Fitzalred Property Syndicate v White Fox & Jones HC Christchurch CIV 2008-409-1648
[2010] NZHC 844
•18 May 2010
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2008-409-001648
BETWEEN FITZALFRED PROPERTY SYNDICATE Plaintiff
ANDWHITE FOX & JONES First Defendant
ANDKENNETH JAMES JONES JACQUELIN LOWE Second Defendants
Hearing: 14 May 2010
Appearances: P F Whiteside for Plaintiff
R Butler for First Defendant
Judgment: 18 May 2010
JUDGMENT OF HON. JUSTICE FRENCH Reasons for Decision of 14 May 2010
Introduction
[1] This case has been set down for a two-week hearing commencing 24 May
2010.
[2] On 7 May 2010 the plaintiff filed an application for particular discovery against the first defendant.
[3] The first defendant opposes the application, and in light of the imminent fixture, the Court arranged an urgent hearing on 14 May 2010. Due to the time constraints after hearing argument, I gave an oral decision. Detailed reasons now
follow.
FITZALFRED PROPERTY SYNDICATE V WHITE FOX & JONES AND ORS HC CHCH CIV-2008-409-
001648 18 May 2010
Background
[4] The plaintiff is a property syndicate that was formed by the first defendant, a Christchurch law firm, White Fox and Jones. The second defendants are the individual partners in White Fox.
[5] The syndicate was formed to take over a contract for the purchase of a commercial property which had been entered into by a White Fox nominee company.
[6] The plaintiff’s sixth cause of action alleges that in inviting the members of the plaintiff syndicate and others to join together in the purchase of the property, White Fox was thereby making an offer of participatory securities to members of the public within the meaning of the Securities Act 1978. It was therefore required to provide a registered prospectus and appoint a statutory supervisor, but failed to do so, rendering the offer void under s 37(4) of the Act. The plaintiffs seek a declaration the offer was void and an order requiring White Fox to repay the contributions of the syndicate members.
[7] For its part, White Fox denies the offer was made to the public. A key issue at the hearing is therefore likely to be whether the people to whom the offers were made fall within any of the exempted categories of persons under s 3(2) of the Securities Act (relatives or close business associates of the issuer, habitual investors or other persons who in all the circumstances can properly be regarded as having been selected otherwise than as a member of the public).
[8] White Fox has also filed a counterclaim in which it pleads that if there was a breach of the Securities Act, the nature of the alleged contravention is such that it would not be just or equitable for the purposes of s 37AH to order it to repay the contributions.
[9] Section 37AH is a relief provision which states:
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.
The application for particular discovery
[10] It is s 37AH(3)(e) which is at the heart of the contested application for particular discovery.
[11] Section 37AH(3)(e) requires the Court to have regard to any other matter it thinks fit in determining an application for relief. The plaintiff contends that if White Fox were a serial non-observer of the statutory requirements, that would be a relevant “other matter” under s 37AH(3)(e), and therefore something I should take into account when considering White Fox’s application for relief. There is evidence that White Fox has formed at least another 14 syndicates in addition to the plaintiff, and accordingly the plaintiff says it wants to explore the setting up of those other
syndicates because it believes they too involve White Fox making an offer to the public without issuing a prospectus and therefore making void allotments.
[12] The plaintiff’s notice of application seeks discovery of documents including
(but not limited to):
•Agreements for the purchase of properties owned by syndicates, organised by the first defendant including but not limited to the Zip Syndicate, the Carthwood Syndicate, the Buchanan Syndicate, the Phoenix Property Syndicate, the Carmen Property Syndicate and the Armagh Property Syndicate (“the syndicates”);
•Correspondence to potential investors in/members of the syndicates, or file notes of such correspondence;
•Offer documents, including financial statements provided to potential investors/members of the syndicates;
•Any application forms completed by investors in/members of the syndicates;
•Internal documents and/or memos relating to the formation of the syndicates;
•Documents relating to the structure of the syndicates (such as partnership deeds and lists of confirmed investors);
•Documents relating to ongoing attempts to find investors for the syndicates where they were not initially fully subscribed; and
• Documents otherwise relating to the formation of the syndicates.
[13] At the hearing, Mr Whiteside indicated he would be willing to reduce the scope of the application to communications with potential investors, correspondence
with real estate agents and property managers, as well as all partnership and/or syndicate deeds.
[14] Mr Whiteside justified the lateness of the application on the grounds that White Fox’s counterclaim seeking relief under s 37AH was only filed this month. He also relied on the continuing nature of the obligation to make discovery of relevant documents.
Grounds of opposition
[15] White Fox opposes the application on several grounds which may be conveniently summarised as follows:
i)Correctly interpreted, the “other matters” to which the Court must have regard under s 37AH(3)(e) are limited to matters pertaining to the particular security at issue, not other securities. The documents sought are therefore not relevant and so not discoverable.
ii)The application is oppressive, involving as it does a last- minute fishing expedition which will place an intolerable burden on the first defendant and prejudice its pre-trial preparation. Should the application be granted, White Fox would have no option but to seek an adjournment.
iii)Even if the material is relevant, much of it is likely to be privileged.
