Perkins v Hurley [2003] CKHC 6; OA5 of 2000 (22 April 2003)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(CIVIL DIVISION)

O/A: 5/2000

IN THE MATTER
of the Declaratory Judgments Act 1945

AND

IN THE MATTER
of a Debenture and Deed of Mortgage both dated 19th April 1999 (the Securities) made between Crown Beach Executive Villas Limited (in Receivership) (Crown Beach) and Rondo W Perkins, Julie Ann Perkins and Eloise Hurley

BETWEEN

Rondo W Perkins and Julie Ann Perkins
of Idaho, United States of America, Company Directors
Applicants

AND

Eloise Hurley of Salt Lake City, Utah, United States of America, Auditor
Respondent

Counsel: A N Manarangi for Plaintiffs
No appearance for Respondent
Hearing: April 7, 2003 at Auckland
Judgment: April 22, 2003 at Auckland

RESERVED JUDGMENT OF DAVID WILLIAMS J

CONTENTS

	Page/div>
The Nature of the Proceedings	2 – 4
The Issues	4 - 6
Relief Claimed	6
Notice of Opposition	6 - 7
Procedural History	7 - 8
The Formal Proof Hearing	8 – 12
Priority of Securities	12 - 17
Result – Orders	17

The Nature of the Proceedings – The Financial History of Crown Beach

[1] The claims in this case involves the investors in and security holders over the Crown Beach Resort in Rarotonga owned by Crown Beach Executive Villas Limited ("Crown Beach"). The primary facts are not in dispute and may be summarised as follows. Crown Beach is the owner and operator of a tourist resort at Arorangi, Rarotonga, Cook Islands and it trades as Crown Beach Resort. The affairs of Crown Beach have had a somewhat troubled history but in respect of these proceedings it is not necessary to go into in detail.

[2] The Applicants and the Respondent are shareholders in the company. The Plaintiffs hold 4,799 shares and the Respondent holds 1,600 shares. There are 10,000 issued shares. The parties purchased their shareholding and became directors of Crown Beach on 9 November 1998re were disputisputes with other shareholders called the Farnsworths.

[3] Securities were granted by Crown Beach in favour of Westpac Banking Corporati security for its borrowings from the Bank ("Bank Securitierities"). In addition securities were granted by Crown Beach to the trustees of the Kotaa Garden Trust ("Trustee Securities"). The latter securities were granted pursuant to an agreement between the trustees and Crown Beach dated 17 September 1998 ("the Kotaa Agreement"). Pursuant to that Agreement the Trustees had for $258,000 purchased 60% of the revenue derived from two of the accommodation units at the Crown Beach Resort. The revenue due under the Kotaa Agreement was secured by debenture and mortgage both dated 17 September 1998.

n ] In early 1999 the parties need to make advances to Crown Beach to secure its financial future and accordingly on 19 April 1999 the sum of $440,218.00 was add to Crown Beach and these funds were applied by Crown Beac Beach to repay most of an overdraft with Westpac Banking Corporation. A few days later the amount of $440,289.00 was reduced to $436,709.38 when $3,569.62 was repaid after it was discovered that as a result of an accounting error too much had been advanced to Crown Beach. Of the amount of $436,709.38, $27,472.50 was contributed by the Respondent. That amount contributed was the equivalent of USD14,999.99. The balance of that advance namely $409,236.88 was contributed by the Applicants jointly. This advance was secured by way of a debenture and mortgage of lease granted by Crown Beach to the Applicants and the Respondents both dated 19 A1999 ("Perkins/Hurley Secu Securities").

[5] The Perkins/Hurley Securities not only secured that initial advance but made provision to permit further advances to be secured. The Perkirley Securities also providrovided for an interest rate of 15% and a penalty rate of 17% for late payment of interest, which was to be paid on the last day of each month. The principal sum was to be repaid on demand. Interest commenced to accrue on the 19th of April 1999.

