Archive | Blue Chip

Blue Chip recovery case all but abandoned

Court action against the directors of the collapsed Blue Chip group is all but over after the liquidators of group subsidiaries, Jeff Meltzer, Arron Heath & Lloyd Hayward (Meltzer Mason Heath), confirmed in the Auckland High Court on Tuesday they didn’t have the funding to continue.

That case was among several strands in the liquidation of the group & its parent, Northern Crest Investments Ltd, which have periodically been brought before Justice Paul Heath since Northern Crest (ex-Blue Chip Financial Solutions Ltd) was wound up on 2 June 2011, with Anthony McCullagh & Steve Lawrence (PKF Corporate Recovery & Insolvency (Auckland) Ltd) appointed liquidators.

The Meltzer Mason Heath) trio were appointed liquidators of the New Zealand subsidiaries in February 2008. In their last report, in August 2012, they said they’d made minimal recoveries and didn’t expect any dividend to become available for creditors.

Northern Crest’s liquidators said in their last report, on 19 December, they’d accepted a secured claim for $4.75 million and 17 unsecured claims totalling $10.17 million, but not even preferential creditor Ross Haywood, claiming $4900 in court costs, is likely to get a payout.

There have been multiple applications before Justice Heath. A group of Blue Chip product investors known as the investor consortium, represented by lawyers Paul Dale & Daniel Grove, called for the Official Assignee to be appointed liquidator of the parent (NZ-incorporated, now Sydney-based) Northern Crest and of former New Zealand subsidiaries, but dropped that application last year. They also wanted recoveries to be pooled, which is no longer relevant given the lack of recovery.

Mr Dale said yesterday his group believed it could have secured litigation funding to pursue the directors provided the liquidators were changed. About 250 investors in Blue Chip schemes won some money back through a confidential settlement with developers following the Supreme Court’s unanimous ruling last August that sale & purchase agreements on apartments they bought were unenforceable.

The complicated litigation over the course to be followed in the liquidations has been adjourned until April.

Earlier stories:
5 November 2012: Trial on Blue Chip liquidation process pushed back to 2013
13 August 2012: Forward 2 years, and the Supreme Court decrees that Blue Chip investors were the lenders
13 August 2012: What was the Blue Chip business all about?
9 August 2012: Blue Chip investors win in 5-0 Supreme Court decision against developers
9 May 2012: Blue Chip liquidation, claims & pooling head to July court hearing

Attribution: Interview, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Trial on Blue Chip liquidation process pushed back to 2013

Published 5 November 2012

A High Court judge set the course 6 months ago to decide how the liquidations of the collapsed Blue Chip group’s parent & subsidiaries should proceed, with a trial on the first available date after 13 July.

Back in court on Friday, this time in a closed case management conference, Justice Paul Heath set out the steps required to be taken by 31 January, pushing any trial back to sometime in 2013.

The problem at the heart of the adjournment was funding for the liquidators of the New Zealand subsidiaries, Jeff Meltzer, Arron Heath & Lloyd Hayward (Meltzer Mason Heath), which hadn’t been an issue at the previous call.

There are multiple applications before the court. A group of Blue Chip product investors known as the investor consortium, represented by lawyers Paul Dale & Daniel Grove, called for the Official Assignee to be appointed liquidator of the parent (NZ-incorporated, now Sydney-based) Northern Crest Investments Ltd & former New Zealand subsidiaries. That group has dropped that application but also wanted recoveries to be pooled.

Northern Crest (ex-Blue Chip Financial Solutions Ltd) was wound up on 2 June 2011, with Anthony McCullagh & Steve Lawrence (PKF Corporate Recovery & Insolvency (Auckland) Ltd) appointed liquidators.

In December 2011, Justice Heath reversed the decision of the parent company liquidators rejecting the proof of debt of the Australian financier of Northern Crest’s attempt to revive itself and escape ASX suspension.

If a large volume of debts filed by consortium investors in Blue Chip schemes was excluded, Justice Heath’s decision would enable the financier, Manifest Capital Management Pty Ltd, to dominate any voting at a creditors’ meeting and thus get its wish to replace the liquidators.

A complication in the parent company liquidation is that the liquidators admitted claims by Lombard Group Ltd totalling $9.7 million, of which $4.7 million was secured and $5 million unsecured. Justice Heath said in May those liquidators also needed to make decisions on whether consortium members’ claims should be admitted, and had to indicate to the court whether they supported or opposed appointment of a single liquidator.

Previous story:

9 May 2012: Blue Chip liquidation, claims & pooling head to July court hearing

 

Want to comment? Go to the forum.

 

Attribution: Post-hearing interview, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Forward 2 years, and the Supreme Court decrees that Blue Chip investors were the lenders

Published 13 August 2012

2 years ago, the Supreme Court overturned a Court of Appeal finding that investors in Blue Chip Financial Solutions Ltd schemes were lending their assets to Blue Chip, taking an unreasonable amount of risk and getting the chance of only a small portion of any profit.

The Court of Appeal view written by Justice Grant Hammond was novel: The borrowers on apartment investments were the lenders?

Last Thursday, the Supreme Court came down with confirmation – in a different Blue Chip case – that that was precisely what had happened. The apartment investments were incidental parts of an arrangement in which those investors – many elderly, many facing the loss of their homes over investments gone wrong – lent their money to a listed company so it could build up an inventory of stock for future transactions.

The Supreme Court this time unanimously allowed appeals by about 250 investors in Blue Chip schemes and decreed that sale & purchase agreements on apartments they bought were unenforceable.

That means deposits must be returned and mortgagee sales of investors’ homes must stop.

New Zealand’s highest court produced a nonsense judgment 2 years ago on the Bartle case, a case taken on behalf of an elderly Whangarei couple against GE Finance, which lent them money to participate in a Blue Chip scheme. That Supreme Court judgment reverted to the view of the original High Court judge, Tony Randerson, who ignored the reality of relationships.

The second major Blue Chip case to track through the courts was taken against 3 developers by investors who decided not to settle on apartments bought through their investment schemes. In the Auckland High Court in 2009, Justice Geoffrey Venning found the investors hadn’t validly cancelled their agreements for sale & purchase.

