THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED V PARR HC AK CIV 2012-404-4212

THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED V PARR HC AK CIV 2012-404-4212 [5 March 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2012-404-4212[2013] NZHC 393BETWEEN THE NEW ZEALAND GUARDIANTRUST COMPANY LIMITEDPlaintiffAND ANDREW EDWARD PARRRepresentative DefendantAND FINANCIAL MARKETS AUTHORITYParty ServedHearing: 25 February 2013Counsel: A R Galbraith QC and N MacFarlane for PlaintiffR J B Fowler for Representative DefendantNo appearance by, or on behalf of Financial Markets AuthorityF J Thorp, amicus curiaeJudgment: 5 March 2013JUDGMENT OF HEATH JThis judgment was delivered by me on 5 March 2013 at 10.30am pursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:DLA Phillips Fox, PO Box 2791, WellingtonFinancial Markets Authority, PO Box 106672, AucklandCounsel:A R Galbraith QC, PO Box 4338, Shortland Street, AucklandR J B Fowler, PO Box 10048, WellingtonF J Thorp, PO Box 3995, Shortland Street, AucklandApplications[1] The New Zealand Guardian Trust Company Ltd (Guardian Trust) seeks relief under s 37AH of the Securities Act 1978 (the 1978 Act) in order to validate certain allotments of securities, in respect of which it had not registered a prospectus. A declaration is also sought that the making of the allotments to which the relief application relates does not affect the validity of subsequent allotments to other investors in the relevant Group Investment Funds1 (the Funds).Background[2] Section 37 of the 1978 Act2 states that 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 it. Section 37AH(1) allows this Court to ameliorate the harsh consequences of non-compliance with s 37(1) by making such relief order as it considers "just and equitable".[3] Guardian Trust is recognised as a trustee company under the Trustee Companies Act 1967 (the 1967 Act) and deemed to be a trustee corporation, for the purposes of the Trustee Act 1956. While incorporated as a company, it is governed by its own statute, the New Zealand Guardian Trust Company Act 1982.[4] In 2009, Guardian Trust established four Funds, pursuant to powers conferred by s 29 of the 1967 Act.3 It is common ground that an offer of an interest in such aFund is a "participatory security" for the purposes of the 1978 Act,4 which triggers the need for compliance with s 37(1). It is also accepted that no prospectus relating to the offer had been registered.[5] The four Funds established by Guardian Trust were separately named and identified:1 See paras [4] and [5] below.2 Section 37 of the Securities Act 1978 is set out at para [23] below.3 See para [14] below.4 Securities Act 1978, s 2(1), definition of "participatory security".(a) The Guardian Bond Fund (GIF 41).(b) The Guardian Property Securities Funds (GIF 42).(c) The Guardian Australasian Shares Fund (GIF 43).(d) The Guardian International Shares Fund (GIF 44).[6] In 2011, following the commencement of a number of provisions of the Financial Advisers Act 2008, Guardian Trust undertook a review of the Funds it had created. In the course of that review, it ascertained that some 15 investors who were members of the public for the purposes of the 1978 Act5 had been placed into one of the four Funds it had established. Those allotments fell foul of s 37(1) of the 1978 Act.[7] Of the 15 investments, 14 investors had appointed Guardian Trust to make investments on their behalf. However, their authorities required either consultation with or a direction from the investor before the investment could be made. The remaining investment was entered into by Guardian Trust, acting as a custodian trustee only.[8] After completing its review, Guardian Trust immediately informed the Financial Markets Authority (the Authority) of the breaches that it had identified.[9] Guardian Trust was concerned that subsequent allotments in the funds that were made to other investors might have been rendered void. To alleviate that problem Guardian Trust established "mirror Group Investment Funds".Administratively, but after consultation with relevant investors, the amountcontractually required to be repaid was paid and the amount re-invested in the mirror fund.6 There is no suggestion of any irregularities in the way in which this process was undertaken.5 Ibid, s 3(1), construction of references to "offer securities to the public".6 Because the repayment was made as a result of contractual obligations, the provisions of ss37(5) and (6) and 37AA(2) have not been engaged.[10] After completing that process, Guardian Trust applied to this Court for the following orders:(a) A relief order, pursuant to s 37AH of the 1978 Act, in respect of the 15 allotments.(b) A declaration that the making of the 15 allotments did not affect the validity of subsequent allotments to other investors in the respective Funds.Procedural issues[11] On 29 August 2012, Ellis J made a number of procedural orders. She changed the status of the Financial Markets Authority (the Authority) from that of adefendant to a "party served"; appointed Mr F J Thorp, Auckland, Barrister asamicus curiae to represent the interests of investors whom Guardian Trust contended were not affected by the invalid allotments; and appointed a representative investor (Mr Parr) to protect the interests of the 15 investors to whom the relief application refers.[12] Prior to the hearing of the application, on 25 February 2013, counsel filed a memorandum indicating that the Authority did not intend to take further steps and abided the decision of the Court. The Authority was content to do that because of the existence of other counsel to protect the interests of all investors.The evidence[13] In support of its relief application, Guardian Trust has filed three affidavits from its General Manager, Personal Client Services, Mr Philip Morgan Rees. In those affidavits Mr Morgan Rees explains the circumstances in which the allotments in issue came to be made and the way in which breaches of the 1978 Act, in relation to the 15 investors, were identified. Only a brief description of the circumstances is required.