R v Ryan HC Auckland CRI-2009-004-28345
[2011] NZHC 2115
•19 October 2011
ORDER PROHIBITING PUBLICATION OF THE JUDGMENT AND ANY PART OF THE PROCEEDINGS (INCLUDING THE RESULT) IN NEWS MEDIA OR ON THE INTERNET OR OTHER PUBLICLY AVAILABLE DATABASE UNTIL FINAL DISPOSITION OF TRIAL. PUBLICATION IN LAW REPORT OR LAW DIGEST PERMITTED.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI-2009-004-28345
THE QUEEN
v
COLIN GREGORY RYAN ROBERT GORDON SUTHERLAND
Hearing: 19 September 2011
Counsel: B H Dickey and S C M Waalkens for Crown
A M Callinan and J R I Laurence for Accused
Judgment: 19 October 2011
JUDGMENT OF BREWER J (Section 347 application)
This judgment was delivered by me on 19 October 2011 at 12:30 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
SOLICITORS
Meredith Connell (Auckland) for Crown
Simpson Grierson (Auckland) for Accused
R V RYAN HC AK CRI-2009-004-28345 19 October 2011
Introduction
[1] The accused are due to stand trial on indictment on nine counts alleging criminal breach of provisions of the Securities Act 1978 (“the Act”). They apply for discharge pursuant to s 347 of the Crimes Act 1961 on count 1 of the indictment. This count alleges that, in breach of s 58(3) of the Act, each of the accused:
... between 19 December 2006 and 12 September 2007, at Auckland or elsewhere in New Zealand, signed a registered prospectus that was distributed and included an untrue statement.
[2] The accused contend that signing a “registered prospectus” is not an element of the offence created by s 58(3). The relevant element under that provision is signing a “prospectus”. There is no evidence that either accused signed a prospectus and therefore the count cannot proceed.
[3] Counsel for the Crown submits that the count is properly drawn and has a sufficient evidential basis to proceed. The Crown contends that “prospectus” and “registered prospectus” as used in s 58(3) are interchangeable terms. The accused signed a memorandum of amendments to the prospectus and Mr Ryan signed an extension certificate with another director on behalf of all of the directors (including Mr Sutherland). These documents are deemed to be a part of the registered prospectus and by signing them the accused are deemed to have signed the registered prospectus.
Relevant statutory provisions
[4] Section 58 creates criminal liability in respect of the distribution of misstatements in advertisements or in registered prospectuses. Subsections 58(3) and (4) provide:
(3) Subject to subsection (4) of this section, where a registered prospectus that includes an untrue statement is distributed, every person who signed the prospectus, or on whose behalf the registered prospectus was signed for the purposes of section 41(1)(b) of this Act, commits an offence.
(4) No person shall be convicted of an offence under subsection (3) of this section if the person proves either that the statement was
immaterial or that he or she had reasonable grounds to believe, and did, up to the time of the distribution of the prospectus, believe that the statement was true.
[5] Both “prospectus” and “registered prospectus” are defined in s 2 of the Act:
Prospectus means a document that contains an offer of securities to the public for subscription, and that is intended to be, or has been, delivered to the Registrar for registration under section 42 of this Act.
Registered prospectus means,—
(a) except if paragraph (b) applies,—
(i) a prospectus that has been registered under section
42 and the registration of which has not been cancelled or suspended under section 44; or
(ii) a document that, except in the matters specified in paragraphs (a) and (b) of section 41, is identical to such a prospectus:
(b) where a memorandum of amendments to a prospectus of the kind specified in paragraph (a)(i) has been registered under section 43, and the registration of that prospectus as so amended has not been cancelled or suspended under section
44 –
(i) that prospectus as so amended; or
(ii) a document that, except for the matters specified in paragraphs (a) and (b) of section 41, is identical to that prospectus as so amended.
The accuseds’ submissions
[6] Counsel for the accused stresses that count 1 is based on a prospectus that was registered on 21 August 2006. It was signed by the directors of the issuer on
15 August 2006. Mr Sutherland did not become a director of the issuer until
30 November 2006 and Mr Ryan did not take up that office until 19 December 2006. Therefore, neither signed the prospectus.
[7] Counsel acknowledges that Mr Ryan did sign an extension certificate pursuant to s 37(1)(c) on 20 December 2006 (which constitutes an amendment to the registered prospectus) and that on the same day both Mr Ryan and Mr Sutherland signed a memorandum amending the registered prospectus whereby they were added
to the directory page as directors of the issuer. In neither case, submits counsel, does such action equate to the accused having signed “the prospectus”.
[8] The Defence case is that s 58(3) is intended only to impose liability on directors who were responsible for signing the prospectus for registration. There are other offence provisions which can catch those who become directors after a prospectus is signed but which is distributed during their tenure.1
The Crown’s submissions
[9] Counsel for the Crown submits that in the context of s 58(3) the terms “prospectus” and “registered prospectus” are used interchangeably and refer to the same document. A memorandum of amendment to a registered prospectus and an extension certificate are deemed incorporated into the registered prospectus. Therefore, by signing these documents (or, in Mr Sutherland’s case, having the extension certificate signed on his behalf) the applicants as directors signed the registered prospectus.
[10] The Crown submits that on its interpretation of s 58(3), directors who are appointed after the initial distribution cannot be made criminally liable for the contents of a prospectus registered and distributed prior to them becoming directors. But if they adopt the prospectus through signing an amendment or extension certificate then in the context of a continuing offence they will be liable.