The Court of Appeal backed Justice Venning in a decision issued in March 2011 and written by Justice Randerson, who’d ruled against the Bartles in the High Court before being elevated to the Appeal Court.

Justice Randerson said in the Court of Appeal decision a breach of the Securities Act wasn’t, strictly speaking, a ground entitling the investors to cancel the agreements: “However, if the separate arrangements between Blue Chip and the investors could be shown to have breached the act, they would be invalid & of no effect. The next step would be to attempt to establish that the agreements were tainted by that illegality and were also invalid & of no effect.”

That next step was taken in the Supreme Court, where all 5 judges agreed Blue Chip offered debt securities (and maybe equity securities, but the judgment didn’t go into detail on that), and that the 3 developers were also securities  issuers.

The Supreme Court appeal in the developer case was heard last November by a panel of Chief Justice Dame Sian Elias and Justices Andrew Tipping, Sir John McGrath, Sir Willie Young & Sir Noel Anderson. The main reasons in the judgment, issued last Thursday, were written by Justice Young. Justice Tipping supplied a supplementary view on the enforceability of the sale & purchase agreements between investors & developers (as distinct from the investors’ agreements to participate in wider Blue Chip packages).

The court declared unenforceable, under section 37 of the Securities Act, all the sale & purchase agreements executed at the same time as, or soon after, each investor entered into the corresponding Blue Chip investment product agreement. Some investors executed apartment purchase agreements with the developer well before they subscribed for Blue Chip investment packages, and the Supreme Court remitted those cases to the High Court to determine what should happen.

The appellants in the developer case were a group of Blue Chip investors headed by Neil Hickman and represented by Paul Dale. The respondents were Turner & Waverley Ltd (ex-Turn & Wave Ltd, director Tim Manning), 74 Albert St Ltd (ex-Greenstone Barclay Trustees Ltd, directors John Abel Pattinson & Kevin Cox) and Grafton Projects Ltd (ex-Icon Central Ltd, director Leonard Ross; former director Craig Mudgway, who’s now bankrupt; the original director, Blue Chip chief Mark Bryers, was director & shareholder when the relevant agreements were entered into).

The central question in the developer case was whether Blue Chip had offered securities to the public in contravention of section 37 of the Securities Act, which required a prospectus, and that the offer wasn’t exempted by section 5 of the act.

The Supreme Court found Blue Chip was in breach and didn’t have an exemption, rendering its allotment of securities unenforceable. The court then extended that unenforceability to the sale & purchase agreements with the developers, held that the developers were also issuers under the Securities Act and thereby found the investors were entitled to relief from the developers.

Justice Young said the investors argued that, although money they said Blue Chip owed them hadn’t been deposited with or lent to anyone, it was nonetheless “otherwise owing”. However, the Court of Appeal accepted the developers’ argument that this should be confined to repayment of money previously paid by the subscriber to the issuer. Justice Venning had accepted the developer argument that Blue Chip wasn’t the “person on whose behalf any money paid in consideration of the allotment of the security is received”, because the money had gone to the developers. On that basis, Blue Chip wasn’t an issuer in relation to its PIP & PAC investment products, through which investors acquired their apartments.

The Supreme Court regarded the Blue Chip products as financing in nature, “meaning that the money & obligations Blue Chip owed the investors were ‘rather like’ those owed by a borrower to a lender. To put the same proposition in different words, we see the Blue Chip products as providing mechanisms by which Blue Chip sought & obtained financing from the public.”

Justice Young explained it a little more: “The investors paid or put up money or money’s worth and accepted financial obligations to the developers on the basis of promises by Blue Chip that they would:

(a) be reimbursed for their financial outlay, and

(b) receive a return for their outlay & risk.

“It is true that they were also buying apartments, but under the investment schemes the apartments had a very limited function. Provided all went according to plan, the investors were never to occupy the apartments. Nor were they ever to receive, directly, the rents which were derived from the apartments. And when the apartments were sold on, the investors received either nothing or next to nothing of any capital gain. Instead, for each investor, the apartment was there primarily as a long-stop against the contingency that Blue Chip might not perform. The apartment thus merely provided a measure of security for Blue Chip’s performance.

“And from the point of view of Blue Chip, the role of the investors was, in part at least, to finance the creation of an inventory of apartments which Blue Chip could resell in the future. It is unsurprising therefore that the Turn & Wave and Icon sale & purchase agreements allowed the vendor to substitute another unit for the agreed unit if the substituted unit provided a similar rate of return. All in all, we are left in no doubt that the products can be properly regarded as providing finance for Blue Chip, whose obligations back to the investors were indeed ‘rather like’ those of a borrower.”

The Supreme Court judgment causes some confusion at clause 63, where Justice Young wrote: “In the argument before us, as in both the High Court & Court of Appeal, the developers argued that Blue Chip was an issuer in relation to the PIP & PAC products. Blue Chip’s status as an issuer was fundamental to the argument as presented because the section 33(1) & (2) prohibitions apply only to such offers as are made ‘by or on behalf of an issuer’. So if there is no issuer, there could not be a breach of sections 33(1) & (2). And the only party nominated by the appellants as an issuer was Blue Chip.” The clause makes sense if it’s the investors arguing this point, not the developers.

Justice Young said the developers argued that no money went to Blue Chip under the PIP & PAC agreements, so Blue Chip wasn’t an issuer. However, some of the money put up by JVA investors did go to Blue Chip. In the end, the judge said, the court ruled that the developers were issuers, rendering this argument irrelevant.

“The idea underlying the PIP & PAC agreements was that Blue Chip would, before or after settlement, take out the investors and in that way be credited (in relation to the developer) with any money paid by the investor. In this admittedly non-technical sense, the payments made by the investors to the developers were received on behalf of Blue Chip. Given the underlying purpose of the Securities Act, we consider that a non-technical approach is the appropriate way to resolve this issue.

