In a recent High Court case (FMA v Hotchin  NZHC 1611*) Justice Winkelmann held that trustees of debt issuers:
- owe duties to depositors to monitor compliance with the trust deed and take appropriate enforcement action; but
- do not owe a duty potential subscribers or roll-over investors to ensure that the contents of a prospectus are true in terms of the Securities Act 1978.
Mr Hotchin, together with his fellow directors, faces a claim by the Financial Markets Authority (FMA) for allegedly untrue statements in prospectuses, investments statements, and advertisements registered and published by debt securities issuers in the Hanover group in 2007 and 2008. The FMA alleges that those offer documents contained untrue statements or statements that became misleading over time. The FMA seeks declaration of contravention to enable investors to obtain compensation and civil pecuniary penalties.
Mr Hotchin brought third party claims against the corporate trustees of the Hanover group debt issuers, The New Zealand Guardian Trust Company Limited (NZGT) and Perpetual Trust Limited (Perpetual).
Mr Hotchin says that the corporate trustees are each liable to contribute to any compensation that he is liable to pay under the Securities Act to the extent that each of NZGT and Perpetual were responsible for the same losses suffered by those investors in respect of the defective prospectuses. The trustees denied this and applied to strike out the third party claims.
Key issue – co-ordinate liability
In order to maintain his claims for contribution under equity and the Law Reform Act 1936, Mr Hotchin needed to establish that his alleged liability is of the same nature as the trustees' liability. That is, the liability of the directors and the trustees must be “coordinate”.
Mr Hotchin's alleged liability is to investors for the losses caused by untrue statements in the prospectus and advertisements. The trustees accepted that they owed duties to monitor the terms of the trust deed and to take appropriate enforcement steps. However, they denied that they also owed a duty of care to ensure that the information contained in the prospectus was true. They said that a duty of this kind would fall well outside of the recognised duties of a trustee and would cut across the regime established by the Securities Act and Securities Regulations. Accordingly, one of the critical questions considered by Justice Winkelmann was whether Mr Hotchin could establish a tenable claim that NZGT and Perpetual owed duties of care in tort to existing and prospective depositors for a failure to ensure that the representations contained in the prospectus were true.
NZGT and Perpetual contended that their duties to monitor the companies' compliance with the trust deeds and the terms of the offer only arose under the terms of the relevant trust deeds (which included terms implied by statute) and that this did not include a duty to monitor the contents of the prospectuses to ensure that the information relating to the business and financial position of the companies was accurate in terms of the Securities Act. They also argued that, if the duty was owed at all, it was owed only to existing depositors and did not extend to prospective subscribers (i.e., members of the general investing public and existing depositors who decided to roll over their investments upon maturity).
In addition to the duties owed to depositors under the trust deed, the court concluded that trustees can also owe tortious duties of care. Justice Winkelmann therefore found that there was a tenable argument that NZGT and Perpetual may owe a duty of care in tort to existing depositors to monitor the relevant issuer's compliance with the terms of the trust deed and the terms of the offer. Justice Winkelmann also found that this duty may extend to prospective depositors and roll-over depositors. However, these findings were not sufficient to allow a claim for contribution from the trustees in equity or under the Law Reform Act 1936 as the damages arising from a breach of this particular duty are not of the same nature and same extent as the directors' potential damages under FMA's proceedings against them.
The court was satisfied that there was no tenable argument that NZGT and Perpetual owed a duty of care in respect of the accuracy of the statements contained within the prospectuses. Justice Winkelmann noted that to impose such a duty would be "to require that the trustee assume a role quite different to that currently performed by trustees".
Her Honour stated "[i]t cannot be argued that the trustees owed a duty to monitor the prospectuses. The trust deeds, Securities Act and [Securities] Regulations and the prospectuses do not suggest that the trustees have any responsibility for the overall contents of the prospectuses, and the imposition of such a duty would run contrary to the legislative division of responsibilities between issuers, trustees and auditors."
Hotchin's third party claims against NZGT and Perpetual were therefore struck out. The judgment is under appeal.
*Bell Gully acted for NZGT in this case.