[6] On 28 May 1999 a further advance was made by the Applicants and the Respondent in the sum of $20,295.47 for the purposes of providing to Crown Beach working capital and to relieve pressure from creditors who were demanding payment. Of that amount, the Respondent contributed the equivalent of USD3500 which was converted by Westpac into New Zealand dollars at the rate of .5415 making the Respondent's contribution $6,463.52 of that advance. This advance was also secured under the Perkins/Hurley Securities as a further advance.

[7] On 4 September 1999 the Applicants made another advance of $83,179.29 to Crown Beach to enable Crown Beach to meet its quarterly interest payment on the term loan with Westpac Banking Corporation. This advance was also secured under the Perkins/Hurley Securities as a further advance.

[8] The Applicants say that the total amount advanced by The Respondent and secured under the Securities is $33,936.02 together with interest on that amount calculated in accordance with the Securities of $6,123.64. The total amount owing under the Perkins/Hurley as at 19 May 2000 is $633,464.08.

[9] The financial affairs of Crown Beach continued to worsen. The High Court proceeding brought by the Farnsworths and the possibility of receivership had seriously undermined the confidence of wholesalers in the Resort and occupancy rates continued to decline such that there was insufficient revenue to meet operating costs and commitments on the term loan with Westpac Banking Corporation. Crown Beach's poor financial position was common knowledge amongst suppliers and although trade creditors were substantially reduced Crown Beach remained on cash terms with suppliers. In addition, Crown Beach had difficulty in meeting payments due under its sublease and payments due under the Kotaa Agreement.

[10] On 15 November 1999 the Kotaa Trustees appointed Michael Robert Carr and Kerryn Mark Downey of KPMG, Chartered Accountants, as receivers and managers of Crown Beach under the powers in the debenture dated 17th September 1998. On that same day Westpac Banking Corporation also appointed Messrs Carr and Downey as receivers and managers of Crown Beach under its debenture dated 21 July 1997. The Company has since that date traded in receivership.

[11] Following the appointment of the receivers, a dispute arose concerning the respective priorities of the Trustee Securities and the Perkins/Hurley Securities. The Kotaa trustees issued proceedings in the High Court of the Cook Islands to resolve this matter but the point is now moot as far as the Kotaa Trustees are concerned because the Applicants purchased the Trustee Securities from the Kotaa Trustees for $223,417.53 on 15 March 2000.

The Issues

[12] The first issue is the priority as between the Perkins/Hurley Securities and the Trustee Securities.

[13] The second issue is the amount of the entitlement of the Respondent under the Perkins/Hurley Securities. The Respondent claims to be entitled to more than $33,936.02 and interest thereon as a result of monies allegedly due to her for accounting work allegedly performed by her for Crown Beach and management fees allegedly paid by her to Zandra Perkins (sister of the applicant Rondo Perkins) during her period of management at the Crown Beach Resort.

[14] The amount claimed by the Respondent in her affidavit dated 25 March 2001 is USD60,825.25 plus interest as per In paragraph 3 of that affidavit and also in submissions emailed to this Court dated 20 August 2002, the Respondent acknowledges that she only seeks a share of the proceeds available for distribution proportionate to the respective contributions of the parties. Documents provided by the Respondent's former solicitors, Fortune Manning, and appended to the affidavit of Rondo Perkins dated 18 May 2000 (annexure "I") claim that the Respondent advanced NZ$127,977.l62 (including interest) to Crown Beach compared with NZ$558,746.91 advanced jointly by the applicants.

[15] The Applicants claim that the Respondent's contribution totalled just $33,396.02 plus interest of $6,123.64 being the advances of USD14,999.99 and USD3,500 mentioned earlier. This is supported by an email sent by the Respondent on 20 September 1999 Perkins/Hurley's then solicitor Mr Manarangi in which she advised that her total advance to Crown Beach under the debenture was USD18,500.

[16] The third issue is the validity of the Applicants' contention that the Respondent's contribution of $33,396.02 and interest thereon has been repaid as a result of three payments made to her by Zandra Perkins while managing the Resort. These payments were discovered by the Receivers during the course of their conduct of the receivership.

