The Judicial Committee of the Privy Council Decisions

 


Christchurch Pavilion Partnership No.1 & Ors v. Deloitte & Touche Tohmatsu Trustee Company Ltd (New Zealand) [2002] UKPC 4 (4 February 2002)

Privy Council Appeal No. 16 of 2001

Christchurch Pavilion Partnership No. 1 and Others Appellants

v.

Deloitte & Touche Tohmatsu Trustee Company Limited 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 4th February 2002

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Present at the hearing:-

Lord Slynn of Hadley

Lord Mustill

Lord Scott of Foscote

Sir Christopher Staughton

Sir John Roch

[Delivered by Lord Scott of Foscote]

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The background
1. The litigation which has culminated in this appeal to the Board has been brought by a number of disappointed investors. They invested their money, $50,000 each, in a project, the Christchurch Pavilions project, to build a luxury motor lodge complex in the South Island and then to run the lodge as a business. The project failed. Their invested money was lost. They seek to recoup their money from Deloitte Touche Tohmatsu Trustee Co Ltd, previously Deloitte Haskins and Sells Trustee Co Ltd (DHST). DHST was the statutory supervisor appointed for the purposes of the Securities Act 1978. The investors' claim against DHST succeeded at first instance but failed in the Court of Appeal. The investors now appeal to the Board.
2. It is convenient to state in brief the core facts. In order to finance the Christchurch Pavilions project the promoter, Horner Greenlees Corporation Ltd (“HGC”) proposed to raise the sum of $4,500,000 as venture capital. In addition, bank borrowings were planned. The venture capital was to be raised as to $4,050,000 by the issue of 8,100,000 shares of 50 cents each in Christchurch Pavilion Holding Co Ltd (“CPH”), a new company, and as to $450,000 by the issue of 90 units of $5,000 each in five 18 unit partnerships, the Christchurch Pavilion Partnerships. It was contemplated that there would be 90 investors each of whom would take one Partnership unit and 90,000 shares. CPH was to acquire the land and build the motor lodge. It was then to lease the lodge to the Partnerships and the Partnerships, via a management company, Christchurch Pavilion Management Co Ltd (“CPM”) owned and controlled by HGC, would run the lodge on behalf of the Partnerships.
3. A prospectus dated 12 November 1987 inviting the public to subscribe for the shares and units was issued and duly registered (see s 33(1)(a), Securities Act 1978). The offer was to close on 18 December 1987 but the closure date was extended by HGC to 23 December. The prospectus stated that the “minimum amount” that in the opinion of the directors needed to be raised by the issue of the shares and units was $4,500,000 (see s 37(2) of the 1978 Act and para 10(4) of the prospectus). The prospectus stated that on 18 December (later 23 December) 40 cents on each 50 cent share had to be paid. The total, assuming all the shares were subscribed for, would have been $3,240,000. The balance, namely 10 cents on each 50 cent share and the $5,000 for each partnership unit, a total of $1,260,000, was, said the prospectus, to be paid on or before 12 August 1988.
4. Allotment of the shares and units took place on 23 December 1987. According to DHST, the allotment applications were all to hand and the $3,240,000 had been received on the date on which the allotment took place. There is a factual dispute about this. The trial judge was not satisfied that all the applications were to hand or that the whole of the $3,240,000 had been received before the allotment took place. The Court of Appeal disagreed. Be that as it may, there is no dispute but that all the shares and units were allotted on 23 December. HGC, which had underwritten the issue, took up 50.5 of the 90 Partnership units and a corresponding number of the CPH shares. Over the next few months HGC placed the shares and units it had taken up with members of the public.
5. The lodge was built and opened for business in November 1988. But, as has been said, the venture failed, CPH went into liquidation and the investors lost their money.
6. The investors contend that DHST, as statutory supervisor under the 1978 Act, owed them duties in respect of the venture and was in breach of those duties. Questions arise as to the nature and extent of those duties and whether any breach by DHST was causative of the investors' losses. Before these questions can usefully be considered, the statutory framework created by the 1978 Act must be described.
The 1978 Act
7. The Securities Act 1978 represented the response of the New Zealand legislature to the collapse of a group of companies known as the Securitibank group. When introducing the Bill the then Minister of Justice, the Hon David Thomson, said that:

“The Bill … will require commercial entities offering securities to the public to do so by way of a registered prospectus, to appoint an independent person to look after the interests of investors, to keep and disclose adequate financial information and to be subject to official scrutiny.”

and that

“The Bill is aimed at redressing the balance in favour of the investor, who, in many of the financial collapses in recent years, had had little or no way of ensuring that his investment has been responsibly and properly managed.” (see NZPD vol 416, 14 December 1977).

