Hanover trustees not liable - court
There is nothing in the law that says trustees are responsible for the truth and accuracy of finance company prospectuses, the High Court has ruled.
Former Hanover boss Mark Hotchin today lost his bid to have the failed finance company's trustees included in a Financial Markets Authority (FMA) case suing Hanover's directors and promoters.
The FMA is pursuing civil action against the directors and promoters of Hanover and two related companies aimed at recovering some of their investors' lost millions.
The FMA alleges that during 2007 and 2008 the companies issued prospectuses, advertisements and directors' certificates containing untrue statements.
These included a failure to provide relevant information showing the companies' liquidity position had deteriorated, false claims that the companies had adopted various prudential management techniques, and a failure to disclose various related-party transactions.
The FMA is seeking penalties and compensation for people who relied on these statements and invested $35 million in the Hanover companies.
Hotchin argued that as trustees of the companies, New Zealand Guardian Trust (NZGT) and Perpetual Trust were liable to contribute to any compensation he and the other defendants may be ordered to pay to the FMA.
But in a written judgement issued today, Justice Helen Winkelmann said the trustees did not have a duty to monitor the companies' prospectuses.
"The trustees' role in connection with the prospectus is a limited one," she said.
Trustees were supposed to rely on the issuer's certificate signed by the directors saying that the prospectus was up to date and not false or misleading.
To argue that the trustees were responsible for checking whether there was anything untrue in the material "requires a strained reading" of the legislation, she said.
The judge also ruled that the finance companies' directors and trustees did not share the same liability.
If the FMA's claim succeeded the directors would be liable for damages flowing from investments made relying on untrue statements, while the trustees would be liable for losses incurred while they failed to act.
"This is not the same damage," she said.
However she dismissed two other arguments put forward by the trustees against Hotchin's case.
Winkelmann struck out Hotchin's third-party claims against NZGT and Perpetual, and ordered him to pay their costs.
- The Hanover group collapsed in July 2008 owing 13,000 investors $554 million.
- Hanover's debt was swapped for shares in Allied Farmers in December 2009.
- The Serious Fraud Office spent 32 months investigating Hanover but did not lay criminal charges, saying it was not confident of a conviction.
- The Financial Markets Authority is suing the group's directors seeking compensation for out-of-pocket investors.
- Assets owned by Mark Hotchin and his family trusts remain frozen by the FMA, including his Paritai Drive mansion.
- Hotchin and fellow former Hanover boss Eric Watson are suing former Shareholders Association chairman Bruce Sheppard for defamation.