[17] The affidavit of Mr Rondo Perkins asserts that without the authority or knowledge of the Applicants, the sometime manager of the Crown Beach Resort, Zandra Perkins, opened a savings account in the name of Crown Beach with the ANZ Bank at Rarotonga (the ANZ account) into which she made several deposits of money belonging to Crown Beach. Mr Perkins annexes a statement showing transfers out of the ANZ accounting including:

• (a) On 27 September 1999 $25,000 was transferred from the ANZ account by Zandra Perkins for the benefit of Eloise Hurley;
  
• (b) On 11 October 1999 a further sum of $13,560 was withdrawn from the ANZ account by Zandra Perkins converted into USD$6944.38, and sent by way of bank draft to H.H.U.A. Inc., a limited liability company registered in the State of Utah. Eloise Hurley is a resident of that State and lives in Salt Lake City. H.H.U.A. Inc. was incorporated on 21 November 1997 and the manager and only representative of H.H.U.A. Inc. listed with the Utah Corporate Commission is Eloise Hurley;
  
• (c) On 8 November 1999 Zandra Perkins closed the ANZ account and withdrew from it the credit balance of $20,221.36.
  

[18] The Applicants say that the three payments made by Zandra Perkins from the ANZ account were for the benefit of the Respondent and should be considered to be either a repayment in full or in part of her entitlement under the Perkins/Hurley Securities. Alternatively they say that the Respondent's entitlement to the surplus or such part of it paid out under the Perkins/Hurley Securities, should be limited to a proportion of that payment calculated by reference to the percentage that her contribution and interest due thereon bears to the total amount of monies dur and owing under the Perkins/Hurley Securities. Alternatively, should the payments made by Zandra Perkins from the ANZ account be less than the Respondent's entitlement under the Securities then she should only receive the difference.

Relief Claimed

[19] In their application of 19 May 2000 the Applicants sought the following declarations:

"1. Determining what priority is to be accorded the Securities granted by Crown Beach to the Applicants and Respondent jointly [the Perkins/Hurley Securities] and the mortgage and debenture both dated 17 September 1998 granted by Crown Beach to the trustees of the Kotaa Garden Trust [Trustee Securities].

2. That the loan made by the Respondent to Crown Beach and secured under the Securities is limited to $35,025.41 (the Advance) as at 19 May 2000 being the Respondents contribution of $29,683.33 and interest thereon calculated in accordance with the Securities of $11,691.09.

3. That –
   

3.1 If all monies due and owing under the Securities are paid, then, nothing more is due to the Respondent as she has received a payment in excess of the Advance by virtue of the payments made to or for the benefit of the Respondent and the Respondent's company (HHUA Inc. LLC) by Zandra Perkins from monies belonging to Crown Beach on 27 September 1999, 11 October 1999 and 8 November 1999 totalling $58,781.36,

or alternatively,

3.2 In the event that only part of all monies due and owing under the Securities is to be paid then either, -

(a) If nothing of the Advance has been repaid, the Respondent is entitled to a proportion of that part payment calculated by reference to the percentage that the Advance bears to the total amount of monies due and owing under the Securities; or

(b) If part only of the Advance has been repaid, the Respondent is entitled to the difference between the payment received and the proportion due under paragraph (a)."

Notice of Opposition

[20] The Respondent did not oppose the making of a decision by the Court on priorities. As to Order Nos 2 and 3, these were opposed on the basis that the amount owing to the Respondent by Crown Beach and secured under the Securities was on 11 August 1999 the sum of USD63,877.44.

[21] It was also asserted that any payments made by Crown Beach to the Respondent or H.H.U.A. Inc. LLC were for goods or services provided by the Respondent or H.H.U.A. Inc. LLC and were not in repayment of the amounts owing to the Respondent and secured by the Perkins/Hurley Securities. The Respondent filed an affidavit dated 25 May 2001 which amplified on these contentions.

