FRIMLEY ESTATE LTD v FOG [2015] NZHC 1010

FRIMLEY ESTATE LTD v FOG [2015] NZHC 1010 [13 May 2015]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2014-404-003364[2015] NZHC 1010IN THE MATTER of the Securities Act 1978BETWEEN FRIMLEY ESTATE LIMITEDApplicantAND MARIANNE FOGRespondentHearing: 14-15 April 2015Counsel: EJ Grove for ApplicantRB Hucker and J Schwarcz for RespondentKS Graham and C Allan for Financial Markets AuthorityJudgment: 13 May 2015JUDGMENT OF ASHER JThis judgment was delivered by me on Wednesday, 13 May 2015 at 3:00pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:KP Legal, Auckland.Hucker Associates, Auckland.EJ Grove, Auckland.Financial Markets Authority, Auckland.Table of ContentsPara NoIntroduction [1]Background [3]The legal framework [13]The respective positions of the parties [21]Was Ms Fog a member of the public? [24]Relief [37]Circumstances relating to the allotment of the security (s 37AH(3)(a)) [40]Nature and seriousness of the contravention (s 37AH(3)(b)) [41]Material prejudice to Ms Fog [53]Other matters [64]Limitation period expired [70]Overall assessment under s 37AH(3) [73]The other subscribers [78]Result [81]Costs [83]Introduction[1] Frimley Estate Ltd seeks relief under s 37AH of the Securities Act 1978 (the Act) from the consequences of issuing a security to the public without a registeredprospectus. Under s 37 of the Act the allotments of security that have beensubscribed for by members of the public are void unless relief is granted.[2] The application is opposed by one of the subscribers, the respondent Marianne Fog. The Financial Markets Authority has appeared and has made submissions, but does not support or oppose the application. It is common ground that the Act applies.1Background[3] Frimley Estate Ltd (Frimley) has 21 shareholders. It was incorporated on 16 December 2004. The project proposed by Frimley was the subdivision into sections and sale of lots of a 7.86 hectare block of land in Hawkes Bay near Hastings. At the time of its incorporation there were two directors, Stephen Duff and1 The Securities Act 1978 has been repealed. However, under the Financial Markets Conduct Act 2013, sch 4, cls 15, 17 and 19, the Securities Act still applies.Allan Duff. Stephen Duff, Allan Duff and a third person Tom Ellis between themheld initially 1,900,000 shares in Frimley.[4] In late 2004 and early 2005 Mr Stephen Duff promoted the company andinvited persons to subscribe for shares in it. On 17 December 2004 he wrote toMs Fog who was a client of his financial advisory company outlining the keyfeatures of Frimley's proposal. A valuation of the property from Valuation Plusdated 8 December 2004 was provided. It is common ground that there was noregistered prospectus and that no prospectus was provided to Ms Fog or any othersubscribers.[5] Ms Fog and other subscribers agreed to buy shares. Ms Fog initially acquired180,000 shares for $99,000. She has paid two further capital calls, the first being on30 September 2009 for $18,000 and the second on 1 October 2010 for $32,400. Hertotal shareholding in Frimley is therefore 432,000 shares, and she has made totalcash investments of $149,400. While there was initially some contention about thesefigures, it was confirmed during the hearing that they were correct.[6] In May 2005 Mr Stephen Duff and his family trust purchased the shares ofAllan Duff and Tom Ellis. Mr Stephen Duff's shareholding increased from 600,000to 1,000,000 shares and his family trust acquired another 1,500,000 shares in 2007.Mr Stephen Duff's interests have also taken up subsequent share offerings byFrimley.[7] As a consequence of the promotion in December 2004 one million newshares were acquired by investors at 55 cents a share. Further land has been acquiredwith the further subscriptions. Some sections have been developed and sold andthere has been some income. However, the development has not been completed andoverall has not been a success. Mr Stephen Duff (hereafter referred to as Mr Duff)states that this is because of sales falling over during the global financial crisis,delays from unexpected remediation works on site, and consent delays in theacquisition of resource consents. In the interim, financing and holding costs haveeroded capital.[8] In 2014 the Financial Markets Authority (the FMA) determined that some of the shareholders were members of the public, and that Frimley should have issued aregistered prospectus to them before seeking their subscription. At the hearing infront of me Frimley, the FMA and Ms Fog all agreed that to be the case in respect ofat least one instance, and because no registered prospectus was issued, there hadbeen an irregular allotment which was invalid under s 37 of the Act.[9] There is, however, a difference between the parties as to the number ofsubscribers who were members of the public. It is argued for Frimley that only onecouple, a Mr and Mrs Rinckes, who were approached in 2004 to subscribe for shares,were members of the public. Mr and Mrs Rinckes are not parties and have taken nosteps in the proceeding. Ms Fog, while not seeking to comment on the Rinckes'position, submits that she was a member of the public.[10] Having accepted the allotments to be void, Frimley brings this originatingapplication for discretionary relief under s 37AH of the Act. If relief is not grantedFrimley has an obligation under s 37(5)(b) to repay the subscribers who weremembers of the public and to pay interest on their subscriptions. Further, unders 37(6) if the subscriptions are not repaid within the stated time periods both Frimleyand all the directors are jointly and severally liable to repay the subscriptionstogether with interest.[11] In its originating application Frimley asserts that the only source of funds torefund the shareholders who can claim repayment of their investments would be theHawkes Bay property. Frimley believes that rather than selling the Hawkes Bayproperty, a better result would be achieved for the shareholders if the propertydevelopment was completed.