Little v Jull
[2013] NZHC 3123
•26 November 2013
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2010-441-713 [2013] NZHC 3123
BETWEEN ROBERT STANLEY LITTLE
First Plaintiff
NARELLE LINDA LITTLE Second Plaintiff
PENELOPE JANE CHOTE Third Plaintiff
LYNETTE ALISON MOGEY and
JOHN VICTOR MOGEY Fourth Plaintiffs
AND
ALBERT EDWARD GEORGE JULL Defendant
Hearing: 22-26 April 2013
(29 & 30 April 2013 - final submissions)
Counsel:
J Toebes and J Grant for Plaintiffs
M Macfarlane for DefendantJudgment:
26 November 2013
JUDGMENT OF WILLIAMS J
Introduction
[1] The plaintiffs (among many others) each made deposits of various sums to Waipawa Holdings Limited (WHL), a mezzanine finance company based in Central Hawkes Bay. WHL had been incorporated in 1975 and had operated for many years as an apparently reputable finance company. It transpired that Warren Pickett, the individual in effective control, was a fraudster. And by 2004, the company had
become little more than a Ponzi scheme.
LITTLE v JULL [2013] NZHC 3123 [26 November 2013]
[2] WHL collapsed in 2008, Warren Pickett was jailed and depositors lost all but
10.53 per cent of their deposits.
[3] Despite having taken deposits for nearly 30 years, WHL never issued a prospectus. Although Warren Pickett is no longer worth suing, the defendant Edward Jull is. He was a director of WHL from 1991 until either 2004 or 2005 (the end date of his tenure is a key issue in this case). The plaintiffs say that WHL’s failure to issue a prospectus means that by the terms of s 37 of the Securities Act
1978, Ed Jull is personally liable to repay all of the deposits claimed in this proceeding.
The facts
WFCL and WHL
[4] The Julls are a Central Hawkes Bay family of long standing. Successful investments in brewing, liquor retailing, agriculture and horticulture in the first half of the 20th century, led to the Julls incorporating Waipawa Finance Company Limited (WFCL) in 1949. WFCL was created to operate as a financier capitalised by the profits from the family’s successful investments elsewhere. According to Ed Jull, it was primarily used as a cash investment vehicle for the business interests of the family and the occasional related investment involving third parties.
[5] In time WFCL came to accept deposits from other family members, business associates, and local Central Hawkes Bay farmers and business people. Ed Jull took on sole directorship of WFCL from November 1991 until his retirement from that role. The date on which Ed Jull retired is disputed.
[6] In 1971, Warren Pickett, an accountant, arrived in Waipawa and joined the accounting firm that managed the books for WFCL. He did work for the Julls. He soon set up on his own account and the Jull family businesses followed him. He established himself as a leading member of the local business and professional community, developing in the process a practice that was the envy of the district. Mr Pickett in due course became company secretary and accountant for WFCL.
[7] In 1975, Ed Jull and Warren Pickett incorporated WHL, another finance business. It seems the success of WFCL had created substantial demand from other potential depositors in the district who wanted to share in that success and, initially at least, it was intended that WHL would focus on receiving and utilising deposits from a wider circle of depositors. If that was the intention originally, it did not last. The line between the two companies soon blurred as we shall see.
[8] The attraction of WFCL and WHL to depositors was the above-market interest rates that they paid. Interest payments were 10 per cent during the period relevant to the deposits in question.
Ed Jull’s role as director
[9] According to Ed Jull, his offices in Waipawa were just down the road from Warren Pickett’s. Each morning he would walk to Warren Pickett’s office and spend at least 10 minutes discussing the various business issues affecting the Jull interests. Mostly, he said, these discussions related to Brewcorp Holdings Ltd, the family’s primary business vehicle. But WFCL and WHL issues would also be discussed where relevant and necessary. Ed Jull said that Warren Pickett would occasionally consult him over investments or lending by one or other company, but his (Ed Jull’s) primary focus in that respect was the relevant interest rate payable to depositors. This was because Ed Jull and Jull family interests were themselves depositors with both companies. Ed Jull did say that he tended to know more about the business of WFCL because this was seen as more closely associated with the family and he knew most of its depositors.
[10] In any event, for the most part, decision-making for both companies belonged to Warren Pickett. Ed Jull displayed no particular understanding of the accounts of WHL when they were put to him in cross-examination. Indeed he frankly admitted that the companies’ accounts were not his “strong point”. Such matters, he said, were left to Warren Pickett to deal with. Ed Jull said the reason he was a director in WHL was that he brought “large amounts” of his own money to the company, as well as representing the Jull family history with both companies. He said he was happy to leave day to day running of the companies to Warren Pickett because after
many years of working together, he trusted Warren Pickett completely and, it seems, unconditionally.
[11] One thing Ed Jull was clear on was that he did ask Warren Pickett, on more than one occasion, whether WFCL and WHL should each issue a prospectus before accepting deposits. Warren Pickett confirmed in evidence that his consistent advice to Ed Jull was that there was no public offer to potential depositors so a prospectus was not required under the Securities Act 1978.
[12] The root cause of the failure of both companies appears to have been a series of failed investments in the 1990s from which they never recovered. In time (it is hard to tell when), Warren Pickett began to mine new deposits from depositors to meet interest commitments in respect of existing deposits, rather than making the loans or investments that he represented to depositors he would be making with their money. So the two companies morphed into a kind of joint Ponzi scheme with depositors being attracted by high (but ultimately unsustainable) interest rates payable even during market downturns.
[13] Inevitably the edifice came crashing down.
[14] WHL never advertised or touted for deposits. Other than Warren Pickett’s own internal record keeping, the only written material the company generated at all was its statements to depositors. These statements recorded deposits, withdrawals and interest entitlements accruing twice a year.
[15] Warren Pickett also kept meticulous record in WHL’s internal accounts of the deposits, withdrawals and interest entitlements of each depositor. The records of deposits and withdrawals were, according to the liquidators, meticulously kept and they eventually formed the basis of the liquidators’ calculations of depositors’ net entitlements.
When did Ed Jull resign?
[16] Ed Jull pulled most (but perhaps not all) of his money out of the two companies in 2004, some years before they collapsed. His withdrawal roughly
coincided with the sale of his Central Hawkes Bay property and removal to retirement (he said) in Taupo.
[17] Ed Jull said it was then that he resigned from his directorship of WHL. A March 2004 resignation date is important because, if it is true that Ed Jull was not a director after March 2004, then none of the deposits the subject of this litigation were made during his tenure. Thus, if I accept Ed Jull’s version of the facts in this respect, both sides acknowledge that he cannot be personally liable to repay any deposits.
[18] Ed Jull said it is likely that he resigned in writing at that time, although no evidence of such written resignation has been found either by Ed Jull himself or the liquidators. A March 2004 resignation date is the first possibility.
[19] The only written evidence of Ed Jull’s resignation is a return filed at the Companies Office on 10 December 2004 by Warren Pickett. It records that Ed Jull had resigned on that date (i.e. 10 December 2004) rather than at the end of March
2004. The return also recorded a minor change in shareholdings – Ed Jull’s shareholding increased by one share to 500 (out of 1500 shares), as a result of the transfer of that share from Roger Douglas Jull, another member of the Jull family who was a trustee of the Jull Family Trust. Thus, a 10 December 2004 resignation is the second possibility.
