Foote v Rolls [1983] CKHC 14; HC PLAINT 21.1982 (9 August 1983)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
PLAINT NO. 21/82

BETWEEN

ROBERT TAYLOR FOOTE
Plaintiff

AND

JOAN ELIZABETH ROLLS
First Defendant

AND

HIBISCUS HOUSE LIMITED
Second Defendant

AND

KENNETH JOHN ROLLS
Third Defendant

Counsel: Mr Holmes & Mr MacFadzien for Plaintiff
Mr Ingram & Mr Arnold for First, Second and Third Defendants

Date of Hearing: 14, 30, 31 May; 1, 2, 3 & 4 June 1983
Date of Judgment: 9 August 1983

INTERIM JUDGMENT OF SPEIGHT CJ

In this action Mr Robert Foote sues three Defendants: Mrs Rolls, Hibiscus House Limited and Mr Rolls. In the ordinary course of events but for a statute of the Cook Islands Parliament it would be an uncomplicated affair. The evidence shows that there was for sale in Rarotonga in early 1981 a restaurant business - that restaurant was owned by a company called Kumete Limited but it had failed. The premises occupied are well known. They are in the main street of down town Avarua - a somewhat elderly building but on a well placed site and having considerable potential if properly renovated and energetically run as a restaurant, bar and place of general entertainment. The receiver had advertised the business for sale. At that stage Mrs Rolls, who is a Cook Islander was in business in a number of enterprises in Rarotonga in company with her husband the Third Defendant. The Plaintiff Mr Foote had recently come to this country from the United States on a 12 months visitor's permit. He was a man who had acquired substantial capital through business affairs in the United States and he and his de facto wife Mrs Holzl were attracted by the country and desired to bring capital into the Cook Islands and start up business here. The Plaintiff and Mr & Mrs Rolls became friends and they became aware of the proposed sale by tender of the Kumete Restaurant. As a result of discussions between them they agreed to tender for the business in the hope that they could acquire it, take it over and run it jointly with a view to building it up by developing the premises not only into a profitable restaurant but also into a small shopping plaza. Mrs Rolls and apparently her husband were somewhat committed financially in other business ventures here but Mr Foote had considerable capital, something in excess of $US60,000 which he was willing to bring into the country and commit to a venture such as this. In the event the receiver was satisfied with a bid which he received from the parties totalling $33,000 and sold it. The agreement was signed by the Plaintiff and the First Defendant as "trustees for a company to be formed." In the ordinary course of events there is no doubt that the Company which was formed as Hibiscus House Ltd would have been owned as to its shareholding, equally between Mr Foote as to half and Mr and Mrs Rolls jointly for the other half. As it happened Mr and Mrs Rolls were somewhat committed with their other ventures and Mr Foote had ample finance available. It seems likely that but for complications of local statutory restrictions on foreigners investing here, he would have advanced to the Rolls their half of the $33,000 required, and would have either gone into partnership on an equal basis with the Rolls or would have become an equal shareholder with them in the company which was formed - Hibiscus House Ltd. Thereafter whether for profit or for loss the business would have been conducted jointly between them and if - as in the event transpired - they fell out there would have been a winding up of the Company or a dissolution of the partnership and a taking of accounts between them with whichever one was capable of doing so acquiring the substantial asset namely the ownership of the quite valuable lease of the restaurant premises. However, the complication which dominates the case is the existence on the statute book of the Cook Islands of the Development Investment Act. This Act, passed in 1977, is aimed at controlling business ventures in the Cook Islands into which foreign capital or foreign management is being injected. The declared purpose of the act is to encourage the importation into the Cook Islands of foreign capital for development of business activities here. But the overriding theme is to ensure that such businesses are conducted by and large for the benefit of the Cook Islands and its people. Accordingly the Development Investment Council has been set up (now replaced by the Monetary Council). Its functions are described in full in Section 9 of the Act but briefly they are to encourage but control overseas investment, so that business carried out with the advantage of funds provided from elsewhere shall in the large part be for the benefit of the Cook Islands economy. For the purpose of implementing this policy the most important section in the Act is section 26, which reads as follows:

"26. Restriction of foreign enterprises - (1) No foreign enterprise shall carry on business in the Cook Islands in any activity unless that foreign enterprise is registered in respect of that activity pursuant to this Act.

(2) Subsection (1) hereof shall not apply to any foreign enterprise carrying on any existing activity until the expiration of the period provided in section 27 of this Act for application for registration in respect of the existing activities."

