LawNews - Issue 36

THIS WEEK’S ARTICLES

Issue 36 16 Oct 2020

Who’d be an expert witness? P1

Directors’ duties: more uncertainty than ever p3

Navigating the tricky world of cryptocurrency insolvencies pages 6&7

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CIVIL LAW

Why would anybody be an expert witness?

By Rod Vaughan

They come in all shapes and sizes and have become a regular fixture in courtrooms all over the world.

Expert witnesses are playing a pivotal role in many high-profile criminal cases in this country.

Boston Globe / Contributor, Getty Images

In last week’s LawNews, we explored the use of experts in criminal cases. Read more.

They’re also in big demand in the civil jurisdiction, offering their services on all manner of complex and convoluted issues. In the second of a two-part series, we interview three New Zealanders who know the civil scene inside out.

They are John Katz QC, author of Expert Evidence In Civil Proceedings, lawyer and financial consultant Grant Graham of Calibre Partners, who has often acted as an expert witness, and Steve Alexander, who has appeared as an expert witness in more than 500 building and construction disputes.

Generally, experts require the same basic qualities in both civil and criminal cases: competence and impartiality, and a recognition that their role and duty is to assist the court rather than to advocate for a client. And for both jurisdictions the gene pool of genuine, independent and knowledgeable experts in New Zealand is small.

How widespread is the use of expert witnesses in civil cases in New Zealand and has there been a significant increase in their numbers in recent years?

John Katz The use of expert witnesses in civil proceedings has certainly increased in recent times but exponentially as against the increase in the number of filings of proceedings.

There appears to me to be a general feeling, rightly or wrongly, that no proceeding can be filed without some sort of expert evidence.

It’s a tough way to make a living

Who in their right mind would put a suit on and head to an environment where some of the country’s cleverest advocates have come prepared to make you look like a fool?

buildings) causing an unprecedented rise in building litigation.

Steve Alexander Civil use of expert witnesses has increased very significantly in the past 20 years due to the proliferation of building defect cases (often leaky

Perhaps the most significant in terms of legal developments of the rules surrounding expert

The government chose a litigation-based model to address the avalanche of building defect cases that developed between 1997 and 2002. At one time I calculated that based on the capacity in the system, it would take 50 years to address all the known and predicted claims.

What have been some of the most high-profile civil cases where expert witnesses have played a pivotal role?

John Katz In civil, it would probably be one of the many insurance cases that proceeded all the way to the Court of Appeal or further.

Continued on page 2

CIVIL LAW

Why would anybody be an expert witness?

John Katz QC

Steve Alexander

Grant Graham

Continued from page 1

same entrenched opinions on every appearance.

For example, in the Ministry of Education v Carter Holt Harvey case I recognised that I did not have all the required knowledge and nor did that knowledge reside in New Zealand. So, I collaborated with a colleague in Canada and this resulted in a brief of evidence from each of us based on a five-year process of research and testing.

evidence is the appellate judgment in Prattley Enterprises v Vero Insurance.

Steve Alexander The largest civil litigation in recent history has been the case of Ministry of Education v Carter Holt Harvey. This matter has been ongoing for the past five years and was recently settled (at least adjourned pending settlement) several weeks into the trial.

I was an expert for the Ministry of Education. This was a product liability case that involved no less than 47 experts. It would be reasonable to conclude that the experts did play a pivotal role in this case; however, I often have difficulty determining whether experts genuinely play a pivotal role or whether they are pawns in a bigger game.

Are there any cases where expert testimony has caused you to question their competence and/or motivation?

Steve Alexander Most cases cause me to question the competence or motivation of experts. The building industry has depleted skill levels and this is mirrored by the knowledge of many experts.

There is no doubt there are some experts who are overtly advocates. What they have to say can easily be predicted in advance and they present the

John Katz There are numerous statements in a number of cases, but predominantly in the UK or Australia, where courts have criticised experts for being biased, non-partisan, adopting an adversarial role or otherwise not being truly independent and there to assist the court rather than necessarily to assist the party that has retained them.

The overarching duty of the expert is to assist the court rather than the client which some experts seem to consider is antithetical to how they perceive their role Is there an adequate pool of expert witnesses in New Zealand? If not, why and what are the ramifications?

Grant Graham There is not an adequate pool, and that’s primarily because it’s a tough way to make a living.

Who in their right mind would put a suit on and head to an environment where some of the country’s cleverest advocates have come prepared to make you look like a fool?

Steve Alexander There is no shortage of people who will stand up and express an opinion but I think the pool of genuine, highly-knowledgeable experts is shallow in New Zealand.

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What attributes make a good expert witness and how do you prepare them for the job in hand?

Grant Graham The only way to be a good expert is to prepare meticulously. Experience in the courtroom is a huge plus and unquestionably engenders a level of respect.

However, when you’re on the stand your CV counts for nothing. There’s nowhere to hide up there; it’s how well you know your stuff and how well you tell your story.

John Katz The best expert is one who, in theory, at least does not even know the party that has retained the expert. In other words, the expert is oblivious to the outcome, simply providing independent expert evidence to assist the court.

In some cases, particularly ones such as disputes over the rent review in a lease and quantum of the Continued on page 4

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LawNews Issue 36 | 16 Oct 2020

COMPANY LAW

Judgment offers more uncertainty for directors

By David Friar and Tim Fitzgerald

​​ hen a company enters troubled W financial waters, directors face difficult decisions about when and how to continue to trade. They have several core duties and are exposed to personal liability if they breach them.

In a significant new decision about the liquidation of Debut Homes, Madsen-Ries v Cooper [2020] NZSC 100, the Supreme Court has restated the duties that apply. The court found the director, Leonard Wayne Cooper, was personally liable for continuing to build four properties while there was a shortfall to creditors.

