Hickman and Ors v Turner and Waverley Ltd Sc

JurisdictionNew Zealand
CourtSupreme Court
JudgeElias CJ,McGRATH,William Young,Anderson JJ
Judgment Date09 August 2012
Neutral Citation[2012] NZSC 72
Docket NumberSC 46/2011
Date09 August 2012

[2012] NZSC 72



Elias CJ, Tipping, McGrath, William Young and Anderson JJ

SC 46/2011

Neil Tony Hickman and Ors
First Appellant


David John Lester and Ors
Second Appellant


Anthony Collingwood and Ors
Third Appellant


Norman and Marie Herrick
Fourth Appellant
Turner and Waverley Limited (Formerly Turn and Wave Limited)
First Respondent


Greenstone Barclay Trustees Limited
Second Respondent


Grafton Projects Limited (Formerly Icon Central Limited)
Third Respondent

P J Dale, N R Campbell and D W Grove for Appellants

S H Barter for Appellant Herrick

D J Chisholm and G P Blanchard for First Respondent

D J Neutze for Second Respondent

B O'Callahan for Third Respondent

Appeal from High Court and Court of Appeal decisions where appellants (“investors”) unsuccessfully sought to impeach agreements for sale and purchase (“ASPs”) closely associated with property investment schemes — “Blue Chip” group of companies (companies associated with Blue Chip (New Zealand) Ltd and Bryers) marketed certain investment products — investment schemes required appellants to commit to purchase of apartments in proposed developments — sale agents for Blue Chip assisted investors in arranging finance for purchase of the apartments and authorised Blue Chip to seek finance on their behalf — appellants relied heavily on Blue Chip parties honouring financial promises which were later dishonoured — if appellants held to ASPs with developers, would suffer substantial losses — whether s37 Securities Act 1978 (void irregular allotments) applied to ASPs rendering them unenforceable.

At issue was whether Blue Chip was offering securities to the public so that s37 SA (void irregular allotments) applied to the ASPs and rendered them unenforceable.

Held: It was common ground that Blue Chip did offer its products to the public. It was also common ground that if s33(1) and s33(2) SA (restrictions on offer of securities to the public) were engaged, their requirements were not satisfied. The approach taken by the Australian High Court in Australian Softwood Forests Pty Ltd v Attorney-General for the State of New South Wales; ex rel Corporate Affairs Commission was directly applicable and accordingly the primary provisions of s33 and s37 had to be read in a way which accorded with the ordinary meaning of the words used, rather than the breadth of the definitions warranting a reading down exercise.

The leading decisions on the scope of the definition of “debt security” were the Court of Appeal and Privy Council judgments in Culverdon Retirement Village v Registrar of Companies. The ratio in Culverdon was consistent with the argument that the definition of “debt security” was only engaged by an obligation to pay money which was by way of repayment of money earlier paid to the issuer by the subscriber. But if money “otherwise owing” was not confined to obligations by an issuer to repay money previously advanced (or something like it) by the subscriber to the issuer, it was difficult to see why it should be confined more generally to repayment of money originally paid by the subscriber to the issuer. Despite the narrowness of the ratio in Culverdon, its tenor strongly supported the investors' arguments.

The legislative history of the SA showed that the words “deposited with” and “lent to” were borrowed from the precursor provisions of the Companies Act 1955 and the Protection of Depositors Act 1968. It was clear that something more must have been intended to be provided for by the phrase “or otherwise owing”. On the developers' primary argument, that “something more” was confined to obligations which, while not exactly those of a borrower to a lender, were nonetheless rather like them. This argument did not admit of much more specificity and thus left scope for nuanced — how long is a piece of string — arguments as to how much similarity was required before the definition was engaged. However a plain meaning interpretation was required, notwithstanding arguments that it would result in a catastrophically broad application of the SA. Straightforward consumer transactions were not caught by the SA concept of what was involved in offering debt securities to the public but on the same preferred purposive approach, the phrase “otherwise owing” had to be construed sufficiently broadly to encompass less usual types of securities.

