HLH Equity Trading Limited v White HC Tauranga CIV 2009-470-40 [2010] NZHC 1107 (19 May 2010)

Last Updated: 7 July 2010

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

_{CIV-2009-470-40}

BETWEEN HLH EQUITY TRADING LIMITED First Plaintiff

AND THE GOOD WORKS COMPANY LIMITED

Second Plaintiff

AND ELIZABETH MARIE VAN DEN BERG Third Plaintiff

AND THEO BOSCH AND THERESA BOSCH Fourth Plaintiffs

AND ELIZABETH SCHUBERT Fifth Plaintiff

AND SHARON YVONNE ADAMS Sixth Plaintiff

AND LESLIE RAYMOND WHITE First Defendant

AND JANINE ARABELLA (PREV WHITE) Second Defendant

AND PROGRESSIVE CONCEPTS LIMITED (IN LIQUIDATION)

Third Defendant

AND GISBORNE SUNRISE APARTMENT TRUSTEE LIMITED (IN LIQUIDATION) Fourth Defendant

Hearing: 17-19 May 2010 (Heard at ROTORUA)

Appearances: Mr C T Patterson for plaintiffs

Second defendant in person

_{Judgment: 19 May 2010 at 2 pm}

HLH EQUITY TRADING LIMITED AND ORS V LESLIE RAYMOND WHITE AND ORS HC TAU CIV-

2009-470-40 19 May 2010

Reasons: 1 July 2010

_{REASONS FOR JUDGMENT OF LANG J}

This judgment was delivered by me on 1 July 2010 at 2 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors:

Graeme Skeates Law, Auckland

Counsel:

Mr C T Patterson, Auckland

Copy to:

_{Ms J Arabella, Papamoa, Tauranga}

2

[1] The plaintiffs in this proceeding all invested large sums of money in property projects promoted by the first defendant, Mr Leslie White, and the second defendant, Ms Janine Arabella. The projects were located in Timaru, Henderson and Gisborne and were undertaken using trading trusts known as the Our Daily Bread Trust and the Gisborne Sunrise Trust. The third and fourth defendants, Progressive Concepts Limited and Gisborne Sunrise Apartment Trustee Limited, were the corporate trustees of those trusts.

[2] The investments have been disastrous. All of the plaintiffs have lost significant sums of money. In virtually every case the entire investment has been lost. The two trustee companies are now in liquidation, and Mr White is bankrupt. There is virtually no money available for distribution to the plaintiffs or to other investors.

[3] Matters have been made significantly worse by the fact that Ms Arabella and Mr White separated in extremely acrimonious circumstances in September 2008. Once that occurred, the plaintiffs found it very difficult to obtain reliable information regarding the status of their investments. It has also led to Ms Arabella and Mr White each blaming the other for the manner in which the investments have failed.

[4] The plaintiffs now seek redress against Ms Arabella. Originally they contended that she was liable to them for misleading and/or deceptive conduct under the provisions of the Fair Trading Act 1986. They also argued that she was liable to them for breaches of the Securities Act 1978 in relation to the manner in which she and Mr White promoted the schemes. Some of the plaintiffs also contended that Ms Arabella was liable to them under personal guarantees that she and Mr White gave to investors, and that she has failed to honour pledges that she and Mr White made to repay monies to the investors in the schemes.

[5] At the conclusion of the evidence counsel for the plaintiffs abandoned all causes of action other than that based on alleged breaches of the Securities Act 1978. That is therefore the only issue that I am required to determine.

[6] At the end of the hearing I entered judgment in favour of those plaintiffs who had invested in the Henderson and Timaru projects. At that time I also entered judgment in favour of Ms Arabella in respect of the claims by those plaintiffs who had invested in the Gisborne project. I explained to those present in court at that time the reasoning that led me to determine the proceeding in that manner. I now record this in written form.

[7] I begin by considering the circumstances in which the plaintiffs came to make their investments.

The circumstances in which the plaintiffs made their investments

HLH Equity Holdings Limited

[8] Originally the first plaintiffs were HL Hope Property Limited and HMY Property Limited. Those companies have now assigned any cause of action arising out of their dealings with Mr White and Ms Arabella to HLH Equity Holdings Limited as part of an accounting restructure. No issue arises out of that fact for present purposes.

[9] Mr Hideo Yoshihama is the director and shareholder of all three companies and, at all material times, dealt with Mr White and Ms Arabella on behalf of the first plaintiff.

[10] Mr Yoshihama and his wife first met Mr White at a meeting for potential investors. They had been referred to Mr White by a friend, the sixth plaintiff Ms Sharon Adams. At this meeting Mr White introduced Mr Yoshihama to an investment involving the subdivision and development of the property situated at

127 Sunnyside Road, Henderson (“the Henderson property”). This property was formerly owned by Ms Arabella’s parents.

[11] On or about 14 May 2007 Mr Yoshihama (via HL Hope Property Limited as trustee of the HL Hope Property Trust) invested the sum of $100,000 in the

Henderson project. In return he received a certificate confirming that he held

“debenture stock” in Progressive Concepts Limited.

