Hotchin and Co lose trustee blame claim

Mark Hotchin and his Hanover fellows, being sued by the Financial Markets Authority, will not be able to share blame for any Securities Act breaches on Hanover’s trustees, the High Court has ruled.

Hanover Finance’s trustees New Zealand Guardian Trust and Perpetual Trust have successfully struck out Mr Hotchin’s third-party contribution claim against them which sought to make them parties in the FMA’s civil action.

Mr Hotchin's claim, that the trustees did not monitor the affairs of Hanover properly and should have to contribute to any penalties they have to pay if the FMA’s case against them succeeds, was an unprecedented move in recent finance company director trials.

Chief High Court Judge Helen Winkelmann has just released her decision, clearing the trustees from responsibility for the overall contents of Hanover Finance’s prospectuses.

She ordered Mr Hotchin to pay New Zealand Guardian Trust’s and Perpetual Trust’s costs.

Mr Hotchin, his fellow Hanover directors Sir Tipene O'Regan and  Bruce Gordon, chairman Greg Muir and Hanover promotors Eric Watson and Dennis Broit are fighting the FMA's claim they misled investors who put $35 million into Hanover Finance in the first half of 2008.

A court date has not yet been set.

If the FMA succeeds on all 10 civil actions, the six men could be ordered to pay up to $5 million each in penalties, or $30 million in total.

At Auckland High Court in March, Mr Hotchin claimed New Zealand Guardian Trust did not monitor the affairs of Hanover properly and owed a duty of care to investors – owed about $554 million when the Hanover group of companies collapsed in July 2008 – to check the accuracy of prospectus statements and should contribute to any damages they have to pay if the FMA’s case succeeds.

Guardian Trust wanted the claim struck out, arguing it had no legs and would consume assets due to investors.

Guardian Trust, in a supervisory role, did not make the untrue statements and it was Hanover and its directors who did and bore primary liability for any Securities Act breaches, it argued. 

Justice Winkelmann says Mr Hotchin’s claim for contribution is untenable and directors and trustees do not share a co-ordinate liability.

“If the FMA claim succeeds, the directors will be liable for the damage flowing from investments made in reliance on those untrue statements. If the trustees have breached their duties, they will be liable for losses incurred while they failed to act. This is not the same damage,” Justice Winkelmann says.

“It cannot be argued that the trustees owed a duty to monitor the prospectuses.

"The trust deeds, Securities Act and 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.”

Separately, Hanover co-owners Hotchin and Eric Watson suing former New Zealand Shareholders' Association chairman Bruce Sheppard for allegedly defamatory comments about the pair. Mr Sheppard will call  25 witnesses to defend his statements when the case is heard in October.

The Serious Fraud Office has closed its investigation into Hanover after deciding not to press ahead with a prosecution in April, however it will provide information and evidence to assist the FMA's claim.

gbond@nbr.co.nz