Commercial

Carbon brokers and the Financial Advisers Act

The Financial Advisers Act 2008 (FAA) and its companion legislation, the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA), are currently being finalised and will come into force from the end of this year.

Broadly, the FAA requires all financial advisers to be registered and some financial advisers to be licensed.  The FAA also sets out disclosure, conduct and qualification requirements for financial advisers.  Similarly, the FSPA requires all financial service providers to be registered and to join an alternative dispute resolution scheme.  The definitions for "financial adviser" and "financial service provider" are still subject to review by the government.

Recent media commentary has suggested that carbon brokers will be outside the regime set up by the FAA and FSPA.  However while brokers trading physically settled emissions units may fall outside the definition of "financial advisers", they may still be financial service providers.  Further, brokers trading cash settled derivatives on carbon or emissions units are likely to be both financial advisers and financial service providers.  Such cash settled instruments are likely to be "futures contracts" under the Securities Markets Act 1988.  The regulatory requirements of the Securities Markets Act, as well as the FAA and FSPA requirements for futures contracts will apply.

The regime set up by the FAA and FSPA is complicated and is currently being reviewed by the government.  If you have any concerns about your business activities and whether you are captured by the FAA or FSPA, you should contact Buddle Findlay.  More information about the FAA and FSPA are available on the Buddle Findlay website.  View legal updates for May here, April here and March here.

Google ducks Vuitton handbag

The Court of Justice of the European Union (the Court) – Europe's highest court - recently issued a decision in connection with the Google "AdWord" advertising service (the AdWords Service).  In short, the Court held that the AdWords Service does not breach European trade mark law.

The outcome of the decision is important to Google and has been highly anticipated. The AdWords Service is Google's flagship worldwide advertising service accounting for approximately 97% of Google's revenue (in 2009, reported to be US$23.7b).  Had the decision gone against Google, it would undoubtedly have had an immediate and adverse effect on Google’s AdWords business.

What are AdWords?

Advertisers pay Google to reserve "keywords".  When Google users enter a search query into Google's search engine that correspond to an advertiser's keyword, it triggers an advertisement with a link to that advertiser's website appearing under the heading "Sponsored Links" (either above or to the right of the standard Google search results).  Google receives a fee from the advertiser every time a Google user clicks on a link in the AdWords advertisement.

Background

Louis Vuitton (and 2 others) brought proceedings against Google in response to AdWords advertisements that were triggered by Google users selecting “Louis Vuitton” and “LV” as search terms, as well as in combination with “imitation” and “copy”.  Louis Vuitton sought a declaration from the Court that Google had infringed its trade mark rights.

Court decision

The Court held that Google did not infringe a third party’s trade mark rights when an advertiser purchases and uses keywords that correspond with a competitors’ trade mark via the AdWords Service, because Google was not "using those trade marks in the course of trade".  Rather, Google was merely "creating the technical conditions necessary for the use of" a trade mark and so was not itself using the trade mark. 

On the other hand, the Court was of the view that advertisers who use the AdWords Service and select third party trade marks as keywords may infringe the trade mark owner’s rights if that use is unauthorised.

Whether or not there is infringement depends on how the advertisement is displayed and if the advertisement allows a "normally informed and reasonably attentive internet user" to determine whether the goods and services referred to by the advertisement originate from the trade mark owner or from a third party.  If that distinction is not clear, then the trade mark owner’s trade mark rights are likely to have been infringed.

The Court’s decision is unlikely to be the last on this subject, as trade mark owners are unlikely to accept that Google avoids liability for "use" of their trade marks as AdWords keywords.

Application to New Zealand

To date, there have not been any cases directly about Google AdWords in New Zealand.  So what about you?

If you suspect or are aware of a competitor who may be using the AdWords Service to promote itself via keywords that correspond to your trade mark(s), please get in touch with us, as we can advise you about strategies and action to take in order to stop the unauthorised exploitation of your trade marks. 

Conversely, if you utilise Google Adwords to promote your business, we recommend that you are careful in the way you select and use keywords, particularly if the keywords are trade marks of your competitors.  We can advise strategies to minimise your potential legal risk.

