Trustees Executors Limited
[2012] NZHC 2817
•25 October 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-4739 [2012] NZHC 2817
UNDER the Trustee Act 1956
IN THE MATTER OF an application for directions under s 66(1) BETWEEN TRUSTEES EXECUTORS LIMITED
Applicant
Hearing: 29 May 2012
Appearances: S Stokes and B J Spiers for Applicant
J K Gorman and C I Fleming for Crown
D G Hurd for Investors
Judgment: 25 October 2012
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 25 October 2012 at 4.30 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
Solicitors: Dawson Harford & Partners, Auckland [email protected] / [email protected]
Crown Law, Wellington
Counsel: D G Hurd, Auckland: [email protected]
TRUSTEES EXECUTORS LIMITED HC AK CIV-2011-404-4739 [25 October 2012]
[1] The Applicant (“the Trustee”) applies for directions pursuant to s 66(1) Trustee Act 1956 (“s 66(1)”) as to whether it should exercise a power, under a deed of trust dated 15 May 1998 (“trust deed”), to amend a register of securities (“register”).
[2] The application concerns the information entered in the register for a group of approximately 80 debenture holders, referred to as the “Affected Investors”. The register records that each Affected Investor is the holder of a “Classic” debenture issued by Equitable Mortgages Limited (“EML”). The issue is whether the register should be amended so that it records that each Affected Investor is the holder of an “Assured” EML debenture.
Parties
[3] By the trust deed, EML appointed the Trustee as trustee in respect of debt securities (“debentures”) that EML had issued. The Trustee was appointed as trustee for the benefit of the debenture holders. EML charged all of its assets in favour of the Trustee for the benefit of debenture holders.[1]
[1] Clause 4.1 of the trust deed.
[4] On 26 November 2010, the directors of EML asked the Trustee to appoint receivers. The Trustee did so on 29 November 2010.
[5] The Trustee made this application in August 2011. Section 66 reads as follows:
66 Right of trustee to apply to Court for directions
(1) Any trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power of discretion vested in the trustee.
(2) Every such application shall be served upon, and the hearing may be attended by, all persons interested in the application or such of them as the Court thinks expedient.
[6] A representative of the Trustee, namely Clynton Neil Hardy, has sworn an affidavit on behalf of the Trustee. There was no evidence from any person associated with EML. Mr Hardy makes various statements in his affidavit as to what EML did and why. The basis on which Mr Hardy purports to be able to give this evidence is not apparent from his affidavit.
[7] Counsel was appointed and appeared for the Affected Investors. Counsel has sought information from the Affected Investors and approximately 50 per cent of them have responded to his enquiries, those responses being included in the bundle of documents. None of the Affected Investors have sworn affidavits. That is not a criticism of Counsel. The sum for which each Affected Investor is at risk may not justify the time and cost that would be incurred in ascertaining the precise facts as to their dealings with EML.
[8] The Attorney-General was served on behalf of the Crown. That is because any directions that I might make could lead to a claim against the Crown under a Deed of Guarantee entered into between EML and the Crown in March 2010.
[9] Crown Counsel opposed the making of any directions. Counsel submitted that the issues which arise on this application are not capable of determination in an application pursuant to s 66(1). Crown Counsel’s submissions were without prejudice to any stance that the Crown might take at a future time if I were to give the directions sought.
[10] The parties agreed a statement of facts (“statement of facts”) prior to the hearing, and that addresses some of the important factual matters.
Background
[11] At all material times prior to November 2010, EML raised capital from the public by issuing securities, including the debentures in issue in this case.
[12] EML offered the debentures pursuant to investment statements and
prospectus registered under the Securities Act 1978 (“Act”). The relevant
investment statements and prospectus are dated September 2008, September 2009 and March 2010.
[13] Both the Act and the trust deed required EML to keep a register of securities, that is the register in which, amongst other things, EML was to enter the nature of the security that it had issued to each debenture holder.[2]
[2] Securities Act 1978, s 51(2)(c); and cl 1.3, sch 1, cls 12-14 of the trust deed.
