Black and Ors v Lagoon Lodges Properties Ltd

• Jurisdiction: New Zealand
• Judgment Date: 19 December 2014
• Neutral Citation: [2014] NZHC 3336
• Date: 19 December 2014
• Docket Number: CIV 2013-409-000759
• Court: High Court

Between

Leslie Allan Black And Lesley Ann Black And Ors

First to Thirteenth Plaintiffs

and

Lagoon Lodges Properties Limited

First Defendant

Neville Ian Cant

Second Defendant

Doyle Financial Services Limited

Third Defendant

Stephen Murray Doyle

Fourth Defendant

Mds Law

Fifth Defendant

[2014] NZHC 3336

CIV 2013-409-000759

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

Application for strike out by the fifth defendant law firm on the grounds it did not owe the plaintiffs a duty of care as non-clients and the claim was time barred under Limitation Act 2010 — the fifth defendant had acted as solicitors for the first defendant in the subscription for and the allotment of securities in relation to a Cook Islands development which the plaintiffs had subscribed to — securities were allotted after 17 April 2007 — plaintiffs alleged the fifth defendant was under a contractual duty, by virtue of the Contracts (Privity) Act 1982 and/or at common law, to ensure that the plaintiffs were not deprived of the protection of the relevant provisions of the Securities Act 1978 (“SA”) — plaintiffs alleged the fifth defendant breached that duty by allowing them to subscribe for the securities when there was no registered prospectus in breach of s37 SA (void irregular allotments) — whether the fifth defendant owed a duty of care to the plaintiffs — whether the claim was barred by s11 Limitation Act 2010 (defence to a money claim if the claim was filed at least 6 years after the date of the act or omission on which the claim was based).

Counsel:

F B Barton, A M Cunninghame and S L McNeill for Plaintiffs

C R Carruthers QC and D M lester for Defendants

JUDGMENT OF WHATA J

1 The plaintiffs in three proceedings claim MDS Law (MDS) acted as solicitors for Lagoon Lodges Properties Limited (Lagoon 1), Lagoon Lodges Properties 2 Limited (Lagoon 2) and Castaway Properties (NZ) Limited (Castaway) in the subscription for and the allotment of securities in relation to a development in the Cook Islands. They also claim that MDS was under a duty, in contract by virtue of the Contracts (Privity) Act 1982 (CP Act) and/or at common law, to ensure that the plaintiffs were not deprived of the protection of the relevant provisions of the Securities Act 1978 (Securities Act). In breach of that duty, MDS is then said to have permitted the Plaintiffs to subscribe for the securities and or permitted the securities to be allotted to them when there was no registered prospectus relating to them.

2 MDS applied to strike out these pleadings. 1 MDS submits that MDS could not owe a duty of care to the plaintiffs who are non clients and between whom there was never any form of contract.

3 MDS also submits that the Lagoon 1 claim should be struck out as it is barred by operation of the Limitation Act 2010.

Background

The pleaded facts

4 The present application for strike out concerns three proceedings but they all relate to essentially the same background facts.

5 In response to an offer to the public by way of an information memoranda dated 17 April 2007 and issued by Lagoon 1, Lagoon 2 and Castaway, the plaintiffs subscribed in New Zealand for interests in a development in the Cook Islands known as Lagoon Lodges Stage 2.

6 The interests for which they subscribed were equity securities for the purposes of the Securities Act and the subscription for and allotment of those securities (“the securities”) were therefore governed by the provisions of the Act. The securities were allotted by the companies to the plaintiffs on a date which is not known to the plaintiffs but in any event after 17 April 2007. At the time the plaintiffs subscribed for the securities there was no registered prospectus relating to them. The allotment of the securities without a prospectus was a contravention of s 37(1) of the Securities Act. By virtue of s 37(4) of the Securities Act the allotment was therefore invalid and of no effect. Under s 37(5) of the Securities Act the subscriptions of the

plaintiffs together with such interest, if any, had been earned on them were therefore repayable to them as soon as reasonably practicable. The defendant companies have not repaid the plaintiffs any of their subscriptions or any interest on them

7 The second defendant, Mr Cant, is a director of the companies. The third and fourth defendants are Doyle Financial Services Limited and Stephen Murray Doyle. They permitted the plaintiffs to subscribe to the securities. MDS acted as solicitors for the companies in the subscription for and the allotment of the securities. They did not ensure that the plaintiffs were not deprived of the protection of the relevant provisions of the Securities Act. MDS in particular permitted the plaintiffs to subscribe for the securities and/or permitted the securities to be allotted to them when there was no registered prospectus relating to them. The plaintiffs therefore lost funds to which they subscribed.

