Green Gecko Limited v Cox

[2013] NZHC 2034

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-9 [2013] NZHC 2034

BETWEEN

GREEN GECKO LIMITED

Plaintiff

AND

JOHN ANDREW REGINALD COX

First Defendant

DENIS JOHN FETHERSTON
Second Defendant

ANNA-MARIE FETHERSTON
Third Defendant

RISCOVERI LIMITED
Fourth Defendant

AND

BARKER BUSINESS BROKERAGE LIMITED

Third Party

Hearing:

17 June 2013

Counsel:

D Connor and R A Dellow for the Plaintiff

K M Burkhart and J Keating for the First Defendant Third defendant in person

No appearance for Second and Fourth Defendants and Third Party

Judgment:

12 August 2013

JUDGMENT OF WOODHOUSE J

(Summary Judgment Application against First and Third Defendants)

This judgment was delivered by me on 12 August 2013 at 4:00 p.m. pursuant to r 11.5 of the High Court Rules 1985.

Registrar/Deputy Registrar

……………………………………

GREEN GECKO LIMITED v COX [2013] NZHC 2034 [12 August 2013]

[1] The plaintiff, Green Gecko, seeks summary judgment against the first defendant, Mr Cox, and the third defendant, Mrs Fetherston. This arises out of purchase on two occasions by Green Gecko of shares in the fourth defendant, Riscoveri.

[2] When Green Gecko purchased the shares they were registered in Mr Cox’s name as a trustee for the RMS Property Trust (the RMS trust). The share transfers were signed by Mr Cox and the second defendant, Mr Fetherston, as the transferors. Mr Fetherston was a trustee of the RMS trust, but the shares were not registered in his name.

[3] There are 12 causes of action against Mr Cox and Mr Fetherston in respect of these sales. Summary judgment is sought against Mr Cox on all but two of them. Summary judgment is not presently sought against Mr Fetherston because he is bankrupt.1 Summary judgment is sought against Mrs Fetherston on one cause of action.

Claim against Mr Cox under s 37 of the Securities Act 1978: summary

[4]      The first and second causes of action include claims against Mr Cox under s 37 of the Securities Act 1978 (the Act). There are separate causes of action for each of the two purchases of shares, but they are conveniently dealt with together.

[5] It is alleged in terms of s 37 that both sales were allotments of a security offered to the public for subscription, the allotments were made when there was no registered prospectus and, as a result, the allotments were invalid and of no effect. It is further alleged that Mr Cox is liable to repay the money paid for the shares because he was, by definition, an issuer of the shares.

[6] The principal issues are: whether Riscoveri initially allotted the shares with a view to their being offered for sale to the public in New Zealand; whether, as an alternative to the first issue, Riscoveri advised, encouraged or knowingly assisted in

1       There is an application for leave to proceed against Mr Fetherston, still to be heard.

the sales to Green Gecko; whether the offers leading to the purchases were offers to the public; and whether Mr Cox was an issuer of the shares as defined in the Act.

[7]     I am satisfied that Green Gecko has established that Mr Cox has no defence to the two claims under s 37. There was no prospectus. That is not in issue. Having regard to the relevant statutory provisions bearing on s 37, and ss 3 and 6 in particular, Mr Cox cannot argue that the sales did not arise from an offer to the public. As a result, s 37(4) makes the sales invalid and of no effect. Section 37(6), combined with the special definition of “issuer” in s 6(7), means that Mr Cox is liable as the issuer to repay the total sum of $700,000 paid for the two parcels of shares, together with interest at the prescribed rate.

The remaining claims against Mr Cox and the claim against Mrs Fetherston

[8] On the remaining summary judgment claims against Mr Cox my broad conclusion is that Green Gecko has not established that Mr Cox has no defence. The claims and my conclusions are summarised later.

[9] The single summary judgment claim against Mrs Fetherston is that she is liable for breach of a Quistclose trust.2 Green Gecko alleges that Mr Cox and Mr Fetherston, as the vendors of the shares, undertook to advance the proceeds of sale to Riscoveri to enable Riscoveri to complete development of software. It is not in issue on the present evidence that the undertaking was given by Mr Fetherston. It is also not in issue that at least some of the proceeds were not advanced to Riscoveri. For reasons recorded below at [68] this summary judgment claim against Mrs Fetherston

is dismissed. In essence, there is no present evidence establishing that Mrs Fetherston had any involvement or knowledge at the time which could make her liable to ensure that the undertaking said to have been given to Green Gecko was complied with.

Factual background

[10] The principal business of Riscoveri is said by the defendants to be the development and marketing of software for management of risk and compliance for

2       Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL).

businesses. The evidence indicates that Mr Fetherston has been involved in seeking to develop and market the software, or variations of it, since around 2000, and possibly earlier. Mr Fetherston described himself as the “chief technical officer” of Riscoveri. The evidence establishes that he controlled company activities relevant to this proceeding and that he controlled the sale of shares to Green Gecko.

