Houghton v Saunders and Ors

JurisdictionNew Zealand
CourtCourt of Appeal
JudgeWinkelmann J
Judgment Date12 October 2016
Neutral Citation[2016] NZCA 493
Date12 October 2016
Docket NumberCA578/2014

[2016] NZCA 493



Ellen France P, Randerson and Winkelmann JJ


Eric Meserve Houghton
Timothy Ernest Corbett Saunders, Samuel John Magill, John Michael Feeney, Craig Edgeworth Horrocks, Peter David Hunter, Peter Thomas and Joan Withers
First Respondents
Credit Suisse Private Equity Inc
Second Respondent
Credit Suisse First Boston Asian Merchant Partners LP
Third Respondent
First New Zealand Capital
Fourth Respondent
Forsyth Barr Limited
Fifth Respondent

C R Carruthers QC, P A B Mills and G R Abdale-Weir for Appellant

A R Galbraith QC, D J Cooper and S V A East for First and Third to Seventh named First Respondents

T C Weston QC for Second named First Respondent

J B M Smith QC, A S Olney and C J Curran for Second and Third Respondents

D H McLellan QC and J S Cooper for Fourth Respondent

A C Challis and D P Turnbull for Fifth Respondent

Appeal against a High Court (“HC”) decision which found investors in Feltex Carpets Ltd (“Feltex”) were not entitled to compensation under the Securities Act 1978 (“SA”) for allegedly untrue statements in the company's share prospectus — the appellant had commenced proceedings in a representative capacity for himself and for others who had been allotted shares in Feltex's initial public offer — the investors claimed that the prospectus was misleading and they had invested on the faith of it — Feltex went into liquidation in 2006, leaving the shares worthless — what was the meaning of “untrue statement” under s55 SA (interpretation of provisions relating to advertisements, prospectuses, and registered prospectuses) — whether the HC erred when it imported into s56 SA (which persons are liable for misstatements) a requirement that the untruth had to be material to trigger civil liability — whether the HC erred in the application of the prudent non-expert investor test — whether 63A SA (no liability under Fair Trading Act 1986 if not liable under the SA) and s5A Fair Trading Act 1986 (“FTA”) (no liability under Act if not liable under SA) applied to preclude a claim under the FTA.

Held: Section 55(a) SA (a statement was untrue if it was misleading in the form and context in which it was included or it was misleading by reason of the omission of a particular which was material to the statement) was an exhaustive definition of the term “untrue statement”. The definition in s55 SA of a statement applied not just to alleged civil liability but also to criminal liability. If an untrue statement could consist of a global impression which was said to be untrue, that would be unworkable as a test for criminal liability. The SA expressly provided for liability for omissions which need not be tied to a particular statement. Section 34(1)(b) prohibited the distribution of a prospectus if the prospectus was “false or misleading in a material particular by reason of failing to refer, or give proper emphasis, to adverse circumstances (whether or not it became so misleading as a result of a change in circumstances occurring after the date of the prospectus)”. Treating s55 SA as an exclusive definition did not therefore create any gaps in coverage inconsistent with the purpose of the SA to ensure that investors had adequate and accurate disclosure.

The HC's finding that the untrue statement must be material before a plaintiff may succeed in a claim under s56 SA came from the express requirement that a plaintiff show it suffered loss “by reason of such untrue statement”. If an untrue statement was immaterial, it was difficult to see how a plaintiff could have suffered loss by reason of it. There was no absolute prohibition on the registration of a prospectus which included an untrue statement. The focus of the legislation was on ensuring the accuracy of material information. The prohibition in s34(1)(b) SA (restrictions on distribution of prospectuses – not to be distributed if false or misleading in a material particular) would not apply if the untrue statement was not material.

