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Court of Appeal of New Zealand |
Last Updated: 27 April 2016
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Hearing: |
23 February 2016 |
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Court: |
Randerson, Miller and Cooper JJ |
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Counsel: |
C R Carruthers QC and D M Lester for Appellant
F B Barton and A M Cunninghame for Respondent |
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Judgment: |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Miller J)
Introduction
[1] The appellants are investors who subscribed for shares in Lagoon Lodges Properties Ltd (Lagoon Lodges), Lagoon Lodges Properties Two Ltd (Lagoon Lodges Two) and Castaway Properties Ltd (Castaway). In separate proceedings they have sued those involved in making and implementing the offer of securities to them, alleging breaches of securities legislation.[1]
[2] The fifth respondent, MDS Law, were the solicitors to the issuers and to the second respondent, who was the director of each of the issuers. MDS Law admittedly held subscriptions on trust for investors pending the issue of securities. They have been sued in each proceeding on the ground that they are liable in tort, and in contract via the Contracts (Privity) Act 1982, and (now) for breach of trust. They have responded by seeking to strike out the claims against them, saying that they must fail on the facts pleaded and are inconsistent with their duties to their client and the structure of the securities legislation. In the High Court they succeeded in part, striking out (on limitation grounds) the claims so far as they relate to a portion of the subscriptions that was paid away more than six years before the proceeding was commenced.[2]
[3] The investors brought this appeal, saying that the claims should not have been struck out in part, and MDS Law cross-appealed, saying that they ought to have been struck out in full. For reasons that may be stated quite shortly, we are satisfied that the appeal must be allowed and the cross-appeal dismissed.
The facts
[4] It is important to recount the facts as pleaded and as they appear in documents put in evidence on the strike-out application. There was some controversy in the High Court about this latter material, but both parties now accept that we may consider it.
[5] The scheme began with a proposal to buy and unit title a resort property in the Cook Islands. The proposal was promoted by Neville Cant and Investment Management Ltd, (IML) a company of which he was a director. The idea was that IML would form companies to purchase unit titles in the resorts and investors would subscribe for shares in the companies, which would earn revenue from occupancy of the units. Pending allotment to investors, Mr Cant and Alison Kirkwood held the shares in Lagoon Lodges, Lagoon Lodges Two and Castaway, and were the directors of these companies.
[6] It was proposed that subscriptions would be received and shares allotted under an exemption under the Securities Act 1978 (the Act) — at that time still in force — pursuant to which “eligible persons” might subscribe to offers without a prospectus.[3] Persons were relevantly eligible if they were experienced in investing money or experienced in the industry or business to which the security related. The legislation required that an independent financial service provider verify that an investor was experienced.[4]
[7] Section 36A of the Act provided that an issuer had to ensure that subscriptions for securities offered to the public were held in trust for the subscribers until the securities were allotted or the subscriptions repaid to the subscribers.
[8] Between December 2006 and January 2007 the appellants made their investments in Lagoon Lodges. IML directed them to pay the funds into the trust account of MDS Law. That account was held for Lagoon Lodges, but it is not in dispute that MDS Law held the money on trust for the investors. At no time did MDS Law communicate directly with investors, but on 30 March 2007 the firm did issue cheques to each of them for interest earned on their funds. The cheques were forwarded to investors by IML.
[9] The Lagoon Lodges investors were the first to subscribe. Their subscriptions were paid between November 2006 and February 2007. Subscriptions for Castaway were paid in April and May 2007, and those for Lagoon Lodges Two were paid in June and July 2007.
[10] On 22 December 2006 $202,500 was paid to the vendor’s solicitors, Knight Coldicutt, as a part deposit on the purchase of units by Lagoon Lodges. It appears that investors were not aware at the time that this payment had been made.
[11] On 17 April 2007 an information memorandum was issued by Lagoon Lodges, Lagoon Lodges Two and Castaway. On the same date the third respondent, Doyle Financial Services Ltd (Doyle), acting through Steve Doyle, wrote to the investors in the capacity of an independent financial service provider, listing risks associated with the investment and expressing the opinion that the investors were experienced.[5] This communication was evidently intended to establish that the investors were eligible persons for purposes of the Act.
[12] It is said that MDS Law assumed an obligation to satisfy themselves about eligibility. There is some evidence to that effect. By letter of 19 April 2007 one of the partners of MDS Law, Mark Tutty, wrote to IML as follows:
We have had discussions with Alison Kirkwood in relation to the [Cook Island] matter today.
Agreement has been reached that we will not release any funds (Castaway or Lagoon Lodges) until we are fully satisfied and have given our opinion as to investors satisfying the eligible persons criteria.
Authorisation from the company to us will then need to be signed by both directors before any payments will be made. If you are not agreeable to us acting on this basis please advise now and we will redirect any funds received to the relevant parties.
[13] On the same day Ms Kirkwood wrote to MDS Law by email stating:
I have now read the document and will sign and return the relevant pages immediately on receipt of confirmation from you that you have examined the eligibility certification of each of the investors and that in your opinion, each of the investors meets the eligibility standards as specified in the Securities Act, and that the certifications have been carried out in a manner which will satisfy the Securities Commission.
