CHIEF EXECUTIVE OF LAND INFORMATION NEW ZEALAND v TANG [2018] NZHC 382

CHIEF EXECUTIVE OF LAND INFORMATION NEW ZEALAND v TANG [2018] NZHC 382 [12 March2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-199[2018] NZHC 382BETWEEN THE CHIEF EXECUTIVE OF LANDINFORMATION NEW ZEALANDPlaintiffAND WENBING TANGFirst DefendantXIANGHUA HUANGSecond DefendantBINYAN ZHOUThird DefendantBINZHI OUYANGFourth DefendantHearing: 9 March 2018Appearances: F Cuncannon for PlaintiffG M Illingworth QC for DefendantsJudgment: 12 March 2018JUDGMENT OF LANG J[on application for civil penalties under the Overseas Investment Act 2005]This judgment was delivered by me on 12 March 2018 at 12.30 pm,pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateBackground[1] The four defendants are Chinese citizens who do not ordinarily reside in NewZealand. Each of them contravened s 22 of the Overseas Investment Act 2005 (theAct) by acquiring an interest in sensitive land without first obtaining consent underthe Act. In this proceeding the plaintiff, the Chief Executive of Land Information NewZealand (the Chief Executive), sought orders under ss 47 and 48 of the Act for thedisposal of the property in question together with civil penalties and costs.[2] The defendants filed an admission of liability on 9 June 2017. The parties havesince filed a joint memorandum dated 2 March 2018 in which they agree on thepenalties to be imposed. These reflect the fact that the property has now been sold.As a result, the only issue to be determined is the level of civil penalty the Court shouldimpose. Before making such orders, the Court must first be satisfied that the agreedpenalties are within the proper range.Agreed facts[3] On 25 June 2013, the first defendant, Mr Tang, entered into an agreement topurchase a residential property at 679 Riddell Road, Glendowie (the property) for$5.128 million.[4] The parties used the Auckland District Law Society standard form agreementfor sale and purchase of land.1 On the first page of the agreement there is an optionenabling the parties to make the agreement conditional on consent being obtainedunder the Act. On the 25 June 2013 agreement, this option was marked "No".[5] Mr Tang acquired an equitable interest in the property immediately uponsigning the sale and purchase agreement.[6] On 21 August 2013, Mr Tang entered into a deed with the second, third andfourth defendants (Mrs Huang, Mr Zhou and Mr Ouyang), under which he nominatedthem to purchase the property. The deed of nomination was not conditional on MrsHuang, Mr Zhou and Mr Ouyang obtaining consent under the Act to acquire the1 Ninth edition, 2012.property. On execution of the deed of nomination, Mrs Huang, Mr Zhou andMr Ouyang each obtained an equitable interest in the property.[7] On 28 August 2013, the transfer of title to the property was registered andMrs Huang, Mr Zhou and Mr Ouyang each thereby became the legal owners of theproperty.[8] None of the defendants has ever sought or obtained consent under the Act forthe acquisition of an interest in the property.Statutory framework[9] The Act regulates overseas investment in sensitive New Zealand assets. Itspurpose is stated in s 3:3 PurposeThe purpose of this Act is to acknowledge that it is a privilege for overseaspersons to own or control sensitive New Zealand assets by—(a) requiring overseas investments in those assets, before being made, tomeet criteria for consent; and(b) imposing conditions on those overseas investments.[10] Section 10(1) of the Act states that a transaction requires consent under the Actif it will result in an overseas investment in sensitive land, as defined in s 12. Section12 provides as follows:12 What are overseas investments in sensitive landAn overseas investment in sensitive land is the acquisition by an overseasperson, or an associate of an overseas person, of—(a) an interest in land if—(i) the land is sensitive under Part 1 of Schedule 1; and(ii) the interest acquired is a freehold estate or a lease, or anyother interest, for a term of 3 years or more (includingrights of renewal, whether of the grantor or grantee), andis not an exempted interest; or(b) rights or interests in securities of a person (A) if A owns orcontrols (directly or indirectly) an interest in land described inparagraph (a) and, as a result of the acquisition,—(i) the overseas person or the associate (either alone ortogether with its associates) has a 25% or more ownershipor control interest in A; or(ii) the overseas person or the associate (either alone ortogether with its associates) has an increase in an existing25% or more ownership or control interest in A; or(iii) A becomes an overseas person.[11] There is no dispute that the defendants meet the definition of "overseas person"under s 7(1) of the Act, in that they are neither New Zealand citizens nor ordinarilyresident in New Zealand. Nor is there any dispute that the property meets thedefinition of "sensitive land" under Part 1 of Schedule 1 of the Act, in that:(a) one boundary of the property adjoins land vested in Auckland Councilfor the purpose of a road shown on the deposited survey plan; and(b) the road adjoins the sea; and(c) the area of the property exceeds 0.4 hectares.