8. Given these objectives it seems surprising that the Act, as originally enacted, was never brought into effect. It was substantially amended by the Securities Amendment Act 1982 but, even as amended, was not brought into effect until 1985. It is tempting to speculate that a reason for the delay may have been some misgivings as to the practicalities of section 37, a section central to this appeal. If there were any such misgivings, the present case, in their Lordships' view, provides some justification for them.
9. The relevant statutory provisions are to be found in Part II of the Act as amended. All references to the Act will hereafter be references to the Act as amended. Part II regulates the issue of securities and distinguishes between three different types of security. There is “debt security” eg. debenture stock, “equity security” eg. shares in a company, and “participatory security”. “Participatory security” is defined as “any security other than an equity security or a debt security” (section 2). This case concerns equity securities, the shares in CPH, and participatory securities, the Partnership units.
10. Section 33 of the Act imposes a number of requirements that must be complied with if offers are to be made to the public inviting subscription for securities. Sub-section (1) requires the offer to be made in or accompanied by a registered prospectus and to be made in an “authorised advertisement”. The Christchurch Pavilions prospectus complied with these requirements.
11. Sub-section (2) of section 33 relates to debt securities and is not material to this case. Sub-section (3) relates to participatory securities. It provides that:

“No participatory security shall be offered to the public for subscription, by or on behalf of an issuer, unless –

(a) The issuer of the security has appointed a person as a statutory supervisor in respect of the security and both the issuer and that person have signed a deed of participation relating to that security; and

(b) A copy of the deed of participation has been registered by the Registrar pursuant to section 46 of this Act; and

(c) [This relates to amendments to the deed of participation].”

12. “Statutory supervisor” is defined in section 2 of the Act as “a person appointed as a statutory supervisor in respect of participatory securities for the purposes of, and in accordance with this Act”.
13. It is important to keep in mind that a statutory supervisor's role relates only to participating securities. He has no statutory function in relation to equity securities. A deed of participation is required only for an issue of participatory securities. It is not required for an issue of equity securities.
14. A Deed of Participation was signed by CPH, CPM, HGC, a Mr Horner, joint managing director of HGC, and DHST. A requirement of section 33(3)(a) is that the deed be signed by the issuer of the participatory securities and by the statutory supervisor. It is not clear which of the signatories signed as the issuer of the Partnership units. Certainly neither CPH nor CPM was the issuer of the units. Perhaps it was HGC, the promoter, who was regarded as the issuer. No point about this was raised before the Board and, apart from noticing the curiosity, their Lordships do not find it necessary to dwell on the point.
15. Sections 34 and 35 of the Act are not relevant to this case. Section 36 was repealed and not replaced by the 1982 Act. It is convenient to set out section 37 in full:

“Void irregular allotments - (1) No allotment of a security offered to the public for subscription shall be made unless at the time of the subscription for the security there was a registered prospectus relating to the security.

(2) No allotment shall be made of an equity security or a participatory security offered to the public for subscription if the allotment is the first allotment of such security to the public unless the amount stated in the registered prospectus relating thereto as the minimum amount which, in the opinion of the directors of the issuer, must be raised by the issue of the securities in order to provide for the matters specified in regulations made under this Act, is subscribed, and that amount is paid to, and received by, the issuer within 4 months after the date of the registered prospectus; and, for the purposes of this subsection –

(a) A sum shall be deemed to have been paid to, and received by, the issuer if a cheque for that sum is received in good faith by the issuer and the directors of the issuer have no reason to suspect that the cheque will not be paid:

(b) The amount so stated in the registered prospectus shall be reckoned exclusively of any amount payable otherwise than in cash.

(3) No allotment of a participatory security offered to the public for subscription shall be made unless, at the time of allotment the statutory supervisor holds a written statement signed by the subscriber authorising the subscription for that particular security.

(4) Any allotment made in contravention of the provisions of this section shall be invalid and of no effect.

(5) Where subscriptions for securities are received by or on behalf of an issuer, but, by virtue of this section, the securities may not be allotted, or for any reason the securities are not allotted, the issuer shall ensure that –

(a) At all times while held by it, the subscriptions are kept in a trust account on behalf of the subscribers; and

(b) The subscriptions, together with such interest (if any) as has been earned thereon, are repaid to the subscribers as soon as reasonably practicable.