[12] Before Mr Yoshihama committed his company to the investment Mr White had told him that it would take between two to four months to get the resource consent for the Henderson property. He also told Mr Yoshihama that, if the resource consent did not come through, the sum that he had invested, together with interest calculated at the rate of 10 per cent per annum, would be returned to him.

[13] Two months later, in July 2007, Mr Yoshihama organised a meeting at his home at which Mr White introduced himself and made a presentation to other potential investors. Ms Arabella was also present at this meeting. During the meeting, Mr White and Ms Arabella made a power point display that began with a section headed up “Who we are – Les and Janine White”. This part of the presentation described Mr White and Ms Arabella, and also described their past successes in the field of property development. It said that they had been involved in no fewer than 20 development projects throughout New Zealand. These had involved 76 properties, with a profit return on each of $50,000 to $1.2 million. Mr White frankly admitted during his evidence that these claims were incorrect, and that he and Ms Arabella had not been involved in property development to the extent claimed in the presentation.

[14] At this meeting Mr White and Ms Arabella introduced the Gisborne Sunrise Apartment development (“the Gisborne Sunrise property”) to investors, and a significant portion of the presentation related to promotion of that venture.

[15] Subsequently, on or about 9 October 2007, Mr Yoshihama (via a trading trust, the HMY Property Trust) invested $200,000 in the Gisborne project. When he did so, he applied for “investment stock” in Gisborne Sunrise Apartment Trustee Limited. His application recorded that he was acquiring 20 shares in the company for the sum of $200,000.

The Good Works Company Limited

[16] Ms Jennifer Nelson is one of the directors and shareholders of the second plaintiff, the Good Works Company Limited. She set the company up in August

2007 with her sons and daughters-in-law in order to invest funds with the defendants.

[17] Her close friend Sharon Adams, the sixth plaintiff, told her about Mr White and Ms Arabella and their companies. Ms Adams had by that stage already invested funds with them and was happy with the way in which things were going. For that reason Ms Nelson decided to invest monies with them as well.

[18] On 7 November 2007 Ms Nelson signed a Debenture Application and paid the sum of $200,000 into the bank account of Progressive Concepts Limited. In return her company received debenture stock in Progressive Concepts Limited. In making her investment Ms Nelson believed that her family was investing in the Henderson property development project that Progressive Concepts Limited was undertaking. Her belief was strengthened when Mr White subsequently offered her employment with Progressive Concepts Limited as assistant project manager for the Henderson project.

Ms Elizabeth van den Berg

[19] Ms van den Berg was introduced to Mr White through Mr Yoshihama’s wife. Mrs Yoshihama told her that Mr White and Ms Arabella were a lovely Christian couple who had bought land in Timaru, and wanted to bless other Christian folk by offering them an opportunity to buy into their projects. They were also promising favourable returns on investments. Ms van den Berg was desperate to own her own home, having recently arrived in New Zealand from South Africa.

[20] Ms van den Berg’s first meeting was with Mr White, who told her that he and his wife owned assets having a net value in excess of $3 million.

[21] Ms van den Berg ultimately chose to invest in two of the remaining sections in the Totara Park development. On 24 August 2007 she applied to invest the sum of

$200,000 in debenture stock with Progressive Concepts Limited. Progressive Concepts Limited accepted her application and issued her with debenture stock. She was subsequently repaid the sum of $34,000, but the balance of her investment remains owing.

[22] Ms van den Berg did not meet Ms Arabella after she had committed herself to this investment. Ms van den Berg needed to wait until three term deposits matured in September 2007 before she could make funds available for her investment. She recalls that Ms Arabella contacted her on several occasions during the period leading up to the release of the funds. She says that Ms Arabella appeared to be involved in the financial side of the investments, and that she was “very pushy” and rude.

[23] Ms van den Berg also gave evidence about an incident that occurred when she went to the home of Mr White and Ms Arabella and Mr White showed her some plans relating to the Gisborne project. Ms Arabella was present and became angry when this occurred. Ms van den Berg said that an “altercation” between Mr White and Ms Arabella then took place. Ms van den Berg gained the impression that Ms Arabella’s anger stemmed from the fact that she considered that Mr White should not be showing the plans to third parties when she (Ms Arabella) had not seen them first.

Mr and Mrs Theo and Theresa Bosch

[24] Mr and Mrs Bosch met Mr White at a meeting where he spoke about his investments and his proposal to develop apartments in Gisborne, as well as the development of 127 Sunnyside Road, Henderson.

[25] Mr and Mrs Bosch agreed in November 2007 to invest the sum of $200,000 in the Gisborne development and a further $100,000 in the Henderson property.