[14] It appears that MDS Law subsequently took the view that investor certifications obtained by Doyle Services were not adequate to satisfy the eligible persons criterion. The firm advised IML accordingly.
[15] IML did not accept the firm’s advice. Mr Cant asserted that the criteria had been satisfied. He advised MDS Law by letter on 26 April 2007 that he would procure Lagoon Lodges to immediately issue and allot the shares, and he instructed the firm to advance subscriptions to that company and forward settlement proceeds to the vendor’s solicitor. He and other entities indemnified MDS Law “in relation to any loss arising from this matter” and waived any claim they might have against MDS Law:
LAGOON LODGES PROPERTIES LIMITED
I, Neville Cant, as sole director of Lagoon Lodges Properties Limited acknowledge:
Lagoon Lodges Properties Limited, Investment Management Limited, Combined Financial Services Limited and I, Neville Cant, indemnify MDS Law in relation to any loss arising from this matter and waive any claim we may have against MDS Law.
[16] The funds were duly released and securities allotted. It appears that they were allotted on or about 19 July 2007 for Lagoon Lodges and Castaway, and about 18 August 2007 for Lagoon Lodges Two. We understand that the investments were a failure.
[17] We were given to understand that Mr Cant has taken no part in the proceeding, which was commenced on 11 April 2013.
The pleadings
[18] The statement of claim as it stood when Whata J considered the strike-out application alleged simply that the appellants subscribed to securities issued by the first defendants, that at the time there was no registered prospectus, and that the allotment accordingly contravened s 37(1) of the Act. As against MDS Law, they alleged that the firm was under a duty in contract (via the Contracts (Privity) Act) and/or at common law to ensure that they were not deprived of the protection of the relevant provisions of the Securities Act.
[19] Since the hearing in the High Court an amended statement of claim has been filed. The claim is structured in the same way — that is, as a pleading that a prospectus was required, that the allotments were made without one, and that MDS Law owed the appellants a duty of care or was liable to them in contract. However, the particulars now include allegations that:
- (a) MDS Law agreed to accept funds to be applied as subscriptions for equity securities and agreed to hold the subscriptions in trust pending allotment or refund;
- (b) In terms of s 36A of the Act, MDS Law and the issuer agreed that MDS Law would hold the funds in trust for the appellants;
- (c) MDS Law accepted the appellants’ subscriptions for the purpose of allocating those funds to securities to be issued;
- (d) In breach of s 36A, MDS Law paid $202,500 of the funds to solicitors for the vendors on 20 December 2006;
- (e) MDS Law agreed in its letter of 19 April 2007 that they would not release funds until fully satisfied that the investors met the eligible persons criteria; and
- (f) MDS Law advised that the Doyle investor certifications did not satisfy eligible persons criteria, but nonetheless released subscriptions in return for an indemnity from the issuer.
[20] At the hearing before us, Mr Carruthers QC advised us that the pleading will be further amended to expressly plead a cause of action for breach of trust by MDS Law.
The cross-appeal
[21] Mr Barton advanced three broad grounds of appeal: the pleaded duties are incompatible with the statutory scheme, the duties are incompatible with the obligations of MDS Law to their client, the issuer, and the allegations cannot be made out from the facts. Accordingly, he submitted, the claim against MDS Law ought to have been struck out.
[22] So far as the first ground is concerned, Mr Barton emphasised that under the Act, eligibility required that an independent financial services provider be satisfied on reasonable grounds that the person was able, from experience of the relevant kind, to assess the relevant considerations, and that the financial service provider must give the person a written statement of reasons for being satisfied, and that the person must sign a written acknowledgement that he or she has received neither an investment statement nor a registered prospectus. Mr Barton emphasised that MDS Law is not a financial service provider and did not purport to be. On the contrary, that role was assigned to Doyle and duly performed by that firm. He emphasised that the obligations under s 37 are those of the issuer, and it is the issuer’s responsibility under s 36A to ensure that subscriptions are held in trust.
[23] No doubt a solicitor does not assume liability to investors merely by acting for the issuer in connection with the offer and allotment of securities. But solicitors may assume responsibility, as between themselves and the issuer — or the investors — for verifying that all of the statutory requirements have been met. In itself that function entails no conflict with the statutory scheme. It does not relieve the financial services provider or the issuer of their own obligations to investors. On the facts narrated above, there are indications that MDS Law did assume such a responsibility in this case.
[24] Mr Barton accepted that there are circumstances in which a solicitor may assume a duty of care to a non-client, but he submitted that that would occur only where the duty is compatible with the solicitor’s duties to the client, as with the testator and beneficiary in Gartside v Sheffield, Young & Ellis.[6] He further acknowledged that a duty might arise where a lawyer has a statutory duty to certify something and there is evidence that the lawyer assumed responsibility for the third party’s interests.[7] But, counsel submitted, the duty alleged in this case is not of that kind. Faced with instruction from their client to hand over the subscriptions, MDS Law had no choice but to comply.
