Twentieth Century Fox Film Corporation v Dotcom
[2016] NZHC 1948
•19 August 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-001272 [2016] NZHC 1948
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 cont'd over …
Hearing: 25-28 July 2016 Appearances:
Judgment:
19 August 2016
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 19 August 2016 at 3.30 pm
pursuant to R 11.5 of the High Court Rules Registrar /Deputy Registrar Date…………………………
BRAM VAN DER KOLK Second Respondent
RSV HOLDINGS LIMITED Third Respondent
COATESVILLE TRUSTEE SERVICES LIMITED
TWENTIETH CENTURY FOX FILM CORPORATION & ORS v DOTCOM & ORS [2016] NZHC 1948 [19
August 2016]
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] Kim Dotcom’s assets in both New Zealand and Hong Kong, are subject to a freezing order made in favour of the applicant film studios on 25 November 2014.1
The studios, Mr Dotcom and Mrs Dotcom have all made applications relating to the terms of the 2014 freezing order. In this decision I deal with some of those applications. The others will be determined in a separate judgment.
[2] Under the current terms of the 2014 freezing order Mr and Mrs Dotcom are presently entitled to draw on the frozen New Zealand assets to meet living and legal expenses to the extent of $80,000 per month and $20,000 per month respectively. Now:
(a) Mr Dotcom seeks an order allowing him to draw on frozen Hong
Kong assets for living and legal expenses;2
(b) the studios have applied to vary the 2014 freezing order to reduce the
amount allowed for Mr Dotcom’s living expenses from $80,000 to
$10,000;3
(c) Mrs Dotcom has applied to increase the amount that she is permitted to draw on to cover living expenses from $20,000 to $35,000;4
(d)Mrs Dotcom has applied to have access to the frozen funds and proceeds of sale of frozen vehicles to meet her reasonable legal expenses.5
[3] In addition, I determine applications made in relation to funds to which
Mr Dotcom is entitled under an agreement with the landlord of the Coatesville
1 Recorded in the minute of Courtney J dated 26 November 2014.
2 Consolidated application by first respondent dated 11 March 2016 for variation of interim freezing orders dated 26 November 2014 and 22 April 2016.
3 The studios’ 1 March 2016 amended application to vary applicants’ asset freeze over first
respondent’s New Zealand and Hong Kong assets granted 26 November 2014.
4 Interlocutory application by Mona Verga Dotcom dated 6 July 2016 to vary freezing orders of
22 April 2016.
5 Interlocutory application by Mona Verga Dotcom dated 6 July 2016 to vary freezing orders of 22
April 2016.
property he previously rented and which will not be subject to the 2014 freezing order (the Coatesville funds):
(a) the studios seek a freezing order over the Coatesville funds on the same terms as the 2014 freezing order;
(b)Mr Dotcom seeks a declaration that he is entitled to apply the Coatesville funds as he wishes or, if a freezing order is granted, an order that he be entitled to draw on the funds for specified purposes;
(c) Mrs Dotcom seeks an order that the Coatesville funds be ring-fenced to be available to her for living and legal expenses.
The freezing orders: background
The 2012 restraining order
[4] Prior to 18 April 2015 Mr Dotcom’s New Zealand assets were restrained pursuant to a foreign restraining order registered under the Mutual Assistance in Criminal Matters Act 1992.6 Under variations to that order Mr Dotcom was permitted to draw up to $6m to cover legal expenses, rent and other property expenses. In addition a draw of $20,000 per month was permitted to cover the Dotcom family’s living expenses. The source of these funds was Mr Dotcom’s $10m of Government Bonds, which has now been exhausted.
The 2014 freezing order
[5] In April 2014 the studios commenced civil proceedings against Mr Dotcom and others, alleging large-scale copyright infringement. The 2012 restraining order was still current and the studios regarded themselves as adequately protected because it was assumed that the order encompassed all Mr Dotcom’s New Zealand assets. In
2014, however, the studios formed the view that Mr Dotcom had other assets that
were not subject to the restraining order. Mr Dotcom was required to make
6 Order of the Court for Registration of Foreign Restraining Order dated 18 January 2012; Mutual
Assistance in Criminal Matters Act 1994, s 54.
disclosure of his assets. The disclosure showed that he had substantial liquid assets in Hong Kong (which were subject to the Hong Kong restraining order) and that he was a discretionary beneficiary of a New Zealand trust, the Trust Me Trust.
[6] The studios obtained a freezing order on 25 November 2014, which relevantly provided that:7
3.2Until further order of the Court, any assets held by [Mr Dotcom, Coatesville Trustee Services Ltd and MD Corporate Trustee Ltd] in their capacity as trustee, former trustee, or, in the case of the first respondent, as a beneficiary or appointor, of the “Trust Me Trust” may not be diminished in value, disposed of or dealt with … until further order of the Court, save that:
…
(c) Until further order of the Court, [Mr Dotcom] may not diminish in value, dispose of or otherwise deal with any of the overseas assets referred to in the first respondent’s 5 September 2014 affidavit filed in this proceeding.
[7] Under an amended interim conditional order made by consent, the assets that were subject to the 2012 restraining order became subject to the 2014 freezing order upon the expiry of the restraining order on 18 April 2015.8 As a result, the Commissioner of Police is an interested party in this proceeding.
Following the 2014 freezing order Mr Dotcom needed more money for living expenses
[8] The main asset of the Trust Me Trust was its interest in Mega Ltd, a business that Mr Dotcom started after the 2012 restraining order was made to provide an alternative source of funds for his family. Throughout 2013 and most of 2014 the Trust Me Trust generated substantial funds and supplemented the $20,000 allowed for living expenses under the 2012 restraining order. Once the Trust Me Trust’s assets were frozen, however, the family was in financial difficulty.
[9] In December 2014 I granted an application by Mr Dotcom to vary the restraining order to allow him greater access to the restrained funds; the amount
7 Minute of Courtney J dated 26 November 2014 and sealed order dated 16 December 2014.
8 Joint memorandum of counsel dated 17 April 2015.
allowed for living expenses was increased to $170,000 per month.9 This figure reflected the high cost of living in the Coatesville property. By that time Mr and Mrs Dotcom had separated and the $20,000 allowed under the 2012 restraining order was being directed to Mrs Dotcom for her living expenses.
