The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 61 of 1996

 

Culverden Retirement Village Limited Appellant

v.

The Registrar of Companies Respondent

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 16th December 1996

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Present at the hearing:-

Lord Goff of Chieveley

Lord Griffiths

Lord Lloyd of Berwick

Lord Nicholls of Birkenhead

Lord Hope of Craighead

  ·[Delivered by Lord Nicholls of Birkenhead]

 

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1. This appeal concerns the application of the Securities Act 1978 to the appellant's offer of units in a retirement village operated by it and known as Culverden Retirement Village.  The Registrar of Companies took the view that the appellant was an issuer of securities offered to the public.  He sought to exercise his power to inspect documents under section 67(1).  The appellant disputed the Registrar's view. Morris J. decided that the Registrar was correct and his decision was upheld by the Court of Appeal. 

 

2. The material facts lie in a small compass.  The appellant built and advertised for sale to retired persons townhouse units in respect of which it had freehold strata estates.  Some units have been sold and are occupied by buyers.  When a unit is sold the buyer enters into a sale and purchase agreement, with seven schedules of terms and ancillary agreements covering 40 pages.  After the settlement date the buyer is issued by the Land Transfer Office at Auckland with a separate certificate of title to his unit.  The appellant agrees to manage the village for the benefit of the residents for  a weekly fee.  The buyer agrees that he will sell his unit back to the appellant when he ceases to occupy it.  Thus the latest date for resale will be the death of the buyer.

 

3. The resale is at the original purchase price less a capital replacement and care charge, calculated at the rate of $6,000 for each year the buyer has been in occupation, up to a maximum of $30,000, and less also the cost of renovating the unit to the same condition as when acquired, plus an inflation adjustment, the amount of which depends on the chosen inflation adjustment factor and the movement of the market.  If the inflation adjustment factor in the particular agreement is nil, nothing will be added under this head however much market prices may have risen.  Thus, in some instances the formula is bound to yield a price lower than the price paid on the original purchase. 

 

4. It was common ground between the parties that the buy back obligation is not merely an option which the appellant may or may not choose to enforce.  When the triggering event of ceasing to occupy occurs, the unit owner is bound to re-sell and the appellant is bound to re-purchase.

 

Securities

Part II of the Securities Act 1978 seeks to protect the public by imposing restrictions on the offer and allotment of securities.  The primary restrictions are set out in section 33.  Subsection (1) prohibits the offer of any security to the public for subscription by an issuer unless, in short, it is made in a registered prospectus or an authorised advertisement.  "Security" is very widely defined in section 2(1) as meaning:-

"... any interest or right to participate in any capital, assets, earnings, royalties, or other property of any person; and includes -

 

(a)Any interest in or right to be paid money that is, or is to be, deposited with, lent to, or otherwise owing by, any person (whether or not the interest or right is secured by a charge over any property); ..."

 

5. Subsections (2) and (3) of section 33 then impose further restrictions on the public offer of certain categories of securities.  Subsection (2) concerns what are termed "debt securities". A debt security may not be offered for subscription unless the issuer has appointed a trustee in respect of the security, and the issuer and the trustee have signed a trust deed which has been registered by the Registrar of Companies.  The definition of "debt security" in section 2(1) repeats paragraph (a) in the definition of "security", and adds a list of particular items which are included, such as debenture stock, bonds, and certificates of deposit. 

6. The two remaining categories of securities are equity securities and participatory securities.  An equity security is, in short, an interest in or a right to a share in the share capital of a company. Participatory securities are a residual category, comprising any security other than an equity security or a debt security.  Section 33(3) requires that a statutory supervisor must be appointed, and certain consequential steps taken, before a participatory security is offered to the public.

 

Exemptions

Section 5 cuts down the wide effect these provisions would otherwise have. Subsection (1) provides that nothing in Part II of the Act shall apply in respect of certain specified matters, the first two of which relate to land and chattels:-

"(b)Any estate or interest in land for which a separate certificate of title can be issued under the Land Transfer Act 1952 or the Unit Titles Act 1972, other than any such estate or interest that -

 

(i)Forms part of a contributory scheme; and

 

(ii)Does not entitle the holder to a right in respect of a specified part of the land for which a separate certificate of title can be so issued; or

 

(c)Any proprietary right to chattels (other than any such right that forms part of a contributory scheme); ..."