Registration as referred to in that section is achieved by the processes set out in Section 27 or Section 28. Section 27 allowed 4 months after the commencement of the Act for existing enterprises to apply, but a new enterprise (such as the Foot/Rolls arrangement) required an approval before commencing business. Application is made to the Development Investment Council and shall disclose full particulars of the nature of the enterprise to be commenced, when it is to be commenced, who are to be its shareholders and a wide variety of information. The overriding scheme seems to require the Council to investigate whether or not it is appropriate to allow foreign investors to inject capital into the Cook Islands for the purpose of making a profit for themselves. The policy seems to be that such profit shall not be forbidden provided that there is seen to be a substantial derived benefit to the Cook Islands economy. (Sections 3 and 9). As has been said the restriction in Section 26 is to the effect that no foreign enterprise shall carry on business unless registered; and registration means a certificate of registration from the Development Investment Council issued after Cabinet approval has been granted pursuant to a recommendation from the Council.

That makes one turn to the definitions in Section 2:

" 'Foreign enterprise' means:

(a) in the case of an enterprise that is a corporation, an enterprise:

(i) in which 33¹/₃ percent or more of the voting shares or power is held or controlled by persons who are not local persons; and

(ii) in which 33¹/₃ percent or more of the value or number of the shares or number of the shares are beneficially owned by persons who are not local persons; or

(iii) that does not have its central management or control in the Cook Islands; or

(iv) that is incorporated or established by or under the law of a place outside the Cook Islands; and

(b) in the case of any other enterprise, an enterprise one third or more of the members or partners of which are not local persons; and

(c) an enterprise in which one third or more of the beneficial ownership of which is owned by persons who are not local persons;

(d) an enterprise that is a person other than a local person;"

" 'Carrying on business' means carrying on an economic activity pursuant to the objects of the enterprise and includes:

(a) establishing or using a share transfer or share registration office; and

(b) administering, managing or otherwise dealing with property as an agent, legal personal representative or trustee, whether by servants or agents or otherwise; and

(c) maintaining an agent for the purpose of soliciting or procuring orders whether or not the agent is continuously resident in the Cook Islands; and

(d) maintaining an office, agency or branch whether or not that office, agency or branch is also used for one of these purposes by another enterprise; and

(e) undertaking a building, construction or assembly project which will not be completed within twelve months;"

Now it is clear that running a restaurant business by a partnership in which Mr Foote and/or his de facto wife Mrs Holzl were more than one third partners would be a foreign enterprise under definition (b) and equally the ownership of the restaurant business by a Company in which Mr Foote and/or Mrs Holzl held more than one third of the shares would be included under definition (a)(i) or (ii). It must be borne in mind that it is the "carrying on business" without a certificate of registration which is an offence. (Sections 26 and 42). It is this restriction which dominates what would otherwise have been a perfectly simple action for trustee ownership in shares or dissolution of an equal partnership with a taking of accounts.

Matters commenced in the early part of 1981 as a result of discussions between Mr Foote and Mr and Mrs Rolls who, as has been said, were on friendly terms at that time. However, because of the lack of funds on the part of the Rolls, it was necessary for Mr Foote to provide substantial finance. The parties were all aware of the restrictions imposed by the Development Investment Act. As far as the Rolls were concerned Mrs Rolls was a local person. Mr Rolls I gather to have been an American citizen who acquired a local residency prior to the circumstances we are concerned with. Mr Foote had come to the country some six months earlier. He had already been in correspondence with the Prime Minister and the Minister of Immigration concerning his overseas status and the possibility of doing business here, and was as he says quite aware of the Development Investment restrictions. Being attracted to the purchase of this restaurant business the parties consulted Mr Trevor Clarke, Solicitor, who acted initially on behalf of all parties. These discussions must have taken place in March 1981 for there was an approval given by the Registrar of Companies on 1 April for the name of a company "Maitai Enterprises Ltd." Also on 2 April 1981, Mr Clarke on behalf of Maitai Enterprises wrote to the Development Investment Council outlining the formation of Maitai Enterprises Ltd a proposed company for which Mr Foote and Mrs Rolls had, as trustees, entered into an agreement (later superseded) for purchase of Kumete Restaurants. It was however expressly subject to a condition subsequent concerning the need for approval under the Development Investment Act. An application was made to the Council on the basis of various facts there disclosed for consent to the carrying on of business by this company, with Mr Foote as a foreigner holding 50 percent of the shares - an approval which of course was required by the Act. April and a large part of May moved by during part of which Mr Foote was absent in Hawaii. This was apparently necessitated by the fact that his temporary immigration papers were soon to expire and he needed to depart the country and re-enter as a visitor to obtain a further 12 month visitor's residential permit.

