Christchurch Pavilion Partnership No.1 v Deloitte & Touche Tohmatsu Trustee Company Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lord Scott of Foscote |
| Judgment Date | 04 February 2002 |
| Neutral Citation | [2002] UKPC 4 |
| Date | 04 February 2002 |
| Court | Privy Council |
| Docket Number | Appeal No. 16 of 2001 |
[2002] UKPC 4
Privy Council
Present at the hearing:-
Lord Slynn of Hadley
Lord Mustill
Lord Scott of Foscote
Sir Christopher Staughton
Sir John Roch
and Others
[Delivered by Lord Scott of Foscote]
The background
The litigation which has culminated in this appeal to the Board has been brought by a number of disappointed investors. They invested their money, $50,000 each, in a project, the Christchurch Pavilions project, to build a luxury motor lodge complex in the South Island and then to run the lodge as a business. The project failed. Their invested money was lost. They seek to recoup their money from Deloitte Touche Tohmatsu Trustee Co Ltd, previously Deloitte Haskins and Sells Trustee Co Ltd (DHST). DHST was the statutory supervisor appointed for the purposes of the Securities Act 1978. The Investors' claim against DHST succeeded at first instance but failed in the Court of Appeal. The investors now appeal to the Board.
It is convenient to state in brief the core facts. In order to finance the Christchurch Pavilions project the promoter, Horner Greenlees Corporation Ltd ("HGC") proposed to raise the sum of $4,500,000 as venture capital. In addition, bank borrowings were planned. The venture capital was to be raised as to $4,050,000 by the issue of 8,100,000 shares of 50 cents each in Christchurch Pavilion Holding Co Ltd ("CPH"), a new company, and as to $450,000 by the issue of 90 units of $5,000 each in five 18 unit partnerships, the Christchurch Pavilion Partnerships. It was contemplated that there would be 90 investors each of whom would take one Partnership unit and 90,000 shares. CPH was to acquire the land and build the motor lodge. It was then to lease the lodge to the Partnerships and the Partnerships, via a management company, Christchurch Pavilion Management Co Ltd ("CPM") owned and controlled by HGC, would run the lodge on behalf of the Partnerships.
A prospectus dated 12 November 1987 inviting the public to subscribe for the shares and units was issued and duly registered (see s 33(1)(a), Securities Act 1978). The offer was to close on 18 December 1987 but the closure date was extended by HGC to 23 December. The prospectus stated that the "minimum amount" that in the opinion of the directors needed to be raised by the issue of the shares and units was $4,500,000 (see s 37(2) of the 1978 Act and para 10(4) of the prospectus). The prospectus stated that on 18 December (later 23 December) 40 cents on each 50 cent share had to be paid. The total, assuming all the shares were subscribed for, would have been $3,240,000. The balance, namely 10 cents on each 50 cent share and the $5,000 for each partnership unit, a total of $1,260,000, was, said the prospectus, to be paid on or before 12 August 1988.
Allotment of the shares and units took place on 23 December 1987. According to DHST, the allotment applications were all to hand and the $3,240,000 had been received on the date on which the allotment took place. There is a factual dispute about this. The trial judge was not satisfied that all the applications were to hand or that the whole of the $3,240,000 had been received before the allotment took place. The Court of Appeal disagreed. Be that as it may, there is no dispute but that all the shares and units were allotted on 23 December. HGC, which had underwritten the issue, took up 50.5 of the 90 Partnership units and a corresponding number of the CPH shares. Over the next few months HGC placed the shares and units it had taken up with members of the public.
The lodge was built and opened for business in November 1988. But, as has been said, the venture failed, CPH went into liquidation and the investors lost their money.
The investors contend that DHST, as statutory supervisor under the 1978 Act, owed them duties in respect of the venture and was in breach of those duties. Questions arise as to the nature and extent of those duties and whether any breach by DHST was causative of the Investors' losses. Before these questions can usefully be considered, the statutory framework created by the 1978 Act must be described.
