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High Court rules continuous disclosure doesn't extend to voluntary administrations

Wednesday 15th August 2018

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The High Court has ruled listed firms in voluntary administration don't need to meet NZX's continuous disclosure obligations designed to protect the integrity of trading. 

Chief High Court Judge Geoff Venning found disclosure obligation don't apply for those listed issuers in voluntary administration, saying the legislation supporting the NZX's listing rules was based on the premise of an active market, which doesn't exist in an administration. Parliament's specific prohibition on share trading during an administration meant there was no need for continuous disclosure, which aims to facilitate and maintain the integrity of an operating market. 

"The whole premise is that there is an active market and continuous disclosure is necessary to prevent trading without the market participants being fully informed," Justice Venning said in a judgment yesterday. "That does not arise when the issuer is in administration and trading in its shares are frozen." 

The Financial Markets Authority put the question to the court, heard in the High Court in Auckland last week, to get some clarity after the collapse of insurer CBL Corp. The company had its stock suspended from the NZX in February over concerns about the information it provided on the solvency of its insurance operations. The FMA is one of several regulators investigating the company and focused on whether CBL kept the market informed of material information and met continuous disclosure obligations

The market watchdog's application was supported by NZX, which considered the listing rules continued to apply to listed firms in administration. The stock market operator didn't seek to be heard. 

The FMA noted the findings and said it took the case stated procedure - which seeks the court's opinion on a point of law without taking action against a particular party - saying it was "grateful to the court for its prompt attention, both in providing a hearing date and issuing its findings". The authority thanked CBL administrator KordaMentha for its participation. 

Justice Venning said the practical benefits of continuing disclosure for fund managers and investors to revalue their shareholdings weren't the interests the regime was designed to protect. Imposing those obligations on an administrator would distract them from their principal role to act in the interest of creditors.

"I consider there is force in the argument for the administrators that where a company is in administration a reasonable person would not expect information from the company to effect the price of the quoted shares, given that shares are unable to be traded," Justice Venning said. "The information may enable analysts to review the value they place on shares as opposed to the price the shares are frozen at on the market, but as noted previously that is not the purpose of continuous disclosure." 

The judge said costs should fall where they lie. 


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