 

7. The Securities Commission has a discretionary power to exempt any person or class of persons from compliance with Part II of the Act (subsection (5)).

 

The appellant's case

The foundation of the appellant's case was a broad submission that the Act is concerned to protect investors, not borrowers (see DFC Financial Services Ltd. v. Abel [1991] 2 N.Z.L.R. 619) or purchasers of interests in land or chattels (see section 5).  Buyers of units under the sale and purchase agreements acquire the right to have units of land transferred to them, to which their right under the buy back provisions is merely ancillary.  The latter right is merely one of the conditions of the transfer by way of sale.

 

8. The appellant further submitted that even if these rights can be considered separately, the buy back right is not a security.  The right to be paid the formula price on re-transfer of the unit is not a right in the property of another, nor is it within the debt security  definition  which forms  paragraph  (a) of  the

definition of security.  Neither the language nor the context justifies treating every obligation to pay money as a debt security.  Had the draftsman intended this, he would surely have drafted the definition of debt security in simple, comprehensive terms, and omitted the reference to deposits and loans.  If the unit holder's right under the buy back provision were a debt security, so also would be the seller's right under every contract for the sale of land or chattels.

 

The ancillary right point

Their Lordships accept that the Act was not intended to protect ordinary buyers of land. This is made clear by the exemption in section 5(1)(b).  Their Lordships do not accept that the purchase of a unit in Culverden Village is an ordinary purchase of land to which the buy back provision is ancillary.

 

9. To decide whether one right is ancillary to another involves looking for the substance of the overall transaction.  Here the unit holder is unable to sell the land of which he has bought the freehold. He needs the appellant's consent to let the property.  He may use it, that is, he may occupy the townhouse.  Indeed, he is required to occupy it, because if he ceases to do so the buy back provision is triggered automatically.  Moreover, the buy back provision can be triggered by failure to pay the weekly fees or observe the rules of the village. 

 

10. In practical terms the substance of this transaction is that in return for a lump sum payment, a buyer acquires two rights: the right to occupy a unit and the right, when his occupation ends, to be repaid the price he paid, adjusted downwards or upwards according to the length of his occupation, the state of the property, the factors built into the inflation adjustment in his particular case, and the movement of the market.  The repayment right, far from being ancillary, is a cardinal feature of the transaction.  This being so, the repayment right cannot be sheltered behind the section 5(1)(b) exemption as an unexceptional term ancillary to the purchase of an interest in land. 

 

11. Two points are to be noted regarding this analysis.  The first is a general point.  Financial transactions may be simple or complex.  Frequently they involve a bundle of mutual rights and obligations, some to be performed at once and others years later.  This does not mean that the Act must apply to the transaction as a whole or not at all.  The Act applies to offers of interests or rights which are securities as defined. A single offer may lead to a single transaction containing several components, one or more of which may be within the statutory definition of securities and others not.  Separate and quite different securities may be comprised in  one  contract.  The offer of one right in conjunction

with other rights and obligations cannot of itself exempt that right from being tested against the statutory definitions. 

 

12. Nor, furthermore, does it mean that when so tested the right must be considered in isolation from its actual factual and legal setting.  When each component in a transaction is being considered, its position within the framework of the transaction as a whole is material and may be crucially important.  Any other interpretation of the Act would emasculate its operation. 

13. Secondly, in the present case there is nothing artificial in focusing on the unit holder's right under the buy back provision as a candidate for the attentions of Part II of the Act.  The artificiality here lies in the way the appellant seeks to characterise the transaction as wholly within the section 5(1)(b) exemption, on the basis that the buy back right is an unexceptional ancillary term to the acquisition of an estate in land, or if it is not, then to look at each element in isolation and disregard the setting in which alone the unit holder's right under the buy back provision arises.

 

The debt security point

The above analysis also provides the answer to the appellant's submission based on the wording of the statutory definition of debt security.  The appellant submitted that this definition envisages a transaction whereby the consideration on both sides is an obligation to pay or repay money. Their Lordships incline to the view that this is too narrow a reading.  But even by this strict criterion this case falls within the definition.  The right acquired under the buy back provision was not granted in isolation.  It cannot be equated with the right of a seller under an ordinary contract for the sale of land.  It was a right granted to those who signed the sale and purchase agreement.  As already noted, the money agreed to be paid by the appellant to the unit holder under the buy back provision in due course was by way of repayment of money previously paid to the appellant by the unit holder.  It was not repayment in the sense of repayment of a loan.  But it was repayment in the sense of payment back of the same amount, subject to adjustment for charges and inflation.