The 1978 Act
The Securities Act 1978 represented the response of the New Zealand legislature to the collapse of a group of companies known as the Securitibank group. When introducing the Bill the then Minister of Justice, the Hon David Thomson, said that:
"The Bill … will require commercial entities offering securities to the public to do so by way of a registered prospectus, to appoint an independent person to look after the interests of investors, to keep and disclose adequate financial information and to be subject to official scrutiny."
and that
"The Bill is aimed at redressing the balance in favour of the investor, who, in many of the financial collapses in recent years, had had little or no way of ensuring that his investment has been responsibly and properly managed." (see NZPD vol 416, 14 December 1977).
Given these objectives it seems surprising that the Act, as originally enacted, was never brought into effect. It was substantially amended by the Securities Amendment Act 1982 but, even as amended, was not brought into effect until 1985. It is tempting to speculate that a reason for the delay may have been some misgivings as to the practicalities of section 37, a section central to this appeal. If there were any such misgivings, the present case, in their Lordships' view, provides some justification for them.
The relevant statutory provisions are to be found in Part II of the Act as amended. All references to the Act will hereafter be references to the Act as amended. Part II regulates the issue of securities and distinguishes between three different types of security. There is "debt security" eg. debenture stock, "equity security" eg. shares in a company, and "participatory security". "Participatory security" is defined as "any security other than an equity security or a debt security" (section 2). This case concerns equity securities, the shares in CPH, and participatory securities, the Partnership units.
Section 33 of the Act imposes a number of requirements that must be complied with if offers are to be made to the public inviting subscription for securities. Sub-section (1) requires the offer to be made in or accompanied by a registered prospectus and to be made in an "authorised advertisement". The Christchurch Pavilions prospectus complied with these requirements.
Sub-section (2) of section 33 relates to debt securities and is not material to this case. Sub-section (3) relates to participatory securities. It provides that:
"No participatory security shall be offered to the public for subscription, by or on behalf of an issuer, unless –
(a) The issuer of the security has appointed a person as a statutory supervisor in respect of the security and both the issuer and that person have signed a deed of participation relating to that security; and
(b) A copy of the deed of participation has been registered by the Registrar pursuant to section 46 of this Act; and
(c) [This relates to amendments to the deed of participation]."
"Statutory supervisor" is defined in section 2 of the Act as "a person appointed as a statutory supervisor in respect of participatory securities for the purposes of, and in accordance with this Act".
It is important to keep in mind that a statutory supervisor's role relates only to participating securities. He has no statutory function in relation to equity securities. A deed of participation is required only for an issue of participatory securities. It is not required for an issue of equity securities.
A Deed of Participation was signed by CPH, CPM, HGC, a Mr Horner, joint managing director of HGC, and DHST. A requirement of section 33(3)(a) is that the deed be signed by the issuer of the participatory securities and by the statutory supervisor. It is not clear which of the signatories signed as the issuer of the Partnership units. Certainly neither CPH nor CPM was the issuer of the units. Perhaps it was HGC, the promoter, who was regarded as the issuer. No point about this was raised before the Board and, apart from noticing the curiosity, their Lordships do not find it necessary to dwell on the point.
Sections 34 and 35 of the Act are not relevant to this case. Section 36 was repealed and not replaced by the 1982 Act. It is convenient to set out section 37 in full:
" Void irregular allotments - (1) No allotment of a security offered to the public for subscription shall be made unless at the time of the subscription for the security there was a registered prospectus relating to the security.
(2) No allotment shall be made of an equity security or a participatory security offered to the public for subscription if the allotment is the first allotment of such security to the public unless the amount stated in the registered prospectus relating thereto as the minimum amount which, in the opinion of the directors of the issuer, must be raised by the issue of the securities in order to provide for the matters specified in regulations made under this Act, is subscribed, and that amount is paid to, and received by, the issuer within 4 months after the date of the registered prospectus; and, for the purposes of this subsection –
(a) A sum shall be deemed to have been paid to, and received by, the issuer if a cheque for that sum is received in good faith by the issuer and the directors of the issuer have no reason to suspect that the cheque will not be paid:
(b) The amount so stated in the registered prospectus shall be reckoned exclusively of any amount payable otherwise than in cash.
(3) No allotment of a participatory security...
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