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Law to validate securities passed

Changes to the law allowing fund managers to go to court to validate “voided allotments” went through Parliament under urgency last week.

Wednesday, April 14th 2004, 6:44AM

by Rob Hosking

Meanwhile investors who receive the penalty payment for voided allotments may get a tax bill for the privilege. The law change – tacked onto the end of the Business Law Reform Bill – was put up by former Commerce Minister Lianne Dalziel as a way past draconian penalties in the Securities Act.

Offshore-based funds are allowed an exemption from the normal Securities Act requirement to issue a prospectus in this country, so long as certain documents are filed with the Companies Office. However as the law stands if those documents are not filed – or even not filed on time – the new securities are deemed void.

The penalty would have required the fund managers to refund money to investors, plus pay 10% penalty for each year the money had been invested.

The law change allows the fund managers – and their investors – their day in court.

New Minister Margaret Wilson says the change “allows the court to consider prejudice to investors as well as the materiality of the breach in deciding relief orders.”

If investors do still receive the penalty payment they may face a tax bill, the Inland Revenue Department says.

In a prepared statement, the department has told Good Returns that if the 10% penalty is deemed to be interest, “an individual investor could be taxed on the interest received (at the usual tax rates)”.

Fund managers, if residing in New Zealand, would have to deduct Resident Withholding Tax from the interest paid.

Meanwhile BT Funds Management has recently written to unitholders who had been issued invalid securities saying that it was continuing with court action.

It says, in a letter that was written before the law change, that it will continue with the case regardless.

"BT will continue to seek validation of any affected investments and investors will continue to have the opportunity to participate in the process for resolution of this matter," chief executive David Clarke wrote.

The matter will be a class action and two classes have been identified; those opposing validation and those supporting validation. Temporary representatives and counsel have been appointed for both classes.

BT is paying for the legal represenation - out of its own pocket as opposed to the affected funds.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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