[20] Ed Jull says that the return did not reflect the correct resignation date. It simply reflected the date Warren Pickett got around to filing a return. If, contrary to Ed Jull’s view, I accept the Warren Pickett return as accurately recording the date of Ed Jull’s resignation, then all relevant deposits in this case were made before his resignation, but only two deposits (amounting in total to $28,173.60) were made in time to trip the statutory trigger under s 37(6) of the Securities Act 1978, while Ed Jull still held office as a director.
[21] As we shall see, under s 37(6), where a company fails to issue a prospectus and should have, the company must repay the deposits (called subscriptions under the Act). Its directors will become personally liable to pay them back with interest at
a date two months after the subscription was made if the company fails to pay the deposits back. A focus of argument will be whether it is sufficient that Ed Jull was a director at the date of deposit, or whether s 37(6) requires him to hold office at the two month trigger date as well.
[22] There is a third possible date. Three Companies Office “off market transfer forms” dated 31 March 2005 record that Warren Pickett had purchased all of the shares in WHL on that date. It recorded the transfer of 499 shares from Ed Jull; one share from Roger Douglas Jull1; and 500 shares from Andrew Richard Train and Roger Douglas Jull (as trustees presumably of the Jull Family Trust).
[23] In addition, off market transfer forms also dated 31 March 2005 recorded that Ed Jull and Andrew Train together with Roger Douglas Jull transferred their shares in WFCL to Warren Pickett.
[24] Later Companies Office returns also recorded 31 March 2005 as the date on which Ed Jull resigned as a director of WFCL2 and Warren Pickett became a director of that company in his place.3 On the basis of this evidence of major movements in March 2005 in ownership of both companies and directorship of WFCL, the plaintiffs say that the Warren Pickett return of 10 December in respect of Ed Jull’s resignation as a director of WHL cannot be relied on. The plaintiffs say this later
circumstantial evidence suggests Ed Jull did not resign as a director of WHL until
31 March 2005. If they are right about that, then Ed Jull was a director when the s 37(6) statutory trigger was tripped for all deposits.
2011 orders of Ronald Young J
[25] As I have said, WHL was put into liquidation on 6 August 2008. WFCL followed suit on 7 August 2008. When liquidators Graeme Edwards and John Palairet stepped in, they found that Warren Pickett had not differentiated between the two companies in any principled way. Deposits were recorded against
one or other company seemingly at random as if there was no division or distinction
1 Despite the earlier 10 December 2004 return that recorded the transfer of that same share to
Ed Jull.
2 The return was dated 16 March 2006 recording the particulars of directors.
3 Registered on 5 April 2005 and backdated.
between them at all. The only exception was where, as with the Mogeys and the Littles, depositors were not New Zealand residents. In that case, WHL was used to receive deposits because WHL had “approved issuer” status with the IRD. This meant “income” on the deposits could be taxed at two per cent instead of the much higher standard income tax rate for New Zealand resident depositors.
[26] The liquidators traced deposits and withdrawals, as far as was possible. They prepared a final reconciliation. In 2010 and based on that reconciliation, the liquidators applied to this court for directions in relation to both companies. On
7 February 2011, Ronald Young J made orders that:
(a) the funds in WHL and WFCL be pooled for the purpose of assessing repayment to depositors, and the identity of the receiving company treated as irrelevant for the purpose of such assessment;
(b)all payments by the company to depositors whether purporting to be by way of interest or not, would be treated as repayments of capital;
(c) calculations be on a constant dollar basis so that earlier deposits would be treated as having greater value in terms of any repayment by the liquidators by comparison to later deposits; and
(d) repayments would otherwise be on a pari passu basis.
[27] The depositors, including the plaintiffs, eventually received a repayment of
10.53 cents in the dollar from the joint liquidation.
The plaintiffs and their claims
[28] So much for the story of Ed Jull and Warren Pickett. The plaintiffs are Robert and Narelle Little, Penelope Chote and Lynette and John Mogey. All had been depositors with WFCL and WHL for years. For example, the Mogeys invested over $5.2 million between 1976 and 2008; the Littles, over $3.1 million; and Penelope Chote, nearly $167,000. They did not claim these totals back because they could not. Instead they now target deposits they made within a relatively narrow
window. They claim only deposits made between September and November 2004. These deposits would, if they otherwise qualified, have given rise to a personal obligation on any director to repay them two months later under s 37(6) of the Securities Act 1978 – that is, liability would arise in respect of the deposits claimed in this case at some point between November 2004 and January 2005.
[29] There were two reasons why such a narrow window was chosen. First, the limitation period, and second, the date of Ed Jull’s resignation as a director of WHL. As to the limitation period, proceedings were commenced in November 2010 making the earliest claimable deposits those lodged in September 2004.4 Ed Jull resigned as a director of WHL on either 30 March 2004, 10 December 2004, or
31 March 2005, depending on the view one takes of the evidence.
[30] The plaintiffs’ claim they made the following specific deposits: (a) John and Lynette Mogey as follows:
(i)$3,173.60 on 27 September 2004 – Jackaroo Holdings account;
(ii) $25,000 on 5 October 2004 – Pendo Holdings account; (iii) $25,000 on 28 October 2004 – Tundra Holdings account; (iv) $756.90 on 8 November 2004 – Cascade Holdings account;
(b) Robert Little: $43,562.33 on 10 November 2004;
(c) Narelle Little: $7,568.00 on 10 November 2004; and
(d) Penelope Chote: $20,000 on 24 November 2004.
[31] According to the liquidators, when deposits and withdrawals are pooled as between the two companies and interest is stripped out as directed by
4 8 November 2010 for the Littles and Chote, and 20 November 2010 for the Mogeys.
Ronald Young J, the net position at the date of liquidation for each of the plaintiff ’s accounts is as follows:
(a) John and Lynette Mogey:
(i) $8,025.68 deficit – Jackaroo Holdings account; (ii) $32,222.37 credit – Pendo Holdings account; (iii) $92,215.73 credit – Tundra Holdings account; (iv) $69,020.03 credit – Cascade Holdings account;
(b) Narelle Little: $68,884.96 credit;
(c) Robert Little: $2,370,218.00 credit; and
(d) Penelope Chote:
(i) $14,856.19 credit; (ii) $13,460.27 credit.
Section 37
[32] The relevant parts of s 37 of the Securities Act 1978 provide as follows:
(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 provision 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–
…
(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 two 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) applies, within five 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.
[33] The essence of s 37 is thus that where the allotment of a security is offered for subscriptions to the public but there is no registered prospectus, the issuer must repay the subscribers as soon as is reasonably practicable. But, if there is no repayment within two months, then the issuer’s directors will be jointly and severally liable to repay the subscriptions with interest at the statutory rate of 10 per cent. Thus, for the plaintiffs to succeed, they must establish that:
(a) WHL allotted and offered securities to the public; and
(b)that Ed Jull was a director within the meaning of s 37(6) at the relevant time.
There is of course no question about the two months requirement having elapsed. Nor is there any question that the deposits were subscriptions for securities within the meaning of the Act.
[34] Ed Jull has a series of defences available to him. He asserts that the proceeding is barred by the Limitation Act 1950. The limitation issue is bound up with the question of when Ed Jull’s tenure as a director ended, but there is also a question about whether a limitation period shorter than six years applies in this case. This turns on whether the repayment obligation is a penalty or forfeiture. The defence can also argue that Ed Jull should not be required to repay the deposits
because the issuer’s failure to repay the subscription was not caused by his misconduct or negligence.