[12] Frimley held a meeting of shareholders on 16 October 2014 to vote on whether or not the application for relief should be brought. Only one shareholder,Ms Fog, voted against the bringing of the application. One other shareholder did notattend the meeting, and one other shareholder provided her proxy form in support ofthe application late. All the remaining shareholders voted in favour of bringing theapplication.The legal framework[13] As I have noted the effect of s 37 is that subscriptions and allotments made to members of the public who have not received a registered prospectus are invalid.Section 37(1) and (4) of the Act provide:37 Void irregular allotments(1) No allotment of a security offered to the public for subscription shall be made unless at the time of the subscription for the security there was a registered prospectus relating to the security.(4) Any allotment made in contravention of the provisions of this section shall be invalid and of no effect.[14] Such subscriptions must be repaid, and can be recovered from the companyand its directors by the subscriber. Section 37(5)(b) and (6) provide:37 Void irregular allotments(5) Where subscriptions for securities are received by or on behalf of an issuer, but, by virtue of this section, the securities may not be allotted, or for any reason the securities are not allotted, the issuer shall ensure that—(b) The subscriptions, together with such interest (if any) as has been earned thereon, are repaid to the subscribers as soon as reasonably practicable.(6) If any subscriptions to which this section applies are not so repaid within 2 months after the date on which the subscriptions were received by or on behalf of the issuer (or, in any case to which subsection (2) of this section applies, within 5 months after the date of the registered prospectus), the issuer and all the directors thereof shall be jointly and severally liable to repay the subscriptions, together with interest at a rate prescribed from time to time by regulations made under this Act from the date on which the subscriptions were received by or on behalf of the issuer:Provided that a director shall not be so liable if he or she proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his or her part.[15] There are a number of relief provisions. Sections 37AA–37AL wereintroduced to address perceived deficiencies in the procedures for relief fromcontractual illegality contained in the Illegal Contracts Act 1970, and their application to the Act, in particular the possibility that the Illegal Contracts Act did not apply to overseas issuers.2 If relief is granted, the effect is that ss 37(4)–(6) do not apply to the allotment of the security. The subscribers are not able to recover their subscriptions.[16] Under s 37AC the Court is obliged to make orders providing relief in certaincircumstances. Those circumstances arise when there is no contention concerningthe order sought, so that orders will be made if the application is by the subscriberitself or the security holder, or the issuer if the subscriber consents, or the securityholder consents, or in certain other specific circumstances. Frimley has not appliedunder this section. Rather, the application has been brought under s 37AH whichprovides:37AH When Court may make relief order in respect of section 37(1) The Court may in the course of any proceedings, or on the application of the issuer under this section, make a relief order in respect of the application of section 37 to the allotment of a security if the Court considers that it is just and equitable to do so.(2) An order may be made under this section regardless of whether the contravention of section 37 occurred before or after this section comes into force.(3) In determining whether to make a relief order under this section, the Court must have regard to—(a) all of the circumstances relating to the allotment of the security; and(b) the nature and seriousness of the contravention of section 37; and(c) whether the contravention has materially prejudiced the interests of the subscriber; and(d) whether the subscriber has disposed of the security to any other person; and(e) any other matters that the Court thinks fit.(4) An application under this section may be made in conjunction with an application under section 37AC or section 37AI.2 Henderson Global Funds v The Securities Commission [2009] NZCCLR 18, (2009) 10 NZCLC 264,477 at [24]–[27]; and John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Brookers, Wellington, 2013) at [SE37AA.01].[17] It is to be noted that this application before the Court is an application forrelief in respect of all subscribers (even though Frimley submits that only theRinckes are subscribers who were members of the public). In particular Frimley hassubmitted that save for the subscriber who did not attend the meeting and whoseposition is not known, and Ms Fog, all other shareholders support the application forrelief.[18] It is necessary to address the scope of the operation of ss 37(4) and 37AH.Section 37(4) provides that "any allotment" that is "made in contravention of theprovisions of [the] section" is invalid. The reference is to the individualcontravening allotment, not all the allotments globally. In the same way, anapplication under s 37AH(1) is in respect of the "application of s 37 to the allotmentof a security". Relief is to be applied therefore to the particular allotment in questionthat is void and requires an order to validate it. The sections are directed at theindividual allotments that are invalid, and not all the allotments globally.3[19] This is a relevant consideration in this case, where the application of Frimleyseeks relief "in respect of the application of section 37 to the allotment of securities".Frimley, which denies that Ms Fog was a member of the public, in theory shouldtherefore not need any relief against her, as relief is not required if she is not amember of the public, or indeed those other subscribers who were not members ofthe public. Section 37AH is not aimed at complying valid allotments.