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Judgment - Feltex Investors: Houghton v Saunders and ors



12 October 2016



(CA 578/2014) [2016] NZCA


This summary is provided to assist in the understanding of the Court’s judgment. It does not comprise part of the reasons for that judgment. The full judgment with reasons is the only authoritative document. The full text of the judgment and reasons can be found at


1. The Court of Appeal today upheld a High Court decision that found investors in Feltex Carpets Ltd were not entitled to compensation under the Securities Act 1978[1] for allegedly untrue statements in the company’s share prospectus.

2. Mr Houghton, the appellant, commenced proceedings in the High Court in a representative capacity for himself and for others who had been allotted shares in Feltex’s initial public offer (IPO) in 2004. Mr Houghton claimed that the prospectus was misleading and he and those he represents had invested on the faith of it. Feltex went into liquidation in 2006, rendering the shares worthless. Mr Houghton sought recovery of his lost investment from the directors of Feltex, the vendor of the shares and those he alleged promoted the IPO.[2]

3. In the High Court, Justice Dobson found there were no misleading statements in the prospectus and he dismissed all of Mr Houghton’s claims against the defendants. The Court of Appeal’s judgment has upheld most of Justice Dobson’s findings and the result. The Court’s reasons were given by Justice Winkelmann.

4. The main issues arising in the appeal concerned the interpretation of the liability provisions in the Securities Act and the statements advanced by Mr Houghton as untrue. In upholding the High Court decision, the Court of Appeal confirmed that in order to establish liability under the Securities Act a plaintiff must prove reliance on a particular untrue statement when deciding to take on the investment risk. Mr Houghton failed to prove he had based his investment decision on an untrue statement.

5. In its judgment the Court of Appeal also considered:

a. the interpretation of “promotership” as it arises under the Securities Act; and

b. whether section 63A of the Securities Act precluded Mr Houghton from advancing claims under the Fair Trading Act 1986.

6. A summary of the Court’s primary findings is given below.

Interpretation of the liability provisions of the Securities Act

7. The Court upheld, in substance, Justice Dobson’s interpretation of sections 55 and 56 of the Securities Act. These are the liability provisions of the Securities Act under which Mr Houghton brought his claim. Mr Houghton said, when attempting to prove an “untrue statement” in the prospectus, he did not have to point to a particular statement but could rely on the entire prospectus as constituting a “statement”. The Court of Appeal rejected Mr Houghton’s argument and said it was a well-established requirement that a plaintiff must prove a particular untrue statement for which liability is alleged to arise.

8. Mr Houghton also argued he did not have to show reliance on a particular untrue statement as causing his loss. He contended he could recover his loss by the mere fact there was an untrue statement in the prospectus. The Court of Appeal held that Mr Houghton had to prove reliance. That was because, in terms of the Securities Act, the plaintiff has to prove they suffered loss by reason of the untrue statement. In reaching a view as to whether the plaintiff had shown such reliance, the court asks first if the prudent but non-expert investor’s investment decision was more likely than not to have been influenced by the untrue statement. If the answer is yes, the reliance element is made out unless the evidence establishes that the particular investor did not rely upon the untrue statement. If reliance on an untrue statement is proved, the measure of loss is the difference between the price paid for the securities and the estimated value of the securities if there had been full and accurate disclosure.

Mr Houghton’s allegations of misstatements

9. In the Court of Appeal, Mr Houghton relied on five broad criticisms of the prospectus as constituting “untrue statements” in terms of the Securities Act. Justice Dobson had said none of the statements put forward were untrue. With one exception, the Court of Appeal upheld Justice Dobson’s findings.

10. The Court of Appeal said the forecast revenue in the prospectus for financial year 2004 was an untrue statement. The directors of Feltex could not have believed the forecast to be true or accurate when the shares were allotted to Mr Houghton. They knew there would be a small shortfall in revenue as against the forecast[3] but did not correct the forecast in the prospectus as they believed the shortfall to be immaterial. The Court said no liability could arise because, even if the forecast had been corrected, it would not have changed the prudent but non-expert investor’s decision to invest in Feltex (in the sense described above at [8]). There were several reasons for this.

11. First, there was ample evidence that sales figures can fluctuate significantly from month to month and there were explanations for the shortfall which suggested it was only temporary. Even if investors were aware of the true position, they would also have been provided with the explanations for it. Second, even if forecast revenue had been stated accurately, at the time there was a generally improving picture for Feltex’s financial performance in terms of sales, EBITDA[4] and profit. Third, the information available to directors indicated the first month of financial year 2005 would be a strong month and a good part of the shortfall on revenue in financial year 2004 would be made up. This turned out to be correct. Fourth, net surplus was in fact 111 per cent of the forecast level for financial year 2004. There was evidence the shortfall in revenue would not have impacted on net profit.

Full judgment: fileDecision_17.pdf

[1] Now repealed.

[2] Credit Suisse First Boston Asian Merchant Partners LP was the vendor. Mr Houghton also sought recovery from Credit Suisse Private Equity LLC, listed in the prospectus as the promoter of the shares; and First NZ Capital Ltd and Forsyth Barr Ltd, the “joint lead managers” (JLMs) of the IPO, on the grounds that they were also promoters of the scheme.

[3] Approximately 2.8 per cent as against forecast annual sales (sales comprising the vast majority of Feltex’s revenue).

[4] Earnings before interest, tax, depreciation and amortisation. EBITDA is not a substitute for net profit but is a useful tool for assessing a company’s operating cash flow.

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