[26] On or about 7 November 2007, they paid $200,000 into the bank account of Gisborne Sunrise Apartment Trustee Limited, having signed a Deed of Acknowledgment of Debt with that company on the same date. The deed recorded that Mr Bosch would be repaid in full, together with interest at 20 per cent, upon resource consent being issued for the Gisborne project. Mr Bosch said that he believes that that document arrived by fax or e-mail, and he did not see either Mr White or Ms Arabella on the day that he and his wife signed the document. Their signatures on the document were witnessed by Ms van den Berg.

[27] On or about 16 November 2007, Mr and Mrs Bosch paid the sum of

$100,000 into the bank account of Progressive Concepts Limited, having earlier signed an application for debenture stock in that company on 7 November 2007.

[28] Mr Bosch says that he may have spoken to Ms Arabella at some stage at about the time at which he and his wife transferred their funds to Progressive Concepts Limited and Gisborne Sunrise Apartment Trustee Limited, but he gives no details of those discussions.

Ms Elizabeth Schubert

[29] Sharon Adams introduced Ms Schubert to Mr White at a meeting held in November 2007. At this meeting Mr White presented the Gisborne Sunrise development as an investment opportunity, and expressed a desire to provide financial help to those in the Christian community. He said that property investment was “easy”, and he expressed confidence in the Gisborne project.

[30] Acting on these representations, Ms Schubert invested the sum of $50,000 in the Gisborne project on 1 December 2007. On the same date Gisborne Sunrise Apartment Trustee Limited signed a Deed of Acknowledgment of Debt acknowledging the advance that she had made. The deed provided for Ms Schubert to be repaid in full, together with interest at 15 per cent, once resource consent was granted for the Gisborne project.

Ms Sharon Adams

[31] Ms Adams met Ms White through a mutual friend at a church function in late

2005. Ms Arabella subsequently travelled to Papamoa, where she stayed for a weekend with Mr White and Ms Arabella. Whilst there, Mr White and Ms Arabella offered her the opportunity to invest in their property development at Brown Street in Timaru where duplex houses were being built. She was told that Mr White and Ms Arabella were family-oriented Christian people who had previous experience in investing, and wanted to share this gift with other Christian people.

[32] Ms Adams agreed to invest $20,000 in the Brown Street project on the basis that she was to receive a 50 per cent guaranteed return. A few months later, she received her investment back, together with the sum of $10,000 as per the guarantee.

[33] Ms Adams then proceeded to invest in the construction of apartments on a property situated at 84 Grey Road, Timaru. On or about 23 March 2006 she paid the sum of $60,000 towards the latter development, and she also allowed her original investment of $20,000 to be transferred into it. This meant that she invested a total of $80,000 in the Grey Road development. When she made the payment of $60,000, she applied for debenture stock in Progressive Concepts Limited. The application form stated that Ms Adams would be repaid on the sale of the Grey Road property and her return would be “prorated [sic] on sale of the property less costs of the project including a 10 per cent project fee on completed valuation of each apartment”. On or about 10 April 2006 Ms Adams received a certificate signed by Mr White and Ms Arabella confirming that she was the owner of debenture stock in Progressive Concepts Limited.

[34] Ms Adams ultimately became the owner of 49 per cent of ERL Investments Limited, a company formed to undertake the Grey Road development. Progressive Concepts Limited owned the remaining shares in that company.

[35] On or about 7 June 2006 Ms Adams agreed to invest the sum of $60,000 in the Totara Park development. She did so having applied on the same date for debenture stock in Progressive Concepts Limited. On or about 8 June 2006 Ms

Adams paid the sum of $60,000 into the bank account of Progressive Concepts

Limited.

[36] In or about August 2007 Ms Adams was staying with Mr White and Ms

Arabella at their property in Papamoa when they offered to pay her the sum of

$25,000. They said that this payment was to recognise the assistance that she had provided in introducing others to their business.

[37] In addition to that sum Ms Adams received the sum of $21,500 from

Progressive Concepts Limited on or about 27 March 2008 and a further payment of

$38,890.27 on 2 May 2008. This means that she has received a total sum of

$60,390.27 back from Progressive Concepts Limited.

[38] Against that background I turn to consider the requirements imposed by the

Act.

Did the provisions of the Securities Act 1978 apply to the plaintiffs’

investments?

[39] The Securities Act 1978 was enacted, as its long title confirms, to amend and extend the law relating to the offering of securities to the public.

[40] In Re AIC International Limited [1990] 2 NZLR 385 the Court of Appeal said at 391:

The Securities Act is limited in its operation. As the long title indicates it is directed and confined to the offering of securities to the public. Part II imposes restrictions on the offer and allotment of securities to the public. The key provision, s 33(1), prohibits the making of an offer of securities to the public unless it is made in or is accompanied by a registered prospectus that complies with the Act and all regulations made under the Act. That is followed by provisions covering ... advertising (s 38 and 38A). ...