[10] Once Mr Dotcom moved from the Coatesville property to a city apartment his level of expenditure decreased. In October 2015 the terms of the freezing order were varied by consent so that (inter alia) the amount he was permitted to draw on for living expenses was reduced to $80,000 per month, together with sufficient to pre-pay the rent on his apartment.10 Although made by consent, the order was made on the basis that the studios did not accept that the new figure for living expenses was either reasonable or ordinary.
The Hong Kong restraining order
[11] Mr Dotcom’s Hong Kong assets are also subject to a restraining order made in Hong Kong in 2012 to protect the interests of the United States government in the context of Mr Dotcom’s alleged criminal offending.
Mr Dotcom’s application to vary the freezing order to access Hong Kong assets
[12] In December 2015 the Hong Kong Court of First Instance granted Mr Dotcom’s application to vary the Hong Kong restraining order, directing that he could have access to the restrained funds to meet his reasonable legal expenses incurred since September 2015 and up to a maximum of $2m per annum for future legal expenses and $80,000 per month for living expenses once his cash assets in New Zealand had been exhausted.11 The Court refused to allow access to restrained funds for past New Zealand legal costs on the basis that to do so would give priority
to unsecured creditors.12
9 Commissioner of Police v Dotcom [2015] NZHC 761; Commissioner of Police v Dotcom [2015] NZHC 820. This decision was appealed by the Commissioner but the appeal is not being pursued pending the determination of other matters and, in any event, has been overtaken by subsequent events.
10 Joint memorandum of counsel dated 14 October 2015; minute of Courtney J dated 15 October
2015.
11 Re Kim Dotcom And Others [2015] HKCF1 2362.
12 Re Kim Dotcom And Others, above n 11, at [9]-[10]. See also memorandum of counsel for
Mr Dotcom dated 3 December 2015 attaching a report from Dr Gerard McCoy QC dated 2
[13] Mr Dotcom perceives that the 2014 freezing order precludes him from implementing the variation to the Hong Kong restraining order. His application to rescind or vary the freezing order so as to allow him to draw on the frozen Hong Kong funds for living expenses in accordance with the order of the Hong Kong High Court was intended to address this concern.
[14] This application has been resolved by agreement. In a joint memorandum, counsel for Mr Dotcom, the studios and the Commissioner (abiding the decision of the Court) consented to an order enabling Mr Dotcom to meet his living expenses from the Hong Kong assets. I am satisfied that the order sought is proper and will make the order in the terms agreed.
Application by the studios to vary the 2014 freezing order in relation to living costs
The application
[15] The studios are very concerned at the rate at which the frozen assets have been spent. Mr Dotcom’s liquid assets in New Zealand have now been exhausted. The studios understand the freezing order to now cover only Mr Dotcom’s real and personal New Zealand property (held by the Official Assignee and worth an estimated US$2,775,478.20) and his overseas assets, which include approximately US$32,172,478 held in Hong Kong bank accounts.
[16] The studios have applied to reduce the amount Mr Dotcom is entitled to draw for living expenses from $80,000 to $10,000 per month. Mr Dotcom opposes this application. Mr Dotcom says that nothing has changed that would justify a reduction in the amount of $80,000 per month for living expenses allowed by consent in October 2015. He has however trimmed his costs to the point where he would regard $70,000 per month as acceptable.
[17] The studios’ application overlaps somewhat with Mrs Dotcom’s applications together because of Mr and Mrs Dotcom’s shared parenting of their children. To
overcome this I have treated costs such as school fees, which Mr Dotcom seems to
December 2015.
have taken responsibility for in the past, as continuing to be to his account rather
than costs to be included in Mrs Dotcom’s budget.
“Ordinary living expenses” under r 32.6(3(a)
[18] The application to vary the 2014 freezing order falls under r 32.6(3)(a) of the High Court Rules, which provides that a freezing order must not prohibit a respondent from dealing with restrained assets for the purpose of “paying ordinary living expenses”. Mr Boldt, for the Commissioner, submitted that, although the standard by which living expenses are fixed under the Criminal Proceeds (Recovery) Act 2009 (CPRA) is not identical to the freezing order regime under r 32 of the High Court Rules, the transition of assets from the 2012 restraining order to the 2014 freezing order was intended to be seamless, with the latter (as varied) providing that it could be varied in the same way and on the same basis as a registered foreign restraining order. I took this as suggesting that determination of the applications relating to the fixing of living costs was to be determined by reference to the CPRA criteria rather than under r 32.6 but I do not accept that would be correct. The order that is being considered for variation was made under r 32 and any variation of it is properly considered under that rule.
[19] The main issue in the application is essentially the extent to which Mr Dotcom’s subjective assessment of what constitutes “ordinary living expenses” is relevant. The studios acknowledge that Mr Dotcom’s individual circumstances are relevant to the assessment of what constitutes “ordinary living costs” but both they and the Commissioner assert that what Mr Dotcom claims to be ordinary living costs is, objectively, excessive and wasteful. They say that an amount substantially less than that claimed would provide a very comfortable lifestyle for any New Zealand family.