[11] Mr Neil Barker is the managing director of Barkers Business Brokerage Ltd (Barkers Brokers), a company which, as Mr Barker described it, connects investors and companies. Mr Barker said that his company was approached by Mr Fetherston in early 2008 to seek investors in a predecessor company of Riscoveri which was seeking to develop the software. The predecessor company, or the holding company associated with the company developing the software, was a company called Risk Management Services Ltd. Mr Fetherston was the sole shareholder and director. This company ceased trading in March 2006 and was placed in liquidation on 26 September 2008. Mr Barker said that the liquidation of that company led to the formation of Riscoveri.

[12] Riscoveri was incorporated on 2 September 2008, 24 days before Risk Management Services Ltd was placed in liquidation. The sole director was Mr Fetherston and he held all of the 1,000 shares issued at the date of registration. In October and November 2008 small numbers of shares were issued to relatives or close business associates of Mr Fetherston, including people who became directors.

[13] On 6 April 2009 Riscoveri issued and allotted 10 million shares to the RMS trust. The new shareholder, at the date of registration on 6 April 2009, is recorded as “RMS Property Trust”. The trust deed for the RMS trust was prepared by Mr Cox who is a solicitor in sole practice. The deed is dated 3 May 2008. It records that the RMS trust was created on 18 February 2008. In affidavits for the defendants, and in particular from Mr Fetherston and Mr Cox, it is said that the software, or modified or new versions of it, and associated assets, were by April 2009 owned by the trustees of the RMS trust (the RMS trustees). The settlor of the trust and sole trustee, as recorded in the original trust deed, was Mr Fetherston. The thrust of the defence evidence is that the software, and business assets associated with the software, were

transferred by the RMS trustees to Riscoveri in exchange for the 10 million shares and, possibly, an acknowledgement of debt.

[14] On 17 July 2009 5,841,000 of the Riscoveri shares that had originally been issued to the RMS trust were registered in Mr Cox’s name. The balance of the 10 million shares had been transferred to another trust called “Riscoveri Trust” and to directors of Riscoveri who replaced Mr Fetherston as the director. Mr Fetherston presumably ceased being a registered director when he was adjudicated bankrupt in October 2008, as noted further below.

[15]   Mr Cox began acting as solicitor for Mr Fetherston, and for Mrs Fetherston, in 2008. Mr Cox said that he was aware that Mr Fetherston had developed the risk management software and that he was aware of a business failure for Mr Fetherston “in about 2004”. He said that in early 2009 Mr Fetherston told him that he, Mr Fetherston, was in the process of redeveloping the software, that ownership of it had been vested in Mr Fetherston’s family trust, and that Mr Fetherston had sold it on 1 April 2009 to Riscoveri.

[16] Mr Cox said that when the Riscoveri shares were registered in his name he was not initially aware of this. He said he “subsequently discovered this registration”, but does not say when he discovered it. Mr Cox said that Mr Fetherston asked him in early 2009 whether he would become a trustee of the RMS trust. Mr Cox said that he declined, but told Mr Fetherston that he would incorporate a trustee company which could act as a trustee. This was done, but not until February 2010.

[17] Mr Cox said that when he spoke to Mr Fetherston about the registration in Mr Cox’s name he agreed that the shares could remain in his name, and that he and Mr Fetherston agreed that Mr Cox would be a “bare trustee for the trustees for the time being” of the RMS trust.  Mr Cox said:

Mr Fetherston had become bankrupt by this time, and I presume that he preferred that his trusteeship of The RMS Property Trust be kept confidential.

Mr Fetherston had been adjudicated bankrupt on 30 October 2008. He was discharged on 30 October 2011. He was adjudicated bankrupt again on 24 January 2013, shortly after this proceeding was issued.

[18] Mr Cox says that he was told by Mr Fetherston “in late 2009” that “the RMS Property Trust” had engaged Barkers Brokers to sell some of the Riscoveri shares held by the RMS trustees. The defence evidence indicates that all instructions to Barkers Brokers, and the provision of all information to facilitate sale of the shares, and in particular information about Riscoveri and its activities with the software, came from Mr Fetherston. Mr Cox says that he was “subsequently advised” by Mr Fetherston  that  Mr  Gordon  Rendell  would  be  purchasing  200,000  shares  for

$200,000.

The share purchases by Green Gecko

[19] The person most closely involved in the relevant transactions on behalf of Green Gecko was Mr Rendell. Mr Rendell had farmed a property near Wanganui. The farm was owned by the trustees of a Rendell family trust, the Gracefield Trust. Green Gecko was incorporated in 2003. Mr Rendell is the sole director. 99 of the 100 shares are held by Mr Rendell and his co-trustee of the Gracefield Trust, Mr Richard Austin. The farm was sold and there were funds to invest. It was decided to make the investment through Green Gecko.

[20]    Mr Rendell says that in late October or early November 2009 he came across a website advertisement placed by Barkers Brokers for investment in “a  world leading software package”. This turned out to be an investment in Riscoveri by purchase of some of the shares which were registered in Mr Cox’s name. The advertisement was as follows:

INVESTORS REQUIRED

Either working or passive investors required to complete a world leading software package which can be used in hand held devices across the globe.