Four years on:  An overview of the Domain Name Commission’s .nz Dispute Resolution Service

On 1 June 2010, the Dispute Resolution Service (DRS), which is an independent and impartial service administered by the Domain Name Commission (Commission) for .nz domain names, will celebrate its 4th birthday.  In this time, the DRS has received around 400 complaints filed by parties claiming rights to a .nz domain name where they are not listed as the current registrant.

From an overview of the DRS decisions to date, it is clear that the DRS is a trade mark owner friendly mechanism for resolving domain name disputes in a timely and cost effective manner.  A pattern has emerged, which highlights that when a complainant is legally represented, files a complaint with corroborating evidence and the evidence shows prior trade mark use and/or registration, then the complainant is almost always successful.

Role of the DRS

The DRS was established in 2006.  The aim was to provide a robust mechanism to resolve domain disputes about who should be the registrant of a .nz domain name.  When considering disputes, the Commission has a number of powers, including the right to grant orders for the transfer of a domain name(s) to a successful complainant, the dismissal of a complaint, cancellation or suspension of a domain name. 

Complaints

A complainant must prove on the balance of probabilities that:

• It has rights to a name or trade mark which is identical or similar to the .nz domain name in dispute
• The registration of the .nz domain name in the hands of the current registrant is unfair.

Once a complaint has been filed there is an informal mediation period of 10 days, and if the dispute is not resolved during that period, then the matter is determined by an expert (with a right of appeal to a panel of experts for the successful party).  There is no right of appeal to the Courts.

Successful complaints

Information published on the Commission website indicates that a number of key factors have been crucial to the success or otherwise of a DRS complaint:

• Complainants that could clearly prove that they had registered and/or unregistered trade mark rights in New Zealand that pre-dated registration of the domain name in dispute were almost always successful
• Complainants that could not prove prior use and/or registration of trade marks were usually unsuccessful
• Complainants who filed a complaint about a domain name that features a generic or a descriptive word(s) (e.g. hotwaterheatpumps.co.nz and aerialmapping.co.nz) were almost always unsuccessful
• Complainants that had legal representation were usually far more successful than those that were not
• Complaints were often dismissed because the complainant was not the correct complainant
• A number of complaints were dismissed simply due to insufficient information provided in the complaint. 

The DRS and you

If a party has registered a domain name that you believe you have rights to, you should consider utilising the DRS.

Proposed amendment to Consumer Guarantees Act

Consumer Guarantees Amendment Bill

In our March update, we reported the intended review and proposed reform of certain consumer legislation, whereby a number of consumer protection statutes may be consolidated and ultimately sit alongside the Consumer Guarantees Act 1993 (the Act).

In a sign that there are no current intentions to repeal the Act, on 6 May the Consumer Guarantees Amendment Bill (the Bill) was selected by ballot to be introduced to Parliament.  The Bill is awaiting its first reading in Parliament, and is intended to address 2 perceived issues with the Act.

Extended warranties

The Bill proposes improved disclosure around extended warranties.  Extended warranties are commonly offered to consumers on the purchase of electrical items but may in fact provide no greater protection than what is already required under the Act.  If enacted in its current form, the Bill requires suppliers to disclose whether the extended warranty being offered provides any protection beyond what consumers are already entitled to under the Act.  Consumers will also be given a 7 day "cooling off period" during which they can cancel the purchase of an extended warranty for a full refund without any other penalty.

Online trading

The second amendment to the Act reflects the increase in online sales such as those conducted through sites such as Trade Me.  At present, the Act applies to suppliers who, in trade, supply goods and/or services to consumers.  The supply of goods by auction or competitive tender is presently excluded from the Act and this has led to debate about whether the Act applies to online sales. The Bill seeks to clarify the point by specifically providing that suppliers supplying goods in trade via an online bidding facility are covered by the Act.

Cape Town Convention and Aircraft Protocol coming to New Zealand

In March of this year Transport Minister Steven Joyce announced that New Zealand will become a party to the Convention on International Interests in Mobile Equipment (Cape Town Convention) and the associated Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Protocol).  