Procedural History

[22] The application was set down for a hearing in 2001. The Respondent sought to vacate a fixture for the hearing of the substantive proceeding. The application was made late after preparations had been undertaken and arrangements made for the Applicants to travel to Rarotonga to give evidence. As a result an award was made for costs in favour of the Plaintiffs against the Respondent in November 2001 for $5,289.53. The greater part of the costs order was the cancellation fees imposed upon the Applicants by the airline concerned.

[23] This order for costs was not paid. An application for enforcement was made in August 2002. The Applicants also sought orders that the Respondent provide security for costs, be directed to pay the amount of the costs order, and be debarred from defending the proceedings until the amount was paid.

[24] The Chief Justice refused to make an order for security of costs and held that the order for costs could be executed by the Applicants in the same way as any other order. However, he acknowledged that with a party overseas and without assets in the jurisdiction, there was probably little scope for effective execution. The Chief Justice ordered that unless and until payment of the amount of the order of November 2001 was made the Respondent was barred from taking any further steps in the defence of the applicant's claim or the prosecution of the claims against them. Thus the Respondent was barred from being heard unless she had paid the amount of the judgment for costs. The costs order remains unpaid to this day.

[25] The Applicants set the substantive matter down for hearing. In accordance with a direction I made dated 15 October 2002 advising that a hearing would be held in Auckland on Monday, 7 April 2003 a notice of hearing on 7 April 2003 was served upon the Respondent on 12 December 2002. An affidavit of service by a sheriff in Utah was duly filed in the Court.

[26] In spite of the order debarring the Respondent there remained the possibility that the Respondent might attend the hearing, pay the outstanding costs, and then seek to participate in the hearing. However, there was no appearance for the Defendant at the hearing at my Chambers in Auckland on 7 April 2003. (I should record that I arranged for Mr Manarangi, counsel for the Applicants to go down to the Auckland High Court to make sure that neither the Respondent nor any person representing her was present. Mr Manarangi advised that these was no one present at the High Court in relation to this matter.)

The Formal Proof Hearing

[27] In the absence of the Respondent the hearing proceeded by way of formal proof. Mr Manarangi first called Mr Rondo Perkins. He was sworn and produced a signed brief of evidence which was as follows:

"1 Except to say that at paragraph 21 of my affidavit dated 18th May 2000, the amount of $5,988.16 should read $6,123.64, I confirm the contents of that affidavit.

2. At paragraph 28 of my affidavit I referred to an agreement for the sale of the assets of Crown Beach to South Pacific Resorts Limited. That agreement became unconditional and settlement of the sale occurred on 29 August 2000. My wife and I are now 50% shareholders of South Pacific Resorts Limited. The balance of the shares are held by Bookfortravel Limited.
   
3. At paragraph 25 of my affidavit I referred to a conditional agreement that I had entered into to purchase the Trustee Securities. Since making that affidavit I have purchased the Trustee Securities. I produce to the Court a copy of the executed agreement dated 15 March 2000.
   
4. I purchased the Trustee Securities because the Receivers had made an earlier determination that the Trustee Securities had priority over the Perkins/Hurley Securities and had advised my solicitor of this by letter dated 28 February 2000. I produce to the Court a copy of that letter of advice from the Receivers.
   
5. The purchase price that was paid for the Trustee Securities was $223,417.53.
   
6. The purchase price was derived from a distribution of surplus funds from the receivership of assets of Crown Beach and made by the Receivers on the settlement of the sale of those assets. The amount of that distribution was $241,000.
   
7. The Receivers were able to make this distribution without concern for the claim in this proceeding by Eloise Hurley because, prior to making that distribution, the Receivers had paid into Court the sum of $137,000, as was directed by the Court, pending the outcome of this proceeding.
   
8. At the same time, the Receivers did not have to rely on their determination that the Trustee Securities had priority over the Perkins/Hurley Securities to make the distribution because I had purchased the Trustee Securities.
   
9. I have not received any other distribution from the Receivers.
   
10. I have been informed by my solicitor that Mr Carr, one of the Receivers, has advised that the Receivers still hold approximately $50,000 which is surplus to the costs of the receivership and will be available for distribution.
    
11. I have also been informed by my solicitor that Mr Carr has advised that these funds will not be distributed until I waive any rights I might have to question the Receivers' conduct of the receivership.
    