There is a strong possibility of the business being involved with one of the worlds leading software suppliers.

Minimum investment of $100,000 up to $4.5 Million required.

This opportunity really has the makings to be a world leader in their field. This business is well established and has been the work of the founder for many, many years. Take advantage of this, the returns may be incredible.

This is your opportunity to invest at the ground level. In the first instance, please contact: …

The contact was Mr Barker.

[21] Mr Rendell contacted Mr Barker. A substantial amount of information has been put in evidence concerning dealings from that point, including information received by Mr Rendell relating to aspects of the investment. Because of the conclusion I have reached it is unnecessary to summarise this information. For present purposes it is sufficient to record the essence of the transactions that followed which resulted in what I will refer to as the first share purchase and the second share purchase.

The first share purchase

[22] On or about 4 November 2009 Mr Rendell told Mr Barker that Green Gecko would purchase 200,000 shares for $200,000. On 5 November Mr Rendell received, from Mr Barker, a resolution of directors of Riscoveri and a share transfer for 200,000 shares. The documents had been forwarded to Mr Barker by Mr Cox. The transfer records the transferor as: “RMS PROPERTY TRUST John Cox (Trustee) Denis John Fetherston (Trustee) for the RMS Property Trust.” The address of the transferor is the address of Mr Cox’s office. The transfer was signed by Mr Cox and Mr Fetherston. Below their signatures their names are typed followed by “(Trustee)”. The resolution was that the share register be updated to record the transfer “upon the vendor confirming that the purchase price of $200,000 has been received into the vendor’s solicitor’s trust account” being the trust account of Mr Cox’s firm.

[23] The transferee was erroneously recorded as “Gordon Rendell as trustee of the Gracefield Trust”. Mr Rendell told Mr Barker that the transferee was Green Gecko. Amended documents were sent by Mr Barker to Rendell a few days later with a request that Mr Rendell have the document signed and that he send the money to Mr Cox.  The transfer was the same as the previous one except that the transferee was

recorded as Green Gecko. On both transfers Mr Cox is simply recorded as “trustee”; there is no further description as to the nature of his trusteeship.

[24]  Before payment was made by Green Gecko a number of questions were put by Mr Rendell, and then by his co-trustee Mr Austin. Mr Barker forwarded the answers to Mr Rendell’s questions on 13 November 2009. The answers were provided by italicised additions to each of the questions put by Mr Rendell in an email. Mr Barker said that the answers to Mr Rendell’s questions were “prepared by Riscoveri”. Mr Barker’s email was directed to Mr Austin as well as Mr Rendell and Mr Barker advised Mr Austin, who is a lawyer, that Mr Austin was “more than welcome to ring and discuss any aspect of this offer with John Cox (Solicitor)”. There were seven questions. Those of present relevance, and the answers, are as follows:

1/. This sale of shares is a transfer ? i.e. a non issue.

Yes That is correct

2/. John Cox is the principal shareholder selling his stock? My funds are transered [sic] to him … then where?

John Cox is the independent Trustee for the RMS Property Trust, The trust is selling up to $4.5 Million of its shareholding to fund the completion of the software and go to market. It has raised currently $300,000 and we estimate we can get the first stage to market within $500,000. The Trust will apply the funds it receives to this purpose.

With the sale of potentially $4.5 mill of shares, (having not seen a balance sheet for the company) will funds be required from this to pay down debt, future marketing cost?

The balance sheet is attached. The debt shown is a term debt and yes the funds will be used for completion of software and marketing costs.

3/. The company has been trading for a number of years, do I have access to a balance sheet or evidence of tax returns?

Riscoveri is a new company incorporated for the SAAS business and not the original trading company for the thick client version of the software which the SAAS version was developed from which is Risk Management Systems Limited. Riscoveri thus has no trading history other than development and initial marketing.

[25]     On 16 November 2009 Mr Austin, by email, asked Mr Barker the following:

If John Cox is selling stock to fund Riscoveri’s development, how do the funds actually get from John C into the company so that the company can pay for the development? Is it being treated as a loan by [the RMS trust] to Riscoveri (similar to the $4.5M already on the books)?

If so, where is the value to the new shareholder? His equity in the company is immediately off-set by the debt John C lends to the Coy?

[26] Mr Barker sent Mr Austin’s questions to Mr Fetherston and Mr Cox. An answer was provided in an email of 16 November 2009 from Mr Fetherston. He said:

The answers to Richard’s [Mr Austin’s] questions are as follows:

1.As Trustee John Cox upon receipt of the funds into his trust account, will apply Gordon’s investment as a term loan to Riscoveri Limited as working capital.

2.The loan to Riscoveri is very small compared with current value and investment already made by it’s [sic] principle [sic] shareholder.

3.The shares offered to Gordon are at $1 per share which is well below the current value and he will be the last to be offered at this price.

4.The value shown on the balance sheet is more than $11 Million or more than $1.67 per share.