The intention behind the adoption of the Cape Town Convention and the Protocol is to significantly improve financial security for investors, financiers and lessors from cross-border transactions in high-value mobile equipment such as aircraft.  It is anticipated that organisations involved in aircraft financing will have more confidence in transactions, with the resulting reduction in risk leading to reduced financing costs.  US Ex-Im Bank already offers a discount on its exposure fee for financing in relation to assets covered by the Cape Town Convention.

The Cape Town Convention and the Protocol allows international investors, financiers and lessors to register their interests in mobile aircraft equipment on an international register called the International Registry of Mobile Assets (the IR).  The IR is a 24 hour online priority-based register operated by an Irish company, Aviareto. 

The Cape Town Convention also offers consistent legal remedies that will apply globally as amongst the Contracting States as well as additional remedies, including, importantly, the ability to remove an aircraft from a national civil aircraft register and export it from that jurisdiction.

On 31 May 2010 the Civil Aviation (Cape Town Convention and Other Matters) Amendment Bill (Bill) was introduced into Parliament.  The Bill will enable New Zealand to become a party to the Cape Town Convention and the Protocol.  It also makes consequential amendments to existing legislation, including the Personal Property Securities Act 1999 and some company, insolvency and statutory management laws.  The Bill also amends the civil aviation rule-making powers in the Civil Aviation Act 1990.  Once the Bill has had its first reading it will be reported back from the Transport and Industrial Relations Select Committee.  The Ministry of Transport expects that accession to the Cape Town Convention and Protocol will come into force in New Zealand on 1 November 2010.

Banking

Financial Markets Authority

On 28 April 2010 the Commerce Minister Simon Power announced plans to establish a new financial sector regulator, the Financial Markets Authority (FMA).  The Establishment Board of the FMA was announced on 26 May 2010.  The nine members are: Simon Botherway (chairman), Shelley Cave, Andrew Harmos, Neville Harris, Frank McLaughlin, Paula Rebstock, Bruce Sheppard, Scott St John, and Mariëtte van Ryn.

The FMA will take over the functions of the Securities Commission, some of the current functions of the Registrar of Companies and the government Actuary, and some of the regulatory roles of NZX.  Essentially it will enforce securities, financial reporting and corporate law in financial markets. It will also regulate and oversee trustees, auditors, financial advisers and financial service providers, including people who offer investments.

It is expected that legislation establishing the Authority will be introduced in the next few months, and that the Authority will be operational early in 2011.

Insurance (Prudential Supervision) Bill

The Finance and Expenditure Committee reported back on the Insurance (Prudential Supervision) Bill on 31 May 2010.  The Bill is loosely based on the Australian Prudential Regulation Authority (APRA) framework and is an attempt by the New Zealand government to bring New Zealand's insurance company regulation in line with the rest of the world's.

The process started with a law commission review in 2004, a government response in 2005 and a review of products and providers in 2006.

In 2007, Cabinet decided that the Reserve Bank of New Zealand would be the prudential regulator for all financial institutions.

The Bill essentially sets up a licensing regime for insurers.  From the outset, insurers will be required to acquire a license and to then comply with ongoing reporting and prudential requirements.

The Bill provides for 2 types of licence: provisional licences and full licences. 

Provisional licences are dealt with by the Bill's transitional regime, which helps insurers to either comply with the regime or to exit the New Zealand market.  A provisional licence will expire 18 months from when the Bill comes into force if a full licence is not issued before then.

The criteria for obtaining a provisional licence is relatively straightforward, whereas the criteria for obtaining a full licence is more complicated and includes:

• Meeting various compliance standards.  These include, among others, solvency standards, reporting obligations and a requirement that directors meet "fit and proper" standards
• Developing relevant policies and programmes as well as registration under and/or compliance with the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

There are also specific compliance requirements for overseas-based insurers.

Budget 2010: Tax rate changes

The 2010 Budget (20 May 2010) contained a reduction in both personal and corporate tax rates, as well as the tax rates for certain portfolio investment entities (PIEs) and other saving vehicles.

