Market Reach Pty Ltd v Henry & Associates Ltd [2002] CKHC 2; HC Plaint No 55 of 1999 (12 February 2002)

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HUGH HENRY & ASSOCIATES LIMITED
duly incorporated company having its registered office at Rarotonga
First Defendant

STUART BRYCE HENRY of Rarotonga,
Business Operator, and HELEN KATHERINE
HENRY of Rarotonga, Business Operator
Second Defendant

Counsel: T Arnold for the Plaintiff
B Gibson for the Defendants
Judgment: 12 February 2002

	Para Nos.

Background	1-5

Evidence Adduced by Plaintiff to Date	6-7

Preliminary Issue of Law	8-12

The Facts	13-21

The Pleadings Regarding Illegality	22-27

Development Investment Act 1977 / Development Investment Act 1995-1996	28-32

Relevant Provisions of the 1977 Act	33

Was the Plaintiff "carrying on business" in the Cook Islands?	34-50

Status of the Approval of the Development Investment Board	51-53

Does the letter advising approval of the registration of Market Reach purport retrospectively to approve advances made before registration?	54-58

Was it within the statutory power of the Board to grant retrospective approval?	59-76

Relief from an Illegal Contract	77-82

Result	83-85

Costs	86

[1] This case concerns the lending of $90,000 by the Plaintiff, an Australian company which is currently in creditors' voluntary liquidation, to the First Defendant, a Cook Islands company which operates as an inbound service operator, to facilitate its purchase of a bus. The Second Defendants, who are Cook Islands residents, are said to have provided guarantees for the First Defendant's obligations under the loan made by the Plaintiff.

[2] The Plaintiff sues pursuant to (1) a Loan Agreement and Acknowledgement of Debt dated 31 May 1995 ("the Loan Agreement") and (2) an Instrument by Way of Security over the bus dated 4 August 1995 and (3) a Multiple Guarantee also dated 4 August 1995.

"A. JUDGMENT in the sum of EIGHTY FIVE THOUSAND NINE HUNDRED AND SEVENTY SEVEN DOLLARS SEVENTY CENTS ($85,977.70) together with a further sum representing interest from the 1^st day of September 1998 down to the date of judgment under and pursuant to the terms of the Judicature Act 1980-81;

B. AN order that the Bus be delivered forthwith to the solicitor and duly authorized agent of the Plaintiff;

C. A declaration that the Plaintiff is entitled to sell and dispose of the Bus, subject to the terms of the instrument by way of security;

[4] The Defendants admit that the total sum of $90,000 was advanced but raise various defences and contend that they are under no obligation to repay the advances.

[5] One of the defences is illegality due to alleged non-compliance with the Development Investment Act 1977 (or, if it was in force, the Development Investment Act 1995-1996). It is pleaded that "the Plaintiff did not obtain approval for the advance of funds from the Development Investment Board...": paragraph 14, Amended Statement of Defence, 13 April 2000.

[6] The evidence of Mr Stephen Lloyd, a director of the Plaintiff and the main witness for the Plaintiff was taken before me in Auckland on 3 October 2000. Mr Lloyd had previously sworn an affidavit dated 23 May 2000. He gave some supplementary evidence and was cross-examined.

[8] The Plaintiff wishes to bring this case to a conclusion because it is the last outstanding matter in its liquidation. There are other witnesses to be heard who reside in the Cook Islands.

[9] The parties agreed in a joint memorandum of counsel dated 12 October 2001 that the final determination of the case may be expedited if the Court rules on the legal issues arising under the illegality defence.

[10] They invoke Rule 197 of the Cook Islands Code of Civil Procedure which provides:

"The parties may, after an action has been commenced, concur in stating the questions of law arising in the action in the form of a special case for the opinion of the Court. Every such special case should be divided into paragraph numbers consecutively, and shall concisely state such facts and documents as may be necessary to decide the questions raised thereby. On the argument of such case the Court and the parties shall be at liberty to refer to the whole contents of such documents, and the Court shall be at liberty to draw from the facts and documents stated in any such special case any inference, whether on fact or of law which might have been drawn therefrom if proved at trial."

[11] The questions of law to be determined are set out in the joint memorandum of 12 October 2001 as follows:

"(a) Whether or not the contract the subject of these proceedings is an illegal contract, by virtue of the actions of the Plaintiff amounting to an illegal carrying on of business (whether under the provisions of the Development Investment Act 1977 (as amended) or under the provisions of the Development Investment Act 1995-96), and if the Court should find it to be illegal;

(b) Whether or not relief is available under the Illegal Contracts Act 1987 (whether under the provisions of Section 46 of the Development Investment Act 1977 (as amended) or under the provisions of Section 40 of the Development Investment Act 1995-96)."