5.The pending interest by SAP and others will drive the shares up dramatically because of their interest in the Patent and Edge Partner program.

6.If and when further shares are sold this will be at a price commensurate with 5. above.

[27] On 16 November Mr Barker sent that response to Mr Austin and Mr Rendell. On 17 November Green Gecko paid $200,000 into the trust account of Mr Cox’s firm.

The second share purchase

[28] The second parcel of shares was purchased  in  March  2010.  Between payment for the first parcel on 17 November 2009 and payment for the second parcel on 30 March 2010 neither Mr Rendell, nor any other person associated with Green Gecko, had any relevant dealings with Mr Cox. Mr Rendell did have some discussions over this period with Mr Fetherston and some others associated with Riscoveri.  Particulars of these discussions, including a meeting, do not need to be

provided for the assessment of the summary judgment claims against Mr Cox. The upshot was that Mr Rendell decided to buy a further 500,000 shares.

[29]   On 26 March 2010 Mr Cox sent directly to Mr Rendell a Riscoveri resolution of directors and share transfer. The transferors were again recorded as Mr Fetherston and Mr Cox as trustees of the RMS trust, and without any qualification as to the nature of Mr Cox’s trusteeship. The first transfer sent to Mr Rendell on this occasion erroneously referred to 200,000 shares rather than 500,000. This was corrected by Mr Cox. He sent the corrected transfer directly to Mr Rendell by email dated 30 March 2010.  In the covering email message he said:

Dear Gordon,

I can confirm that you are buying a further 500,000 shares for $500,000, bringing your total shareholding to 700,000 out of a total of 6,600,000 shares.

February 2010: appointment of new RMS trustees

[30] By deed dated 19 February 2010 Mrs Fetherston and North Shore Professional Trustees (No. 3) Ltd were appointed new trustees of the RMS trust. The appointment was made by Mr Fetherston and he continued as a trustee. In the usual way, all real and personal property which at that date was vested in Mr Fetherston as the continuing trustee was revested in him and the new trustees. North Shore Professional Trustees (No. 3) Ltd is a trustee company incorporated by Mr Cox and he is the sole director of the company.

Summary judgment principles

[31] On a summary judgment application by a plaintiff,  the  plaintiff  cannot succeed unless it satisfies the Court that the defendant has no defence. The relevant principles were summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd as follows:3

[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The

3       Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307, (2008) 19 PRNZ 162.

onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

Securities Act s 37

[32] The broad effect of s 37, of relevance in this case, is that an allotment of securities offered to the public without a registered prospectus is invalid and of no effect. If subscriptions have not been repaid to subscribers within two months of payment, the issuer of the securities and all directors of the issuer are jointly and severally liable to repay the subscription, together with interest as prescribed.4

Matters not in dispute

[33] The parties did not dispute that there was no prospectus, the completed agreements for sale and purchase of the shares constituted allotments of securities and the purchase by Green Gecko was, by definition, a “subscription” for the shares. I am also satisfied those matters are established.

[34] The matters that are in contention are discussed below under each of the following subheadings. Submissions of Mr Connor for Green Gecko and Ms Burkhart for Mr Cox not expressly noted have been taken into account.

Previously allotted securities

[35] The word “allot” is defined in s 2 as including “sell” and “allotment” has a corresponding meaning. On the face of it, therefore, the two sales of shares to Green Gecko were allotments. This is subject to s 6(1) which provides that s 37 (and ss 37A and 56, as well as other provisions) do not apply to securities that have previously been allotted.   The shares sold to Green Gecko had previously been

4       Section 37(1), (4), (5) and (6).

allotted to the RMS trustees. However, s 6(1) is in turn subject to s 6(2) which provides, so far as material:

All the provisions of this Act shall apply in respect of a security that has previously been allotted … if the security was originally allotted with a view to its being offered for sale to the public in New Zealand and the security has not previously been offered for sale to the public in New Zealand …

[36] The shares purchased by Green Gecko had not previously been offered for sale to the public in New Zealand. The issue is whether Green Gecko has established that the shares it acquired were originally allotted to the RMS trustees with a view to those shares being offered for sale to the public in New Zealand.

[37] The evidence provided by Green Gecko, through Mr Rendell, is sufficient to establish the requisite purpose in the original allotment and the evidence in reply does not raise any arguable defence. Mr Cox’s evidence on this issue, as with most issues, was that he had no relevant involvement and no relevant knowledge at any material time. In consequence, he did not provide evidence which might support an argument that the shares had not originally been allotted by Riscoveri to the RMS trustees with a view their being offered for sale to the public.  Mr Barker’s evidence

as to the reasons Mr Fetherston approached Mr Barker in early 2008,5 when related

to the subsequent incorporation of Riscoveri and the issue of shares to the RMS trust, or the RMS trustees, in my judgment positively establishes that Riscoveri issued the shares with a view to those shares being offered for sale to the public in due course.

