Secretary of Internal Affairs v Integrated Commercial Solutions Limited HC Auckland CIV-2010-404-5253 [2011] NZHC 424 (18 April 2011)

Last Updated: 17 June 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2010-404-5253}

IN THE MATTER OF THE Gambling Act 2003

BETWEEN THE SECRETARY OF INTERNAL AFFAIRS

Applicant

AND INTEGRATED COMMERCIAL SOLUTIONS LIMITED

First Respondent

AND ALVIN SHANE COSGRAVE Second Respondent

Hearing: 14 March 2011

Appearances: A M Wharepouri for the Applicant

P J Andrew as Amicus

Judgment: 18 April 2011

_{RESERVED JUDGMENT OF ELLIS J}

This judgment was delivered by me on 18 April 2011 at 4 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors: Crown Solicitors, PO Box 2213, Auckland 1140

Counsel: P J Andrew, PO Box 31, Auckland 1140

Copy To: A S Cosgrave, 216 Opaheke Road, R D 4, Papakura, Auckland.

SECRETARY OF INTERNAL AFFAIRS V INTEGRATED COMMERCIAL SOLUTIONS LIMITED HC AK CIV-2010-404-5253 18 April 2011

[1] The Secretary of Internal Affairs has applied under s 112 of the Gambling Act

2003 for the recovery of approximately $1 million that he says was improperly paid by the South Auckland Charitable Trust (the Trust) to, or on behalf of, the two respondents.

[2] The second respondent (Mr Cosgrave) is one of the three trustees of the Trust and the first respondent (ICSL) is a company controlled and operated by Mr Cosgrave and with whom the Trust had an ongoing contractual relationship.

[3] The money sought to be recovered is said to constitute the improperly paid out “net proceeds” of the Trust’s class 4 gambling operation that it had, until 2008, been licensed by the Secretary to conduct. The money comprises amounts paid out by the Trust to:

(a) The first respondent pursuant to a management contract between itself and the Trust;

(b) The second respondent as “loans”; and

(c) Third parties in relation to contracts with one or other of the respondents.

Procedural background

[4] While the second respondent is one of the three trustees of the Trust, the other two trustees are not parties to these proceedings although they were served and advised that they could be heard on the application if they wished. No appearance has, however, been filed by either of the other Trustees and neither of them attended, or were represented at, the hearing before me.

[5] At an earlier stage of the proceedings it was unclear whether the respondents intended to oppose the application. Although they were served with the Secretary’s application, they had not, prior to 2 March 2011, filed a notice of opposition or taken

any other steps. At some point it seems that Mr Cosgrave advised counsel for the

Secretary, Mr Wharepouri, he intended to oppose the application.

[6] When the matter was called before me on 2 March 2011 Mr Cosgrave did attend Court on behalf of himself and, purportedly, on behalf of his company. He advised the Court that the application was opposed and that he had sought, but had been unable to obtain, legal aid. He is, however, in receipt of legal aid in related criminal proceedings in the Papakura District Court.

[7] As a result of Mr Cosgrave’s position and because of the amount of money at stake and the novelty of the application (this being the first time the Court has been asked to make orders under s 112) I formed the view that an amicus curiae should be appointed and the matter was adjourned for that to occur. It was on that basis that Mr Andrew appeared to assist the Court on 14 March 2011.

[8] On 2 March 2011 I also advised Mr Cosgrave that although he could appear on his own behalf, he could not formally do so on behalf of his company. I could see no particular prejudice to him in that respect given that there was no obvious divergence or conflict between Mr Cosgrave’s personal position and that of his company. As well, the appointment of the amicus was intended further to protect the company’s position.

[9] In the minute issued by me following the 2 March call, I noted that:

Mr Cosgrave has now filed (with my permission) a pro forma notice of opposition although it does not disclose any specified grounds of opposition. In that respect I record that in light of the content of the voluntary interview given by Mr Cosgrave (the transcript of which is annexed to Mr Carr’s affidavit) my assumption is that no issue is taken by him with the Secretary’s position on the facts. And in terms of the legal position it may well be that Mr Cosgrave is content for the relevant issues to be tested by the amicus and the Court.

[10] In the event, and for whatever reason, Mr Cosgrave did not appear at the substantive hearing on 14 March. In light of Mr Andrew’s presence, I determined that the hearing could proceed in Mr Cosgrave’s absence.

Facts

[11] The South Auckland Charitable Trust was incorporated on 3 July 2003 as a charitable trust under the Charitable Trusts Act 1957. Mr Cosgrave was one of the three original trustees. One of the other original trustees has subsequently been replaced.

[12] At about the same time the Trust was granted a class 4 operator’s licence under the Gambling Act 2003. The licence permitted the Trust to operate gambling machines from a number of different licensed venues in the South Auckland area.