In doing so, it disagreed with the Court of Appeal, which had said Cooper made a “perfectly sensible business decision” that was likely to improve the return to creditors.

While the decision clarifies aspects of the law, the difference on the facts between the Court of Appeal and Supreme Court highlights the real risks that directors face, particularly given the current economic environment.

The facts Debut Homes was a residential property development company. By the end of October 2012, it was in financial difficulties, with a substantial debt owed to the IRD. It also had four properties yet to be completed.

The director discussed the company’s financial position with the its accountant. The accountant said there would be a GST deficit of at least $300,000 if the company completed those properties, as compared with an immediate liquidation.

The director decided that creditors as a whole would be better off if the company completed the outstanding properties. It completed the work and in doing so made repayments to secured creditors, whose debts were personally guaranteed by Cooper and his trust.

Nothing was left to pay the GST liability arising from the sales. The company was later placed into liquidation on the application of the IRD. The High Court found Cooper had breached his duties. It considered he knew there would be a significant shortfall to the IRD but nevertheless elected to complete the properties. The court said Cooper’s decision was improper.

The Court of Appeal reversed the decision. It said there would have been a shortfall to the IRD even if the company had elected not to complete the properties. In the Court of Appeal’s view, it was a “perfectly sensible business decision” that was likely to improve the return to creditors rather than

David Friar

Tim Fitzgerald

cause them loss.

The court emphasised that by November 2012, Cooper knew that completing the properties would lead to a GST shortfall of at least $300,000 – a loss that was certain, and it was serious.

The Supreme Court reversed the Court of Appeal and reinstated the High Court’s decision. In doing so, it addressed several key issues relating to directors’ duties.

Restructuring If a company cannot return to solvency, directors must start an insolvency or restructuring process.

An important consideration for the Supreme Court was that by November 2012, it was clear there would be a shortfall to creditors under any realistic scenario. Further, it was not enough that the overall shortfall would be reduced by ongoing trading. The court ruled that if there is a shortfall, some form of insolvency or restructuring ​mechanism is required.

That could be a formal insolvency process, such as a liquidation, receivership, creditors’ compromise, scheme of arrangement or voluntary administration. It could also be less formal, such as an informal compromise with creditors, if this were done in a way that is consistent with the directors’ duties and involved all classes of creditors.

The touchstone in each case is the involvement of all classes of affected creditors and a corresponding loss of absolute control by the directors. Directors in these circumstances who continue to operate without reference to creditors are at risk of breaching their duties.

The court said if continued trading would result in a shortfall to creditors without engaging a formal or informal insolvency mechanism, then there was a breach of the director’s duty not to engage in reckless trading. Importantly, it is not an answer to a claim for breach of duty that some creditors were better off as a result or that the overall deficit to creditors was projected to be reduced.

Involuntary obligations Directors can “agree” to involuntary obligations such as tax debts.

They also owe an obligation under the Companies Act not to agree to the company incurring obligations without a reasonable belief that it can perform them.

The court rejected Cooper’s submission that the duty applies only to contractual obligations incurred with the agreement of the director, rather than tax debts. It said the duty applied here because Cooper had allowed Debut Homes to enter into the sale and purchase agreements knowing this would result in the company incurring a GST liability. As Cooper knew the company could not meet the GST liability, the duty had been breached.

Reckless trading Continuing to trade a company that cannot be returned to solvency is reckless trading, even if trading would benefit creditors as a whole

The court said it was not legitimate to enter into a course of action to ensure some creditors had a higher return where this can be achieved only by incurring new liabilities to other creditors which will not be paid.

Under the Companies Act, directors must not engage in reckless trading. The Supreme Court ruled that Cooper had breached that duty here by continuing to trade.

Good faith The duty to act in good faith in the best interests Continued on page 5 3

Continued from pages 1, 2 lease payment, the telling question is to ask the expert whether his or her opinion on quantum of lease payment would be the same if the expert were giving evidence for the opposing party.

Preparation of the expert includes instilling in the mind of the expert these principles and ensuring the expert truly is independent and objective.

Steve Alexander In my view, having a good knowledge of the law and practice of dispute resolution is an important attribute.

To write an effective brief of evidence requires an understanding of the dispute process and what lawyers and the court need from an expert.

To what extent are people deterred from becoming expert witnesses because of the stress caused by the often-aggressive adversarial process?

Grant Graham There is no avoiding the stress. Professional pride alone creates that and I feel it every time I walk into a courtroom. There is generally quite a difference in the nature or adversarial approach of counsel to experts between civil and criminal matters.

Where liberty is at stake, I have found counsel far more determined to question an expert’s personal credibility whereas in civil matters an expert’s competence is seldom at issue. Rather, challenge comes over the expert’s opinions, as of course it should be.

Steve Alexander Some people thrive on the dispute resolution process but I do know of others who do not want to be involved at all for a range of reasons.

Some have had a bad experience giving evidence, others see dispute resolution as negative and unproductive rather than just an essential part of resolving differences.

Many, including myself, experience that truth and justice are often not an outcome achieved.

How objective and independent are expert witnesses and to what extent do some consciously or unconsciously become an advocate for the legal team that has hired them?

Grant Graham The Code of Conduct for Expert Witnesses has seriously changed matters for the better. Prior to that, advocacy was the name of the game rather than assisting the court with your genuine beliefs.

We are so much better served now.

I have found that when an expert starts to wander into an advocacy realm, opposing counsel will be quick to come down on it, as will the judge.