The Barkers Brokers’ advertisement supports this.6

[38] Mr Fetherston provided affidavit evidence. None of his evidence raises any argument to the contrary. In broad terms Mr Fetherston’s evidence supports the conclusion that the shares were allotted by Riscoveri to the RMS trustees, with all of this controlled on both sides by Mr Fetherston, with a view to at least some of those shares then being offered to the public. As the evidence also clearly establishes, without any argument to the contrary, the shares then were offered to the public through Barkers Brokers.  The answers to Mr Rendell’s questions in November 2009

5 See above at [11].

6 See above at [20].

also support the conclusion that Riscoveri made the allotment to the trustees with the intention that this would be followed by an offer to the public.7

[39] Section 37 will also apply, notwithstanding a previous allotment, in the circumstances defined in s 6(3): if the offeror, not being the original allotter, offers the shares for sale to the public and “the original allotter advises, encourages, or knowingly assists the holder or offeror in connection with the offer or sale of the security”. The evidence establishes that the original allotter, Riscoveri, advised, encouraged and knowingly assisted the RMS trustees, as offeror. There is no evidence to the contrary. This is clearly established by the uncontested evidence of the activities of Mr Fetherston who plainly had control, whatever his formal designation, of Riscoveri and on behalf of the RMS trustees as the “offeror”. And the offer was for sale to the public, as discussed under the next subheading.

Offer to the public

[40] The expression “offer of securities to the public” is widely defined in s 3(1). What occurred in this case comes within that definition and there is no argument to the contrary. Section 3(3) provides that the fact that a person already holds shares in the company does not preclude that person from being regarded as a member of the public in regard to any further offer of securities. In consequence, the fact that Green Gecko made a further purchase in 2010 does not of itself mean that there was no offer to the public in respect of the second share purchase.

[41] The issue raised for Mr Cox concerns an exception in s 3(2)(a)(ii). This provides that an offer of securities to persons who, “in the course of and for the purposes of their business, habitually invest money” does not constitute an offer to the public. Mr Cox did not advance any argument that Green Gecko (or Mr Rendell, or his family trust from which the money was derived) habitually invested money in the course of and for the purpose of its business. There was a faint suggestion by Mr Fetherston that Green Gecko is an habitual investor. He said that “the [RMS] Trust was advised by Barker Brokers that the Plaintiff was registered as a Habitual Investor”.  Standing alone this lacks plausibility; assessed in context it is contrived.

7       See above at [24] – answers 2 and 3.

And it was expressly rejected by Mr Barker.  Mr Fetherston’s assertion barely raises a conflict with Mr Rendell’s evidence and Mr Barker’s response is sufficient to conclude that what Mr Fetherston said does not reach the threshold of raising an arguable defence for Mr Cox.

Section 37 liability

[42] Liability to repay subscriptions when there has been no registered prospectus arises under subsections (5) and (6), which are as follows:

(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]   Because liability to repay under s 37(6) is joint and several, if there are two or more persons with liability the subscriber is entitled to pursue any one, or more, of the persons liable. As a result, if Mr Cox has liability as the issuer, or as a director of the issuer, Green Gecko will be entitled to judgment against him for the subscriptions and interest although there may be another person who is also liable.

[44] Both counsel addressed a question whether Mr Cox was a director of the issuer. The word “director” is widely defined in s 2. Mr Connor placed emphasis on the wide definition.  However, I am satisfied that it does not apply to Mr Cox for two

reasons. First, if the issuer is taken to be the trustees of the RMS trust (and I am satisfied that the issuer includes the trustees) Mr Cox, as one of those trustees, is not also a “director of the trust”. A trust is not a distinct legal entity which could have “directors”, even as broadly defined in the Act. A person who is not a formally appointed trustee might be treated as one by applying the definition of directors, but that is not relevant in this case. And there is no basis to treat Mr Cox in some way as a “director” in relation to the assets of the trust. Second, for reasons discussed below, the issuer includes Riscoveri as the original allotter, as well as the RMS trustees. However, there is no present evidence supporting an argument that Mr Cox was a director of Riscoveri, assessing this in terms of the wide definition, at any material time.  Finally, even if there was some basis for concluding that Mr Cox was a director of the issuer, Green Gecko did not establish that Mr Cox has no defence under the proviso to s 37(6).

[45] The central issue in relation to liability is whether Mr Cox was an “issuer” of the shares sold to Green Gecko. Ms Burkhart referred to the general definition of “issuer” in s 2. In relation to an equity security this means “the person on whose behalf any money paid in consideration of the allotment of the security is received”. On that basis she submitted that the evidence positively establishes that Mr Cox was not the issuer because, as she put it, Mr Cox was not a trustee for the purposes of receiving money. As between Mr Cox and Green Gecko I am doubtful that that follows as a matter of law, but it is unnecessary to consider the point. This is because, in relation to previously allotted securities, there is a special definition of issuer. This is contained in s 6(7) of the Act which relevantly provides:

Notwithstanding anything in section 2 of this Act, in this Act, unless the context otherwise requires, in relation to a security to which subsection (2)

… or subsection (3) of this section applies, the term issuer means  the original allotter of the security, and, except for the purposes of sections 51 to 54 of this Act, also includes the offeror of the security.