[41] Section 33(1) of the Act provides:

33 Restrictions on offer of securities to the public

(1) No security shall be offered to the public for subscription, by or on behalf of an issuer, unless—

(a) The offer is made in, or accompanied by, an authorised advertisement that is an investment statement that complies with this Act and regulations; or

(b) The offer is made in an authorised advertisement that is not an investment statement; or

(c) The offer is made in, or accompanied by, a registered prospectus that complies with this Act and regulations.

[42] Section 37 of the Act provides for void irregular allotments. It provides as follows:

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.

(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—

_{(a) Repealed.}

_...

(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.

[43] Mr White and Ms Arabella never registered a prospectus or produced an investment statement in relation to any of the projects that are relevant to this proceeding. They did not endeavour to comply with the requirements of the Act at

all. If the Act applied to the investments that they promoted, they and their companies will therefore have breached s 33(1).

Were “securities” offered to the plaintiffs?

[44] Before an offering will be caught by s 37, it must relate to a “security” in terms of the Act. The definition of “security” is to be found in s 2D, which provides:

2D Meaning of “security”

(1) In this Act, unless the context otherwise requires, the term security means any interest or right to participate in any capital, assets, earnings, royalties, or other property of any person; and includes—

(a) An equity security; and

(b) A debt security; and

(c) A unit in a unit trust; and

(d) An interest in a superannuation scheme; and

(e) A life insurance policy; and

(f) Any interest or right that is declared by regulations to be a security for the purposes of this Act; and (g) Any renewal or variation of the terms or conditions of any such interest or right;—but does not include any such interest or right (other than a security referred to in paragraph (f) of this subsection) that is declared by regulations not to be a security for the purposes of this Act.

(2) Where the terms of a security require or allow the subscriber to pay separate amounts of money at different times, each such payment shall, for the purposes of this Act, be treated as payment for the same security as each other payment.

[45] Section 2, the definitions section of the Act, defines the terms “equity security”, “debt security” and “participatory security” as follows:

Equity security means any interest in or right to a share in, or in the share capital of, a company; and includes—

(a) A preference share, and company stock; and

(b) A security that is declared by regulations to be an equity security for the purposes of this Act; and

(c) A renewal or variation of the terms or conditions of any such interest or right or a security referred to in paragraph (a) or paragraph (b) of this definition;—

but does not include any such interest or right or a security referred to in paragraph (a) or paragraph (c) of this definition that is declared by regulations not to be an equity security for the purposes of this Act:

Debt security means any interest in or right to be paid money that is, or is to be, deposited with, lent to, or otherwise owing by, any person (whether or not the interest or right is secured by a charge over any property); and includes—

(a) A debenture, debenture stock, bond, note, certificate of deposit, and convertible note; and

(b) An interest or right that is declared by regulations to be a debt security for the purposes of this Act; and

(c) A renewal or variation of the terms or conditions of any such interest or right or of a security referred to in paragraph (a) or paragraph (b) of this definition;—

but does not include—

(d) An interest in a contributory mortgage where the interest is offered by a contributory mortgage broker; or

(e) Any such interest or right or a security referred to in paragraph (a) or paragraph (c) of this definition that is declared by regulations not to be a debt security for the purposes of this Act:

Participatory security means any security other than— (a) An equity security; or

(b) A debt security; or

(c) A unit in a unit trust; or

(d) An interest in a superannuation scheme; or

(e) A life insurance policy:

[46] The narrative at [8] to [37] discloses that those who were responsible for processing the investments on behalf of the trustee companies adopted differing approaches to the manner in which the investments were described.

[47] Mr and Mrs Bosch, Ms Schubert and Mr Yoshihama’s company all invested in the Gisborne project. The investments by Ms Schubert and Mr and Mrs Bosch were the subject of the Deeds of Acknowledgment of Debt. They fall clearly within

the definition of debt securities under the Act. Mr Yoshihama’s investment, involving as it did the acquisition of stock or shares, is most appropriately described as an equity security. If it is not an equity security it clearly falls within the definition of a security, because it involved the acquisition of capital in Gisborne Sunrise Apartment Trustee. If it was not an equity security it would therefore be a participatory security.

[48] All of the plaintiffs who invested in the Henderson and Totara Park projects applied for debenture stock and in some cases they received debenture certificates. Those investments involved the issue of debt securities, because a debenture is expressly included within the definition of debt security.

[49] As a result, I have concluded that all of the plaintiffs accepted an offer to subscribe for securities as that term is defined in the Act.

Were the securities offered to the public?

[50] Section 37(1) only applies to securities that are offered to the public. The manner in which this requirement is to be construed is prescribed by s 3 of the Act, which provides as follows:

3 Construction of references to offering securities to the public

(1) Any reference in this Act to an offer of securities to the public shall be construed as including—

(a) A reference to offering the securities to any section of the public, however selected; and

(b) A reference to offering the securities to individual members of the public selected at random; and

(c) A reference to offering the securities to a person if the person became known to the offeror as a result of any advertisement made by or on behalf of the offeror and that was intended or likely to result in the public seeking further information or advice about any investment opportunity or services,—

whether or not any such offer is calculated to result in the securities becoming available for subscription by persons other than those receiving the offer.