[35] The defence may also have resort to s 37AH(1) of the Securities Act 1978 which allows the court to grant relief to a director if it is “just and equitable” to do so.
[36] Finally, Ed Jull has raised an issue about whether some of the deposits made by John Mogey were in fact his money.
The issues
[37] This proceeding therefore gives rise to the following issues:
(a) When did Ed Jull resign as a director? A sub-issue here is whether he is caught by s 37(6) if he was not a director when the obligation to repay under that subsection was triggered even if he was when the subscription was paid.
(b)Did WHL offer securities to the public for subscription? This issue breaks down into two sub-issues –
(i) Did WHL make any offer?
(ii) Was any such offer to the public?
(c) Was the requirement to repay with interest a “penalty or forfeiture”,
such that the relevant limitation period is two years not six?
(d)Was the issuer’s failure to repay caused by the misconduct or negligence of Ed Jull?
(e) Is it just and equitable that the defendant should be granted relief from repaying the deposits in whole or in part?
(f) Were the deposits in the following Mogey accounts, money that actually belonged to them?
(i) Jackaroo; (ii) Pendo; and (iii) Tundra.
I turn now to address each of those issues.
When did Ed Jull resign his directorship?
[38] As I said, there are two issues in this question. The first issue is when did Ed Jull resign his directorship? The second issue is whether Ed Jull will still be caught by s 37(6) – and liable to repay relevant deposits plus interest – if he was a director when the deposit was paid, but not when the two months time limit expired. That second issue arises only if I find that the relevant resignation date is 10
December 2004. If that is the date, only the deposits lodged before 10 October 2004 will have triggered the two month deadline in s 37(6) by the date of his resignation. On the other hand, a March 2004 resignation date would not catch any of the deposits, and a March 2005 date would comfortably catch all of them.
[39] As I have said, the plaintiffs’ focus in the first instance is on the Companies Office off market transfer forms that say Ed Jull’s shares in WHL and WFCL were transferred to Warren Pickett in March 2005 and that Ed Jull also resigned as a director of WFCL at that time. That, they say, shows the real resignation date from WHL. Very much in the alternative, they argue that the only other possible date is
10 December 2004 because that is the date recorded in Warren Pickett’s Companies
Office return filed that day.
[40] The defendant focuses instead on his move to Taupo in March 2004. He says that was the date of his disengagement with Warren Pickett and WHL. He said he advised Warren Pickett of his retirement, and, after that, had no further involvement in WHL governance.
[41] Section 157 of the Companies Act 1993 provides:
(1) the office of director of a company is vacated if the person holding that office–
(a) resigns in accordance with subsection (2); or
(b) is removed from office in accordance with this Act or the constitution of the company; or
(c) becomes disqualified from being a director pursuant to s 151; or
(d) dies; or
(e) otherwise vacates office in accordance with the constitution of the company.
(2) A director of a company may resign office by signing a written notice of resignation and delivering it to the address for service of the company. The notice is effective when it is received at that address or at a later time specified in the notice.
(3) Notwithstanding the vacation of office, a person who held office as a director remains liable under the provisions of this Act that impose liabilities on directors in relation to acts and omissions and decisions made while that person was a director.
[42] The section contains a number of options for ending the tenure of a director. Resignation, the relevant option here, is, according to subsection (2), achieved when the resigning director delivers written notice of his or her resignation to the company. No such written notice has been found. Nor is there any evidence of Ed Jull providing written notice to WHL on 10 December 2004, the date recorded in Warren Pickett’s Companies Office return.
[43] Mr Macfarlane for the defendant, argues that this absence of the required documentation is understandable. It is nearly a decade since the resignation, and paper can go missing.
[44] Mr Macfarlane argues in the alternative that the requirement for written notice is not mandatory: subsection (2) uses the word “may”. Mr Toebes, for the plaintiffs, argues that “may”, properly read in context, means “must”. “May”, he says, is used only because the list provides an alternative method for resignation – that is resignation in accordance with the company’s own constitution.
[45] As Mr Macfarlane points out, the authors of Company Law in New Zealand5
suggest it is at least arguable that s 157 is directory only:6
[I]t may be that s 157(2) is more directory than mandatory. There is some older authority that supports the view that an oral resignation, at least once accepted, is effective notwithstanding any constitutional provision for written notice. It is also reasonably clear that contractual obligations to act as director cannot be kept indefinitely on foot in the face of a clear manifestation of an intent to resign. Indeed the standard rule is that a resignation is effective without acceptance.
[46] The learned authors refer to more recent authority in Vance v Smith in which the High Court assumed, without argument on the point, that s 157(2) is mandatory.7
[47] In my view, the “may” in subsection (2) does not necessarily mean that the requirement to resign in writing is directory only. It seems likely that “may” was used because the alternative resignation mechanism – pursuant to the company’s constitution (s 157(1)(e)) – would be nullified if subsection (2) had been drafted using “must” instead of “may”.
[48] Nonetheless, stepping back and looking more broadly at the provision, I do not think that the list in s 157(1) was intended to be closed. I agree with the authors of Company Law in New Zealand, that it is unlikely that s 157 was intended to prevent a director from resigning by evincing a clear intention to do so (short of written notice to the company) if that communication is also clearly accepted by the company. Any other approach to s 157 would see directors locked in indefinitely where, by their actions and the actions of the company, all relevant parties have shown that that is not the true position. Assistance is perhaps provided by the definition of director in s 2: “any person occupying the position of director.” This suggests directorship is a question of fact. It is certainly the case that even after a formal resignation, an individual can be held to have continued in that role. There is no reason in principle why the reverse should not also apply. The simple point is that the provision says office “is vacated” in one of five ways. It does not say that
office is vacated only by one of those five ways.
5 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (LexisNexis, Wellington 2011).
6 At 937 (citations omitted).
7 Vance v Smith HC Wellington CIV-2005-485-24, 5 June 2008.
[49] It follows that if there is clear evidence of an oral resignation that is equally clearly accepted on behalf of the company that, in my view, will be sufficient to amount to resignation as a director.
[50] In this case Ed Jull said he advised Warren Pickett orally that he wished to resign his directorship and retire with his wife to Taupo. Accompanying documentation he provided to the court – a mover’s bill, a contract for the sale of his Waipawa home, and another contract for the purchase of his Taupo home all between March and May 2004 – confirm the move if not the retirement.
[51] Ed Jull’s evidence was that he (as was his usual practice) left the paper work
for his retirement to Warren Pickett to complete.
[52] Warren Pickett confirmed his recollection that Ed Jull’s resignation coincided with his move to Taupo. He explained the delay in registering that resignation with the Companies Office in terms of it simply taking him a long time to get around to it. Warren Pickett said that it was very likely he would have completed a form for Ed Jull’s signature, but none has been found. Ed Jull’s evidence was that these changes coincided with him pulling most of his money out of WFCL to purchase a commercial property in Auckland in the second half of 2004. Ed Jull signed over his shares in both companies a year later on 31 March 2005. His signature appears on the transfer forms. That date is, as I have said, also the date on which he is recorded as resigning from his WFCL directorship.
[53] There is much in Mr Toebes’ argument that the major share transfers in relation to both companies and Ed Jull’s resignation from WFCL provide contextual hints that 31 March 2005 was the key transition date in terms of Mr Jull’s final disengagement from the two companies. In the end however, I am not convinced that this hint should be trusted. The factual matrix, when properly analysed, suggests that date is too late.