“The same result can be arrived at in a more roundabout way: ‘money’ is defined as including ‘money’s worth’ and the definition of ‘subscribe’ includes ‘contribute to, whether by way of cash or otherwise’. It follows that where the subscription is not in cash but is rather ‘otherwise’ or in ‘money’s worth’, anyone who receives all or part of the ‘otherwise’ or ‘money’s worth’ benefit is an issuer. It is perfectly clear that Blue Chip received such benefits.

“The entering into the sale & purchase agreements by the investors conferred a number of benefits on Blue Chip, facilitating the payment of the underwriting fees and conferring on Blue Chip control over the apartments. In those circumstances we see no difficulty in treating the relevant subscription as encompassing the entering into of the sale & purchase agreements, given that they provided a mechanism by which the investors provided benefits to Blue Chip, which for this reason also was an issuer.”

The Supreme Court has gone further into the nature of the commercial setup in its section of the judgment on the investors’ argument that the Blue Chip joint venture agreement involved an offer of equity securities.

The Court of Appeal dismissed the investors’ argument on this point with reasoning that went right back to Justice Randerson’s view in the High Court Bartle case, where he ignored the reality of relationships (a cursory glance would also show he ignored form at crucial moments).

The Court of Appeal said in its developer case judgment: “But the more substantial difficulty with the appellants’ case … is that there was no offer to the public for subscription in terms of section 33. The JVA provided that the investor was entitled to all the shares in the company to be incorporated and to appoint the directors of the company. The shares were not purchased from Blue Chip or issued by a company that was offering them to the public for subscription. They were issued to the investor by a company incorporated by the investor himself or herself.

“The appellants maintain that this reasoning does not address the argument that what Blue Chip was marketing were the rights to have shares in a joint venture company. That the joint venture companies were apparently formed on the instructions of the investors is, according to the appellants, beside the point.”

The Supreme Court found the investors’ argument on this point “at least at first sight, logically compelling”: “What Blue Chip was offering was, inter alia, the right to go into business with it on a joint venture basis. This right was to be given effect in a number of ways, including the entitlement to be a shareholder, along with Blue Chip, in a company which was to play a particular role in the investment. Looking at what was proposed in this broad way, the detail of the manner in which the joint venture company was formed and its capital subscribed may be beside the point.

“That said, we have reservations as to both the substance of the argument and whether it leads anywhere in the context of this case. The joint venture companies were bare trustees for the investors & Blue Chip and their role was thus not particularly material to the way in which the JVA product operated. And if the financial components of what was marketed by Blue Chip (which included the sale & purchase agreements) did not engage the definitions of ‘security’ & ‘debt security’, it would be difficult to see how the entitlement of the developers to insist on performance of the sale & purchase agreements would be impeached by a rather technical breach in relation to the shares in the joint venture companies. Accordingly, we see no point in reviewing the arguments on this issue in any more detail.”

At this point, the way out for the developers was through the Securities Act exemption in section 5(1)(b), in relation to interests in real estate. Justice Venning concluded this was a complete answer to the investors’ Securities Act arguments. The Supreme Court disagreed with Justice Venning and said the Court of Appeal still took too narrow a view on the point.

Justice Young wrote in the Supreme Court decision: “It could not seriously be suggested that the transactions entered into between the investors and Blue Chip in relation to the apartments (for instance, the option arrangements in relation to the PIP & PAC products) involved ‘the ordinary purchase of land’ or that the Blue Chip obligations to the investors in relation to the apartments were in the nature of ‘an unexceptional term ancillary to the purchase of an interest in land’. It follows that the argument – that section 5(1)(b) excludes a Securities Act challenge to the marketing of the Blue Chip products – is flatly inconsistent with the approach taken by the Privy Council (in the Culverden retirement village case).”

Justice Young went on: “The reality is that, from the point of view of the investor – and assuming of course that all went according to plan – the apartments were of only peripheral significance. Such profits as the investors could expect to derive were to come substantially from the efforts & substance of Blue Chip.

“And, as events have shown, the practical ability of the investors to recover their outlays was very dependent on Blue Chip honouring its promises. Those promises were well removed from what could be seen as ancillary to ordinary real property transactions. Rather, in our appreciation, they fell four-square within the intended regulatory scope of the act.

“We note that the Court of Appeal considered that some aspects of the promises made by Blue Chip were ‘ancillary’ to the purchase of interests in land and thus protected by the exemption. This was in respect of the right under the JVA to receive interest payments, and the right under the PIP to receive option fees. As is no doubt apparent, we disagree. The financial promises made by Blue Chip must be addressed in the way they were intended to be considered by the investors, that is, as a whole. And we think it perfectly clear that, as a whole, those promises are not protected by the exemption.”

The developers argued in the Supreme Court that, even if the court reached the conclusion it did on exemption, they could still insist that the investors perform on the sale & purchase agreements. Both Justice Venning & the Court of Appeal had supported the developers on that point.

Justice Young said the Supreme Court wouldn’t respond to all the arguments on this, which included the operation of the exemption, the extent of the developers’ knowledge of the detail of Blue Chip’s investment products, whether the actions & knowledge of Blue Chip should be imputed to the developers and, more generally, the application of the law of illegal contracts and the extent to which a contract, in itself lawful, might be tainted & rendered unenforceable by reason of associated illegality.

“We accept that the developers were perfectly entitled to insulate themselves from the legal consequences of misrepresentations & nonperformance by Blue Chip. What they could not do, however, is contract out of the Securities Act. For this reason, the appropriate Securities Act categorisation of the actions of the developers & Blue Chip is not controlled by the way in which they were described in the contractual documents.

“From the point of view of the investors, the Blue Chip products which they acquired were inextricably linked to the sale & purchase agreements they signed. This is because the Blue Chip products simply could not work independently of the sale & purchase agreements. This means that the sale & purchase agreements and the Blue Chip investments products were integrated packages. This is not affected by the precise order in which the various agreements were entered into, in particular whether the sale & purchase agreement was completed before the JVA, PIP or PAC, providing they occurred at practically the same time and in circumstances where the investor & Blue Chip intended them to operate together. Given the consumer protection focus of the statute, we see this consideration as dominant….