As to what followed I am dependent on the evidence of Mr Foote for the Defence called no evidence. A meeting was held, which is crucial to this case, on 26 May 1981 in the office of Mr Clarke. Approval of the Development Investment Council had not been forthcoming although there was a letter from its Secretary dated the 4 May saying that it would recommend to Cabinet that registration be approved once Mr Foote and Mrs Holzl's immigration status was clarified. The Development Investment Council was informed on 7 May by Mr Clarke that Mr Foote and Mrs Holzl had been granted a further 12 months permit and requested that the matter moved forward so that approval could be obtained. It appears however that there were moves behind the scenes. The former owners of Kumete Restaurant in receivership were local people and some people believed, whether rightly or wrongly that the policy of the Cook Islands Administration was that locals should run businesses where possible. It seems that these owners had made representations to the Minister in charge of these matters. They apparently hoped that they could be refinanced and for this purpose, so it is thought, suggested that consideration of approval of Mr Foote, and of the Rolls proposition, should be delayed to enable some further scope for manoeuvre by the former owners. However, that maybe, the parties to this action knew by the 26 May, apparently based on local rumour, and confirmed by Mr Clarke, that the matter could not be expected to be finalised before the 29 May which was the expiry date for concluding the purchase. The parties reconsidered their situation. They discussed the legal technicalities with Mr Clarke. It was decided on his advice that it was desirable to continue with the tender for purchase of the restaurant lease and chattels at a figure of $33,000. They planned eventually for 50/50 ownership by the Rolls family on one hand and by Mr Foote on the other. Mr Foote offered to make his share of the needed funds available on the basis that a company would be formed of which the shareholders would be only Mr and Mrs Rolls but that Mrs Rolls would hold half the shares in trust for Mr Foote. I accept Mr Foote's evidence that at this meeting there was only general talk about what working capital might be needed. He said that this initial agreement was a stop gap arrangement because of the 29th May deadline. I accept that at this stage although it was known that the recommendation from the Council (hereafter called DIC) would not be confirmed by Cabinet in the immediate future it was genuinely believed that before too long that difficulty would be cleared away. It was referred to by the Rolls as a "red tape" delay. What that was resolved Mrs Rolls would be able to transfer half the shares to Mr Foote and he would then destroy the promissory note which she had given him for $16,500 being half the purchase price. On this basis Mr Foote advanced $16,500 the Rolls provided a similar sum and the purchase was made. At the same time the name decided on was changed to "Hibiscus House Ltd."

A few days later, when possession had been obtained there was a further meeting. This went more particularly into how the business would be run. Details of working capital required were discussed. The Rolls could not contribute so it was agreed that Mr Foote would advance sums of money from time to time, referred to in evidence as the "bits and pieces" money, for such renovations and improvements as were required and for day to day working capital. This was said to be a loan by Mr Foote to the enterprise which he expected to have repaid, as against the initial purchase money (his share being $16,500) which he regarded as "risk" capital in terms of the earlier discussions. It was said in evidence that he did not expect repayment of the working capital at any time in the immediate future. Some discussions took place as to interest on it but it was agreed that interest would be waived and three reasons were advanced by Mr Foote for this. One was that there was a motor car available and this would be provided for him together with running expenses chargeable to the company free for his use. Secondly, so he says, it was agreed that when the additional funds - "the bits and pieces money" - was repaid it was agreed that it would be repaid in equivalent US dollars regardless of what depreciation might have taken place in New Zealand currency in the meantime, it being understood that the funds were being provided by Mr Foote cashing in existing US funds. The third reason that was given for no interest to be charged on the money he was to advance was, and I quote his words, "I was a 50/50 partner and in effect I was loaning money to myself". Great concern was expressed at this time by Mr Foote lest he be himself infringing the Development Investment Act. He says that he was assured by Mr and Mrs Rolls but more particularly by Mr Clarke that he was not and that this was only a loan and not caught by the provisions of the Act. Now my preliminary reaction to this is that that advice was sound provided it was based on an understanding that this was the merest temporary arrangement and that DIC approval would be forthcoming in the near future before there was any "carrying on business". When that approval arrived Mr Foote would receive his share holding entitlement and become a 50/50 proprietor of the incorporated company and such initial funds as he had advanced for preliminary expenses would be a debt owing to him by the company. I have not had the advantage of being told of any previous decision concerning this particular statute but my initial view is that advice of this sort by Mr Clarke was sound.

