Mark Stephen Hotchin v The New Zealand Guardian Trust Company Ltd

• Jurisdiction: New Zealand
• Judge: Glazebrook J,Elias CJ,William Young J,Arnold,O'Regan JJ,O'Regan J
• Judgment Date: 15 March 2016
• Neutral Citation: [2016] NZSC 24
• Court: Supreme Court
• Docket Number: SC 92/2014
• Date: 15 March 2016

Between

Mark Stephen Hotchin

Appellant

and

The New Zealand Guardian Trust Company Limited

Respondent

[2016] NZSC 24

Court:

Elias CJ, William Young, Glazebrook, Arnold and O'Regan JJ

SC 92/2014

IN THE SUPREME COURT OF NEW ZEALAND

Appeal against a Court of Appeal decision which upheld a High Court decision of the striking out the appellant's claim against the respondent for contribution under s17(1)(c) Law Reform Act 1936 (“LRA”) (proceedings against, and contribution between, joint and several tortfeasors) — the appellant was a director of a number of finance companies which ceased trading in 2008 — the Financial Markets Authority (“FMA”) had filed proceedings against the appellant alleging that the prospectuses and advertisements distributed by the companies contained untrue statements causing loss to investors — the respondent was the trustee for the securities issued by one of the companies — the appellant and FMA later reached a settlement — whether the appellant could claim a contribution from the respondent under s17(1)(c) LRA and under the common law regime for equitable contribution — whether the respondent's liability to the FMA and investors was in respect of the “same damage” as the appellant's liability.

Counsel:

N S Gedye QC and J A MacGillivray for Appellant

D J Cooper and J Q Wilson for Respondent

JUDGMENT OF THE COURT

• A The appeal is allowed.

• B Costs of $25,000 plus usual disbursements are awarded to the appellant. We certify for second counsel.

• C The costs orders in the High Court and the Court of Appeal are set aside.

REASONS

Glazebrook J	[1]
Elias CJ	[111]
William Young J	[160]
Arnold and O'Regan JJ	[237]

Glazebrook J

Table of Contents

	Para
Introduction	[1]
Statutory background	[6]
Issue of securities	[6]
Trustee	[9]
Factual background	[15]
Documentation	[18]
The trust deed	[18]
Summary of trust deed in prospectus	[22]
FMA's claim against the directors	[24]
Mr Hotchin's draft amended statement of claim	[34]
The contribution claim under the 1936 NZ Act	[38]
Judgments below	[43]
Winkelmann J's judgment	[43]
The Court of Appeal judgment	[55]
The effect of the settlement	[57]
Test for contribution under the 1936 NZ Act	[70]
Application of the test to this case	[77]
Equitable contribution claim	[90]
Other matters	[98]
Result and costs	[108]
Appendix: Timeline

Introduction

1 Mr Hotchin was a director of a number of finance companies which ceased trading in July 2008. 1 The Financial Markets Authority (FMA) filed proceedings against him and various associates alleging that the prospectuses and advertisements distributed by the companies contained untrue statements and that this had caused loss to investors. Similar allegations were made with regard to the directors' certificates issued to obtain extension of the prospectuses. The FMA proceedings settled after the oral hearing of the appeal in this Court.

2 The New Zealand Guardian Trust Company (Guardian Trust) was the trustee

for the securities issued by one of the companies, Hanover Finance Ltd (Hanover Finance). Mr Hotchin claimed that Guardian Trust was liable to contribute to any compensation that he was required to pay to the FMA (for the benefit of certain investors in debt securities issued by Hanover Finance). He therefore joined Guardian Trust as a third party to the proceeding. Guardian Trust applied to strike out Mr Hotchin's third party claim against it. 2 It was successful in the High Court and the High Court decision was upheld by the Court of Appeal. 3

3 The issue in this appeal 4 is whether Mr Hotchin can claim contribution from Guardian Trust for any part of the settlement sum paid to the FMA. Mr Hotchin says that he is entitled to do so on two alternative bases:

• (a) under s 17(1)(c) of the Law Reform Act 1936 (the 1936 NZ Act); and

• (b) under the common law regime for equitable contribution.

4 Before discussing those alternatives, I first summarise the relevant statutory provisions and provide more factual background, including a summary of the documentation relating to the role of Guardian Trust. Secondly, I analyse the nature of the claims against Mr Hotchin as a director of Hanover Finance and Mr Hotchin's pleadings relating to Guardian Trust. I then discuss the basis of the contribution claim and summarise the decision of Winkelmann J, in particular as it relates to the nature of possible liability of Guardian Trust, as well as providing a brief summary of the Court of Appeal decision.