 

14. The statutory consequences which flow from this appraisal of the transaction are unexceptional.  Unit holders are at risk that, having paid the original price to the appellant, the appellant may not be able to honour its repayment commitment.  The right granted to the unit holder under the buy back provision is a debt security.  The appellant is the issuer of that security: the buy back right is granted by the appellant in consideration of the original price paid to the appellant. Unless the Securities Commission exercises  its  discretionary  power to exempt the

appellant, that right may not be offered to the public for purchase, or thereafter granted, without complying with the requirements of sections 33(1) and (2) and 37A.  The offer documents must be in a particular form, and a trustee must be appointed in respect of the unit holder's right under the buy back provision.  This is intended to afford protection to members of the public who are invited to pay, and do pay, substantial sums of money to the appellant against, in part, its promise to repay all or a large part of it in due course. Unit holders do, of course, have the protection that they will retain their houses until paid, but the statutory definition of debt security recognises explicitly that the existence of protective security over property does not negate the application of the Act. Their Lordships agree with the Court of Appeal that the overall conclusion appears consistent with the purpose of the Act.

 

"Investment of money"

This conclusion suffices to decide this appeal without considering the Registrar's further ground: that the offered units are participatory securities which are not within the section 5(1)(b) exemption.  However, their Lordships wish to make an observation on one aspect of this contention.  It concerns the meaning of "investment of money" in the definition in section 2(1) of "contributory scheme" which is one of the necessary ingredients of the exception to the section 5(1)(b) exemption.  Contributory scheme is defined as meaning:-

"... any scheme or arrangement that, in substance and irrespective of the form thereof, involves the investment of money in such circumstances that -

 

(a)The investor acquires or may acquire an interest in or right in respect of property; and

(b)Pursuant to the terms of investment that interest or right will or may be used or exercised in conjunction with any other interest in or right in respect of property acquired in like circumstances, whether at the same time or not; -

 

but does not include such a scheme or arrangement if the number of investors therein does not exceed 5, ..."

 

15. Both Morris J. and the Court of Appeal held that the purchase of units in Culverden Retirement Village was not an investment.  The units were bought solely for the purpose of providing the occupant with a secure home, not to make a profit or earn interest on the money paid.  In a large proportion of cases the scheme ensured that occupants would be considerably worse off financially at the end of the association.

 

16. As the courts below recognised, one of the every day meanings of investment is the laying out of money in the acquisition of property in the hope of return.  The return may come in the form of capital or income or both.  It may be in cash, or it may be in kind such as the provision of services.  There may be no prospect of capital growth, as with the purchase at par of short dated government stock.  There may be no prospect of any lump sum return at all, as happens with an annuity.  The purchaser of an annuity would readily say that he has invested his money in buying an annuity.

 

17. Likewise in the present case, their Lordships consider that, without any strain of language, buyers of units would say they have invested their money in buying a townhouse in Culverden Retirement Village on terms that they will occupy this, with necessary services provided, for so long as they wish and that they will then get back all or a large part of their outlay.  The return from their outlay is to be found in the totality of these benefits, not just the financial repayment at the end. 

 

18. Their Lordships can see nothing in the context of the definition of contributory scheme to suggest that the undefined words "investment" and "investor" were intended to bear a more restricted meaning excluding this type of transaction from the scope of the definition.  Broadly stated, and subject to the somewhat obscure paragraph (ii) in section 5(1)(b), the effect of the contributory scheme exception is to take outside the exemption and leave within the scope of the Act interests in land forming part of a joint enterprise involving more than five investors. Their Lordships cannot see any compelling reason for distinguishing between schemes under which the sole return is money and schemes under which the return comes partly as money and partly from the use of the land.

 

19. Their Lordships will humbly advise Her Majesty that this appeal should be dismissed. The appellant must pay the respondent's costs before their Lordships' Board.

 

© CROWN COPYRIGHT as at the date of judgment.