The parties therefore proceeded. They took over the premises and they started to renovate it and prepare for an opening in time for Constitution week - after purchase of more equipment, much hard work and the expenditure of more of Mr Foote's money the refurbished restaurant opened for business under its new name "Hibiscus House" on 29^th July 1981.

The day to day running of it was apparently attended to by Mrs Rolls and by Mr Foote. He claims that she was largely involved in promotional activities because of course she had other businesses to attend to and that at a later stage he had to encourage her to take more interest in the administration of the cooking side of things. Apart from that he claims that he did most of the work; both physically in refurbishing the premises, and later administratively in controlling the books and the staff and all other matters after they opened for business. He has claimed that he and Mrs Holzl did 65 to 75 percent of the work of running the restaurant thereafter. Now the important thing to be noted is that contrary to what I accept was an initial genuine expectation, the consent from the DIC was never received. It seems to have dragged on month after month. One can perhaps only speculate as to the reasons that it did, but inactivity in governmental agencies is not unknown in Rarotonga particularly when behind the scene influences are being brought to bear. It is claimed by Mr Foote that from time to time he pressed Mr Rolls on the matter and was assured that something was coming up soon. I am not entirely persuaded that this took place. I think that the matter was allowed to drift. But the running of the restaurant certainly did not lapse. Mr Foote worked energetically for the next eight months from August 1981 until March 1982. Mr and Mrs Rolls were away from the country for substantial periods of time. Mr Foote also was absent in Hawaii but for a short period. He received no wages nor did Mrs Holzl. He claimed to have worked full time on the job. As for his reward I particularly note the following: "It was part of the conditions that I join in management and have access to the books and the premises. That was implicit in the joint control concept." At another time he said "Profit was never in contemplation in the near future. Any money made would be spent by reinvesting it in the company so that we could get on with stages two and three of our development plan." As has already been mentioned one of his reasons for not asking for interest on his money was that he was lending it to himself which I take to mean that the money was being utilised for his benefit, that is to say towards establishing a profitable business in which he would have a substantial share. The first ten lines in page 50 of the transcript is a record of his answers to a number of questions asked by the Court. He said that the reward that he was to get for his services was that he anticipated that when the day came that the DIC would approve of him as a 50/50 owner he would reap benefit and for that purpose he put in his "blood, sweat and tears" for nothing. As to reward which he expected for the money he said "Any direct interest with respect of that money was being forgone because of the arrangement which would ultimately result in the 50/50 shareholding" - and also because of the car and payment of some of his expenses. And he acknowledged that he was anticipating that he would build this into a profitable business. Throughout his evidence he emphasized that the terms of the initial agreement, which he said were never varied, were for the running of the company to be done jointly by himself and the Rolls. In every case where he was asked about the improvement of the facilities or decisions as to policy he used the words "we agreed".

