Fletcher Challenge Forests Limited v Hyslop HC Auckland Cp62-Sd/01

[2002] NZHC 225

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP62-SD/01

BETWEEN FLETCHER CHALLENGE FORESTS LIMITED
Plaintiff

AND PAUL RUSSELL HYSLOP
First Defendant

AND KEITH ALEXANDER STEWART and JUDITH ANNE STEWART
Second Defendants

AND ELIZABETH MARY CORBY
Third Defendant

Hearing: 22 February 2002

Counsel: R J C Partridge for the plaintiff
B J Barker for Mr first defendant
B O’Callahan for second defendants
A C Sorrell for third defendant

Judgment: 18 March 2002

JUDGMENT OF O’REGAN J

Solicitors:
Bell Gully, P O Box 4199, Auckland
Barker Hunt, P O Box 105-017, Auckland 1
Carter & Partners, P O Box 2137, Auckland
D Bell, P O Box 105-451, Auckland
Counsel: A Sorrell, P O Box 3810, Shortland St, Auckland

[1] This case involves actions by Fletcher Challenge Forests Limited (“Fletcher Challenge”), which was formerly known as Fletcher Challenge Limited, alleging breach of a duty of confidence by all defendants and breach of the insider trading provisions of the Securities Amendment Act 1988 by the second and third defendants. The litigation arose out of events which led to the Securities Commission’s report on insider trading law and practice dated 20 November 2000. Those events arose from the accidental disclosure of a draft press statement on Fletcher Challenge’s computer network, making the information accessible to all network users. The draft press release related to the confidential restructuring proposals then being considered in relation to the paper division of Fletcher Challenge. The Securities Commission’s report sets out what happened after that disclosure occurred and I do not propose to repeat that in this judgment.

[2] The matter came before me in the context of a judicial settlement conference. During the course of that conference the parties reached a consensus on some issues but needed more time to conclude settlement negotiations. The conference was therefore adjourned. Subsequently the matter came back before me in Chambers at which time the parties informed me that a settlement agreement had been signed by all the parties pursuant to which the litigation would be settled. However, the settlement agreement was expressed to be -

“entirely conditional upon the High Court’s approval of the settlement under s 19 of the Securities Amendment Act 1988 and/or s 66 of the Trustee Act 1956 in terms of the draft Court order attached as Appendix 2.”

[3] In view of that condition, Fletcher Challenge filed an interlocutory application for the Court to approve the terms of the settlement and for directions regarding the proceeds of settlement on 15 February 2002. All other parties supported the application. This judgment deals with the issues arising from that application.

Nature of “approval” sought

[4] In response to a request for submissions as to the nature of the “approval” sought and the basis on which it could be given, I received a memorandum from counsel for Fletcher Challenge, which was filed with the concurrence of all other counsel. That memorandum made it clear that no specific “approval” was sought. What the parties seek is a direction in terms of s 19(2) of the Securities Amendment Act or, as an alternative, an approval under s 66 of the Trustee Act, relating to the basis on which money which will be paid to Fletcher Challenge by the defendants will be held by it. If such directions are made, the settlement agreement will become unconditional.

Terms of settlement

[5] Under the settlement agreement, a total of $75,000 is to be paid to Fletcher Challenge. This consists of two payments. The first is a payment of $37,500 to be paid by all defendants jointly and severally within 7 days of the settlement agreement being approved by the Court. That sum will be received by Fletcher Challenge in settlement of the causes of action (both breach of duty of confidence and insider trading) against the second and third defendants. The second payment is a payment of $37,500 to be paid by the first defendant in settlement of the action against him for a breach of a duty of confidence. There is no allegation of insider trading against the first defendant. The second payment will be in settlement of the cause of action against the first defendant. That sum will be payable 60 days after the Court approval.