[14] An investor would apply for a debenture by completing and executing an application form included with the investment statement, and submitting that to EML together with the sum that they wished to invest with or, more correctly, lend to EML.
[15] Up until March 2010, EML issued one class of debenture. It was for an investor to choose the term of the investment and other matters such as whether they wished interest to be paid periodically or to compound.
[16] The pre March 2010 application form included the following provisions:
INVESTMENT OPTIONS
I/we wish to subscribe for Debentures in Equitable Mortgages Limited as set out below, upon the terms and conditions set out in Equitable Mortgages Limited’s current Prospectus, Investment Statement, Trust Deed and this Application Form, and agree to accept the Debentures applied for or any lesser amount that may be allocated to me/us.
and
MATURITY INSTRUCTIONS
I/We understand that we will be notified in writing prior to maturity of my/our investment (unless I/we hold a 90 Day investment). Unless I/We otherwise instruct Equitable Mortgages Limited by the due date, then I/we authorise and direct you to reinvest the current investment value in a new investment of the same type for the same term at the current rate at that time.
[Emphasis added]
[17] It can be taken from the agreed statement of facts that each Affected Investor
gave EML this form of instruction (“maturity instruction”). It was contained in the
application form included in the September 2008 investment statement and there were no material differences in the form included in the September 2009 investment statement.
[18] The next relevant matter concerns the Crown’s introduction of a scheme to guarantee the repayment of deposits with, or debts due from, approved institutions. The Crown introduced this scheme in 2008. EML was approved as a participant in the scheme and EML and the Crown entered into three Deeds of Guarantee, dated
4 December 2008, 9 December 2009 and 19 March 2010.
[19] In the first of these Deeds, the Crown guaranteed the payment by EML of indebtedness due and payable during the defined guarantee period, being 12 October
2008 to 11 October 2010. Some classes of debenture holders, not relevant to this case, were excluded but that was the gist of the document.
[20] The position was different in the later two Deeds, the difference being that each of those Deeds distinguished between debentures that would and would not have the benefit of the guarantee, the latter being referred to as an “Excluded Debt Security”. The Crown did not guarantee EML’s indebtedness to the holder of an Excluded Debt Security. As will be seen from what follows, the holder of an Assured debenture was to have the benefit of the guarantee, whereas the holder of a Classic debenture was not.
[21] The Deed dated 9 December 2009 superseded the first Deed, in that it guaranteed repayment of particular indebtedness falling due within the first guarantee period, that is from 12 October 2008 to 11 October 2010. The Deed dated
19 March 2010 applied in respect of the period 12 October 2010 to 31 December
2011.
Post March 2010
[22] In March 2010, EML issued a new investment statement and registered an amended prospectus, introducing the Classic debenture. Mr Hardy’s affidavit includes the following:
31.As a result of the introduction of the extended Crown Guarantee, EML found that a very large number of its Investors were investing for terms which required repayment of their investment in or around December 2011. In order to have a more balanced book which was not so dependent on the Crown Guarantee and therefore called for maturity at the end of 2011, EML decided to introduce a new type of debenture stock which would pay a higher interest rate.
32.Therefore, in or about March 2010 EML introduced a new type of security called the Classic. It was issued by EML on the express basis that it was not covered by the Crown Guarantee. ... It was issued on terms which were otherwise identical to the terms on which Assureds were issued except as to interest. Typically the Investor was offered a higher rate of interest (usually 1½% or so) to compensate the Investor for the absence of the Crown Guarantee.
[Emphasis in original]
[23] Material changes were made to the provisions in the application form included with the investment statement. First, an investor was required to select their choice of investment, Classic or Assured, following which there was the following statement:
If you subscribe for Classic Debentures which are Excluded Securities, then none of Equitable Mortgages’ obligations under or in respect of those Debentures will be covered by the Crown guarantee. A holder of Classic Debentures will not be able to make a claim under the Crown guarantee.
