The Court of Appeal has given Marlborough investor Michael Jacomb the green light to continue bankruptcy proceedings against Ken Wikeley.
Mr Wikeley, who now resides in Kentucky, had tried to avoid bankruptcy by calling on shares from a company he gained control of through what a panel of judges has labelled "a elaborate and high contrived series of events."
The businessman is best known for his involvement in Rainbow Corporation in the 1980s, as managing director of Aquaria 21 in the 1990s and in the affairs of the serial NZX Listing Rules infringer, Plus SMS in the 2000s.
This latest case stems from his involvement in a Chilean mining venture with former friend and business partner Michael Jacomb.
An unusual company set-up
The pair formed Edel Metals Group to invest in rock crushing machinery in 2008 but the business failed. The company’s shareholders were Genset Trust and a trust company called Geier.
Geier held shares on trust for Mr Wikeley and his associates, and court judgments reveal Mr Wikeley effectively controlled it.
The shares were issued unpaid so the company had no money but could technically call on shareholders to stump up with cash.
Genset Trust, of which Mr Jacomb is a trustee, lent Edel Metals just over $US1.5 million, for which Mr Wikeley gave a personal guarantee.
After the business collapsed, creditors obtained judgment against Mr Wikeley in April 2013 for $US862,534 for payment under that guarantee.
A bankruptcy notice was then issued to Mr Wikeley demanding $875,768; made up of the sum awarded plus interest, as well as $48,130 for costs.
To counter this, Edel called up $100 million of unpaid share capital, including some $23.75 million from Genset Trust, which would lead to the original judgment debt being wiped out. It filed separate proceedings against Genset. The Genset trustees do not accept the validity of the actions taken by Mr Wikeley.
What the courts said
In the Wellington High Court Associate Judge Roger Bell decided the bankruptcy notice should stand. He found Mr Wikeley’s measures to restructure the business and avoid the payment had “a high degree of artificiality.” Mr Wikeley had gained majority control of Edel by paying $20,000 for 200 million shares in the company through another company, Sundome Enterprises.
Mr Wikeley took the case to the Court of Appeal, claiming that if Edel got money from a new call for shares he would not longer be liable for the debt. Edel had issued another call for shares, requesting $5.9 million.
Last week a Court of Appeal panel of judges; Ellen France, Christine French and Mark Cooper agreed with Judge Bell.
The judges found that Mr Wikeley had given no explanation for the “dubious” set-up of Edel Metals.
“The call-up of the shares has its origins in an elaborate and highly contrived series of events engineered by Mr Wikeley,” the judgment says.
The shareholding had been artificially inflated and a shareholder’s resolution described by Justice French as “highly questionable” meant shares issued at $0.01 per share were ranked the same as of existing shares of $1 each.
“Other dubious aspects include the restoration of the company to the Companies Register at the behest of a person who was neither a shareholder nor a director at the time, the transfer of the one share to Mr Wikeley in breach of the company constitution, and the removal of Mr Jacomb as a director,” the judgment says.
The court also ruled there was no interdependence between the guarantee to the loan and the call on unpaid shares which could give Mr Wikeley the benefit of a set-off.