[6] Clause 1.3 of the agreement provides that Fletcher Challenge will hold the first payment of $37,500 referred to above on trust for distribution in accordance with the directions of the Court to any person who satisfies the Court that the person could obtain judgment against any of the defendants under s 7 or s 9 of the Securities Amendment Act. It provides for apportionment of the money if more than one such person emerges. It also provides that if no person has made an application for a distribution out of that trust fund within 6 months of the date of the settlement agreement or if any of the trust fund remains undistributed following the disposal of any such applications then the trust fund will cease to be held by Fletcher Challenge on trust and may be retained by it on its own account to defray its costs. The evidence before me is that the costs incurred by Fletcher Challenge in investigating matters up to the time of the settlement conference and conducting these proceedings exceeds $160,000. About $70,000 of that is classified as internal management costs.

Wilson Neill case

[7] The application is similar to that which was considered by Holland J in Re Wilson Neill Limited [1994] 7 NZCLC 96,652. In that case Holland J made orders under s 19 that the money received by Wilson Neil in settlement of certain insider trading actions be paid to the parties who had purchased shares from the defendant in accordance with s 19 and also made orders to protect the confidentiality of the terms of the settlement, including the amount of money paid. In that case all of the counterparties to the sale transactions by the defendant consented to the orders.

[8] The parties in this case have also applied for confidentiality orders in the form of an order that the file not be searched, copied or inspected without leave. However, the parties are not asking that the terms of the settlement itself be confidential because the settlement agreement provides that a press release in an agreed form will be made on behalf of all parties. That is obviously necessary in order to ensure that any person who thinks he or she may have a claim on the trust fund is notified of the existence of the trust fund and the deadline for making an application to share in it.

Does s 19 apply to settlement proceeds?

[9] The first question which I need to determine is whether s 19 applies in the present circumstances. All parties argued that it did, and relied on the Wilson Neill decision as authority for that proposition. While the judgment of Holland J does not expressly address the question of the application of s 19, it appears to have proceeded on the assumption that it applied. However, it is not clear that s 19 applies where money has been recovered by a public issuer from an insider (or a person who is alleged to be an insider) as a result of a settlement of litigation, as opposed to the situation where money has been recovered after the issuing of a judgment against an insider by a Court. If s 19 does not apply to settlement payments, then the issue arises as to whether there is any requirement for a public issuer which settles an insider trading claim to make provision for any other party to share in the settlement proceeds and whether any trust obligation arises.

[10] In argument before me counsel for Fletcher Challenge argued that two possibilities existed if s 19 did not apply. One is that the cause of action itself would be held on trust by Fletcher Challenge for the benefit of the parties to whom distributions may be made under s 19 of the Act, in which case the Court could make orders under s 66 of the Trustee Act similar in nature to those which would be made under s 19 if s 19 applied. The other is that if s 19 does not apply then there is no restriction on the public issuer and any money received pursuant to a settlement can be retained by it.

[11] The latter possibility is obviously an unattractive one when considered against the obvious intention of the Securities Amendment Act that money recovered by a public issuer should be subject to the supervision of the Court under s 19. If s 19 did not apply and there was no other trust imposed, there would be an obvious incentive for a public issuer to reach a settlement of insider trading litigation so that any money recovered could be retained by it rather than proceeding to trial and leaving itself in the position where any amount it recovered would be subject to Court supervision under s 19. It seems to be obvious that that cannot have been the intention of Parliament when it enacted this legislation.

[12] The former possibility is less unattractive but it is hard to find any basis in the Securities Amendment Act itself for concluding that any cause of action held by a public issuer under that legislation is held on trust for parties of the kind described in s 19.

[13] Counsel argued that I should interpret s 19 in accordance with s 5(1) of the Interpretation Act 1999, which requires that the meaning of an enactment be ascertained from its text and in the light of its purpose. Counsel argued that a purposive interpretation of s 19 led inevitably to the conclusion that it applies not only in a situation where the money recovered by a public issuer from an insider is as a result of a judgment being entered against an insider, but also where there has been a settlement.