[20] However, presumably against the possibility that its claim that Ms Fog wasnot a member of the public may fail, Frimley seeks relief in respect of her allotment.It does not seek specific relief against the Rinckes or any other specific shareholder,but the general way in which the application is worded would allow for relief inrespect of any invalid allotment.The respective positions of the parties[21] Mr Grove for Frimley submitted that Ms Fog was not a member of the public, but that if she was the assessment of the factors listed in s 37AH(3) should lead to a3 The New Zealand Guardian Trust Company Ltd v Parr [2013] NZHC 393 at [24].conclusion in favour of relief. He focused on the support of the shareholders otherthan Ms Fog of the application, and the practical problems that will arise shouldrelief not be granted. He submitted that the level of fault on the part of Frimley waslimited, and that there will be little material prejudice to Ms Fog should relief begranted. He argued that it is in the overall interests of all subscribers that there berelief.[22] Mr Hucker for Ms Fog submitted that she was a member of the public. He did not engage on issues relating to the commercial merits of supporting thecompany in allowing the development to proceed, as distinct from Ms Fog requiringrepayment and the consequent possible failure of the company and the subdivision.He submitted that this application is not the place to debate the commercial merits ofrequiring a refund or allowing the development to continue. His focus has been onthe extent of the failures by Frimley to properly inform members of the public, andthe material prejudice to Ms Fog and other subscribers, which he submits shouldresult in relief being refused.[23] The FMA neither supports or opposes the application. However, the FMAmade submissions to assist the Court. The FMA has submitted that thecontraventions by Frimley were serious, and that if the Court determines that reliefshould be granted, conditions should apply to the order to ensure that Frimleyprovides investors with any outstanding material information. The FMA'ssubmission was that there is an ongoing failure on Frimley's part to provide theinformation which should have been provided with a registered prospectus, andreferred in particular to the failure on Frimley's part to provide audited statementsright down to the present time.Was Ms Fog a member of the public?[24] Given the way the application is framed and the arguments developed, it isnecessary to commence the consideration of the application for relief by determiningwhether Ms Fog was a member of the public.[25] Mr Grove commented that I did not have to decide whether Ms Fog was infact a member of the public, given Frimley's concession that at least one member ofthe syndicate was not a member of the public. I do not agree. As I have stated relief is considered per allotment and not globally, and Frimley will not need relief againstMs Fog if she is not a member of the public.4[26] Even if this were not so, it is desirable that I set out my view on whether Ms Fog was a member of the public. In the end, under s 37AH I must have regard to all the circumstances of the allotment, the nature and seriousness of the contravention of s 37, and the material prejudice to the subscriber in question in order to determine whether it is just and equitable to grant relief.[27] Neither Mr Duff or Ms Fog in their affidavits discuss in detail the associationthat existed between them through the relevant time period. However, the followingfacts are clear:(a) Ms Fog had been a client for at least two years of Mr Duff's financial advisory company, Financial Vision Ltd. Ms Fog had inherited$900,000 that she invested through Mr Duff and his company, and heran a portfolio for her from approximately February 2002.(b) For approximately two years Ms Fog was a member of a syndicate that Mr Duff had set up named the Farmers Trading Property Syndicate.(c) Ms Fog was introduced by Mr Duff to the Farmers Trading Property Syndicate as a client of Financial Vision Ltd.[28] In assessing whether Ms Fog was a member of the public, I refer to the definition of member of the public in s 3(2) of the Act. That section sets out certain offers which shall not constitute an offer of securities to the public. Section 3(2)(a)(i) provides:3 Construction of references to offering securities to the public4 At [17]–[19] above.(2) 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:(emphasis added)Pursuant to that section it is the submission of Mr Grove that Ms Fog was a closebusiness associate of Frimley through her association with Mr Duff.[29] There was some discussion between counsel as to what onus arose when aparty made a s 37AH application. On the face of it s 37AH confers a wide discretionto the Court.5 Any general onus is on the persons seeking the discretionary relief, inthis case Frimley, to provide with reference to the s 37AH(3) factors evidence tosupport their application.6[30] The issue of what is a close business associate was considered in SecuritiesCommission v Kiwi Co-op Dairies Ltd.7 The Court of Appeal noted that the words"close", "business" and "associate" were all relatively imprecise terms. It said:8Parliament has chosen to use the word "associate" rather than "association", indicating that the focus of the exception is upon a connection of a personal nature between individuals, rather than upon a relationship with a corporate body. The Oxford English Dictionary (2nd ed) defines an "associate" as"One who is united to another by community of interest and shares with him in enterprise, business or action; a partner, comrade, companion" and also as"One who is frequently in company with another, on terms of social equalityand intimacy; an intimate acquaintance, companion, mate". Moreover, the Act is speaking not just of an associate but of a close associate. Closeness too involves nearness or intimacy.Although an