He said from time to time he vetoed certain expenditures because he was concerned that money should not be spent frivolously, and he said such things as: "I restricted payment because we had outstanding bills". He emphasized throughout that the control and handling of the finances was largely entrusted to him and that Mr and Mrs Rolls did not express dissatisfaction with the way that he had handled these matters. From time to time when troubles loomed he said he put in additional funds to keep the company going. There were some disputes as to policy decisions on running the business - for example there was the employment of the unusual Mr Piri Puruto; he favoured the hiring of this man while the Rolls did not want to have him on, but they discussed it between themselves and they agreed on a compromise. Similarly when he heard rumours at the beginning of 1982 that Mr and Mrs Rolls had been flirting with a possible sub - tenant, he discussed it with them and was satisfied when they said that no decision would be taken on that topic without his consent. Because of the emphasis which was placed in cross examination on the predominant role that he had taken, Counsel for the Plaintiff re-examination should be treated with some reserve. The reason for this is well known to Counsel as a result of consultation in Chambers. I do not propose to record any particular conclusion except to say that I treated with some reservation the answers given in re-examination, because the questions appeared to fall upon prepared ground. But the significant factors which I note even from the re-examination is this: that they were planning a two year period in which no one was to receive any profits and any excess of income over expenditure would be put back into the company. It was said that they had not wholly concluded what stage they might have arrived at by that time. But that nothing had been changed from the initial meeting of 26 May 1981 as to the long range objectives of the company to develop the restaurant and the shopping complex in three stages. And it was emphasized by Mr Foote that he had rights in respect of the management of Hibiscus House Limited and that there was to be joint approval of all steps which were to be taken in management. For this reason I disregard the eleventh hour claim which was made that the money which he had advanced, particularly the "bits and pieces", was to be repaid as soon as possible and at some time during the first two years. This observation is quite incompatible with the evidence which the Plaintiff had given over a period of two and a half days. I conclude without hesitation that once he moved in, in June 1981 he was expending his time and his labour without salary and he was advancing money progressively without interest, in building up a business with the intention that he would share in the profits of it and in any accumulated assets that might be acquired. Indeed it is to be noted that at all stages, Statements of Claim which have been filed (and there have been four of them), have quite specifically said that it was a condition of the money being advanced (and that means the initial $16,500 and the subsequent working capital) that no decisions affecting the manner in which the business was carried on could be made without his approval; that he would have full access to the financial records; that he would sign the cheques; and that he would have full control of the premises. Further that it was a condition of his participation in the business activity, pending the approval of his 50 percent shareholding in the company, that he would receive one half of the net profits of the Defendants restaurant or other business together with one half of the accumulated capital assets and goodwill or increase in value of the existing assets and to this end the Plaintiff called two witnesses as to the current value of the premises and the increase of the value of the shares of the company from the time of incorporation.

The balance of the narrative can be quite briefly summarised. Although initially shares were taken on Mr Foote's behalf in trust by Mrs Rolls, the conditions under which he could assume those shares never arose. Differences arose between the parties but there is a strong suspicion that these were fabricated, because, unbeknown to Mr Foote the Rolls had, early in 1982 been negotiating to sublet for it seems by then they were disenchanted with the venture. In March 1982 for whatever reason Mr and Mrs Rolls excluded Mr Foote from further participation in the business and barred him from the premises. If it were not for the subtleties of the Development Investment Act and the bar in Section 26 to the carrying on of business there is no doubt at all that this action claiming (1) the initial loan of $16,500; (2) the refunding of the working capital advanced from time to time for the benefit of the company which is owned by the First and Third Defendants and (3) for a share in the profits including the premium received from the subsequent sub-lessees and accumulated capital assets could be brought as a partnership dissolution action or as a voluntary winding up of the company and in such an action there is no doubt that the Plaintiff would succeed. That being so I cannot see any other conclusion but that at some date after June 1981 when, without DIC approval, the Plaintiff took the major role in running the affairs of this company in putting up the money to run it and his declared intention that the profits would be ploughed back into the business with an entitlement on his part to share in the profit and the capital accumulation would be clear evidence of a partnership between himself and Hibiscus House Ltd. However in those circumstances it is apparent that after 29 July they were carrying on business within the definition contained in Section 2 of the Act. The question therefore has to be asked, given that carrying on of business is declared by Section 26 to be illegal what is the consequence on this claim for the return of these funds? As this takes us immediately into the examination of the plea of illegality advanced on behalf of the Defendants. As is so often the case it is not a meritorious defence by persons who have advantaged themselves by money advanced in illegality carrying through an illegal operation.

Many submissions were made on the subject of illegality of contracts and numerous cases were cited. But before one embarks on a study of common law principles it is necessary to see clearly the provisions of our statute, and the facts of our case.

Under the Development Investment Act a partnership between Mr Foote on the one hand and the Rolls on the other is a foreign enterprise - see Section 2 - definition (b) and so too is a company in which Mr Foote is the beneficial owner of more than one-third of the value of the shares - Section 2(a) (ii).

The prohibition in Section 26 and 40 is not against forming or being part of a foreign enterprise, but against a foreign enterprise carrying on business in the Cook Islands, so one looks for the definition of "carrying on business" in Section 2 (supra).

None of the classifications in sub paragraphs (a) to (e) seem appropriate and consideration must centre on the initial definition.

"Carrying on business means carrying on an economic activity pursuant to the objects of the enterprise" - clearly the running of a restaurant by a combination of two or more persons as a business venture for gain either as a partnership or through a company constitutes the carrying on of a business.

But when one looks to the facts it will be seen that two even three phases emerged in this venture.