[13] Such licences are issued for a 12 month period. At the end of each financial year, the licensee must submit its audited financial statements for the previous period and an outline of their proposed gambling operation for the 12 months ahead. Provided the Secretary is satisfied that the proposed gambling operation is financially viable and other matters are in order, licences are routinely renewed. That is what occurred with the Trust’s licence until 2007.

[14] In 2007, however, the Department of Internal Affairs (being the Department responsible for administering the Act) became concerned with two matters relating to the Trust’s operations. First, it appeared that Mr Cosgrave had placed himself in a conflicted position by managing the Trust’s day-to-day activities through his company, ICSL, while still maintaining his role as a trustee. Secondly, the on-going financial viability of the Trust’s gambling operation seemed to be doubtful.

[15] Discussions and correspondence with Mr Cosgrave ensued but the issues were not resolved to the Department’s satisfaction. Accordingly, on 19 September

2007, the Department advised the Trust that the Secretary had determined that he would not further renew its class 4 operator’s licence.

[16] No appeal was filed by the Trust against that determination. Instead, the Department was told that the Trust intended to sell its gaming machine operation to another gambling operator licensed under the Act, the Lion Foundation. That

proposal was acceptable to the Department and on 30 June 2008 the Trust’s assets

were legally transferred to the Lion Foundation.

[17] At that point, the Department believed that the Trust had ceased operating. The Trust did not, however, complete a copy of the “cessation pack” which has been designed by the Department as a means of informing the Secretary about the turnover of the gambling operation, the proceeds from the sale of assets and the final distribution of net proceeds.

[18] The Trust did, however, later submit to the Department its financial statements for the last 13 months of its gaming activities (a period ending on

31 October 2008). These accounts were reviewed by Mr Carr (a forensic accountant with the Gambling Compliance Unit of the Department). Mr Carr noted that the accounts revealed that there had been a significant increase in the Trust’s operating costs, when they were compared with its costs in the previous financial period. Mr Carr had concerns not only because of the size of the increase but also because some of the costs incurred did not appear to have any obvious connection with the Trust’s gambling operation.

[19] Mr Carr formed the view that further investigation was warranted and wrote to the Trust on 22 October 2009 advising his intention to carry out a full audit of the Trust’s accounts. That letter was acknowledged by Mr Cosgrave a few days later.

[20] Mr Carr’s audit confirmed his preliminary view that a number of payments made by the Trust during the 13 month period were not connected with the Trust’s gambling operation.

[21] The first group of payments identified were made pursuant to a management agreement between the Trust and ICSL. The Trust entered into the contract on

30 November 2007, two months after it had been notified that the Secretary did not intend renewing its licence. The 30 November 2007 agreement purportedly replaced an earlier (2004) management agreement whereby ICSL had been contracted to:

(a) Compile weekly gaming machine profit reports in return for payment of $15 plus GST per machine per week.

(b) Provide general services such as dealing with the Department, lawyers and venue operators regarding the Trust’s gambling operation. For this work ICSL was paid $20 per hour to a maximum of 160 hours per month.

[22] The 2004 contract had commenced on 28 June 2004 and was to terminate on

28 June 2007 unless either brought it to an end or extended by mutual agreement of the parties. In the event of termination ICSL was to return all Trust property to the Trust. No compensation whatsoever was payable by the Trust to ICSL in the event of termination.

[23] By contrast, the November 2007 contract provided that :

(a) its initial term was for three years, with two rights of renewal in favour of ICSL;

(b) the level of remuneration payable to ICSL for work carried out regarding the gaming machines was $16.65 plus GST per machine per week;

(c) the charge out rate for the provision of general services was increased to $60 per hour based on a thirty five hour working week; and

(d) in the event of early termination by reason of, inter alia, the Trust ceasing its gaming operations, compensation was payable to ICSL in the sum of the average monthly income figure paid to ICSL over the previous 12 months of the agreement multiplied by the months remaining to the end of the fixed term.

[24] The Trust’s decision not to contest the non-renewal of its class 4 licence and/or the transfer of its assets to the Lion Foundation necessarily had the effect of triggering the early termination clause. Compensation then became payable to ICSL

in the sum of $681,584.10 (excluding GST). On that basis the Trust had made three payments to ICSL comprising $250,000 (which was made pursuant to an invoice dated 30 June 2008), $200,000 (made pursuant to an invoice dated 15 July 2008) and

$231,584 (made pursuant to an invoice dated 19 August 2008). Once GST had been added the total amount paid was $766,782.

[25] On 2 November 2008, the Trust also paid ICSL $23,634 by cheque for work undertaken in July, August and September 2008 said to be in connection with the wind-down of the Trust’s affairs.