‘Prospectus’ and ‘registered prospectus’
[11] Section 58(3) is drafted clumsily. Its meaning must be ascertained from the text of the provision and in the light of its purpose.2 It is clear to me that the terms “prospectus” and “registered prospectus” are used interchangeably within s 58. Put simply, they describe the document that begins life as a prospectus and which
becomes a registered prospectus upon being registered with the Registrar of
1 Securities Act 1978, ss 56(1)(b), 58(1) and 59(1).
2 Interpretation Act 1999, s 5(1).
Companies.3 Once the prospectus has been registered then it can lawfully be distributed and securities allocated in reliance upon it.4 I am satisfied that this is a proper construction of the terms as they are used in s 58.
[12] First, “registered prospectus” falls squarely within the definition of “prospectus”. It is a document that “has been, delivered to the Registrar for registration”.5
[13] Secondly, s 58(3) refers both to a person who “signed the prospectus” and a person on whose behalf a “registered prospectus was signed”. It is apparent from the context, however, that these documents are one and the same.
[14] Thirdly, s 58(4), which provides a defence to the s 58(3) charge, refers to “the distribution of the prospectus”. An unregistered prospectus may not be distributed to the public and any such distribution will be void.6 It is the registered prospectus that is distributed. Similarly, the definition of registered prospectus in s 2(b)(i) refers to a “prospectus as so amended”, whereas it is only a registered prospectus that can be amended under the Act. This context strongly indicates that the terms are used
interchangeably within s 58.
Amendments to a registered prospectus
[15] Liability under s 58(3) arises only in respect of persons who have signed the prospectus / registered prospectus. Directors who sign a prospectus for registration and distribution have an obligation to ensure that it is not materially false or misleading.7
[16] Although the accused did not sign the prospectus at the outset, the Crown submits that they signed the registered prospectus when they signed (or had signed on their behalf) a memorandum of amendments and an extension certificate. I agree.
Every instrument to amend a registered prospectus must be signed by, or on behalf
3 Securities Act 1978, s 41(1)(b)(i).
4 Ibid, s 33(1)(c).
5 Ibid, s 2.
6 Ibid, s 37(1).
7 Ibid, ss 34(1)(b) and 37A(1)(b).
of, the directors.8 An instrument that amends a registered prospectus is deemed incorporated into the registered prospectus.9 Therefore, by signing the instrument, the directors sign the ‘updated’ registered prospectus.
[17] In my view, s 58(3) exists to create a continuing offence for directors who distribute untrue prospectuses. A director will be responsible for such distribution if he or she signed the prospectus which was then registered and distributed, or if he or she subsequently became a director and associated him or herself with the prospectus by signing (or having signed on his or her behalf) a certificate of extension.
[18] The purpose of the Act is to protect the investing public through timely disclosure of material information.10 One requirement for extension certificates is that they must state that, in the directors’ opinion, the financial position of the company has not materially changed and the registered prospectus is not, at the date of the certificate, false or misleading in a material particular.11 Where directors are specifically required to turn their minds to the contents of the prospectus, it is consistent with the purpose of s 58(3) that they should be liable if they sign their name to a registered prospectus that contains an untrue statement. I agree with Venning J’s observations in R v Petricevic that:12
It is an important and significant step to sign off a prospectus as correct or to complete an extension certificate. Both acts involve statements of fact at a particular point in time about which there can be little argument.
[19] But for the signing of the certificate, the distribution of the registered prospectus would have to cease within nine months of the date of its creation.13 In
my view, the purposes that justify imposing liability under s 58(3) are satisfied when
8 Ibid, s 43(3)(a).
9 Ibid, ss 2(b)(i) and 55(c).
10 R v Steigrad [2011] NZCA 304 at [74]–[76].
11 Securities Act 1978, s 37A(1A)(c). Because the present case concerns an extension certificate, it is not necessary for me to consider the effect of the absence of an equivalent statutory obligation in respect of memoranda of amendment. My inclination, however, is that directors who
associate themselves with a registered prospectus are subject to the continuing offence provision
in s 58(3).12 R v Petricevic HC Auckland CRI-2008-004-29179, 25 March 2011 at [46]; see R v Steigrad at [18]. On appeal in R v Steigrad, the Court of Appeal adopted a broader interpretation to s 58 than that applied by Venning J.
13 Securities Act 1978, s 37A(1)(c)(i).
a director signs a certificate extending the life of a prospectus for up to a further nine months.14
[20] Liability under s 58(3) arises only in respect of distributions made from the date of signing the prospectus. Directors will not be liable for distributions made prior to signing. Likewise, directors who are removed and so do not sign an extension certificate will typically have a defence under s 58(4) in respect of distributions made in accordance with the extension.
[21] I am not persuaded by the accuseds’ submission that this interpretation is inappropriate merely because liability in the summary jurisdiction could also arise under s 59(1). Finally, it is no excuse for a director who signs a prospectus to say that they were powerless to make material changes to a registered prospectus that has
been distributed.15
Decision
[22] Accordingly, the application by Mr Ryan and Mr Sutherland for discharge on count 1 in the indictment is refused.
Brewer J
14 Ibid, s 37A(1)(c)(ii).
15 R v Steigrad at [112]–[114].
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