Hotchin cleared to pursue Guardian but will have to admit liability

Former Hanover director Mark Hotchin will need to prove he is “liable” to investors if he is to pursue New Zealand Guardian Trust for a contribution to an $18 million settlement with the Financial Markets Authority.

But in a 347-paragraph judgment released today, judges from the Supreme Court have criticised the claim as being “hypocritical” and “cynical,” pursuing a “diametrically opposite” position from having continually “vigorously denied” any liability.

In June last year, the FMA announced it had accepted $18 million from the former directors and promoters of Hanover Finance to settle allegations filed in 2012 that their investment documents contained significant false statements.

The defendants in the claim were Hanover directors, alongside prospectus promoters Eric Watson and Dennis Broit. 

The six men – Mark Hotchin, Greg Muir, Sir Tipene O’Regan, Bruce Gordon, Eric Watson and Dennis Broit – denied the allegations and the settlement includes no admission of liability.

But a few months earlier, Mr Hotchin pursued a claim against Guardian Trust to have it included in the FMA’s civil case against him, having reached a confidential settlement with another trustee, Perpetual Trust, on the morning of the Supreme Court hearing.

In mid-2013, Justice Helen Winkelmann had agreed with the trustees to strike out Mr Hotchin’s claim, which he appealed.

And in an extensive decision released today, the Supreme Court has allowed his appeal by a majority of three judges to two.

The court unanimously held the settlement with the FMA, which occurred after the hearing, did not prevent the claim but required Mr Hotchin’s acceptance “he will need to prove at trial that he is liable in tort to the investors.”

Chief Justice Sian Elias, as well as Justices William Young and Susan Glazebrook, allowed the appeal, on the grounds the claims against the directors and against the trust relate to the same damage, being the loss in value of investments.

Justices Terence Arnold and Mark O’Regan dissented, finding the damage suffered as a result of Mr Hotchin’s “negligent misstatements” was not the same as that suffered because of Guardian Trust’s negligent monitoring.

Mr Hotchin was also awarded $25,000 in costs.

But many of the judges, including one who allowed the appeal, have been critical of the claim being pursued after the settlement.

Hotchin will prove the prospectus had ‘untrue statements’
Justice Glazebrook allowed the appeal but in her reasons says she finds Mr Hotchin’s pursuit of the claim against Guardian Trust “hard to reconcile.”

"Mr Hotchin has now accepted that he will have to prove his negligence in this regard," she says.

"Essentially, therefore, he is seeking contribution on the basis that Guardian Trust did not stop his wrongdoing soon enough." 

In a statement following the announcement of last year’s settlement Messrs Hotchin, Muir, Gordon and Sir Tipene said they had reasonable grounds to believe the prospectus statements to be true at the time and did not think the FMA would have succeeded at trial.

“We decided to settle because of the cost and burden of litigation lasting for many more years, and because our insurers and former insurance broker made it possible to provide a payment that will go to the investors.

“We are pleased that this result for the investors has been possible.

“We agree with the FMA that this outcome for investors (and taxpayers) is without doubt far better than any likely result after trial in future years.”

Justice Glazebrook says the “very strong” public statements they would not have been found liable at trial are contrary to a requirement he will have to prove he is liable in tort to the investors in his claim against Guardian Trust.

Submissions were sought as to the effect of the settlement. Mr Hotchin said it would not affect the claim and that “he would prove at trial that the prospectus did contain untrue statements.”

“At best, this is hypocritical,” Justice Glazebrook says.

“But the suspicion must be that this may be a cynical attempt to force a settlement with Guardian Trust.”

Liable for “total loss”
Justices Arnold and O’Regan found in their judgment Mr Hotchin’s claim depends on him showing he is liable for the “total loss” of the investors’ funds.

But having “vigorously denied” any liability to the investors his litigation stance against Guardian Trust is “diametrically opposite” to the position he has maintained in every other aspect of the Hanover litigation.

"It must be remembered that the essence of Mr Hotchin's claim against Guardian Trust is predicated on the proposition that, if he caused loss to investors by his negligence in relation to the offer documents, he should be compensated by Guardian Trust because it failed to stop him from continuing to cause that loss," the judges said.

"His claim of repugnance to justice has to be seen in that light." 

Read the judgment here.

Read the Supreme Court's media release here.

Follow NBR on Facebook, Twitter, LinkedIn and Instagram for the latest news and free on-demand audio from NBR Radio.