[20] Rule 32 was introduced in 2009,13 based on the Australian Federal Court
Amendment Rules 2006.14 Its predecessor, r 239, was simply declaratory of the
Court’s power to grant a Mareva injunction and was silent as to the rights of those
13 Judicature (High Court Rules) Amendment Act 2009.
14 The Australian Federal Court Amendment Rules 2006 were drafted by a committee of judges that included Baragwanath J, the then chair of New Zealand Rules Committee.
whose assets were frozen to draw on them for living and legal expenses. The commentary to r 239 merely noted that it had become accepted practice that any application for a Mareva injunction should leave the defendant with the ability to meet “reasonable living expenses”. This probably reflected the decision in PCW (Underwriting Agencies) Ltd v Dixon, which used that phrase.15 In comparison, the phrase “ordinary living expenses” in r 32.6 appears to have been drawn from clause
12(a) of the Federal Court of Australia’s Practice Note on Freezing Orders 5 May
2006. There are, however, no decided cases in Australia on the meaning of the phrase.
[21] PCW is invariably relied on in New Zealand as establishing the principles on which to determine an appropriate allowance for living expenses. In PCW the first defendant was alleged to have made secret profits from a company of which he was a director. The plaintiffs obtained a Mareva injunction on terms that allowed him a sum of £100 per week as “reasonable living expenses”. This defendant, who had previously enjoyed a very comfortable lifestyle, sought to increase the allowance to
£1,000 pounds a week. On the question of the appropriate amount to be allowed
Lloyd J said:16
The purpose of the jurisdiction is not to secure priority for the plaintiff; still less, I would add, to punish the defendant for his alleged misdeeds. The sole purpose or justification for the Mareva order is to prevent the plaintiffs being cheated out of the proceeds of their action, should it be successful, by the defendant either transferring his assets abroad or dissipating his assets within the jurisdiction …
I am not going to attempt to define in this case what is meant by dissipating assets within the jurisdiction or where the line is to be drawn; but wherever the line is to be drawn this defendant is well within it. It could not possibly be said that he is dissipating his assets by living as he has always lived and paying bills such as he has always incurred …
I would regard it as unjust in the present case if the defendant were compelled to reduce his standard of living, to give up his flat or to take his children away from school, in order to secure what is as yet only a claim by the plaintiffs.
15 PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 (QB).
[22] In An Ying International Financial Ltd v Li, which was decided under r 239, Allan J said, citing PCW:17
… the level of allowances permitted a defendant must be realistic and not parsimonious. A defendant ought not to be required to reduce his or her living standards at the behest of a plaintiff.
[23] In De Alwis v Chean Winkelmann J considered that r 32.6 seemed to be no more than a codification of the common law position and, relying on PCW, considered that whether the matter was determined under the predecessor r 239 or r 32.6 the defendant was entitled to reasonable living expenses.18 In Li v Li Lang J cited the principles as they were set out in An Ying and proceeded to determine the appropriate amount to be allowed for living expenses on the basis of what was reasonable.19 No distinction was drawn in either case between “ordinary living expenses” as used in r 32.6 and “reasonable living expenses” as used in PCW. This may have been because the expenses being sought were not at a level that attracted serious resistance from the plaintiffs.
[24] Two subsequent United Kingdom cases have considered the meaning of “ordinary living expenses” in the context of Mareva injunctions made on those terms. In TDK Tape Distributor (UK) Ltd v Video Choice Ltd & Ors Skinner J was asked to determine whether a defendant whose assets were subject to a Mareva injunction on terms which allowed him to spend “up to £100 pounds per week on
“ordinary living expenses” had acted in breach of the terms of the injunction.20
Skinner J adopted a meaning that very much reflected PCW:21
Ordinary living expenses, in my judgment, mean ordinary, recurrent expenses involved in maintaining the subject of the injunction in the style of life to which he is reasonably accustomed. It does not include exceptional expenses like … the purchase of a Rolls Royce ... That is not an ordinary living expense.
[25] In Travel Holidays v Charter, which also concerned a Mareva injunction
granted on terms that allowed the respondent a fixed sum per week “for ordinary
17 An Ying International Financial Ltd & Li HC Auckland CIV-2004-404-6952, 6 April 2015 at
[82].
18 De Alwis v Chean HC Auckland CIV-2007-404-5357, 5 June 2009 at [11].
19 Li v Li HC Auckland CIV-2011-404-7393, 2 December 2011.
20 TDK Tape Distributor UK Ltd v Video Choice Ltd & Ors [1985] 3 All ER 345 (QB).
living expenses,” Hamblen J adopted the statement just cited from TDK Tape Distributor UK Ltd but also cited Lloyd J’s comment in PCW that it would be unjust to compel the defendant to reduce his standard of living without distinguishing between “ordinary living expenses” and “reasonable living expenses” before concluding that:22
The authorities, therefore, show that the court is concerned to identify what the standard of living was to which the freezing order defendant was reasonably accustomed prior to the grant of the freezing order relief.
[26] Whether the phrases “reasonable living expenses” and “ordinary living expenses” are interchangeable appears not be have been regarded as significant in the previous cases but it does assume some importance in this case because the studios and the Commissioner emphasised the objective reasonableness of Mr Dotcom’s and Mrs Dotcom’s living expenses, notwithstanding their acknowledgement that their particular circumstances were relevant.
[27] I consider that there is a difference between “ordinary living expenses” and “reasonable living expenses”. The natural and ordinary meaning of “reasonable” in relation to cost connotes commensurability, of being “within the limits of what it would be rational or sensible to expect; not extravagant or excessive; moderate”.23 “Ordinary”, on the other hand, means “normal; customary; usual”.24
[28] In interpreting r 32.6(a) it is also vital to keep in mind that the purpose of freezing orders is to prevent a plaintiff’s claim being defeated by the dissipation of the defendant’s assets. The freezing order does not give the plaintiff priority and nor is it intended to have a punitive effect on the defendant, against whom nothing has yet been proven.
[29] One might compare the difference in purpose and wording of s 28(1)(d) of the CPRA, which permits “reasonable living costs” to be met from the restrained property. In my reasons for varying the restraining order to allow increased amounts
for living expenses I discussed the meaning of that phrase, referring to the decisions
22 Travel Holidays v Charter [2013] EWHC 4334 (Comm) at [7].
23 Oxford English Dictionary (2nd edition, online ed).
24 Oxford English Dictionary (2nd edition, online ed).
in Solicitor General v Darwish25 and Commissioner v Yan26 and concluded that an assessment of what is reasonable requires consideration of the factors identified by Heath J in Darwish, which included the average weekly expenses for New Zealand families in different income brackets as well as the applicant’s financial and other commitments.27
[30] If the words “ordinary living expenses” are accorded their usual meanings, and the purpose and limitations of a freezing order are taken into account, a person whose assets are restrained should be entitled to draw an amount that is usual or customary for him or her, provided the expenditure does not reach the point where it is properly regarded as dissipation. This would be consistent with the approach taken in the cases PCW and TDK Tape in which there was concern over the level of the allowance sought (even though the terms of the orders differed).