[46] The definition of issuer in s 6(7) applies unless the context  otherwise requires. There is no evidence of context requiring the s 6(7) meaning to be set aside. The issues under s 6(7) are therefore whether Mr Cox was the original allotter of the shares or the offeror of the shares.   He was not the original allotter.   The

critical question therefore is whether, as a matter of law, Mr Cox was “the offeror” of the shares purchased by Green Gecko.

[47] “Offeror” is not defined. However, the word “offer” is defined in s 2 as including “an invitation, and any proposal or invitation to make an offer” with “to offer” having a corresponding meaning. The word “offeror” in the Act therefore does not necessarily have the same meaning as that word has under the general law of contract.8

[48] In conventional contractual terms, in relation to agreements for the sale and purchase of shares, the offeror could either be the person offering to sell shares, and who will therefore be the vendor if an agreement is made, or the person offering to buy the shares. In the present context, s 6(7) of the Act is obviously directed to the party in the former position – the party who will become the vendor if an agreement for sale and purchase is entered into. Analysed in this way, the offeror of the shares in Riscoveri was the party capable of transferring title to the shares to Green Gecko if an agreement for sale and purchase was made. At the time of both the 2009 and the 2010 transactions, the registered holder of the shares sold to Green Gecko was Mr Cox. On the face of it that made him the offeror. And he would be the offeror notwithstanding the fact that all of the negotiations with Mr Rendell were conducted mainly by Mr Barker and with Mr Barker’s instructions coming from Mr Fetherston. Those facts do not exempt an offeror from liability arising from s 6(7) when applied to s 37(6).

The relevance of Mr Cox’s trusteeship

[49] A principal argument advanced by Ms Burkhart for Mr Cox was that the shares were in Mr Cox’s name as a bare trustee; effectively, as Ms Burkhart put it, he was simply the trustee of the trustees of the RMS trust. On the present evidence Mr Fetherston was the sole trustee at times relevant to the 2009 share sale. There is the deed of appointment of new trustees dated 19 February 2010. Mrs Fetherston and North Shore Professional Trustees (No. 3) Ltd were appointed new trustees, with Mr

8       See Orr v Martin (1991) 5 NZCLC 67,383 (HC) at 67,390, and R v Petricevic [2012] NZHC 665, [2012] NZCCLR 7 at [119]. See generally Stace Securities Law in New Zealand (LexisNexis, Wellington, 2010) at [2.3] and Farrar and Watson (eds) Company and Securities Law in New Zealand (2nd ed, Brookers, Wellington, 2013) at [34.31.1].

Fetherston continuing as a trustee. Mr Cox is the sole director of the  trustee company, but that does not make Mr Cox an RMS trustee under the general law.9

[50] Mr Cox’s evidence is that he was a bare trustee.  The original trust deed, and the deed appointing new trustees, are consistent with this evidence. It is reasonably arguable that he was holding the shares as a bare trustee. But the important question is whether this makes any difference to the ultimate issue under s 6(7): this is whether Mr Cox was the offeror of the shares. The fact that Mr Fetherston was a party to the share sale agreements, as transferee with Mr Cox, does not make any

difference to the answer to this question. The singular “offeror” includes the plural “offerors”.10

[51] In my judgment, given the uncontested evidence of relevance in this case, the precise nature of Mr Cox’s powers and obligations as a trustee is irrelevant when considering the present question governed by the Act and involving a transaction with a third party – Green Gecko. Ms Burkhart referred to the discussion of the meaning of the expression “bare trustee” in Burns v Steel.11 The meaning may vary depending on the context. But whatever the precise meaning, this will in most cases be relevant only to the relationship between the bare trustee and other trustees and beneficiaries.  In other words, it is relevant to the internal arrangements affecting the

trust, not to dealings by a person who happens to be a bare trustee with third parties. A further consequence of this analysis is that it is unnecessary to resolve the issue, arising from some submissions, as to whether Mr Cox should properly be described as a bare trustee. For present purposes it can be accepted that that is an apposite description.

[52] The nature of the trustees’ powers and obligations, vis-à-vis the trust assets, beneficiaries of the trust, and others directly interested in the trust, may in some cases have a bearing on the relationship with third parties. This could arise, for example, where a contract between a person acting as a trustee and a third party

9       It might be arguable that the wide definition of director under the Act could result in Mr Cox being treated as a trustee. However, this was not argued and does not require consideration given the conclusion against Mr Cox on other grounds.