(6) If any subscriptions to which this section applies are not so repaid within 2 months after the date on which the subscriptions were received by or on behalf of the issuer (or, in any case to which subsection (2) of this section applies, within 5 months after the date of the registered prospectus), the issuer and all the directors thereof shall be jointly and severally liable to repay the subscriptions, together with interest at the rate of 10 percent per annum from the date on which the subscriptions were received by or on behalf of the issuer:

Provided that a director shall not be so liable if he proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his part.”

16. Whereas section 33 regulates the manner in which securities can be offered to the public, section 37, and section 37A as well, regulates the actual allotment of securities to those who have accepted the offer.
17. Sub-section (2) of section 37 is expressed to apply both to equity securities and to participatory securities. It applied, therefore, both to the allotment of the shares in CPH and to the allotment of the Partnership units. The “minimum amount” to which the sub-section refers was stated in the Christchurch Pavilion prospectus to be “$4,500,000 being the full amount sought by this prospectus” (para 10(4) at p 23). The same figure, $4,500,000, is stated in paragraph 5(e) of the Deed of Participation to be the minimum amount.
18. But the prospectus required only $3,240,000, not the full $4,500,000, to be paid on allotment. The balance, $1,260,000, which included the whole of the $450,000 payable in respect of the participating securities, ie. the Partnership units, was not required by the prospectus to be paid until 12 August 1988, well after the expiry of four months from 12 November 1987, the date of the prospectus.
19. Section 37(2) required that, before any allotment could take place, first, the “minimum amount” had to be “subscribed”, and second, the “minimum amount” had to be paid to the issuer within the period of four months from the date of the prospectus.
20. An issue arising out of section 37(2) concerns the meaning of “subscribed”. In order for an amount to be “subscribed” is it necessary for the amount to be actually paid? Or is it sufficient for the investor, by signing an application form, to become contractually committed to pay the amount? The word “subscribe” can, depending on the context, bear either meaning and, in the context of subscription for shares, it often bears the latter meaning (see Thames Tunnel Co v Sheldon (1827) 6 B & C 341 at 347 and Government Stock and other Securities Investment Co Ltd v Christopher [1956] 1 WLR 237 at 242). However, in sub-sections (5) and (6) of section 37 the word “subscriptions” plainly means money that has been paid and it seems to their Lordships that “unless the amount … is subscribed” in sub-section (2) ought to be given a corresponding meaning. Moreover, a contrary view would, in many cases, render section 37(2) unworkable. In the event of a breach of the section 37(2) requirements, the allotment is invalid and of no effect (ss (4)). If the minimum amount does not have to be actually paid at the time of allotment but may be paid within the period of four months from the date of the prospectus, what is the status of the allotment in the meantime? No one will know until the minimum amount is paid, or until the four months expires, whether those shares that have already been allotted, which may have been fully paid up in cash, have been validly allotted. Section 37 taken as a whole requires the conclusion, their Lordships think, that the minimum amount is not subscribed unless it is paid.
21. If that is right, and sub-section (2) requires the minimum amount to be actually paid before any allotment takes place, the additional requirement that the minimum amount be paid no later than four months after the date of the prospectus would, in effect, require the allotment to take place within that four month period. And that, too, seems to their Lordships to make good sense. It would prevent an allotment being made pursuant to an out-of-date prospectus.
22. The Christchurch Pavilion allotment failed to comply with either of the sub-section (2) requirements. The minimum sum, the $4,500,000, was not subscribed, ie. paid, by 23 December 1987. Nor was it paid within four months of the date of the prospectus. So the allotment both of the CPH shares and of the 90 Partnership units was invalid (see s 37(4)). But no one noticed the invalidity. The professionals attending to the allotment, including DHST, appear to have thought that provided the $3,240,000 had been paid by 23 December 1987 the allotment of the shares and the Partnership units could properly proceed. In these circumstances it is not surprising that sub-section (5) was not complied with. The subscription money was not placed in a trust account. The subscriptions were not repaid to the subscribers. Instead they were released to CPH, which seems to have been treated as the “issuer” not only in relation to the shares, which it was, but also in relation to the Partnership units, which it was not. Nor, so far as their Lordships are aware, has any attempt been made by the investors to recover their money from the directors of the issuer, whether CPH or HGC.
23. It was submitted to their Lordships by Mr Lusk QC, counsel for DHST, that the exemption from section 37(2) provided by the Securities Act (Minimum Subscription) Exemption Notice 1987 applied to the Christchurch Pavilions issue.
24. The 1987 Notice, given by the Securities Commission pursuant to the power conferred by section 5(5) of the Act, is expressed to apply to “specified participatory securities”. A specified participatory security is defined in the Notice as:

