Validation Act & protected transactions law prove tough nuts for Mangawhai ratepayers to crack

Mangawhai ratepayers’ determination to overcome a legislative blockade and to pursue alternatives to their funding of a financial blowout on the village’s sewerage scheme went to court in Whangarei this week. It’s a complicated case, with moving targets.

The ratepayers group saw some hope in changes to ownership of $58 million of the debt – perhaps forcing creditors to bring about receivership of the council, looking into the changing price of the debt as it’s been securitised.

The group’s lawyer, Wellington barrister Dr Matthew Palmer, said the commissioners put in charge of the Kaipara District Council by the Government in August 2012 should have been pursuing those involved in creating the debt blowout – including councillors & council staff, plus advisors – and proposed an independent valuation of the sewerage scheme which the ratepayers would agree to pay, leaving the balance to be clawed back from other parties.

But looming over the case is the Kaipara District Council (Validation of Rates & Other Matters) Act 2013, introduced by Northland MP Mike Sabin on behalf of the council commissioners last June and given assent on 10 December.

How to get around that act? How to pursue those responsible for breaches of local government laws, including secretly raising council debt far beyond reasonable?

In the Whangarei High Court on Monday, Justice Paul Heath went some way towards helping Dr Palmer in his search for a resolution which didn’t involve chasing down mostly elderly & retired ratepayers.

ABN AMRO NZ Ltd, the investment banking & broking company that organised the finance for the Kaipara District Council’s Mangawhai Ecocare sewerage scheme, no longer holds the loan. The way that “revelation” ran round courtroom 5 in Whangarei, you could see it was a surprise to many, even if NZ First MP Andrew Williams had mentioned it during select committee debate on the bill to validate a long list of council transactions, and details of the assignment to new lenders was in the affidavit of new council chief executive Steve Ruru.

ABN AMRO NZ was 50% owned by the Royal Bank of Scotland when it pulled out of New Zealand in 2009, largely because of the Scottish bank’s huge losses. Now the bulk of the $58 million loan is held by the ANZ Bank – $53 million of it – and the rest has been securitised among about a dozen investors. The ANZ portion of it, at least, will need to be refinanced in July.

3 intertwined processes make the Mangawhai Ecocare sewerage scheme debacle even more complicated than it had become after 18 years of preparing, building, funding & user-charging.

First, the Mangawhai Ratepayers & Residents Association went to court to argue the illegality of numerous Kaipara District Council decisions & actions.

Second, the commissioners appointed to run the council, after the mayor & councillors were sacked in August 2012, sought legislation to validate several years of council decisions & actions which were acknowledged to be in breach of various local government laws.

Third, Auditor-general Lyn Provost investigated, wasn’t impressed but didn’t take matters further.

2 of these processes reached conclusions in December: Mrs Provost issued her report on 3 December, and the Kaipara District Council (Validation of Rates & Other Matters) Act 2013 was given assent on 10 December. The ratepayers association fought off an attempt by the council’s commissioners to strike out its primary cause of action in August, and the association has introduced a new cause of action aiming to overcome the Validation Act. That would need to go to a separate hearing – if the judge sees it has some merit.

“It relates to additional defects that have not been expressly or implicitly validated by the Validation Act, which still provide a lawful basis for association members & others to resist paying rates, despite the Validation Act,” Dr Palmer said.

The preamble to the act says that, “in relation to the Mangawhai EcoCare sewerage scheme, (a) the council subsequently borrowed approximately $58 million to fund the capital costs of the scheme, and (b) it is acknowledged that section 117 of the Local Government Act 2002 applies to those borrowings and that they are protected transactions that remain valid & enforceable”.

It is hard to escape the overriding power of the Validation Act, or the status given by the protected transactions legislation.

Dr Palmer argued: “This recital appears to be an attempt by the council (commissioners) to bolster their argument about the protected transactions provisions in this court. Of course, the recital has no operative legal effect in deciding the questions of law that are before this court.