[12] As to the "facts and documents" to which reference may be made in terms of Rule 197, the joint memorandum states that "Counsel are agreed that for the purposes of addressing these two issues, the Court shall have regard to the pleadings of the parties and to the folio of agreed documents which has been filed by the parties." It further states:

If the Plaintiffs lose on the basic question of illegality, but it is held that relief is available under the Illegal Contracts Act, there may need to be additional evidence relevant to the exercise of the discretions under [Section 40 of the Development Investment Act 1995-96] to grant relief.

7. COUNSEL for the Defendants take the position that there is sufficient evidence in the portfolio of agreed documents for the purposes of making a determination under Section 40 of the Development Investment Act 1995-96. The submissions of the Defendants under Part F address this issue.

8. COUNSEL for the Plaintiff takes the position that the evidence contained in the portfolio of agreed documents is insufficient for the purposes of making a determination under Section 40, and wish to reserve their right to call further evidence for the purpose of determining any issues of fact relevant to the application of Section 40.

9. IF the Plaintiff chooses to call further evidence, the Defendants reserve their position to alter, amend or add to [its] written submissions..."

[13] Based on the pleadings and the Agreed Bundle of Documents and drawing appropriate inferences from them, the Court finds that the undisputed chronology of events is as follows. On 21 March 1995 there was a meeting at Aggie Grey Hotel, Western Samoa, between Mr Stuart Henry a director of the First Defendant and Mr Steven Lloyd, a director of the Plaintiff. The purpose of the meeting was to make arrangements for a loan by the Plaintiff to assist with the financing and purchase of a Mitsubishi Fuso coach model No NK 116J ("the bus") which was at that time situated in New Zealand. The bus was to be used in Rarotonga for the purposes of the tourist business of the First Defendant which operates within the Cook Islands.

[14] As a result of the Aggie Grey meeting, the Plaintiff made a first advance of $10,000 by transmitting that sum to the First Defendant's bank account in Rarotonga on 28 March 1995. On 31 May 1995 the Plaintiff, the First Defendant and Second Defendants signed in Rarotonga a document entitled "Loan Agreement and Acknowledgment of Debt", under which the Plaintiff agreed to advance the sum of $120,000 to the First Defendant and the Second Defendants for the purchase of the bus, for alterations and refurbishment, for its freight and insurance, for the construction of a garage for the bus and for refinancing aspects of the First Defendant's operations. The loan agreement provided:

"Security for the advance shall be provided by way of chattels security over the coach as a first and only charge in respect of the coach...."

"The principal sum shall earn interest at a rate to be agreed between the parties hereto; and repayment shall be made at such rate and manner as shall be agreed between the parties."

Subsequently the parties agreed that a lesser sum than $120,000 would be advanced.

[15] On 8 June 1995 the Plaintiff advanced the sum of $80,000 by transmitting that sum to the First Defendant's bank account in Rarotonga. No arrangements were made for interest to be paid on the advance.

[16] The total sum of $90,000 was paid by the First Defendant to a Christchurch, New Zealand company in relation to the acquisition of the bus.

[17] On 2 August 1995 the First Defendant through its solicitors Stevenson Nelson & Mitchell, applied to the Cook Islands Monetary Board for registration of the Plaintiff as a foreign enterprise. The application was put forward on the basis that "the case of Andersen v Automarine suggests that Market Reach Pty Ltd should apply ... for registration as a foreign enterprise at least for the purposes of making the advance ... and possibly in respect of the payment in and out of their bank account at Rarotonga which might conceivably fall under the description of "carry on business"".

[18] On 4 August 1995 the First Defendant executed an instrument by way of security over the bus. On 4 August 1995 the Second Defendants signed in Rarotonga a document entitled "Multiple Guarantee" by which they assumed personal responsibility as principal debtors for all sums advanced. Under the loan agreement of 31 May 1995 and the Multiple Guarantee of 4 August 1995 the liability of the Second Defendants was joint and several.

[19] On 5 October 1995 the Cook Islands Monetary Board wrote to Stevenson Nelson & Mitchell and said:

Please to advise that the Board at its meeting has approved the registration of Market Reach Pty Limited as a foreign enterprise pursuant to section 28 and 46 of the Development Investment Act 1977 to carry on business in the Cook Islands in the activities of:-

'Advancing funds to Hugh Henry & Associates to refinance the recent purchase of a bus and make further funds available for the construction of a garage for the bus and make further sum available for the settlement of certain company obligations'.

[20] On 15 November 1995 the Plaintiff entered into Creditors' Voluntary Liquidation.

[21] On 1 September 1998 the Plaintiff made formal demand of the First and Second Defendants for the sum of $85,977.70 which it claims is outstanding but has not received payment. The First and Second Defendants have not made any payment in reduction of the amounts advanced by the Plaintiff to the First Defendant.

[22] The Defendants' amended statement of defence dated 13 April 2000 states in the relevant part:

"14. ...the "advance" of funds made by the Plaintiff to the First Defendant was in contravention of the Development Investment Act 1977 ("the 1977 Act") by virtue of the fact that the Plaintiff did not obtain approval for the advance of funds from the Development Investment Board as required under the 1977 Act.