issuer and a holder of its securities have a relationship through business, the use of the terms "close" and "associate" requires more than this: there must be a degree of intimacy or "business friendship" in the relationship, though not necessarily a friendship away from business. It must be sufficient to overcome any inequality which might otherwise be present in the relationship.5 Little v Jull [2013] NZHC 3123 at [122].6 At [125](c).7 Securities Commission v Kiwi Co-op Dairies Ltd [1995] 3 NZLR 26 (CA).8 At 31–32.Where the issuer is a body corporate an offeree can still be regarded as a close business associate if those individuals who control the issuer have an intimacy of business contact with the offeree (or, where the offeree is a corporation, with those individuals who control the offeree). By "control" in this context we are referring to the holding of a position in an issuer which properly enables the dissemination of corporate financial information, and the corresponding position in a corporate offeree.(emphasis added)[31] In Lawrence v Registrar of Companies, both the High Court and Court of Appeal decisions referred to the Court of Appeal's comments in SecuritiesCommission v Kiwi Co-op Dairies Ltd.9 Lawrence was an appeal against convictionsfor offences under the Act for making offers of a security to the public without aprospectus. The investors in question in that case were private individuals and nothabitual investors who had been introduced to the issuer by an employee who hadbeen their investment advisor through his prior employment at a private bank.Morris J held that such persons did not have possession of all the means of obtaininginformation relevant to their investment to the extent that they could be regarded asclose business associates.10 The Court of Appeal held that he was correct to hold thatthe " offeree must have, or have the capacity to obtain information concerning theproposed investment, sufficient to be able to make an informed decision in relationto the offer."11[32] In the affidavit of Ms Fog and the two affidavits of Mr Duff (who was cross-examined), there is nothing to suggest that there was any particular friendship orindeed closeness between Mr Duff and Ms Fog, or that they met more thanoccasionally, perhaps once a year for general meetings. Their relationship appears tohave been only a business relationship, and not particularly close in that they did notmeet frequently. There is no evidence that they confided in each other. Although itcan be assumed that Ms Fog had confidence at that time in Mr Duff, this appeared to9 Lawrence v Registrar of Companies (2003) 9 NZCLC 263,177 (HC); and Lawrence v Registrar of Companies [2004] 3 NZLR 37 (CA).10 At [31]. See also other cases adopting the test in Securities Commission v Kiwi Co-op Dairies Ltd, above n 7, such as Dodge v Snow (1999) 8 NZCLC 261,803 (HC) (upheld on appeal: Dodge v Snow CA21/99, 22 February 2000); and de Alwis v Luvit Foods International Ltd (2007) 10 NZCLC 264,304 (HC).11 Lawrence v Registrar of Companies, above n 9, at [1].be no more than the confidence that could be expected between a business advisorand a client. When being cross-examined Mr Duff said:12 But I did have a lot to do with the people that I got on board, like forexample Ms Fog too, and in terms of the day-to-day management I had atleast one meeting a year with people like Ms Fog and, amongst other things,we'd talk about what was going on in the syndicate. Each year I'd sendpeople tax returns. They got paid their rent monthly, directly into their ownbank accounts usually and so on. And from time to time if anything, forexample if there were a rent review due or at one stage the Farmers TradingCompany, who were the long term leasers of the property, wanted a variationof the lease, that sort of thing, so.[33] This extract demonstrates that the relationship between Ms Fog (and possiblyother investors) and Mr Duff was not close, but rather a business relationship wheremeetings were dictated by formal requirements. There was not the added degree ofintimacy.[34] I conclude that Ms Fog was a member of the public. The investor/advisor relationship between Ms Fog and Mr Duff did not amount to a close businessrelationship. Nor did her investment in the Farmers Trading Company Syndicate,which appears to have been a one-off investment in a developed property. Therelationship was confined to occasional business matters and the regular yearlymeeting of the syndicate. In terms of the mischief that s 37 is aimed at, Ms Fogcould not be assumed to have all the relevant knowledge of Frimley, or know what toask Mr Duff. The relationship did not overcome the inequality that existed betweenMr Duff as the promoter of a complex risky development project, and Ms Fog as apassive investor.[35] There was therefore a breach of the Act specifically in relation to Ms Fog.There appear to have been other subscribers who were in the same category as her,but I do not have details of them so I do not extend my finding beyond Ms Fog, andthe Rinckes (who it is conceded were members of the public).[36] I have put to one side a good deal of evidence by Ms Fog in her submissions,and Mr Duff in reply, concerning events after 2005, save for those that specificallyrelate to the relationship in 2005 and the three subscriptions. That later evidence has12 Notes of evidence, p 39, lines 17–26.little relevance to the issue I have to determine, which is the nature of the relationship and events at the time of the subscriptions. The minutiae of the exchanges between Ms Fog and Mr Duff down to the present time cast no light onwhether Ms Fog was a member of the public for the purposes of s 37.Relief[37] I will now proceed to consider the merits of the application. I respectfullyagree with the observation of Warwick Gendall J in Re Perpetual InvestmentManagement Ltd:13[14] The Court must be mindful of the purpose of the legislation. If there are purely technical breaches such as late filing of documents and no cogent