“Finally, as in the strikeout argument, the Bill of Rights Act bears on the interpretation of the Validation Act if the council seeks to argue that it overrides this judicial review proceeding. Section 27(2) protects the right of the ratepayers to challenge the setting & assessment of rates by the council by way of judicial review.”

But the judge is now reviewing council actions which have been validated. Can the court overrule Parliament? It’s accepted that they can’t.

Judges in New Zealand tend not to interrogate. They might poke around a little to clarify a point, but they won’t pull an assertion apart to establish its validity. In this case, Justice Heath has done some of that poking around, has rephrased points to settle a view, sometimes he has been given a reference to back up the assertion, but he hasn’t examined the veracity of a statement like this one, in paragraph 4.47 of Mr Palmer’s submissions: “Of course, the recital has no operative legal effect in deciding the questions of law that are before this court.”

There is no “of course” about it. The Kaipara District Council (Validation of Rates & Other Matters) Act 2013 overrides.

Dr Palmer told Justice Heath in his opening on Monday: “What we are dealing with here is an extraordinary saga of incompetence…” Ratepayers had persisted in attempting to hold their managers to account but, having turned the spotlight on, then suffered the indignity of having their course to recovery of illegally charged payments overridden, in part, by Parliament. “The association sees this court, and this case, as its last hope for justice.”

Dr Palmer said Parliament provided for a receivership strategy for creditors to pursue debts owed by councils, and the Validation Act couldn’t override the Bill of Rights Act.

In one exchange, Justice Heath put to Dr Palmer: “Your submission has the effect of protecting ratepayers from paying rates raised for an illegal contract, whereas Mr Goddard’s (council counsel David Goddard QC) protects creditors. That’s the tension isn’t it?”

Dr Palmer: “Yes.”

Later, Dr Palmer proposed: “I think what you have here is the way in which the tensions ought to be reconciled is the democratic imperative must override the act as a whole. The protected transaction provisions validate loans, but they don’t go as far as requiring a rate to be struck…. But if the council doesn’t have the funds to satisfy its obligations to the creditor, it has no duty to reach into ratepayers’ pockets to do so. That would convert a shield for creditors against the council to a sword for the council against ratepayers.”

Further into his submissions, Dr Palmer noted the council commissioners suggesting that, “because the ratepayers of Mangawhai have the ‘benefit’ of the wastewater facility, they should bear the cost. But the evidence does not demonstrate significant benefit compared to the previous private wastewater arrangements. And it demonstrates huge cost to deliver that uncertain benefit. If the ratepayers of the Kaipara District had been properly consulted over the proposal and asked whether they wanted to replace the septic tanks of 2000 residents of Mangawhai with a facility that would cost them $62 million, the likely answer is tolerably clear….

“What you really need to do to come to grips with that is get an independent valuation as to what that facility ought to have cost. They (the ratepayers) are perfectly happy to finance that, but they object to paying the different between what that wastewater should have cost and what it did cost.”

Mr Goddard, for the council, had a short answer to the association’s claims: The Ecocare financing arrangements were protected transactions, and there was no allegation before the court that section 119 of the Local Government Act rendered the council’s obligations to its current creditors under those agreements unenforceable against the council.

Section 115 of the Local Government Act authorised councils to give security over rates, enabling a lender to appoint a receiver in the event of default. Making lending to local authorities unenforceable would make it riskier, raising the cost of borrowing. Mr Goddard said if a lender did appoint a receiver, the council’s position would be worse: The receiver could compel the sale of assets, attach the council’s bank accounts or exercise security rights. “So the council would be forced to pay, in a process driven by the creditor (or a receiver), rather than as the result of democratic and consultative decision-making processes.”

  • I sat through the case on Monday and have read the subsequent submissions, obviously without the further verbal input. The hearing was due to finish this afternoon.

Attribution: Court hearing, submissions.

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