Experts need to be firm with counsel as to what they will and won’t put into a brief or affidavit. It’s not the lawyer who will be cross-examined on it in the courtroom.

Steve Alexander A lawyer would not call an expert to give evidence for a party if that expert did not have knowledge or experience that is of value to that party.

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There is no doubt there are some experts who are overtly advocates. What they have to say can easily be predicted in advance and they present the same entrenched opinions on every appearance

So, to some extent it can be expected that all experts for the claimant will give evidence generally advantageous for the claimant and similarly for the respondent experts.

Expert evidence in building disputes has deteriorated under the pressure of time, cost and market demand.

The result has often been partisan evidence to support a commercial negotiation process rather than well-researched quantitative peer-reviewed evidence fully compliant with court or tribunal rules.

To what extent do lawyers shop around for expert witnesses who will say what they want them to say?

Grant Graham Although there might be some lawyers who shop around to find an expert who will support their case, this would be very much the exception rather than the rule.

Often lawyers will engage an expert to provide their views on certain issues which will then enable the lawyer to properly assess their client’s case and to make appropriate recommendations on strategy, particularly as to whether to either continue with or continue defending a claim.

An expert’s role is to be impartial to assist the court and ironically those who come across as less-thanimpartial will more often damage the case they are supporting, rather than provide any assistance.

Steve Alexander There are clearly some experts who are selected because the lawyer knows what they will say.

Alternatively, the lawyer or client knows that the expert would not want to jeopardise comfortable ongoing business.

John Katz I have certainly heard of lawyers who do shop around for a pliable expert who will provide evidence that suits the case of the party concerned.

Expert shopping is, however, frowned upon and there are a number of English decisions on that point.

In the US, expert witnesses are often regarded as little more than hired guns who make large sums of money. Is there any evidence of this emerging in New Zealand?

Grant Graham I wish – well, the money bit. If it comes to New Zealand, let me know.

Steve Alexander Yes, this has come to the fore in the building and construction sector because of the unusual market circumstances but I am sure that this is also a trend in other sectors to some extent.

John Katz I think we have evolved in New Zealand to the point where we have escaped or largely escaped the problems in other jurisdictions such as the US where there is sometimes a win-at-all-costs mentality.

Compared to prosecutors, are defence counsel disadvantaged when it comes to accessing expert witnesses in New Zealand? Is more funding required?

Grant Graham I suspect this is more of an issue in criminal cases where many accused are legally aided. As far as I am aware, defence counsel are entitled to funding for expert witnesses under legal aid but they are limited by hourly rates and other factors.

So, it is arguable that more funding should be made available where prosecutors have much more latitude and funding in the engagement of experts than defence counsel.

Steve Alexander There is a general problem with affordability of justice that is well recognised by the judiciary.

Very frequently power imbalances arise, particularly when claimants have limited resources and most of the available defendants are either territorial authorities, insurers or ‘deep pocket’ corporates.

Taking everything into consideration, do you think the process for giving expert evidence should be reformed to make it less adversarial?

If so, do you favour options such as pre-trial conferences where defence and prosecution experts agree on areas of agreement and disagreement, or do you prefer the inquisitorial process known as hot tubbing?

Grant Graham I am a big fan of the preparation of joint reports of experts, where opposing experts will identify the issues between them and summarise their respective positions in a simple document that may run to 10 to 15 pages maximum.

In cases where briefs can run over 100 pages this makes real sense and has the advantage of narrowing down significantly the issues for the judge.

Continued on page 10

LawNews Issue 36 | 16 Oct 2020

Continued from page 3 of the company is subjective.

There is some debate in the case law about the nature of a director’s duty to act in good faith in the best interests of the company. The court said the duty was subjective, requiring the director to act in what he or she believes to be in the best interests of the company.

It also said the director’s actions should not be judged solely in hindsight. However, the court considered that a director could not subjectively believe he or she was acting in the best interests of the company in an insolvency scenario if he or she had failed to consider the interests of all creditors, including prospective creditors.

Directors are particularly at risk of breaching this duty if they have a conflict of interest: for example, if they are also a creditor of the company or guarantor of some of the company’s debt and have an incentive to favour certain creditors over others.

As a result, the court found Cooper had breached the duty here.

Remedy The court also addressed the appropriate remedies for a breach of directors’ duties – an issue of particular interest as we await the decision of the Court of Appeal in the Mainzeal litigation.

The Supreme Court held that although duties are

owed to the company rather than to creditors, the consequences for directors will not necessarily be measured in terms of a company’s financial loss.

show the genuine challenges for directors of a near-insolvent company when deciding whether to continue trading.

If directors have breached a duty of loyalty, or if they breach duties by incurring obligations without a reasonable belief that they can be met, then other remedies are possible. These include orders that directors restore property they have received from the company and/or pay compensation measured by reference to debts a company has incurred.

The key in this case was Cooper’s knowledge that the company could not meet the GST liability that would arise from completing the properties. In those circumstances, the court considered that a decision on whether to continue to trade should have been made in the context of a formal or informal insolvency process in which all creditors had the ability to participate.

The court also held that although the remedy was primarily compensatory, the courts were also entitled when assessing the appropriate remedy to consider the need to deter directors from breaching their duties.

The position might be different where there is less certainty about whether there would be an ultimate shortfall or while a director is pursuing the possibility of a formal or informal insolvency process. In these circumstances, directors are likely to be allowed time to understand the company’s position and options. Indeed, there may be circumstances when continuing to trade is a reasonable risk even if the company does ultimately fail.

The Supreme Court restored the orders made in the High Court under which Cooper was required to pay $280,000. It also partly set aside a general security agreement securing a further advance made to the company by Cooper’s trust after November 2012, on the ground that it would not be just and equitable for the trust to receive the funds the liquidators would recover from Cooper for breaching his duties.

