BRAEMAR LODGE 2004 LTD (IN RECEIVERSHIP) V PRUDENCE KAYE OWERS AND ORS CA50/2010

BRAEMAR LODGE 2004 LTD (IN RECEIVERSHIP) V PRUDENCE KAYE OWERS AND ORS CA50/2010 16 July 2010IN THE COURT OF APPEAL OF NEW ZEALAND CA50/2010 [2010] NZCA 300BETWEEN BRAEMAR LODGE 2004 LIMITED (IN RECEIVERSHIP) Appellant AND PRUDENCE KAYE OWERS First Respondent AND LINK CORPORATION LIMITED Second Respondent AND DAVID CHARLES INNES AND RAYLENE JOY INNES Third Respondents AND JEANETTE DOREEN DRISCOLL Fourth Respondent AND BLUE HORIZON ENTERPRISES LIMITED Fifth Respondent AND MICHAEL GEORGE FITZMAURICE AND CHRISTINE NORAH FITZMAURICE Sixth Respondents AND TL LIMITED Seventh Respondents AND GREGORY JOHN DIXON Eighth Respondent AND KEITH FREDERICK SULLIVAN AND GINETTE LOUISE SULLIVAN Ninth Respondents AND MARGARET WHEELER AND RICHARD LEWIS WHEELER Tenth Respondents2 AND TONY GRANT MCINTYRE AND HELEN MCINTYRE IN THEIR CAPACITY AS TRUSTEES OF THE CEDAR GROVE TRUST Eleventh Respondents Hearing: 21 April 2010 Court: Ellen France, Gendall and Cooper JJ Counsel: M R Crotty and S P Pope for Appellant H C Matthews for Respondents Judgment: 16 July 2010 at 2.30 pmJUDGMENT OF THE COURTA The appeal is dismissed. B Costs are reserved.REASONS OF THE COURT(Given by Cooper J)Table of ContentsPara NoIntroduction [1]The facts [7]The Associate Judge's decision [29]The arguments on appeal [33]Discussion [41]Result [67]Introduction[1] The Securities Act 1978 (the Act) regulates the manner in which securities may be offered for public subscription. What constitutes "an offer of securities to the public" is broadly defined in s 3(1) of the Act, but s 3(2)(a) lists offers that do not constitute such an offer. This appeal turns on the meaning of s 3(2)(a)(iia), which provides that an offer of securities is not an offer of securities to the public when it is made only to:persons who are each required to pay a minimum subscription price of at least $500,000 for the securities before the allotment of those securities.[2] The appellant (Braemar) argued on the facts of this case that subscribers for securities that it had offered were required to pay for the securities prior to allotment, with the consequence that there had not been an offer of securities to the public. The respondents contend to the contrary. [3] Section 5(5) of the Act enables the Securities Commission, by notice in the Gazette, to exempt any person, class of persons, transaction or class of transactions from compliance with the provisions of Part 2 of the Act. That Part contains the Act's detailed rules regulating the offer of securities to the public, including the requirements for advertisements, investment statements and prospectuses. It also sets out the obligations and liabilities of issuers. [4] Pursuant to s 5(5), the Securities Commission gave the Securities Act (Braemar Lodge 2004 Limited) Exemption Notice 2005 (the Exemption Notice) which exempted Braemar from various provisions of the Act in respect of securities that had been offered to the public. [5] Although the Exemption Notice was directed to the specified participatory securities that had been issued by Braemar, Braemar argues on appeal that the Exemption Notice was unnecessary because of the provisions of s 3(2)(a)(iia), and that it was therefore of no effect. It submits that because there had not been an offer of securities to the public the conditions on which the Exemption Notice was made did not apply. The respondents argue that the Exemption Notice and its conditionsdo apply and that, as a consequence of non-compliance by Braemar with the conditions, agreements that they had entered into with Braemar were effectively at an end. [6] Associate Judge Christiansen rejected Braemar's arguments in the High Court 1 and Braemar now appeals.The facts[7] Braemar was incorporated in June 2004 as the vehicle for the construction and development of a "luxury tourist accommodation complex" near Hanmer Springs (the development). Commencing in December 2004, Braemar marketed the development to investors. The development was to be structured on the basis that individual investors would acquire units offered for sale as managed units and sold subject to a management agreement giving the manager (Braemar Lodge Operations Ltd) the right to let the units for tourist accommodation. [8] Purchasers were to receive unit titles to the individual units which they purchased and in addition they would acquire a proportionate ownership in the common property of the development and receive a 1/24th share of 60 per cent of its net tariff income. The remaining 40 per cent of that income was to be paid to the manager. The income would be pooled and shared between the manager and the investors in those proportions. It is common ground that the right to share in the income was a security within the meaning of s 2D of the Act being a right "to participate in any earnings of any person". The security was a "participatory security" as defined in s 2 of the Act. [9] From February 2005 to January 2006, the respondents (save for the fifth respondent) entered into agreements for the sale and purchase of units in the development. The agreements incorporated the rights to participate in the income pooling scheme.1 Owers v Braemar Lodge 2004 Ltd (in rec) HC Christchurch CIV-2009-409-1126, 16 December 2009.