[31] The studios also argued that a stricter approach ought to be taken because their claims are proprietary in nature. This argument was considered in PCW, in which Lloyd J said:28
… Counsel for the plaintiffs seeks to support the ex parte injunction on another ground. He submits that this is a case in which there is a fund which in equity belongs to the members of the syndicates. The plaintiffs are, he says, entitled to restrain the first defendant from using other people’s money to meet his bills or pay for his defence. The fact that some of his own money may be mixed with the money which belongs to the “names” is, it is said, no answer to the plaintiffs’ claim for an injunction. Counsel for the plaintiffs conceded that if that way of putting the plaintiffs’ case is correct the first defendant would not even be entitled to £100 a week.
…
The distinction between the ordinary Mareva plaintiff … and the case where the plaintiff is laying claim to a trust fund on the so-called wider ground, is thus clear. In the latter case the whole object is to secure the trust fund itself so that it should be available if the plaintiff should prove his claim. In the former case by contrast the plaintiff is not entitled to any security. The purpose of the jurisdiction, as is now clearly established, is not to provide the plaintiffs with any form of pre-trial attachment. It is simply to prevent the injustice of a defendant removing or dissipating his assets so as to cheat the plaintiff of the fruits of his claim.
25 Solicitor General v Darwish HC Auckland CIV-2004-404-1603, 24 November 2004.
26 Commissioner of Police v Yan [2015] NZHC 2544.
27 Commissioner of Police v Dotcom [2015] NZHC 820.
28 PCW (Underwriting Agencies) Ltd v Dixon, above n 15, at 163.
…
In my view justice and convenience require in the present case that the first defendant should be allowed the means of defending himself, even if it could be said that the plaintiffs had laid claim to the whole of his assets in the trust fund. Similarly justice and convenience require that he should be able to pay his ordinary bills and continue to live as he has been accustomed to live heretofore. So whether the case is put on the basis of the Mareva jurisdiction or on so called wider jurisdiction to trace in equity I reach the same conclusion.
[32] Allan J considered a similar argument in An Ying International.29 He did not cite PCW but instead relied on United Mizahi Bank Ltd v Doherty, which adopted the statements made by Lord Bingham in Sundt Wrigley & Co Ltd v Wrigley:30
… There is the important decision of Sundt Wrigley & Co Ltd v Wrigley (unreported) 23 June 1993 Court of Appeal (Civil Division) transcript number 685 of 1993, in which Sir Thomas Bingham MR gave a detailed judgment, with which Mann and Peter Gibson LJJ agreed, considering the first instance decision in which very careful consideration had been given to a number of questions, including the question of whether a litigant should be driven from the judgment seat by not having legal representation on the one hand, or whether the fund should be expended on the other. He concluded that it was only in an exceptional case, where the merits could be gone into for the purpose of satisfying the court that the proprietary claim was so strong that it could be demonstrated that such a proprietary claim was well founded at an interlocutory stage, that a defendant should not be free to draw on enjoined funds to finance his defence. Absent the intervention of such considerations, the ordinary balancing act would apply, albeit that the question was formulated by Sir Thomas Bingham MR in this way:
Is there so great a risk of injustice to the defendant if he is not represented as to justify recourse to enjoined funds which may be shown to be the plaintiff’s funds held by the defendant as trustee or constructive trustee?
He further said:
A careful and anxious judgment has to be made in a case where a proprietary claim is advanced by the plaintiff as to whether the injustice of permitting the use of the funds by the defendant is outweighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may of course turn out to be a successful defence.
[33] In the present case, whilst the studios do assert a proprietary claim and were able to advance a sufficient evidential basis for the freezing order, the claims do not
29 An Ying International Financial Ltd v Li, above n 17.
30 United Mizahi Bank Ltd v Doherty [1998] 2 All ER 230, [1998]1 WLR 435 (Ch)at 439.
appear so strong at this stage as to displace the usual right of a person whose assets have been frozen to draw on them for his or her ordinary living expenses.
Mr Dotcom’s ordinary living expenses
[34] Mr Dotcom asserts that $70,000 per month is needed to maintain his current lifestyle. He provided a schedule of his monthly expenses. Not every aspect of expenditure is the subject of challenge. In particular, there is no challenge to any of the expenses associated with the children.
[35] As a general criticism, the studios and the Commissioner point to the fact that Mr Dotcom’s claimed monthly needs are more than twice that of Mrs Dotcom’s even though she has a much bigger household to maintain and, most weeks, has the children for a greater proportion of the time. That is true in a sense. But Mr Dotcom’s monthly expenditure includes private school fees, speech therapy, the children’s two nannies and a contracted driver who collects the children from Mrs Dotcom’s house, takes them to school and picks them up each day. None of these costs were challenged. Because of these costs a direct comparison of Mr Dotcom’s and Mrs Dotcom’s budgets is not possible.
[36] The main challenge to Mr Dotcom’s expenditure relates to his three other full-time staff: a personal assistant, a chef and a housekeeper. They have all been with the family for many years and perform services that are both personal and essential to the smooth running of Mr Dotcom’s household. It is a term of their employment that they are provided with accommodation. Their base hourly rate is not especially high; $34 for the personal assistant, $23 for the chef and $20 for the housekeeper.
[37] The personal assistant works with Mr Dotcom on his various pieces of litigation as well as a new business venture. There was strong challenge to this expenditure, with Mr Boldt arguing that because some of the litigation was not active there was no need for a fulltime personal assistant. It is true that some of Mr Dotcom’s litigation is dormant but there is still significant active litigation (the extradition proceeding, the GCSB proceeding and the appeal against the civil forfeiture order in the US). I accept that these pieces of litigation are substantial and
time consuming. I do not see it as being at all wasteful for a person in Mr Dotcom’s position, who has always had a level of administrative support, to maintain that support in the circumstances in which he currently finds himself.