“… a participatory security the terms of which require that the price for the security is payable by instalments over a period specified in the registered prospectus relating to the security with the first such instalment payable on subscription for the security.” (paragraph 2(1)).

25. Paragraph 3 of the Notice provides an exemption from compliance with section 37(2):

“… in respect of any offer of specified participatory securities in so far as that subsection provides that no allotment of the specified participatory securities shall be made unless the … minimum amount … is paid to and received by the issuer within 4 months after the date of the registered prospectus.”

26. Mr Lusk submitted that, for the purposes of the Notice, the Christchurch Pavilions issue represented for each investor a package consisting partly of CPH shares and partly of Partnership units. The package, taken as a whole, did not consist of equity securities. Therefore, taken as a whole, it consisted of participatory securities. The price for the package was required to be paid in part on 23 December 1987 and as to the balance on 12 August 1988. This was, in effect, payment by instalments over the period from 23 December to 12 August. So, submitted Mr Lusk, the package represented specified participatory securities as defined and the issue was exempt from the section 37(2) minimum amount requirements.
27. Their Lordships, in agreement with the trial judge and the Court of Appeal, are unable to accept these submissions.
28. First, although the Christchurch Pavilions issue comprised both CPH shares and Partnership units it is not, in their Lordships' opinion, permissible to lump the shares and the units together in order to bring them with the section 2 definition of “participatory security”. The issue had two constituent parts one of which was an equity security, the other of which was a participatory security. The “issuer” in respect of the former was CPH and in respect of the latter may have been HGC but certainly was not CPH. For the purposes of the Act, and therefore of the Notice, the two parts were distinct. And, although the Partnerships units were participatory securities, the $450,000 price for each unit was to be paid on 12 August 1988. There were no instalments. So the units were not “specified participatory securities”.
29. Moreover, the exemption applies only to the section 37(2) requirement that the minimum amount be paid within 4 months of the date of the prospectus. The Notice does not provide any exemption from the section 37(2) requirement that the minimum amount be subscribed before an allotment can take place.
30. Accordingly, the Notice provides no escape from the conclusion that the Christchurch Pavilions issue, having failed to comply with the section 37(2) requirements, was “invalid and of no effect” (ss (4)).
31. Section 37A of the Act warrants a mention. Sub-section (1) bars the allotment of a security if the case falls within one or other of six sub-paragraphs, lettered (a) to (f). Sub-paragraph (b) applies if the “issuer of the security does not hold, in respect of the security, a form of application that is both properly completed and signed by or on behalf of the subscriber”. The investors say that sub-paragraph (b) was not complied with in the present case. But a contravention of section 37A(1), unlike a contravention of section 37(2), does not render the allotment void. The allotment becomes voidable and may be avoided by notice in writing given by the investor within a prescribed period (ss (3)). No such notice has ever been given by any of the Christchurch Pavilion investors and the prescribed period is now long since past. The only remaining relevance of section 37A to this case is that it forms part of the regulatory system imposed by the Act and, therefore, part of the contextual background for an assessment of the extent of the duties of DHST as statutory supervisor.
32. Other provisions of the Act relevant to the arguments that have been addressed to their Lordships are to be found in sections 49, 62 and 63. Section 49 enables a statutory supervisor to make an application to the court for directions when in his opinion:

“(b) the provisions of any deed relating to the securities are no longer adequate to give proper protection to the security holders.”

33. Section 62, subject to certain exceptions, declares void contractual provisions exempting a statutory supervisor from liability for failing to show “… the degree of care and diligence required of him as … statutory supervisor having regard to the provisions of any deed conferring on him any powers, authorities or discretions”. And section 63 gives power to the court to relieve a statutory supervisor of liability in respect of negligence, default or breach of duty if he has acted honestly and reasonably and ought fairly to be excused.
The Deed of Participation
34. The investors' case, as pleaded, is based largely upon alleged breaches by DHST of contractual duties owed under the Deed of Participation. The duties owed are set out in paragraph 17(a) of the Deed:

“The Statutory Supervisor shall exercise reasonable diligence to ascertain whether or not any breach of the terms of this Deed or of any offer of interests to members of the public has occurred and, except where it is satisfied that the breach will not materially prejudice the interests of the Participants, shall do all such things as it is empowered to do to cause any breach of those terms to be remedied.”