[10] Braemar had offered the participatory securities for subscription in conjunction with the individual unit titles without a registered prospectus, investment statement or deed of participation, notwithstanding the requirements of s 33 of the Act. However, in July 2005, Braemar and its directors offered an undertaking to the Securities Commission for acceptance under s 69J of the Act. The undertaking recorded that Braemar had offered the participatory securities for subscription since December 2004, but stated that no allotments of the securities had yet occurred. It recorded that at the time of the offer Braemar and its directors had been unaware that the offers had been made in contravention of the Act and that Braemar had become aware that its offers of the units in the development "may have constituted offers of securities to the public" under the Act. Once it became aware of the "potential breach" Braemar had ceased offering the participatory securities, informing the Commission of the situation and applying for exemptions from ss 33, 37, 37A and 51 to 54 of the Act in respect of future offers of participatory securities in respect of the development. [11] Paragraph 6 of the undertaking recorded:6. Braemar acknowledges the Commission's concerns about its breaches of the Securities Act 1978. Braemar and the directors wish to remedy the situation and to ensure that no further breaches occur. They have offered the undertakings set out below. The Commission has agreed to accept these undertakings under section 69J of the Securities Act 1978.[12] A number of specific undertakings were then set out. They were:7. Braemar and the directors will not offer further securities to the public for subscription, other than in an investment statement, registered prospectus, or authorised advertisement that complies with the Securities Act 1978 and the Securities Regulations 1983 or in accordance with any applicable exemption granted by the Commission. 8. Braemar and its directors will similarly not allot securities other than in accordance with the Securities Act 1978 or in accordance with any applicable exemption granted by the Commission. 9. In relation to the securities already offered to persons who have entered into sale agreements to purchase units in the property prior to the publication of the specific exemption granted by the Commission, Braemar:(a) will give written notice to each such person of the contravention of the Securities Act 1978 and provide each such person with all documentation that was required to be provided before subscription under the specific exemption granted by the Commission; (b) request (sic) that each such person agrees to the cancellation of the existing sale agreement and agrees to sign a new sale agreement to purchase the unit in accordance with the form of sale agreement required by the specific exemption granted by the Commission; (c) offer (sic) to refund subscription monies received, together with any interest earned, to any person who does not, within 15 working days of the date of this undertaking, sign a new sale agreement for the purchase of their unit in accordance with paragraph 9(b) of this undertaking; (d) will, for those persons who do not within 15 working days of the date of this undertaking sign a new sale agreement for the purchase of their unit in accordance with paragraph 9(b) of this undertaking, cancel the existing sale agreement immediately.[13] The enforceable undertaking was accepted by the Securities Commission on 7 July 2005, and on that day the Commission gave the Exemption Notice. [14] Clause 5 of the Exemption Notice exempted Braemar and every person acting on its behalf from ss 33(3), 37, 37A and 51 to 54 of the Act in respect of "specified participatory securities". These were defined in cl 4(1) to mean "participatory securities issued by Braemar in respect of the proportionate ownership scheme". The term "proportionate ownership scheme" was also defined, as follows:proportionate ownership scheme means a contributory scheme offered by Braemar that involves the investment of money in circumstances where each subscriber for specified participatory securities — (a) will acquire a stratum estate in a unit on the unit plan; and (b) will be issued with a certificate of title in the subscriber's name for the relevant stratum estate.[15] The exemption given by cl 5 of the Exemption Notice was subject to a number of conditions, set out in cl 6. The conditions required that each subscriber be provided with a registrable transfer instrument enabling the subscriber to be registered as the proprietor of the stratum estate for the unit, and that all subscriptions be paid into a trust account immediately after receipt. Thesubscriptions were to be retained in that account unless paid to Braemar after the "key event" had occurred for the relevant subscriber, and all conditions relating to the receipt of subscriptions by Braemar in the relevant subscription contract had been satisfied. Another condition required provision of a written statement to subscribers prior to them entering into the subscription contract, the written statement to contain detailed information about the scheme in accordance with a schedule to the Exemption Notice. [16] Clause 6(h) provided for a number of conditions, including:(h) that, if the key event has not occurred for a subscriber within 36 months of a subscription being received by, or on behalf of, Braemar (the settlement period), no specified participatory securities may be allotted to the relevant subscriber in relation to that subscription and that subscription must promptly be returned to the relevant subscriber, unless, before the end of the settlement period, — (i) Braemar has given the relevant subscriber written notice that the key event will not occur before the end of the settlement period and that the subscriber is entitled to have that subscription returned at the end of the settlement period; and (ii) the subscriber and Braemar have both signed a written