[26] Mr Carr also discovered that on the same day that the Trust and the Lion

Foundation signed their agreement for the sale and purchase of the Trust’s assets (i.e.

1 June 2008), the Lion Foundation and ICSL also entered into a management agreement. Under this agreement ICSL agreed to perform services for the Foundation similar to those which it had previously performed for the Trust. The Lion Foundation agreed to pay ICSL $60 per hour based on a thirty five hour working week basis, and $16.65 plus GST per machine per week.

[27] Mr Carr formed the view that:

(a) The compensation claim and the contractual basis for it were contrived and lacking in commercial reality because at the time the contract was entered the parties to it must have known that it was inevitable that the early termination clause would be triggered. As well, the amount of compensation payable grossly overstated any supposed commercial loss suffered by ICSL as a result of the early termination; and

(b) There was no basis for the $23,634 “wind down” payment given that ICSL had agreed with the Lion Foundation that after June 2008 it would perform (and be compensated for) the same functions that it had previously performed for the Trust.

[28] The second group of payments identified by Mr Carr as being unrelated to the Trust’s gambling operations were made either to Mr Cosgrave personally or another company, Clendon Inn 2007 Limited (CIL). There were three such payments totalling some $75,202.25.

[29] CIL was incorporated on 7 February 2007. Mr Cosgrave is the sole director of this company and ICSL the only shareholder. CIL is now in liquidation, a liquidator having been appointed on 23 April 2010.

[30] CIL owns and operates the Clendon Inn which is a pub and restaurant complex located on Roscommon Road, Manukau City. The Clendon Inn also provides onsite TAB facilities and gaming machines.

[31] The first of the three payments was made on 30 April 2008 by cheque to CIL for $45,202.25. The second payment for $20,000 was made on 18 March 2009 to Mr Cosgrave. The third payment of $10,000 was made on 8 May 2009 by cheque to Mr Cosgrave. Mr Carr found that the $75,202.25 paid was used to meet costs associated with either the day-to-day running of the Inn, Mr Cosgrave’s personal expenses and/or establishing a gaming room at the Inn.

[32] Although each of the three cheques appeared to have different signatures, during the course of a recorded interview with another officer of the Department on

11 March 2010, Mr Cosgrave admitted that he had signed all of them. He also admitted that he had used these funds “for his own personal gain”. While he said that he fully intended to repay the monies once he had sold the Clendon Inn and referred to the sum as a loan, he later accepted that he had stolen the money.

[33] Mr Carr identified a third group of payments identified which appears to be unrelated to the gambling operation of the Trust. These payments related to building work done at the Clendon Inn. More particularly, in 2008 Mr Cosgrave engaged a building firm named 3 Bald Men Limited to carry out building and fit-out work in connection with a gambling room at the Inn. On 25 March 2008 3 Bald Men Limited addressed an invoice to the Trust in Mr Cosgrave’s name for $45,202.25.

[34] In a letter dated 3 December 2009, the accountants for 3 Bald Men Limited combined this invoice, a further August 2008 invoice for $30,789.91 and a November 2009 credit note for $5,960.01 to arrive at an overall balance due of

$49,782.15. Most of this amount ($49,762.15) was paid by the Trust by cheque dated 28 January 2009.

[35] Later the same year CIL, using the trading name Clendon Inn and Restaurant, invoiced the Trust for a further $44,004.00 for the fit out of the Clendon Inn gaming room. This invoice was paid by the Trust in a cheque dated 21 October 2008.

[36] Thus the total amount paid by the Trust for building work at the Clendon Inn was $93,766.55.

[37] The fourth group of payments identified by Mr Carr related to legal work associated with the Clendon Inn.

[38] In June 2008 Mr Cosgrave instructed a legal firm to provide legal services to the Trust in connection with the sale and purchase of the Trust’s gambling operation to the Lion Foundation. The settlement statement dated 1 July 2008 records, however, that some of the legal work provided did not relate to the anticipated sale. More particularly, $6,750 related to work already carried out regarding the Clendon Inn, and a further $4,000 was retained by the lawyers for future attendances relating to the Inn.

[39] The fifth group of payments identified by Mr Carr related to vehicles operated by the Trust under lease agreements with Toyota Financial Services. The cars were repossessed in October 2008 and then sold by Toyota to defray the costs of each vehicle under the separate lease contracts. The amounts realised by the sales were not sufficient to meet the amount owing in respect of each vehicle, leaving

$19,943.37 still payable to Toyota Financial Services by the Trust.

[40] In a cheque dated 18 October 2008 the Trust paid $25,437.96 to Toyota Financial Services which covered the $19,943.37 and an additional $5,494.59. This additional sum covered the shortfall on a lease for a car under an agreement between

Toyota Financial Services and ICSL dated 15 November 2006. The personal guarantor under the contract was Mr Cosgrave.