“The promises & payments made by the investors to the developers were pursuant to, and in that sense part of, the consideration for the promises made by Blue Chip. This supports the view that the subscriptions which were invalidated by section 37(4) included the contractual commitments of the investors to the developers and the payments the investors made pursuant to those commitments…..

“The investors are directly challenging enforcement of what, on their face, look to be reasonably orthodox agreements for the sale & purchase of apartments which were being sold off the plans. At first sight, therefore, the transactions between the developers and the investors might be thought to fall four-square within the section 5(1)(b) exemption. Such an approach, however, ignores the bigger picture:

(a) The investors subscribed for the securities which Blue Chip was issuing by, inter alia, entering into the sale & purchase agreements and, as we have explained, the operation of the Blue Chip products (which we have held to be debt securities) were inextricably associated with the sale & purchase agreements

(b) Icon & Greenstone knew either the detail (in the case of Icon) or at least the substance (in the case of Greenstone) of the investment products which Blue Chip was marketing

(c) The knowledge of Blue Chip & its actions (which included marketing the apartments & investment products as integrated packages) is to be attributed to each of the developers

(d) So the developers were parties to the actions of Blue Chip & its sales force, with full attributed knowledge of the substance & detail of the Blue Chip products and that those products & the sale & purchase agreements were marketed as integrated financial packages.”

The Supreme Court went further after the hearing than the submissions made, when Justice Young said it occurred to the panel that section 37(5) of the Securities Act provided an alternative approach to the question of whether the developers were issuers.

Justice Young said the court thought considering this issuer point was warranted, given the case had to go back to the High Court for final orders and other investors not party to this case might enter new litigation.

Justice Young said this subsection could apply directly to the developers only if they were issuers: “And despite the case not having been argued on this basis, it seemed to us to be well arguable that they were issuers:

(a) The consideration provided by the investors for the allotment by Blue Chip of the securities included entering into the sale & purchase agreements & any payments made under them

(b) The developers thus received what was provided by the investors to Blue Chip as consideration for the allotments, in the form of money (being deposits) & money’s worth (in the form of the obligations under the sale & purchase agreements), and were thus ‘issuers’ within the section 2 definition

(c) The sale & purchase agreements (along with any payments made by the investors to the developers under them) were subscriptions within the meaning of the section 2 definition

(d) Applying section 37(5) to the circumstances as they now are, the developers must repay any money received and must cancel the sale & purchase agreements or are otherwise disqualified from enforcing them.”

I’ve left the detail of Justice Tipping’s tainting examination out of this story.

Related story today:

13 August 2012: What was the Blue Chip business all about?

Earlier Blue Chip court stories:

9 August 2012: Blue Chip investors win in 5-0 Supreme Court decision against developers

9 May 2012: Blue Chip liquidation, claims & pooling head to July court hearing

25 January 2012: Liquidators file $40 million claim against Blue Chip directors & auditors

7 September 2011: Supreme Court allows Blue Chip appeal on prospectus question

30 March 2011: Blue Chip investors lose appeal against developers

4 December 2010: Starting point for Supreme Court’s Bartle ruling flawed

3 December 2010: Supreme Court sides with GE in Blue Chip-related Bartle case

1 June 2010: Bartle case off to Supreme Court, complications for hearing of remitted Blue Chip case

7 May 2010: Court finds old couple lent to Blue Chip, not the other way round, and the setup was oppressive

27 November 2009: Venning rejects Blue Chip investors’ hopes of avoiding apartment settlements

2 October 2009: Judgment abjectly wrong in Blue Chip case

1 July 2009: Second Blue Chip-based trial set to close next week

8 June 2009: Update: Second major investor case over Blue Chip takes a breather, application to wind up parent company opens, and Northern Crest files 2009 accounts

12 May 2009: Dale outlines case in second Blue Chip trial, this time against developers

22 April 2009: Blue Chip clients point at GE in test case

3 April 2009: Hundreds of Blue Chip cases adjourned to 21 April test case hearing date

Want to comment? Go to the forum.

 

Attribution: Judgments, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

What was the Blue Chip business all about?

Published 13 August 2012

If the primary purpose of Blue Chip investors wasn’t to invest in apartments for a future income stream, what was the business all about?

Justice Sir Willie Young, writer of last week’s Supreme Court judgment, outlined the business, the investment products and how the investors came to be lenders.

Blue Chip marketed 4 investment products: the mainstream agreement, the joint venture agreement (JVA), the premium income product (PIP) and the put & call agreement (PAC).

“Under the mainstream agreement, the investors purchased apartments which were subject to leases with the rent guaranteed by Blue Chip. There were associated agreements for the sale & purchase of a furniture pack and for property management. None of the appellants in this case acquired the mainstream product, although it was envisaged that the apartments the appellants purchased would later be sold again, with the new purchasers entering into mainstream agreements.

“The other 3 products were all associated with a Blue Chip strategy which was based around:

 

(a) Blue Chip identifying & securing sites suitable for apartment buildings

(b)  either selling such sites to an independent developer who would build an apartment building on the site, or alternatively Blue Chip itself directly putting in train the planning & funding arrangements for the erection of such a building

(c) Blue Chip selling apartments ‘off the plan’ to short-term investors and in this way generating sufficient presales to allow funding to be drawn down for the construction of the apartment buildings and at the same time generating underwriting fees for Blue Chip based on the selling prices of the apartments, and

(d) Blue Chip, in due course, locating a second purchaser for each apartment, whose purchase payment would enable the original investor to be taken out.

“Whether Blue Chip made profits on the initial securing of the development sites and their onsale to developers was not explored before us and is not material to the outcome of the appeals. But there were plainly other benefits. The arrangements facilitated the receipt by Blue Chip of underwrite fees, which were essentially commissions on the sales made to the investors. More generally, according to material generated by Blue Chip, these arrangements enabled it to maintain control over a significant number of apartments which were, in effect, ‘on the shelf’ and could later be sold to investors under the mainstream agreement (who were said to prefer ‘immediate settlement stock’). Any capital gain derived on such further sales would accrue, either entirely or substantially, to Blue Chip.