agreement that clearly states that the settlement period is to be extended and specifies the period of time by which the settlement period is to be extended:[17] The "key event" was defined in cl 4(1) as the provision of "a registerable transfer instrument to a subscriber in accordance with clause 6(a)(i)". [18] In March 2006 Braemar advised the respondents that the existing agreements for sale and purchase needed to be redocumented. According to Mrs Wheeler (together with her husband a tenth respondent), who swore an affidavit in support of the summary judgment application, the directors of Braemar advised her that the redocumentation was necessary to enable the company to comply with the Act. On 23 and 24 March 2006 all of the respondents entered into replacement agreements, with the exception of the fifth respondent who entered into an agreement for sale and purchase for the first time on 31 March 2006.[19] The agreements signed were, for material purposes, in the same terms. They included general terms of sale and a number of special conditions. Among the latter was cl 15.1 which provided:15.1 The Purchaser acknowledges and agrees that it will take title to the Unit subject to a management agreement in respect of the Unit granted (or to be granted) by the Vendor to a manager nominated by the Vendor prior to the Settlement Date. The management agreement will entitle the manager to rent the Unit to the general public. The management agreement will be substantially in the form attached as Schedule B and will contain provision that rentals received from the Unit (and other Units within the Development) while under management will be apportioned net of GST on the basis of 60% for the Purchaser (and all other Unit owners, on a pro- rata basis) and 40% for the manager. To enable the Manager to fully and properly manage the Development, a lease of or right to use the common property of the Development will also be granted to the Manager prior to the Settlement Date.[20] The Management Agreement that was attached as Schedule B recorded the essential aspects of the income pooling arrangements and the respective entitlements of the proprietor of the unit and Braemar Lodge Operations Ltd as the manager. [21] One of the special conditions of the agreements for sale and purchase (cl 11.1 in the case of the agreement signed by the Wheelers) provided that the agreement was conditional on the vendor unconditionally selling a sufficient number of units in the development by 6 March 2006 to make the development viable "at the sole discretion of the Vendor". The condition was inserted expressly for the sole benefit of the vendor. [22] By letter dated 28 March 2006, Braemar's solicitors wrote to the Wheeler's solicitors in the following terms:BRAEMAR LODGE 2004 LIMITED TO WHEELER (OR NOMINEE) – UNIT 21 & 22 BRAEMAR LODGEWe advise that we have received a replacement contract between the above parties on the same terms and conditions, but without purchaser conditions confirmation as the previous contract between the above parties for the same unit(s). The replacement contract clarifies and includes technical provisions pertaining to the investment statement and valuation that are required for the Securities Act Exemption Notice. We are instructed to confirm clause 11.1 of the new replacement contract.We will advise you in respect to progress and settlement in due course.[23] Although the language is less than precise we consider it clear that the intent and effect of the second paragraph of this letter was to confirm that Braemar was of the view that a sufficient number of units had been sold to make the development viable. [24] Under the agreements for sale and purchase a deposit of ten per cent of the purchase price was payable, the deposit to be paid by taking out an approved development bond issued for the benefit of the purchaser by New Zealand Home Bonds Ltd (NZHB). The "Home Bonds" issued by NZHB were delivered to Braemar on 5 May 2006 in payment of the deposits due, the respondents having entered into agreements with NZHB. Under those agreements, the purchasers agreed to execute a mortgage over their property in consideration of NZHB's bond to pay the deposit. NZHB agreed not to enforce the mortgage unless the purchaser had defaulted on settlement of the agreement for sale and purchase. If the purchasers failed to settle then Braemar was able to deliver to NZHB a written demand requiring NZHB to pay the purchaser's deposit to it. [25] Receivers were appointed over the assets and undertakings of Braemar on 19 July 2007. Between April 2008 and October of that year the respondents gave notice to Braemar of cancellation or rescission of the agreements for sale and purchase and cancellation of the Home Bond agreements on various grounds. Braemar disputes that there were grounds to do so. [26] On 23 December 2008, Braemar's solicitors wrote to purchasers enclosing a copy of a certificate of practical completion for the development and they confirmed that code compliance had been achieved. A copy of the code compliance certificate was also enclosed. However, on 7 May 2009, solicitors acting for each of the purchasers who had entered into agreements with NZHB wrote to Braemar's solicitors stating that the agreements for sale and purchase were at an end and seeking to have the deposits "repaid" forthwith. The purchasers relied on cl 2.4 in the special conditions of each of the agreements for sale and purchase, which provided that the deposit would be paid to the purchaser if settlement had notoccurred within 36 months of the date of payment of the deposit. Since the deposits had been paid on 5 May 2006, that period