Ramifications for directors The stark differences between the approaches of the Court of Appeal and the Supreme Court

In its judgment, the Supreme Court acknowledged uncertainty about the parameters of directors’ choices in such situations but decided not to give any guidance on these issues in its decision.

David Friar and Tim Fitzgerald are partners at Bell Gully. Senior associates Nick Moffatt and Sarah Leslie also contributed to this article

Senior Legal Counsel (In-house)

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TECHNOLOGY

What to do if a cryptocurrency business goes bust

By James Cochrane, Arran Hunt & Samantha Chow

Cryptocurrency markets have been volatile in the wake of Covid-19, including a sharp correction and significant selloff in tech equities. This means investors are at risk of further cryptocurrency insolvencies in New Zealand or affecting Kiwi investors.

This article looks at the recent New Zealand High Court decision in Ruscoe & Moore v Cryptopia Limited 2020 (in liquidation) [2020] NZHC 728, alongside the curious Canadian tale of Quadriga CX (QCX) and considers what investors can do when faced with a crypto insolvency.

Cryptopia collapse In January 2019, the Christchurch-based cryptocurrency exchange, Cryptopia, suffered a serious security breach resulting in NZ$30 million worth of digital currency being hacked and transferred into an undisclosed exchange.

Liquidators Grant Thornton were appointed on 15 May 2019.

With the rising value and popularity of crypto assets, Cryptopia at its liquidation date had more than 2.2 million registered users and employed 37 staff. To give some context around how significant its operations were, New Zealand had the twentysixth largest number of account holders (9,475) with 230 other countries and territories identified as account holders by reference to IP addresses.

The liquidators estimated that Cryptopia held cryptocurrency worth, at the time of judgment, about NZ$170m.

As this was a novel case for New Zealand, Cryptopia’s liquidators filed an application to the High Court seeking directions (under s 248 of the Companies Act 1993) about the legal status of crypto assets in New Zealand.

The liquidators had earlier filed a petition in the bankruptcy court in New York to preserve Cryptopia information stored on US servers, engaged former staff to assist them and gained a court order allowing them to convert 344 bitcoin into cash to fund the liquidation expenses and to preserve assets. At the time those bitcoin were worth more than NZ$4.4m.

The application concerned the competing interests between Cryptopia’s account holders and creditors. Post-liquidation, Cryptopia had 960,143 account holders with a positive coin balance.

Of that number, 104,186 were believed to have a “deemed nil value”, presumably because of the hack.

Creditors were also owed substantial amounts.

The liquidators’ first report showed 69 unsecured 6

James Cochrane

Arran Hunt

creditors owed in excess of $2.16m and secured creditors owed more than $1.4m, with the company owing employees’ preferential claims of $318,000 for outstanding wages and holiday pay and a further $271,808 in unsecured debt.

cryptocurrencies were mere information, by explaining that the purpose of cryptocurrency is not to impart information or knowledge but to create an item of tradable value. To strengthen this position, account balances and the function of private keys were compared to online banking systems.

The legal issues The two main legal issues before the court were: Does cryptocurrency constitute “property” under s 2 of the Companies Act? And can cryptocurrencies form the subject matter of a trust?

Was the cryptocurrency being held on trust by Cryptopia for account holders?

Counsel for the account holders argued that cryptocurrency is a form of intangible property at common law and under the Companies Act and is capable of forming the subject matter of a trust.

Cryptopia was holding the cryptocurrencies on trust for the account holders, by way of either an individual trust for each account holder as a sole beneficiary or in one trust for the benefit of all account holders being co-beneficiaries of that trust.

Counsel for the creditors disagreed, saying the question of whether cryptocurrency should constitute property should be left for Parliament to decide. It was instead argued that the account holders were unsecured creditors and the cryptocurrency formed part of Cryptopia’s pool of assets which ought to be distributed in accordance with Part 16 of the Companies Act. Analysis The property issue The High Court was satisfied that cryptocurrency met all four classic characteristics of property: identifiable subject matter, identifiable by third parties, capable of assumption by third parties and had some degree of permanence or stability.

The court rejected the argument that

While revolutionary in terms of New Zealand law for cryptocurrency, this finding was not particularly surprising in light of overseas decisions. But in the ever-changing world of decentralised finance or “DeFi”, the finding is welcome.

The trust issue Distinguishing the Singaporean Court of Appeal case Quine v B2C2 Ltd [2020] SGCA (1) 02, the New Zealand High Court was satisfied on the particular facts and on construction of Cryptopia’s terms and conditions that the three certainties required to form an express trust were met. The court held that the cryptocurrency was held on separate express trusts for each and all account holders, not just those active at the time of liquidation.

Because of the nature of the cryptocurrency exchange and trading, the court acknowledged that some account holders might be unidentifiable.

In this case, it directed the liquidators to follow the procedure set out in s 76 Trustee Act 1956 where advertisements are published, calling for claims to be made. As only those account holders who held types of cryptocurrency that were stolen would have suffered a loss, any recovered misappropriated cryptocurrency should go to those account holders whose accounts were looted, on a pari passu basis. In any event, the crypto cannot be treated as company assets.

Quadrigca CX Another example about the liquidation of a Continued on page 7

LawNews Issue 36 | 16 Oct 2020

She has reduced the loss to creditors by agreeing to surrender everything she inherited from Cotten’s estate and any assets he transferred to her before his death.

But as many believe Cotten is still alive, creditors have asked the Royal Canadian Mounted Police to exhume his body and conduct a post-mortem autopsy to confirm his identity and cause of death.