“The returns for the investors were in the form of ‘fees’ which, in the case of the JVA product and particularly the PIP, were functionally very similar to interest and, in the case of the PAC product, involved a sharing of Blue Chip’s underwrite fee. Assuming that all went according to plan, that was, for the investors, either it, or just about it. In return, they became unconditionally committed to the purchase of the apartments and they paid the required deposits. The investors’ outgoings were either covered by the fees payable by Blue Chip or were the subject of indemnities.”

Justice Young said the JVA agreement was the form at issue in the Bartle case: “The investor agreed to purchase an apartment & furniture pack but also agreed, jointly with Blue Chip, to establish a joint venture entity to engage in the business of owning & leasing the apartment. The investor was required to fund the purchase of the apartment & the associated furniture pack. The return for the investor was a procurement fee (in the nature of interest). Blue Chip was to meet all outgoings on the borrowing & property. The joint venture was intended to last for approximately 4 years, at which point it was envisaged that the property would be sold, with 95% of any capital gain going to Blue Chip and the balance (5%) accruing to the investor.”

The judge said the risks for the investor were associated with the following features of the transactions:

 

(a) the prices at which the joint ventures acquired the apartments included substantial underwrite fees, in the nature of commissions, paid to Blue Chip

(b) the amount borrowed by the investor included not only the price of the apartment (including the commission) but also the furniture pack & a working capital payment (which provided a fund from which the procurement fees could be paid)

(c) the income generated by the apartments did not cover borrowing costs

(d) as a result of factors (a), (b) & (c), the success or failure of the investment was dependent on either continuing substantial growth in apartment values or the substance of Blue Chip’s promises, and

(e) because many of the investors had little or no independent income and had mortgaged their existing homes to raise the money required to participate in the scheme, the failure of the investment meant they might well lose their homes.

Under the PIP, the investor agreed to purchase an apartment & furniture pack and was required to pay a 10% deposit, which was held in the trust account of the property developer’s solicitors, with interest accruing for the benefit of the investor or Blue Chip, depending on who eventually settled the purchase. The sequence of events was that the PIP agreement was entered into conditionally upon: (a) execution by the investor of the sale & purchase agreement and a deed on nomination, (b) Blue Chip securing execution by the developer of those documents within 10 days and (c) approval of the PIP agreement by an authorised officer of Blue Chip within the same period of 10 days.

Justice Young said: “Counsel for the developers submitted that this meant it was possible for the investor to become bound under the sale & purchase agreement without Blue Chip committing to the PIP under the third of the conditions. We do not see this as plausible either (a) legally, because we think Blue Chip could not properly have put the sale & purchase agreement to the developer without at the same time committing to the PIP or (b) commercially, because it is inconceivable that it would do so.”

From payment of the deposit until settlement, Blue Chip paid the investor a monthly option fee amounting to a return on the deposit of about 16%/year. These fees were linked to Blue Chip having an option to acquire the apartment from the investor before settlement. If Blue Chip exercised this option, the investor received back the deposit but not the interest. If Blue Chip didn’t exercise the option, the investor was required to complete the purchase of the apartment, with Blue Chip (a) agreeing to pay the investor’s reasonable costs of settlement, including the costs of borrowing the balance required to settle, and (b) retaining an option to acquire the apartment at the original purchase price.

The risks to the investor were similar to those identified in the joint venture scheme, except the investor wasn’t making a working capital contribution so the underlying property value growth assumptions didn’t match those under the JVA.

Under the PAC agreements, the investor was required to enter into agreements to acquire an apartment & furniture pack and pay the required deposit (or enter into an approved bond). There were put & call options under which Blue Chip could call for, or have put to it by the investor, the right to acquire the apartment or the apartment itself (if settlement had by then occurred). Blue Chip was to pay a call option fee, which was typically $7500 and was payable within 14 days of Blue Chip receiving an underwrite fee from the developer. Justice Young said it followed that the PAC agreement disclosed to the investor that Blue Chip would be receiving an underwrite fee from the developer. Many of the PAC investors were either associated with Blue Chip or had family associations with someone who was.  The risks for the investor were similar to those associated with the PIP.

Justice Young then outlined the 3 apartment developments & their funding.

Blue Chip managing director Mark Bryers approached Greenstone Barclay directors John Abel Pattinson & Kevin Cox in October 2005 about an Albert St property opposite the district court which was subject to an option in favour of Blue Chip. Mr Bryers told them Blue Chip had a pool of investors available to buy apartments. It was agreed that Greenstone would buy the site and build an apartment building on it. Blue Chip was to introduce its investors as purchasers for the apartments. The parties completed profit-share & underwrite agreements in March 2006, although the profit-share agreement wasn’t engaged.

Westpac Bank, the primary financier of the development, required $39 million of presales on an arm’s length basis. Greenstone had an underwrite agreement with Blue Chip up to $20 million, so Blue Chip would buy any units unsold by a specified date. In exchange, Blue Chip was to be paid a fee of 12.6% of the sale price of each unit sold. Under the sale & purchase agreements, the deposits were usually 15% of the purchase price and the properties were sold subject to lease.

Turn & Wave’s project was the Bianco off Queen, on a site it acquired from Blue Chip. Blue Chip was to underwrite sales in return for underwrite fees of either 12.6% or 15% of the purchase price of the units, depending on whether the unit was to be serviced. Westpac was again the primary funder, again with special funding conditions. Marketing began about October 2006 and sales picked up in the first quarter of 2007, many achieved by Blue Chip using the PIP.

Icon Central’s property was on St Martin’s Lane, off the top of Symonds St. Mr Bryers was shareholder & director from incorporation in February 2007 until he sold the company to Mr Ross & Mr Mudgway’s company,  Paxton Pacific Group Ltd, in October 2007. By then the company had already made progress on planning & funding for the building and enough presales had been attained to enable the company to draw down development funds from Westpac under similar funding arrangements to the other 2 developments.