had elapsed. The letter also referred to condition 6(h) of the Exemption Notice. Since titles for the units had not been issued, Braemar, as vendor, was not in a position to provide a registerable transfer instrument enabling the purchaser to be registered as the proprietor of the stratum estate for the unit. Provision of a registrable transfer instrument was the defined "key event" under the Exemption Notice. The 36 month period referred to in condition 6(h) of the Exemption Notice had expired. [27] Braemar's solicitors replied on 15 May 2009. They rejected the purchasers' contention that the agreements for sale and purchase were at an end. They denied that deposits were due to be repaid, but asserted that even if that was the case the agreements did not provide an express right of cancellation for the purchasers in those circumstances. Referring to the Exemption Notice, the letter asserted that as the units had a value in excess of $500,000 in each case, there was no need to rely on the Exemption Notice and Braemar did not seek to do so. It was claimed that the Exemption Notice had no relevance to the terms of the sale and purchase agreements. [28] On 28 May 2009 the respondents commenced a proceeding in the High Court and applied for summary judgment. One issue raised by the respondents in the proceeding has been settled with the consequence that each of the Home Bond agreements has now been cancelled, with Braemar's agreement. However, the summary judgment application also sought an order that Braemar may not allot any of the securities, by way of a sale of the units, to any of the respondents. Associate Judge Christiansen made an order declaring that the agreements between the appellant and the respondents are void and that the respondents are no longer required to perform any obligations as purchasers under the agreements. The appellant contends that that order should not have been made.The Associate Judge's decision[29] Before Associate Judge Christiansen the respondents asserted that the deposits that they had paid on 5 May 2006 were a subscription, and that because the"key event" had not occurred by 5 May 2009 (the 36 month period in cl 6(h) of the Exemption Notice) the specified participatory securities could not be allotted, the units could not be transferred and Braemar was required to return the deposits. [30] Braemar argued that cl 6(h) did not void the contracts by cancelling any obligations of the respondents to complete the purchases. Further, the relevant provisions of the Act did not have that effect because the value of the units was in each case in excess of $500,000, and there had not been an offer of securities to the public under s 3(2)(a)(iia) of the Act. It was Braemar's argument that the subscribers had been required to pay the subscription price for the securities before they were allotted. The respondents however contended that the allotment had occurred before the obligation to pay the purchase price of the units arose. [31] The Associate Judge upheld the respondents' submissions. He considered that allotment took place when condition 11.1 of the agreements for sale and purchase was satisfied. He said:[42] I accept the better view is that an allotment took place when that condition (clause 11.1) was satisfied and satisfaction was communicated by end of March 2006. However viewed, it seems clear to me that the allotment occurred before an obligation to pay at least $500,000 arose. Before payment was due the Agreements became unconditional, the purchasers were liable to pay deposits and thereafter became liable to settle and to pay the balance of the purchase price on settlement date.[32] In the result, he held that Braemar could not rely on s 3(2)(a)(iia). He further held that Braemar could proceed no further in attempting to enforce the agreements for sale and purchase because, under s 37 of the Act, any allotment would be invalid and of no effect.The arguments on appeal[33] The principal argument advanced by Braemar on appeal is that the Act does not apply to the agreements for sale and purchase due to the the exemption contained in s 3(2)(a)(iia). The Exemption Notice had been given on the basis that the Act applied; but because that is not correct the Exemption Notice cannot determine the rights and obligations of the parties.[34] Section 3(2) of the Act, in the form in which it was at the relevant times, provided as follows:None of the following offers shall constitute an offer of securities to the public: (a) An offer of securities made to any or all of the following persons only: (i) relatives or close business associates of the issuer or of a director of the issuer: (ii) persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money: (iia) persons who are each required to pay a minimum subscription price of at least $500,000 for the securities before the allotment of those securities: (iii) any other person who in all the circumstances can properly be regarded as having been selected otherwise than as a member of the public:[35] As can be seen, s 3(2)(iia) specifically excludes offers of securities to persons who are each required to pay a minimum subscription price of at least $500,000 for the securities before the allotment of those securities. In the present case, the participatory security in question is the right to share in the net tariff income of the development. In each case the purchaser had to pay a subscription price for the security of over $500,000 on the settlement date. [36] Braemar contended that allotment could not precede settlement, registration of the purchasers as holders of the securities and their registration as proprietors of the