[41] The total amount considered by Mr Carr to have been improperly paid out by the Trust (on the grounds that the payments could not be said to be connected with its gambling operation) was $975,629.39. It is that sum that the Secretary seeks to recover through the present proceedings.

The scheme and purpose of the Gambling Act 2003

[42] Until 2003 the gambling sector in New Zealand was governed by three statutes that each had different objectives and which treated gambling providers in different ways and as requiring varying degrees of regulation. Following a review by the Department of Internal Affairs, the Gambling Act 2003 was enacted. The Act repealed both the Gaming and Lotteries Act 1977 and the Casino Control Act 1990 and created a harmonised regulatory framework. Aspects of racing were also included within the framework, although the Racing Act 2003 was also enacted separately and at the same time.

[43] The explanatory note to what was then known as the Responsible Gambling

Bill said:

The underlying theme of the Bill is that gambling is usually prohibited unless it is run to raise money for community purposes. Gambling generates a considerable amount of money each year for community organisations and there is general support in the community for this form of fundraising. However, there is also a widespread belief that distribution of gambling funds (particularly gaming machine funds) is not transparent and that appropriate recipients often miss out. The potential exists for operators to inflate expenses, promote grants that benefit only certain groups, and to misuse the system for personal benefit. This Bill addresses these concerns by enhancing accountability and transparency in the operation of gaming machines and the allocation of grants.

[44] The reference here to particular concerns about the distribution of gaming machine funds (gaming machine venues being known as “class 4” venues, even before the enactment of the 2003 Act) had also been expressly recognised by the

Courts. In Pub Charity v Attorney-General,[1] the Court of Appeal provided an overview of some of the historical issues, and insight into how the statutory and regulatory controls on class 4 gambling have developed. At [3]–[10] of its judgment the Court said:

[3] In November 1987, the Minister of Internal Affairs (the Minister) decided to implement a licensing regime for gaming machines under s 8 of the Gaming and Lotteries Act 1977 (the Act). The licensing regime was introduced as a temporary measure pending review of the Act, and was a response to the introduction of gaming machines by entrepreneurs on an unlicensed basis. The purpose of the licensing regime was to provide an element of consumer protection and to ensure that money raised through the use of gaming machines was channelled back into the community. Licences are issued only to non-profit societies that operate gaming machines to raise money for a purpose authorised by the Act. Those purposes may be charitable, philanthropic, cultural, party political, or otherwise beneficial to the community.

[4] Despite several reviews of gaming and two draft Bills, it was not until

2003 that new legislation was enacted in the form of the Gambling Act 2003. Provisions of that statute governing the operation of gaming machines did

not take effect until 1 July 2004, so this case is concerned only with the Act.

[5] There is provision in s 8 of the Act for regulations, but no regulations were made governing the operation of gaming machines. The Department of Internal Affairs (the Department), officers of which issue licences under delegation from the Minister, has filled the vacuum to some extent by promulgating standard licence conditions relating to matters such as purchasing of machines, banking of profits, payment of expenses, record keeping and distribution of profits. Licences also include conditions specific to a given society such as its statement of authorised purposes and its schedules of gaming machines, equipment and approved sites.

[6] A prominent feature of the licensing regime has been the Department's attempts to ensure that gaming machines can be operated only for the object of raising money for purposes authorised by the Act. It has done so partly by controlling expenses that may be claimed by a society or paid to the operator of a given site and requiring detailed financial reporting. Until 1996, the Department capped expenses at a fixed rate that was intended to cover space used and electricity consumed by the machines. In 1997, the Department allowed societies to claim expenses on an actual and reasonable basis, and accepted a wider range of expenses. Societies were largely left to determine for themselves whether expenses were actual and reasonable.

[7] Site payments made by societies to site operators under the 1997 regime had two components. They were "site rental", being payment for the right to place the machine on the site, and the costs of labour to administer the machines. Site rental payments were intended to reflect the value to the society of a particular site.

[8] Pub Charity was the first non-profit society to receive a gaming machine licence, and it has around 3,000 gaming machines at approximately

335 approved sites. Beginning some time before 1997, however, competing societies were established. This created an opportunity for site operators to

move their custom between societies, which in turn led to an increase in site payments being paid to some operators. In one case, more than $800 per machine per week (pmpw) was being paid. This behaviour led to a 1997

complaint from Pub Charity in which its Chief Executive, Mr Bray, complained that high turnover sites were being poached by societies "less

scrupulous" than Pub Charity. By inflating expenses in this way, operators reduced the profit available for authorised purposes.

