09 August 2012

Blue Chip: Hickman v. Turner & Waverley Ltd


In a ruling with implications for proportionate sales of commercial property, a substance-over-form approach has been adopted by the Supreme Court in the interpretation of Blue Chip investment contracts.  Blue Chip’s financing construction of inner city apartments were in the form of contracts for the sale of land which are exempt from securities law but were held to be in substance debt securities unenforceable because Blue Chip did not issue a prospectus.
It has been a long battle for Blue Chip investors who signed up for over-priced apartments to be constructed in Auckland’s central business districts.  Led to believe they were lending money to finance the construction of apartment blocks, they later discovered they were committed to buying a finished apartment and at risk of losing their own debt-free homes to meet their commitment.
Newspaper reports have indicated that deals have been struck by some investors allowing them to stay in their own homes with Blue Chip apartment debts deferred until their death, to be paid out of their estate.
Blue Chip sought money from public investors to finance the construction of three Auckland inner city projects.   The primary funder in each case was Westpac Bank.  A specified level of pre-sales was a condition of bank funding being released.  Blue Chip agreed to underwrite the pre-sales.  Sales levels were achieved by making sales to short-term investors with the intention that second purchasers would take out the original buyer when each development was completed over the next eight to nine months.  When the market collapsed, these short-term investors were left as the only “buyer” and committed to paying the purchase price.
Both the High Court and the Court of Appeal dismissed investor arguments that their contracts were securities governed by the Securities Act, being void and unenforceable because Blue Chip did not issue a prospectus for the securities offered to the public.
Each investor had signed up to a web of contracts which included a sale and purchase agreement for a specified apartment.  Both Courts ruled the sale and purchase agreement was the primary contract and exempt from Securities Act requirements because contracts for the sale of land do not require a prospectus.
The Supreme Court took a different view.
In substance, each of the web of transactions put in front of an intending investor amounted to a debt security offered to the public.  Blue Chip was offering to pay money to investors who signed contracts and stumped up with the deposit for an apartment.  Investors were offered reimbursement for the deposit paid and promised a return for the money invested.  This created a debt payable by Blue Chip.  The sale and purchase agreements were secondary to the creditor/debtor relationship.  Rights of repayment were the primary feature of the web of transactions.  This was not an ordinary apartment purchase with the buyer intended to take ownership and possession.
The Supreme Court ruled that sales of real estate become securities governed by the Securities Act when accompanied by collateral arrangements intended to provide a return to investors based on the efforts of others.  Examples can arise in proportionate sales of agricultural and commercial properties where shares in a property-based business are offered to the public for investment.
In the case of Blue Chip contracts, the Supreme Court ruled that each Blue Chip investor needed to return to the High Court to prove the circumstances of their individual case before their contract was invalidated.  Those investors signing agreements for sale and purchase at the same time or after signing up to a Blue Chip financing package will have their agreements ruled unenforceable as being in breach of the Securities Act.  But those investors who signed an agreement for sale and purchase before being introduced to Blue Chip must prove in their individual case that the transactions were linked in such a way as to be an issue of debt securities in breach of the Act.
Hickman v. Turner & Waverley Ltd – Supreme Court (9.08.12)
12.020