Personal tax cuts

The depth and the scope of the personal tax cuts go further than most have expected.  From 1 October 2010, the personal marginal tax rates will be:

There is a sentiment that New Zealand's four-step progressive system could be further simplified.  Nonetheless, these rate changes have generally been well received.

Company tax cut

The reduction of the corporate tax rate from 30% to 28% came as a big surprise to most tax practitioners, economists and commentators.  The corporate rate change will take effect from the 2011/2012 income year, ahead of the Australian’s corporate tax cuts which will phase in over 3 years from 2012/2013.

Savings and investment tax changes

In line with the new personal and corporate tax rates, the tax rates for most PIEs will also be reduced with effect from 1 October 2010.  The top PIE tax rate will be reduced from 30% to 28%.  Other PIE tax rates will also be amended, to align with the new personal tax rates.

The tax rates for other non-PIE saving vehicles, such as unit trusts and widely-held superannuation funds will also be reduced from 30% to 28% from the 2011/2012 income year. 

Resident withholding tax rates on interest will also be reduced to align with the new personal tax rates, with effect from 1 October 2010.

A more coherent tax system?

A key feature of the personal tax rate changes is the matching of the top personal tax rate to the trustee tax rate, through which the government hopes to improve coherence of the tax system.  Trust structures have been favoured by high income earners since the implementation of the 39% top personal tax rate in 2000, because of its ability to limit tax on income derived through a trust at the trustee tax rate of 33%.

It will be interesting to see whether the rate changes could put company structures back in the spot light given the 5% tax rate differential that will exist between the top personal tax rate (33%) and the corporate tax rate (28%).  However, unlike trusts, companies do not offer the ability to limit tax on income as income derived through a company remains taxable when it is distributed to its shareholders (although imputation credits attached to dividends can help to shelter part, or all, of the shareholder’s tax liability). 

That said, a company structure can still offer the benefit of postponing the imposition of the 5% tax differential until the income is repatriated to shareholders at the top personal tax rate (although this may not apply to all companies, particularly in light of the proposed "look through" treatment to qualifying companies and loss attributing qualifying companies as discussed further below). 

The recent removal of foreign dividend withholding tax on foreign dividends received by a company could also increase the attractiveness of a company holding structure for offshore shareholders. 

Imputation credits - different impact for domestic and offshore distributions

A key effect of the reduced corporate tax rate which companies should be aware of is the consequential changes affecting the use of imputation credits from dividends distributed from 1 April 2011.  The maximum ratio at which imputation credits can be attached to such dividends will be reduced to no more than 28 cents for each dollar of gross dividends. 

Similar to the last rate change, the government has allowed a transitional period (from the first day of the company’s 2011/2012 income year to 31 March 2013) during which companies can continue to attach imputation credits at the old imputation ratio, but only to the extent that the company has "old" imputation credits (i.e. imputation credits arising from tax paid at the old corporate tax rate of 30%). 

The changes mean that New Zealand resident shareholders can continue to receive tax credits of up to 30 cents from each dollar of gross dividends distributed before 31 March 2013.  Corporate shareholders will receive only a 28 cents tax credit against their tax liability even though the dividends they received are with full imputation credits of 30 cents.  It is expected that companies will endeavour to utilise the opportunity to attach imputation credits prior to 31 March 2013 to take advantage of the transitional window.

That said, the same may not necessarily apply to non-resident shareholders.  The reduced maximum imputation credit ratio means that companies can attach a lesser amount of imputation credits than they are currently required in order to fully impute a dividend made to a non-resident shareholder, to benefit from the foreign investor tax credit regime or to qualify for the nil non-resident withholding tax rate (which applies to certain types of non-resident shareholders). 

QCs and LAQCs

The government has announced comprehensive changes to Qualifying Companies (QCs) and Loss Attributing Qualifying Companies (LAQCs), following concerns about both the use of LAQCs to generate losses greater than the equity put into the LAQC by the shareholders, and the use of LAQC losses to offset the taxable income of shareholders.  In response, the government proposes to change the QC and LAQC rules so that they are flow-through entities, similar to partnerships.  Flow-through treatment means that both losses and profits will be passed through to the shareholders.  Loss limitation rules would also apply.