[54] Nor do I accept the evidence of Ed Jull and Warren Pickett in relation to the date of Jull’s resignation. It does not square with a careful analysis of the whole context. Although I accept that Ed Jull moved to Taupo in March 2004, I do not
consider that alone provides clear evidence of his resignation. It is true that when living in Central Hawkes Bay, Ed Jull met with Warren Pickett on a daily basis to discuss matters of mutual business interest and he could not do this after the move. But as Ed Jull said, WHL matters were only rarely discussed. Warren Pickett made almost all decisions and consulted Ed Jull only on occasion (and mostly about interest rates). The loss of daily contact between the two, occasioned by Jull’s removal to Taupo, was therefore not necessarily inconsistent with him continuing in his already rather residual governance role in relation to WHL. The move does not, of itself, corroborate Ed Jull’s evidence of an oral resignation.
[55] I am inclined to treat Jull’s evidence of an oral resignation with some scepticism in light of the absence of contemporaneous written corroboration. I also treat Warren Pickett’s support of Ed Jull’s assertion in that respect with a similar sense of scepticism. It is just as likely to be borne of loyalty to his old principal, or guilt, or both.
[56] I acknowledge Alda Anderson’s evidence that after his move to Taupo, Ed Jull’s “connection with the Warren Pickett offices ceased”. I take this to mean simply that Ed Jull no longer visited as was his routine. Ms Anderson took over Ed Jull’s former role as a cheque signatory for obvious practical reasons. But again none of this is necessarily inconsistent with Ed Jull remaining in his minimal role as director.
[57] In my view, the best independent evidence of Ed Jull’s stepping aside from a governance role is the withdrawal of his funds from WHL’s accounts. As Ed Jull said, the reason he was a director of WHL was the money he brought to that company. Once that money was removed, there was logically no longer any justification for him remaining as a director. Jull’s evidence was that he pulled all of his money out of both companies in order to fund the purchase of a commercial building in Auckland. The purchase was made, he thought, in October or November
2004. He confirmed in cross-examination that by 1 February 2005, all of the funds he controlled had been withdrawn.
[58] In my view, Jull’s investment in the Auckland transaction is very likely to have been the trigger for Warren Pickett filing his December return recording Ed Jull’s resignation. As Warren Pickett himself said in evidence, he feared that Ed Jull would discover the true state of both companies. Ed Jull had been asking inconvenient questions. He wanted Ed Jull out of the company and that fact officially recorded as soon as possible. I do not therefore believe Warren Pickett when he said that Ed Jull had resigned on or before March 2004 but that Warren Pickett did not “get around to” filing notification of that fact with the Companies Office until 10 December 2004. In my view it is far more likely that Warren Pickett filed the return promptly and as soon as Ed Jull had pulled his money out of WHL. He certainly would have recorded an earlier date in the return on 10 December, if the resignation had occurred earlier. That is what he did with the WFCL return filed in March 2006, but backdated insofar as Ed Jull’s resignation was concerned, to
31 March 2005.
[59] It is true of course that Ed Jull’s resignation as a director of WFCL is recorded nearly a year and a half later, as having occurred three months after the WHL resignation. I do not think that is inconsistent with a finding that the
10 December return accurately recorded what happened with respect to WHL.
[60] First, there is a great deal of evidence that Warren Pickett was shoddy with procedural details. His focus must have been on WHL in December 2004, and he clearly forgot about WFCL. Backdating the WFCL return to 31 March 2005 was probably as far back as Warren Pickett felt able to go when he finally did file that return in March 2006. Alternatively, it may be that there continued to be Ed Jull related money in WFCL after 10 December pending settlement of the purchase, and the resignation was not recorded until the withdrawal of those funds. Perhaps the first withdrawal of funds (in 2004) to pay the deposit on the Auckland commercial building came from WHL. It is hard to know given the state of the accounts. In any event, my primary focus in this proceeding (even bearing in mind Ronald Young J’s ruling), is WHL, and I am satisfied that the 10 December date given in the Companies Office return was accurate.
[61] To conclude, the withdrawal of Ed Jull’s money from WHL to fund the purchase of the Auckland property at the end of 2004, is in my view clear evidence that he stepped aside as a director at that time; and Warren Pickett’s recording of that fact on 10 December 2004 is clear evidence of the company’s acceptance of that resignation.
[62] That means that there are two subscriptions for which the two month deadline in s 37(6) is clearly triggered before Ed Jull’s resignation. They are:
(a) Jackaroo - $3,173.60; and
(b) Pendo - $25,000.
[63] Both are accounts claimed by the Mogeys. All other subscriptions were made while Ed Jull was a director but he had resigned by the later two month trigger for liability. That fact raises the second question: i.e. whether a person who was a director at subscription date but not two months after that date, nonetheless attracts liability under s 37(6).
[64] The plaintiffs argue that it was enough that Ed Jull was a director at deposit date. The defendant argues that a director’s liability under s 37(6) is only triggered two months after deposit so that the defendant must be in place at that time.
[65] In Chean v De Alwis, the Court of Appeal dealt with the reverse scenario: was the director in that case liable under s 37(6), even though she had been appointed after the date that the company offered its securities, and subscriptions from the public were received? 8 The Court of Appeal did not hesitate to conclude that the director was so liable. In that case, the subscriptions had found their way to the bank accounts of the appellant and her husband, so the appellant had received a benefit from the invalid offer. It was not surprising that she was therefore held to be caught by s 37(6). But the court expressly reserved its position in respect of the scenario
that arises in this case. The court said:9
8 Chean v De Alwis [2010] NZCA 30.
9 At [47].
Whether it applies to directors who were in office when the illegal allotment was made but were not in office when the repayment obligation arose is a matter to be left for another case. It may be that some clarification is required in that regard, so that liability can be sheeted home to directors in office at the time of an allotment but who have been careful enough to vacate office before the obligation to repay occurs.
[66] Director is defined in s 2 in the present tense as:
… any person occupying the position of a director of the company by whatever name called.
[67] In that definition, “occupying” must mean occupying at the relevant time. Clearly (in light of Chean), after the two month trigger date is one such relevant time, but is it the only one?
[68] The Court of Appeal in Chean suggested that it might be minded to “sheet home” responsibility to a retiring director where the director has been “careful enough” to vacate office before the two month period has expired. The court was obviously concerned to ensure that directors who were responsible for the offer of securities and the acceptance of subscriptions are not allowed intentionally to evade responsibility. If so, it might be enough that the director is in that role when the issuer makes the offer of securities and when it accepts subscriptions. This approach, in my view, is consistent with the section’s underlying policy. That is to make directors personally responsible when companies under their governance have failed to comply with the Act’s disclosure requirements and failed to protect invalid subscriptions. On this basis, occupying the position of director two months after receipt of subscriptions would not be a mandatory requirement. Just because liability arises after two months, it does not necessarily mean that “occupying” can only relate to the two month trigger. That would be to create a significant loophole the legislature cannot have intended. Nor is the loophole to be found unambiguously in the words used in the section.
[69] The construction I favour is supported by the proviso to subsection (6). This allows the court to absolve the director from responsibility where he or she can demonstrate the failure to pay was not any fault of theirs, even though that director was in place at a relevant time. This suggests that an important component of ultimate responsibility is causation.
