Twentieth Century Fox Film Corporation and Others v Dotcom and Others
| Jurisdiction | New Zealand |
| Judge | Courtney J |
| Judgment Date | 05 February 2016 |
| Neutral Citation | [2016] NZHC 88 |
| Docket Number | CIV-2014-404-001272 |
| Court | High Court |
| Date | 05 February 2016 |
CIV-2014-404-001272
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
Application by the respondent (a) challenging the standing of an interested party (the Commissioner of Police) to be heard (b) for an order varying a freezing order, and (c) for an order requiring the applicants to give an extended undertaking — the respondent wished to borrow against a property that was subject to a freezing order and then on lend to a trust — the trust wanted the funds in order to participate in a rights issue offered by a company — if the trust did not participate, its shareholding in that company could be wiped out — the respondent wished to ensure that the trust's assets were preserved for the beneficiaries (his children) — the respondent said that variations of freezing orders under r 32 High Court Rules were not limited to the circumstances set out in r32.6(3) (paying ordinary living expenses and legal expenses, and transactions in ordinary course of the respondent's business) — whether the Commissioner had standing — whether the borrowing was within the scope the respondent's ordinary course of business — whether the court could vary a freezing order to allow assets to be used for purposes other than those specified in r32.6(3) — whether variation of the order was in the interests of justice — whether the applicants should provide an extended undertaking to cover claims for losses to the trust sustained as a result of not being able to participate in the rights issue.
M C Sumpter and L L Fraser for Applicants
S L Cogan and H Wild for First Respondent
L L C Cooney (excused) for Second Respondent
A R B Barker and A J Steele for Fourth Respondent
D J Boldt and A Dixon for Interested Party (Commissioner) M J Gavin for Recording Industry
J E M Lethbridge for Custodians
JUDGMENT OF Courtney J
[Reasons]
The applicants in this proceeding are a group of US film studios. In civil proceedings brought in the United Sates they allege large scale breaches of copyright by Mr Dotcom and others. In 2015 they obtained a freezing order over Mr Dotcom's assets and, subsequently, over the assets of the Trust Me Trust, alleging that Mr Dotcom is the beneficial owner of the trust's assets (the named beneficiaries are Mr Dotcom's former wife, Mona Dotcom, and their children).
One of the frozen assets is 5H The Prom, Coatesville, which Mr Dotcom, owns. 1 In December 2015 I dismissed Mr Dotcom's application to vary the freezing order to allow him to use that property as security for personal borrowings that he planned to on-lend to the trustee of the Trust Me Trust, Coatesville Trustee Service Ltd (CTSL). CTSL is a shareholder in Mega Ltd and need the funds to participate in a rights issue offered by the company.
In this judgment I give reasons for my decisions (1) rejecting Mr Dotcom's challenge to the standing of the Commissioner of Police to be heard (2) dismissing Mr Dotcom's application and (3) refusing to require the studios to give an extended undertaking in favour of CTSL.
The Commissioner originally became an interested party in this proceeding by virtue of an agreement between Mr Dotcom, the studios and the Commissioner; the Commissioner withdrew his application to register a foreign restraining order against Mr Dotcom's assets under the Mutual Assistance in Criminal Matters Act 1992 on the basis that all Mr Dotcom's assets would be the subject of the civil freezing order obtained by the studios so that the Commissioner's interest would be adequately protected. However, in submissions filed in support of the application to vary the freezing order Mr Dotcom asserted that the Commissioner of Police lacked standing to oppose the application. Given the pressure of time, it was agreed that I
would hear submissions on behalf of the Commissioner and determine the issue of his standing along with the other issues that fell to be decidedMr Cogan, for Mr Dotcom, argued that the time for registering the foreign restraining order expired in April 2015 and that, in the absence of any restraining orders, the Commissioner's interest had subsided. Mr Cogan did not suggest that the Commissioner should actually be struck out of the proceeding, though that would be the logical next step if his submission were correct. I do not, however, accept that it is correct.
I am satisfied that the Commissioner does have an interest in seeing that Mr Dotcom's assets that are subject to the freezing order are properly dealt with in terms of r 32. First, the Commissioner is in the position of an interested party rather than having the benefit of a foreign restraining order as a result of the agreement reached with Mr Dotcom. It is not open for Mr Dotcom to resile from that agreement on the basis that no foreign restraining order exists. Secondly, as Mr Boldt pointed out, 5H The Prom is still subject to forfeiture proceedings in the United States and remains restrained in that jurisdiction. Any variation to the freezing order made here will affect the US government's interest such that it is entitled to remain (through the Commissioner) an interested party and to be heard on the application to vary the freezing order.
For these reasons I took the submissions that Mr Boldt made on behalf of the Commissioner into account.
Mr Dotcom founded Mega Ltd in 2013 but is no longer associated with it. The company has been plagued by financial difficulties. These were substantially caused by Pay Pal's refusal in mid-2015 to process credit card transactions. Last year the company undertook three rights issues to raise urgently needed working capital. Each rights issue had a dilutive effect on existing shareholders. The first, in July 2015 was a 2:1 offer. CTSL did not participate in that. The second was 50:1. CTSL participated to maintain its interest in the company (then just over 7%).
Mr Dotcom's application related to the third rights issue. It was offered on a two tiered basis, potentially at 50:1 and closed on 22 December 2015. If CTSL did not participate its shareholding would effectively be obliterated. CTSL did not have funds to participate and could not borrow to do so because it could only offer security over the Mega shares, which was unacceptable to the proposed lender.
Mr Dotcom planned to borrow the necessary funds using 5H The Prom as security and on-lend them to CTSL. Although Mr Dotcom has no interest in Mega Ltd and is not a beneficiary of the Trust Me Trust, he was motivated to ensure that the trust's assets were preserved for the benefit of his children. Despite public criticism of Mega Ltd's current management and shareholders, Mr Dotcom maintained that the company was worth investing in and was anxious to assist CTSL to maintain its interest in the company.
In evidence given in February 2015 on an unrelated application Mr Dotcom estimated the value of Mega Ltd to be approximately $320m. At that time CTSL held 21,697 Mega shares. By the end of 2015, two new, unrelated, parties held the majority of the Mega shares. There was no clear evidence before me as to the value of the Mega Ltd shares in December 2015. The studios provided an affidavit from a consultant in company finance, Mr Anderson, who considered that, on the basis of the company's own documents relating to share transactions in July and August 2015, the total value of the company was approximately $12.5m. Mr Dotcom did not accept this but did not offer any independent evidence to challenge Mr Anderson's analysis.
Rule 32 codifies the Mareva jurisdiction developed at common law in the United Kingdom and exercised here under the previous r 236B. It permits freezing orders to be made where there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied either because the debtor or prospective debtor might abscond or because the assets of the debtor or prospective debtor might be removed, disposed of, dealt with or diminished in value. 2
Because of their effect freezing orders are commonly described as draconian. 3 However they are not intended to prevent respondents from carrying on their usual private and business activities nor from defending the substantive proceedings. To this end r 32.6(3) limits the scope of freezing orders:
The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of –
(a) Paying ordinary living expenses; or
(b) Paying legal expenses related to the freezing order; or
(c) Disposing of assets, or making payments, in the ordinary course of the respondent's business, including business expenses incurred in good faith.
In addition, r 32.8 permits a respondent to apply to discharge or vary the order:
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(1) A freezing order must reserve leave to the respondent to apply to the courts to discharge or vary the freezing order on whatever period of notice to the applicant the court considers just.
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(2) An application by the respondent to discharge or vary the freezing order must be treated as an urgent application by the court.
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