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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 “co-ordinate”. 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). Court’s decision 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. *<strong>Bell</strong> <strong>Gully</strong> acted for NZGT in this case. CORPORATE REPORTER – 29 July 2013 12
Lombard Finance directors lose their appeal and gain increased sentences The Court of Appeal has upheld the convictions of the former directors of Lombard Finance and Investments Ltd (Lombard Finance) on charges laid under the Securities Act 1978 following the collapse of the company in April 2008, and has also increased their sentences. Background Last year, the High Court found the directors of Lombard Finance guilty on charges arising from untrue statements made in offer documents issued by Lombard Finance leading up to its receivership in April 2008. Justice Dobson found the directors guilty in relation to one particular – the offer documents' description of Lombard Finance's liquidity risk. The documents described that risk conditionally – that is, if the company failed to manage its liquidity, problems could arise – but did not express a concern about an existing liquidity risk. Further details of this decision are set out in our earlier article: The Lombard verdict: important lessons for directors. In the Court of Appeal the directors argued that there was no support for Justice Dobson's finding that the statements in the prospectus were untrue and further that Justice Dobson was wrong to dismiss their defence under section 58(4) of the Securities Act. Section 58(4) provides directors with a defence where they believe, and have reasonable grounds to believe, that the statements in a prospectus are true. Court of Appeal’s decision The Court of Appeal disagreed with both arguments ruling that the High Court’s verdicts were open on the evidence and Justice Dobson could reasonably have been satisfied of the directors’ guilt (see Jefferies v R [2013] NZCA 188). With regards to the section 58(4) defence the court noted that: “Given the [directors’] own knowledge of the critical state of Lombard’s liquidity, neither reliance on the views of the company’s executives nor the advice of professionals could avail the [directors]. It was open to the Judge to conclude they could not have had reasonable grounds to believe that their expressions of confidence in the company’s liquidity were true without reference to the omitted matters which demonstrated clearly the vulnerable state the company was in. Nor could they have reasonably relied on the advice and assurances of management in the circumstances. That is because of the non-delegable nature of the duty imposed by [section] 58 and because the ultimate responsibility to govern and manage the company is theirs.” For further commentary on the Court of Appeal’s decision see an earlier client update here. Increased sentences on cross-appeal The Crown also brought a cross-appeal, arguing that the sentences that Justice Dobson imposed on the directors were "manifestly inadequate". The Crown asked the Court of Appeal to substitute sentences comprising a combination of home detention and community work. The court agreed and held that Justice Dobson had erred by adopting a starting point for sentencing which was short of imprisonment. In a subsequent decision (see Jeffries v R [2013] NZCA 274) the Court of Appeal substituted the sentences of community work imposed by the High Court with combined sentences of community work and home detention (ranging from six months to nine months for each director). CORPORATE REPORTER – 29 July 2013 13
Page 1 and 2: 29 JULY 2013 Welcome to Issue No. 2
Page 3 and 4: Accounting Infrastructure Reform Bi
Page 5 and 6: the New Zealand market as in anyway
Page 7 and 8: Consultation on DIMS and custody re
Page 9 and 10: The consultation is aimed at assist
Page 11: Financial Advisers (Australian Lice
Page 15 and 16: (iv) Transitional period - The SOP
Page 17 and 18: Parking Limited’s parking assets.

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