[12] Each of the defendants acquired an interest in the property in terms ofs 12(a)(ii) of the Act. The transactions that led to the three defendants being registeredas the owners of the property therefore amounted to overseas investments in sensitiveland that required consent under the Act. Sections 22 and 23 require every overseasperson making an overseas investment to apply in writing for consent. It is acceptedthat none of the defendants complied with that requirement.[13] If the Court is satisfied that a person has contravened the Act, it may make avariety of orders. These include ordering the disposal of rights or interests in theproperty,2 and ordering the person to pay a civil penalty.3 Section 48(2) states that acivil penalty must not exceed:2 Overseas Investment Act 2005, s 47.3 Overseas Investment Act 2005, s 48.(a) $300,000; or(b) any quantifiable gain (for example, the increase in the value sinceacquisition) by the person in breach in relation to the property for whicha consent should have been obtained; or(c) the cost of remedying the breach of condition; or(d) the loss suffered by a person in relation to a breach of condition.Approach to fixing penalties[14] Chief Executive of Land Information New Zealand v Carbon Conscious NewZealand Ltd is the only decision of this Court to date in which the approach to be takenwhen the Court is required to fix penalties under s 48 of the Act has been considered.4Edwards J held that the method for determining the quantum of pecuniary penaltiesunder the Commerce Act 1986 should apply equally to the fixing of penalties in thepresent context.5 Her Honour considered that, of the different statutes that provide forpecuniary penalties to be imposed by the Court, the regime under the Commerce Actis the most analogous to that provided for in the Act.6[15] Under the Commerce Act approach, criminal sentencing principles are used tofix a pecuniary penalty.7 This means the Court must assess the seriousness of theoffending, identifying relevant aggravating and mitigating factors to determine anappropriate starting point. The Court then has regard to any factors specific to thedefendant that may warrant an uplift in, or reduction from, the starting point.8[16] However, it is necessary to bear in mind that the primary purpose of penaltiesunder the Commerce Act is deterrence. In criminal cases the Sentencing Act 20024 Chief Executive of Land Information New Zealand v Carbon Conscious New Zealand Ltd [2016]NZHC 558.5 At [22], [26] and [27].6 At [26].7 Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC) at [14]; CommerceCommission v EGL Inc HC Auckland CIV-2010-404-5474, 16 December 2010 at [12].8 Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC) at [14].prescribes a range of sentencing purposes and principles.9 Although the need fordeterrence is one of these, it will not be the dominant concern in many cases.10 In thecontext of the Commerce Act, Miller J commented:11effective deterrence requires that the wrongdoer's unlawful gains orintended gains be eliminated but also that a rational wrongdoer takes intoaccount ex ante, when contemplating the wrong, the probability that it will bedetected and penalised. This rational approach is appropriate because generaldeterrence is concerned with violations that have yet to occur, viewed fromthe perspective of those who may be contemplating them.I consider that the primary purpose of penalties imposed under the OverseasInvestment Act is also deterrence.[17] In Carbon Conscious, Edwards J identified several factors that may provideguidance when fixing the quantum of pecuniary penalties:12(a) The nature and extent of the breach;(b) The nature and extent of any loss or damage caused by the breach;(c) The nature and extent of any financial gain made from the breach;(d) Whether the breach was intentional, inadvertent or negligent;(e) The level of pecuniary penalties that have been imposed in previoussimilar situations; and(f) The circumstances in which the breach took place.[18] As for features specific to the offender, Edwards J drew on factors said to berelevant in the Commerce Act context:13(a) Any previous misconduct of a similar nature by the offender;(b) The size of the offender;(c) Any co-operation with the authorities;(d) Any admission of liability; and9 Sentencing Act 2002, ss 7 and 8.10 Commerce Commission v EGL Inc HC Auckland CIV-2010-404-5474, 16 December 2010 at [13]–[14].11 See Commerce Commission v NZ Bus Ltd (No 2) (2006) 3 NZCCLR 854 (HC) at [25].12 At [31], citing Law Commission Pecuniary Penalties: Guidance for Legislative Design (NZLCR133, 2014) at [16.47].13 At [47].(e) Any compliance programmes put in place by the offender.[19] Where penalties are agreed between the parties, as in the present case, theCourt is not required to embark on its own enquiry as to an appropriate figure, butrather to consider whether the proposed penalties are within the proper range.14 Thepolicy rationale behind this is to promote acknowledgment of wrongdoing and ensurethat defendants who negotiate a resolution are not deterred by the fear that the Courtwill reject their proposed penalty because it does not "precisely coincide with thepenalty the Court might have imposed".15Starting point for Mr Tang[20] The parties in the present case have, broadly speaking, had regard to the factorslisted by Edwards J in assessing starting points of the breaches that have occurred.They acknowledge the property comprised valuable residential land in a coastalsetting. That type of property is precisely the type of asset that should require consentto be obtained under the Act when a purchase by an overseas person is proposed.