[9] These developments led the Department to review its practice of allowing societies to determine whether expenses were actual and reasonable. In 2000, the Department undertook a survey of licensees. The results of that survey showed that expenses paid did not exceed $150 pmpw at 70% of sites. For the remaining 30%, sums of $250 or more were being paid. The survey results were shared with the industry. The Department subsequently learned that societies were under pressure to match $250 pmpw to remain competitive. ...

[10] The Department's response was to implement a regime under which standard licence conditions were amended, effective 1 October 2001. Licences had provided that not less than 33% of gaming profit must be returned to the community. The new conditions emphasised that all available funds must be returned to the community, not just the 33% minimum. Expenses of up to $150 pmpw were authorised, but payments in excess of that required a dispensation. Applications for dispensation were to be supported by evidence verifying the expenses claimed. The Department proposed to base dispensations partly upon profit generated by a site. This approach appears to have been based on acceptance by the Department that site rental payments recognising the value to a society of a particular site were legitimate expenses.

[45] The 2003 Act reflected a somewhat changed approach to the regulation of class 4 gambling. I set out key aspects of the regime below.

[46] Section 30 of the Act defines class 4 gambling as gambling, the net proceeds of which “are applied to or distributed for authorised purposes” and for which “no commission is paid to, or received by, a person for conducting the gambling”. In turn s 4 defines “net proceeds” and “authorised purpose” as follows:

Net proceeds, in relation to gambling, means the turnover of the gambling plus interest or other investment return on that turnover plus proceeds from the sale of fittings, chattels, and gambling equipment purchased from that turnover or investment return less–

(a) the actual, reasonable, and necessary costs (including prizes), levies, and taxes incurred in conducting the gambling; and

(b) the actual, reasonable, and necessary costs incurred in complying with whichever of the following apply to the gambling:

(i) this Act or any other relevant Act: (ii) an operator’s licence:

(iii) a venue licence

[47] The phrase “actual, reasonable and necessary costs” is not defined in the Act. In the High Court’s decision in the Pub Charity case reference was made to the Departmental guidelines which set out the Department’s then policy in this respect.[2]

At [58] and [59] of his judgment Miller J said:

[58] The Department also issued guidelines, which although not part of the licence clarified the Department's policy with respect to expenses. The guidelines provide that "actual" expenses are based on actual, rather than projected, expenses and are able to be substantiated. "Reasonable" expenses take into account the size of the operation and normal market values for the goods or services provided. "Necessary" means necessary to the gaming operations. The society must exercise good business practice and due care to ensure that expenses are clearly related to the society's function of raising funds for authorised purposes.

[59] The guidelines illustrate expenses that may be deducted, including levies and taxes, depreciation where a society owns the equipment, cost of credit, insurance, installation costs, servicing and administration costs.

[48] While I am not certain whether such guidelines exist the approach evinced in them appears to me to accord with the statutory wording and context. In particular their context makes it clear that reasonableness and necessity are to be judged by reference to the dictates of the gambling operation rather than within some wider frame. What that means, for example, is that a cost that is incurred by a gambling operator could not be said to be “necessary” simply because the operator has some contractual obligation to pay it.

Authorised purpose, means,–

(a) for class 1 gambling, class 2 gambling, and class 3 gambling, any of the following purposes:

(i) a charitable purpose:

(ii) a non-commercial purpose that is beneficial to the whole or a section of the community:

(iii) promoting, controlling, and conducting race meetings under the Racing Act 2003, including the payment of stakes:

(iv) an electioneering purpose:

(b) for class 4 gambling, any of the purposes specified in paragraph

(a)(i) to (iii).

[49] Section 31 provides that class 4 gambling may only be undertaken by a corporate society (as defined by s 4) that holds a class 4 operator’s licence for that gambling and a class 4 venue licence for the venue where that gambling takes place.

[50] Section 50(2) states that a corporate society’s application for a class 4 operator’s licence must (inter alia) include:

(a) ...

(b) details of the authorised purposes to or for which net proceeds from the class 4 gambling will be applied or distributed; and

(d) information about the financial viability of the proposed gambling operation and the means proposed to maximise the net proceeds from the class 4 gambling to be applied to or distributed for authorised purposes; and

(e) in the case of an applicant that operates mainly to distribute net proceeds from the class 4 gambling to the community, details of the methods, systems, and policies for consideration of applications and distribution of net proceeds.

[51] Under s 52 the Secretary must refuse to grant a licence if the Secretary is not satisfied on each of the matters listed in that section which include that:

(b) the applicant's purpose in conducting class 4 gambling is to raise money for authorised purposes; and

...

(d) the applicant will maximise the net proceeds from the class 4 gambling and minimise the operating costs of that gambling; and

(e) the net proceeds from the class 4 gambling will be applied to or distributed for authorised purposes ...