reasons given by an objector as to how his or her interests have been"materially prejudiced" by such technical contravention, then it is obvious that the purpose of the legislation was to ensure that relief be granted. [38] I also note the following written submission made by the Securities Commission in Henderson Global Funds v The Securities Commission:14The legislative changes made by the Securities Amendment Act 2004 (introduced in ss 37AA to 37AL) seek to provide some balance between theinterests of issuers and those subscribers. These changes provide a route bywhich issuers can obtain relief from the otherwise absolute prohibition ins 37(1). Such amendments direct the Court to focus on both substantiveprejudice to investors and the nexus between the contravention and theprejudice. The legislation recognises that breaches of some of the exemptionnotices may in many cases have been immaterial and of a technical nature.This is particularly the case for those contraventions falling within s 37AI.[39] It is clear therefore relief is likely to be granted where there have been only technical breaches, and there is no real prejudice to subscribers.15Circumstances relating to the allotment of the security (s 37AH(3)(a))[40] I have traversed these circumstances already, and I will return these inconsidering the nature and seriousness of the contravention. In terms of the Rinckes,I received no affidavit material as to the circumstances of their subscription, and am13 Re Perpetual Investment Management Ltd (2006) 2 NZCCLR 1203, (2006) 9 NZCLC 264,207.14 Henderson Global Funds v The Securities Commission, above n 2, at [26].15 Re Perpetual Investment Management Ltd, above n 13, at [14], [19]; applied in (for example) Re APVC Ltd HC Auckland CIV-2007-404-6533, 9 June 2008 at [16]-[17].not able to comment on the circumstances relating to the allotment of their security.I do, however, note the concession that the Rinckes who were subscribers were alsomembers of the public. Certainly it is not open to Frimley to submit that the failureto register a prospectus was limited to only one subscriber. I approach the breachtherefore from the perspective that it was a breach proven in relation to twosubscribers. There was no evidence of a deliberate and flagrant breach.Nature and seriousness of the contravention (s 37AH(3)(b))[41] It is important to evaluate the nature and seriousness of the contravention. Inmy view, the nature and seriousness is to be considered at the time the relevantallotment is taken up, although subsequent events may have some relevance toassessing that seriousness. Of particular importance will be whether the breach canbe regarded as technical or substantive, and if it is substantive how extreme.[42] The purpose of the Act has been described as providing greater protection tothe investing public by ensuring full disclosure of the company's affairs and of thesecurity it is offering.16 This then allows the investor to make an informedinvestment decision which in turn facilitates the functioning of financial markets.[43] I received careful submissions from both Mr Grove for Frimley andMr Hucker for Ms Fog on the extent of the non-disclosure. Any non-disclosureapplication must be considered against the requirements for a prospectus set out insch 1 of the Securities Regulations 1983, which were the regulations in place at thetime.17 Material matters that are referred to, and should have been disclosed, includetrading prospects and risks,18 securities paid out other than in cash,19 preliminaryissue expenses,20 other material matters21 and an audited statement of financialposition.2216 Re AIC Merchant Finance Ltd (in rec) [1990] 2 NZLR 385 (CA) at 392 per Richardson J.17 See Securities Regulations 1983, reg 3(1), and sch 1.18 Sch 1, cl 9.19 Sch 1, cl 12.20 Sch 1, cl 19.21 Sch 1, cl 21.22 Sch 1, cl 23.[44] I have referred to the material provided to Ms Fog in the letter of 17 December 2004 and the attached valuation. This was the promotional document.It seems to me that there were a number of serious shortcomings in the informationprovided.[45] There was no reference to the risks that would normally arise in relation to aninvestment in land for subdivision purposes, in particular the risks of extra costs anddelays resulting from the resource management consent process, and the risk of a fallin land values. In fact these risks did indeed eventuate with serious consequences forthe wellbeing of the subdivision. A considered reference to prospects and forecastswould have revealed these risks.[46] More specifically there was a failure to refer realistically to the interest coststhat would have inevitably accrued over the years. On the plan proposed it wasanticipated that the subdivision would be completed by June 2007. However, despitethe fact that there were therefore two and a half years to run on the forecast at thetime it was made, interest for only three-quarters of a year was provided for. Otherholding costs provided for expressly excluded interest. Thus, there was a whole areaof expense that was to be incurred which was not listed.[47] Further, it was not explained in any of the material that all the share capital ofthe Duffs and Mr Ellis was not paid up. The only cash that was available for Frimleywas the actual cash from the subscriptions which amounted to approximately$550,000. The modesty of capital, and the lack of cash other than the new investorsubscriptions, was not made clear from the material provided. Rather, the letter andaccompanying valuation would have led a potential subscriber to assume that thesignificant share capital owned by the Duff and Ellis interests was paid up and washelping to finance the subdivision. This was particularly so given the modestallowance for interest.[48] There is no reference to management fees and guarantee fees which, as willbe seen, materially increased costs. Even though these were not charged for in theinitial months, the end fees were very significant and the issue should have beenaddressed, at least as a reference to the possibility of such fees.