tiles for the units. Mr Crotty argued that the Associate Judge was wrong to hold that "allotment" of the securities had occurred at the time an obligation to make payments was fixed. [37] He submitted that if these arguments were accepted, then the Exemption Notice would be irrelevant since Braemar would require no exemption. Alternatively, Mr Crotty submitted that the Associate Judge erred in finding that cl 6(h) of the Exemption Notice entitled the purchasers to an order that the agreements are void. In terms, cl 6(h) simply provided that no allotment of securitiescould take place if unit titles were not issued within 36 months of the subscription being received by Braemar. If, as the Associate Judge held, there had already been an allotment of securities then cl 6(h) could not assist the purchasers. [38] For the respondents, Mr Mathews submitted that there was no reason why payment for securities could not occur subsequent to allotment and that in the normal course a subscription will constitute an offer which, on acceptance, will result in allotment. He submitted that while it would be possible to argue in the present case that allotment took place on the signing of the purchase contract (because the condition at cl 11.1 could have been waived by the vendor), the better view was that allotment took place when the condition was satisfied and satisfaction was communicated in the letter of 28 March 2006. Any difference between the two dates was, in any event, immaterial because in either case allotment had occurred before the obligation to pay the purchase price arose. It followed that the Associate Judge had correctly determined that s 3(2)(iia) of the Act did not apply. [39] The Exemption Notice had been referred to in the agreement for sale and purchase and it was clear that the investments had been sold on the basis that the Exemption Notice applied. Since the defined "key event" had not occurred within the prescribed time, then under cl 6(h) no specified participatory securities could be allotted to the subscribers and the subscriptions must promptly be returned. This meant that the agreements were effectively at an end. Further, since there had been non-compliance with ss 33 and 37 of the Act, any allotments made were invalid and of no effect under s 37(4) of the Act. [40] In summary, there had been an offer of securities to the public, the Exemption Notice applied, its terms had not been complied with and the consequence was that both under the Exemption Notice and the Act the agreements for sale and purchase could not be enforced.Discussion[41] The starting point for analysis must be the nature of the participatory securities that were offered to investors. The securities consisted of the right toparticipate in the income earned as a result of the letting of the individual units in the development. The income earned was to be pooled and shared between the manager and the investors in the respective percentages of 60 and 40 per cent. The relevant provisions of the Act, designed to protect investors and from which Braemar subsequently sought exemption, plainly apply unless Braemar is right in the argument it now advances that there never was an offer of securities to the public because of the provisions of s 3(2)(a)(iia) of the Act. [42] At the time when Braemar made its undertaking to the Securities Commission it undertook to comply with the relevant provisions of the Act. It said that further securities would not be offered to the public for subscription other than in an investment statement, registered prospectus or authorised advertisement complying with the Act or in accordance with any applicable exemption granted by the Commission. It is plain that even if some of the language used in the undertaking was guarded, Braemar understood that any offer of securities to the public would be in terms of the overall arrangements offered to purchasers of the units in the development. [43] This in turn was reflected by the terms of the Exemption Notice itself, which defined the "specified participatory securities" as the "participatory securities issued by Braemar in respect of the proportionate ownership scheme". As we have already noted, the term "proportionate ownership scheme" was defined by reference to the investment of money in circumstances where each subscriber for the specified participatory securities would acquire a stratum estate in a unit on a unit plan and be issued with a certificate of title in the subscriber's name for the relevant stratum estate. [44] It was clear from the arrangements that purchase of a unit carried with it the right to participate in the income pooling and sharing scheme. The management agreement which was referred to in cl 15.1 of the special conditions in the agreement for sale and purchase contained the essential elements of the scheme together with the 60/40 split between the purchaser and the manager.[45] Clause 11.1 contained a condition designed to ensure that the development would be financially viable in terms of the uptake of the units. It was a condition inserted for the sole benefit of the vendor and in the event was satisfied. The vendor's confirmation was set out in the letter dated 28 March 2006. [46] On signing the agreements, and subject to the satisfaction of the condition in cl 11.1, the purchaser agreed to purchase the units, but to do so subject to the management agreement which effectively incorporated the terms of the "scheme", defined in the management agreement as the "pooled income Scheme operated by the Manager where the net income of the Complex is divided among the Proprietors on a proportionate basis in accordance with this Agreement". [47] Further, in the management agreement, there was provision under the heading "Manager's Remuneration" as follows:15. The Proprietor agrees that the Manager is entitled to be paid a commission of 40% of the Net Income and this commission may be deducted by the Manager before payment to the Proprietor under clause 18. 