[52] If the Secretary is not satisfied of the matters specified in s 52 he must also refuse to grant the renewal of a licence under s 56. He may also suspend or cancel a

class 4 operator’s licence if he is satisfied that any of the grounds in section 52 are

no longer met.

[53] The central importance of the class 4 requirement to distribute net proceeds only for authorised purposes can be seen throughout the Act: see for example ss 55(1), 60(1)(a), 109, 110.

[54] Further distribution requirements and/or limits on the costs that may be incurred by class 4 gambling operations can be imposed by way of regulations promulgated under s 114 and by Gazette notice promulgated by the Secretary under s 116.[3]

[55] Failure to apply or distribute net proceeds only to or for authorised purposes is a summary offence: (s 106). Conviction results in automatic cancellation of all class 4 operator and venue licences held by the society with no right of appeal.

[56] In summary, and as the Gambling Commission[4] has stated in one of its decisions: [5]

[24] The statutory scheme is clear: holders of class 4 operator’s licences must return all net proceeds to the community, and they must maximise those net proceeds. The definition of net proceeds is fundamental and ultimately controlling of society activity. Net proceeds are defined as all of a society’s gambling revenue less only the actual, reasonable and necessary costs which a society incurs “in conducting the gambling” and complying with statutory requirements and licence conditions. Any cost incurred that is not actual, reasonable and necessary in conducting the gambling, or in compliance, is not excluded from the definition of net proceeds and is therefore subject to the section 106 distribution requirement. Although section 106 does not say “all” net proceeds, its requirement that net proceeds (defined as “all turnover” less specified items) be distributed “only” to authorised purposes has the effect of requiring all net proceeds to be distributed for authorised purposes.

...

[27] ... the definition of net proceeds, when combined with section 106 and section 52(1)(e), has the effect that societies may only incur costs that are actual, reasonable and necessary in conducting the gambling or in legal

compliance. Costs that are not actual, reasonable and necessary to the conduct of the gambling and legal compliance are not excluded from the definition of net proceeds and are therefore subject to the statutory requirement of distribution only for authorised purposes. The incurring of any other costs is, therefore, not permitted because anything beyond what is actual, reasonable and necessary for conducting the gambling and legal compliance is subject to the requirement of distribution for authorised purposes. It follows that only actual, reasonable and necessary costs for the specified purposes may be incurred. An effective prohibition on incurring costs beyond what is actual, reasonable and necessary for conducting the gambling and legal compliance is consistent with the duty to minimise operating costs (and maximise net proceeds).

...

[28] ... A class 4 society is subject to two express duties, to maximise net returns and to minimise costs, which are not in conflict and of apparently equal weight. It is not necessary to construe the obligations by giving primacy to the latter (as the Secretary urged). As costs must bear some relationship to the size of the gambling operation, the Commission doubts that it prohibits the incurring of costs which would be expected to increase materially the net proceeds. ... The overall sense conveyed is a requirement of conservatism in spending and the need to protect funds intended to benefit the community from speculation and waste.

[57] It is against this restrictive statutory background that s 112 falls to be interpreted and applied. That section provides:

(1) The Secretary may apply for orders in accordance with subsections (2)

and (3) if -

(a) a corporate society ceases to conduct class 4 gambling, whether temporarily or permanently; or

(b) a corporate society fails to apply or distribute net proceeds from class 4 gambling within a time period prescribed by regulations made under section 114; or (c) the Secretary considers that it is necessary in order to recover net proceeds from class 4 gambling that have been improperly paid to a person.

(2) An application for an order must be made to -

(a) the High Court if the net proceeds from class 4 gambling are, or are estimated to be, more than $200,000; or

(b) the District Court if the net proceeds from class 4 gambling are, or are estimated to be, $200,000 or less.

(3) On application by the Secretary under this section, the High Court or the District Court may -

(a) make whatever orders are necessary to recover an amount improperly paid out, applied, or distributed; or

(b) order the application or distribution of an amount not yet applied or distributed.

[58] By virtue of the definition of “net proceeds”, a Court is thus required by s 112, first to scrutinize whether the costs in respect of which amounts have been paid out by a Part 4 operator were:

(a) actually incurred;

(b) reasonably incurred (in the context of a Part 4 gambling operation and in light of the twin statutory imperatives to maximise net returns and to minimise costs) and reasonable in terms of quantum;

(c) necessarily incurred (in the context of a Part 4 gambling operation and in light of the same twin imperatives).