10      Interpretation Act 1999, s 33.

11      Burns v Steel [2006] 1 NZLR 559 (HC) at [41]-[49] and [62].

contains provisions limiting the liability of the trustee to the realisable value of the trust assets. Nothing of that sort arises in this case. The direct dealings between Green Gecko and Mr Cox, which were very limited, contained nothing which in some way limited Mr Cox’s liability under the Act as offeror – the registered holder selling the shares. The fact that Mr Cox recorded on the share transfer that he was signing as trustee makes no difference, and Ms Burkhart did not seek to argue to the contrary. It is trite law that, in the absence of a contractual, or statutory, limitation of liability, a trustee entering into a contract incurs full personal liability.  This, in

fact, is the entirely conventional basis upon which Mr Austin, Mr Rendell’s co- trustee, understood the transaction was being conducted.12 And there is no provision in the Act which limits Mr Cox’s liability under s 37 because he was a trustee. The difference between the definition of “issues” in s 2 of the Act and the special definition in s 6(7) reinforces the conclusion.

Mr Cox’s liability assessed in terms of statutory policy

[53] This conclusion is also consistent with the broad purpose of the Act. This purpose, and the impact of purpose on interpretation, is summarised in Company and Securities Law in New Zealand as follows:13

“[T]he Act is aimed at the protection of investors”,14  and the pattern of required disclosure and the sanctions imposed have been interpreted in light of that protective purpose. Protection of the investor lies at the heart of the Securities Act and the courts have interpreted the key elements of the capital raising process against that yardstick.

[54] The conclusion that I have come to that Mr Cox is liable, notwithstanding that it is reasonably arguable on the present evidence that he was a bare trustee, is also a conclusion which in my judgment is consistent with what may be seen as the allocation of risk in relation to compliance with the Act. As between members of the public and issuers in general, the statutory obligations rest on the issuers without the investing members of the public being required to make enquiries.  In this case Mr

12 See Mr Austin’s email to Mr Barker quoted above at [25].

13      Farrar and Watson (eds) Company and Securities Law in New Zealand, above n 8, at 34.1.

14 Re AIC Merchant Finance Ltd (in rec) [1990] 2 NZLR 385 (CA) at 391; see also Securities Commission v Kiwi Co-operative Dairies Ltd [1995] 3 NZLR 26 (CA) at 31; Culverden Retirement Village Ltd v Registrar of Companies (1996) 1 BCSLR 162 (CA) at 166; Lawrence v Registrar of Companies [2004] 3 NZLR 37 (CA) at 44; Christchurch Pavilion Partnership No 1 v Deloitte and Touche Tohmatsu Trustee Co Ltd [2002] 3 NZLR 289 (PC) at 296.

Rendell and Mr Austin, for Green Gecko, made enquiries and these enquiries were forwarded to Mr Cox as well as to Mr Fetherston. Nothing was relayed back to Mr Rendell and Mr Austin which might have put them on further enquiry, whether or not that would have had any statutory effect. Some of the responses in fact appear designed to put them off from enquiry. On the other hand there is no evidence to indicate that Mr Cox, as the vendor, made any effort at all to check that statutory obligations were being complied with. In addition, Mr Cox’s own evidence establishes that he knew that Mr Fetherston had been involved in an earlier business failure and that, at the time of the transactions with Green Gecko, Mr Fetherston was bankrupt. Mr Rendell and Mr Austin were unaware of this. In terms of allocation of risk for loss, assessed in a broad way, this reinforces a conclusion that, as between Green Gecko and Mr Cox, the loss for failure to comply with a strict statutory obligation quite properly falls on Mr Cox. This is further reinforced by the fact that, if Mr Cox was a bare trustee, performing a limited function at the request of Mr Fetherston, Mr Cox could have requested an indemnity from Mr Fetherston, or from assets of the RMS trust.

Conclusion on s 37

[55] Green Gecko is entitled to judgment against Mr Cox in a sum of $700,000 together with interest at the rate prescribed pursuant to s 37(6) on $200,000 from 17 November 2009 and on $500,000 from 30 March 2010.

Other summary judgment claims against Mr Cox

Section 37A(1)(a) of the Act: voidable allotment: Green Gecko did not receive an investment statement

[56] This provision prohibits an allotment of a security offered to the public if the subscriber did not receive an investment statement relating to the security before subscribing for it (subject to exceptions which do not apply). It is not in issue that Green Gecko did not get an investment statement at any relevant time. An allotment in contravention of this section is voidable provided the issuer gives notice within the “prescribed period”.

[57] Mr Cox has an arguable defence that notice was not given by Green Gecko within the prescribed period. The prescribed period is defined in s 37A(4) as the lesser of one year after the security or a certificate of the security has been sent to the subscriber or six months after the subscriber knows, or ought reasonably to know, that the allotment was made in contravention of s 37A. Compliance with this time limit is unclear on the present evidence.

Section 6A of the Act: implied term

[58] The relevant effect of s 6A is that, if ss 37 and 37A of the Act do not apply, but the shares in question are offered to the public, a term is implied in the offer agreement that the vendor of the shares has no information not already publicly available that would, or would be likely to, affect materially the price of the shares if the information was disclosed.

[59] Summary judgment is declined on this claim. There is an issue whether there was relevant information. It is also reasonably arguable that Mr Cox did not have any relevant information. There are also issues as to the quantification of damages sought  by Green  Gecko  –  $334,000  in  relation  to  the  first  share  purchase  and

$835,000 in relation to the second share purchase. Mr Connor recognised this difficulty by submitting that judgment could be entered for a total of $700,000, being the total paid, subject to Green Gecko seeking to prove liability for a greater sum. Judgment cannot be given on that basis.