35. Regulation 26 of the Securities Regulations 1983 set out, in the 7th Schedule, a number of clauses “deemed to be contained in every deed of participation required for the purposes of this Act and relating to participatory securities”. Paragraph 17(a), cited above, is based upon and not materially different from clause 1 in the 7th Schedule.
36. So the duty of DHST was to exercise “reasonable diligence” to ascertain whether or not any breach of the terms of the Deed of Participation or of the offer contained in the prospectus had taken place and, in effect, to protect the interests of “the Participants”. “The Participants”, as defined in paragraph 1(a) of the Deed were the investors “who have agreed to subscribe for units in the Partnership and who have executed this Deed and such other persons who by virtue of their execution of a Deed of Accession shall become participants”.
37. Two points arise out of this. First, is any distinction to be drawn between the investors who were original subscribers for their units and the investors with whom HGC, having taken up 50.5 units, subsequently placed the units? It is accepted that each investor to whom HGC transferred a unit will have executed a Deed of Accession. And Mr Lusk accepts that as from the time they executed Deeds of Accession these investors became entitled to the benefit of the contractual obligations of DHST under the Deed of Participation. But he submitted that these post 23 December 1987 investors could not sue on breaches of duty that had taken place before they had become participants.
38. Their Lordships see considerable force in this submission. A possible answer might be that a statutory supervisor owes a statutory duty of due diligence as well as a contractual one and that the statutory duty is owed to everyone who acquires a proprietary interest in the participatory security in question. But the context of the Act and the 1983 Regulations suggest, in their Lordships' opinion, that the legislature was contemplating a contractual duty owed via a deed of participation rather than a statutory duty owed independently of the deed of participation. It seems, however, artificial to distinguish between those investors who were original subscribers for the units and those investors with whom units were subsequently placed by HGC, the underwriter who had underwritten the issue. Their Lordships are prepared to assume, for the purposes of this appeal and without finally deciding the issue, that not only the original investors but also the investors who acquired their units from HGC are entitled to sue on breaches by DHST of its paragraph 17(a) duty whenever the breaches may have occurred.
39. The second point relating to DHST's duty under the Deed of Participation is that the Deed related only to the Partnership units and the conduct of the Partnership business. It did not impose on DHST any duty in relation to the issue of the CPH shares. Nor does any provision of the Act or the Regulations made thereunder impose on a statutory supervisor any duty or function otherwise than in respect of participatory securities ie. the Partnership units.
The Investors' pleaded case
40. The Investors' case, as pleaded against DHST, is important not only for what it alleges but also for what it does not allege. The case is based upon allegations of breach by DHST of duty owed under the Deed of Participation.
41. Paragraph 11 of the pleading (the 4th Amended Statement of Claim) set out the gist of the duties imposed by paragraph 17(a) of the Deed, referred to the payment obligations of subscribers imposed by the prospectus and correctly identified the section 37 (2) “minimum amount” as being $4,050,000 in respect of the CPH shares and $450,000 in respect of the Partnership units. Paragraph 12 pleaded that no payments of capital had been made by the investors by 18 December 1987 and that the minimum amount had not been paid by that date. It is accepted that 23 December was validly substituted as the relevant closing date and that all references in the pleading to 18 December should therefore be read as references to 23 December.
42. The allegations of breach of duty by DHST are to be found in paragraphs 16 and 17:

“16. The 1st Defendant breached its duty as statutory supervisor in permitting the investments of the partners in the Plaintiffs to be accepted by the promoter and in permitting the Christchurch Pavilions development to proceed, notwithstanding the breaches of the requirements of the Registered Prospectus and of the Deed of Participation, as particularised in paragraph 12.

17. The 1st Defendant further breached its duty as statutory supervisor through failing to hold, as at [23 December] 1987 written statements from the partners of the Plaintiffs authorizing their subscription for securities under the Registered Prospectus, as required by section 37(3) of the Securities Act.”