[59] If, after this inquiry, the Court is satisfied that the amounts paid are not referable to actual, reasonable and necessary costs of conducting the gambling operation and therefore qualify as “net proceeds” then the next question is whether they were paid out “improperly”. In the vast majority of cases the answer to that question would no doubt coincide with the outcome of the first inquiry. An exception might be where there is room on the facts for debate about whether a

particular payment had in fact been made for an authorised purpose (as defined).[6]

[60] Next, and once the Court has determined that those factual thresholds have been met, the section confers upon it a broad discretion to make whatever orders are “necessary” to recover the relevant amounts. The principal question that then arises is whether there is anything in the statutory or broader legal context that requires that discretion to be interpreted and applied in a narrower way, or suggest it is subject to some kind of fetter.

[61] One particular issue I raised with counsel in this respect was whether, before the Court could order recovery of money paid to the first respondent under the

management contract, it would need first to be satisfied that that contract was an illegal or unenforceable one. This question was in part prompted by the fact that s 116(5) of the Act expressly provides that, where the Secretary has by Gazette notice set limits on the costs that may be incurred by a class 4 operator, a contract entered into by the operator that does not comply with those limits “is an illegal

contract for the purposes of the Illegal Contracts Act 1970”.®[7] The effect of that

provision would appear to be:

(a) to import the limitation contained in s 6 of the Illegal Contracts Act (ICA), namely that the contract’s illegality does not render ineffective dispositions for valuable consideration made to third parties who have acted in good faith; and

(b) to import the Court’s discretion under s 7 of the ICA to grant relief to

a party to such a contract if the interests of justice so require; and

(c) to require the remedial provisions of the Gambling Act (such as s 112)

to be read together, and consistently, with ss 6 and 7 of the ICA

[62] There is no express provision in the Gambling Act that states that a contract purporting to authorise the improper payment out of “net proceeds” is also an illegal contract for the purpose of the ICA. It seems to me that the most likely reasons for this are that:

(a) In a “net proceeds” case any breach of the Act (i.e. the making of an improper payment) may not manifest itself until the relevant contract is performed. In other words (and by contrast with a contract that breaches the s 116 Gazette limits[8]) such a contract may well not be

_{illegal at the time of its creation;}[9] _and

(b) Any impropriety may be more debatable as a matter of fact. While the specificity of a s 116 Gazette notice will likely mean that any contract entered in breach of its requirements will be identifiable on its face, whether or not a contract authorises an improper payment is likely to be less clear-cut.

[63] Once a determination has been made under s 112 that net proceeds have been improperly paid out pursuant to a contract, however, it seems to me that a finding of illegality/unenforecability would necessarily follow. Section 5 of the ICA provides:

A contract lawfully entered into shall not become illegal or unenforceable by any party by reason of the fact that its performance is in breach of any enactment, unless the enactment expressly so provides or its object clearly so requires.

[64] One of the specific purposes of the Gambling Act is to “ensure that money from gambling benefits the community”.10 Central to the attainment of that object in relation to class 4 gambling is the requirement that holders of class 4 operator’s licences return all net proceeds to the community. It seems to me that the object of the Act therefore clearly requires that a contractual attempt to subvert those requirements will be unenforceable. That conclusion is, I think, reinforced by -

(a) the fact that distribution of net proceeds for anything other than an authorised purpose is a criminal offence ( s 106); and

(b) the existence of the broad s 112 remedial power.

[65] So in terms of the question originally posed, it seems to me that, in cases where the improper payments have been made pursuant to contract, the answer is that a finding of illegality is not a prerequisite to the exercise of the s 112 discretion but a necessary consequence of it. The signal point, however, is not simply that a contract whose performance breaches the “net proceeds” requirement is (either wholly or in part) illegal and unenforceable. Rather, it seems to me that just as with a contract that is expressly said to be illegal by s 116, the Court’s wide restorative

_{powers under s 112 are limited by reference to the relevant provisions of ICA.}

10 Gambling Act 2003, s 3(g).

[66] Thus, in a case where improper payments have been made pursuant to a contract, the s 112 power is fettered to the extent that any orders made should not negate or render ineffective dispositions for valuable consideration made to third parties who have acted in good faith. As well, the Court retains a discretion (referable to s 7 of the ICA) to grant relief to a party to such a contract if the interests of justice so require.

[67] Having reached those conclusions, a further issue that arises is whether (in order to avoid engaging with ICA matters) the Secretary can apply under s 112 to recover money that has been improperly paid away to an innocent third party from the person on whose behalf or for whose benefit it was paid. That is what the Secretary seeks to do here, in relation to the payments made to 3 Bald Men Limited, the Clendon Inn lawyers and Toyota Finance Limited.