15. The approval of the Development Investment Board was for "Advancing funds to Hugh Henry & Associates to refinance the recent purchase of a bus and make further funds available for the construction of a garage for the bus and make a further sum available for the settlement of certain inter-company debt".

16. The approval of the Development Investment Board was granted on 5^th October 1995, some seven (7) months after the advance to the Plaintiff of the sum of Ten thousand dollars ($10,000) and for some four (4) months after the advance of Eighty thousand dollars ($80,000) by the Plaintiff to the First Defendant.

17. Therefore the advance of funds by the Plaintiff to the First Defendant was illegal and under the 1977 Act any contract that may have existed under the documents plead [sic] by the Plaintiff, or otherwise is void ab initio, and the Plaintiff does not have recourse to the Illegal Contracts Act 1987."

"18. ... if the Development Investment Act 1995-96 ("the 1995 Act") applies to the transaction undertaken by the Plaintiff and the First Defendant and contract that may have existed under the documents plead [sic] by the Plaintiff or otherwise was illegal and the Plaintiff has no recourse to the Illegal Contracts Act 1987.

This is by virtue of the provisions of section 40(i)(a) as the Plaintiff knew or ought to have known that the act or omission reasonably done by him was in contravention of this Act."

[24] At paragraph 14 of the Plaintiff's amended statement of claim dated 4 May 2000, it is stated:

"If for any reason the Court should find that any contract alleged in this statement of claim is illegal at law or in equity (which is denied by the Plaintiff), then in the circumstances of the case it is appropriate that the Court, in the course of these proceedings, grant to the Plaintiff such relief as is available under section 6 of the Illegal Contracts Act 1987; specifically:

(a) The Plaintiff at all times intended to comply with the laws of the Cook Islands;

(b) The Plaintiff at all times conducted itself in a manner calculated to ensure that its actions were in compliance with those laws;

(c) To ensure that the Plaintiff's actions were in compliance with those laws, the Plaintiff retained a solicitor in the Cook Islands to ensure that the transactions the subject of these proceedings were legal, binding and enforceable as a matter of the laws of the Cook Islands;

(d) In finalising those transactions, the Plaintiff acted in good faith and in reliance upon the advice given by that solicitor;

(e) The Plaintiff at no time deliberately did or made any act or omission in contravention of the Development Investment Act 1995-96 or any other enactment in force in the Cook Islands;

(f) Having retained a solicitor in the Cook Islands to ensure that the transactions the subject of these proceedings were legal, binding and enforceable as a matter of the laws of the Cook Islands, and not having been advised that its proposed actions were illegal as a matter of the laws of the Cook Islands and having instead been advised that the documents made and approvals obtained by that solicitor on its behalf were sufficient compliance with the laws of the Cook Islands, the Plaintiff did not know, nor ought it reasonably to have known that the acts or omissions of the Plaintiff were in contravention of the Development Investment Act 1995-96 or any other enactment in force in the Cook Islands".

[25] The Plaintiff filed written submissions dated September 2001 disputing the Defendants' allegation of illegality of the contract under the 1977 Act. The Plaintiff's submissions are in summary:

(a) The Plaintiff was not carrying on business in the Cook Islands because the contract to advance funds was made in Western Samoa;

(b) The written documents entered into in the Cook Islands were only to secure repayment of funds previously agreed by persons outside the Cook Islands and advanced to a third party in New Zealand. Section 21 (h) of the Development Investment Act 1977 provides that the securing or collection of a debt is not to be regarded as the carrying on of business;

(c) The advance of $80,000 was an isolated transaction excluded from the definition of "carrying on business" pursuant to section 21(i) of the Development Investment Act 1977;

(d) The advance of funds for the benefit of the Defendants did not require regulatory approval under the Act because it lacked the necessary object of pecuniary gain pursuant to section 2(1) of the Act;

(e) If the contract and loan were illegal under the Act, the Plaintiff is entitled to relief under the Illegal Contracts Act 1987.

[26] The Defendants filed submissions dated 1 October 2001 in respect of the defence of illegality. The Defendants submit in summary that:

(a) The Plaintiff was in breach of section 26(1) of the Development Investment Act 1977, which requires registration of a foreign enterprise carrying on business in the Cook Islands;

(b) Monetary Board registration was sought after the arrangements between the parties had been made and the advances to the First Defendant had taken place. The Monetary Board was not able to grant retrospective registration;

(d) Section 46 of the Act bars relief for illegal contracts, including recourse to the Illegal Contracts Act 1987;

(e) The arrangements between the parties are therefore unenforceable and the Court cannot grant relief to the Plaintiff.

