Boonham on Mangawhai: Who is Responsible?

I am a bach owner at Mangawhai Heads and have been steadily drawn into the campaign about the wastewater system (known as EcoCare), rates, Kaipara District Council behaviour and so on. One of the locals who has been particularly assiduous is retired lawyer Clive Boonham. He has been running a website on his investigations for the past few years. You can see it here.

I am running a couple of extracts from his site this week. In this article, Clive considers what might happen if the whole mess was to be taken to court..... :

WHO IS LIABLE FOR THE ILLEGAL DEBT?  09.12.12 (By Clive Boonham aka Legal Eagle)
 

Legal Eagle believes that the decision to extend the EcoCare project and to almost double the debt was illegal and ultra vires (outside Council's legal powers) because Council failed to go through the decision-making process specified under the Local Government Act (LGA) and because it failed to meet the requirements of the LGA in respect of consultation with ratepayers. It was obliged to issue a new statement of proposal and go through the special consultative procedure with ratepayers before making a decision on the scheme and the debt..

Not only did it not satisfy any of those compulsory requirements, it did everything in secret and hid all the details of the extended scheme and the increased debt from ratepayers for many years.

This was a deliberate breach of the law and a breach of trust by the Council.

So, who is legally responsible for the illegal debt?

The government, according to John Robertson (Chairman of Commissioners appointed by Govt to run Kaipara District Council), has made it clear that it is not going to bail out the Council. That may well be its stance. It may deny any liability . But, as in any case where liability is disputed, it is for the court to decide who is to be held legally responsible. The government is not exempt from liability. More of that later.

The ratepayers also state that they are not going to bail out Council. Of all the parties involved they were the innocent party. They were the victims of a cynical, deliberate fraud and deception that should have landed the perpetrators in jail.

The court will (would) be asked to confirm that:

• Council acted ultra vires in incurring the debt, and

• Under the LGA Council has no power to charge rates to pay for ultra vires debts, and

• As a fiduciary (trustee) of the ratepayers, councillors or commissioners must always act in the best interests of ratepayers and not third parties (the government or the banks). A fiduciary cannot bill a beneficiary for debts illegally incurred by the fiduciary.

One of the basic misconceptions about local government in New Zealand is that the ratepayers of a district are responsible for all the debts of the local authority no matter whether those debts are legal or not. Ratepayers are the scapegoat and the easy target for incompetent councils.

This misconception is based on a superficial reading of a section in the LGA which states that debts entered into by a local authority are deemed to be valid and enforceable even though they were secured in contravention of the requirements of the Act, or even by fraud. It is true that the bank can appoint a receiver who has special (but limited) power under the LGA to set a rate to cover the repayment of the debt.

The problem is that the LGA is very loosely drafted and the special power to charge a rate to repay the debt is only granted to a receiver. The Council itself - whether operating through councillors or commissioners - has no such power. When setting rates it is still bound by the principles of the LGA - the four well-beings - and by its fiduciary (trustee) obligations.

This means that a council cannot set draconian rates to repay an illegal debt that effectively destroy the communities in the district simply to appease the government and the bankers. The ratepayers best interests come first.

The commissioners and the government are not going to acknowledge the legal situation because it puts at risk the whole basis of ratepayer liability, and if Kaipara ratepayers manage to reject liability for illegal debts then the flood-gates will open, and the whole of local government in NZ will be turned on its head.

That is why ratepayers need to file proceedings in court to ensure that they are not made the scapegoats for the fraud that has been committed on them.

If ratepayers are not responsible for the debt, then who is?

Quite clearly those who were negligent, incompetent and were responsible for the massive and illegal blow-out of borrowings and the illegal actions.

If you want to know who the suspects are then simply look at the crime scene and see who was involved in the fiasco. The forensic boys then need to examine the role played by each participant to see what responsibility they carry for the losses.

The commissioners have already acknowledged in the recent letter from John Robertson that Council (the former Chief Executive and the elected Councillors) were negligent, so that is a good start.

The former Chief Executive, Jack McKerchar, who was employed by the Council for 12 years, has to bear the major responsibility for the ruination of our beautiful district. The impact that his incompetence and his illegal forays have had on our communities and individuals is immeasurable. It may take generations for the district to recover and many lives will have been ruined by his arrogant disregard of the law and correct procedures. It is my personal view that his behaviour was so bad, and the effect that he has had on the whole community so great, that he should be serving a term in prison.

Jack McKerchar should have insurance to cover his negligent acts, and he should be the first target.

Councillors may well be uninsured but they are still liable, in the same way as company directors, for the breach of their duty of care. Jack McKerchar could never have got away with what he did if he had not had a bunch of dopey councillors who abdicated all responsibility for decision-making and allowed him total latitude to wreak his special type of havoc. There were of course some Councillors like Bruce Rogan, Bill Guest, and Jonathan Larsen who did what they could to counter the excesses of the McKerchar dictatorship, but by and large the councillors failed miserably in their legal obligations.

They should be sued individually for breach of their duty of care and the Auditor-General should recover from them losses suffered by Council because of their negligence under the special powers in the LGA

The role played by consultants and advisers also needs to be scrutinised. You have to ask yourself how the Council could spend the vast sums of money that it did on consultants and legal advisers and yet get itself into such a financial and legal pickle. It looks as though there may be some negligence lurking there.