5 After this, I analyse the effect of the settlement with the FMA, before assessing in what circumstances contribution may be ordered under the 1936 NZ Act

and whether it could be ordered in this case. I then deal with equitable contribution and some other matters that may impact on both bases for contribution

Statutory background

Issue of securities

6 Under s 33(1)(c) of the Securities Act 1978, no offer of securities to the public could be made without a registered prospectus. 5 No registered prospectus could be distributed if it was false or misleading in a material particular by reason of failing to refer, or give proper emphasis, to adverse circumstances (defined as an untrue statement). 6 It did not matter if the prospectus was misleading from inception or if it became misleading as a result of a change in circumstances after the date of the prospectus.

7 Under ss 55A and 55G of the Securities Act, where a prospectus containing an untrue statement was distributed (a civil liability event), 7 the court could make a compensation order, on the application of either the FMA or a depositor (investor). Pecuniary penalties could also be imposed but only on the application of the FMA. 8

8 Sections 56 and 57 of the Securities Act dealt with the persons and experts who were liable for untrue statements in advertisements and registered prospectuses. In addition to the issuer of a registered prospectus, 9 liable persons included those who have signed the prospectus as a director. 10

Trustee

9 Section 33(2) of the Securities Act provided that no debt security was to be offered to the public for subscription unless the issuer of the security had appointed a

person as a trustee for the security, both the issuer and the trustee had signed a trust deed related to the security and a copy of the trust deed had been registered by the Registrar under the Act. 11

10 By virtue of s 45 of the Securities Act, every trust deed required for the purposes of the Act had to contain the matters prescribed in the regulations made under the Act. 12 Clauses 1–11 of sch 5 of the Securities Regulations 1983 (the Regulations) were deemed to be incorporated into trust deeds. 13 Clause 1 of sch 5 of the Regulations provided that:

1 Duties of trustee

• (1) The trustee shall exercise reasonable diligence to ascertain whether or not any breach of the terms of the deed or of the terms of the offer of the debt securities has occurred and, except where it is satisfied that the breach will not materially prejudice the security (if any) of the debt securities or the interests of the holders thereof, shall do all such things as it is empowered to do to cause any breach of those terms to be remedied.

• (2) The trustee shall exercise reasonable diligence to ascertain whether or not the assets of the borrowing group that are, or may be available, whether by way of security or otherwise, are sufficient or are likely to be sufficient to discharge the amounts of the debt securities as they become due.

11 There were also information seeking powers given to trustees. Under cl 2(3) of sch 5 of the Regulations the issuer was required, if requested to do so in writing, to make available for inspection the whole of the accounting and other records of the issuer.

12 Further, various information had to be provided to the trustee. Under cl 4(1) of sch 5, the issuer was obliged to provide to the trustee within 30 days of the end of

each month the monthly management report prepared for the directors of the issuer. Pursuant to cl 4(2) of sch 5, it was also obliged to provide a monthly report on the liquidity of the issuer, the asset quality, reinvestment rates and any breaches by members of the borrowing group of financial covenants in financing arrangements with third parties. Finally, every three months the issuer had to provide a certificate signed by at least two directors 14 on behalf of the board certifying that the prospectus remained up to date and was not false and misleading in a material particular and that the issuer had complied with the provisions of the trust deed. 15

13 Schedule 2 of the Regulations stipulated the matters required in a registered prospectus for debt securities. Clause 13 of sch 2 required brief particulars of the provisions of the trust deed to be contained in any prospectus. Also required was a statement by the trustee that the offer of securities complied with any relevant provisions of the trust deed and that the trustee did not guarantee the repayment of securities or the payment of interest.

14 Clause 10 of sch 5 of the Regulations, provided for the right of the trustee (under certain circumstances) 16 to appoint an independent auditor to audit the financial statements of the borrowing group. Under cl 11, the trustee had the right to engage an expert (such as an auditor, investigating accountant, valuer, or actuary) to assist the trustee to determine the true financial position of the issuer if the trustee considered, on reasonable grounds, that it required the assistance of the expert.

Factual background

15 On 7 December 2007 Hanover Finance registered a prospectus containing an offer of secured debenture stock under a trust deed between Hanover...