12. Given the distribution that has been made, the payment made to Court and subject to the exact amount held by the Receivers, the total surplus available for distribution is $428,000.
    
13. I have read the affidavit sworn 25th May 2001 of Eloise Hurley.
    
14. At paragraph 11 of her affidavit she refers to paragraph 31 of my affidavit where I allege that there were 3 unauthorised payments made from an ANZ Bank account by Zandra Perkins to Eloise Hurley's company HHUA LLC or to Eloise Hurley.
    
15. At paragraph 12 of her affidavit she denies, for herself and HHUA, having received any of the other money alleged to have been paid.
    
16. However as a result of inspecting the documents referred to in Eloise Hurley's sworn affidavit of list of documents dated 20 February 2001, I believe that all 3 sums that I refer to at paragraph 31 of my affidavit were received by Eloise Hurley and/or HHUA LLC. I produce to the Court a Quickbooks record of transaction details for HHUA LLC.
    
17. The Quickbooks record of transaction details was obtained by my solicitor upon that inspection. I had not seen this document prior to that inspection.
    
18. The 3 sums that I refer to in my affidavit are set out in the first 3 lines of that record under ANZ and total $58,781.36.
    
19. I have also obtained from the Receivers the ANZ Bank documentation that shows the deposit and withdrawal of these 3 sums from the Crown Beach account with ANZ Bank as follows –
    

19.1 The sum of $25,000.00 was transferred from the account on 27 September 1999 by Zandra Perkins and deposited in her own account with the ANZ Bank. By letter of 21 January 2002 the Bank confirmed that Zandra Perkins closed her account on 8 November 1999. I produce to the Court copies of this documentation.

19.2 The sum of $13,560.00 was withdrawn on 10 October 1999 by Zandra Perkins, converted to United States dollars, and transferred to HHUA LLC. I produce to the Court copies of this documentation.

19.3 The sum of $20,221.36 was withdrawn by Zandra Perkins on 8 November 1999 when the account was closed. I produce to the Court copies of this documentation.

20 My wife and did not authorise the opening of the ANZ Bank accounts and we did not know of these deposits and withdrawals. Crown Beach had never had an account with ANZ Bank. Until these ANZ Bank accounts were opened, Crown Beach had all of its accounts with Westpac.

21 Apart from the transfers on 27 September 1999 and 10 October 1999, all of these transactions took place within days of the appointment of the Receivers (15 November 1999) and 1 or 2 days before Zandra Perkins departed the Cook Islands permanently to return to the United States on 9 or 10 November 1999. Since her departure from the Cook Islands, she and Eloise Hurley have lived together.

22 I was aware of only 2 payments that were made to Eloise Hurley for supplies that she had purchased for Crown Beach. Those payments were $4,740.4 of 13 June 1999 and $1,708.60 of 8 July 1999 which were disclosed in a draft set of accounts received from Zandra Perkins in early August 1999. I produce to the Court this set of accounts.

23 These amounts of $4,740.4 and $1,708.60 also appear in the Quickbooks record of transaction details prepared by Eloise Hurley. They are the first 2 entries under Westpac Checking.

24 I believe that the first payment relates to the supplies that I and my wife helped pack. I did ask Eloise Hurley to provide a details list of the supplies for these entries. I received a list from Eloise Hurley on 10 August 1999 for the first nayment but not the second. I produce to the Court this list of supplies.

25 By this time my relationship with Zandra had deteriorated and I did notive any further accounting from her relating to the operatierations of Crown Beach.

26 The Quickbooks record of transaction details discloses that $91,752.50 has been paid to HHUA LLC and/or Eloise Hurley from the ANZ Bank accounts and the Crown Beach account with Westpac. Of that amount I was aware of only $6,449.04 being the total of the 2 payments referred to in paragraph 22.

27 Eloise Hurley has therefore received $91,752.50 in repayment of whatever she contributed to the Perkins/Hurley Securities.