[28] The first matter to be determined by the Court is which legislation applied to restrict the activities of foreign enterprises at the time of the relevant transactions. The Plaintiff submits that the Development Investment Act 1995-1996 ("the 1996 Act") applied, while the Defendants submit that the Development Investment Act 1977 ("the 1977 Act") applied.

[29] The Court finds that the 1977 Act was the legislation in force when the transactions in question took place.

[30] The 1977 Act was repealed on 1 September 1996 (the date that the 1996 Act came into force) under section 44 of the 1996 Act. Section 43(2) of the 1996 Act confirms the rule of statutory interpretation that the later Act is not retroactive in effect. It states:

"(2) Without limiting the provisions of the Acts Interpretation Act 1924, it is hereby declared that the repeal of the Development Investment Act 1977 by this Act shall not affect any approval granted or anything whatsoever done under the enactment so repealed and every such approval so far as it subsists or is in force at the time of the amendment or repeal shall continue and have effect as if it had been made or done under the corresponding provision of this Act."

[31] The material arrangements between the parties were initiated in March 1995 in Western Samoa, but, more importantly, the actual advances were made in Rarotonga on 28 March 1995 and 8 June 1995. Dealings between the parties continued until the Plaintiff entered voluntary liquidation in November 1995. The application to the Cook Islands Monetary Board was made on 4 August 1995. Registration by the Cook Islands Monetary Board was given in October 1995 but under the 1977 Act.

[32] There is therefore no doubt that the 1977 Act was the current legislation at the time of the relevant transactions between the parties, namely the advances made in March and June 1995.

[33] In determining whether the contract in question is illegal under the 1977 Act, the following provisions are relevant.

"'Activity' includes any single commercial, industrial or trade enterprise carried on with the object of pecuniary gain..."

"'Carrying on business' means carrying on an economic activity pursuant to the objects of the enterprise ... but an enterprise shall not be regarded as carrying on business by reason solely that it:

(h) secures or collects any of its debts or enforces its rights in regard to any securities relating to any such debts; or

(i) conducts an isolated transaction that is completed within a period of 31 days, not being one of a number of similar transactions repeated from time to time."

"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."

"Registration of new activities - (1) Any foreign enterprise intending to carry on business in the Cook Islands in any activity in respect of which it is not registered pursuant to this Act or which it is not included in the existing activities of that foreign enterprise shall apply to the Board for registration of that activity pursuant to this section."

"Pursuant to this Act, a registered foreign enterprise may carry on business in an activity in relation to which it is registered."

"Every foreign enterprise which carries on business in contravention of subsection (1) of section 26 of this Act commits an offence and shall be liable on conviction to a fine not exceeding $5,000 and where the offence is a continuing one to a further fine not exceeding $500 for every day or part of a day during which the offence continues."

"Loans and Contracts - In any case where a foreign enterprise carries on business in the Cook Islands in contravention of section 26 of this Act, any loan or contract entered into by that foreign enterprise shall be illegal and of no effect, and none of the provisions of the Illegal Contracts Act 1987 shall be available to that foreign enterprise, nor to the party who contracted with that foreign enterprise if that party knew at the time of entering into the loan or contract that the foreign enterprise was operating in contravention of section 26."

[34] The Plaintiff submits that it was not carrying on business in the Cook Islands under the definition in the 1977 Act because the contract was formed in Western Samoa, the activity that did take place in the Cook Islands was an isolated transaction, and in any event the Plaintiff did not make the loans with the object of pecuniary gain.

[35] The issues whether the contract was formed in the Cook Islands and whether the Plaintiff's activities amounted to an isolated transaction under the Act are linked.

[36] The Court rejects the Plaintiff's submissions. The Plaintiff is faced with the difficulty that even if the original agreement was formed in Western Samoa, this agreement was at a minimum varied in the Cook Islands and may in fact have been replaced by a new agreement formed in the Cook Islands. But in any event the crucial point is that counsel have agreed in a joint memorandum that the $10,000 and $80,000 advances were made in the Cook Islands and matters relating to the loan, including formal documentation, took place in the Cook Islands.

[37] In Preston v Tierney (CA 7/92, 2 July 1992, McMullin, Speight and Barker JJA) the Court of Appeal noted the exceptionally broad meaning of "carrying on business" under the 1977 Act. The Court stated at page 10:

"...the terms "activity" and "carrying on business" have been defined in the Act in a comprehensive way and undoubtedly cover activities which would not normally be considered to be the carrying on of a business or the carrying out of an activity. As the Chief Justice observed the Act cast "a wide net of fine mesh" and "it was very difficult to imagine an economic activity which would not be caught by the Act...""

[38] As to whether the Plaintiff's activities amounted to an "isolated transaction" as defined in section 2(1), the Court finds that the Plaintiff cannot bring itself within this exception to the definition of carrying on business. "Transaction" is not defined in the 1977 Act but is regarded as a word of wide import. The connotations of the word may be illustrated by reference to certain statutory definitions of the term.