[70] There will be circumstances where innocent retiring directors will not have contributed to the companies’ non-payment, or inability to pay and so can claim the benefit of the proviso to s 37(6). There will be other circumstances where retiring directors nonetheless carry a significant responsibility for the default even though they are no longer in office at the trigger date. The thrust of the subsection is to create a wide net while providing the court with a discretion to do justice in particular cases. The “just and equitable” proviso in s 37AH(1) also supports such a construction.
[71] I conclude therefore that Ed Jull is prima facie caught by the terms of s 37(6)
in relation to all subscriptions at issue in this case.
Did WHL offer to the plaintiffs to make subscriptions?
[72] Ed Jull argues that WHL never made an offer to the plaintiffs to make subscriptions. None of the plaintiffs was approached by or on behalf of the company. Rather, the reverse was the position. The individual subscribers approached WHL, offering to provide subscriptions. That is true as a description of the physical process that took place. WHL did not advertise. People heard of its activities by word of mouth and made contact with (usually) Warren Pickett, asking whether he would accept their deposits.
[73] Mr Toebes argues that that nonetheless amounted to an offer in terms of the definition in s 2 of the Securities Act 1978. That section defines “offer” as including:
… an invitation, and any proposal or invitation to make an offer; and [to offer] to subscribers.
[74] In his 2011 judgment in respect of both companies, Ronald Young J proceeded on the basis that s 37 applied.10 In that case, counsel for each of the liquidators, the investors and Mr Rennie QC, as amicus, all agreed that s 37 applied.
Whether offers were made to subscribers was assumed rather than argued.
10 Re Waipawa Finance Limited (in liquidation) HC Wellington CIV-2010-441-465, 7 February
2011.
[75] That said, there is no doubt in my mind that there was an offer. The definition includes not only an offer as generally understood, but also an invitation to potential subscribers to make an offer. Steel v New Zealand Guardian Trust addressed this question.11 In that case, a grocery and hardware merchant began taking cash deposits from its shareholders and employees operating much as a banker would with the funds. There were no advertisements or public notifications.
Ellis J rejected the argument that the company’s role in that case was entirely passive and that active soliciting was necessary to amount to an offer under the legislation. The Judge concluded:12
The evidence was that the existence of the deposit scheme got abroad by word of mouth to employees, friends and neighbours. I am satisfied that the stock was offered by creating it and letting it be known that it was available. I cannot agree that the company’s role was entirely passive. To suggest passivity amounting to indifference cannot stand beside the substantial borrowed funds of up to $1 million upon which the company plainly depended.
[76] Mr Macfarlane sought to distinguish that decision by arguing that in this case, WHL did not “let it be known” that it was accepting deposits, there was no guarantee that subscription offers would be accepted by the company and it was not even clear to subscribers which company would take the subscriptions.
[77] I do not agree. Mr Toebes is right that WHL had been in the business of taking deposits for 33 years. WFCL had been doing so for 59 years. A company in the business of taking subscriptions for that long must self-evidently have “let it be known” to the community that it was taking them. It would defy common sense to suggest otherwise. In terms of the definition, Warren Pickett was, by letting it be known that WHL was open for business, inviting subscribers to offer subscriptions.
[78] An offer was therefore made.
11 Steel v New Zealand Guardian Trust Company Ltd HC Christchurch CP 374/89, 22 August
1990.
12 At 19.
Was the offer made to the public?
[79] It is clear that potential subscribers came to know of WHL and WFCL by word of mouth. The public is defined very broadly in s 3(1) of the Act:
(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.
[80] Section 3(2) provides exclusions from what constitutes the public as follows:
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:
(b) an invitation to a person to enter into a bona fide underwriting or sub-underwriting agreement with respect to an offer of securities.
[81] The authorities are clear that the fact that people heard of WHL and WFCL by word of mouth is irrelevant. The mode of notification is not the point, rather it is the nature of the connection between the recipient of that notification and the company or its officers that counts.
[82] Subsection (2) excludes any offers of securities where such offers are made only to relatives or close business associates of either the issuer or a director of it; or to professional investors or to those who pay a minimum subscription of $500,000; or to anyone else who, in all the circumstances, can properly be regarded as having been selected on some basis other than as a member of the public.
[83] The leading authority is Securities Commission v Kiwi Co-operative in which the Court of Appeal analysed the subsection (2) exceptions.13 Blanchard J writing for the coram held that the purpose of the legislation is to protect investors by ensuring that they are well informed about companies in which they are considering some form of security investment through full disclosure of relevant affairs of the issuer. It is designed to go some way to redressing the usual information asymmetry
between the issuer and potential subscribers who have no special sources of information not otherwise available to the public. The exceptions in subsection (2) are based on the idea that such investors are assumed to know enough about the issuer through closer private or business relationships, or to have the means otherwise to find out about those affairs. Alternatively the legislation assumes that there are investors who from professional expertise or by value of the investment, understand and are prepared to take the risks involved. The additional compliance cost in issuing a prospectus to subscribers exclusively comprising such narrow
classes cannot be justified because the legislation is not aimed at protecting such
13 Securities Commission v Kiwi Co-operative [1995] 3 NZLR 26 (CA).
investors. Thus, the purposive dividing line between public and other in s 37 is to be scribed by asking whether the subscribers are close enough to the issuer or its directors to know or to have the means to know about the relevant affairs of the issuer and so have no need for protection; or whether subscribers are professional or high value investors who can be relied on to take care of themselves.
[84] Finally, I note that subsection (2) excludes the effect of s 37 only when all offerees fit the description in s 3(2). The defendant concedes that Penelope Chote is a member of the public without relevant disqualifying connections to the companies. That concession means the s 3(2) exclusion can have no application to any of the subscribers even if some of them are not members of the public. Section 37 is an all or nothing provision.
[85] I would add that on the evidence as I heard it, none of the remaining subscribers can be described as “close business associates” or professional or habitual or high value investors anyway. It is true that John Mogey and Warren Pickett were good friends but I take the phrase close business associates to describe individuals who are intimately involved in each other’s business affairs: business partners, joint venturers, co-directors and the like. Though these two were good friends and John Mogey invested in Warren Pickett’s companies, they were not necessarily close business associates. In addition, none of them could properly be described as professional investors in my view. They are or were retired business people administering their (admittedly substantial) retirement savings – often created by the sale of farms or other businesses. But I do not take such individuals to fit the description in s 3(2)(a)(ii). The evidence was that none of them invested more than
$500,000 at a time in WHL. Nor do I consider that there is any other reason in terms of s 3(2)(a)(iii) to treat these individuals as other than members of the public. All of them had longstanding associations with Warren Pickett, but that does not stop them from being the public. Long term investors drawn from the public do not become private associates by reason only of the length of the relationship, without something more.
[86] The information asymmetry that underpins s 37 was clearly present, and none of the plaintiffs, in my view, possessed the means to redress it. I agree with Ronald
Young J that the securities were offered to the public and that the plaintiffs are a sub- group of that category.
Penalty or forfeiture?
[87] It is common ground that the subscriptions now claimed, were in time in terms of the standard six year limitation period under s 4(1)(d) of the Limitation Act
1950 (the governing statute at the commencement of proceedings). Mr Macfarlane argues that the limitation period is two years rather than six years. He focuses on the terms of that part of s 37(6) requiring directors to repay the subscriptions at the prescribed interest rate – 10 per cent at the time. Mr Macfarlane argues that both the strict liability for repayment and the mandatory 10 per cent rate elevate the redress in this case to a penalty.