As a result, the LAQC structure is likely to become a less popular structure because profits will flow through to the shareholders and be taxed at their marginal tax rate.  In addition, LAQCs that are highly geared will no longer be attractive, since there will be a limit on losses that can be used by their shareholders to reduce their own taxable income. 

Depreciation of buildings

Much recent discussion has focused on the level of investment by New Zealanders in property, and the government has decided to remove some of the tax incentives that encourage this investment.  If a building has an estimated useful life of 50 years or more, it will not be depreciable for tax purposes, from the 2011/12 income year.  Limited grandfathering is available for some structures acquired on or before 30 July 2009, including barns, car parking buildings and site huts. 

The estimated useful life of a building will be set by depreciation determinations issued by the Commissioner of Inland Revenue, and taxpayers will no longer be able to apply to the Commissioner for special rates for buildings. 

Removal of depreciation loading

Currently new assets can be depreciated at an accelerated rate, by increasing the prescribed depreciation rate by 20%.  This 20% loading will not be available for any asset acquired after 20 May 2010, effectively reducing depreciation deductions. 

GST Advisory Panel

The government has set up a private sector GST Advisory Panel to assist with the implementation of the new 15% GST rate on 1 October 2010.  Chaired by Frank Owen, the Panel will provide advice to businesses, monitor issues faced by businesses in dealing with the transition, and provide advice to the government on dealing with such issues.

GST - Zero-rating of land sales

Having previously considered introducing a domestic reverse charge that would apply to high-value transactions and all land transactions, the IRD now appears to favour zero-rating land sales.  Proposals relating to high-value transactions have been dropped.  Zero-rating would apply to any supply that features land, including both freehold and leasehold interests in land - this would apply to a large proportion of going concerns.  When enacted this change will apply from 1 April 2011. 

Totara Investments v Crismac & Anor [2010] NZSC 36

The decision considered the extent to which a lender can use a "boilerplate" power of attorney provision (a standard feature of loan and security documents) to improve its position on enforcement.

Totara Investments (Totara) sought to recover loans it had made to the Crismac and Ulster (the Companies) by using a power of attorney (contained in mortgages securing the loans) to execute general security agreements in its favour. Upon the execution of these general security agreements, Totara issued demands under the loans and proceeded to appoint receivers over the assets of the Companies.  The Companies claimed that the appointment of the receivers was invalid as the general security agreements had been invalidly granted.

The Companies relied upon a clause contained in the loan agreements which stated that despite any other provisions in the loan agreements, Totara acknowledged that the liability of the respective borrowers was limited to the value of the security provided by them in the form of mortgages over certain contracts (the mortgaged contracts).  The clause also stated that the respective borrower could apply or assign all of the value received under the mortgaged contracts in full satisfaction of that borrower's obligations.  The Companies therefore argued that pursuant to this provision, their liabilities under the loan agreements were not intended to exceed the value of the accompanying mortgaged contracts and Totara's only recourse in the event of default was to this security.

Totara, on the other hand, relied upon a boilerplate clause contained in the mortgage documents under which each borrower irrevocably appointed Totara to be its lawful attorney with the power to do, execute and perform all further acts, deeds, matters and things which became necessary or were regarded as being necessary by Totara in order to more satisfactorily secure payments under the loans.

The Supreme Court found in favour of the borrowers, holding that the provisions in the loan agreements limiting Totara's recourse in the event of a default to the mortgaged contracts was an overriding provision. The Court held that the loan agreements were drafted on the basis that the original security that was taken was sufficient to cover the obligations of the respective borrowers. This meant that each borrower's liability would not exceed the value of the respective mortgaged contracts and therefore the taking of further security would be a pointless exercise.

The Court also noted that the drafters of commercial documents frequently, out of caution, incorporate boilerplate provisions which may not be appropriate in the circumstances. While a court will strive to find a role for such boilerplate provisions, it will not allow these provisions to lead to a distortion of the objective intention of the parties as discerned from a reading of the contract as a whole.