First there were the negotiations between Mr Foote and the Rolls, contemplating the purchase and running of the restaurant; the negotiations with the receiver; the plans to form a company; the loan of half the money free of interest from Mr Foote to Mrs Rolls, evidenced by her receipt and promissory note; the settlement with the receiver of the purchase of the leasehold interest and the chattels - and not, it will be noted of a going concern; - and the formation of the company.

Up to that stage although the entering into a partnership agreement and/or the joining in subscribing to shares amounted to a foreign enterprise, it had not, as at the date of the advance of $16,500 (end of May 1981) commenced to carry on business.

The next step was distinct from the earlier one. After settlement and taking of possession there was a second meeting early in June when ways and means were discussed. It had of course, as Mr Foote insisted in his evidence, always been agreed that when business commenced Mr Foote would play a full part in running the restaurant and have a very large say in management. This understanding continued in the June meeting and it was then that the provision of working capital by loan from Mr Foote was agreed upon, together with the "no interest" arrangements, because of the other benefits he was going to receive, including a share of profits and capital gain.

This money was referred to throughout as "bits and pieces" money - whether because it was initially spent in buying various items to equip the restaurant, or whether it was because it was advanced in smaller sums as required from time to time, I am unsure.

However that may be the parties, and particularly Mr Foote and Mrs Holzl worked hard to get the premises in proper order, and much new equipment was purchased; but they did not commence trading until 29^th July, 1981. Up to that date Mr Foote spent many thousands of dollars, over and above the initial $16,500, in accordance with his promise to provide working capital.

After business commenced further large sums were required until eventually - taking into account the original sum, Mr Foote now claims to have put upwards of $60,000 into the venture.

Now the shadow which is cast across the whole of this case is that of illegality.

Once these parties commenced to "carry on an economic activity" - i.e. engaged in business for gain, without having a certificate of registration under Section 29, their activities became illegal, with all the consequences that has upon their rights inter se.

The claim is for recovery of money invested, or advanced, and for a share of profits and of capital gain. Because of the period over which sums of money were advanced it becomes crucial to ascertain when illegality supervened on what, but for the Development Investment Act would have been a legitimate business; and what were the rights of the Plaintiff against the Defendants prior to that time, and after that time - if any.

The pleadings even when put into digested form, were complex. The composite statement of claim comprised 42 paragraphs, pleading 10 alternative causes of action - some on the outer shores of contractual jurisprudence.

I trust I do the various causes no disservice when I say that many are duplicated, but the relief sought is based on the alleged failure of the Defendants to carry through the arrangements entered into in May and June 1981 for joint ownership and management of the restaurant, for wrongful eviction from his managerial position in March 1982 and for failure to repay sums of money advanced, and failure to honour certain alleged promises of fringe benefits, such as the provision to Mr Foote of a free car and payment of certain personal and household expenses.

The remedies sought are in the alternative but follow logically from these allegations.

Claims are for:

Specific performance of the agreement to pay half the net profits, plus the value of half the accumulated capital assets.

Alternatively specific performance of the trust implied in the initial share holding, or half the value of the company's assets.

Alternatively repayment of the loan of $16,500, together with the repayment of the "bits and pieces" money - initially put as $25,000, but claimed in evidence at a much higher figure. Together with payment for the value of services rendered - these three items combining to a total of approximately $105,000.

Additionally claims for exemplary and aggravated damages for the outrageous nature of the defendants' conduct and the injury to the Plaintiff's feelings and dignity.

And Additional sums representing the increased amount required to replace the sums advanced by payment in U.S. dollars.

And Claims for deprivation of the fringe benefits.

And The sum of $500 being a loan advanced to the third Defendant to buy shares in a Hawaiian Company South Seas Enterprises Limited.

The Statement of Defence admits the advance of $16,500 and "certain bits and pieces" and says that the first of these was an interest free loan to be extinguished when consent could be obtained to the transfer to the Plaintiff of 50% of the shares in the Company and the balance of the money was advanced without interest and on an implied understanding that at some future date the Plaintiff would be credited or reimbursed for the same.

The Defence, after acknowledging the advance of $16,000 admits that of this sum $11,106.78 is owing but counterclaims for $6,361.50 - which last sum is the amount standing to the Plaintiff's debit in the Company's books. I cannot quite reconcile the alleged justification for the reduction for the initial loan by $3,393.22, but perhaps it comprises (a) repairs to the car, allegedly damaged by Mr Foote, and (b) stocks and money allegedly taken when he was dismissed from the premises - more of this will be discussed later.