In respect of the EcoCare, the ultra vires extension of the scheme, and the ultra vires debt, it is essential that the roles of the financier, the contractor and Council's consultants and legal advisers need to be examined.

I find it hard to believe that all of those competent and experienced people (and experienced in dealing with local authority projects) were party to an arrangement to build a sewerage scheme for a local authority that involved massive costs and debt, yet not one of them appeared to know that the LGA required specific decision-making and consultation processes before any decision could be made or any contracts signed.

Did they all suffer from John Key's brain-fade?

As a lawyer myself I understand the obligations that a lawyer has when advising a client on a project and a debt, and the liability that a lawyer faces if he fails to advise a client on the appropriate legal processes. That is why clients use lawyers.

A cursory glance at all the various reports that the consultants used to persuade Council to undertake the EcoCare project and to extend it seem to me to be riddled with assumptions and financial models that have little solid basis, and it is appears to me that the whole scheme was a massive financial gamble based on flimsy figures and projections.

Experts need to examine the role of consultants, advisers and lawyers to see if there was any evidence of negligence on their part. If there is then action must be taken against them.

What of the contractor who built the plant? From the information available to ratepayers it seems that the EcoCare plant is not what we contracted for. The expression "not fit for purpose" is being bandied about. Were we sold a dud? Steve Ruru (acting CEO of Kaipara District Council) has acknowledged that the plant can cope with no more than the current 1200 connections (out of a promised 4,500) without massive further expenditure. The discharge farm also appears to be unsuitable for soakage even though a report from a consultant recommended it.

The Bicknell report that was commissioned by Greg Gent (Chair of the Govt appointed Review Ctte that was set up before Commissioners replaced Councillors and Mayor) to ascertain the status of the EcoCare plant appears to have disappeared into the mists.

The valuations for the plant seem to support the view that there is a short-fall in value. That seems a fertile area to inquire into to see if Council has a case to recover a substantial sum from the contractor in an action for breach of contract.

The big question of course is the role of the Office of the Auditor-General and whether that Office is liable for the financial and legal problems facing Council.

The OAG has two basic roles. One is that of auditor to the Council to ensure that the Council's plans and accounts meet the audit requirements and satisfy legal and accounting requirements. The second is a general role to act as a watchdog to ensure that Council acts appropriately and to protect the best interests of ratepayers.

It has been my view for some time that the OAG has failed miserably to perform both those roles. I suggest that if the OAG had performed its roles satisfactorily then Jack McKerchar and his complicit Council would not have been able to get away with years of incompetence and flouting legal requirements.

Several years ago John Dickie, Helen Curreen of the MRRA, and Legal Eagle filed complaints with the OAG about the dreadful performance and illegal actions of the KDC. I personally made detailed legal submissions on the persistent failure to comply with the requirements of the Rating Act when setting rates. (Those submissions have all been subsequently vindicated by the Salter report.)

Our complaints were dismissed by the OAG. I got the distinct impression that the Office was not the slightest bit interested in reining in local authorities that were clearly operating outside the legislation. I also suspected that the legal people at the OAG had no understanding of the law relating to rating and setting rates. Either that or they simply did not care if rates were set incorrectly.

It is interesting that last year the Deputy Auditor-General Legal came to Kaiwaka to meet with us and apologised on behalf of the Auditor-General for her failure to pursue the matter when we first complained. We were then advised that there would be a full inquiry into EcoCare. However, that inquiry only came about because, in spite of the OAG's indifference, we had continued to press Council until it obtained the Salter report which confirmed our submissions on the legality of rates, and because Legal Eagle made further submissions to the OAG on the illegality of the decision to extend the EcoCare scheme and double the debt.

If ratepayer representatives had not taken the initiative and kept up the pressure it seems that the OAG that would have been happy to sweep the whole debacle under the carpet.

This has been a dreadfully shoddy performance by the OAG and the legal experts need to have free rein to see if legal action should taken against the OAG.

We finally come to the Minister of Local Government and the government itself.

Rodney Hide, as Minister, played for time and did very little to bring Council to account even though he was fully advised of the problems and illegalities. He put the Council "on watch" but little else. The Minister' Office only took decisive action after mounting pressure from ratepayers and far too late to salvage anything from the destruction of Kaipara.

The government has a broader role in this debacle. The government has a constitutional obligation to ensure that the powers of local government (which devolve from central government) are exercised appropriately by local authorities, that they act within the law, and that the rights of citizens are protected.

The government failed miserably to perform its obligations. It is blaming the obvious short-comings of local government on the deficiencies in the legislation but it is clear that the problem lies in the way the government performed its own obligations.

The watchdogs that it appointed - the Ombudsman and the OAG - are underfunded and toothless and do not have the necessary powers or, apparently, motivation to police their areas of responsibility. They are very much like the old Securities Commission which sat by while renegade finance companies pillaged the life savings of New Zealanders.

The Office of the Minister, which should be a back-stop to pick up missed balls, went AWOL.

The government's attempt to dump liability for local authorities' excesses and illegalities on innocent ratepayers is shameful. It relies on ratepayers not having the financial backing or the courage to stand up to the government and seek redress from the courts.

That is a serious misjudgement on the part of the government. Kaipara ratepayers are not going to lie down and accept this debt. If the government refuses to listen to them and to act fairly within the law, they will reluctantly, but steadfastly, take the legal action that is appropriate to ensure that those who are truly responsible for the fraud that was perpetrated on the people of Kaipara are held responsible in law.