[49] Further, the lack of any audited accounts at all was a significant omission,and it is to be noted that in the years that followed there were no audited accountsprovided.[50] If the proper procedures had been followed by Frimley, a prospectus would have been delivered to the Registrar of Companies for registration, and it can be fairly anticipated that these omissions would have been required to be remedied before the prospectus would have been accepted for registration.23[51] I conclude that the contravention was serious. It was not a minor or technical breach. In relation to Ms Fog, there were omissions, which if corrected would have involved the provision of a considerable body of adverse information. It wasinformation that would have given any prospective subscriber significantreservations about whether this was a sound investment. Ms Fog says if she hadknown what she now knows she would not have invested. Looking objectively atthe nature of the investment, and what was actually disclosed, it is likely that aproper prospectus would have put off many possible investors because of theparticular risks.[52] In relation to the later subscriptions, I accept that the failure was less serious,as the problems with the subdivision were by then known.Material prejudice to Ms Fog (s 37AH(3)(c))[53] Section 37AH(3)(c) provides that the Court must have regard to whether the contravention has materially prejudiced the interests of "the subscriber". As I havestated, Ms Fog is the relevant subscriber. The way the section is worded the focusshould be on her, as the objecting party, rather than other subscribers about whomthere is no evidence.24 It would be a mistake to try and hypothesise about how theymight have been materially prejudiced, in the absence of evidence or concession.[54] Bare assertions of prejudice are not sufficient. The Court must be able todiscern prejudice when assessing the facts objectively. Applying this approach to the23 Securities Act 1978, s 42.24 See [18] above.facts before me, on any objective approach the non-disclosures that I have referred to in the preceding section were highly prejudicial to a subscriber who was not fully familiar with all the details of the project, and experienced in such developments. There is a great deal of difference between investing in shares or investments in developed properties (the type of investment that Ms Fog had previously made underMr Duff's guidance), and investing in an undeveloped green fields property project, the development of which would take work and time before income and profit was forthcoming.[55] Further, Mr Duff did not in the material provided disclose what would happenin relation to management fees and guarantee fees. Shortly after the issue of theprospectus in May 2005, following his brother's withdrawal from the project and hisassumption of his brother's role, Mr Duff commenced charging significantmanagement fees and guarantee fees. These can be summarised as follows:(a) $163,424 charged in 2006;(b) $254,190 charged in 2007;(c) $464,900 charged in 2008;(d) $422,815 charged in 2009; and(e) $425,000 charged in 2010.[56] In total, $1,730,329 was charged in fees in the period up to 31 March 2010. Ido not have clear information about fees (if any) after that date.[57] The failure to disclose the possibility of management fees and guarantee feesin my view materially prejudiced Ms Fog or any reasonable subscriber in herposition. This went well beyond a mere technical or procedural oversight. I acceptMr Hucker's submission that a reasonable subscriber could assume that given theextensive shareholding of the Duffs and Mr Ellis, they would be happy to providetheir time without charging, as they stood to benefit the most from the project. Therewas going to obviously be a great deal of time involved in managing such asubdivision, as well as an element of risk in guaranteeing any loans. A statement was required describing all special trade factors and risks unlikely to be known by the general public and that could materially affect the prospects of the issuing group.25 The issue of management and guarantee fees should have been disclosed and discussed.[58] If there had been an indication of the possibility of expenses for managementand guarantee fees it would have given any investor significant reason to pause. Ifthere had been full disclosure and it had been revealed that the only cash held wasthe $550,000 subscribed for by persons other than the Duffs and Mr Ellis, then itwould have been obvious to those subscribers that their entire investment could bespent in paying the fees within two years, leaving nothing for actual developmentcosts. This was a significant omission.[59] As the history of this development indicates, the subdivision of farmlandinevitably involves significant risks, in particular the risk of unforeseen physicalproblems, large fees, the risk of Council delays in granting the necessary consents,and the risk of changes in the market which could render the developmentunprofitable. Given the extent of the prejudice, and in my assessment its relativepredictability, I accept Ms Fog's assertion that she would not have entered into thesubdivision if she had known all the risks. Leave was not sought to cross-examineher.[60] I accept Mr Grove's submission that some of the risks that she refers towould not have been known at the time of subscription in 2005. In particularMr Duff's later actions in employing family members would not have been known.However, Mr Duff knew that the share capital was not paid up, knew that therewould have to be financing, should have known that guarantee and management feeswere at least a possibility, and should have known that there were significant risks ofcost overruns and delay. He did not address any of these matters in the material hesent to Ms Fog. If he had sought to register a prospectus, he would have been alertedto these obligations. In not doing so he materially disadvantaged Ms Fog.25 Securities Regulations 1983, sch 1, reg 9(2).