[38] Mr Dotcom cannot cook and has always had someone to cook for him. He has type 2 diabetes and has recently had other medical treatment. As a result, he now requires a specific and limited diet. The chef cooks for Mr Dotcom, the children when they are with him and for the other staff. Mr Boldt urged that Mr Dotcom could eat just as well and more cheaply by taking advantage of the restaurants near to where he lives. I do not consider that eating in restaurants is a practical long term solution for someone on a rigid diet for medical reasons. In these circumstances I do not regard the retention of a chef as wasteful.
[39] Mr Dotcom’s housekeeper cleans, does the laundry and changes the beds. Mr Boldt argued that this person should be dispensed with and a contract cleaner brought in for specified hours each week. Once again, this is a balancing issue. If Mr Dotcom were living alone all of the time then a housekeeper for a fixed number of hours a week could work well. But for about a third of the time he has five children in his apartment. The cleaning, laundry and shopping for five children and their two nannies is an entirely different proposition. Overall, I do not regard the retention of a housekeeper in these circumstances as wasteful.
[40] The Commissioner was critical of the level of salaries being paid to the staff members and the fact that they were provided with accommodation. However, these are the terms on which they were employed. This is not a situation where Mr Dotcom has recklessly engaged staff in recent times on higher than market salaries. To a large extent the expenditure is a function of Mr Dotcom’s large family and his previous lifestyle. Even if some of the staff were replaced with contractors there would still be a legitimate level of expenditure. Moreover, Mr Dotcom is entitled to have the security of reliable, longstanding employees rather than contractors.
[41] The other major expenditure is security at $10,000 per month. The
Commissioner has expressed justified concern at whether there is any real need for
ongoing security given the historical nature of threats resulting from Mr Dotcom’s hacker activities (a recent threat does not appear to represent any long-term or recurring risk). In this sense there might be a question as to whether ongoing security is really an ordinary living expense. However, security is provided by a contractor and Mr Dotcom has deposed that this person also takes the children to and from school and other activities (using a vehicle provided by Mr Dotcom). That cost, already mentioned, is not challenged. Therefore the proportion of expenditure specifically allocated to security is not as high as it appears.
[42] From an approximate monthly expenditure of $70,000, therefore, nearly
$20,000 relates to school fees and other forms of educational expenditure for the children, which is not challenged, $20,000 for the staff payroll, which I have already concluded to be reasonable and $10,000 for security/transporting the children, which I have also found to be reasonable. That leaves $20,000 to cover normal expenditure such as groceries, internet, power, gas, and phones. Very few of these costs were challenged.
[43] Mr Boldt criticised the cost of storage which is, admittedly, substantial at just over $6,000 per month. On the other hand, this is expenditure that might fairly be regarded as normal for a family that has changed the nature of its accommodation but does not yet know where and in what circumstances it will finally live. Some people might regard it as a better use of the money to sell the items being stored and reduce that aspect of expenditure. But it is neither a type of expenditure nor at a level that could be viewed as a dissipation of assets.
[44] Mr Boldt had some general criticisms about Mr Dotcom’s other expenditure such as his high level of consumption of bottled water. I am not prepared to engage in this level of re-assessment. Mr Dotcom has long enjoyed a very comfortable lifestyle. On the principles as I have already outlined them he is entitled to maintain a comfortable lifestyle provided it does not reach the point of wastefulness that is properly regarded as dissipation of the frozen assets.
[45] Mr Dotcom has previously had an allowance of $80,000 per month and is now seeking $70,000. I find that, in his particular circumstances, this level of
expenditure represents ordinary living expenses for the purposes of r 32.6(3)(a). The application by the studios to reduce the allowance to $10,000 per month therefore fails, though, as a result of Mr Dotcom’s own reduction, the freezing order should be varied so that the figure that he may draw for living expenses will be $70,000 per month.
Mrs Dotcom’s application to vary the 2014 freezing order in relation to living and legal expenses
Ordinary living expenses
[46] Mrs Dotcom manages a very large and diverse household. From Monday to Friday she has the day-to-day care of her four children, her stepdaughter and her two brothers. She is the legal guardian of her brothers who are now aged 19 and 16 and are still at school. In addition to the children, the nannies form part of her household for the five nights that the children are with her each week. She estimates the cost of groceries at between $1,000 and $1,200 a week. Mrs Dotcom does most of the cooking but has a housekeeper for four hours each week day. In addition, she sends money back to the Philippines to support her mother and her sister. There was no challenge to any of this expenditure.
[47] Mr Boldt argued that the starting point for my assessment of living expenses ought to be the $20,000 allowed by Potter J in 2012 as an allowance from the money frozen under the criminal freezing order. I do not accept that the $20,000 figure has any relevance now. That figure was settled in the context of proceedings under the CPRA which provides for “reasonable living expenses” and, (even if “reasonable” and “ordinary” were used interchangeably) addresses different purposes from a freezing order under r 32. I have already indicated that, in my view, the applications fall to be dealt with under r 32.6.
[48] In any event, Mrs Dotcom’s circumstances are quite different now. Soon after the $20,000 was fixed the family had access to the substantial funds generated by Mega. That avenue of funding no longer exists. Two more children were born after that figure was fixed. The children are now older and, inevitably, more expensive to maintain. Finally, the Dotcoms have separated and even allowing for
the overlap in expenditure relating to the children, are maintaining separate households.
[49] There were legitimate criticisms of the budget that Mrs Dotcom presented;
$1,500 in mortgage costs which is anticipatory because Mrs Dotcom does not have a mortgage and $800 per month for miscellaneous fees associated with the children when it is evident that expenditure associated with the children’s schooling and other activities is built into Mr Dotcom’s budget. Removing these items would produce a figure for Mrs Dotcom’s ordinary living expenses of about $25,000 per month which the Commissioner and the studios regarded as fair. I, too, consider this figure to fairly represent Mrs Dotcom’s ordinary living expenses.
Legal expensees
[50] Mrs Dotcom currently owes her former solicitors and counsel more than
$100,000 and her current solicitor and counsel more than $20,000. She requires ongoing legal representation in relation to the present proceedings, her relationship property claim, her interest in the assets forfeited by order of the US court and her claim in the GCSB proceedings.