[68] It seems to me that s 112 plainly does permit recovery from someone such as Mr Cosgrave in these circumstances. It is Mr Cosgrave who has received the benefit of the payments, which were made by the Trust to third parties on his behalf. He is financially better off by the amounts so paid. And the section is quite clearly focussed on recovery of an “amount”. The identity of the person from whom that amount may be recovered is in my view deliberately not specified, no doubt leaving it to the Courts to ensure that no injustice is done in the individual case.

Application of the law to this case

[69] On the evidence before the Court there can be little doubt that none of the payments made by the Trust that are detailed above can properly be regarded as actual, reasonable, and necessary costs incurred by the Trust in conducting its gambling operation. More particularly:

(a) The early termination payments made pursuant to the management agreement between the Trust and Mr Cosgrave’s company ICSL were in my view neither reasonable nor necessary because:

(i) As Mr Carr concluded, they were artificial and excessive in the sense that they have no ostensible relationship with any work performed or detriment suffered by ICSL;

(ii) They were not linked in any relevant way to the Trust’s

gambling operation (which had ceased);

(iii) The obligation to make the payments was entered into by the Trust at a time when the Trust (and ICSL) knew that the Trust’s gambling operation would inevitably cease;

(b) There is no evidence that the payment to ICSL $23,634 on

2 November 2008 was either reasonable or necessary in terms of the Trust’s gambling operation (which had by that time ceased, its assets have being transferred by the Lion Foundation);

(c) The three payments made to Mr Cosgrave personally or CIL totalling

$75,202.25 have been accepted by Mr Cosgrave as having been stolen by him and necessarily therefore bearing no relation to the Trust’s gambling operation (rather having been used for the day-to-day running of the Clendon Inn, Mr Cosgrave’s personal expenses and/or establishing a gaming room at the Inn);

(d) Similarly the $93,766.55 paid during 2008 to 3 Bald Men Ltd relating to building work done at the Clendon Inn and the $10,750 paid by the Trust for legal work associated with the Inn bear no conceivable relationship to the gambling operation of the Trust; and

(e) The payment of $5,494.59 made to Toyota Finance related to a lease for a car under an agreement with ICSL and had no relationship with the gambling operation of the Trust.

[70] Because none of these payments can be said to relate to actual, reasonable, and necessary costs incurred by the Trust in conducting its gambling operation it

follows that the monies paid were in fact part of the Trust’s “net proceeds” which were required by the Act to be distributed only for authorised purposes. It is axiomatic that that requirement was not met and I am therefore satisfied that the amounts were improperly paid.

[71] In terms of the payments that were made to ICSL under the management contract, my analysis above suggests that part of the contract which purported to authorise the payments was illegal and unenforceable in terms of the ICA. No issues as to innocent third parties or discretionary relief, however, arise and there is in my view no bar to making an order that the sum of $766,782 is to be paid by ICSL to the Secretary under s 112.

[72] Similar orders can be made in relation to the three payments made to Mr Cosgrave personally and/or CIL. Although CIL is not a party to these proceedings it is plainly, and for all relevant intents and purposes, merely ICSL and Mr Cosgrave in another guise.

[73] For the reasons I have already given the sums of $93,766.55 and $10,750 (in relation to building and legal work relating to Clendon Inn) and the sum of

$5,494.59 (in relation to the car formerly leased by ICSL) can be recovered from Mr Cosgrave as the real beneficiary of the payments improperly made rather than from the innocent third parties to whom the payments were made.

[74] In summary therefore I find that Mr Cosgrave and ICSL are jointly and severally liable to repay to the Secretary $975,629.39, that being the total amount that was improperly paid out either to them or on their behalf by the Trust. I make

_{an order that that amount be repaid by them accordingly.}

Rebecca Ellis J

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[1] Pub Charity v Attorney-General CA103/04, 8 November 2004.

[2] Pub Charity v Attorney-General HC Wellington CIV 2003-485-1106, 25 May 2004.

[3] Although such a notice containing such limits has been issued the issue of non-compliance by the _{Trust with these limits does not appear to arise in the present case.}
[4] _{The Commission being the body authorised to hear appeals under the Act.}
[5] Appeal by Southern Trust GC 10/10, 5 May 2010.

[6] Namely for a charitable purpose, a non-commercial purpose that is beneficial to the whole or a section of the community, or the purpose of promoting, controlling, and conducting race meetings under the Racing Act 2003.

[7] Section 14(1) of the Act similarly provides that “every contract for, or relating to, illegal gambling is _{an illegal contract for the purposes of the Illegal Contracts Act 1970 and that Act applies accordingly.”}
[8] _{It seems tolerably clear from s 116 that such contracts are regarded as illegal from their inception.}

[9] To take the present case as an example it is conceivable that it was only the triggering of the early termination clause that caused the Act’s net proceeds requirements to be breached. Unless and until that event occurred the management contract may have been unobjectionable.