As to the motor car it is claimed that Mr Foote wrecked the same. The alleged loan for the Hawaiian shares is denied, and last, and most importantly the Defence pleads illegality on the basis that the "transaction" was illegal and in contravention of the Development Investment Act 1977.

The most important issue is the question of illegality.

In his initial submissions Mr Holmes submitted that Mr Foote had at all times been anxious to avoid any illegality and had continuously impressed on Mr and Mrs Rolls and Mr Clarke that everything must be legal, especially in terms of the Development Investment Act and he claims he was assured at all stages that the methods agreed upon would not transgress the Act.

If this was meant to be a plea of ignorance of the law then of course it would be of no avail, but Mr Holmes may have been trying to establish that if the transaction was illegal, then the parties were not "in pari delicto". I do not think that this can avail the Plaintiff but as will be developed shortly I think the real answer is that this arrangement as it developed was not a single illegal affair ab initio, but emerged as a series of transactions, originally legal in concept, and recovery may be available in respect of that part of the claim which can be made out without relying on an illegality. See Bowmakers Ltd v Barnet Investments Ltd 1945 KB 65.

The defence submits that the entire arrangement was illegal from beginning, for even the initial money was advanced to enable the Plaintiff (and the Defendants) to participate in a venture which was a foreign enterprise requiring registration and that it was illegal for him to advance money for that purpose - viz. for carrying on a prescribed business.

With respect I think this argument fails to give proper recognition to the fact that it is the "carrying on of business" which is illegal, not merely "being a foreign enterprise".

It is clear under Section 27 that in respect of a foreign enterprise which was carrying on business before the Act came into force a period of 4 months was allowed to obtain registration. Also worth noting are the provisions of Section 28(2) in respect of a new foreign enterprise intending to carry on business.

The information to be forwarded in support of an application include details of all the directors and officers of the company and of its proposed activities. Now from the definition of foreign enterprise it is apparent that the non-local person may be only one of a number of persons intending to carry on the business. In such a case it is only to be expected, and it appears to me that the Statute expects, that preliminary contracts of some sort will be entered into, subject to registration being obtainable.

It would be a vain exercise to apply for and obtain registration with but a vague anticipation of being able to form a business - indeed Section 28(2) (c) is an indication to the contrary.

Many regulatory Statutes recognise the necessity of preliminary contracts, prior to application being made for permission to carry on business, or to complete a sale.

There are many jurisdictions where certain contracts cannot be carried out unless consent of a regulating authority is obtained - particularly sales of real property.

Some such transactions may not be entered into at all without consent - such as town planning or land subdivision cases - e.g. George v Greater Adelaide Land Development Co Ltd [1929] HCA 40; 1929 43 CLR 91 where it is unlawful to enter into the initial contract. In other cases illegality only arises when consent to an agreement for sale is not obtained within a specified time limit - e.g. the New Zealand Land Settlement Promotion Act 1952 - where it has always been recognised that no rights are acquired under the contract because it becomes illegal once consent is not obtained - but it has always been acknowledged from the pattern of the Statute that a preliminary contract is essential in the nature of things - and deposits paid prior to the supervening illegality have always been recoverable see Wainuiomata Golf Club Incorp v Anker Developments Ltd 1971 NZLR 278 where recovery was granted on the basis that the claimant did not have to base his claim on the illegal contract.

Those examples arose from the particular structure of the statute in question but the same conclusion can be reached in the general law by the application of these principles to the facts of a given case, when a plea of illegality arises. As is said in Halsbury (4^th Edn) Vol 9, para 430, "a contract will rarely be totally illegal or void and certain parts of it maybe entirely lawful in themselves. The question therefore arises whether the illegal or void parts may be separated or 'severed' from the contract and the rest of the contract enforced without them".

Similar observations and supporting authorities may be found in Chitty on Contracts (24^th Edition) at paras. 1049 etc. Severance will only be granted (a) where the action of the court will not amount to making a new contract and (b) where it accords with public policy to do so.

In considering the application of these procedures it must be remembered that initially this was not a contract partly legal and partly illegal - it was entirely legal in its initial intention - it only became illegal in execution by the failure of the DIC to issue a certificate of registration at a stage when money had been bona fide advanced by the Plaintiff prior to the commencement of carrying on business.

A number of authorities on this topic were discussed by Lord Morris in Mistry Amar Singh v Kulubya 1964 AL 142 and 153. His Lordship referred to Scott v Brown Doering McNab and Co. [1892] UKLawRpKQB 170; 1892 2 QB 724 where at 728 Lindley LJ said:

"Any rights which (a Plaintiff), may have irrespective of his illegal contract will of course be recognised and enforced".