At the Icon, the underwrite agreement was with BFB Underwriters Ltd, controlled by Neil Bell & Rikki Flowerday, who held senior positions at Blue Chip. BFB was a subsidiary of Mide Ltd, incorporated in August 2007 to operate the New Zealand business of Blue Chip. BFB underwrote the sale of the units up to $73 million and, in return, was to receive an underwrite fee of 15% of the sale price of each unit sold. Justice Young said differences in this agreement weren’t material. The sale & purchase agreements were similar to the others, except that Mr Bryers signed them all on behalf of the vendor.

Those all seem like agreements revolving around the development & sale of apartments. However, fundamental to the arguments of the appellant investors was the contention that Blue Chip’s marketing of its JVA, PIP & PAC products amounted to the making of offers of securities to the public. That’s what the Supreme Court found, which I’ve detailed in a related story.

Related stories:

13 August 2012: Forward 2 years, and the Supreme Court decrees that Blue Chip investors were the lenders

9 August 2012: Blue Chip investors win in 5-0 Supreme Court decision against developers

 

Earlier Blue Chip court stories:

9 August 2012: Blue Chip investors win in 5-0 Supreme Court decision against developers

9 May 2012: Blue Chip liquidation, claims & pooling head to July court hearing

25 January 2012: Liquidators file $40 million claim against Blue Chip directors & auditors

7 September 2011: Supreme Court allows Blue Chip appeal on prospectus question

30 March 2011: Blue Chip investors lose appeal against developers

4 December 2010: Starting point for Supreme Court’s Bartle ruling flawed

3 December 2010: Supreme Court sides with GE in Blue Chip-related Bartle case

1 June 2010: Bartle case off to Supreme Court, complications for hearing of remitted Blue Chip case

7 May 2010: Court finds old couple lent to Blue Chip, not the other way round, and the setup was oppressive

27 November 2009: Venning rejects Blue Chip investors’ hopes of avoiding apartment settlements

2 October 2009: Judgment abjectly wrong in Blue Chip case

1 July 2009: Second Blue Chip-based trial set to close next week

8 June 2009: Update: Second major investor case over Blue Chip takes a breather, application to wind up parent company opens, and Northern Crest files 2009 accounts

12 May 2009: Dale outlines case in second Blue Chip trial, this time against developers

22 April 2009: Blue Chip clients point at GE in test case

3 April 2009: Hundreds of Blue Chip cases adjourned to 21 April test case hearing date

 

Want to comment? Go to the forum.

 

Attribution: Judgments, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Blue Chip investors win in 5-0 Supreme Court decision against developers

Published 9 August 2012

The Supreme Court has unanimously allowed appeals by about 250 investors in Blue Chip Financial Solutions Ltd schemes and decreed that sale & purchase agreements on apartments they bought are unenforceable.

That means deposits must be returned and mortgagee sales of investors’ homes must stop.

This story will continue once I’ve read the judgment.

Want to comment?

Go to the forum.

 

Attribution: Court judgment & release, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Blue Chip liquidation, claims & pooling head to July court hearing

Published 9 May 2012

Justice Paul Heath set the course on Monday for litigation to decide how the liquidation of the parent company of the collapsed Blue Chip group, Northern Crest Investments Ltd, and the separate liquidation of former subsidiary companies in New Zealand should be handled.

The judge made timetabling orders towards a hearing in the Auckland High Court on the first available date after 13 July.

Lawyers Paul Dale & Daniel Grove, acting for a group of Blue Chip product investors, have called for the Official Assignee to be appointed liquidator of the parent (now Sydney-based) & former subsidiaries. That group, known as the investor consortium, also wants recoveries to be pooled.

But a large part of the court action – the application for pooling, and consortium claims against directors & auditors – could collapse if the Official Assignee isn’t appointed liquidator of all companies in the group, and formerly in the group. Mr Grove told the judge: “The funders are not prepared to fund it unless there is a completely independent overseer, namely the Official Assignee.”

The liquidators of 19 franchise-operating companies in the Blue Chip group, Jeff Meltzer, Arron Heath & Lloyd Hayward (Meltzer Mason Heath), filed a claim in January for about $40 million against directors of the formerly listed parent company & 3 subsidiaries, and also against Blue Chip’s auditors.

The directors include former Blue Chip executive chairman Mark Bryers (bankrupted in 2009), onetime chairman Jock Irvine and former Cabinet ministers Wyatt Creech & John Luxton. The auditors were BDO Ltd. The relevant subsidiaries were Becroft Ltd, Kingsley Ltd & Lanark Ltd.

The claim relates to 800 investors who invested in Blue Chip Financial Solutions (NZ) Ltd schemes up to 2006. Their deposits went directly to Blue Chip, not to a solicitor’s trust account as subsequent deposits did, and the buildings they invested in weren’t built (although the sites have subsequently been developed).

In December, Justice Heath reversed the decision of the liquidators of Northern Crest Investments (ex-Blue Chip Financial Solutions Ltd) rejecting the proof of debt of the Australian financier of Northern Crest’s attempt to revive itself and escape ASX suspension. Northern Crest was wound up on 2 June 2011, with Anthony McCullagh & Steve Lawrence (PKF Corporate Recovery & Insolvency (Auckland) Ltd) appointed liquidators.

Excluding a large volume of debts filed by consortium investors in Blue Chip schemes, Justice Heath’s decision would enable the financier, Manifest Capital Management Pty Ltd, to dominate any voting at a creditors’ meeting and thus get its wish to replace the liquidators. However, that part of the process hasn’t happened yet, being thrown in with the other issues for hearing in the post-13 July fixture.

A complication in the parent company liquidation is that the liquidators have admitted claims by Lombard Group Ltd totalling some $9.7 million, of which $4.7 million is secured and $5 million unsecured. Justice Heath said those liquidators also needed to make decisions on whether consortium members’ claims should be admitted, and had to indicate to the court whether they supported or opposed appointment of a single liquidator.

In court on Monday, Justice Heath said consortium members had also brought claims for damages against directors of various Blue Chip companies. Directors who’ve been sued have indicated they’ll seek security from litigants for costs, and Justice Heath expected the auditors to do the same.