[39] Section 2 of the Financial Transactions Reporting Act 1996 (NZ) defines "transaction" for the purposes of the Act as follows:

(a) Means any deposit, withdrawal, exchange, or transfer of funds (in whatever currency denominated), whether-

(b) Without limiting the generality of the foregoing, includes any payment made in satisfaction, in whole or in part, of any contractual or other legal obligation;..."

[40] Section 292 of the Companies Act 1993 (NZ) defines "transaction" as
follows:

(e) The payment of money by the company, including the payment of money under a judgment or order of a court."

[41] In the light of the wide import of "carrying on business in the Cook Islands" and what constitutes a separate transaction as opposed to part of a single transaction, it is improbable that the Plaintiff's activities in the Cook Islands come within the exception for an isolated transaction not related to other similar transactions under section 2(1)(i) of the 1977 Act.

[42] In any event, even if the Plaintiff's activities may properly be regarded as amounting to one isolated transaction, the chronology of events referred to in paragraphs 14-18 above shows that the transaction was not concluded within a period of 31 days as required by the 1977 Act. Counsel have agreed by a joint memorandum dated 4 February 2002 that advances were made to a Rarotonga account of Hugh Henry & Associates on 28 March 1995 and 8 June 1995. This joint memorandum renders untenable the Plaintiff's argument that the first advance on 28 March 1995 did not constitute the carrying on of business in the Cook Islands and whilst the advance of 8 June 1995 might have constitute the carrying on of business in the Cook Islands, it was covered by the exception for an isolated transaction. Counsel now agree that both advances were made in the Cook Islands and even if they are to be regarded as one transaction, the transaction was not completed within 31 days.

[43] In regard to the third point raised by the Plaintiff - whether the advances were made with the object of pecuniary gain to the Plaintiff - the Court finds that the object of pecuniary gain existed.

[44] "Pecuniary" was defined in Presbyterian Church of New Zealand Beneficiary Fund v Commissioner of Inland Revenue [1994] 3 NZLR 363 at 376 as "pertaining to or of money".

[45] Importantly, pursuant to section 2(1) of the 1977 Act, it is not necessary for the Plaintiff to have received a financial benefit before becoming subject to sanctions under the Act. All that is necessary is that the Plaintiff had the object of gaining a financial benefit.

[46] While interest was not charged on the loan as it was in Preston v Tierney, it does not follow that there was no "object of pecuniary gain" as contemplated in section 2(1) of the 1977 Act.

[47] First, the loan cannot be divorced from the Plaintiff's ongoing commercial relationship with the Defendants. The Plaintiff contemplated a long-term and financially beneficial commercial relationship of which the loan was an integral aspect. Even in the short term, the Plaintiff's clients were to get the use of the Defendant's coach and other services and it was contemplated that the Plaintiff and its clients would receive preferential treatment from the Defendants in return for the loan.

[48] Second, it is not of assistance to the Plaintiff that the First Defendant was not under any contractual obligation to provide pecuniary reward in return for the loan. The term "pecuniary gain" is analogous to the term "reward", which was considered by Cooke J in Transport Ministry v Keith Hay Limited [1974] 1 NZLR 103. This case concerned whether carriage may be for reward even where there is no contractual obligation to pay for it. His Honour held at page 106:

"Carriage, then, may be for reward although no-one is legally bound to pay for it"

[49] The exception for non-pecuniary activity must also be seen in the light of section 2(2) of the 1977 Act. This sub-section permits the Minister to declare that a person is not an enterprise within the meaning of sub-section (1) where:

"...the activity in which a person is engaged is primarily and mainly intended for a religious, educational charitable or community purpose or for any other non-profit purpose that is socially desirable, or for a combination of such purposes ..."

[50] This reinforces the Court of Appeal's view in Preston v Tierney that the legislature intended the Act to catch almost all economic activity, even where it would not be considered to be the carrying on of business in "common parlance" (page 10). The legislature allowed a limited exception for economic activity which is primarily for a non-profit purpose. The Plaintiff did not apply for a declaration that its objects were non-pecuniary, and in any event they were sufficiently pecuniary to be subject to the Act.

[51] In the light of the finding that the Plaintiff was carrying on business in the Cook Islands, there are two principal issues to be considered in this part of the judgment. The first issue is whether the letter from the Monetary Board advising that it had decided to approve the registration of Market Reach purports retrospectively to approve advances made before registration. The second issue is whether the Monetary Board had the power to grant retrospective approval.

[52] The Defendants submit that under the 1977 Act, it was essential that approval by the Cook Islands Monetary Board was granted before the advances were made and the written documents entered into. Because the Board's approval was in fact granted some months after the advances were made and the various legal documents executed, the Defendants say that the advance of funds by the Plaintiff to the Defendant was illegal and any contract which may have existed under the documents was void from the outset.