28 The Quickbooks record of transaction details shows that legal fees of $13,692.00 paid by Eloise Hurley to Mr. G Chapman have also been repaid to her. Mr Chapman represented Perkins/Hurley interests in the shareholders dispute with Mr. and Mrs. Farnsworth. Perkins/Hurley was responsible for Mr Chapman's fees not Crown Beach. They therefore are not secured by, or able to be recovered under, the Perkins/Hurley Securities.

29 My wife and I also paid for Mr. Chapman's fees. That amount was approximately $60,000. We accept that this payment is not a responsibility of Crown Beach and is not secured under the Perkins/Hurley Securities.

30 Other than the distribution of $241,000 made by the receivers, my wife and I have never received a repayment of any of our monies secured by the Perkins/Hurley Securities.

31 At paragraph 9 of her affidavit Eloise Hurley says she paid management fees due to Zandra Perkins. The total amount claimed is $72,055.73. My wife and I did not know that payments to the extent now claimed were made by her. These payments are also inconsistent with the written agreement relating to the amount that was to paid by her. I produce to the Court that written arrangement.

32 The agreement which was signed by Eloise Hurley and my wife, for herself and on my behalf, was that Zandra Perkins would be paid a monthly fee of USD5000.00. Half of that amount was to be deferred for payment by and when Crown beach had the financial means to do so. The other half was to be paid by myself, my wife, Zandra Perkins and Eloise Hurley equally. The maximum liability that Eloise Hurley had for the management fees was therefore USD625.00 per month or a total over 8 months of USD5,000.00.

33 I have never seen any documentation that would demonstrate that Eloise Hurley paid the management fees to the extent that she has claimed.

34 I would like to refer to the Quickbooks transaction detail for Debenture prepared by Eloise Hurley which was obtained in the course of inspecting documents listed in her affidavit of documents. I produce this to the Court.

35 The Quickbooks transaction detail for Debenture reflects Eloise Hurley's claim as to her total contribution to the Perkins/Hurley Securities of $127,977.62. I have asked Mr. Brannigan as an accounting expert to prepare a calculation adjusting this amount to reflect the evidence that I have given and the detail contained in the Quickbooks transaction detail for HHUA LLC and the Quickbooks transaction detail for Debenture and Eloise Hurley's comment at paragraph 3 of her affidavit of 25 May 2001."

[28] Mr Peter Brannigan, a Chartered Accountant in practice on his own account in Auckland was also called to give evidence for the Respondent. His signed brief recorded that he had been involved as an adviser to the purchaser in the negotiations and settlement of the purchase of the Crown Beach Resort assets by South Pacific Resorts Limited from the receivers of Crown Beach Executive Villas Limited (In Receivership). He had also represented the Applicants. He deposed inter alia as follows:

"3 I became aware of the Deed of Priority dated 19 April 1999 shortly after Crown Beach Executive Villas Limited (CBEVL) was placed into receivership. Under the provisions of the agreement (clause 12) dated 17 September 1998 between the trustees of the Kotaa Garden Trust (Kotaa) and CBEVL there was provision for substituting one borrower for another provided that a debt to equity ratio of 4:1 was maintained "at all times". This provision was specifically referred to in clause 2 of the Deed of Priority.

4. At the time of the receivership the only accounting records of the company passed to KPMG (the Receiver). I was in discussion with their Rarotongan office on the matter of priority as between Kotaa and Perkins/Hurley. They eventually produced a draft calculation of the debt/equity ratio as at 19 April 1999 which was the subject of further discussion between us, (Attachment "A").
   
5. On 21 February 2000 the Receiver, Mike Carr, wrote to Mr. Manarangi confirming the view that the Kotaa securities had priority over the Perkins/Hurley Securities (Attachment "B"). Mr. Manarangi in turn consulted with me and I advised him that although the calculation produced was still in draft form I was unable to argue against it in any substantive manner and that it appeared certain that the debt to equity ratio of 4:1 had not been maintained.
   
6. Accordingly, we advised Mr. and Mrs. Perkins that in the circumstances we thought negotiations should be commenced to purchase the Kotaa securities. I was requested to pursue this which I did through the lawyers representing the Trustees and an agreement was reached and documented on 15 March 2000.
   