[51] Not all of these needs can be addressed under r 32.6, which only allows legal expenses in relation to the freezing order itself to be met from frozen funds. I consider that the legal expenses connected with Mrs Dotcom’s relationship property claim ought to be regarded as falling within this category because, although there is no dispute as to her interest in the relationship property, the freezing order is affecting resolution of her claim in that the relationship property agreement that she reached with Mr Dotcom is said to constitute a breach of the freezing order and unenforceable by reason of the freezing order. The other legal expenses do not fall with r 32.6 and I cannot allow access to restrained funds to meet them.
Unrestrained funds
[52] Mrs Dotcom accepts that she cannot access frozen funds while she still has unrestrained funds at her disposal.31 The studios and the Commissioner were justifiably critical of Mrs Dotcom’s previous inadequate disclosure regarding access to unrestrained funds. It was clear from her evidence in relation to the present application that she had access to substantial unrestrained funds during 2014. When she and Mr Dotcom separated in May 2014 she retained $1.15m cash for her own
use, as well as the $20,000 under the 2012 restraining order. She acknowledged substantial withdrawals of cash including $35,000 in October 2014 and $20,000 in November 2014. She could not recall how the money was used and her explanations for the likely use of such sums were unconvincing.
[53] By the end of the hearing, however, the studios and Mrs Dotcom had agreed that, to the extent I was satisfied that Mrs Dotcom no longer has access to unrestrained funds, her ordinary living expenses and her reasonable, ongoing legal costs in this proceeding and in connection with her relationship property could all be met from the sale of vehicles that are subject to the freezing order, any other frozen funds and the Coatesville funds (if frozen).
[54] Mrs Dotcom now acknowledges having $80,000 on term deposit, together with another $11,000 which is held as security for her credit card. There is, in addition, $28,000 held by the MVD Trust, to which she has access. Ms Hosking, for Mrs Dotcom, sought to have those funds excluded from the calculation of unrestrained funds for present purposes because they are regarded as untainted for the purposes of the US forfeiture orders and represent the only funds from which legal expenses for that litigation can be met.
[55] I find that, once Mrs Dotcom has exhausted the $80,000 on term deposit she should be regarded as no longer have unrestrained funds for the purposes of accessing frozen funds to meet ordinary living expenses and legal expenses relating to this application, ongoing legal expenses relating to the freezing order and her
relationship property claim. She should be entitled to retain the $11,000 that is used
31 Halifax Plc v Chandler [2001] EWCA Civ 1750 at [17].
as security for her credit card provided that it cannot be used for any other purpose. I also accept that she should be able to use the MVD Trust funds for the US litigation.
[56] There is no agreement in relation to historical legal costs dating back to the period when Mrs Dotcom did have access to substantial unrestrained assets and could have paid those costs but chose not to. I deal with this aspect later in relation to the Coatesville funds. It is sufficient to say at this point that I accept the studios’ argument that during 2013 and most of 2014 and indeed even up to the date of the hearing of the present application Mrs Dotcom had access to unrestrained funds and this money ought to have been used to meet her ongoing legal costs. Given that substantial funds have been withdrawn and cannot be accounted for I do not consider it a proper use of frozen funds to meet historical debts.
The Coatesville funds
The applications
[57] Under an agreement reached in December 2015 with the owner of the Coatesville property that Mr Dotcom previously rented Mr Dotcom will receive $2m once the property is sold. If it has not been sold within 12 months of the date of the agreement he will still receive $250,000 on expiry of the 12 month period, leaving the balance of NZ$1.75m payable upon the property’s eventual sale. Because of a threatened set-off relating to chattels Mr Dotcom may ultimately receive less than
$2m but it is anticipated that he will receive at least $250,000 by 3 December 2016.
[58] It is not in dispute that, as worded, the 2014 freezing order does not apply to property acquired later so the proceeds of the Coatesville agreement will not be subject to the order. The studios have applied for an order that any funds received by Mr Dotcom under the Coatesville agreement be frozen on the same terms as set out in the freezing order (save that if Mrs Dotcom has no other resources for living and legal expenses she may have access to the funds in priority to any other party to the extent of $1m).
[59] Mr Sumpter, for the studios, submitted that there could be no resistance to the freezing of the Coatesville funds, given the previous factual and legal findings as to the basis of the existing freezing order. Mr Mansfield did not resist the argument that the factual and legal findings that led to the freezing order being made apply equally to the Coatesville funds. However, Mr Dotcom has historical debts/obligations and wants to apply the funds to those. He opposes the studios’ application or, if the funds are frozen seeks an order that he be entitled to access the funds for the purpose of paying historical income tax and legal fees, settling an employment dispute and performing his obligations under a relationship property agreement with Mrs Dotcom.
A danger of any judgment going unsatisfied if the funds are not frozen
[60] The studios’ application is for a new freezing order and, although the legal and factual findings that led to my earlier finding that there was a good arguable case apply equally now, I must still be satisfied that there is a danger that any judgment obtained by the studios will be wholly or partly unsatisfied “because … the assets …
might be … disposed of, dealt with or diminished in value”.32 In Oaks Hotels &
Resorts NZ Ltd v Body Corporate 358851 Asher J noted that the mere fact that an asset was to be disposed of was not, in itself, enough to invoke the freezing order jurisdiction:33
There must be a danger that the prospective judgment creditor’s ability to recover will be defeated because assets have been disposed of.34 In Bank of New Zealand v Hawkins it was observed that there had to be a “… real risk that the defendant will dissipate or dispose of assets so as to render himself
‘judgment proof’”.35 This is now expressly stated at r 32.5(4), which
provides that the Court “may” make an order if it is dissatisfied having
regard to all the circumstances that there is a danger that the judgment or prospective judgment will be wholly or partly unsatisfied because of the removal or disposal. As Laughton LJ observed in Third Chandris Shipping Corporation v Unimarina SA, there must be facts from which a commercial court, like a prudent sensible commercial person, could properly infer a
32 High Court Rules, r 32.5(4)(b)(ii).
33 Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [18].
34 Citing Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG [1983] 1
WLR 1412 (CA) at 1422.