Applying Cryptopia Cryptopia differs to QCX. While there has been no published judgment, it looks as if QCX’s account holders are being treated like unsecured creditors in the company’s liquidation rather than as beneficiaries of separate trusts.

Samantha Chow

Continued from page 6 cryptocurrency exchange company is the Canadian case of Quadrigca CX. On 9 December 2018, Gerald Cotten, founder and CEO of Canada’s largest cryptocurrency exchange, QCX, unexpectedly died at the age of 30 while on honeymoon in India with his wife, Jennifer Robertson.

QCX was shut down in January 2019 and declared bankrupt in April that year, leaving users without access to their digital wallets. According to a report by the Ontario Securities Commission (OSC), more than 76,000 clients were owed a combined $215m in assets. Cotten was the only person with access to their private crypto keys, with no alternative operational procedures in place for if he were to ever lose access.

The OSC report said most of the $169m asset shortfall – approximately $115m – resulted from Cotten’s fraudulent conduct. It was found that Cotten created a string of accounts under different aliases which contained fictitious dollar balances to buy his customers’ cryptocurrency. He then moved those amounts into his own personal accounts at other cryptocurrency trading sites. The OSC report noted: “He sustained real losses when the price of crypto assets changed, thereby creating a shortfall in assets to satisfy client withdrawals. Cotten covered this shortfall with other clients’ deposits.”

In effect, the report said, “this meant that Quadriga operated like a Ponzi scheme.”

According to his wife, his cause of death was complications from Crohn’s disease. But QCX’s creditors are convinced Cotten faked his own death to escape liability from his lucrative Ponzi scheme.

Cotten’s will, which was finalised just days before his sudden death, left all his financial assets to his wife and made her the sole executor of his estate.

And Cryptopia’s losses have not yet been attributed to any fault of the company or its directors. Unlike Cryptopia, where an internal ledger was maintained, there is no evidence that QCX maintained any accounting records since at least 2016. Rather, Cotten appears to have treated his customers’ assets as his personal slush fund.

In this regard, QCX is more akin to the Ross Asset Management Ponzi scheme discussed in the New Zealand Supreme Court decision McIntosh v Fisk.

Justice Warwick Gendall notably stated that if there was any fault on Cryptopia’s part, as a matter of principle where a trustee is also a beneficiary of a trust (which Cryptopia considered was the case) and there is a shortfall in trust assets, then the trustee cannot have a share in the distribution if the trustee is found to be culpable, in respect of, and to the extent of, that shortfall.

Still, there remains the question of how New Zealand law might respond to a case where the liquidation of a cryptocurrency exchange platform resulted from failings of the company or its directors.

Possible liquidator actions For a similar case to QCX, where the exchange turns out to be insolvent, a liquidator might bring a personal recovery action against the director for reckless trading.

Section 135 Companies Act specifically creates a duty owed to creditors not to engage in reckless trading, meaning directors must not cause, agree or allow the company to operate in a way which creates substantial risk of serious loss to creditors.

Similarly, actions would likely lie against the director for breach of their duties under s 131 to act in the best interests of the company and also under s 136 which focuses on specific transactions and prohibits directors from incurring obligations unless they reasonably believe the company can perform them when required. Action might also be possible under s 137 for breach of their duty of care and skill.

A director like Cotten would probably have committed an offence under s 138A for a serious breach of his or her duty to act in good faith and in the best interests of the company, if it could be shown he or she in fact acted in bad faith.

Claims would also be available under the Subpart 6 of the Property Law Act 2007 on the basis that the transfer of the cryptocurrency was a disposition made when the company was insolvent and with

intent to prejudice a creditor or without receiving reasonably equivalent value.

If the crypto can be traced on the blockchain or via other means, a recovery action may be available against the recipient. Any transactions occurring while the company was insolvent and within the statutory specified period (in the case of QCX, any transfers of crypto from the company into Cotten’s false personal accounts) could be considered insolvent transactions under s 292 of the Companies Act. This would entitle a liquidator to set aside the transactions.

Doing your research and reading the fine print will likely be your best defence against crypto insolvencies Liquidators could also recover from someone in Cotten’s wife’s position, as she would probably be captured under s 297 for receiving the cryptocurrency or the wallet “keys” at undervalue or s 298 for acquiring the property for inadequate consideration.

In addition, there could be equitable and restitutional remedies available to the liquidators and/or the creditors, such as claims in knowing receipt and dishonest assistance, or where money is paid under mistake or received without consideration and the recipient is unjustly enriched.

A Japanese exchange that suffered a significant hack in 2018 has just commenced a claim against another major exchange, Binance, seeking to recover its losses. The plaintiff, Fisco, asserts that Binance’s “know your client” or “KYC” protocols, which are designed to prevent money laundering, failed to meet industry standards and that Binance was put on notice by the exchange which suffered the hack through which the stolen funds were being laundered.

Fisco’s complaint explains how blockchain analytics were used to trace the stolen bitcoin to the recipient’s cryptocurrency address and, from there, how the bitcoin was laundered in smaller amounts (less than two bitcoin) through Binance’s pool.

Account holders and creditors in a similar position to those in QCX may also have a cause of action under the Fair Trading Act 1986 (FTA). A director in Cotten’s position could be held personally liable under s 9 for misleading and deceptive conduct by creating fake aliases to purchase customers’ crypto amounts, and on describing the company’s general financial position. The FTA’s incoming unconscionable conduct provisions would likely be relevant.

Reducing risk Both Cryptopia and QCX highlight the problem of a centralised exchange – a factor in both cases.

Continued on page 10 7

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Understand the differences between the process options and how they work in practice.