[88] Section 4(5) of the Limitation Act 1950 provides as follows:
An action to recover any penalty or forfeiture, or sum by way of penalty or forfeiture, recoverable by virtue of any enactment shall not be brought after the expiration of two years from the date on which the cause of action accrued …
[89] Mr Macfarlane argues that the compulsory 10 per cent interest rate is “a punishment, especially a fine, for a breach of law, rule or contract …”, and it is therefore a penalty.14
[90] Mr Macfarlane argues that the director’s liability is strict under s 37. Subscribers, he said, do not need to prove loss; the director does not have any direct control of the subscriptions; the subscribers may well have benefitted from the deposits; some of the deposit money may have been repaid; the money could well have been properly invested by the issuer, accruing interest as promised; and there may have been no reason to even consider repayment. Nonetheless, Mr Macfarlane argues, the director must pay from his or her own pocket, plus an arbitrary interest
figure.
14 Tony Everson and Graham Kennedy (eds) The New Zealand Oxford Dictionary
(Oxford University Press, Oxford, 2005) at 837.
[91] Thus Mr Macfarlane argues that this is no longer a matter of compensation and becomes a matter of punishment. Mr Macfarlane pointed to the 19th century New Zealand decision in Whittington v Cohen, in which a member of a local body entered into a contract for supply with it.15 The Local Body’s Contractor’s Act 1885 at the time prohibited any payment to him and required repayment with an additional
₤10, plus costs. Prendergast CJ found that the provision was penal. Mr Macfarlane said that case was on all fours with this.
[92] Before its repeal by s 58 of the Limitation Act 2010, s 37 of the Securities Act
1978 had a subsection (7). That subsection provided:
For the purposes of the Limitation Act 1950, any sum recoverable under subsection (5) or subsection (6) is not a penalty or forfeiture or sum by way of penalty or forfeiture.
[93] Mr Macfarlane pointed to s 59 of the Limitation Act 2010, a transitional provision covering the treatment of actions based on acts or omissions prior to
1 January 2011. Subsection (2) provides as follows:
[Any such] action, cause of action, or right of action must, despite repeal of the Limitation Act 1950 and unless the parties agree otherwise, be dealt with or continue to be dealt with in accordance with the Limitation Act 1950 as in force at the time of its repeal.
[94] Mr Macfarlane says therefore that Parliament has directed that any claim filed prior to the repeal of 1950 Act must be dealt with as if the Limitation Act was still in force at the time of its repeal. That means, he says, that s 37(7) of the Securities Act 1978 is gone, but the penalty provision of the Limitation Act remains. That is because s 59 keeps the Limitation Act 1950 alive but it does not expressly resurrect s 37(7) of the Securities Act. That clears the way, he says, for the repayment sum, plus interest, to be treated, as it should be, as a penalty.
[95] Mr Toebes, on the other hand, argues that the law should be as it applied at commencement of proceedings in November 2010, at which time subsection (7) was still in effect.
[96] In my view, the only sensible way to read that provision is to treat the Limitation Act 2010 as if it had not been enacted – including the provision within that Act repealing s 37(7). Section 59(2) effectively says apply the 1950 Act and ignore the 2011 Act. In any event, even if that is wrong, s 37(7) is not necessarily to be read as a deeming provision such that the state of affairs declared within it, is not in fact the case without its deeming effect. Its terms appear more to be “for the avoidance of doubt” than to deem that which is not. It would not follow therefore that the absence of s 37(7) would automatically make a penalty the sum payable under s 37(6). Whether it is will be a question of fact and context.
[97] In this Act, there are wide powers to grant relief in deserving cases including those powers set out in s 37(6). I disagree with Mr Macfarlane’s submission that the director’s liability is mandatory and inexorable under s 37. There is no inexorable liability where there is no causation, negligence or misconduct or where considerations of justice and equity apply. I do not accept that the starting point in that subsection is necessarily a penalty when the full statutory context is taken into account. Full liability under s 37(6) is the upper limit not the mandatory outcome.
Did WHL fail to repay because of Ed Jull’s negligence?
[98] I have set out the terms of s 37(6) above. It is the proviso that is relevant here:
Provided that a director shall not be so liable if he or she proves that the default in the repayment of the subscriptions was due to any misconduct or negligence on his or her part.
[99] As Blanchard J noted in Reuhman v Paape:16
The proviso enables a director to escape from this strict liability if he or she can prove that the default – the failure to make the repayment (and presumably also the failure to pay interest, though the statute is silent about this) – was not due to any misconduct or negligence on his or her part. An example might be if the director was incapacitated by illness or accident at the relevant time.
… its language is unambiguously, in the context in which it appears, directed towards excusing default only where the director in question was not
personally guilty of misconduct or negligence in relation to the issuer’s
failure to hold and repay the subscriptions.
[100] The essential question is whether there were any steps Ed Jull ought reasonably to have taken to ensure that WHL was in a position to hold and repay the subscriptions. There are two aspects to this:
(a) Should Ed Jull have taken steps to discover Warren Pickett’s fraud
earlier? and
(b)Should Ed Jull have made further enquiries about WHL’s obligation to issue a prospectus so as to limit the scale of the company’s repayment obligation?
[101] On the first aspect, Mr Macfarlane emphasised Warren Pickett’s impeccable business credentials at the time and his long track record as a business advisor and company director for WHL and the wider Jull interests. Mr Macfarlane argues that Ed Jull was entitled to rely on Warren Pickett’s professional expertise and advice both on the state of the company and on whether it had to issue a prospectus.
[102] Mr Macfarlane points (by way of analogy only) to s 137 of the Companies Act 1993 requiring company directors to exercise reasonable care, skill and diligence in discharge of directorial functions. He points also to s 138 of the Companies Act
1993. This allows directors to rely on any reports, statements and advice given by professional advisors and co-directors provided the director receiving the material:
(a) acts in good faith;
(b)makes proper inquiry where there is a need for such inquiry in the circumstances; and
(c) does not know that reliance on the advice is unwarranted.
[103] Mr Macfarlane points out that Warren Pickett was both an advisor and a de facto director even though he had (on paper at least) resigned his directorship
earlier. Mr Macfarlane’s argument was essentially that Ed Jull was justified in relying on Warren Pickett’s advice on all matters in the particular circumstances of WHL.
[104] Mr Toebes argues that Ed Jull’s reliance on Warren Pickett could not be justified. Rather, he said, such reliance (as was proved in the evidence) amounted to a complete abdication of his directorial function. It was submitted that Mr Jull displayed no understanding of the company’s financial accounts, no knowledge of the legal obligations that encumbered him, and focused selfishly only on the interest rates WHL would pay to subscribers because he was himself a subscriber.
[105] There is no doubt in my view that the manner in which Ed Jull carried out his functions as a director of WHL was a material cause of the ultimate inability of that company to repay subscribers. He failed to ascertain for himself whether a prospectus was required in accordance with s 37 and if it was, he failed to ensure the subscriptions were held for repayment. And, more fundamentally, he failed to discover the true state of WHL’s finances in time to prevent that company’s collapse and subscribers losing their subscriptions.