Credit Contracts and Consumer Finance Act: Oppressive Credit Contracts

In the recent decision of Bartle v GE Custodians Limited [2010] NZCA 174, the Court of Appeal found that a loan transaction supporting a failed "Blue Chip" investment was "oppressive" within the meaning of the Credit Contracts and Consumer Finance Act 2003 (CCCFA).  Consequently, there was a case for the transaction to be re-opened and the matter was remitted to the High Court for consideration of the appropriate remedy.  An appeal has been lodged against this decision.  If the appeal is not successful this decision will have significant implications for lenders. 

In our view the effect of the Court of Appeal's judgment may in certain circumstances place an onus on a lender to ensure that the borrower has the ability to repay its indebtedness.  It also indicates that a lender may not be able to rely either on statements or certificates from the borrower in this case to the effect that the borrower has the ability to repay or on the fact that the borrower has obtained independent legal advice where that advice has not been properly given.

Mr and Mrs Bartle were retirees with a combined pension income and owned an unencumbered house and other modest assets.  The Bartles' associated company had put money into an investment scheme with Blue Chip under which they entered into an unconditional sale and purchase agreement for a residential apartment.  The purchase was to be funded by 3 tranches by the lender (via an intermediary).  The first 2 tranches were made to the Bartles' personally and secured by a mortgage over the Bartles' home.  The third tranche was made to Bartles Properties (a company set up by the Bartles for the purpose of purchasing the apartment) and secured by a mortgage over the apartment.  Mr and Mrs Bartle also provided personal guarantees of the obligations of Bartles Properties in favour of the Lender and their guarantees were secured by a mortgage over their home.  As part of the arrangements Blue Chip promised a modest fortnightly income to the Bartles.  The investment was promoted as short term: the apartment would be sold after 4 years and the proceeds would be applied first to repay the Bartles' borrowings, secondly to return the amount of their initial contribution, and lastly the Bartles were to share in any capital gains.  The Court of Appeal was of the view that the Bartles were, in effect, borrowing money to facilitate a small income stream.  The High Court had earlier found that the Bartles' solicitor (now bankrupt) had acted negligently in advising his clients.

On appeal, the Court considered whether the loan agreement at issue was "oppressive" within the meaning of the CCCFA.  In determining that the loan agreement was oppressive:

• The Court considered that it had a wide discretion to consider the reopening of credit contracts on the grounds of oppression.  "Oppression" was described as not being a "bounded concept" and was not limited to an examination of the terms of the loan agreement or circumstances of the loan transaction
• The Court accepted that the lender had no actual knowledge of the Bartles' inability to repay the loans or that the proceeds of the loans were to be used in a Blue Chip investment scheme.  However, the Court found that knowledge on the part of the lender was not a necessary requirement in determining that a credit contract is oppressive under the CCCFA
• Furthermore, the lender's admission in the High Court that, had it known the Bartles' declaration of their ability to repay the loans was incorrect, it would not have made the loans available, was taken by the Court as being "powerful evidence" of a departure from reasonable standards of commercial practice, and a clear indication that the loans were oppressive.  The lender could not avoid the applicability of the CCCFA merely because it outsourced the origination, settlement and enforcement of the loan to an intermediary.

The Court did not identify any particular aspect of the loan transaction which was oppressive, but pointed to a number of factors which it considered were oppressive, in the context of the Bartles' ability to service the loans:

• The loans were fixed interest, "interest only" loans for the first 5 year period.  Thereafter, the interest rate would became variable and the increased repayments would be in respect of both principal and interest
• The term of the loans was 25 years and was inappropriate for pensioners on a modest income
• Although asset lending (where the lender primarily relies on the value of the security for repayment, rather than the ability of the borrower to repay) is not inherently oppressive, such contracts have the "substantial potential for injustice".

New Zealand lenders will be watching the outcome in the Supreme Court with considerable interest and possibly, in some cases, a degree of apprehension.