• About
• Publications
• Exemptions
• Notices
• What's new?
• International
• Speeches
• Information for investors
• Contact us
• Site map
• Home

Binding Rulings on Securities Law
A Discussion Paper

CHAPTER 6    BINDING RULINGS AND THE COURT

Appeals

6.1

An applicant dissatisfied with a ruling may be able to appeal it. A case may be stated for the High Court, on questions of law, under section 26 of the Securities Act. Section 26(1) and (2) provide:

26.    Appeals to High Court on questions of law only - (1) Subject to subsections (2) to (10) of this section, every decision of the Commission shall be final and binding on the parties to the proceedings.

(2)    Where any party to any proceedings before the Commission is dissatisfied with any determination of the Commission as being erroneous in point of law, he may appeal to the High Court by way of case stated for the opinion of the Court on a question of law only.

6.2

The succeeding subsections of section 26 set out a strict timetable for the lodging of an appeal and deal with procedural matters in respect of the conduct of the hearing and various other procedural matters.

6.3

A ruling on a particular matter would be a "proceeding before the Commission" in terms of section 26. Of course, judicial review would also be mechanism that may be available for providing relief to persons aggrieved with a refusal by the Commission to make a ruling or to persons who believed they had been adversely affected by a ruling.

Commission and Registrar Still Bound

6.4

If the court did not support the Commission's interpretation in a binding ruling, we think the Commission and Registrar would still need to be bound by the ruling in respect of any persons who had entered into transactions in reliance on the ruling, at least in respect of any exercise of their enforcement powers. This would preserve the certainty of the application of the Commission's interpretation, which is at the heart of the binding rulings regime.

6.5

The greatest risk to persons who obtained a ruling which was subsequently overturned in court is that they may then be open to action from investors for breach of the securities law. This may be particularly acute in respect of a ruling that an offer did not constitute an offer that was subject to the securities law and therefore the offer was not made in a registered prospectus or investment statement. Under section 37(4) of the Securities Act, any allotments made in respect of such an offer would be invalid, while under section 37A, subscribers could notify the issuer that they wished to void their allotments. The directors of the issuer then become personally liable to pay back any subscription moneys, possibly with interest.

6.6

The Commission considers that, under a binding rulings regime, the most appropriate way to ensure that directors and others with potential liability, who act in good faith in reliance on a Commission ruling, could not subsequently be penalised if a ruling were overturned on appeal, is through the enactment of safe harbours in respect of the civil and criminal liability provisions of the securities legislation (including the repayment liability on issuers and directors under sections 37 and 37A of the Securities Act).

Safe Harbour Provisions, Third Parties, and the Illegal Contracts Act

6.7

A statutory safe harbour provides protection to persons who have made efforts to comply with the law. There are a number of safe harbours already available in the Securities Act, which may be relied upon in certain circumstances by individual issuers, or directors of the issuer, and by promoters and experts. For example, under section 56(2) and (3), a director or promoter who would otherwise be liable to investors for damages in respect of misstatements in an advertisement (for example, in an investment statement) or in a registered prospectus may avoid personal liability if he or she is able to prove, amongst other things, any of the following:

1. Withdrawal of consent to be a director before the distribution of the prospectus; or

2. Lack of knowledge or consent to the distribution of the advertisement or registration of the prospectus; or

3. Withdrawal of consent prior to any subscriptions being made for the securities; or

4. Belief, on reasonable grounds, that the statement was true; etc.

6.8

Section 57(2) and (3) provide similar safe harbours in respect of misstatements in advertisements or prospectuses made by experts. There are also limited safe harbours or defences available in respect of the criminal liability provisions of the Securities Act.

6.9

Further safe harbour provisions could be enacted in respect of binding rulings, so that, provided proper disclosure of all material facts had been made by the persons relying on the safe harbour, immunity from liability would be available in respect of any contravention of the securities law that arose out of reliance on a ruling.

6.10

It would normally only be where the court had overruled a Commission ruling that an issuer, directors, promoters or experts would wish to rely on a safe harbour from liability.

6.11

Such safe harbours would, in certain circumstances, affect the ability of investors to obtain relief if they were looking to get their subscription monies back. The statutory safe harbours would operate to make a director (or other potentially liable person) immune from liability where the court ruled that the Commission had wrongly interpreted the law and that in following the ruling the director had thereby failed to comply with the law. Where this resulted in the invalidation of the allotments of the securities issued, investors could not in those circumstances look to securities law for a remedy, if the only fault of the issuer under securities law was action taken in reliance on a ruling.

6.12

In view of the harshness of the result on investors, it may be important to have a requirement in these circumstances that the court consider the provisions of the Illegal Contracts Act, so that the allotments could be validated and the investment continue. In weighing up whether or not to grant relief under the Illegal Contracts Act, the court would bear in mind that the Securities Act is for the benefit of investors and is not to be operated to their disadvantage, provided they have acted in good faith and there are no other reasons why relief should not be granted (Westpac Financial Services Ltd v Securities Commission (1996) 7 NZCLC 261,106).

6.13

If, on the other hand, a director (or other potentially liable person) failed to properly comply with some aspect of securities law not covered by the ruling, he or she could not rely on the safe harbours in respect of rulings merely because the offer was subject to a ruling at the time of the breach.

15. Would safe harbour provisions provide satisfactory protection to directors (and others with potential liability) acting bona fide in reliance on a ruling that is overruled in an appeal?

16. Should such safe harbours extend to remove potential liability under other legislation, e.g., the Fair Trading Act, or the common law?

17. Would the effects of such safe harbours on investors' remedies be justified?

18. Should there be a requirement that the court considers the provisions of the Illegal Contracts Act if it overturned a Commission ruling, the result of which would otherwise be the invalidating of the allotment of securities?