Section 56 of the Act: liability for untrue statements in advertisements for shares

[60]  Green Gecko responded to advertisements offering the shares for sale.  When the issuer of the shares is an individual, that person is liable to pay compensation to the subscriber if an advertisement for the shares contained an untrue statement and the subscriber suffered loss as a consequence. An issuer is not liable if the advertisement was distributed without the issuer’s knowledge or consent (and subject to other provisions of no present relevance).

[61] Summary judgment is declined for several reasons. There is an issue as to whether the advertisement contains untrue statements.  Green Gecko has pointed to

matters of concern, but not to the level of persuasion required on a summary judgment application. There are issues, both of fact and law, as to whether the advertisements were distributed without Mr Cox’s knowledge or consent. At least one of the legal issues is whether Mr Cox can be liable because he effectively authorised or permitted Mr Fetherston to act on his behalf. A similar issue arises with some of the other claims. There is a further issue that needs to go to trial as to whether, if there were untrue statements in the advertisement, Green Gecko suffered loss or damage “by reason of the untrue statement”. And there are issues as to quantification of damages similar to those noted for claim 3.

Quistclose trust claim

[62] This claim was summarised in the introduction to this judgment.15 Summary judgment is declined. It is reasonably arguable for Mr Cox on the present evidence that he did not have knowledge of the undertaking. There is some evidence to the opposite effect arising, in particular, from the email enquiries from Mr Rendell and Mr Austin in November 2009.16 But this falls short of establishing that Mr Cox has no defence to the effect that he did not have knowledge of the undertaking.

Contractual misrepresentation

[63] It is alleged by Green Gecko that it was induced to purchase each parcel of shares by a number of misrepresentations which are actionable under the Contractual Remedies Act 1979.

[64] The application for summary judgment on this claim is declined. There are reasonably arguable issues: whether Mr Cox had knowledge of the representations; whether absence of knowledge absolves Mr Cox or whether relevant knowledge of Mr Fetherston is to be imputed to Mr Cox; whether the representations were misrepresentations; and, if there were misrepresentations, whether Green Gecko suffered loss in consequence.

15 See above at [9].

16      See above at [24]-[26].

[65] There are also issues in relation to quantification of the damages claimed, similar to quantification issues already noted for other claims.

Fair Trading Act 1986, ss 9, 10 and 13: misleading and deceptive conduct

[66] These claims, in broad terms, are the same as the claims of contractual misrepresentation. The issues are much the same, with an added issue as to whether Mr Cox was not “in trade” in any relevant respect.

[67]  The application for summary judgment on this claim is declined, generally for reasons discussed in respect of the misrepresentation claim. An issue whether Mr Cox was “in trade” in any relevant respect is also arguable.

Summary judgment claim against Mrs Fetherston

[68] On the single summary judgment claim against Mrs Fetherston, Green Gecko has not established that Mrs Fetherston has no defence. This conclusion follows in large measure from three things. First, and as Mr Connor properly acknowledged for Green Gecko, at this stage of the proceeding Green Gecko is unable to establish that Mrs Fetherston had any knowledge of the undertaking on which Green Gecko relies at any time at which it could be said that the undertaking was required to be complied with. Second, Mrs Fetherston was not a trustee of the RMS trust at any time when it could be said that the undertaking should have been complied with, or at the time when Green Gecko says the undertaking was breached. Third, there is no present evidence indicating how Mrs Fetherston could have been responsible in some other way for ensuring that the undertaking was complied with at the relevant times.

Result

[69]   There is judgment for the plaintiff against the first defendant pursuant to s 37 of the Securities Act 1978 in a sum of $700,000 together with interest at the rate prescribed under to s 37(6) of the Securities Act 1978 on $200,000 from 17 November 2009 and on $500,000 from 30 March 2010.

[70] The plaintiff is entitled to recover costs and disbursements from the first defendant on a 2B basis. If the parties are unable to agree on quantum a memorandum for the plaintiff in that regard is to be filed and served within four weeks of the date of this judgment with a reply for the respondent to be filed and served two weeks later.

[71]  The plaintiff’s application for summary judgment against the first defendant on the remaining causes of action, and against the third defendant, are dismissed.

[72] This proceeding is to be referred by the case officer to an Associate Judge for appropriate case management directions.

Woodhouse J

Solicitors / Counsel / Parties:

Mr D Connor and Mr R A Dellow, Barristers, Advocacy Chambers, Auckland Mr D Burgess (Plaintiff’s instructing solicitor), DB Law, Solicitors, Auckland Ms K Burkhart, Kennedys, Auckland

Mr D J Fetherston and Ms A M Fetherston (Second and Third Defendants), Auckland Riscoveri Limited (Fourth Defendant), Auckland

Mr R S Walker (Solicitor for the Third Party), Solicitor, Auckland