35 Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC) at 454.
danger of default if assets are removed.36 This test is not “unduly exacting”.37
…
The jurisdiction is not designed to provide an applicant with pre-judgment security. The general rule that a respondent can deal with its assets without constraint, which applied to the original Mareva jurisdiction,38 is still reflected in the new detailed rule, if only indirectly. Even if the disposal will result in insufficient funds to pay a plaintiff, a court is unlikely to interfere if the disposition is genuine and in the ordinary course of business.39 That limitation of the common law regime applies under the new rules and is indicated in r 32.6(3) which states that the freezing order must not prohibit the respondent from dealing with the assets for the purpose of paying ordinary living expenses and legal expenses related to the freezing order, but also “… disposing of assets or payments, in the ordinary course of the respondent’s business, including business expenses incurred in good faith.” The prospective judgment debtor must be able to continue to trade or carry on business in the usual way.
… Restrictions on the ambit of the remedy remain, and it will not be permitted to be used by an applicant to force a respondent who could ultimately pay the judgment debt.
[61] The value of the frozen assets needs to be considered alongside the size of any judgment the studios are likely to obtain. Mr Mansfield argued that the evidence as to the amount of any prospective judgment exceeding $11.8m was very uncertain. In granting the studios’ application for an ancillary order requiring Mr Dotcom to disclose his assets I held that the studios had shown a good arguable case for damages in excess of $11.8m, though I could not form any view on the amount by which any award might actually exceed that figure and the studios’ claim for
damages is far higher.40
[62] The studios point out that the liquid frozen assets in New Zealand have reduced significantly in value because of the amounts being released to cover Mr Dotcom’s living and legal expenses. On the other hand, Mr Mansfield asserted,
without challenge, that Mr Dotcom’s Hong Kong assets have increased in value by
36 Citing Third Chandris Shipping Corporation v Unimarina SA [1979] QB 645 (CA).
37 Citing Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh” [2001] 2 NZLR 801 (HC) at
[122].
38 Citing Barclay-Johnson v Yuill [1980] 1 WLR 1259 (HC); Property Marine Australia Pty Ltd v
Condor Yachts (Bermuda) Ltd (1987) 1 PRNZ 251 (HC) at 253 and Laws of New Zealand
Creditors Remedies (online ed) at [13].
39 Citing Whitmarsh v A’mon Corporation Ltd (1988) 2 PRNZ 576 (HC) at 582 and High Court
Rules, r 32.6(3)(c).
40 Twentieth Century Fox Film Corporation v Dotcom [2014] NZHC 1789 at [72]; upheld on appeal Dotcom v Twentieth Century Fox Film Corporation [2014] NZCA 509.
more than $10m during the time they have been frozen. In these circumstances I consider that freezing the Coatesville funds would do no more than go part of the way towards restoring the position in relation to liquid assets to what it was when the
2014 freezing order was made. For that reason I consider that the proper course is to make a freezing order in relation to the Coatesville funds. It is relevant that these funds, if frozen, will be applied mainly to Mr and Mrs Dotcom’s living and legal expenses, thereby avoiding the need to liquidate real assets for a time.
Variation of the Coatesville freezing order
[63] Mr Dotcom wishes to access the Coatesville funds to meet specific debts/obligations, namely: income tax of $124,519.82 (including penalties); New Zealand legal fees incurred between June and September 2014 relating to Mega governance issues ($53,587), the extradition proceedings ($442,977), the claim by the studios ($385,517) and the restraining order ($52,598); US legal fees of USD$3.3m; Employment Relations Authority determination of $33,376 together with the amount required to meet legal fees on the claimants’ appeal against the determination and resolution of Mrs Dotcom’s relationship property entitlement.
[64] The studios and the Commissioner object to Mr Dotcom using the funds for these purposes. They argued strongly that most of the debts to which Mr Dotcom now wishes to apply the Coatesville funds were incurred at a time when he had access to the substantial funds from the Trust Me Trust and he chose to waste those funds rather than attend to his debts.
[65] It is not in dispute that throughout 2013 and 2014, up to the date of the freezing order on 25 November 2014, Mr Dotcom had access to substantial funds from the Trust Me Trust. However, the studios can only criticise the way in which unrestrained funds were spent after 27 May 2014, when they filed their application for a freezing order. The studios’ application had been triggered by reports in the media of the Internet Party donation and other instances of an extravagant lifestyle that (in the studios’ view) were incompatible with Mr Dotcom’s assets having been restrained. But whether the expenditure was a proper use of the trust’s money before
that date does not concern the studios; that is solely a matter for the trustees and beneficiaries of the Trust Me Trust.
[66] The evidence from Mrs Dotcom’s affidavit filed in support of her 2014 application to remove Mr Dotcom as appointor of the Trust Me Trust suggests that, although not a trustee prior to Mr and Mrs Dotcom separating in May 2014, Mr Dotcom nevertheless controlled or, at least, influenced Mrs Dotcom, who was a trustee, in the use of the Trust Me Trust funds. Mrs Dotcom’s affidavit showed that the trust had $7m in cash prior to Mr and Mrs Dotcom separating. At Mr Dotcom’s direction, Mrs Dotcom moved $2.3m out of the trust’s account and later they agreed to split that amount. She retained $1.15m and paid the balance back into the trust’s account. This must have left about $5.85m with the Trust Me Trust. From this figure Mr Dotcom donated $4m to the Internet Party. Mrs Dotcom also referred to the production of Mr Dotcom’s musical album, though she did not know the cost. By the time the studios applied for a freezing order on 27 May 2014 the trust must still have had approximately $1.5m.
[67] In Mr Dotcom’s affidavits sworn in September and October 2014 he disclosed that the trust had cash of $950,000 and $650,000 on those dates. The studios point to instances of waste during that period, though they were generally minor (skiing holidays) or did not involve actual expenditure (proposed bounty for whistle-blower information). The exception was a donation to the Internet Party of
$250,000 in August 2014.