43. And paragraph 18 alleged that as a result of the pleaded breaches of duty, the Plaintiffs lost all their invested money.
The trial before Cartwright J
44. The case made by the investors at trial was that the capital, the $3,240,000, that, according to the prospectus, should have been in the hands of CPH on 23 December 1987, the allotment date, was not in CPH's hands and that DHST should have been aware that that was so and should not have allowed the allotment to proceed (see p 5 of the judgment of Cartwright J). The judge noted the discrepancy between the “minimum amount” as stated in the prospectus, $4,500,000, and the amount that the prospectus required to be paid by the allotment date, £3,240,000 but then set herself the task of determining the amount that was actually in hand on the allotment date. The working papers and records of HGC and DHST suggested that the $3,240,000 was in hand and, together with an advance of $1,750,000 from HGC, was then paid to CPM. The $3,240,000 included, according to the papers and records, $804,000 paid in cash by subscribers and $1,818,000 paid by HGC for the shares it had taken up. The balance, $618,000, was provided by HGC by way of temporary assistance to investors who had not yet organised their financial arrangements.
45. The judge concluded that “When fewer than 45 units were subscribed at 23 December 1987, there was a shortfall in capital required for the initial stage of the project” (p 10). This view appears to have been based on the proposition that finance coming from HGC, whether the $1,818,000 or the $618,000, was of less value to the project than funds coming directly from the investors. It led to the judge concluding that “… the venture was seriously under-subscribed as at the date of the allotment” (p 12) notwithstanding that the full $3,240,000 contemplated by the prospectus had been made available to CPH.
46. The judge, in addition, examined whether all the application forms from the investors to whom shares had been allotted on 23 December 1987 were actually then held. This examination, arising out of paragraph 17 of the Statement of Claim, was relevant to section 37(3) of the Act. In reliance mainly on answers to Interrogatories which had been given by some of the investors, she concluded that several of the application forms had been received later than 23 December 1987. This conclusion was inconsistent both with documentary evidence and with the oral evidence of Mr Jenkins, an officer of HGC who had been present on the allotment occasion.
47. The funds produced by the issue of the shares and units were to be applied in paying the expenses of the issue and, subject to that, in or towards payment of the price of the building site and of the amount due under the building contract. The building contractor was an associate company of HGC. The judge took the view that because the subscription money, less the issue fees, went from HGC, the promoter, to CPM, as manager of the project, and from CPM to the building contractor and because both CPM and the building contractor were companies controlled by HGC, the money was not real money. She thought the consequence was that real money for financing the project could not be obtained otherwise than by bank borrowings at high interest rates and that this was a major cause of the collapse of the project and the loss of the investors' money.
48. The breaches of duty by DHST that the judge found had been established were, first, that DHST did not hold application forms signed by all those investors to whom shares were allotted on 23 December 1987 (the s 37(3) point: p 27) and, second, that DHST should have realised that “the venture did not meet the terms of the offer in that significantly less than 50% of the units and shares had been applied for” (p 28). She thought DHST should have realised that “the venture was, on the face of it, seriously undercapitalised …” (p 28). She concluded that there was a “close nexus between [DHST's] failure to note the deficiencies in the investment and attempt to delay or halt the allotment, and the ultimate failure of the project”. She held DHST liable to the investors for the loss of their money and drew no distinction between investors who were subscribers on 23 December 1987 and those who obtained their shares and units from HGC subsequently.
The Court of Appeal
49. The Court of Appeal disagreed with the judge as to the conclusions that could legitimately be reached regarding the application forms that were in hand on 23 December 1987 and the amount of subscription money that was made available to CPH as a result of the 23 December allotment. The court noted the inconsistency between the section 37(2) minimum amount, $4,500,000 as stated in the prospectus and in the Deed of Participation, and the amount required by the prospectus to be paid on allotment of the shares and units, $3,240,000, with the $1,260,000 balance of the payment for the shares and units not being payable until 12 August 1988. As to that, however, Tipping J, who gave the judgment of the court, said this:

“But the investors cannot complain that the full amount of $4.5m was not paid as at 23 December 1987. This is because the prospectus required only $3.24m to have been paid at that date, which was the date on which allotment was to take place. Indeed there was nothing legally wrong, in terms of s 37(2) with the second tranche being delayed beyond the date of allotment provided it was paid within 4 months of the date of the prospectus. That date was 12 November 1987.” (para 8).