A plaintiff must establish that the investment was made “on the faith of” the prospectus, which suggested something more than merely investing after reading the prospectus. The expression may be seen as a necessary first part of establishing that the untrue statement was material to the decision to invest. The plaintiff must prove it suffered loss by reason of the untrue statement. If there was no evidence the investor was affected by the untruth, the court must then consider whether the notional investor would have invested if they had known the true position. The materiality of the statement was critical at that point. That test included both subjective and objective elements. The court considered whether the notional investor's investment decision was more likely than not to have been influenced by the untrue statement. If the answer was yes, the element was made out unless the evidence established that the particular investor had not relied upon the untrue statement.

What was misleading for the purposes of s55 SA and s56 SA was to be assessed by reference to an objective standard: the prudent but non-expert investor. A prudent investor would seek clarification when they realise they do not understand something. The notional investor could therefore be expected to seek advice when they realised they were unable to understand information contained in the prospectus. Applying the standard of that notional investor when determining whether or not a statement was misleading, did not amount to imposing an obligation on the investor to ensure the issue was compliant.

The HC had been correct to hold that the purpose of the SA was to protect investors by ensuring they have adequate and accurate disclosure to enable them to assess the risks entailed in the investment. “Full” disclosure, above and beyond that mandated by the SA, was not required. The definition provided in s55 SA of “untrue statement” could be treated as an exclusive definition. An entire prospectus could not for the purposes of the SA, be an untrue statement. The need to identify particular untrue statements in a prospectus for which liability under s56 SA was alleged to arise was a well-established requirement. Any omission must be linked to a specific statement said to be untrue. There was a materiality requirement in s56 SA. A plaintiff must prove an untrue statement, that they read and considered the prospectus, and that the notional investor's decision to invest was more likely than not to have been influenced by the untrue statement. The HC had not erred in his application of the “prudent, non-expert investor” standard.

The prospectus contained untrue statements but they were not material misstatements. The defence of due diligence under s56(3) SA was not available to those who knew a statement was untrue but failed to correct or withdraw it because they believed it to be immaterial. Section 56(3) SA only provided a defence to those who believed at the relevant time that the statement was true and had reasonable grounds for that belief. If the defendant knew the statement to be untrue but wrongly considered it immaterial, then s56(3) SA had no application.

Section 56 SA extended liability for misstatements in a registered prospectus to “every promoter of the securities”. Promoter was defined as a person who was instrumental in the formulation of a plan pursuant to which the securities were offered to the public. The JLMs had been engaged to provide investment banking and broking services. The existence of a definition of promoter in s2 SA (a person who is instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public) made it plain that a person may be a promoter even though they were not named as such in the prospectus. Applying the ordinary meaning of those words, someone was instrumental in the formulation of a plan or programme pursuant to which securities were offered to the public if they were a means by which the plan or programme was formulated. Under the SA a promoter would not be liable unless they signed the prospectus or knew of and consented to the breach. The definition focused upon the role played, not ownership, in determining who was a promoter for the purposes of the SA. CSPE fell within the definition of promoter, as it was CSPE and not CSAMP which was a means by which the plan or programme pursuant to which the securities were issued to the public was formulated. It was CSPE which played the active role

The Feltex prospectus was issued before either s63A SA or s5A FTA came into force. The proceeding was issued after s63A SA came into force but before s5A FTA came into force. Section 24 Securities Amendment Act 2006 (“SAA”) (transitional provision for existing offences and contraventions) applied to proceedings under the SA but not to proceedings alleging a breach of the FTA. There was no indication in the language of s24 SAA or s63A SA that indicated that s63A SA was intended to have retrospective effect. If conduct occurred prior to the 2006 amendments, no matter when proceedings were initiated, neither s63A SA nor s5A SA would operate to deprive plaintiffs of their rights which accrued when that conduct occurred. It would be unfair to deprive H of any cause of action available under the FTA when he could not access the enhanced rights under the SAA. In determining whether to grant any of the remedies pleaded for in s43 FTA (other orders), H must show that any breach of s9 FTA (misleading and deceptive conduct generally) was an effective cause of some loss or damage. The only conduct capable of being made out as misleading or deceptive was the forecast in respect of the financial year 2004, however that forecast was immaterial.

Liability under s55 SA and S56 arose when a particular statement was proven to be untrue. Reliance had to be proved...

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