In any event, the Blue Chip products were financing in nature — the money and obligations Blue Chip owed the investors were “rather like” those owed by a borrower to a lender. The investors paid or put up money or money's worth and accepted financial obligations to the developers on the basis of promises by Blue Chip that they would be reimbursed for their financial outlay and receive a return for their outlay and risk. The apartment in each case merely provided a measure of security for Blue Chip's performance and under the investment schemes had a very limited function. The Blue Chip products were therefore debt securities.

Transactions involving real estate were commonly exempt from the provisions in part 2 SA (restrictions on offer and allotment of securities to the public) under s5(1)(b) SA (exemptions from the SA). In the absence of such an exemption the definition of “security” was so broad that advertising houses for sale would have amounted to offers to the public of securities. There was an exception to this exemption in relation to interests, which both formed part of a contributory scheme and did not entitle the holder to a right in respect of a specified part of the land for which a separate title could be issued.

It could not seriously be suggested that the transactions entered into between the investors and Blue Chip in relation to the apartments involved “the ordinary purchase of land” or that the Blue Chip obligations to the investors in relation to the apartments were in the nature of “an unexceptional term ancillary to the purchase of an interest in land”. An argument that s5(1)(b) SA excluded a SA challenge to the marketing of the Blue Chip products was inconsistent with the Privy Council's decision in Culverdon.

The approach of the United States decisions, which favoured a form over substance approach, was consistent with the underlying purpose of the SA. These decisions showed that a purposive approach should be adopted. The reality was that from the point of view of the investor, the apartments were of only peripheral significance. Such profits as the investors could expect to derive were to come substantially from the efforts and substance of Blue Chip. The practical ability of the investors to recover their outlays was very dependent on Blue Chip honouring its promises.

Blue Chip's marketing of its investment products was in breach of SA, on the basis that these investment products were debt securities offered to the public without a prospectus, it was an issuer and the s5(1)(b) exemption was not applicable. The developers argued if these conclusions were reached, this would not impeach their ability to insist on performance by the investors of the ASPs. The ASPs were rendered unenforceable by s37 SA. The developers knew that Blue Chip was selling the Blue Chip products (investment packages) as part of their marketing of the apartments. They must have realised that the investment packages which Blue Chip was marketing included financial promises made by Blue Chip. Their knowledge went further than this and they had complete or substantial knowledge of the detail of the investment products and could fairly be regarded as having authorised Blue Chip to market the apartments in conjunction with the investment products.

In addition, the knowledge and actions of Blue Chip could fairly be attributed to the developers given the principles applied in Meridian Global Funds Management Asia Ltd v Securities Commission and Dollar & Sense Finance Ltd v Nathan. Strictly speaking Blue Chip was not the agent of the developers in that Blue Chip was not authorised by the developers to act on their behalf so as to affect their (legal) relationship with third parties (it was not authorised to commit the developers contractually). Blue Chip was however the “agent” of the developers in the rather different sense of acting on their behalf in the marketing of the apartments. Blue Chip was soliciting offers and was doing so “on behalf of” the developers.

It was clear that if Blue Chip had retained the development sites to develop the apartment buildings itself, it would have used the same investment products to fund the developments and the ASPs would have been unenforceable by reason of s37 SA. The impact of s37 could not be avoided by the simple device of using separate companies for different components of a single integrated financial product. Nor should the end result be any different because of the interpolation of third party developers who either knew the nature of the investments products which Blue Chip was marketing, or to whom that knowledge (along with the actions of Blue Chip) could fairly be attributed.

The investors subscribed to the Blue Chip products by, inter alia, committing themselves to the ASPs. By doing this and by making the payments required under the ASPs, they contributed to Blue Chip's investment scheme both “otherwise” and “by way of cash”. The promises and payments made by the investors to the developers were pursuant to, and in that sense part of, the consideration for the promises made by Blue Chip. This supported the view that the subscriptions which were invalidated by s37(4) included the contractual commitments of the investors to the developers and the payments the investors made pursuant to those commitments. Subscriptions did not have to be in the form of money and could consist of contractual commitments (Christchurch Pavilion Partnership No 1 v Deloitte & Touche...

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