This passage shows that the Court of Appeal were adopting a view as to the meaning of “subscribe” in section 37(2) which their Lordships think was in error. But it shows also that the real issue being debated, the investors' real complaint, was that the full $3.24m had not been paid by 23 December 1987 (see also paras 14 and 15 of the judgment).
50. The court then addressed itself to the question whether the failure of the Christchurch Pavilions project and thus the loss of the investors' money was caused by the fact that $1,260,000 of the $4,500,000 minimum amount was not paid until August 1988 and concluded that the requisite causative link was absent. Tipping J, who gave the judgment of the court, said this:

“The allotment was … in breach of s 37(2). Deloitte should have picked this up and taken such steps as it could to prevent the allotment from taking place. … [Mr Lusk] argued however that the breach was not material in causative terms because from the point of view of cash flow the venture was always structured on the basis of two tranches; the fact that the second was outside the time permitted by s 37(2) can therefore have had no causative effect on the ultimate financial failure.

We accept that proposition which Mr Wilson [counsel for the investors] did not seriously challenge. The fact that the second tranche was paid outside the parameters of s 37(2) cannot logically have had any causative bearing on the investors' losses because they subscribed on the premise that their second payment would be made some 8 months after the first and, if and to the extent that this caused difficulties for the venture, the investors must be deemed to have taken the risk that that would be so. They cannot complain in causative terms of what they knew full well was to be the position, albeit strictly an unlawful one. Thus although Deloitte was in default in this respect its default did not cause the loss. The only way it could be said to have done so is by the application of a wholly ‘but for’ approach to causation which in present circumstances would not be appropriate, as Mr Wilson properly recognised” (paras 20 and 21).

51. The Court of Appeal did not accept the judge's factual conclusion that a substantial part of the $3,240,000 was not paid until after 23 December 1987. Nor did the court accept that the relationship between HGC, CPM, CPH and the building contractor, Farnsworth Equities, meant that the $3,240,000 net of fees did not represent real money properly applied for the purposes of the project. The court concluded that:

“HGC passed on a total exceeding £4.625m to Farnsworth and thereby procured full payment of what was required to satisfy the up front obligations under the building contract. The same position was therefore reached as would have obtained if the building contractor had been an independent party” (para 40).

and that:

“ … we are satisfied that Deloitte cannot be regarded as being at fault on the basis that the venture was under-capitalised. It was not.” (para 50).