[24] Secondly, there was a significant change to the maturity instruction as follows:
MATURITY INSTRUCTIONS
I/We understand that we will be notified in writing prior to maturity of my/our investments (unless I/we hold a 3 Month investment). Unless I/we otherwise instruct Equitable Mortgages by the due date, then I/we authorise and direct Equitable Mortgages to reinvest the current investment value in a new investment of the same type (subject to the following sentence) for the same term at the current rate at that time. If my/our investment is an Assured Debenture where automatic reinvestment is triggered then we direct you to reinvest my/our maturity proceeds as a Classic Debenture which I/we acknowledge is an Excluded Security and is not covered by the Crown guarantee.
[Emphasis added]
Receivership
[25] As at the date of receivership, the register recorded that each Affected Investor held a Classic debenture. This is despite the fact that they are to be taken as having given EML a maturity instruction in the terms referred to in [16] above.
[26] Debenture holders, whether of Assured or Classic debentures, share pari passu in EML’s assets. In his submissions, Counsel for the Affected Investors informed me that the Receivers have estimated that recoveries for debenture holders might be up to 65 to 70 per cent of their principal. Holders of Assured debentures will recover, or have recovered, the balance due to them under the Crown guarantee. Holders of Classic debentures, such as the Affected Investors, will not and so can expect to suffer a loss.
[27] As of 26 November 2010, the sum owed to Affected Investors was
$1,437,953.17 (principal and interest). An amendment to the register of the nature referred to in [2] above might (and it can be put no higher than that) lead to a claim against the Crown in respect of the shortfall to Affected Investors.
[28] For the purposes of this proceeding it is common ground that:
(a) no Affected Investor applied to be issued a Classic debenture; and
(b) EML issued each Affected Investor a Classic debenture after the
Affected Investor’s prior, Assured, debenture had matured.
Discussion
[29] First, I propose to assume that the Trustee does have power under the trust deed to amend the register. This power is said to be within the terms of cl 15 of the trust deed. I did not understand the Crown to suggest otherwise. For myself, I am not entirely satisfied that the trust deed does confer such a power but I am going to proceed on the basis that there is scope under cl 15 for such an amendment.
[30] That leads to the issue of whether I should give any direction to amend the register. In my view I should not.
Nature of the register
[31] I consider the register is intended to serve as a record, or as evidence, of the securities that an issuer has issued.
[32] Section 51 of the Act requires an issuer to keep a register. The relevant parts of s 51 are as follows:
51 Issuers to keep registers of securities
(1) Every issuer of securities offered to the public shall keep in New
Zealand—
(a) A register of all equity securities; and
(b) Where the issuer is a company, a register of all debentures, debenture stock, bonds, notes, certificates of deposit, and convertible notes; and
(c) A register of all participatory securities; and
(d) A register of all units in unit trusts; and
(e) A register of all interests in superannuation schemes; and
(f) A register of all life insurance policies—
of which it is the issuer.
(2) Every register kept for the purposes of this section shall contain, in respect of every security entered in it,—
(a) The name and address of the holder; and
(b) The date on which the security was allotted or transferred to the holder, as the case may be; and
(c) The nature of the security; and
(d) The amount of the security (if any); and
(e) The due date of the security (if any); and
(f) Such other particulars as are required to be entered in the register by regulations.
(3) ...
(4) No notice of any trust, expressed, implied, or constructive, shall be entered on a register kept under any of paragraphs (a) to (c), and (f) of subsection (1) of this section.
(5) Every register kept under this section is prima facie evidence of the matters required by this Act to be entered in it.
(6) Every issuer of securities offered to the public (other than securities that have been redeemed) shall ensure that every register kept by it under this section is audited at least once a year by a qualified auditor.
(7) ...
(8) If the auditor considers at any time that this section is not being complied with, the auditor shall forthwith advise the issuer and,—
(a) In the case of equity securities, the security holders at their next meeting:
(b) In the case of debt securities, the trustee:
(c) In the case of participatory securities, the statutory supervisor:
(ca) in the case of interests in a KiwiSaver scheme other than a restricted scheme, the KiwiSaver trustee:
(d) In the case of units in a unit trust, the unit trustee.
(9) Every issuer shall send a notice to the Registrar of the place where its registers are kept and of any change in that place.
(10) Subsection (9) of this section does not apply to an issuer that is a company if the registers of the company are kept at its registered office.