[53] The Plaintiff however, argues that the Cook Islands Monetary Board has the ability retrospectively to approve and register a foreign enterprise's activities. The Plaintiff submits that this is what indeed it did in October 1995 and the terms of the approval cover the transaction in issue in this case.

Does the letter advising the approval of the registration of Market Reach purport retrospectively to approve advances made before registration?

[54] As a preliminary matter it must be determined whether the approval document purports to grant retrospective approval, irrespective of whether a power to grant such approval exists.

"Please to advise that the Board at its meeting has approved the registration of Market Reach Pty Limited as a foreign enterprise pursuant to section 28 and 46 of the Development Investment Act 1977 to carry on business in the Cook Islands in the activities of:-

"Advancing funds to Hugh Henry & Associates to refinance the recent purchase of a bus and make further funds available for the construction of a garage for the bus and make further sum available for the settlement of certain company obligations".

[56] It is not clear from this that the Monetary Board intended retrospectively to approve advances which had already taken place. The document is most probably a standard form statement used for prospective approvals. New Zealand statutory schemes distinguish between prospective approval and retrospective approval where the latter is permissible. An example is the Overseas Investment Act 1973 in which separate provisions for retrospective approval are contained in section 15. Where it exists, a power to grant retrospective approval is a separate discretion, the exercise of which should be evident in an approval document.

[57] The Court observed during the taking of evidence that the approval document does not reveal whether the Board knew the funds had been advanced. The letter of request for approval sent to the Board by the Defendants' lawyer on 2 August 1995 (after the advances had been made) does not contain an express request for retrospective approval. The letter contains statements which suggest that only prospective approval was being sought. These include:

"[A] Sydney company in the travel industry who wish to advance funds...to refinance the recent purchase of a bus and to refinance other aspects of the company's business"

"Under the proposed arrangement, the Sydney company which is Market Reach Pty. Limited would advance funds to refinance that purchase..."

[58] It is highly doubtful that the Board's letter of approval purports to grant retrospective approval. However, I shall proceed to consider whether it had the power to grant such approval.

Was it within the statutory power of the Board to grant retrospective approval?

[59] As soon as a foreign enterprise carries on business in the Cook Islands in an activity in respect of which it is not registered, it breaches section 26(1) of the 1977 Act and thus section 46 is triggered. Section 46 provides that in this situation "any loan or contract entered into by that foreign enterprise shall be illegal and of no effect". Therefore, if it is considered that the advancement of the loans was "carrying on business in the Cook Islands", then the contract was illegal from its inception. The advancement of the loans without Monetary Board registration was a statutory offence subject to significant penalties under section 42(1) of the Act and sanctions under section 46, including the barring of recourse to the Illegal Contracts Act 1987. Consequently, the arrangement was unenforceable and the Plaintiff would have been unable to recover the advances if it had attempted to do so.

[60] The Plaintiff's only argument on this point can be that the Monetary Board's approval cured this illegality, and thereby validated the contract. The Plaintiff's submissions do not expressly address the question whether the Board had the power to grant retrospective approval. The argument for the Plaintiff would likely be that the use of the present tense "is registered" in section 26(1) does not unambiguously prohibit the Board from granting retrospective approval and therefore such a power may be presumed to exist. Section 26(1) simply states that the activity must be registered but it does not specify expressly when that registration must occur.

[61] However, any lack of clarity in section 26(1) should favour the argument that the Board did not have the power to grant retrospective approval. A clear statutory power is necessary to permit the Board to effect a change to the legal position, which was that the arrangement was illegal from its inception and the advancement of funds was a statutory offence. Section 26(1) does not clearly grant the Board the power to bring about the legal change of nullifying the statutory offence and validating the arrangement between the parties. In New Zealand statutory regimes, it is considered necessary to expressly provide for a power to validate otherwise illegal contracts where the existence of such a power is considered desirable. Examples include section 15 of the Overseas Investment Act 1973 and section 25 of the Land Settlement Promotion and Land Acquisition Act 1952 (repealed).

[62] In Cromwell Corporation Ltd v Sofrana Immobilier (New Zealand) Ltd (CA 258/89, 10 September 1991) the New Zealand Court of Appeal considered Regulation 15(1) of the Overseas Investment Regulations 1985 (SR 1985/256) (repealed), which provided:

"...where a take-over offer is made and neither the Minister's consent is granted pursuant to regulation 10 of these regulations, nor is the take-over offer effective under regulation 12(1)(b) of these regulations, any contract for the sale of shares resulting from the acceptance of any such offer and any transfer of those shares consequent on such acceptance shall be unlawful and void."

[63] This is similar to the "illegal and of no effect" provision in section 46 of the 1977 Act. The Court of Appeal held at page 42:

"[T]here can be no valid and lawful contract until application for consent has been made and either the Minister's consent has been obtained, or the prescribed time has expired without notice of refusal of consent."