Gain insights into the relevant considerations which may be taken into account and what a party and their adviser should do to prepare to participate in the process.

Expert Evidence in Health and Safety Cases In Person | Live Stream Expert evidence often plays a vital role in a wide range of litigation. In health and safety litigation, experts are regularly briefed by both parties due to the complex workplace contexts from which these cases arise. This seminar will explore the role of experts and expert witnesses in health and safety cases. Who are “experts”? What are the admissibility principles for expert opinion evidence? Why call expert evidence? When do you object to expert evidence? This seminar will explore these fundamental advocacy questions in the health and safety context. Learn more about the Evidence Act 2006 pre-conditions to the admission of expert opinion evidence.

Understand better how to: • identify issues that require expert evidence; • elicit expert opinion evidence that will be admissible, and which will assist your case and the Court; and • competently object to expert opinion evidence being tendered by the opposing party; and gain insights into how expert opinion evidence is perceived by the Court (how “substantially helpful” is it?).

Your Legal Business: Project Management and Other Tools for Improving Effectiveness In a year like no other, legal professionals and firms have dug deep and adapted to new ways of working. This begs the question: what else can be achieved – and not just now, but in the longer term? Through the use of relatable examples, the presenters will help you garner a set of tools to help you raise the bar even higher, enabling you to take control and make improvements all-round.

 Wed, 21 Oct 12pm – 1pm

 Presenter Carlene O’Meagher

 Webinar CPD 1 hr

 Fri, 23 Oct 12pm – 1pm

 Presenters Mark Colthart, Barrister/Arbitrator, FortyEight Shortland Barristers Catherine Green, Executive Director, New Zealand Dispute Resolution Centre

Livestream

 Seminar CPD 2 hrs

 Wed, 28 Oct 4pm – 6.15pm

 Presenter Fletcher Pilditch, Barrister, Richmond Chambers Angus Everett, Senior Solicitor, Legal Group, WorkSafe

 Chair Her Honour Judge Jelas

 Webinar CPD 1 hr

 Mon, 2 Nov 12pm – 1pm

Learning outcomes:

 Presenters

•

•

•

Caroline Ferguson, Director of Business Transformation and Innovation, Simpson Grierson Kathryn Low, Associate General Counsel – Legal Operations, Kāinga Ora – Homes and Communities Karen O’Leary, Senior People & Culture Manager, Chapman Tripp

Become apprised of the general principles and specific stages of legal project management, and how these can be tailored to your firm or organisation’s size, areas of practice and culture Gain a better understanding of how tools – technology, templates and checklists – can empower and streamline, resulting in reduced stress, increased profitability and enhanced client satisfaction Benefit from receiving templates that can be used in/adapted for your practice.

Getting to know IPONZ and its Services In this session on the Intellectual Property Office of New Zealand (IPONZ) you will get to know about: • IPONZ as an organisation, and IP regimes in New Zealand (Trade Marks, Patents, Designs, Plant Variety Rights, Geographical Indications, Copyright).

• The IPONZ online case management facility and application processes for Trade Marks and Patents.

• How the IPONZ online case management facility is maintained, including: how changes to the online system are considered; when and how these changes are released; and how to subscribe for system updates via email.

Learning outcomes: •

• •

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Learn more about the Intellectual Property Office of New Zealand (IPONZ) and the IPONZ online case management facility that handles applications and examinations for intellectual property in New Zealand.

Improve your understanding of the Trade Mark and Patent application process with IPONZ. Find out more about how enhancements to the online system are determined, and how you can subscribe for updates.

 Webinar CPD 1.5 hrs

 Wed, 4 Nov 12pm – 1.30pm

 Presenters Dylan Packman, Senior Stakeholder Engagement Advisor, IPONZ; Sean Uy, Stakeholder Engagement Advisor, IPONZ

LawNews Issue 36 | 16 Oct 2020

CPD in Brief Burning Issues in Employment Law Forum 2020

 Forum

This Guy Fawkes night, the Burning Issues Forum 2020 has it all – bon fires, camp fires and wild fires! – a veritable barbecued smorgasbord of the hottest and spiciest issues to emerge in these times of global challenge. First “The Covid Conundrum” – a blistering review of the Covid case law and a meaningful insight into the Covid challenges faced by employment lawyers and their clients. Next, a scorching commentary on recent judgments that are clearing the smoky blurred lines between employees and independent contractors and, last, come fireside as the Chief Judge illuminates the path towards meaningful access to justice in employment law.

Presenters: Her Honour Chief Judge Inglis; Garry Pollak, Solicitor; Rachael Judge, Senior Associate, Simpson Grierson Chair: Catherine Stewart, Barrister

CPD 2 hrs

Fairness in the Consumer and Commercial Sphere: An Update In recent times, we have heard a lot about being kind. In relation to consumer and commercial law, fairness may be kindness’ cousin. How does this translate to the consumer and commercial sphere? In this seminar, the presenters will provide an update and refresher on key areas which affect or will affect some consumer and commercial relationships, such as fair trading, (un)fair contract terms, and (un)conscionability.

Presenters: Tania Goatley, Partner, Bell Gully; Anne Callinan, Partner, Simpson Grierson; Dot Benson, Credit Deputy General Counsel, Commerce Commission Chair: Steve Dukeson, Principal, Dukesons Business Law

Are you Trust Fit? – Varying, Resettlements, Winding Up and Mediation

 Thu, 5 Nov 4pm – 6pm

Livestream CPD 1.5 hrs

 Mon, 9 Nov 4pm – 5.30pm

Livestream

In Person | Live Stream The new Trusts Act and continuing developments in relationship property laws have led many clients to reconsider existing trust structures, and either look to update old trust deeds, or to take the opportunity to substantially restructure, resettle or simply wind-up existing trusts. This seminar will examine the processes which can be adopted to vary, resettle or wind up a trust and the issues that can arise from those processes. The seminar will also look at the Trusts Act from a mediation perspective and will cover the specific ADR provisions in the Act, as well as how trustees’ costs are likely to be treated on compromise.