(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:

(ii) Persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money:

(iia) persons who are each required to pay a minimum subscription price of at least $500,000 for the securities before the allotment of those securities:

(iib) persons who have each previously paid a minimum subscription price of at least $500,000 for securities (the initial securities) in a single transaction before the allotment of the initial securities, provided that—

(A) the offer of the securities is made by the issuer of the initial securities; and

(B) the offer of the securities is made within 18 months of the date of the first allotment of the initial securities:

(iii) Any other person who in all the circumstances can properly be regarded as having been selected otherwise than as a member of the public:

...

[51] The investors in the present case were clearly members of the public who came to be introduced to Mr White and Ms Arabella as a result of recommendations by their friends and associates. They had no common feature that could cause them to be regarded as other than randomly selected. None of them were relatives or close business associates of Mr White and Ms Arabella. None of them could be described as persons whose principal business was the investment of money or who could otherwise be described as habitual investors.

[52] For that reason I have no doubt that the securities in the present case were offered and issued to members of the public in terms of s 3 of the Act.

Conclusion

[53] These findings mean that the requirements of the Act applied to each of the investments that the plaintiffs made. The fact that the issuer of the securities did not comply with those requirements means that each allotment is void by virtue of s 37(4) of the Act.

[54] Section 37(5) of the Act requires the issuer of the security to repay subscriptions in full as soon as reasonably practicable whenever the section operates to prevent an allotment being made. Neither Progressive Concepts Limited nor Gisborne Sunrise Apartment Limited has been able to repay the investors to date. There is now no prospect that either will be able to do so in the future.

[55] As a result, the directors of each company are liable to repay the subscriptions by virtue of s 37(6) of the Act.

[56] There is no difficulty in this context so far as Progressive Enterprises is concerned. Ms Arabella is a director of that company and is therefore now liable to repay the subscriptions that the plaintiffs paid to that company.

[57] The position is more complicated so far as Gisborne Sunrise Apartment Ltd is concerned, because Ms Arabella has never been a director of that company. For that reason she argues that she cannot be liable under s 37(6) to repay subscriptions paid to that company. The plaintiffs disagree. They contend that the Act operates to render Ms Arabella liable as a director notwithstanding the fact that she was never formally appointed as such. This is the next issue that I need to determine.

Is Ms Arabella a director of Gisborne Sunrise Apartment Limited for the purpose of s 37(6) of the Act?

[58] The argument for the plaintiffs is based on the definition of the term

“director” in the Act. That definition is as follows:

director means—

(a) In relation to a company, any person occupying the position of a director of the company by whatever name called:

(b) ...

[59] The plaintiffs contend that, although Ms Arabella was never formally appointed as a director, nevertheless she acted in all respects as if she was a director. For that reason the plaintiffs argue that she was a person who for all practical purposes was occupying the position of a director.

[60] This is an issue that is far from straightforward, and there is no New Zealand authority directly on point. There is some authority in relation to the definition of “director” in the Companies Act 1993, which is drafted in similar terms to the definition in the Securities Act 1978. The definition of “director” in the Companies Act is expressly inclusive, however, in the sense that it defines what the term “director” includes. It does not define what it means. The authorities suggest that persons who are not formally or validly appointed as directors under the Companies Act may nevertheless be treated as directors for some, but not all, purposes under that Act: See eg Clark v Libra Developments Limited [2007] 2 NZLR 709 at [179]. That does not provide much assistance in the context of the present case.

[61] The fact that the definition in the Securities Act is exhaustive is, in my view, significant. It suggests that Parliament did not intend an overly broad interpretation to be applied. That is to be contrasted with the position under the Companies Act1993, where Parliament has opted for an open-ended definition. Having said that, the definition in the Securities Act 1978 is clearly intended to allow persons who are not formally, or validly, appointed as directors under the Companies Act

1993 to be regarded as directors for the purposes of the Act.

[62] In the United Kingdom several legislative definitions of the term “director”

use wording similar to those used in the Companies Act 1993 and the Securities Act

1978. In such cases the words “any person occupying the position of a director of the company by whatever name” have been equated with de facto directorship, a notion that has been understood for many years. In Re Hydrodan (Corby) Ltd [1994] BCC 161 Millett J said at 163:

A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a

person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.

[63] In Re Kaytech International Plc [1999] BCC 390 (CA) at 400-401 Robert Walker LJ cited the following examples of cases in which unsuccessful attempts have been made to have a person categorised as a de facto director:

... In Richborough [Richborough Furniture Ltd [1996] BCC 155], Mr LloydQC decided that Mr Muncaster, a business consultant providing computerand other management services to a furniture-making company, was not a de facto director, despite his having undertaken extensive negotiations with creditors and performed some of the functions of a finance director. In Tjolle [Secretary of State for Trade and Industry v Tjolle [1998] BCLC 333] Jacob J reached the same conclusion in relation to Mrs Kenning, a manager employed by a holiday company who was given the courtesy title of deputy managing director and sometimes attended board meetings, but was never in a position of real power.