(11) ...
[33] As I have already said, the terms of the trust deed also required EML to establish and maintain a register of securities. There are no material differences between the content of the register as required by s 51 and as required by the trust
deed.[3]
[3] Schedule 1, cl 12 of the trust deed.
[34] Section 52 requires that the register be open for inspection. The relevant parts of s 52 read as follows:
52Rights of inspection of registers of securities and to copies of registers and deeds
(1) The registers kept under paragraphs (a) to (d) of section 51(1) of this Act shall, except when duly closed (but subject to such reasonable restrictions as the issuer may impose, so that not less than 2 hours in each day shall be allowed for inspection), be open to the inspection of any holder of the securities without fee, and of any other person on payment of the prescribed fee.
(2) The registers kept under paragraphs (e) and (f) of section 51(1) of this Act shall, except when duly closed (but subject to such reasonable restrictions as the issuer may impose, so that not less than
2 hours in each day shall be allowed for inspection), be open to the inspection of a holder of securities in respect of the securities of that
holder without fee.
(3) Any person may require a copy of a register kept under paragraphs (a) to (d) of section 51(1) of this Act, or any part of the register, on payment of the prescribed fee.
(4) A holder of securities may require a copy of that part of a register kept under paragraph (e) or paragraph (f) of section 51(1) of this Act that relates to the securities of that holder on payment of the prescribed fee.
...
[35] The information that is required to be included in the register, the obligation to have the register audited and to keep it available for inspection and the provision in s 51(5) that the register is prima face evidence of the matters to be entered in it are all consistent with the document being a record of a factual state of affairs. I note that this view is consistent with other statements made by the Court in cases such as Morris v Equiticorp Finance Ltd and The Trustees Executors and Agency Company of New Zealand Ltd v Deutsche Hyp Deutsche Hypothenkenbank Frankfurt –
Hamburg Aktiengesellschaft.[4]
[4] Morris v Equiticorp Finance Ltd (1990) 5 NZCLC 66,465 (HC) at 66,740; and The Trustees Executors and Agency Company of New Zealand Ltd v Deutsche Hyp Deutsche Hypothenkenbank Frankfurt – Hamburg Aktiengesellschaft (2008) 8 NZCLC 262,208 (HC) at 262,212 and 262,220.
[36] Given that, I consider that power to amend a register could be exercised only if it were believed that the information in the register was inaccurate. That is not the
view I take of EML’s register. As it stands, the register records that each Affected
Investor is the holder of a Classic debenture. And that, as a matter of fact, is the nature of the security that each Affected Investor does hold, EML having issued it to them on maturity of their prior investment.
[37] Whether EML should have issued a Classic debenture to each Affected
Investor is a different matter.
[38] It was common ground between Counsel for the Affected Investors and the Crown that, on the face of it, EML breached the terms of its contract with each such investor when it issued them a Classic debenture. Those two parties agreed that EML was instructed to issue “a new investment of the same type”, and that such would be an Assured debenture, not a Classic debenture. Had EML been pursued, particularly at an earlier time, it is quite possible that as at the date of receivership Affected Investors would have held Assured debentures, whether as a result of an application for specific performance of the maturity instruction, or as a result of rectification.
[39] However, as Crown Counsel submitted, that is not a matter that I can address on an application for directions. There would first have to be a proceeding to determine the legal relationship between Affected Investors and EML, so that any subsequent amendment to the register reflected the nature of the security issued, as a matter of fact. Such relief is not, and could not be, encompassed in this proceeding. It could only be sought in a proceeding to which EML was a party, as it is EML that had power to issue securities and it is EML that is said to have breached its contract or made a mistake.
Result
[40] Accordingly, in my view there should be no amendment to the register until it ceases to be accurate.
[41] I realise that this outcome will disappoint Affected Investors, many, if not all, of whom will find themselves facing a shortfall in their recovery through no fault of their own. However, there can be no case for amending the register in the absence of
an allotment to them of an Assured debenture, in place of the Classic debenture that has been issued.
[42] I thank Counsel for their submissions. The parties may submit memoranda if they are unable to agree on costs.
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M Peters J
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