Discussion
[16] In support of its argument that “other matters” is limited to matters pertaining to the particular security at issue, White Fox relies on the ejusdem generis rule of interpretation and the remedial purpose of s 37AH. Counsel, Mr Butler, contended that if the plaintiff’s interpretation was correct and the Court required to embark on a broad-ranging inquiry traversing all of an issuer’s prior conduct, then proceedings
under s 37AH would become impractical, unwieldy and potentially unfair. Mr Butler further argued that if the legislature had intended such a broad inquiry, it would have used similar language to that employed in the comparable provision in the Illegal Contracts Act 1970 which makes references to “conduct” and “the public interest”: see s 7(3) of the Illegal Contracts Act. In Mr Butler’s submission, the absence of similar words in s 37AH was highly significant.
[17] Mr Butler also drew my attention to the decision of Re Perpetual Investment Management Limited (2006) NZCLC 264,207 where Gendall J held that the key to s 37AH is “material prejudice” and that there has to be some nexus between the statutory breach and the objector’s loss. Absent material prejudice, relief will usually follow, at least in the case of a technical breach.
[18] However, there is a later High Court decision which disagrees with the analysis in Re Perpetual Investment.
[19] In Henderson Global Funds & Anor v Securities Commission HC Wellington CIV-2006-485-001376 31 October 2008, Clifford J held that the “just and equitable” decision under s 37AH is not limited to a consideration of whether the contraventions with respect to which relief is sought themselves caused material prejudice. Further, at [122] and [123] Clifford J expressly held that similar considerations to those applicable under the Illegal Contracts Act, such as the conduct of the parties and the public interest, must inform the concept of when it would be just and equitable to make relief orders.
[20] I accept that Henderson Global did not concern the relevance or otherwise of an issuer’s prior conduct, and I also accept that admitting such evidence is problematic. It may, for example, necessitate an inquiry into the individual circumstances of each of the investors if for example White Fox were to rely on the habitual investor exception. It is doubtful, too, that the mere fact of previous breaches would in itself be a weighty consideration if for example all the previous breaches were inadvertent and none of the other investors were materially prejudiced. White Fox says it would want to adduce evidence to that effect, which in turn would enlarge the scope of the hearing.
[21] On the other hand, the general reasoning in Henderson Global is compelling, and following decisions under the Illegal Contracts Act such as Christchurch City Council v Arbuckle (1988) 2 PRNZ 609, issues about transactions other than the transactions at issue are capable of bearing on public interest. If an issuer has been a serial non-observer, then depending on the circumstances, that is something which a Court might well “think fit” to take into account.
[22] I cannot exclude that possibility and therefore consider it is highly arguable the material may in principle be relevant. I am also not persuaded it would necessarily be privileged. As Mr Whiteside submitted, the plaintiff is not seeking details of any legal advice given by White Fox to any potential investor. There is a distinction between confidential investment advice and solicitor/client privilege.
[23] That does not mean, however, I am prepared to grant the application, or at least not at this stage.
[24] According to the affidavit evidence, there are approximately 70 investors who have taken up investments in property syndicates formed by White Fox. Some of the syndicates have been wound up and some of the individual investors are deceased. If the application were to be granted, it would require White Fox having to search literally hundreds of Eastlight folders, several of which are now stored off site. There have been no syndicates formed since 2005 and no certainty that all records still exist.
[25] I am satisfied that even taking into account Mr Whiteside’s narrowing of the scope of the application, compliance with an order would be very onerous, and unfairly so because of the lateness of the application and the fact that the potential relevance is likely to be peripheral. Although White Fox’s counterclaim was only filed this month, an earlier statement of defence filed in March 2009 made express reference to s 37AH. There is the further point that the Court may invoke s 37AH of its own initiative without there being any application. The plaintiff was therefore always faced with the prospect of s 37AH becoming an issue. The plaintiff has in my view left it too late.
[26] If I were to grant the application now, I would also, in fairness to White Fox, be obliged to grant an adjournment. Yet, Mr Whiteside’s clients are said to be “anxious” for the trial to proceed on 24 May, and in any event the disputed material is not so central to the matters at issue as would warrant an adjournment, with all its implications for precious court resources. An adjournment is out of the question.
[27] After weighing up all the competing interests, I have therefore decided that the fairest approach is to defer further consideration of the application until the conclusion of the hearing, by which time it will have become much clearer whether the documents sought are indeed as significant as the plaintiff claims. If they are and the plaintiff still wishes to pursue the matter, then there may need to be a second subsidiary hearing about the alleged past breaches. This is obviously far from ideal, but I consider it to be the only just solution in the circumstances.
Solicitors:
Wynn Williams & Co, Christchurch
Jones Fee, Auckland
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