[21] Mr Tang's culpability lies in the fact that he instigated the actions that led toall of the breaches occurring. He has previous experience in purchasing land in NewZealand, as well as significant experience in business both in China and New Zealand.The reference to "OIA consent" on the first page of the sale and purchase agreementmeant that the issue of consent under the Act needed to be considered. Consequently,Mr Tang should have been aware of the restrictions on purchasing property in NewZealand.[22] However, the Chief Executive is satisfied that the need for consent was neverraised with Mr Tang by either the real estate agents who introduced him to the propertyor the solicitor who acted on his behalf in relation to the transaction. The ChiefExecutive therefore accepts Mr Tang did not intentionally breach the Act; rather, hewas negligent as to the consent requirements. Importantly, Mr Tang did not make any14 Chief Executive of Land Information New Zealand v Carbon Conscious New Zealand Ltd [2016]NZHC 558 at [24], citing Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC)at [18].15 Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC) at [18].identifiable gain from his breach of the Act. He is therefore liable to a maximumpenalty in the sum of $300,000.[23] I consider, however, that Mr Tang's culpability is greater than that of thedefendant in Carbon Conscious. In that case the defendant was aware of the potentialneed for consent and obtained legal advice as to a structure for the proposedtransaction that would avoid that need. Edwards J approved a starting point of $80,000that reflected the defendant's "complete reliance on erroneous legal advice".16Mr Tang also undoubtedly received poor legal advice. His experience as abusinessman, however, and the presence of the "OIA consent" checkbox on the frontpage of the sale and purchase agreement ought to have alerted him to the consentrequirement.[24] The parties appear to have agreed that the starting point falls within the rangebetween $120,000 and $140,000. I infer from the agreed final penalty that they agreethe starting point should be $130,000, which is in the middle of that range.17 I considera starting point at that level to be at the upper end of the available range having regardto the factors the parties have identified and the penalty imposed in Carbon Conscious.I accept, however, that it is within range.Starting point for Mrs Huang, Mr Zhou and Mr Ouyang[25] Mrs Huang, Mr Zhou and Mr Ouyang have each technically contravened theAct twice, by acquiring both equitable and legal interests in the property. However,the Chief Executive accepts that the acquisition of their equitable and legal interestsrealistically occurred as part of a single transaction. Rather than imposing an uplift,the parties have recognised this in their proposed starting point.[26] These defendants are experienced businesspeople, with extensive involvementin business dealings both in China and New Zealand. Each of them has been andcontinues to be a shareholder and director of various New Zealand incorporated16 At [46].17 The parties did not expressly state this in the joint memorandum but they agree the final penaltyshould be $110,000 after applying a discount of 15 per cent to reflect mitigating factors: See [33].companies. They candidly accept they should have been aware of the restrictions onoverseas persons purchasing property in New Zealand.[27] Unlike Mr Tang, these defendants made a quantifiable gain in relation to theproperty. They purchased it for $5.128 million and sold it for $6.150 million. Thegross qualifiable gain was therefore $1.022 million before taking into account the costsinvolved in selling the property.[28] The parties have agreed the defendants should be permitted to deduct thefollowing costs from the gross quantifiable gain:(a) rates ($60,694.82);(b) water charges ($221.90);(c) insurance fees ($9,000.66); and(d) real estate agency fees from the sale of the property ($145,722.74).[29] These sums do not represent all the costs the defendants say they have incurredin relation to the property. They contend they have suffered an overall loss in the sumof approximately $1.535 million when all costs are taken into account. Mr Tang's sonhas set these out in an affidavit filed in opposition to the Chief Executive's application.The defendants have effectively waived their ability to persuade the Court to includethe remaining costs in return for the Chief Executive accepting they should bepermitted to deduct the sums set out above. I consider that to be a reasonablecompromise.[30] The total net quantifiable gain is therefore $806,360.42. Given that each of thedefendants owned an undivided one-third share of the property, each has made a gainof just under $269,000.