[106] None of that amounts to actual misconduct, but were his actions nonetheless negligent in terms of the proviso to s 37(6)? The answer must surely be yes. In fact Ed Jull was negligent as a director in a causative way. Ellen France J in Paape v Fahey discussed the appropriate standards to be applied in the proviso as follows:17
The Brookers’ commentary also states that the common law applies generally to the offer of securities to the public. For example, liability may arise at common law for mis-statements in offering documents, under the torts of deceit or negligent mis-statement.
I take the view that the court in considering the scope of the proviso can be informed by the sorts of matters set out in ss 137 and 138. As I indicated in the course of hearing, the New Zealand approach appears to be to consider the statutory framework as a whole reflecting the piecemeal development of the legislation. The standard will be that of common law negligence but can be assessed by reference to ss 137 and 138 matters.
17 Paape v Fahey HC Wellington CIV-2001-485-810, 18 May 2005 at [89]-[91]. This was the downstream trial following the refusal of Blanchard J in Reuhman v Paape (above) to grant application for summary judgment.
The matters in ss 137 and 138 are also the sorts of issues likely, as a matter of common sense, to have influence on an assessment as to whether the common law threshold is met. In any event, there has been some movement in recent cases which suggests that the duty of care at common law (gross negligence) is closer now to that in s 137 (see Brookers at CA137.2; CF Beck and Borrowdale at paras 317-319; and AS Sievers “The director’s duty of care: what is the new standard?” (1997) 15 Company and Securities Law Journal 392; see also the discussion in Farrar JH “The duty of care of company directors in Australia and New Zealand” (1996) 15(7) Cantab Law Review 228). In other words, I am not sure there is a great deal of difference in application to this case between the two approaches.
[107] In my view, it was not reasonable for Ed Jull to rely on Warren Pickett’s advice that a prospectus was not required. There was a great deal at stake both for the issuer and the directors – not to mention the subscribers who committed millions of dollars to the venture. A prudent director would have known that the net of s 37 is very wide indeed. Independent legal advice was obviously necessary given the scale of the subscriptions and investments in WHL. Such advice would inevitably have caused the company to take a different tack. Nor more generally, was it reasonable or prudent for Ed Jull to leave almost all governance decision-making in WHL to
Warren Pickett.18
[108] In evidence before me, Ed Jull demonstrated no real understanding of the financial accounts of the company, and he frankly admitted that his contribution to the company was not his expertise in the governance of finance and investment companies, but his own personal and family networks, and his wealth.
[109] Ellen France J in Paape made it clear that the directors in that case could not leave everything in the share offer in question to one party – the organising broker and promoter.19 Neither could Ed Jull in this case. He could have, and should have, required a far greater level of accountability of Warren Pickett in his administration of the company. There seemed to be no real accounts, and certainly no audit during all the years of WHL’s operation. If there had been, Warren Pickett’s fraud could have been averted or at least nipped in the bud at an early stage. That this was the
state of affairs in this company is the root cause of WHL’s (and WFCL’s) inability to
18 See for example, Lewis v Mason [2009] NZCA 306, (2009) 10 NZCLC 264,545.
19 Paape v Fahey, above n 17, at [111].
repay the invalid subscriptions. For the reasons traversed, some responsibility for that state of affairs can be “sheeted home” to Ed Jull.
[110] I hold therefore that the proviso to s 37(6) does not apply in this case.
Is it just and equitable to order relief?
[111] Ed Jull argues that he should receive relief under s 37AH – the “just and
equitable” provision. The section relevantly provides:
(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.
…
(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.
[112] For Ed Jull, Mr Macfarlane argues that all withdrawals from each of the
plaintiffs’ accounts should be deducted from any entitlements together with the
10.53 cents in the dollar repayment following liquidation. Mr Macfarlane argues that withdrawals cannot be credited as interest only, because there probably was no interest, at least not in the later years in light of the way deposits were mismanaged. Mr Macfarlane also argues that there should be a kind of speculation discount for the inherently risky nature of the investments these plaintiffs entered into with WHL. He does not suggest a figure.
[113] Mr Macfarlane refers further to s 7 which provides (effectively) that s 37 only applies where the offer to the public is “in New Zealand”. He says that excludes the Norfolk Island plaintiffs – the Mogeys and the Littles.
[114] Mr Macfarlane argues that a deduction should also be made for this.
[115] It is efficient to deal with that argument now and briefly. I do not agree with Mr Macfarlane’s contention. Rather, s 7 is to be read as having the same implication as s 37. That is, as long as the offer is generally made in New Zealand (and there is no argument that WHL’s standing offer as that term is broadly defined in the Act, was made in New Zealand), offshore investors are not excluded from the protection of s 37. Subsection 7(2) provides that a security is offered to a person in New Zealand if the offer is “received by a person in New Zealand”. The standing offer was received by persons in New Zealand. In any event, on the facts, the resident Norfolk Island plaintiffs all came to New Zealand to do business and made subscriptions to a greater or lesser extent while here. WHL’s offer to treat over subscriptions was therefore received by them in New Zealand at various times.
[116] Putting that matter to one side, Mr Macfarlane’s analysis is that when the other deductions are made, the Mogey accounts have all been fully repaid if grossed up together. Jackaroo has been fully repaid. Cascade was overpaid $9,020, Pendo should have $4,080 deducted in withdrawals between 2006 and 2008, while Tundra should at least be debited the 10.53 per cent deduction for the liquidator’s payment. Taken together, argued Mr Macfarlane, the positive balances are extinguished by the overpayments.
[117] Ms Chote only had $3,363.65 left in her account as at 31 March 2008 as the rest had already been withdrawn.
[118] The Littles should at least have the 10.53 per cent deduction he submitted.
[119] Mr Toebes argues that withdrawals from the plaintiffs’ accounts should not be deducted from the deposited amounts. He argues that the statutory responsibility relates to the deposit itself and there is no way of knowing whether the withdrawals
made after the relevant deposit related to earlier amounts on deposit or the actual deposit in question. Nor is it possible to differentiate between the interest and capital components of the moneys held.
[120] Mr Toebes proposes that credit be given to each plaintiff for his or her full deposit with the statutory 10 per cent interest rate being payable until the liquidator paid out the 10.53 per cent return. Thereafter, Mr Toebes argues, interest should continue to be paid at the statutory rate but on the net sum after the deduction. Mr Toebes accepts that his proposal was “not logically correct” in the sense that the deductions were comparing “apples with pears” (his phrase). But, he argues, there was no real prejudice in this approach because the plaintiffs had already suffered under Ronald Young J’s directions in having all interest stripped out of their accounts, all withdrawals accounted for and the liquidator’s payment credited.
[121] Section 37 requires me to focus on what is “just and equitable”. In reaching a
view on this, I must by s 37AH(3) consider:
(a) all of the circumstances relating to the allotment of the security; (b) the nature and seriousness of the breach of s 37;
(c) whether there has been material prejudice to the plaintiffs;
(d)whether the plaintiffs have disposed of their securities to any other person; and
(e) any other (relevant) matters.
[122] This section clearly delegates a wide discretion to the court to take full account of all relevant factors in coming to a view as to what is just in the circumstances. Going through the factors in order, it is hard to know what the actual circumstances of the allotment of the security were, except to say that by the time the subscriptions were made, WHL was already a Ponzi scheme in which Warren Pickett preyed on the naivety both of investors and Ed Jull.