16. The Manager is also entitled to deduct from the Proprietor's Proportion of the Net Income a margin of 5% of the actual cost for arranging maintenance of the Unit and other services provided for the Unit by third parties. 17. The Proprietor acknowledges and agrees that all revenues received from external bookings and commissionable activities are attributed solely to the Manager and do not form part of the Gross Income.[48] The term "Proprietor's Proportion" was defined as meaning a 1/24th share. Consequently, on execution of the agreements for sale and purchase, the extent to which the individual purchasers would share in the profits of the complex was defined. Putting that in the language of the definition of "security" in s 2D of the Act, the extent of the purchasers' "interest or right to participate in any earnings" had been defined at that point. [49] Section 2(1) of the Act defines "allot" as follows:allot includes sell, issue, assign, and convey; and allotment has a corresponding meaning:[50] In Re AIC Merchant Finance Ltd2 securities had been offered to the public for subscription without complying with the Act's requirements in relation to prospectuses. Both the High Court and the Court of Appeal held that because no registered prospectuses had been in existence that were properly referable to the securities being offered for subscription, the allotments of shares were unlawful. The question for the Court was whether the contracts should be validated under the Illegal Contracts Act 1970. Richardson J said:3Section 37(1) prohibited the allotment of the security in the absence of a registered prospectus relating to the security. That was an unlawful act on the part of the company. However, in contract terms allotment by the company was acceptance of the offer by the particular investor to place the funds on deposit. ... As with any other contract, acceptance had legal effect on communication of that acceptance (ie the allotment) to the investor:Gunn's Case (1867) LR 3 Ch App 40; Re Saloon Steam Packet Company, ex parte Fletcher (1867) 37 LJ Ch 49; New Zealand Company Law and Practice para 7-321. It was at the second step in the creation of the contract that the illegality arose.This was to treat as an allotment the issuer's acceptance of an offer by the subscriber, constituting a binding agreement. [51] In DFC Financial Services Ltd v Abel4 Fisher J referred to Re AIC Merchant Finance, the definition of "allot" in s 2(1) of the Act and a definition of allotment taken from Halsbury's Laws of England5 in the context of company law as "an appropriation to some person or corporation of a certain number of shares, but not necessarily of any specific shares". He continued by observing that in the normal course an allotment will take the form of acceptance by the issuer of an offer by the subscriber thereby forming a conventional contract. 6[52] Later, he observed: 7From that brief survey I take it that the "allotment" to be avoided under s 37(4) will normally be the contract formed by the issuer's acceptance of a subscriber's offer to provide valuable consideration in return for an interest in present or future property, which property had initially been the subject of2 Re AIC Merchant Finance [1990] 2 NZLR 385 (CA).3 At 389.4 DFC Financial Services Ltd v Abel [1991] 2 NZLR 619.5 Halsbury's Laws of England (4th ed, 1974) vol 7 Companies at [366].6 At 625.7 At 626.an invitation to treat communicated to the public by the issuer. No doubt there will be variations in unusual cases. For example, it would seem possible for the issuer to express the offer to the public in the form of a contractual offer capable of immediate contractual acceptance by the act of subscription itself. It would seem possible in principle to have a subscription and corresponding allotment by exchanging dispositions of property without any underlying contractual relationship at all. It may also be possible to have an offer to the public by one person and then an allotment emanating from an entirely independent person. However, I think that in the normal case, the "allotment", and hence the primary transaction rendered invalid and of no effect under s 37(4), will be a contract of subscription with the characteristics that I have described.[53] We agree with that analysis and see no reason to adopt a different approach in this case. Having entered into the agreements for sale and purchase, the respondents acquired the contingent right to participate in the net tariff income of the complex in defined shares. It was contingent in the sense that the vendor had first to decide that the development was financially viable, and that decision was communicated to the subscribers on 28 March 2006. There was then an agreement pursuant to which Braemar, as the issuer, had appropriated the securities to the individual purchasers. From that point, both the vendor and the purchaser under the individual contracts would have been in a position to compel performance of their respective obligations. Yet the time for payment of the subscription price had not yet arrived. In the circumstances, we consider that the respondents were not persons required to pay the subscription price before the allotment of the securities. [54] Mr Crotty advanced a number of reasons which he said justified departing from the case law