai, in an affidavit sworn 27 November 2015:

On 27 October 2015, Mr Dotcom approached ACL with a request for an

urgent loan from ACL to him …

At the meeting, Mr Dotcom advised that neither he nor Coatesville were in a position to subscribe for the rights issue.  As Mr Dotcom’s solicitors, we are aware of the various freezing orders over his assets and those of Coatesville, so this was entirely consistent with our understanding of Mr Dotcom’s and Coatesville’s respective positions …

ACL is not in the business of lending, to clients or otherwise.  As a firm, we were clear that we did not wish to charge interest for any loan to Mr Dotcom. We are, first and foremost, his solicitors.   With our knowledge of Mr Dotcom’s global legal and financial position we could see and understand that Mr Dotcom had a legitimate concern for his children’s financial future. We could also see that, if ACL did not assist, the chances of finding anyone

else who would be prepared to assist at all, let alone in the short time available, would be almost non-existent.

Therefore, in these exceptional circumstances, ACL agreed to make the loan to Mr Dotcom.   The agreement is wholly oral.   It is not intended to have normal commercial terms for the reasons stated above.  The key terms of the agreement are:

(a)       The loan amount is $272,818.50, being the subscription amount for

Coatesville’s entitlement.

(b)       The loan is interest free.

(c)       There is no fixed repayment date. The loan is repayable on any of:

(i)       the release of funds for that purpose by the High Court of

New Zealand;

(ii)      the release of funds for that purpose by the High Court of

Hong Kong;

(iii)      a liquidity event in the event of the Trust e.g. the freezing order being lifted and the Mega shares being sold.  The ACL loan was made to Mr Dotcom, not the trust.  Accordingly, in that case the understanding reached was that Mr Dotcom would use his best endeavours to encourage the Trust to make funds available for him to repay the loan;

(iv)      the loan amount  was  to be  paid  by ACL to  Mega  Ltd’s nominate NZ$ bank account, as set out at page 4 of the Offer Document.

[16]     Mr Lai went on to confirm that ACL transferred the loan amount directly to Mega’s NZ$ bank account.  He produced an email from him to Mega attaching the subscription form signed on behalf of CTSL and confirmation of the transfer of funds to Mega.  The subscription form was signed by Mrs Dotcom as a director of CTSL.

[17]     Subsequently Neale Jackson, one of the custodians wrote to Mrs Dotcom and Mr Lewis (the other director of CTSL) noting the increase in CTSL’s shareholding in Mega from 6.84 per cent to 7.63 per cent and that any shares issued from the rights issue were covered by the existing freezing orders.

Did Mr Dotcom’s actions assist CTSL to breach the freezing order?

[18]     It was common ground that the shares acquired through participation in the

rights issue were trust property.  However, the studios’ case was not concerned with

argued that the funds were a trust asset, use of them to participate in the rights issue was a breach of the order because it dissipated that asset and Mr Dotcom assisted in that breach by arranging the loan.

[19]     Mr Mansfield, for Mr Dotcom, argued that (1) the funds were not caught by the freezing order because the order was limited to existing assets (2) it was only CTSL’s use of the funds that could amount to a breach of the order, not Mr Dotcom making the funds available (3) the purpose of the order was the preservation of the trust’s assets and participation in the rights issue enhanced the value of the assets and (4) the studios had not sought any finding of breach against CTSL.

[20]     The last of these points is already answered by my discussion of the general principles applicable; the fact that CTSL is not the subject of an application does not preclude a finding that Mr Dotcom acted in contempt of the freezing order.

[21]     The studios’ argument depended on ACL’s funds having been settled on the

Trust Me Trust, the evidence of which came from Mr Dotcom’s own statement in his

9 November 2015 affidavit that:

I have settled that money on the trust in order to enable the trust, for the benefit of my children, to take up the Mega rights issue and thereby keep its proportionate shareholding.

[22]     It is understandable that the studios should ascribe weight to Mr Dotcom’s own assertion of what happened.   However, Mr Dotcom’s lay perception of what happened does not necessarily reflect the legal position.   I consider that the circumstances in which ACL advanced the funds meant that Mr Dotcom did not settle the money on the trust.

[23]     Mr Lai’s evidence shows plainly that the money never came into CTSL’s hands.   It was advanced directly by ACL to Mega pursuant to the loan agreement between Mr Dotcom and ACL.  The Trust received only the Mega shares paid for with the ACL funds.

within the scope of the freezing order because neither Mr Dotcom nor the trust could acquire a beneficial interest in them.  It is beyond doubt that the ACL loan was made specifically, and solely, for the purpose of enabling CTSL to participate in the rights issue.   These circumstances would create a Quistclose trust in favour of ACL;9  if participation in the rights issue proved to be impossible (for example, as the result of the intervening liquidation of Mega) the money would unquestionably have had to be returned to ACL.

[25]     The recipient  of  money subject  to  a Quistclose trust  does  not  acquire a beneficial interest in it.  For that reason Mr Dotcom could not have settled the funds on the trust.   Moreover, given Mr Dotcom’s evidence of his discussions with Mrs Dotcom,  CTSL more likely than not  knew the  terms  on  which  the funds  were advanced.  In these circumstances CTSL could not acquire a beneficial interest in the funds.

[26]     Assets in which the legal owner has no beneficial interest generally do not fall within the scope of a freezing order.10    It follows that the use of the funds to participate in the rights issue would not have amounted to a breach of the freezing order.  For the same reason, it does not matter whether or not the order had the effect of capturing after-acquired assets.

[27]     Finally, I note that, although Mr Dotcom’s incurring of liability to ACL while subject to an asset freeze was said to have caused harm to the studios, this aspect was not actually raised as a ground of contempt, the studios’ case being limited to the assertion that Mr Dotcom had assisted in CTSL’s breach.

Result

[28]     The application is dismissed.

9      Barclays Bank v Quistclose Investments Ltd [1970] AC 567, [1968] 3 All ER 651 (HL); General

Communications Ltd v Development Finance Corporation Ltd [1990] 3 NZLR 406 (HC) at 433–

435; Twinsectra Ltd v Yardley & Ors [2002] UKHL 12, [2002] 2 AC 164.

10     Westpac Corporation v Gill (No 1) (1987) 2 PRNZ 52 (HC); Federal Bank of the Middle East

Ltd v Hadkinson [2000] 1 WLR 1695 at 1708–1709 (EWCA Civ).

P Courtney J