Presenters: Jarrod Walker, Partner, Chapman Tripp; Carole Smith, Barrister, FortyEight Shortland Barristers Chair: Bill Patterson, Partner, Patterson Hopkins

 Seminar

Corporate Restructuring: Navigating Covid-19

 Webinar

Covid-19 has already had a dramatic impact on the tourism, accommodation, hospitality and retail sectors, but the broader economic impact of Covid-19 is yet to be felt by the wider economy. In this session, we will provide you with an overview of the restructuring tools available to corporates, so that you are aware of options should your clients call seeking advice to manage risk or distress. We will also touch on relief for directors and businesses and early warning signs to look for.

Presenters: Conor McElhinney, Partner, McGrathNicol; Laura O’Gorman, Barrister, Bankside Chambers

CPD 2 hrs

 Tue, 10 Nov 4pm – 6.15pm

CPD 1.25 hrs

 Tue, 17 Nov 4pm – 5.15pm

CPD Pricing Delivery Method

Member

Non-Member



Webinar (1 hour)

$80 + GST

$115 + GST

Webinar (1.25 hour)

$90 + GST

$130 + GST



Seminar (2 hour in person)

$130 + GST

$185 + GST

Seminar (2 hour live stream)

$130 + GST

$185 + GST

On Demand (1 hour recording)

$90 + GST

$130 + GST

On Demand (2 hour recording)

$145 + GST

$205 + GST

 

CPD On Demand Earn CPD hours by completing On Demand activities via your computer or smart device visit: adls.org.nz/cpd

For group bookings for webinars and seminars, contact cpd@adls.org.nz ADLS members and non-member lawyers who have registered their Airpoints™ membership with ADLS can earn Airpoints Dollars™ on eligible ADLS CPD purchases.

Terms and conditions apply.

Lockdown Relief? Commercial Leases and COVID-19 Rent Disputes Friday 23 October | Webinar | 1 CPD hour Visit adls.org.nz for more information.

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Continued from pages 1, 2, 4 It also has the benefit of narrowing and shortening cross-examination which, of course, appeals to me.

John Katz It is implicit in our system that it is adversarial.

I am not a fan of hot tubbing. While it may be convenient for the judge or for lazy counsel, I think it limits the ability of a good expert to add real value under cross-examination.

That said, that quintessentially Australian phenomenon known as the hot tub, or what I prefer to call concurrent evidence, where the experts get together and effectively argue between themselves their respective positions, is becoming more common in New Zealand and is a welcome development.

Steve Alexander Hot tubbing is over-rated and is not in itself sufficient to make a difference.

There are many possible avenues for reform.

The most important reforms to make the most difference would seem to be greater judicial case management, specialist courts, a move to court- or tribunal-appointed experts and tempering of the adversarial battle with a more inquisitorial process.

Of those, I strongly favour greater judicial case management and tempering the adversarial process with a more inquisitorial process.

I really see no preference to be given to hot tubbing or concurrent evidence on the one hand and expert meetings directed under the High Court Rules on the other.

As for future developments or prospects for reform, one of the major areas would be to limit the scope of expert evidence and the number of experts to be called. In England expert evidence can be deployed in court only by leave of the court. In New Zealand any party can call expert evidence without any prior approval being obtained from the court. I think the English approach is preferable.

A further area is in relation to the sheer cost of expert evidence. Generally, where a party has deployed expert evidence and succeeds at trial, the full costs of the expert are required to be paid by the opposing party.

In England, where costs budgets are now required, the court exercises greater pre-trial control over experts’ costs and this is a welcome approach. It certainly makes access to justice more affordable especially litigants such as those in the Christchurch insurance claims.

In simple terms, I think the courts can do a lot more to exercise super intendancy and control over expert evidence. This may, however, require a change to the court rules as our system generally works on the basis that parties are free to call such evidence as they see fit.

For insights into expert evidence in the health and safety field, you might be interested in attending our upcoming seminar on 28 October.

Continued from pages 6, 7 Exchanges tend to use “web wallets”. These tend to be connected to the internet and are commonly known as a “hot wallet”. These wallets are easy to set up and the funds are quickly accessible, making them convenient for traders and other frequent users.

But they have risks that other “cold” wallets, such as “paper” or “hardware” wallets, do not have, including the risk of the exchange’s central servers being hacked or the risk of the company itself becoming insolvent. Cold wallets, on the other hand, have no connection to the internet. Instead, they use a physical medium to store the keys offline, making them resistant to online hacking attempts. As such, cold wallets tend to be a much safer alternative of “storing” your coins.

In QCX’s case the exchange held and managed the users’ private “keys”, allowing Cotten to steal their funds.

In Cryptopia’s case, the users deposited their “fiat” currency into a “hot wallet” for the cryptocurrency in question. Once deposited, the currency could be left in the hot wallet to meet withdrawal requests from other users or be transferred to a cold wallet.

When a trade occurred between two users on the exchange, the users’ respective coin balances on the company’s internal ledger would change to reflect the trade but the balances in the company’s digital wallets did not change. The trades and transfers that took place on the exchange did not affect the blockchain ledgers (the general ledgers of ownership that exist for each cryptocurrency outside of the exchange).

