Good grounds to investigate Hotchin: judge

Mark Hotchin has been allowed to pay his $5 million tax bill and claim back some of his household assets. Photo / Paul Estcourt

Mark Hotchin's New Zealand assets will remain frozen after a High Court judge ruled the Financial Markets Authority has "good grounds" to investigate the Hanover Finance director in relation to alleged Securities Act breaches.

Hotchin's application to overturn the freezing orders was dismissed on Friday.

The judgment of Justice Helen Winkelmann was released yesterday and reveals that Hotchin has been allowed to pay his $5 million tax bill and unfreeze some of his household assets.

Read the decision here.

The judgment was suppressed until yesterday and part of its contents remain suppressed - including the evidence presented by the authority to justify its investigation.

However, Justice Winkelmann said there were "good grounds" for the FMA to continue its investigation into the statements made in the prospectuses of Hanover Finance.

Justice Winkelmann added that it was clear there were matters of significant public concern affecting the interest of "a significant group of aggrieved persons".

The FMA - which has taken over from the Securities Commission - is investigating whether there were breaches of the Securities Act in the registered prospectuses of Hanover Finance, Hanover Capital and United Finance when Hotchin was a director of all three companies.

The authority froze Hotchin's assets without notice in December. This was the first time the commission used such force.

Its powers were extended in 2006 when the Securities Act was amended.

The asset preservation orders were put in place to ensure that if any investors wished to take civil action against Hotchin in the future, there would be money available, should they win.

At the time the authority claimed the unprecedented move was done in the "public interest".

In December, Justice Winkelmann made orders that prohibited Hotchin from dealing with New Zealand-based property held or controlled by him.

It also prohibited family trusts KA3 Trustee and KA4 Trustee and Hotchin's accountant Tony Thomas from dealing with any property they hold on his behalf.

Hotchin appealed against Justice Winkelmann's decision, which was heard in February in the High Court at Auckland.

During the hearing personal financial details regarding the Hotchin family were suppressed.

Hotchin said the orders were not necessary because there was no risk of asset dissipation and that any civil claim brought against him had a limited chance of success.

He also said that the orders should be discharged on various grounds. But these were also dismissed by Justice Winkelmann.

The freezing orders over KA3 and KA4 were however revoked, and Thomas, who requested to be struck out as a party from the proceedings, has been removed as a defendant.

The only asset of KA4 that remains frozen is its interest in the Paritai Drive property, because of its dealing with Hotchin in relation to the property, Justice Winkelmann ruled.

The FMA listed a number of properties registered in the name of KA3 Trustee and KA4 Trustee in its original statement of claim.

It claimed that those trusts held properties for Hotchin, and that Hotchin had bought or contributed to the purchase price of the properties and then transferred ownership to the trusts.

The FMA claimed Hotchin had an interest in these properties, that the money to buy them had come from him, and before they were transferred he had control of them.

But Justice Winkelmann said that despite the FMA's arguments that the trusts were a "sham, emerging sham, resulting trust and that the trusts held the assets on a bare trust for Hotchin", powers of appointment of trustees, and even of discretionary beneficiaries, were not sufficient to give Hotchin control over the assets of the trust, because that control rests, at law, with the trustee once appointed.

Justice Winkelmann said she was unable to follow this part of the FMA's argument, which appeared "to shift and change through the course of exchanges with counsel".

Because of this, Justice Winkelmann has asked the FMA to file an amended statement of claim to provide a basis for orders in relation to KA3 and KA4.

Justice Winkelmann said that even if the FMA established that Hotchin had control of KA3 and KA4 through powers of appointment, it would not be sufficient to make further freezing orders against the trusts - this provision applies only in respect of assets held on behalf of the relevant person (Hotchin), and not where the asset is controlled by the relevant person (Hotchin).

"The pleaded claim [of the FMA] does not therefore provide any basis for continuation of the orders against KA3, KA4 and Thomas," she said in her judgment.

THE TRUSTS

The KA4 Trust was created by a written Deed of Trust on May 1, 2003

- Hotchin was the settlor and has power of appointment under the Trust Deed.

- Until 2005 he was the sole trustee, from then until May 2009 he was a co-trustee.

- From May until the present, KA4 Trustee has been the sole trustee, and Tony Thomas is the sole shareholder and director of KA4 Trustee.

The KA3 Trust was created on December 23, 1999

- Hotchin was the settlor of the trust and Michael Ward was one of the initial trustees.

- Since 2003 the trustee has been KA3 Trustee. Since April 2010 the sole director and shareholder of KA3 Trustee has been Thomas.

- Hotchin is a discretionary beneficiary but is not a sole or a final beneficiary.

- Hotchin has the power to remove and appoint trustees to KA4.