[61] The disadvantage has been significant, as the risks that I have mentioned allcame to pass and if the subdivision is wound up now the return will be limited.Mr Duff in his affidavit states that the current total government valuation of theHawkes Bay property is $1,880,000, but Frimley's financiers' secured debt over theland totals $2,029,000. Although Mr Duff has significant assets in trust, he statesthat personally he would not have the means to make any material payment to theinvestors in the event the sale proceeds fall short of Frimley's debts. If thedevelopment continues as planned the prognosis is for a realisation of a sum between$1.5 and $2.4 million. Some capital will be returned, but it will have been a verypoor investment. At least $1,730,329 has been spent in fees.[62] Mr Duff on a number of occasions refers to the fact that as events transpiredfollowing Ms Fog's subscription, she did not object. For instance she did not objectwhen in May 2005 he advised that management fees and guarantee fees would becharged. However, I place little weight on this when assessing prejudice. Ms Fogmay well have not protested because she felt locked in. Ultimately she did protest.[63] It seems likely that in relation to the two smaller later subscriptions, the material prejudice was much less. By then, and despite the absence of a prospectus, Ms Fog would have been well aware of the risks because the risks had in fact beenshown to have existed and the subdivision was in trouble. However, it could beequally said that there was an even greater need for Mr Duff at that point to providea registered prospectus when he sought those further subscriptions and to haveemphasised that the delays and extra costs that had been incurred to that point couldwell continue through the future. He gave no such warning.Other matters (s 37AH(3)(e))[64] In determining whether to make a relief order the Court must have regard to"any other matters that the court thinks fit" in addition to those specifically listed.26[65] Mr Duff in his affidavit acknowledged that no audited accounts and noupdated valuations had been provided. He stated that Frimley "simply does not have26 Securities Act 1978, s 37AH(3)(e).the cashflow to prepare final accounts or obtain formal valuations". He emphasisedthat Ms Fog was only one of 21 shareholders/investors, and she was the onlysubscriber who opposed the application for relief, and the only shareholder whovoted at the shareholders' meeting of 18 October 2014 against Frimley bringing therelief application.[66] In submissions Mr Grove referred to the fact that if relief is refused in relation to Ms Fog, she would be in a position to seek liquidation of the company orseek to bankrupt Mr Duff, and this could mean that the development would collapseto the detriment of all the other subscribers who would like it to proceed. However, Inote that while the other subscribers have not opposed this application for relief,none of them have actively supported it in this proceeding. In the absence ofsubmissions from them, this submission is hard to evaluate, and I am not satisfiedthat the development must stop if relief is refused in respect of Ms Fog.[67] Moreover, I do not consider that the overall commercial consequences ofdenying relief for the company and other subscribers can be a major factor when aCourt makes a s 37AH assessment. Although s 37AH(3)(e) permits the Court toconsider any other matters it thinks fit, the focus of the first three preceding factors ison circumstances at the time of subscription and the consequences of anycontravention. It would be out of keeping with the factors that are specifically listed,which apply to the situation at the time the contravention was made and theconsequences of the failure to register a prospectus, to extend the s 37AH reliefanalysis to a general evaluation of the best commercial options for the companytoday. As Mr Hucker pointed out, issues such as the present interest of othersubscribers in the future of the company and their wishes could be taken into accountif Ms Fog sought to enforce a judgment. For instance, the Court has a discretion(although exercised with caution) as to whether to order liquidation of a company.27[68] The effect of Mr Grove's submission if accepted would be that a subscriberwho should have received a prospectus and who has been materially prejudiced,could be forced to remain a subscriber and be unable to recover the subscription bythe majority will. There is nothing to indicate that this is how the discretion reserved27 Companies Act 1993, s 241.in s 37AH(3)(e) is meant to operate. As I have noted, relief is granted on a per allotment basis, not globally for all subscribers. The focus is on the particularsubscription, not the overall circumstances of the company.[69] It could be the case that in particular circumstances events since thesubscription could be considered, and I note that s 37AH(3)(d) does permit the Courtto take into account whether the subscriber has disposed of a security to any otherperson. However, it would in my view run contrary to the purpose of the section totreat the wishes of the majority of shareholders as trumping a legitimate objection bya subscriber to relief. The obligation to register a prospectus and the consequencesof failure cannot be put to one side because it may be for the benefit of the companyto grant relief.Limitation period expired[70] As an argument against the objection by Ms Fog, Mr Grove submitted that any proceedings she might bring to recover her investment would be statute barredas her rights will have been in existence for more than six years.