CHESTERFIELD PRESCHOOLS LTD AND ORS V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV 2004-409-001596

CHESTERFIELD PRESCHOOLS LTD AND ORS V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV 2004-409-001596 30 September 2008IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV 2004-409-001596BETWEEN CHESTERFIELD PRESCHOOLS LTD First Plaintiff AND DAVID JOHN HAMPTON Second Plaintiff AND CHESTERFIELDS PARTNERSHIP Third Plaintiff AND CHESTERFIELDS PRESCHOOLS PARTNERSHIP Fourth Plaintiff AND THE COMMISSIONER OF INLAND REVENUE Defendant Hearing: 30 September 2008 (By Telephone) Counsel: M Andrews for Plaintiffs (D Hampton on line) P J Shamy for Defendant Judgment: 30 September 2008JUDGMENT OF FOGARTY J[1] This is an application by the plaintiffs for approval of a financing transaction from a third tier lender, Basecorp Limited, in the sum of $108,500 on a six month capitalised interest term at an interest rate of 15.75% with a lender's fee of $8,000 and a broker's fee of $2,500 which Mr Shamy for the Inland Revenue Department has calculated as finance in the order of 30% annual rate. On any view, it is a very high cost financing and reflects the fact that the Hampton family are now reduced to borrowing from what I call a "third tier" lending institution.[2] This matter has been argued before me previously and at that stage I was concerned that Basecorp Finance Limited did not appreciate that some of the money would be used to finance the litigation. Mr Rolls has been told that the funds would be used for completion of title consolidation and up to $35,000 for legal fees in "the misfeasance action". That proposition is not quite correct. It is intended to be legal fees for the judicial review that is coming up. That has been confirmed to me by Mr Andrews whose firm have an outstanding invoice for $30,000 and are about to raise a further invoice for $25,000. Mr Andrews confirmed that his firm is committed to representing the plaintiffs in the upcoming fixture in any event. I have, however, in the past been of the view that it is reasonable for these assets to be used to raise some money to provide for the legal fees to give some kind of equality of arms between the parties in this litigation. The balance of the money is intended to be used for title consolidation and there is a credible argument that the aggregation of certain titles may increase the value of those properties. [3] As Mr Shamy has pointed out, and I accept, the whole debt structure is teetering. There is a likelihood of mortgagee sales coming from a number of sources, particularly the National Bank. Mr Shamy, for the Inland Revenue, has argued that the Hampton companies should be dealing with the National Bank and seeking an extension of facilities from them. [4] The National Bank, as a trading bank, operates on a completely different standard of risk-taking from companies like Basecorp Finance. I am quite satisfied that there is no realistic option in raising money from the National Bank between now and the fixture date. [5] So the issue comes down to whether or not this loan should be approved, even at its very high cost. I also agree with Mr Shamy that it is likely there will have to be some rationalisation and sale of properties in any event and, probably I might add, at least before Christmas, a program for rationalisation will need to be put in place. But the judicial review hearing, which is a substantial challenge to the Budhia decision, will clear the decks in the sense of giving both the plaintiffs and the defendants a big picture look at the indebtedness of the plaintiffs or where it is likely to go post that decision. This is of course subject to rights of appeal. It will notresolve the matter. My view is that whatever decision I come to, and whether or not it is appealed, the Hampton family will have to look at sale of some of these assets. That will have to be done in conjunction with regard to the Inland Revenue's rights. The result, in my mind, is inevitably this Court will have to approve what is effectively some kind of de facto scheme of arrangement which takes into account the competing interests of the two sides to this litigation, and maybe other parties. [6] Against that background, I am still of the view that the Basecorp loan should be approved, essentially because I think that the plaintiffs are entitled to good quality legal representation. Although Mr Andrews has been utterly candid and is committed as a barrister to seeing this through, in my view, it is still reasonable that his firm gets at least a contribution to their actual costs before the case starts. A $35,000 contribution would still leave the firm $20,000 owed plus the continuing costs of legal representation at the hearing. In the round, in other words, the $35,000 costs is likely to be no more than underwriting 50% at this stage of the costs of Mr Andrews' firm. [7] For these reasons I do approve the loan transaction as exhibited to the affidavit of Mr Hampton on 25 September. I reserve leave for any directions if there is a need to clarify any order or seal any order. It may well be the parties are content to work from this judgment which will be issued in writing later today but takes effect from now. [8] Costs are reserved. [9] Mr Shamy has applied for a stay. There will be a stay of this decision until 10 am, Friday, 3 October when I will hear, by telephone conference, an application by the Inland Revenue for a further stay. Parties can file written submissions the day before or present oral arguments. Either way I will leave that in the hands of the parties.Solicitors: Minter Ellison Rudd Watts, Wellington, for Plaintiffs Raymond Donnelly & Co, Christchurch, for Defendant