The appellants' case
52. The appellants put forward before the Board three grounds of Appeal. The first ground was that the breach of section 37(2) rendered the 23 December 1987 allotments invalid. Their Lordships agree that that was so. The minimum amount, the $4,500,000, was not paid on 23 December 1987 (the first section 37(2) requirement) nor was it paid within four months from the prospectus date (the second section 37(2) requirement). As a result the allotments were invalid (s 37(4)). But it does not follow that Deloitte, as statutory supervisor, was liable to repay the investors' money. A statutory remedy is provided in sub-sections (5) and (6). The subscription money paid in respect of the invalid allotment should be placed in a trust account and repaid with interest as soon as practicable (ss (5)). But the obligations under sub-section (5) are placed on the issuer, not on the statutory supervisor. And under sub-section (6) it is the issuer and its directors who are jointly and severally liable to repay the subscriptions. Both Cartwright J and the Court of Appeal formed the view that DHST ought to have been aware that the payment terms of the prospectus would inevitably involve a breach of section 37(2). Their Lordships respectfully agree. DHST were professionals, and were charging a fee of, their Lordships were told, $5000 for their services. Mr Lusk pointed out that the registrar had accepted the prospectus and the draft deed of participation for registration without raising any query about the discrepancy. Moreover, DHST’s solicitors had approved the contents of the documents. But the inconsistency between the minimum amount, $4,500,000, that section 37(2) required to be paid within four months of the date of the prospectus (the second section 37(2) requirement) and the $3,240,000 that the prospectus required to be paid within that period is so immediately obvious as to make any suggestion that DHST cannot be blamed for not noticing the discrepancy very difficult to sustain.
53. In their Lordships’ view DHST cannot be blamed for not appreciating that the first section 37(2) requirement, namely, that the minimum amount, the $4.5 million, be subscribed before any allotment could take place, meant that the amount had to be paid before any allotment could take place. A conclusion that that was so depends upon the meaning to be attributed to “subscribe” and was not reached either by Cartwright J or by the Court of Appeal.
54. But DHST can, in their Lordships' view, be expected to have noticed that, if the terms of the prospectus were adhered to and the balance, $1.26 million, were not paid until August 1988, there would be bound to be a breach of the second section 37(2) requirement. The point is particularly sharp if considered in relation to the Partnership units. Paragraph 5(e) of the Deed of Participation stated that the minimum amount in respect of the Partnership units “which must be subscribed before this Deed comes into force” was $450,000. And the prospectus made clear that the $450,000 need not be paid until 12 August 1988. No part had to be paid within the four month period. Their Lordships agree with Cartwright J and the Court of Appeal that the DHST’s failure to notice this was a breach of their “reasonable diligence” duty.
55. Mr Wilson QC, counsel for the investors, argued before their Lordships, as he had successfully done before Cartwright J, that DHST did not on the allotment day, 23 December 1987, hold application forms signed by the investors to whom shares and units were on that day allotted and that not all the $3,240,000 had been paid. The contentions regarding the receipt of the $3.24 million were not accepted by the Court of Appeal and their Lordships, too, in view of the documentary material referred to by Mr Lusk and the evidence given by Mr Jenkins, are not persuaded that they are correct. As to the application forms, Mr Wilson’s written case says that there were concurrent findings by the courts below that DHST “failed to hold all application forms on allotment”. (para 5.5 at p. 32). The Court of Appeal did not so find but treated the issue as subsumed within the question whether the right amount of subscription money had been received (see para 10 and 11 of the judgment). It follows, in their Lordships' view, from the Court of Appeal’s rejection of the investors' contentions regarding the receipt of the $3.24 million that the court did not accept the contention that the application forms were not in hand on 23 December 1987. Their Lordships, too, are not persuaded by that contention. The only breach of duty by DHST that has been made out is, in their Lordships’ view, that to which reference has already been made.
56. Before their Lordships Mr Wilson contended that the twin findings, (i) of breach of section 37(2) resulting in the allotment both of the shares and of the units being invalid and (ii) that DHST’s failure to notice that the payment terms of the prospectus would lead to this result was a breach of their “reasonable diligence” duty, were all that were necessary for the investors’ success. He submitted that “the Court was not entitled to further inquiry into causation”. In the court below, however, Mr Wilson seems to have accepted the need for a causative link between the breach of duty and the loss of the investor’s money (see para 21 of the Court of Appeal judgment). Their Lordships have no doubt that the causative link is necessary. The section 37(5) and (6) obligations do not lie on the statutory supervisor. A failure on DHST’s part to insist on the subscription money being placed in a trust account or to advise the investors of their remedies under those sub-sections was not pleaded and was no part of the investors' case in either of the courts below. It is too late to raise the point for the first time before the Board.
57. So the causation issue, in their Lordships’ view, is whether the loss of the investors’ money was caused by DHST’s failure to draw attention to the fact that, according to the prospectus, the minimum amount might not be fully paid until after the expiry of the section 37(2) four month period.
58. The evidence and arguments below that were directed to this issue concentrated on the question whether the reason the Christchurch Pavilions project failed was under-capitalization (see para 1 of the judgment). The Court of Appeal’s conclusions are to be found in paragraph 56. Shortly stated, the reason for the failure was, in the view of the court, an inadequate cash flow brought about by trade figures which were below expectations. The court said that:

“… even if Deloitte had been at fault in some material respect, the investors would still have faced major difficulties in showing that such default caused the loss of their investments.”

59. Their Lordships agree with the Court of Appeal that the investors have not shown the requisite causative link between DHST’s breach of duty and the loss of their money. What would have happened if DHST had drawn HGC’s attention to the section 37(2) problem is a matter of speculation. HGC had power, under the terms of the offer contained in the prospectus, to postpone the allotment date. The date had already been postponed from 18 December. There were various things that might have happened but no evidence was directed to this and their Lordships are not inclined to speculate. The investors' problems regarding causation are made the more difficult by the circumstance that whereas DHST’s breach of duty related to its Deed of Participation obligations in respect of the Partnership units, the claim is for recovery not simply of the $450,000 paid for the units but also the $4,050,000 paid for the CPH shares in respect of which no contractual duty was owed. The investors’ first ground of appeal therefore fails.
60. The second and third grounds of appeal, as set out in the appellants’ written case and expounded upon by Mr Wilson in argument, add nothing that has not been already dealt with.
61. Accordingly their Lordships will humbly advise Her Majesty that this appeal should be dismissed with costs.