[25] We agree that it is exceptional for a solicitor to assume a duty of care to a non-client, but it is possible. It is plausible, for example, that an issuer might assign to a solicitor its responsibility for holding subscriptions in trust, and further that it might use the solicitor as an honest broker, marketing an offer to investors by assuring them that the solicitor will hold the money in trust for them pending allotment. MDS Law did hold the subscriptions in trust for investors, and there are indications that the firm recognised they may have assumed responsibilities to investors. As noted above, the firm assumed responsibility for confirming that investor certifications by Doyle complied with the Act and agreed not to release subscriptions until they were so satisfied. Before following what appeared to be altered instructions by the issuer, the firm obtained an indemnity. As Mr Barton conceded, that indemnity extended to liability to the investors, and the inference may be available that the firm obtained it precisely because they wanted to protect themselves from investor claims.
[26] Mr Barton submitted that such a duty of care would be novel. That may be so, but it cannot be excluded summarily on the material before us. The question whether the duty ought to be recognised should be answered against the full factual context supplied by a trial.[8]
[27] Mr Barton also submitted that in various respects the claim must fail on the facts. For example, it is said that MDS Law did not have control of any relevant personal information, so could not assess whether the appellants were eligible persons, and further that its responsibility to the issuer was simply to pay out on instruction when the appropriate certification was placed before the firm.
[28] These and similar contested facts may well be proved at trial. It may be that no representations about MDS Law’s function were made to investors, and that investors knew nothing about arrangements between the issuer and MDS Law under which the firm undertook to advise the issuer about adequacy of the investor certifications. We are in no position to answer these questions now.[9]
[29] For these reasons, which are similar to those of Whata J, the cross-appeal must fail.
The appeal
[30] As noted, Whata J allowed the strike-out application in part, finding that a limitation defence must succeed in relation to the payment of $202,500 made on 22 December 2006. The Judge reasoned that the contract claim was premised on an agreement recorded in the letter dated 19 April 2007 and that agreement did not apply to funds that had already been released at the date of the agreement. The duty of care claim was also factually underpinned by the agreement of MDS Law to retain the funds and be satisfied that the appellants were eligible investors; it was broadly coextensive with the contract claim. That being so, the claims to the December 2006 payment must be time barred.
[31] Mr Carruthers challenged this reasoning on a number of grounds. In particular, he submitted that the claim does not depend on the 19 April 2007 letter but rather upon the statutory obligation assumed by MDS Law under s 36A of the Act.
[32] This leads us to remark that the pleading evidently presumes that the appellants were mere members of the public and embarked on their investment in that lay capacity from the beginning, but the material before us suggests rather that the appellants intended to invest without benefit of prospectus, relying on their own claims to the status of expert investors. That being so, one would expect that their subscriptions were to be held in trust pending compliance with the statutory prerequisites, which required not that a prospectus issue but that the appropriate certifications and acknowledgements be completed before allotment. It is only if investors were ineligible that the subsequent allotment was unlawful for want of a prospectus.[10] Mr Barton gave us to understand that MDS Law will assert that the appellants were in fact eligible investors.
[33] However, this is to say only that the question when a cause of action arose in contract or tort as between the appellants and MDS Law is controversial and the answer will likely turn on the facts as they emerge at trial. So far as the claim proceeds in tort, we observe too that the cause of action is not complete until loss has been suffered. Finally, we have noted that the appellants will now amend the pleading to add a cause of action for breach of trust. Consideration may need to be given to any limitation of action of defence relevant to such claim.
[34] For all of these reasons, we are satisfied that the appeal must be allowed and pleading restored so far as it concerns the December payment.
Decision
[35] The appeal is allowed and the cross-appeal is dismissed. The fifth respondent must pay the appellants one set of costs for a standard appeal on a band A basis, with provision for two counsel and usual disbursements.
Solicitors:
Hope & Associates
Legal, Oamaru for Appellants
[1] This appeal and cross-appeal encompass all three proceedings.
[2] Black v Lagoon Lodges Properties Ltd [2014] NZHC 3336 at [52]–[57]. The judgment was recalled on 22 January 2015 and errors relating to the date of commencement of the proceedings were amended. Justice Whata also took the opportunity to include the filing numbers of all three proceedings, though Lagoon Lodges Properties Two Ltd and Castaway Properties Ltd were not listed as defendants in either strike-out judgment: Black v Lagoon Lodges Properties Ltd [2015] NZHC 29.
[3] Part 5 of the Securities Act 1978, in particular s 5(2CB) and (2CC).
[4] Securities Act, s 5(2CE).
[5] Not all of the letters are in evidence but we understand that all investors are in the same position.
[6] Gartside v Sheffield, Young & Ellis [1983] NZCA 37; [1983] NZLR 37 (CA).
[7] Brownie Wills v Shrimpton [1998] 2 NZLR 320 (CA).
[8] Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.
[9] Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267; and Couch v Attorney-General, above n 8 at [33].
[10] Cowles v Syndicated Investigations Ltd (1998) 8 NZCLC 261,581 (HC).
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