The judge stayed consortium claims against directors in the meantime and adjourned the pooling application to the next case management conference.

Earlier stories:

25 January 2012: Liquidators file $40 million claim against Blue Chip directors & auditors

22 December 2011: Judge opens way for Northern Crest backers to try again to remove liquidators

16 December 2011:Australian bid to assume control of Northern Crest (Blue Chip) liquidation stays foiled for the moment

3 June 2011: Northern Crest (ex-Blue Chip) wound up – the judgment

2 June 2011: Blue Chip – now Northern Crest – wound up

30 March 2011: Blue Chip investors lose appeal against developers

4 December 2010: Starting point for Supreme Court’s Bartle ruling flawed

3 December 2010: Supreme Court sides with GE in Blue Chip-related Bartle case

3 December 2010: Northern Crest (ex-Blue Chip) still talks of relisting despite negative equity

27 November 2009:Venning rejects Blue Chip investors’ hopes of avoiding apartment settlements

2 October 2009: Judgment abjectly wrong in Blue Chip case

27 March 2008: Meltzer retains liquidation for Blue Chip companies against push for tougher action

18 February 2008: 18 Blue Chip companies in liquidation

12 September 2007: Blue Chip formalises change to become franchise fee-earner

25 June 2004: 10-minute meeting sees Bryers get Blue Chip listed through Newcall

 

Want to comment? Go to the forum.

 

Attribution: Court hearing, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Invercargill woman sentenced for Blue Chip sales frauds

Published 13 April 2012

A former Blue Chip salesperson in Southland, Rachel Jarvis has been sentenced to 7 months’ home detention, 200 hours’ community work & $50,000 reparation for mortgage frauds.

Ms Jarvis, 34, pleaded guilty in the Invercargill District Court in February to 5 offences under the Crimes Act in relation to charges the Serious Fraud Office laid in connection with mortgage frauds.  They included one count of forgery and 4 counts of using a forged document for personal benefit.

Ms Jarvis alteredlending documents to secure loans worth $1.469 million for property investments, subsequently leaving investors with properties they would otherwise have been unable to afford. At the time, she was a sales rep for residential investment company Blue Chip Financial Solutions Ltd.

Serious Fraud Office chief executive Adam Feeley said the level of offending was at the lower end of the office’s threshold for investigations, but it prosecuted because of the high levels of public interest in matters related to Blue Chip.

Mr Feeley also said the case was a good example of co-operation between law enforcement agencies.  The criminal investigation branch of the Invercargill police originally referred it to the fraud office after 23 people in Southland laid complaints.

Mr Feeley said Ms Jarvis held 2 roles, one working for Blue Chip selling residential investment properties to potential investors and the other working for Town & Country Finance brokering mortgage applications to lending institutions.

“When Jarvis submitted some mortgage applications to banks on behalf of those she had convinced to invest in Blue Chip products, she changed some of the information supplied to enhance the applications and ensure they were accepted. Exaggerating income, creating fake letters of employment, fraudulently using other companies’ logos on documents, creating fake tenants for applicants and taping applicants’ signatures on to unapproved statements were her methods for obtaining some of the mortgages.

“The investors were unaware of the incorrect information contained within their applications and the false documents were submitted to the bank.”

Want to comment? Go to the forum.

 

Attribution: SFO release, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Liquidators file $40 million claim against Blue Chip directors & auditors

Published 25 January 2012

The liquidators of 19 franchise-operating companies in the Blue Chip group have filed a claim for about $40 million against directors of the formerly listed parent company & 3 subsidiaries, and also against Blue Chip’s auditors.

The directors include former Blue Chip executive chairman Mark Bryers (bankrupted in 2009), onetime chairman Jock Irvine and former Cabinet ministers Wyatt Creech & John Luxton. The auditors were BDO Ltd. The relevant subsidiaries were Becroft Ltd, Kingsley Ltd & Lanark Ltd.

The claim relates to 800 investors who invested in Blue Chip Financial Solutions (NZ) Ltd schemes up to 2006. Their deposits went directly to Blue Chip, not to a solicitor’s trust account as subsequent deposits did, and the buildings they invested in weren’t built (although the sites have subsequently been developed).

Blue Chip sold apartments off the plans for developments in Emily Place, Turner & Waverley Sts and St Martins Lane in Auckland.

The liquidators, Jeff Meltzer, Arron Heath & Lloyd Hayward (Meltzer Mason Heath), have been analysing what action they could take for the 3 years since their appointment.

Mr Meltzer said yesterday: “It’s taken some time to effectively analyse the considerable data underpinning a series of complex Blue Chip investor agreements & sub-agreements written during the relevant period. Blue Chip had many variations of the agreements."

The liquidators allege in their statement of claim that there were a number of inherent flaws in the Blue Chip business model which caused the collapse of the group and losses to investors & creditors.

“These inherent flaws were compounded by the way the business model was operated. Rather than purchasers’ deposits being held in a solicitor’s trust account, they were instead paid to Blue Chip NZ Ltd and used by it for working capital. In addition, a 12.6% royalty fee on sales of apartments exceeded usual selling costs incurred by developers and was a possible contributing factor to the developments not being built.

“A Blue Chip undertaking to pay investors 9.3% interest on deposits, or a licence rental, cut into Blue Chip’s cash resources which should have been available to pay construction & related costs on these developments.”

Earlier story:

15 November 2010: Meltzer says recovery for early Blue Chip investors likely from civil actions

Want to comment? Go to the forum.

 

Attribution: Liquidators’ release, interviews, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Judge opens way for Northern Crest backers to try again to remove liquidators

Published 22 December 2011

Justice Paul Heath has reversed the decision of the liquidators of Northern Crest Ltd (ex-Blue Chip Financial Solutions Ltd) rejecting the proof of debt of the Australian financier of Northern Crest’s attempt to revive itself and escape ASX suspension.

Excluding a large volume of debts filed by investors in Blue Chip schemes, Justice Heath’s decision would enable the financier, Manifest Capital Management Pty Ltd, to dominate any voting at a creditors’ meeting and thus get its wish to replace the liquidators.