Affidavit evidence — preliminary issue

8 Affidavit evidence was filed by both parties on the application for strike out. The admissibility of this evidence is now disputed by MDS. A preliminary issue arises as to whether I may have regard to this additional evidence. Three considerations enable me to take it into account.

9 First, MDS filed an affidavit of Mr Tutty in support of its application to strike out. Mr Tutty was a solicitor involved in the securities transactions. He deposes that “MDS was not instructed to provide any advice in relation to whether or not an investor was an eligible person under the [Securities] Act”. The plaintiffs produced documentary evidence that Mr Tutty wrote to a director of the first plaintiffs stating that agreement had been reached that MDS would not release investor funds until it was fully satisfied and given an opinion as to the investors satisfying the eligible persons criteria. Mr Tutty also conceded in reply that the investors paid monies directly to MDS. In these circumstances, it is not available to MDS to complain about the admissibility of this or related evidence.

10 Second, the evidence is essentially based on documentation produced via discovery, the source of which is not disputed. The affidavit evidence does not by itself enlarge or contradict the pleaded causes of action. It does however fill in some of the factual gaps in the pleadings and includes information that is relevant to the central issue as to whether this matter can be resolved without a fact based inquiry. More specifically it enables the key events to be chronicled, identifies salient steps taken by the key actors and clarifies MDS's contractual obligations as solicitors for the transactions. The evidence is therefore relevant and prima facie admissible.

11 Third, Mr Barton accepted that a chronology of events provided by the plaintiffs based on discovered information is accurate. I will shortly come to that chronology, but it has long been settled authority that it is appropriate to consider evidence which was not contradicted and which itself did not contradict the allegations in the pleadings. 2

A chronology of events

12 The chronology produced by the plaintiffs states:

• •November 2006 – Plaintiffs approached about investing.

• •15 December 2006 – 10 January 2007 – plaintiffs pay deposit into MDS trust account titled “Lagoon Lodges Properties Limited”.

• •20 December 2006 – Investors certify that they meet criteria

• •22 December 2006 – $202,500.00 deposit paid to Knight Coldicutt Trust account — Tepaki 5 Holdings Limited: part deposit on purchases of units Lagoon Lodges by Lagoon Lodges Properties Limited.

• •12–16 January 2007 – investors pay balance of investment into MDS trust account titled “Lagoon Lodges Properties Limited”.

• •30 March 2007– MDS pays interest to individual investors.

• •17 April 2007 – independent advice is given to investors.

• •19 April — MDS Letter to Investment Management Limited “ agreement has been reached that we will not release any funds (castaway or lagoon) until we are fully satisfied and have given our opinion as to investors satisfying the eligible persons criteria.”

• •19 April 2007 – Email from IML to MDS Law “… I have now read the document and will sign and return the relevant pages immediately on receipt of confirmation from you that you have examined the eligibility certification of each of the investors and that in your opinion, each of the investors meets the eligibility standards as specified in the Securities Act, and that the certifications have been carried out in a manner which will satisfy the Securities Commission.”

• •20 April 2007 – independent advice by financial planners is acknowledged by the investors.

• •16–24 April 2007– Mr Steven Doyle rings investors and provides a written statement outlining why investors are “experienced” in a letter.

• •24 April 2007 – Email from IML to MDS, handwritten notes of conversation between Mr Cant and Mr Tutty as to compliance with Act.

• •26 April 2007 – Neville Cant letter to MDS Law.

  “ I have been advised by MDS law that investor certifications reviewed by MDS Law do not satisfy the “eligible persons” criteria specified in the Securities Act, 1978.

  Notwithstanding that advice I am of the opinion as a financial planner and following discussions with the independent financial service provider that the correspondence does satisfy the criteria detailed above.

  I will be procure (sic) Lagoon Lodges Properties Limited to immediately issue and allot the shares.

  I instruct MDS Law to advance funds to Lagoon Lodges Properties (Cook Islands) Limited and then forward settlement proceeds … to Knight Coldicutt McMahon Butterworth or their appointee to enable settlement to be completed.

  Lagoon Lodges Properties Limited, Investment Management Limited, Combined Financial Services Limited and I, Neville Cant, indemnify MDS Law in relation to any loss arising from this matter and waive any...