In the Wainuiomata Golf Club case (supra) Wild CJ relied on Bowmakers Ltd v Barnet Instruments Ltd (supra) for the proposition that:

"A Plaintiff was entitled to recover money paid in part performance of a contract which subsequently became illegal because in seeking to do so it was not forced either to found its claim on the illegal contract or to plead its illegality in order to support its claim."

Although the case is not on all fours with the present one, an example of a lawful contract into which an illegality is introduced part way through its performance is St John Shipping Corporation v Joseph Bank Ltd 1957 1 QB 267. There a ship carrying cargo under a lawful charter party put into a port part way through a voyage and took on bunkers which overloaded the ship, below its load line, thereby committing an offence for the balance of the voyage. Devlin J held that the ship owners could recover freight from a consignee.

The reasoning of the learned Judge are accurately summarised in the head note as follows:-

"Held, (1) that the infringement of a statute in the performance of a contract which was legal when made did not render the contract illegal unless the contract, as performed, was one which the statute meant to prohibit, and that, on a true construction of the Act of 1932, having regard to its scope and purpose, contracts for the carriage of goods were not within the ambit of the statute at all so that the plaintiffs' infringement of sections 44 and 57 did not prevent them from suing on the contract.

(2) That in order to succeed in their claim for freight the plaintiffs need do no more than show that they had delivered the goods to the defendants in the same good order and condition in which they had received them, and it was not necessary for them to disclose that they had committed an illegality in the course of the voyage.

(3) That the principle that a right was unenforceable if it directly resulted from the crime of the person asserting it did not apply in the present case, for the plaintiffs' right to freight from the defendants was not a right which was brought into existence by their crime, which affected the total amount of freight carried by the ship, and no claim or part of a claim for freight could be clearly identified as being for the excess illegally earned accordingly the plaintiffs' claim succeeded."

Now I would not be prepared to apply that reasoning in to the present case, because the "carrying on business" without a license (after June 1981) is prohibited by the Development Investment Act.

But the analogy of a legal contract, made illegal subsequently, leads me to the view, based on cases quoted earlier that the Plaintiff has an enforceable claim for money advanced prior to the supervening illegality.

The claim for money was an alternative to that for transfer of shares or share of subsequent profits and capital gain.

These later claims are not sustainable because they cannot be successfully sued for without relying on the illegal activities of the parties after the 29 June, nor can a claim be made for transfer of the shares to the Plaintiff, because of the provisions of Section 38 of the Act:-

"Transfer of Shares - (1) No transfer of shares in or proprietary interest of a foreign enterprise registered pursuant to this Act or a local enterprise shall be valid and of any effect unless the approval of Cabinet to such transfer has first been obtained."

In-so-far as the Rolls were the shareholders in Hibiscus House Limited which had not yet been registered under the Act the first part of subsection (1) would not apply. It obviously deals with transfers to unregistered persons. But that company was a local enterprise, viz., it was an enterprise "engaged or proposing to become engaged in the carrying on of business for gain" (Section 2) and hence no transfer of shares or any other proprietary interest in that local enterprise could be valid, as no approval of Cabinet has been obtained. The only remedy is by way of refund of monies advanced and for the reasons already explained this is a valid claim - it can be pleaded and established independently of any subsequent illegality, and it is not contrary to public policy that money lawfully advanced should be recoverable when the original agreement becomes impossible of achievement.

The question of how much money was advanced will however require to be the subject of further submissions. It will be remembered that at the conclusion of the hearing I indicated I would not examine the voluminous documents tendered in support of different aspects of the claim until I had determined questions of liability.

I therefore invite Counsel to attend further to make representations on the following matters:-

(a) The initial loan of $16,500 and the terms;

(b) The amount of the "bits and pieces" money prior to 29 July;

(c) To direct my attention on the question of the rate of exchange to the evidence on the "US funds" topic because there is apparently some question of the record of evidence;

(d) The true conclusions to be drawn in respect to the quantum of contras claimed by the Defendants such as the personal allowances to which the Plaintiff was allegedly entitled prior to 29 July;

(e) The details of the evidence, some of which I am uncertain about, concerning the Hawaiian Company.

Unless something unusual emerges requiring further evidence, it is not my present intention to hear further witnesses, but items of detail may have to be referred to a referee.

SPEIGHT CJ