[68] During this time some of the funds were certainly used for the Dotcom family’s living expenses. When Mr Dotcom gave evidence in December 2015 he was asked about his and the trust’s expenditure over the months preceding his affidavits and explained that it was costing $200,000 per month to maintain his household at the Coatesville property and that he had been funding his household over the preceding few months by pre-paying bills that were required to be paid. Living expenses therefore account for some of the expenditure. By October 2014 there was approximately $650,000 in the Trust Me Trust’s account. Nearly all of that was paid out in the days leading up to and on the day the freezing order was made. The circumstances of those dispositions naturally gave cause for suspicion, though it
emerged in evidence that these funds were used for pre-payment of rent, utilities and staff.
[69] I accept that during 2013 and most of 2014 Mr Dotcom did have access to unrestrained funds through the Trust Me Trust. Not all of those funds are fully accounted for and I infer that Mr Dotcom could, had he wished, apply some of the funds to his legal fees. This issue is raised particularly in relation to the legal fees owing to Simpson Grierson and Mr Davison QC (as he then was). I am unable to accept Mr Mansfield’s assertion that the failure to pay the fees as they were incurred during 2014 was a mere coincidence of timing. Mr Dotcom did not provide any evidence as to this and it is very unlikely that this could be the reason for not having paid fees rendered as early as June 2014.
[70] The same issue arises in relation to the income tax debt. There is no explanation given as to the exact nature of the debt and no reason given as to why it was not paid with funds available from the Trust Me Trust prior to the freezing order being made. I do observe, however, that the accruing penalties will ultimately affect the amount available to creditors and, had the studios been agreeable (and had more information been provided), I would have considered allowing this debt to have been met from the Coatesville funds.
[71] In relation to Mr Dotcom’s US legal fees, which are said to be US$3.3m, no information was provided at all. Even leaving aside the studios’ argument that I could not allow the funds to be used for this purpose because it would be contrary to the decision of the US Court in Virginia, there is no basis on which to consider allowing this item to be paid.
[72] The studios have taken a more pragmatic approach to the employment dispute. The determination is not accepted by the claimants and there is a two week trial set down for February 2017. The studios recognise the potential for Mr Dotcom’s assets to be reduced and have indicated their consent to the release of funds for the purpose of reaching a prudent settlement that would save the costs of the trial.
Summary of results
[73] Mr Dotcom’s application to amend the 2014 freezing order is granted and
clause 3.2 of the freezing order is amended, by consent, to provide that:
(c) until further order of the Court the first respondent may not diminish in value, dispose of or otherwise deal with any of the overseas assets referred to in the first respondent’s 5 September 2014 affidavit filed in this proceeding save as provided:
(i) In relation to legal expenses in the consent order dated 19 February
2016 in this proceeding; and
(ii) In relation to living expenses in the order of Deputy High Court Judge Wilson Chan dated 1 December 2015 in HCMP116 of 2012 (the Hong Kong order) as may subsequently be varied from time to time, provided that the quantum of living expenses available to Mr Dotcom in New Zealand shall be as determined by this Court from time to time.
(d) The parties’ respective consents to the variation to subparagraph (c)
above are without prejudice to any party’s right to:
(i) Apply to vary or rescind the freezing orders in this proceeding or the restraint order in the Hong Kong proceeding (HCMP116 of 2012) including, for the avoidance of doubt, Mr Dotcom’s right to apply to rescind and/or vary the Studio applicant’s freezing orders at a later date including (without limitation) on the grounds advanced in support of Mr Dotcom’s application dated 11 March 2016; and/or
(ii) Challenge any such variation or rescission as applicable whether in
New Zealand or Hong Kong.
[74] In relation to the amount to which Mr Dotcom may access frozen funds for ordinary living expenses:
(a) The studios’ application to reduce the amount to $10,000 per month is
dismissed;
(b)The amount is, however, reduced to $70,000 per month as a result of Mr Dotcom’s indication that this amount now represents the amount needed to cover those costs.
[75] In relation to Mrs Dotcom’s application to increase the level of her ordinary living expenses and to access frozen funds to meet legal expenses, once Mrs Dotcom has expended the $80,000 held on term deposit she may access funds and the
proceeds of sale of assets frozen under the 2014 freezing order for the purposes of meeting:
(a) ordinary living expenses up to $25,000 per month;
(b)current and ongoing legal fees arising out of or in relation to the 2014 freezing order (including the present application) and her relationship property claim, such expenses to be approved by the Court appointed supervisor in accordance with the 22 April 2015 order (as subsequently varied) in this proceeding.
[76] The studios’ application for a freezing order in respect of the Coatesville funds is granted. There will be a freezing order over the Coatesville funds that takes effect whenever the Coatesville funds are received by or on behalf of or at the direction of Mr Dotcom on the same terms as the 2014 freezing order, save that:
(a) once Mrs Dotcom has expended the $80,000 held on term deposit then, subject only to (b), she may have access to up to $1m of the Coatesville funds ahead of any other person for the purposes of ordinary living and legal expenses arising;
(b)Mr Dotcom may have access to the Coatesville funds for the purposes of reaching a settlement of the outstanding employment dispute, provided that he must act prudently in the settlement of the dispute and obtain the consent of the studios to the amount of any settlement before agreeing to be bound;
(c) Mr Dotcom shall be entitled to pay from funds received pursuant to the Coatesville Agreement the following legal expenses in New Zealand that the Court appointed supervisor under the order of Deputy High Court Judge Wilson Chan dated 1 December 2015 in HCMP 116 of 2012 (Hong Kong order) has indicated are not payable under the Hong Kong order as may subsequently be varied from time to time:
(i)legal expenses arising out of or in connection with this proceeding;
(ii) legal expenses arising out of or in connection with EMPC
391/2015 Dotcom v Orduna & Ors, EMPC 86/2016 Dotcom v Orduna & Ors and EMPC 85/2016 Orduna & Ors v Dotcom; and
(iii) legal expenses arising out of or in connection with Mr
Dotcom’s relationship property matters;
subject to such legal expenses being approved by the Court appointed supervisor in accordance with the 22 April 2015 order (as subsequently varied) in this proceeding.
[77] Leave is reserved to the parties to seek further direction as to the terms of any of the orders made.
P Courtney J
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