dealing with the allotment of shares, which he submitted was not easily applied to the participatory securities in the present case, which had been offered alongside interests in land. We do not accept that there is any real difficulty, especially having regard to the breadth of the definition of "allot" in the Act. Mr Crotty put some emphasis on a submission that the definition had collapsed the distinction between "allot" and "issue" found in English law and summarised by Lord Templeman in National Westminster Bank Plc v Inland Revenue Commissioners: 8The Act of 1985 preserves the distinction in English law between an enforceable contract for the issue of shares (which contract is constituted by an allotment) and the issue of shares which is completed by registration.8 National Westminster Bank Plc v Inland Revenue Commissioners [1995] 1 AC 119 (HL) at 126.Allotment confers a right to be registered. Registration confers title. Without registration, an applicant is not the holder of a share or a member of the company: the share has not been issued to him.[55] However, in our view the breadth of the definition in fact makes application of the approach ordinarily adopted in respect of the allotment of shares readily applicable to the contractual arrangements in the present case. To allot, in terms of the definition, includes to sell, issue, assign and convey. There is no reason why the participatory securities in this case cannot be referred to as having been both issued and sold under the agreements. Those events occurred when the contracts became unconditional. There is no reference to registration in the definition. [56] One of Mr Crotty's submissions was that allotment did not in fact occur until the point of registration. It was at that point that the subscriber would be "registered" as a security holder. He submitted that it was that step which completed the subscriber's legal title to the securities and that until then, subscribers had no more than a right to be included on the register. He submitted that an advantage of taking that approach would be that the date of allotment would appear on the register. [57] Section 51 of the Act obliges issuers of securities amongst other things to keep a register of all participatory securities. Under s 51(2), every register kept for the purposes of the section must contain, amongst other things (in respect of every security entered in it), the date on which the security was allotted or transferred to the holder as the case may be. Mr Crotty also pointed to s 54 of the Act and noted that the time of allotment triggered an obligation under s 54(1) to issue a certificate, within one month of the date of allotment. He submitted that if allotment were to occur at the point of registration, that would ensure that the evidence as to the ownership of securities was consistent as between the register and certificates. He argued that Parliament must have intended that the time of allotment be fixed and certain and noted that, under s 37A(1)(c), there are time limits by which allotment must occur. Further, under s 36A subscription moneys must be held in trust for subscribers until securities are allotted. If the time of allotment were fixed at the point of registration, then subscribers could have the protection of this provision up until the point at which the register records that they became security holders.[58] We have not found any of these arguments persuasive. Their common theme was the desirability for practical reasons of having what Mr Crotty referred to as "a simple and certain answer to the question of when securities are allotted". However, no uncertainty arises from the approach that we prefer. Here, in the case of each subscriber, we have determined that allotment occurred on the date when the contracts became unconditional, that is 28 March 2006. There would be no difficulty in applying the various obligations and duties arising under the provisions of the Act, to which Mr Crotty referred, on the basis that there was an allotment on 28 March 2006. However, it is also worth recording that, as Mr Matthews pointed out, the Exemption Notice in fact exempted Braemar from compliance with most of the provisions to which Mr Crotty referred in this part of his argument, presumably on the basis that they did not have direct relevance to the particular securities offered in the present case. [59] An alternative argument advanced by Mr Crotty was that if allotment were not fixed at the point of registration, allotment would nevertheless require the issuer to take a positive step to apportion the securities authoritatively to the subscriber and there would need to be notification of the allotment to the subscriber. He argued that the letter from Braemar's solicitors dated 28 March 2006 did not communicate that allotment had occurred. Instead, it referred to further advice that would be forthcoming "in respect of progress and settlement". He submitted also that the letter did not communicate that the agreements were at that point unconditional and noted that since the agreements had been entered into before a survey plan had been approved under s 223 of the Resource Management Act 1991 they were deemed by s 225(1) of that Act to have been made subject to a condition that the survey plan would be deposited under the Land Transfer Act 1952. Further, the purchasers' obligation to settle remained contingent on a number of further events occurring, including Braemar erecting the units, the land being subdivided to obtain unit titles for the units under the Unit Titles Act 1972, the issue of a certificate of practical completion, a search copy of the new certificates of title becoming available, commencement of the management agreement, and commencement of the operation of the unit as a taxable activity, that would allow its sale to be treated as the sale of a going concern.