[64] In Tjolle Jacob J referred to the tests that had been applied in Richborough and

Re Hydrodan (Corby) Ltd and said at 343-344:

For myself I think it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks ‘was this individual part of the corporate governing structure’, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.

In this regard I think it very important to remember that an alleged de facto director can only be such by reason of the factual position. De jure directors have both common law and statutory powers and duties. In particular they are entitled to be at the heart of the company, and to have proper details of its financial position. They cannot be heard to say: ‘I had no way of knowing what the position was’. But an alleged de facto director is in a different position. De facto they may have had no knowledge and no right or means to have that knowledge. This is important in this case, because the Secretary of

State’s case in part relies on what he alleges Mrs Kenning ought to have known. Mr Davies contends that one is either a director or not. He says there are no different rules for de facto directors as opposed to de jure directors. I think that must be right, but I think it follows that someone who has no, or only peripheral knowledge of matters of vital company concern (eg financial state) and has no right, legal or de facto, to access to such matters is not to be regarded by the law as in substance a director.

[65] I consider that this is the most helpful way in which to approach the test to be applied in the present situation. A holistic approach is required, in which the Court is required to analyse all of the relevant evidence in order to determine, as a matter of fact, the role that the putative director played in the governance of the company. Persons who are not formally or validly appointed as directors will only be held liable to investors under the Act if it can be demonstrated that they carried out functions that would ordinarily be within the domain of the directors of the company.

[66] This approach properly takes into account the objects and purposes of the Securities Act 1978, one of which is to impose liability on those persons who are responsible for the actions of an issuer of securities that has failed to comply with the requirements of the Act. Ms Arabella should not be subject to liability under the Act unless the evidence demonstrates that she was truly part of the corporate governance of Gisborne Sunrise Apartment Trustee Limited. If that can be proved, however, it may be appropriate for her to bear responsibility for that company’s failure to meet its obligations under the Act.

[67] In his closing submissions counsel for the plaintiffs submitted that Ms Arabella’s role within the Gisborne company could be deduced from four aspects of the evidence:

(i) The fact that she presented a powerpoint demonstration that featured the Gisborne development at a meeting of prospective investors held at the home of Mr and Mrs Yoshihama in July or September 2007;

(ii) The fact that she had reviewed and approved a brochure relating to the

Gisborne development before it was distributed to potential investors;

(iii) The fact that she approved the payment by Gisborne Sunrise Apartment

Trustee Limited of a management fee amounting to approximately

$180,000 to Progressive Concepts Limited for work that it had undertaken to the Gisborne project;

(iv) The fact that she reprimanded Mr White when he showed Ms van den Berg plans relating to the Gisborne development before Ms Arabella had seen them.

[68] I agree that all of these factors are relevant to the factual assessment that I am required to make. That assessment must, however, be made against a much wider backdrop than the four factors upon which the plaintiffs rely.

[69] Several aspects of the evidence assist me to reach my conclusion regarding the role that Ms Arabella played in relation to the Gisborne project. First, there is the evidence relating to the formal structure of the company. Next, there is the meeting of investors at Mr Yoshihama’s home in Auckland. Allied to that is the issue of who prepared the material for that meeting and the brochure that was later given to investors. Thirdly, there is the evidence given by Ms Shoebridge, Mr White and Ms Shea regarding their perceptions of Ms Arabella’s role in relation to the Gisborne project. Fourthly, there is the pool of documentary evidence that the parties produced at trial. Finally, there are the factors relied upon by the plaintiffs and set out at [67] (iii) and (iv).

The formal structure of the Gisborne company

[70] An appropriate starting point in the present case is the manner in which the Gisborne company was formally structured. That, in my view, is a matter of real significance. Mr White and Ms Arabella must have discussed how that company was to be structured. A conscious decision was then made that Mr White would be the sole director of Gisborne Sunrise Apartment Trustee Limited. That is to be contrasted with the position in relation to Progressive Concepts Limited, in which both Mr White and Ms Arabella were directors.

[71] When I asked Mr White why Ms Arabella had not been appointed as a director of the Gisborne company, he appeared to accept that primary responsibility for the Gisborne project rested with him. He said that they were both busy at the time the Gisborne company was set up. He was working with a friend in Gisborne who owned the property that the development was to be built upon. He was the person who put the Gisborne project together, whilst Ms Arabella was involved in her career as an occupational therapist in Auckland.

[72] The fact that the parties decided that Ms Arabella would not be a director of the company indicates, in my view, that they acknowledged from the outset that Gisborne was principally to be Mr White’s project. It also indicates that they decided that he alone would be responsible for exercising the functions of a director.

[73] Allied to this is the fact that the company never formally held Ms Arabella out as a director, and she never held herself out as occupying that position.