[64] A similar approach can be applied in the present case. The contract is neither valid nor lawful (it is illegal and of no effect) until consent is given. This means that the Monetary Board would require a power to waive the statutory offence (as provided in section 15 of the Overseas Investment Act 1973) in order to cure the illegality at the contract's inception. The 1977 Act does not contain such a power.

[65] The availability and effect of retrospective consents was also considered by Doogue J in Brodie v Wellington City Council (HC Wellington, AP 186/00, 7 November 2000).

"32. Buildings not to be constructed, altered, or demolished without consent

(1) It shall not be lawful to carry out building work except in accordance with a consent to carry out building work... issued by the territorial authority, in accordance with this Act.

(1) An owner intending to carry out any building work shall, before the commencement of the work, apply to the territorial authority for a building consent is respect of the work."

[67] The Council had a policy of allowing retrospective consents. The question was whether the granting of a retrospective building consent cured the illegality of building work undertaken prior to a consent being obtained, thereby preventing the Council from bringing proceedings under the offences section of the Act. The Court said:

"The failure was a continuing failure and could not be righted by any action by the Council to grant an after-the-event building consent....It is not a consent, in any event, to the appellants' commencing the work without the requisite consents. It is a consent after the event to certify that the work carried out has been carried out in accordance with the Council's requirements" (para 17).

"[T]he Council cannot by its policy amend or vary the statutory provisions or estop itself from taking action in respect of any breach of the Act" (para 18).

"The retrospective consent of the Council is not inconsistent with the prosecution of the appellants for the breach of the Act. As already noted, the Council's policy is one to enable the lawfulness of the works done to be justified after the event. It is not a waiver of the failure of the appellants to apply for and obtain the necessary building consents before the works were commenced" (para 23).

[68] This case is different from the present case to the extent that the Building Act 1991 expressly requires consent prior to construction. However, Brodie does indicate that the Court will not lightly conclude that an authority possessed and exercised a power to waive past illegality. In the present case the Board's approval letter conveys that the Plaintiff would have obtained registration to advance loans if it had applied for registration before making the advances. However, this does not alter the fact that the Plaintiff's activities were illegal at the time they were undertaken and additional statutory authority was required to waive the statutory offence committed. No such authority existed.

[69] In addition, there is force in the argument for the Defendants that it cannot have been Parliament's intention to allow a foreign enterprise to carry on business in the Cook Islands only to apply for registration and approval at a later stage. The whole purpose behind the Cook Islands Monetary Board approval and registration of foreign enterprises was to consider and screen foreign investment in the Cook Islands before it commenced. It was not therefore a rubber stamping formality. It was also persuasively submitted that if a foreign enterprise were allowed to operate in the Cook Islands without current registration, this would do little to deter foreign investors from setting up in the Cook Islands without any vetting whatsoever, only to operate until caught.

[70] Additionally, section 26(1) must be interpreted in the light of other provisions of the 1977 Act and the Investment Code established pursuant to the Act.

[71] Section 46 of the Act makes it clear (indeed, the Plaintiff describes this section as "somewhat draconian") that once a foreign enterprise has engaged in illegal activity, it has no legal recourse - the contract is of no effect. Section 46 is triggered as soon as section 26(1) has been breached. It would be difficult to conceive that Parliament would have provided in section 46 that the illegality cannot be cured even pursuant to the Illegal Contracts Act 1987 only to allow the Plaintiff to go back to section 26 and obtain a waiver of the statutory offence and validation of the contract through the back door by applying for retrospective approval.

[73] The words "any foreign enterprise intending to carry on business in the Cook Islands" suggest that only prospective approval is contemplated in the Act.

[74] Taken alone, section 26(1) may also be read as prohibiting retrospective approvals, albeit in a less than clear-cut manner. The provision "no foreign enterprise shall carry on business in the Cook Islands in any activity unless that foreign enterprise is registered" is not very different from a provision along the lines of "no foreign enterprise shall carry on business in the Cook Islands prior to obtaining registration". In the light of the purposes of the Act (section 3), including the regulation of foreign investment, and the consequences of non-compliance with the Act, it would appear that the legislature intended the meaning conveyed by the latter wording. It is stretching the language of the Act to argue that the use of the present tense "is registered" confers a power to effect the legal change of waiving the statutory offence and validating the contract.

[75] The Cook Islands Investment Code, which was established pursuant to section 18 of the 1977 Act, also indicates that only prospective approval was contemplated in the Act. The Code provides in part:

"Foreign investment must first seek approval from Government and must be registered as a foreign enterprise before being permitted to carry on business in any activity in the Cook Islands."

[76] The Court finds that the Monetary Board did not have statutory authority to grant retrospective approval under the 1977 Act. It necessarily follows since the Plaintiff's activities amounted to "carrying on business in the Cook Islands" under the 1977 Act, that the contract and advances were illegal.