[31] The parties suggest the starting point for the penalty for these defendants lieswithin the range of $270,000 to $300,000. They have settled on a penalty of $270,000,which effectively requires the defendants to disgorge all their quantifiable gains. Iconsider that to be appropriate in the circumstances having regard to the need for thepenalty to act as a deterrent.Adjustment of penalty to reflect factors personal to the defendantsAggravating factors[32] There are no aggravating features personal to the defendants. None of themhas any previous history of this type of misconduct. For that reason there is no needto increase the penalty to reflect aggravating factors personal to the defendants.Mitigating factors[33] The fact that the defendants have acknowledged liability is an obviousmitigating factor because early disposal of the proceeding saves significant time andcost and is therefore of benefit to the community.18 Each has also expressed remorseand a desire to rectify the situation at a reasonably early stage in the plaintiff'sinvestigation. Mr Tang, Mrs Huang and Mr Ouyang also co-operated with theproceedings by instructing counsel to accept service of the proceedings. Mr Zhou didnot instruct counsel, meaning the Overseas Investment Office had to seek an order forsubstituted service. All defendants also signed an admission of liability. Taking thesefactors into account the parties suggest a discount of 15 per cent for Mr Tang,Mrs Huang and Mr Ouyang and a discount of 10 per cent for Mr Zhou.[34] In Carbon Conscious, Edwards J observed that discounts of up to 50 per centhad been applied in cases brought under the Commerce Act where the defendants hadprovided admissions of liability and had co-operated with the authorities.19 The partiesin Carbon Conscious therefore suggested, and her Honour applied, a discount of50 per cent in that case. Given that approach it could be argued that discounts of10 and 15 per cent respectively are too low in the present case.18 Chief Executive of Land Information New Zealand v Carbon Conscious New Zealand Ltd [2016]NZHC 558 at [53].19 At [56], citing Commerce Commission v EGL Inc HC Auckland CIV-2010-404-5474, 16December 2010 at [26]; Commerce Commission v Cargolux Airlines International SA HCAuckland CIV-2008-404-8355, 5 April 2011 at [52] (a one third discount was given in this case);and Commerce Commission v Koppers Arch Wood Protection (NZ) Ltd (2006) 11 TCLR 581 (HC)at [24] and [49].[35] I consider, however, that the approach taken in Carbon Conscious is of limitedassistance in the present context. In that case there was a dispute as to whether thedefendant had made any gain on the transaction. The parties agreed, however, thatany gain that may have been made was not quantifiable. Edwards J therefore imposeda civil penalty that did not take into account any quantifiable gain.[36] The position is obviously different in cases where the defendant has made aquantifiable gain. In such cases the desirability of making allowance for mitigatingfactors is tempered significantly by the concurrent need to ensure the penalty does notlose its deterrent effect. A discount of 50 per cent in cases where the defendant hasmade a quantifiable gain will generally deprive the penalty of much of its deterrenteffect.20[37] Two factors become important when considering the proposed level ofdiscount in the present case. The first is that, as I have already observed, thedefendants contend their actual costs greatly exceed the gross profit made on the saleof the property. More importantly, however, the Chief Executive accepts that as amatter of policy there is considerable value in having a defendant co-operate with anyinvestigation and acknowledge liability at an early stage. It is therefore in the publicinterest that defendants have an incentive to act in this way. Removal of any discountfor mitigating conduct would remove that incentive.[38] I am satisfied that the proposed discounts of 15 and 10 per cent correctly strikethe balance between the two competing interests the parties have identified. Theyrecognise the mitigating factors undoubtedly present whilst also preserving thedeterrent effect of the penalties to be imposed.Result[39] Mr Tang is ordered to pay a civil penalty in the sum of $110,500.2120 During the hearing, counsel advised me that an amendment to the Act is currently beforeParliament that will permit the Court to impose a civil penalty up to three times the value of anyquantifiable gain. This will remove the difficulty posed by the current form of s 48(2), which doesnot permit the Court to impose a penalty beyond the level of the quantifiable gain.21 A deduction of 15 per cent produces a final penalty of $110,500 but I infer the parties have agreedto "round down" the penalty to $110,000.[40] Mrs Huang and Mr Ouyang are each ordered to pay a civil penalty in the sumof $229,500.[41] Mr Zhou is ordered to pay a civil penalty in the sum of $243,000.Costs[42] The parties propose that Mr Tang should contribute the sum of $5,000 towardsthe Chief Executive's costs, whilst Ms Huang, Mr Zhou and Mr Ouyang should eachcontribute the sum of $10,000. This is at variance with the approach taken in CarbonConscious, where the parties agreed the defendant should pay costs to the ChiefExecutive on a category 2B basis, together with disbursements as fixed by theRegistrar.[43] Counsel advised me that the proposed orders in this case seek to follow theapproach taken in cases brought under the Commerce Act. In those cases thedefendant is commonly ordered to make a payment of costs designed to reimburse theCommerce Commission for investigative costs as well as legal costs. I see no reasonin principle why that should not be the case, and I consider a combined contributionof $35,000 towards the costs incurred by the Chief Executive to be reasonable.[44] I therefore make orders as to costs as sought by the parties in their jointmemorandum.Lang JSolicitors: Meredith Connell, AucklandMcLeod & Associates, AucklandCounsel:G M Illingworth QC, Auckland