The meeting at Mr Yoshihama’s home and the preparation of promotional material

[74] The meeting of investors at the home of Mr and Mrs Yoshihama is certainly significant. I have no doubt that Ms Arabella was involved in creating the powerpoint presentation and in presenting it to investors at that meeting. I am also satisfied that she had some involvement in the preparation of the brochure that was later given to investors. Those factors clearly suggest that Ms Arabella had an involvement in the Gisborne project, because information in relation to that project formed a significant part of the total presentation.

[75] It needs to be remembered, however, that the meeting was effectively a “sales pitch” to potential investors. The fact that Ms Arabella was involved as a salesperson who actively and enthusiastically helped to promote the Gisborne project does not necessarily mean that she was also involved in the corporate governance of the company responsible for that project. Even the most persuasive and enthusiastic salesperson may have no involvement in that aspect of his or her company’s affairs.

[76] It also needs to be borne in mind that the presentation did not relate solely to the Gisborne project. Part of it related to the Henderson and Timaru projects, in which Ms Arabella was obviously heavily involved.

[77] Finally, Ms Shoebridge, the company’s office administrator to whom I refer at [78] to [81], was under the clear impression that Mr White alone was responsible for organising the meeting. She had this impression because she was telephoned by people who were providing goods or services for the meeting. Those persons were trying to get hold of Mr White and not Ms Arabella. She believes that Ms White only came up to Auckland on the evening of the meeting, and that she was there principally in her capacity as Mr White’s wife.

The evidence of the witnesses

[78] Ms Shoebridge was employed by Ms Arabella between October 2007 and September 2008 as an office administrator. She worked up to two and a half days per week in the office from which all of the companies and trusts operated. She therefore had a valuable opportunity to view the dynamics of the business relationship between Mr White and Ms Arabella.

[79] Ms Shoebridge struck me as a level-headed and impartial witness who had nothing to gain by giving evidence. She gave her evidence in a measured and precise way, and was careful to qualify her answers when she was not sure that she could assist the Court. I did not gain the impression that she sided with either party in relation to the present dispute, although she accepted that she had given evidence on behalf of Ms Arabella in relation to proceedings in the Family Court. I do not consider that this fact undermined her impartiality in the slightest. I found her to be a truthful and reliable witness. To the extent that Ms Shoebridge’s evidence was in conflict with that of Mr White and Ms Shea, I have no hesitation in preferring the evidence of Ms Shoebridge.

[80] Ms Shoebridge had the clear impression that Ms Arabella was involved in making decisions for the Our Daily Bread Trust and FHP Investment Trust. She considered, however, that Ms Arabella did not make decisions on behalf of the

Gisborne Sunrise Trust. If Ms Shoebridge asked Ms Arabella questions about the Gisborne project, Ms Arabella would generally tell Ms Shoebridge to talk to Mr White about the issue or to leave him a note about it. Ms Shoebridge’s evidence was to the effect that she took directions from Mr White regarding the Gisborne project and not from Ms Arabella. She regarded Mr White as being responsible for the Gisborne project because he was a director of the Gisborne company and Ms Arabella was not. To the extent that she dealt with Ms Arabella in relation to that project, it was as a conduit to pass messages on to Mr White.

[81] I consider that Ms Shoebridge’s evidence points unequivocally to the fact that Ms Arabella was not part of the corporate governance structure of the Gisborne company.

[82] Ms Shea worked initially as an assistant to Ms Arabella in her occupational therapy business. Later she was employed as a nanny to look after Ms Arabella’s children. She was of the view that Ms Arabella was the “brains” behind all of the companies, and that Mr White played a role that was very much secondary to that played by Ms Arabella.

[83] I do not place any real weight upon Ms Shea’s observations. She was never directly involved in the business affairs of Mr White and Ms Arabella, so she did not have the same opportunity as Ms Shoebridge did to observe the business dynamics of the couple. It was also obvious when I asked Ms Shea questions about the businesses that she only had a very vague idea about how they operated. I therefore prefer the evidence of Ms Shoebridge in relation to the role that Ms Arabella played within the various businesses.

[84] Overall, I found Mr White’s evidence unconvincing. He was vague about many aspects of his companies’ affairs, and the thrust of his evidence appeared to be directed towards placing the blame upon Ms Arabella for the way in which the projects have caused loss to investors. He also attempted to place the sole responsibility for all aspects of the companies’ financial management on Ms Arabella.

[85] In doing so Mr White made several claims that cannot, in my view, be correct. By way of example, he said that Ms Arabella was responsible for preparing the debenture documentation that investors signed. That evidence was at odds with the evidence of Ms Shoebridge, who said that she prepared the debentures when she was working for Mr White and Ms Arabella between October 2007 and September

2008. She did so using the documentation that had been used in earlier similar transactions as a precedent. Similarly, Mr White said that Ms Arabella managed and paid all accounts and liaised with an external accountant in relation to the preparation of all financial documents. Again, that evidence does not reconcile with that of Ms Shoebridge. Ms Shoebridge said that she, and not Ms Arabella, was responsible for those aspects of the companies’ operations. I have no reason to doubt Ms Shoebridge’s evidence on either point. I therefore put the evidence of Mr White largely to one side.