[60] Once again, we do not consider that these propositions should result in a different approach to the issue of when "allotment" occurred in the present case to that which we have earlier set out. Securities were apportioned under the terms of the agreements and the agreements became unconditional once the vendor decided that the development was financially viable. It would be artificial to suggest that some other notification of allotment was necessary to the subscriber, since at that point the allotment had occurred under the terms of the contract. The contract itself was the notification, coupled with the advice that it was unconditional. Thereafter, Braemar was bound to take the various steps to which Mr Crotty referred as being necessary before settlement could occur. Those steps were matters of contractual obligation and if need be, compellable at the suit of the purchasers. While it is correct, as Mr Crotty noted, that cl 4.6.2 of the special conditions gave Braemar the right to require a purchaser, as a pre-condition of settlement, to confirm in writing prior to or at the settlement date that the unit had been completed to the purchaser's satisfaction, there was no evidence that Braemar had exercised that right. [61] Mr Crotty also mounted an argument based on cls 22 and 23 of the special conditions of the contracts. Under the former, Braemar could obtain an alternate purchaser for each unit, in which case it was stipulated that the contract would be void. In that eventuality, cl 23 provided that Braemar would pay the original purchaser compensation at the rate of five per cent of the contract price. Mr Crotty submitted that these provisions were inconsistent with the notion that there was an allotment at the time of contract formation. As we have said, we consider that the allotment occurred at the time the agreements became unconditional under cl 11.1, not at the time of contract formation. But cls 22 and 23 would not be inconsistent with either outcome. If the contract became void, any prior allotment would also be void, and the parties had agreed to the compensation that would become payable at that point. We reject this argument as well. [62] Next, Mr Crotty argued that since the subscribers could not participate in the proportionate income of the complex until they became registered on the title of the individual units, it would be wrong to conclude that there had been an allotment at any earlier point in time. He submitted that the point at which the subscribers became security holders could not be divorced from the point at which they becameregistered proprietors of the units. We do not accept those propositions. Nor do we consider it "surprising", as Mr Crotty contended, that the securities were allotted at a time when the units did not exist. This was simply the ordinary consequence of an exchange of contractual promises once the agreements became unconditional. Braemar was then bound to construct the units under cl 4.2 of the special conditions in the case of each agreement. [63] We mention finally an argument that Mr Crotty made based on the terms of the Exemption Notice. He submitted that the wording of cl 6(h) of the Exemption Notice was inconsistent with allotment prior to the occurrence of the "key event", namely the provision of a registrable transfer instrument in accordance with cl 6(a)(i), enabling the subscriber to be registered as the proprietor of the stratum estate for the unit. Mr Crotty submitted that the Exemption Notice therefore reflected an understanding that the allotment would take place following settlement. He referred to other exemption notices issued under the Act which he claimed had proceeded on the same assumption. [64] We have set out cl 6(h) at [16]. We do not consider that it has the effect for which Mr Crotty contends. Clause 6(h) operates outside the agreements as a condition on which the exemptions set out in the Exemption Notice have been given; it is effectively an overlay on what the parties have agreed. It does not have effect to alter the provisions of the agreement itself as to when allotment occurs. In this respect it can be contrasted with cl 6(a) of the Exemption Notice which also set out conditions of the exemption, but made requirements in relation to the agreement providing "that it is a term of each subscription contract that–". There is no such provision in cl 6(h). [65] Overall, we are of the view that the securities were allotted to the purchasers prior to them being required to pay the purchase price, and s 3(2)(a)(iia) of the Act does not apply. Braemar cannot rely on the Exemption Notice because the key event did not occur within the settlement period defined. It follows that under s 37(4) of the Act, the allotments made were invalid and of no effect.[66] We are satisfied for the reasons we have given that the Judge reached the correct conclusion.Result[67] The appeal is dismissed. [68] Mr Matthews invited us, in the event that the respondents were successful on the appeal, to reserve questions of costs so that consideration could be given by the respondents to an application for costs against the ANZ National Bank Limited, which appointed the receivers. Costs are reserved accordingly, to await any application that the respondents may wish to make within 15 working days of the date of delivery of this judgment.Solicitors: Russell McVeagh, Auckland for Appellant White Fox & Jones, Christchurch for Respondents