This is because the coins remained in Cryptopia’s digital wallets. Only trades outside the exchange would be recorded on the relevant cryptocurrency’s public ledger. However, crucially,

like QCX, Cryptopia exclusively held the private keys to its digital wallets that contained the cryptocurrencies traded on the exchange. Account holders did not have access to the private keys.

This, and the fact the hot wallets were connected to the internet, allowed them to be hacked.

With ever-increasing numbers of “mobile” hot wallets and exchanges, and the assets held and traded on them increasing in value, investors need to understand how ownership of their crypto property is recorded and managed. While we hate and often overlook it for the sake of convenience, doing your research and reading the fine print is likely to be your best line of protection from a crypto insolvency.

James Cochrane and Arran Hunt are partners at Stace Hammond and Samantha Chow is an intern

NEW BOOK

Assessment of Mental Capacity: A New Zealand Guide for Doctors and Lawyers Authors: Alison Douglass, Greg Young and John McMillan

it is assessed and what supporting people with impaired capacity means in practice.

The guidance in this book has been written to serve the needs of doctors, lawyers, health practitioners, families and whānau. It is written by experts from a range of disciplines including law, medicine and ethics and is based on the Toolkit for Assessing Capacity.

Price for non-members: $50.00 plus GST* Price for ADLS members: $45.00 plus GST*

It combines an explanation of the law, case studies and practical guidance for health and legal practitioners about capacity, how

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(* + Postage and packaging) To purchase this book, please visit adls.org.nz; alternatively, contact the ADLS bookstore by phone: (09) 306 5740, fax: (09) 306 5741 or email: thestore@adls.org.nz.

LawNews Issue 36 | 16 Oct 2020

Senior Lawyer – Trust/Property/Business Role We are looking for a senior lawyer with a minimum of 5 years’ PQE to join our team. This role is to ease the workload of a Director who is moving towards retirement.

This is a great opportunity for an ambitious and dynamic person with a sound understanding of trusts, property and business. The ability to supervise estate work undertaken by another team member would be beneficial.

WILL INQUIRIES LawNews The no-hassle way to source missing wills for $80.50 (GST Included) Email to: reception@adls.org.nz Post to: ADLS, PO Box 58, Shortland Street, DX CP24001, Auckland 1140 Fax to: (09) 309 3726. For enquiries phone: (09) 303 5270

Key attributes required for this role: • Have experience in dealing with clients and able to manage your

Wills

• Relate well to clients and referrers • Have good time management, interpersonal skills, attention to

We offer:

Please refer to deeds clerk. Please check your records and advise ADLS if you hold a will or testamentary disposition for any of the following people. If you do not reply within three weeks it will be assumed you do not hold or have never held such a document.

• An innovative firm with a great team environment • An opportunity to be part of one of the eastern suburbs’ largest

Siauva’a Mokofisi ATIGIFAGU, Late of 5 Agar Place, Mangere, Auckland, aged 78 (died 16’12’18)

own files with minimum supervision

detail and operate in a collaborative team environment

• Be able to work in a Paperlite office and manage an electronic file

• • • •

using Infinity Software

legal practices Market salary, team monthly and annual bonus schemes Excellent established precedents, systems and technology Free parking and iPhone The excellent training, conferences and benefits that are available to members of NZ LAW legal firms

Please email your resume and covering letter to our Practice Manager, Brandon Tam brandont@dglaw.co.nz or Director, Kelly McCullough kellym@dglaw.co.nz.

No Agencies please

Jennifer Ann BROOME, Late of 3/24 Speight Road, Kohimarama, Auckland, divorced, nurse, aged 66 (died 04’10’20) Carol ERUTOE (also known as Carolyn ERUTOE), Late of 14 Royal Arch Place, Rosehill, Papakura, Auckland, retired driver, aged 54 (died 09’07’19) Kau Tina KAULIMA, Late of 82 Colwill Road, Massey, Auckland, aged 61 (died 11’05’20) Phillip Mark Lindo LINES, Late of 137b Cook Drive, Whitianga, aged 62 (died 24’09’20) Patricia Ancie ROGERS, late of Papakura, Auckland, receptionist, aged 66 (died 05’09’20)

Dinner with His Honour Chief District Court Judge Taumaunu Friday 6 November From 6.30 pm The Northern Club 19 Princes Street, Auckland

RSVP

T 09 978 3970

E events@adls.org.nz

W adls.org.nz

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MEDIATION Nigel Dunlop Barrister

PROPERTY LAWYER We are a busy provincial law firm situated at the gateway to the Coromandel and seek to employ a solicitor, ideally with at least 5 years’ experience in property law, to work in our general practice.

We offer a challenging and interesting range of work in a supportive congenial working environment. Definite prospects for advancement exist for the right candidate.

This is an opportunity to be part of a progressive practice where a positive work/life balance is a priority.

Applications with CV should be forwarded by email to rodney@millerpoulgrain.co.nz

EXPERTISE & EXPERIENCE Recognised industry experts. Serving legal documents for over 30 years.

Fast, professional, nationwide process serving for solicitors and government agencies.

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021 685 910 nigel@nigeldunlop.co.nz www.nigeldunlop.co.nz

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CHARTERED ACCOUNTANTS | INSOLVENCY & LITIGATION

Burning Issues in Employment Law Forum 2020 Thursday 5 November | 2 CPD hours Venue: Simpson Grierson, Auckland City This Guy Fawkes night, the Burning Issues Forum 2020 has it all – bon fires, camp fires and wild fires.

A veritable barbecued smorgasbord of the hottest and spiciest issues to emerge in these times of global challenge.

Places are limited, register now to secure your place.

T 09 303 5278

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E cpd@adls.org.nz

W adls.org.nz