[86] Ms Arabella did not give evidence, so I did not have the benefit of her views on this point. It is evident, however, from the questions that she directed to witnesses that her position is that she had no significant involvement in the Gisborne project.

The documentary evidence

[87] It is significant, in my view, that all written communications to investors in relation to the Gisborne project came from Mr White. Ms Arabella was never involved in any correspondence with investors relating to that project.

[88] The position was very different in relation to the Totara Park and Henderson projects. Ms Arabella sent numerous e-mails to investors in relation to those developments. This factor strongly supports the proposition that Mr White, and not Ms Arabella, was the person who had overall control of, and responsibility for, the Gisborne project.

[89] Also of significance is the fact that all of the investors in the Gisborne project met Mr White before they met Ms Arabella. This, too, suggests that it was primarily his project and that any involvement that Ms Arabella may have had was less

significant. This leads me to consider the remaining two factors that the plaintiffs rely upon.

The payment of the administration fee to Progressive Concepts Limited

[90] Ms Arabella undoubtedly knew about the payment of the administration fee that the Gisborne company paid to Progressive Concepts Limited. Whether or not she approved it on behalf of the Gisborne company is, however, unclear. She may well have been anxious for Progressive Concepts to obtain the money. Her role in that transaction may therefore have been primarily as a director of Progressive Concepts rather than in any capacity in relation to the Gisborne company. I therefore view this aspect of the evidence as a neutral factor.

The incident involving Ms van den Berg

[91] The incident that occurred when Mr White showed the plans relating to the Gisborne development to Ms Van den Berg is also, in my view, a neutral factor. I accept that it could be taken as demonstrating that Ms Arabella believed that she had an entitlement to see plans relating to the Gisborne development before potential investors did. On the other hand, it may show that Mr White believed that he was the person who had the ability to decide who should see the plans, and that he was entitled to make that decision without consulting Ms Arabella first. I therefore place no real weight on that factor.

Conclusion

[92] There can be no doubt that Ms Arabella knew about what was happening in the Gisborne project. She also played a part in promoting it. Her involvement in the meeting at Mr Yoshihama’s house and her involvement in preparing promotional material are testament to that. Those factors are not, however, sufficient to give her the status of a de facto director.

[93] I consider that three factors combine to prevent the plaintiffs from establishing that she had that status. First, there is the fact that the parties

deliberately chose to have Mr White as the sole director of the Gisborne company when they had structured the Henderson and Timaru projects in a different way. Next, there is the evidence of Ms Shoebridge, which I have accepted in preference to the evidence of Mr White and Ms Shea. Thirdly, there is the fact that Mr White was solely responsible for all written communications with investors in relation to the Gisborne project.

[94] Those factors persuade me that, although Ms Arabella undoubtably had an involvement in marketing and promoting the Gisborne project, her involvement did not go beyond that. In all other respects Mr White had responsibility for it. He alone was the person responsible for the corporate governance of Gisborne Sunrise Apartment Trustee Limited.

[95] As a result, the plaintiffs’ claims against Ms Arabella must fail in relation to the investments that they made in the Gisborne project.

Is Ms Arabella entitled to relief from liability in respect of the Henderson and

Timaru investments under the proviso to s 37(6)?

[96] The final issue I am required to determine is whether Ms Arabella is entitled to relief under the proviso to s 37(6) from liability in relation to the sums invested in the Henderson and Timaru projects.

[97] The proviso to s 37(6) provides that a director shall not be liable to repay subscriptions 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. The onus is therefore on the director, in this case Ms Arabella, to establish that the failure of the company to repay the subscriptions to the Henderson and Timaru projects did not arise as a result of any negligence or misconduct on her part. That onus will not be easy to satisfy when, as in the present case, the director does not give or call evidence on the point.

[98] I have concluded that relief is not available to Ms Arabella under the proviso. She was fully involved in the operations of the company and knew that it was

receiving monies from investors. As a director of Progressive Concepts Limited she had a responsibility to know the requirements of the Securities Act 1978. She also had an obligation to ensure that, if the allotments turned out to be void, the company would be in a position to repay investors. It was not sufficient for her to rely upon her fellow director or the company’s accountant. I am unable to say that the company’s inability to repay the subscriptions occurred in the absence of negligence on her part. I stop short, however, of saying that it occurred as a result of any actual misconduct on her part.

Result

[99] For these reasons I entered judgment in favour of those plaintiffs who invested in the Henderson and Timaru projects for the sums that they invested in those projects, together with interest at the rate provided for in the Act and Regulations.

[100] I entered judgment for Ms Arabella in relation to the claims by those plaintiffs who invested in the Gisborne project.

[101] I also made an order for costs and disbursements in favour of the successful plaintiffs. Costs are to be calculated on a category 2B basis.

Lang J