[77] Where a statute states that contracts in breach of the statute are illegal, the contract is illegal at its inception (Contract chapter in Butterworth's The Laws of New Zealand, para 226). Section 46 of the 1977 Act specifically provides that the contract itself, and not solely the performance of the contract, is illegal. Where a contract is illegal as formed, the courts will not enforce it (Chitty on Contracts (28^th ed, 1999) paras 17.007-17.008) and money paid under the illegal contract cannot be recovered (Treitel, The Law of Contract (10^th ed, 1999) 452). As stated in Halsbury's Laws of England 4^th ed, vol 9(1), 1998, para 883:

"Where a plaintiff seeks to recover money paid under an illegal contract the rule is that he may not do so unless he can make out his cause of action without reliance on the illegal contract, and there does not seem to be a case in which a plaintiff has succeeded in doing this."

[78] Section 46 of the 1977 Act provides that "none of the provisions of the Illegal Contracts Act 1987 shall apply to [the] foreign enterprise".

[79] The Court of Appeal of the Cook Islands said in Preston v Tierney (CA 7/91, 2 July 1992) that:

"Prior to the passing of s 46, the most direct way of enforcing the legislation was by way of prosecution but this may have been ineffective against those foreign enterprises which were not resident within the Cook Islands. S 46 gave further teeth to the legislation by making the transactions entered into in breach of it illegal and of no effect; it provided that none of the provisions of the Illegal Contracts Act should be available to the foreign enterprise."

[80] In its submissions, the Plaintiff, arguing that the 1995-1996 Act applies, appears to concede that it would not have recourse to the Illegal Contracts Act 1987 under the 1977 Act. The Plaintiff in its submissions regarding the meaning and extent of applicable legislation calls section 46 "somewhat draconian" (para 2l) and further states that the section was inserted "to absolutely preclude relief under the legislation, whatever the merits or circumstances of a given case" (para 30). The Plaintiff went on to observe (para 31):

"Section 46 was deeply flawed in that it denied relief to foreign investors whatever the justice or equity of the particular circumstances of the case might require. Parliament has obviously recognised that the provision was inappropriate and accordingly it has been repealed.... It is submitted [on the basis that the 1995-1996 Act applied] that the bar to relief by way of an application under the Illegal Contracts Act 1987, represented by s 46 of the 1977 Act, no longer operates."

[81] While the position under section 46 was unduly rigid, it is by no means unusual. Several New Zealand statutes preclude recourse to the Illegal Contracts Act 1970, including the Employment Contracts Act 1991, sections 25 and 178, the Fisheries Act 1983, section 41(5) and the Commerce Act 1986, section 89(5) (Contract chapter in Butterworth's The Laws of New Zealand, para 217).

[82] The Plaintiff cannot rely on the general law or the Illegal Contracts Act 1987 to recover the loans advanced to the First Defendant.

[83] For all of the foregoing reasons the Court answers the first question (a) in the affirmative and finds that the contract sued upon was an illegal contract and the advances of funds made to the Defendants were in contravention of the Development Investment Act 1977. The Plaintiff was illegally carrying on business in the Cook Islands in terms of the Development Investment Act 1977 without official approval and the contract and loans were therefore illegal. It is doubtful whether the Monetary Board's letter of approval actually granted retrospective approval and in any event the Court finds that the Board had no such power to grant such an approval under the Act.

[84] The Court answers the second question (b) by determining that relief is not available under the Illegal Contracts Act 1987. Recourse to that Act was precluded by section 46 of the 1977 Act.

[85] The Court derives no satisfaction from the foregoing result and is less than impressed by the attitude of the Defendants. They encouraged the Plaintiff to make the loan but are now content to utilise the technical defence of illegality to defeat their otherwise clear obligations to repay it. However the Court considers that the result is compelled by the inflexibility and rigidity of the 1977 statute brought about by its elimination of the ameliorating provisions of the Illegal Contracts Act. It is unfortunate that the 1977 Act excluded reference to the Illegal Contracts Act and also did not clearly specify that the Cook Islands Monetary Board might grant what could be called a retrospective approval. There can be absolutely no doubt that the financing of the bus purchase was plainly for the benefit of the Cook Islands economy and it is inconceivable that an application to the Monetary Board would have been refused if made in a timely way prior to the commencement of business in the Cook Islands by the granting of the loans.

[86] The Plaintiff's action must fail and there will be judgment for the Defendants. In view of the overall circumstances and especially the matters referred to in the preceding paragraph, the Court is not enthusiastic about making any award of costs to the successful Defendants. However, the Defendants are entitled to make an application for costs if they wish and the Court will of course consider such application on its merits. If the parties cannot otherwise agree the question of costs and the Defendants wish to pursue such an application, they must file a written application within 21 days. If such an application is made, the Plaintiff must respond to it within a further 14 days.

High Court of the Cook Islands

Market Reach Pty Ltd v Henry & Associates Ltd [2002] CKHC 2; HC Plaint No 55 of 1999 (12 February 2002)