[14] When the Funds were established, Mr Morgan Rees believed that s 29 of the 1967 Act gave Guardian Trust the ability to make investment decisions on behalf of all of those whose monies were transferred to acquire interests in one or more of the funds. Section 29(1)–(4) states:29 Group Investment Funds(1) A trustee company may from time to time establish and keep in its books one or more Funds, each of which shall be called a Group Investment Fund. Where more than one Group Investment Fund is so established, each such Fund shall be given an appropriate distinguishing number.(2) All funds forming part of any Group Investment Fund shall be invested, as the company which establishes the Group Investment Fund determines at the time when the Fund is established,—(a) In any class or classes of investments authorised by the instrument (if any) creating the trust under which the funds are held; or(b) In accordance with the provisions of the Trustee Act 1956 as to the investment of trust funds.(3) Subject to the provisions of this section, a trustee company may invest any trust funds in its possession, whether at the time in a state of investment or not, whether they came into its possession before or after the commencement of this Act, whether the trust estate to which they belong is under administration by the trustee company or by any other trustee or trustees, and whether they comprise the whole or part of that trust estate, either—(a) On a separate account in respect of the trust estate to which the funds belong; or(b) If the funds are not directed to be invested in some other specified manner and investment in a Group Investment Fund is not inconsistent with the terms of the trust instrument (if any) governing the funds, as part of any Group Investment Fund established and kept in the books of thecompany .(4) Where a trustee company is a co-trustee of any trust funds, those trust funds may be invested as aforesaid in a Group Investment Fund with the consent of every other co-trustee of those trust funds.[15] The difficulty faced by Guardian Trust stems from the circumstances in which its power to invest under s 29 was exercised. Mr Morgan Rees deposes that Guardian Trust exercised its powers to invest in four different capacities:(a) As sole trustee;(b) As a co-trustee;(c) As the holder of an enduring power of attorney;(d) As a property manager appointed under the Protection of Personal and Property Rights Act 1988.Submissions[16] Mr Galbraith QC, for Guardian Trust, submitted that the 15 relevant allotments had been made in error but, nevertheless, in good faith. He submitted that no investor has suffered loss or any other material prejudice arising out of the invalid allotments. For those reasons, he submits that the Court should exercise its discretion to grant relief under s 37AH(1).7[17] Mr Galbraith also submits that I should make an order declaring that the making of the 15 allotments does not affect the validity of subsequent allotments made to other investors in the respective Funds. That declaration is sought in an endeavour to foreclose the possibility that someone might argue in the future that the irregular allotments have tainted the validity of those that followed.[18] Mr Fowler, for the representative defendant, Mr Parr, did not wish to make submissions in opposition to the orders sought. He took that stance after hearing the discussion that took place between myself and other counsel during the course of argument.[19] Mr Thorp, as amicus curiae, has identified three points on which it is necessary for me to rule. They are:(a) Did Guardian Trust fail to comply with the prospectus provisions of the 1978 Act in those cases in which it was a co-trustee of property?7 Section 37AH of the Securities Act 1978 is set out at para [20] below.(b) Does the invalidity of the allotments to the 15 investors taint and render void allotments made to all remaining 893 investors?(c) Should declaratory relief be granted, in addition to specific relief directed to the position of the 15 investors?The application for relief[20] Section 37AH of the 1978 Act provides: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.[21] Section 37AH was considered by this Court in Re Perpetual Investment Management Ltd8 and Henderson Global Funds v Securities Commission.9 InPerpetual,10 Gendall J discussed the purposes of the relief regime. His observations,8 Re Perpetual Investment Management Ltd (2006) NZCLC 264,207 (HC).9 Henderson Global Funds v Securities Commission (2009) 10 NZCLC 264,477 (HC).10 Re Perpetual Investment Management Ltd (2006) NZCLC 264,207 (HC), at para [14].adopted by Clifford J in Henderson Global Funds,11 were to the effect that if therewere "purely technical breaches such as late filing of documents and no cogentreasons 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".[22] So far as the 15 identified allotments are concerned, I am satisfied that relief should be granted. I rely on the following factors, all of which fit within the s 37AH(3) criteria, in concluding that relief is "just and equitable":12(a) The allotments were made in ignorance of the legal obligation, but in good faith.(b) As soon as the error was discovered, steps were taken to correct it to avoid any loss or material prejudice to the 15 investors.(c) Voluntary disclosure of the fact of the error and the contravention of s 37(1) of the 1978 Act was made promptly to the Authority.(d) A prompt application for relief has been made.[23] Section 37(1) and (4) of the 1978 Act provides: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.....