[123] As to (b), the breach of s 37 was clearly of a very serious kind and it obviously significantly prejudiced the interests of the plaintiffs. Even those whom Mr Macfarlane argued had overdrawn accounts in accordance with Ronald Young J’s directions, did not appear to have overdrawn accounts in fact. Young J, it is to be remembered, gave no credit for an interest component in the plaintiffs’ accounts. And, in some cases at least, that component may well have been quite substantial.
[124] In those circumstances, the essential principles ought to be:
(a) deposits made in breach of s 37 must be repayable with interest at the statutory rate unless it is not just and equitable to require it;
(b)any partial or complete repayment of the invalid subscriptions should produce corresponding reductions in s 37(6) entitlements in the plaintiffs;
(c) Ronald Young J’s directions were made because it was impossible to trace where actual deposits had gone and whether money said to be in any particular account represented interest or capital.
[125] This means:
(a) it is impossible to know whether a partial or complete repayment of any particular deposit has been effected in the ordinary course of WHL’s business;
(b) it is impossible to differentiate in reality between WHL and WFCL;
(c) it is necessary then to do justice in the circumstances as best as can be, bearing in mind that the underlying purpose of the statute is to hold directors accountable for their breaches of the Act, and that it is for the defendant to show good cause for relief. Only those deductions that are clearly warranted in justice and equity, should be made.
[126] In this case:
(a) the 10.53 cents in the dollar deduction is justified under s 37AH even though there is no way of tying the liquidators’ payout to specific claimed deposits;
(b)if the final combined balance in respect of each plaintiff as recorded by the liquidators in compliance with Ronald Young J’s directions is a sum greater than the deposit claimed, then no further deduction is justifiable;
(c) if the final account total is less than the deposit, then the difference between the deposit and the Ronald Young J total at liquidation is to be treated as a deduction on that plaintiff’s entitlement; and
(d)once those calculations are made, the statutory entitlement of 10 per cent interest under s 37(6) is payable from the date of liquidation with appropriate adjustment for the later distribution by the liquidators.
[127] I accept that this approach can be criticised as rough and ready justice, but it is the best that can be done in the circumstances. On the one hand, it would be quite unfair to allow subscribers to reclaim deposits that have already been paid out. Equally it would be unfair to allow the defendant to deduct all withdrawals without also crediting deposits. The approach I have adopted steers a middle course between these two extremes by taking the lead from Ronald Young J’s directions. I am satisfied there is a clear case in justice and equity for taking this approach,
[128] I finally note that I have no appetite for a speculation discount. It seems to me that these investors have suffered already and significantly for the speculative nature of their investments, and a further surcharge on the deposits in question in this case cannot be justified.
Did the Mogeys own the money in Jackaroo, Pendo and Tundra?
[129] Mr Macfarlane argues that the funds held by the Mogeys in three of their accounts: Jackaroo, Pendo and Tundra, did not in fact belong to them. Rather, the Mogeys were using their offshore residential status to deliver significant tax
advantages to third parties. The argument was that John Mogey organised deposits and introductions to WHL on behalf of third parties but using his accounts. Jackaroo, it was argued, was an account John Mogey opened for his son Warwick; Pendo contained the money of a Norfolk Island resident and alternative musician named Wayne Pendleton; while Tundra contained money belonging to John Mogey’s sister, Annette Aitken.
[130] Mr Macfarlane refers to the evidence of Warren Pickett and Alda Anderson – the latter the office manager in Warren Pickett’s office for many years. They said that John Mogey had organised deposits on behalf of third parties, and introduced them to Warren Pickett. Ms Anderson in particular said that Warwick Mogey treated the Jackaroo account as his own (and not John Mogey’s) and Warren Pickett said he recalled the Mogeys writing an angry letter to him in which they complained of his actions having wrecked their son’s savings.
[131] Mr Mogey denies these allegations. He said the accounts had been set up in order for family and friends to repay to him money they owed. This was true of Warwick Mogey, his sister Annette Aitken, and the Norfolk resident Wayne Pendleton. He said there were no separate loan agreements in respect of these repayments into the separate accounts, because the borrowers were either family or well trusted. He said that so far as he was aware, he was the only person with authority to operate the accounts and Alda Anderson must have been wrong. He said the complaint contained in his letter to Warren Pickett was right in a sense to treat Warren Pickett’s actions as having ruined his children’s savings because the loan repayments they made were a kind of savings scheme for them. The Mogeys, he said, could afford to be generous to their children before WHL’s collapse.
[132] From all that, Mr Macfarlane argues that the explanations John Mogey offered were not credible and that it was open to me to conclude that John Mogey’s evidence left me unconvinced the accounts were actually owned by him on the balance of probabilities. Mr Macfarlane argues that the only way for me to have reached the requisite level of certainty was to hear from the three individuals concerned – Warwick Mogey, Wayne Pendleton and Annette Aitken. Despite
knowing that this was an issue, Mr Macfarlane submits, the plaintiffs did not call them.
[133] I am not convinced of Mr Macfarlane’s argument. General allegations were made, but the only specific allegations related to Warwick Mogey. Scepticisms over the Pendo and Tundra accounts leveraged off specific evidence in relation to Jackaroo. In that case, the evidence was that Warwick Mogey had access to the accounts and could make withdrawals from them. That is, Warwick Mogey behaved as if the account was his.
[134] Alda Anderson recalled organising withdrawals from Jackaroo to Warwick Mogey’s credit, with no involvement from his father. John Mogey essentially said in response that if that was the case, that was the first he had heard of it. It is entirely possible that Warren Pickett and Alda Anderson thought that that account was Warwick’s, while John Mogey knew it was not. The evidence I heard does not dislodge the direct and generally credible evidence from John Mogey that the account (indeed the accounts) were his.
[135] I find accordingly.
Disposition
[136] The plaintiffs will therefore be entitled to judgment as follows:
(a) Robert Little: $38,975.22 (being $43,562.33 less 10.53 per cent); (b) Narelle Little: $6,771.09 (being $7,568 less 10.53 per cent);
(c) Penelope Chote: $17,894 (being $20,000 less 10.53 per cent); (d) John and Lynette Mogey as follows:
(i) Jackaroo account – nil (but see reduction in Pendo account)
(ii)Pendo account - $14,341.79 (being $25,000 less 10.53 per cent and the Jackaroo deficit of $8,025.68);
(iii) Tundra account - $22,367.47 (being $25,000 less
10.53 per cent);
(iv) Cascade account - $677.20 (being $756.90 less
10.53 per cent).
[137] The judgment sums in each case are less than the amounts recorded as being in credit in each account pursuant to the calculations undertaken by the liquidation in accordance with Ronald Young J’s directions on 7 February 2011. I have also deducted $8,025.68 from the Pendo account of John and Lynette Mogey. This reflects the deficit in the Jackaroo account as calculated by the liquidators. It is just and equitable in my view that this notional overpayment be treated as a reduction in the Mogey’s overall entitlements.
[138] In all cases, the plaintiffs will be entitled to 10 per cent interest on the full deposit amounts as indicated from the date of liquidation on 6 August 2008 until the date of the liquidator’s payment on 20 October 2011. I use the date of the liquidation as the commencement of interest under s 37(6) because that is the earliest date upon which a usable reconciliation is available. This advantages the defendant and it is just and equitable that he receives that advantage in the circumstances of this case. Thereafter, interest on the amount net of the 10.53 per cent payment from 21 October
2011 until this judgment.
[139] Costs are reserved.
Williams J
Solicitors:
JTLaw, Wellington
Sainsbury Logan & Williams, Napier
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