Justice Heath said that in the next round he would need to consider Manifest’s application to remove the liquidators or to compel the liquidators to call a further creditors’ meeting.

But there is still likely to be a case put next year for the Northern Crest liquidation to be pooled with the liquidations of the group’s former New Zealand subsidiaries. If that proposal by lawyers acting for investors in Blue Chip schemes succeeded, Manifest’s debt would remain swamped and its attempt to replace the Auckland-based liquidators would fail.

Manifest director Gerard Eakin is the brother of Laurie Eakin, who was appointed as an independent non-executive director of Northern Crest in May 2009, then became its executive director on 22 June 2009, replacing Mark Bryers, who became a consultant. Mr Bryers was bankrupted on 1 October 2009 and Northern Crest was wound up on 2 June 2011, with Anthony McCullagh & Steve Lawrence (PKF Corporate Recovery & Insolvency (Auckland) Ltd) appointed liquidators.

At the 22 November creditors’ meeting – called as a postal vote – Manifest thought it would have control given there were only 19 creditors registered for total debt of $6.89 million. Manifest had lent Northern Crest $A3 million for working capital.

However, Manifest counsel Bruce Stewart QC told Justice Heath in the hearing last Wednesday that, by the time of the vote, the number of creditors had risen to 289 and the claimed debt to $44 million, through claims registered “on behalf of the ma & pa investors”.

The questionmark over the Manifest debt was whether it was legitimately owed by Northern Crest or by a subsidiary which had held the money. That subsidiary, Barkley Walsh Pty Ltd, went into liquidation in May 2009. Mr Stewart said Barkley Walsh had held the money because Northern Crest didn’t have a bank account after its suspension from trading on the ASX.

In a reserved decision issued on Tuesday, Justice Heath found that Manifest had advanced the $A3 million for the benefit of Northern Crest, and that Northern Crest owed the money. The judge directed the liquidators to file a report by 27 January on progress in determining whether the large volume of other claims should be admitted.

The whole dispute will go to a chambers case management conference before Justice Heath in the week starting 6 February.

The second part of last week’s hearing in the Auckland High Court concerned an application to admit affidavits by Lombard Group Ltd’s former chief executive, Michael Reeves, supporting Manifest’s application to remove the liquidators.

Mr Reeves gave details of discussions he had with liquidator Steve Lawrence, even though those discussions were all on a “without prejudice” basis. It was revealed only at last week’s hearing that Mr Reeves had recorded & transcribed the discussions.

The primary allegation arising from the discussions was that Mr Lawrence had sought $850,000 – a good proportion of that in fees, the reason for the rest not disclosed – to quit as liquidators. Mr Reeves’ evidence also suggested one issue discussed involved the extent to which the liquidators might investigate the conduct of Northern Crest officers before liquidation. There was also the possibility of investigating whether a deed of company arrangement could be entered into. Mr Reeves said he believed Mr Lawrence’s proposal was improper.

Justice Heath decided the Reeves evidence was inadmissible. Apart from those parts referred to in his judgment, he prohibited publication of the affidavits’ contents until further order of the court.

Earlier stories:

16 December 2011: Australian bid to assume control of Northern Crest (Blue Chip) liquidation stays foiled for the moment

3 June 2011: Northern Crest (ex-Blue Chip) wound up – the judgment

2 June 2011: Blue Chip – now Northern Crest – wound up

 

Want to comment? Go to the forum.

 

Attribution: Judgment, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading

Australian bid to assume control of Northern Crest (Blue Chip) liquidation stays foiled for the moment

Published 16 December 2011

The Australian financier of a scheme to get Mark Bryers’ Northern Crest Investments Ltd (ex-Blue Chip Financial Solutions Ltd) out of ASX suspension went to the Auckland High Court this week to replace the company’s liquidators with Sydney-based appointees.

Lawyers for investors in failed Blue Chip schemes in New Zealand intend to file a conflicting proposal to pool the Northern Crest liquidation with that of former New Zealand subsidiaries.

Jeff Meltzer, Arron Heath & Lloyd Hayward (Meltzer Mason Heath) were appointed liquidators of 19 Blue Chip franchise operating companies in New Zealand in February 2008, and Anthony McCullagh & Steve Lawrence (PKF Corporate Recovery & Insolvency (Auckland) Ltd) were appointed liquidators of parent company Northern Crest on 3 June this year.

The dispute between financier Manifest Pty Ltd (headed by then-Northern Crest director Laurie Eakin’s brother Gerard) and Northern Crest’s liquidators began when the liquidators didn’t accept Manifest’s proof of debt for more than $A3 million. At the 22 November creditors’ meeting – called as a postal vote – Manifest thought it would have control given there were only 19 creditors registered for total debt of $6.89 million.

However, Manifest counsel Bruce Stewart QC told Justice Paul Heath on Wednesday, by the time of the vote the number of creditors had risen to 289 and the claimed debt to $44 million, through claims registered “on behalf of the ma & pa investors”.

The questionmark over the Manifest debt was whether it was legitimately owed by Northern Crest or by a subsidiary which had held the money, which Mr Stewart said was for working capital. That subsidiary, Barkley Walsh Pty Ltd, went into liquidation in May 2009. Mr Stewart said Barkley Walsh had held the money because Northern Crest didn’t have a bank account after its suspension from trading on the ASX.

After evidence on the question of whether the Northern Crest liquidators should have accepted Manifest’s proof of debt, the court moved on to whether to admit an affidavit from former Lombard Group Ltd chief executive Michael Reeves relating to the proposal to remove Northern Crest’s present liquidators.

Justice Heath reserved his decision on Manifest’s application and expects to give a decision early next week on whether to accept Mr Reeves’ evidence. A case management conference will be held in February, followed by a substantive hearing in 2012.

Want to comment? Go to the forum.

 

Attribution: Court hearing, story written by Bob Dey for the Bob Dey Property Report.

Continue Reading
WordPress Appliance - Powered by TurnKey Linux