[24] In my view, the 15 identified allotments are the only ones in respect of which it is necessary for Guardian Trust to invoke the relief provisions. Section 37(1) is11 Henderson Global Funds v Securities Commission (2009) 10 NZCLC 264,477 (HC) at para [22].12 Securities Act 1978, s 37AH(1).directed at individual allotments of securities, not to the global offer made to the public.13 It is the time at which the subscription is taken up that determines whether there has been compliance with that provision. In other words, the registered prospectus must be in existence at the time the investor subscribes for the security. The individual nature of the inquiry is emphasised by s 37(4) which is directed to the particular allotment made in contravention of s 37(1), rather than to all allotments made pursuant to the offer of securities.[25] Nor am I persuaded that the relief sought needs to extend to those investments made by Guardian Trust as a co-trustee.[26] It is common ground that all co-trustees must agree to make an investment decision. Further, the usual position is that a trustee may not make an investment if it were to gain a personal pecuniary advantage. The latter proposition emerges fromthe trustee's obligation as a fiduciary and the legal requirement that a trustee notprofit from a trust without proper authorisation.[27] Guardian Trust's fiduciary obligations are modified by statute, in the case of aFund established under s 29 of the 1967 Act.14 In particular, s 29(4) provides authority for a trustee company to invest trust funds in one of its Funds if all co- trustees agree. Guardian Trust is also entitled to charge management fees.15[28] The evidence establishes that all co-trustees did agree. Given the statutory authorisation for Guardian Trust and a co-trustee to invest in a Fund created under s 29 of the 1967 Act, a co-trustee cannot be regarded as a member of the public for whose benefit it is necessary to register a prospectus.[29] For those reasons, only allotments made in respect of the 15 investments identified by Guardian Trust were issued in contravention of s 37(1).13 See, generally, Re AIC Merchant Finance Ltd [1990] 2 NZLR 385 (CA) at 389; "an allotment" is"acceptance of the offer by the particular investor" per Richardson J, with whom neither Casey Jnor Doogue J expressed disagreement on the point.14 Section 29 of the Trustee Companies Act 1967 is set out at para [14] above.15 Trustee Companies (Group Investment Funds: Disclosure of Expenses and Management Fees)Regulations 2003. These Regulations require proper disclosure of management fees andexpenses to be charged against the trust property.Declaratory relief[30] Is it appropriate to grant discretionary relief in the form pleaded16 when persons who might be adversely affected by the declaration are not represented before the Court? Although Mr Thorp has been present to put forward submissions in relation to the position of the remaining investors, they have not been joined as parties. Nor have they had the opportunity to give instructions to Mr Thorp specifically.[31] Last year, I had cause to consider whether Court orders should be made in a case in which non-parties might be adversely affected by them and later take a contrary view on the point. In QBE Insurance (International) Ltd v MTEC Consultants Ltd,17 I reviewed relevant authority in the context of an application made by an insurer for directions requiring all persons who intended to make claims against an insured to file proceedings against the insured within 14 days of the date of a judgment, so that the insurer knew with whom it could treat to settle claims and obtain a valid discharge, for the purposes of s 9(6) of the Law Reform Act 1936. InQBE, I declined to make the declaration sought, saying:[29] My concerns revolve around the position of non-parties; in particular:(a) the extent to which (if at all) it is appropriate for the Court to make a purported binding order on non-parties who have not had the opportunity to be heard.(b) the possibility that particular owners may not yet have an accrued cause of action.(c) the possibility that, well after the time for filing a proceeding may have expired, a non-party to this proceeding might either issue proceedings (on the basis that it is not bound by the order) or apply to set it aside and resurrect the problem that the Insurers are trying to foreclose.[30] Where claims are brought in personam, only those who have an opportunity to be heard on an application or proceeding can be bound by any orders made in it. In a general proceeding, parties must be joined, either as a plaintiff or a defendant. On an originating application, such as this, a non- party may be ordered to be served, in which case it will (for practical16 See para [10] above.17 QBE Insurance (International) Ltd v MTEC Consultants Ltd [2012] NZHC 2861.purposes) acquire the status of a party and will be bound by any orders made on the application.(footnotes omitted)[32] In my view, similar principles apply in this case. It would be futile to make a declaration in circumstances where non-parties are not bound by it and might later take a different view. For that reason, I decline to provide the declaratory relief sought.Result[33] For the reasons given, I make an order under s 37AH(1) of the 1978 Act relieving Guardian Trust from any statutory or other consequences arising out of the invalid allotment of interests in the Funds to the 15 investors. I decline to grant the declaratory relief sought.[34] As to costs, Guardian Trust accepts that it must bear all consequences as to costs, given that it has been necessary to seek an indulgence from the Court. I order Guardian Trust to pay from its general assets (not the assets of any trust property with which this proceeding is concerned) the reasonable solicitor and client costs incurred by the Authority, Mr Parr and amicus curiae. If there were any disputes as to quantum, leave is reserved to apply for further directions.[35] I thank all counsel for their assistance. In particular, I acknowledge the comprehensive and helpful submissions made by Mr Thorp, in his role as amicus.___________________________P R Heath JDelivered at 10.30am on 5 March 2013