[14] The difficulty with that argument is that the words of s 19 need to be given a strained interpretation to reach that result. In particular -

[a] The reference in s 19(1) to “insider” needs to be extended to include an alleged insider in a situation where there has been a settlement without an admission by the defendant that he or she is an insider. Later references to the term “insider” would also need to be interpreted in the same way;

[b] The word “also” in s 19(2)(a)(i) needs to be ignored because its presence creates an implication that the general words of s 19(1) “any money recovered” are intended to be limited to a situation where the money is recovered by the public issuer through the obtaining of a judgment;

[c] The words “judgment obtained by the public issuer” in s 19(3) needs to be interpreted as referring not only to a judgment obtained but to money recovered pursuant to a settlement.

[15] Counsel suggested to me that a purposive interpretation of s 19 would justify some departure from the literal interpretation of the words of the section. Counsel referred me to the decision of the Court of Appeal in Northland Milk Vendors Association Inc v Northern Milk Limited [1988] 1 NZLR 537. In that case Cooke P said -

“. . . the Courts must try to make the Act work while taking care not themselves to usurp the policy making function which rightly belongs to Parliament. The Courts can in a sense fill gaps in an Act but only in order to make the Act work as Parliament must have intended.”

[16] The circumstances of this case are quite different from those which applied in the Northland Milk Vendors case. However, the principle which applies is similar. In this case there is a clear purpose ascertainable from both s 19 itself and other provisions in the legislation, particularly ss 17 and 18, to indicate that the interests of the parties mentioned in s 19 are to be preferred to those of the public issuer itself in litigation of this kind. There may be circumstances where the Court orders that money recovered by the public issuer be applied for a charitable purpose rather than retained by the public issuer itself. In order to give effect to that statutory object it is necessary to interpret s 19 in the manner outlined in para [14] above. In my view the statutory objective is so clear in this case that the strained interpretation required to give effect to it is justified, on the same basis as the Court of Appeal interpreted the Milk Act in the Northland Milk Vendors case.

The directions sought by the parties

[17] I therefore find that s 19 does apply in the present circumstances and now turn to consider the directions which are sought by the parties.

[18] In the Wilson Neill case, Holland J considered whether it was necessary to appoint someone to represent persons who may have an interest in terms of s 19 but determined that it was not necessary in that case because of the relatively small amount of the settlement. In my view the same applies in this case, particularly since the counter-parties to the transactions in this case are not identifiable (as they were in the Wilson Neill case) and the number of shareholders in Fletcher Challenge is considerable. In my view the creation of the trust as proposed by the parties adequately deals with the possibility that persons of the kind described in s 19(2) may have a claim against the fund and there is no need for their separate representation in relation to this application.

[19] In the event that no-one comes forward the $37,500 will be payable to Fletcher Challenge itself and used by it to defray the considerable costs it has incurred in pursuing this litigation. I have considered whether it would be more appropriate that this sum be applied to a charitable purpose as contemplated by s 19(4), but I am satisfied that there is no reason for that to occur in this case, given that even if the $37,500 is retained by Fletcher Challenge itself, it would still be considerably out of pocket. In my view it is consistent with the scheme of s 19 that a public issuer be permitted to recover at least some of its costs of pursuing an insider trading action before a Court would require application of the proceeds of the claim for charitable purposes.

[20] As I have already stated, the nature of this application is not one which requires the Court to approve the terms of the settlement itself. That is properly a matter for the parties. As was the case in Wilson Neil, there is no reason in this case to doubt that Fletcher Challenge has been motivated to enter into this settlement in the best interests of Fletcher Challenge and with a view to saving the very expensive costs of pursuing the case. It is notable that the Securities Commission’s report recommended no action be taken against any of the defendants.

[21] I conclude that the proposal that the proceeds of the settlement of the insider trading action be held on trust for 6 months is an appropriate scheme for the holding of the proceeds of the agreed settlement and I am prepared to make directions accordingly.

