Directors
of the Hanover Group being sued for damages following alleged untrue statements
when raising funds from the public have failed in attempts to drag New Zealand
Guardian Trust and Perpetual Trust into the litigation as trustees for
debenture holders. The trustees’ job
overseeing investors’ interests did not extend to liability for any lies told
when Hanover raised investment funds from the public.
The Financial Markets
Authority is testing new statutory rules in the Securities Act which allows it
to sue on behalf of aggrieved investors with any damages recovered distributed
amongst harmed investors. It alleges
directors of the Hanover Group misrepresented the Group’s position in various
prospectuses, investments statements and advertisements during 2007 and 2008
when raising funds from the public. In
particular, the Authority alleges: there was a failure to disclose adverse
information showing deteriorating liquidity and reductions in reinvestment
rates; false claims were made regarding the Group’s prudential management
techniques; and a failure to disclose various related party transactions. These issues have yet to be decided in court.
In pre-trial manoeuvering,
Hanover directors argued NZ Guardian Trust and Perpetual Trust should be added to
the litigation as trustees for the debenture holders. Securities law requires a third party trustee
be appointed when a business borrows money from the public. The trustee’s job is to exercise oversight on
behalf of public investors. The extent
of oversight required is set out in both securities legislation and the
contract between the trustee and the borrowing company.
Hanover directors
argued that if they were liable, so too were the appointed trustee
companies. The Law Reform Act 1936 allows
the court to force into litigation outside parties who might be required to
contribute to any order for damages. The
1936 Act was intended as a tidy-up statute to prevent a multiplicity of legal
actions arising out of one set of circumstances. This procedural statute has seen some
creative use as litigants try to reduce their potential liability by dragging
others into the litigation.
In this case, Justice
Winkelmann ruled that Hanover directors and the trustees did not share
co-ordinate liability such that they should both be parties to the same
litigation.
Hanover directors are
being sued by the Financial Markets Authority for alleged misstatements in
company offer documents. Trustees for
debenture holders are under no obligation to check the content and accuracy of
these offer documents, said Justice Winkelmann.
That is the directors’ obligation.
The court was told
that Hanover directors had previously agreed to indemnify the trustees against
any legal claims. No claim for
contribution can be made under the Law Reform Act 1936 where the person making
the claim has agreed to indemnify the person they are claiming from.
Claims for
contribution against NZ Guardian and Perpetual Trust were struck out.
Financial
Markets Authority v. Hotchin – High Court (28.06.13)
13.018