Brian Gaynor: The trials of Eric Watson

Brian Gaynor: The trials of Eric Watson


Eric Watson, the high-profile businessman, has hit two massive speed bumps in recent months.

On July 31, the High Court of England and Wales found in favour of Sir Owen Glenn in his dispute with Watson.

Six weeks later, Justice Nugee ordered Watson to pay Glenn a maximum sum of £47.3 million ($91.7m) with an annually compounding interest rate of 6.5 per cent per annum.

The £47.3m compensation included £3.8m of costs.

An interim payment of £25.3m due on September 27 was not paid, with Watson’s solicitor stating he was “unable to pay the sums ordered by the Court as he does not have the assets to do so”.

On October 4, control of Cullen Group — Watson’s main NZ operating company — changed hands when Victoria Equities Limited transferred its 100 per cent stake to Zedra Asia Limited.

Victoria Equities is a Watson-controlled NZ company while Zedra Asia is Hong Kong based.

Glenn’s legal team noted this change and successfully applied to the High Court of England and Wales to freeze £47.3m worth of Cullen Group assets.

Two weeks ago, Cullen Group lost its High Court of New Zealand claim against the Commissioner of Inland Revenue.

Justice Palmer agreed with the IRD that Cullen Group owed it $112.0m, made up of $51.5m in taxes plus $60.5m for use-of-money interest.

Watson and his companies, including Cullen Group, now owe a massive $203.7m because of court decisions in the UK and New Zealand.

In the UK, Justice Nugee wrote that Watson “described his business dealings today as bringing people together to do a deal, identifying investment opportunities and then identifying investors who would be a good fit”.

“He generally participated in the deals he facilitates either by making an investment himself or by having an interest in the business or its performance. He also said that he commonly borrows all or a significant part of his investment from one of the other parties to the deal thereby enabling him to invest without seeking bank finance”.

“One major question remains unanswered: do Watson and his group of companies have sufficient funds to meet their $200m-plus legal obligations to Sir Owen Glenn and the Commissioner of Inland Revenue?”


Justice Nugee wrote that Glenn and his legal team contended “that he (Watson) carries on business using a complex web of trusts and companies; that although he claims not to be interested in certain vehicles they are in truth nominees for him; that he enters into arrangements, often undocumented, which meant that the relationships set out in the former legal documents do not reflect the true position”.

Glenn claimed that Watson “holds out companies as being owned by third parties when they are in fact vehicles to make profits for him”.

The latter comment was the basis of Glenn’s case against his fellow New Zealander.

Neither Glenn nor Watson could agree on when they first met, but they told the UK High Court that they had certainly done so before May 2008 when Glenn invited Watson to join him on his Monaco yacht and villa.

Glenn said he liked Watson as they were fellow Kiwis and shared several interests, including rugby, horses, golf and philanthropy. He said by early 2012 he thought of Watson as a very good friend.

Watson was more circumspect: he said that Glenn was not a good friend and they mainly met to discuss business matters.

Glenn and Watson invested in several projects together, including the New Zealand Warriors rugby league team. However, their major investment was Project Spartan, a complex real estate opportunity that focused on ground rents, affordable housing and residential portfolios.

As part of the arrangement, Glenn believed he was purchasing a 50 per cent stake in Project Spartan from Watson’s existing partner for £22.5m. Watson would continue to own the other 50 per cent.

In short, Justice Nugee decided this was fraudulent misrepresentation as £10m of the £22.5m went to the seller of the 50 per cent stake, with the other £12.5m effectively going to parties associated with Watson.

Justice Nugee wrote: “In the course of the events with which the trial is concerned [Watson] resorted to deliberate deception; and that he not only did so himself but also recruited those who worked with him to do so as well”. The UK decision was a comprehensive victory for Glenn against Watson, his old friend and business partner.

Back in New Zealand, Cullen Group appeared in the High Court in late August and early September in a case taken against the Commissioner of Inland Revenue.

The hearing related to the restructuring of Watson’s business interests following his move from New Zealand to the United Kingdom in 2002.

Justice Palmer described the situation as follows: “A ‘non-domiciled resident’ of the UK was allowed to pay UK tax only on income generated in the UK as well as on income generated outside the UK during UK residence but subsequently remitted to the UK. Accordingly, such taxpayers had incentives to ensure money remitted to the UK was ‘clean capital’, which did not represent income generated during a period of UK tax residence. This was usually done by setting up a segregated fund of clean capital outside the UK, to minimise UK income and inheritance taxes, such as in a tax haven”.

Justice Palmer wrote that Watson “was concerned to ensure his ‘permanent place of abode’, for tax purposes, changed from New Zealand to the United Kingdom. I accept that, in making such a move, it is common for a high net worth individual to seek to disestablish New Zealand tax residency, and plan remittance of assets and income to the United Kingdom accordingly. This could involve using off-shore entities to hold assets, as it did here”.

Watson achieved this by replacing his shares in Cullen Investments by loans made to Cullen Group through a conduit of entities, including several companies domiciled in the Cayman Islands.

Cullen Group paid interest of $397m to these Cayman Island companies and applied an Applied Issuer Levy (AIL) rate of 2 per cent, rather than the Non-Resident Withholding Tax (NRWT) rate of 15 per cent.

The tax department successfully defended its view that Parliament enacted the AIL regime with the objective of encouraging investment in New Zealand, by reducing the cost of New Zealand residents borrowing from non-residents.

Justice Palmer wrote that the Cullen arrangement “introduced no new funds into New Zealand. It restructured shares in one New Zealand company (Cullen Investments) into loans to another New Zealand company (Cullen Group), which were assigned to overseas entities (in the Cayman Islands) in form but not substance”.

He wrote that Watson “retained a high degree of control over the relevant entities and was on both sides of the loans. I do not consider the arrangement was with the contemplation and purpose of Parliament in enacting the AIL regime. It was a tax avoidance arrangement”.

The High Court determined that the Commissioner of Inland Revenue was correct and Cullen Group has a tax liability of $51.5m. This is the difference between the 2 per cent AIL applied to its interest payments to the Cayman Islands and the 15 per cent payment it should have made under the Non-Resident Withholding tax requirement.

In addition, Cullen Group is liable for a further $60.5m for use-of-money interest.

Cullen Group lost its NZ case on all fronts, including the claim that the tax should have been at a 10 per cent NRWT rate, instead of 15 per cent, because of the Double Tax Agreement between NZ and the UK. This would reduce Cullen’s tax liability from $51.5m to around $31.6m.

Justice Palmer rejected this claim because the Double Tax agreement was in relation to interest remitted to the UK, rather than the Cayman Islands where Cullen Group remitted $397m of interest.

Watson, who had an estimated wealth of $250m last year according to the NBR, faces an extremely difficult period ahead. He has court-imposed penalties of $203.7m and the share price of Naked Brand, which now owns Bendon, has fallen 75 per cent over the past 12 months. Cullen Investments owns 6.9 per cent of Naked Brand.

The March 2019 financial year has clearly been annus horribilis as far as Watson and his group of companies are concerned.

However, one major question remains unanswered: do Watson and his group of companies have sufficient funds to meet their $200m-plus legal obligations to Sir Owen Glenn and the Commissioner of Inland Revenue?

Brian Gaynor is a director of Milford Asset Management.


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