[71] There was argument on this issue. Mr Hucker submitted that the limitation period may have only commenced to run when Ms Fog discovered all the relevantcircumstances. He relied on s 23B of the Limitation Act 1950. He also submittedthat the 2009 and 2010 allotments occurred within the relevant six year period. Heargued that the subscriptions could be treated as trust property under s 21(1)(b) of theLimitation Act so that no limitation period was engaged and he argued that to theextent that repayment and/or compensation is treated as an action for account unders 4(2) of the Limitation Act, the filing of the relief application was anacknowledgement by Frimley for the purposes of s 25(4) of the Limitation Act.[72] I do not consider it necessary to determine these limitation issues. Even ifMs Fog's claim is statute barred, this does not necessarily assist Mr Grove'sargument as it undermines his contention that she has the ability to obtain a judgmentagainst Frimley and stop its continued operation. If there is a limitation bar, then thatis an issue that will have to be resolved in future proceedings. It does not directlyarise here.Overall assessment under s 37AH(3)[73] I have concluded that there was a serious contravention of s 37 in respect ofMs Fog which materially prejudiced her interests.[74] I consider that the primary focus must be on the circumstances of theparticular allotment and the nature and seriousness of the contravention, and materialprejudice at that time, rather than the general commercial factors at the present timewhich might militate for or against the granting of relief to ensure the best return forshareholders. Although there is a general discretion at the end of listed factors toconsider other matters that the Court thinks fit, the likely commercial consequencesof a refusal to grant relief are better considered in any enforcement proceedingsbrought by a subscriber that might follow the refusal.[75] In general terms I must exercise the discretion under s 37AH and grant reliefif I consider it to be "just and equitable to do so". I do not consider it just andequitable to deny Ms Fog her rights under s 37 and to grant Frimley relief. This wasa serious failure causing her serious prejudice. She should be able to require arefund of her investments from the parties at fault. I conclude that relief should bedenied in relation to Ms Fog.[76] I have been addressing seriousness and prejudice in the context of the firstsubscription. The two later subscriptions were not as serious as Ms Fog by then wasvery familiar with the investment. However, by then she was already bound into thesubdivision and her options were limited given that further investment was beingpromoted to improve what would otherwise be a very poor return.[77] The contraventions in respect of the later subscriptions were still serious.There was still no prospectus and there were still no audited accounts. I do not thinkit appropriate to grant relief in respect of any of the subscriptions.The other subscribers[78] Frimley's application seeks relief in relation to all subscribers. The othersubscribers have not opposed relief being granted. However, it is not clear whichsubscribers other than Ms Fog and the Rinckes were members of the public, and forwhom relief is therefore needed. The application should always identify thesubscriptions for which relief is sought, but unfortunately this application did not doso, and I have no material on which to assess the merits of the position of the othersubscribers.[79] The minutes of the special general meeting of 16 October 2014 where theshareholders voted on the resolution that relief be sought, showed support from allsubscribers who had taken steps, save for Ms Fog. There was a report provided byMr Duff for subscribers called "Further report for SGM" where the background wasset out. Although it clearly set out the failure by Frimley to provide a prospectus andthe fact that Frimley had never been audited, there appears to have been no realdiscussion of what might happen should relief in relation to Ms Fog be declined.[80] The fact that relief is being declined in relation to Ms Fog might or might notlead the other subscribers to take a different view about whether relief should begranted in relation to other subscriptions, if there are indeed other members of thepublic to which s 37 applies. I think it is only fair to them to give them anopportunity to read and understand this decision and take advice before I finallydetermine the application. In any event, I have no information before me about theseother subscribers, on which to base a s 37AH assessment. If there are othershareholders, Frimley may wish to bring an application under s 37AC.Result[81] The application for relief in respect of the respondent Ms Fog is declined.[82] The application for relief in relation to the other subscribers is adjourned. Igive leave to Frimley to seek relief for other specific subscriptions, if it wishes to doso. The applicant has 28 days to make submissions on these proposed orders, therespondent (if any) and the FMA a further seven days to reply. If the parties canagree a joint memorandum can be filed.Costs[83] Mr Hucker on behalf of Ms Fog submitted that because the proceedings haveresulted from a serious failing by Frimley to issue a registered prospectus, Ms Fogshould get indemnity costs whether she failed or succeeded.[84] Mr Grove for Frimley submitted that in the event of Frimley failing, costsshould be as per scale.[85] It is true that these proceedings have been necessary because of Frimley'sfailure to register and serve a registered prospectus. However, there has beennothing to show bad faith on the part of Frimley or its directors, and the proceedingshave been advanced promptly.[86] In these circumstances I am not prepared to order indemnity or indeedincreased costs. It seems to me that although Ms Fog has been successful and isentitled to costs, the usual approach of costs being in accordance with scale andbeing only a contribution to costs, should apply.[87] Frimley is to pay costs on a 2B basis to Ms Fog. I am prepared to certify fortwo counsel given that there were some complexities in the case.[88] The FMA did not seek costs whatever the outcome, and no order for costs is made in relation to its attendances...Asher J