Confidentiality issues

[22] The next issue concerns confidentiality. The Securities Commission report does not name the parties involved. In this case the parties are named in accordance with the normal rules of the Court but I have been asked to make an order that the Court file not be searched, copied or inspected without leave. This is similar to the order made in the Wilson Neill case, although that order went further because it also forbade the publication of the amount of the settlement and the Judge refrained from referring to that amount in his judgment.

[23] In this case the parties are not seeking confidentiality in relation to the amount of the settlement and, as I have already said, have agreed that a press release will be made setting out the broad terms of the settlement and notifying parties who may wish to bring a claim that they must do so within 6 months of the settlement agreement.

[24] In the Wilson Neill case, Holland J was prepared to agree to confidentiality on the basis that the only people who could bring proceedings were the public issuer or the actual counterparties to a transaction with the defendant, and all of those parties were represented and agreed to the terms of the settlement including the confidentiality term. That is different from the situation here because the counterparties are not known and it is possible that the parties that do have rights of action will wish to pursue them and will wish to have access to the $37,500 held by Fletcher Challenge. However, the making of the press release will notify such parties and, if they wish to pursue an action and believe that they need access to the Court file to do so, they can apply for leave.

[25] In the Wilson Neill case, Holland J said that he was reluctant to exceed to the request of confidentiality and said that it should not be seen as being common or universal that a Court will agree to suppression of vital parts of the transaction. I agree with those comments. However, I accept that the essential features of the settlement will be apparent through the press release and also the terms of this judgment, and that there is no substantive public interest which would be prejudiced by making the order limiting access to the Court file. Accordingly, I indicate that I am prepared to make the order sought.

Costs

[26] I record that the parties have agreed that they will bear their own costs.

Orders

[27] I therefore make the following orders -

[a] As agreed by the parties in the settlement agreement (to be attached to the order of the Court), the sum of $37,500 payable by the defendants to Fletcher Challenge in settlement of both the breach of confidence and insider trading causes of action against the second and third defendants is to be held on trust by Fletcher Challenge for distribution in accordance with the directions of this Court to any person who satisfies the Court that that person could obtain judgment against any of the defendants under the provisions of s 7 or s 9 of the Securities Amendment Act 1988. If more than one person satisfies the Court that he or she could obtain judgment against the defendants then the Court will direct how the trust fund is to be apportioned between those persons. If no person has made an application for distribution out of the trust fund within 6 months of the date of the settlement agreement (which is dated 22 February 2002) or if all or any of the trust fund remains undistributed following the disposal of any such applications then the trust fund shall cease to be held by Fletcher Challenge on trust and may be retained by Fletcher Challenge to its own account to be applied towards the costs incurred by Fletcher Challenge in investigating and pursuing the causes of action in these proceedings.

[b] The Court file in this proceeding may not be searched, copied or inspected without leave of the Judge.

[c] The parties shall bear their own costs.

[28] I should note that the draft press release refers to the High Court having approved the settlement of the legal proceedings which, in my view, does not properly summarise the outcome of the application. The press release should therefore be amended as follows -

[a] The first sentence should read -

“The legal proceedings sought by Fletcher Challenge Limited against Mr Paul Hyslop and others have been settled.”

[b] The last sentence of the third paragraph should begin -

“The High Court has made directions confirming the parties’ proposal that . . .”

[c] The reference to 6 months should be clearly stated as running from the date of the settlement agreement, 22 February 2002.

[29] The orders in paragraph [27] above are to the same effect as the draft orders referred to in the settlement agreement, but the wording is not identical. The orders are therefore subject to the parties’ agreement that the making of those orders satisfies the condition of their settlement agreement, and also their agreement to the amendments to the draft press release referred to in paragraph [28] above.

[30] This matter was adjourned until 22 March 2002. I now find I am unavailable on that date. I ask that counsel for Fletcher Challenge notify the Court before 22 March 2002 whether the settlement has become unconditional on the basis set out in this judgment, and if it has not, to apply for an alternative date.