7. As part of their responsibilities as Receivers KPMG engaged a valuer and from the information provided by him produced a draft calculation of the amount owing to the Kotaa Trustee Securities. (Attachment "C").
   
8. This calculation was acceptable to me and I accordingly advised Messrs Manarangi and Perkins of this by telephone. However, as the Kotaa Trustee Securities were now subject to the settlement agreement, which would cause them to pass into the beneficial ownership of Mr. Perkins no final resolution of this was confirmed in writing at the time. It was simply not thought necessary by either myself, or KPMG.
   
9. I attended at the settlement of the purchase of the Crown Beach assets which took place in Rarotonga on 25 August 2000. I attach two pages of the settlement statement produced on the day by KPMG. The handwritten amendments are in the hand of Kerryn Downey one of the receivers, (Attachment "D"). As can be seen from the statement Westpac as first charge holder was paid $1.925million, $137,000 was paid into Court (the subject of these proceedings) and after providing for a further $60,000 of fees to complete, a sum of $241,000 was available for distribution to the subsequent charge holders.
   
10. This sum was in fact distributed by the Receivers to Westpac (on behalf of Mr. Perkins). Westpac provided a Bank cheque in the sum of $223,417.53 in favour of the Kotaa Trustees to settle the settlement agreement and the balance was credited to a temporary loan account of Mr. Perkins. I confirmed this to Mr. Perkins on 6 September 2000. (Attachment "E").
    
11. I have calculated the amount owing under the Kotaa securities to the present day based upon the KPMG calculation to 11 May 2000 adjusted for the $241,000 distribution made by the Receivers and interest at the Westpac Rarotonga Bank lending rate as used in the KPMG calculation. This assumes that the Kotaa securities have priority. The sum remaining unpaid on this basis is $169,649.60. (Attachment "F")
    
12. I have calculated the amount available for distribution to the second and third charge holders as $428,000, being $241,000 distributed on settlement plus $137,000 paid into Court plus approximately $50,000 still held by the Receivers.
    
13. If Kotaa has priority then I have calculated that $17,351 is available for the Perkins/Hurley Securities. (Attachment "G")
    
14. The calculation at Attachment H reflects my interpretation of the contributions made by Eloise Hurley as a percentage of the total amount secured by the Perkins/Hurley Securities. This calculation reflects the comments contained in Mr. Perkins Brief of Evidence and reflects the statement at paragraph 3 in the affidavit of Eloise Hurley dated 25 May 2001 that '... it was expressly and orally agreed between Mr. and Mrs. Perkins and me that all advances that my be made by any of us to or on behalf of the company would be secured under the Debenture and the Mortgage. It was agreed that if it was decided to call up the Debenture then we would each share equally in the proceeds of receivership or sale on a pro rata basis according to the amount of our total respective contributions to the company'.
    
15. I have interpreted this to mean that all sums including the Accounts Payable shown in the Quickbooks record of transaction details were to be secured under the Perkins/Hurley Securities."
    

Priority of Securities

[29] At the outset I record that, although the effect of the Chief Justice's order barring the respondent from defending the proceedings must be respected, I have nonetheless considered the affidavit dated 25 May 2001 filed by the Respondent prior to the Chief Justice's order and the four page Petition dated 20 August 2002 filed by the Respondent and addressed to this Court.

[30] The initial determination required in this matter is the relative priorities of the Trustee Securities and the Perkins/Hurley Securities. This turns on the terms of securities document dated 17 September 1998 between Crown Beach Executive Villas Limited and the Kotaa Garden Trust (attachment A to Mr Perkins' affidavit). This agreement precedes the securities granted to the Perkins/Hurley interests. Clause 12 of the agreement for the Kotaa Garden Trust provides:

"Security and Debt to Equity Ratio

12.1 Crown Beach hereby undertakes and covenants as follows:

(a) To use its best endeavours not to breach or allow to subsist any breach of any of the terms and conditions of the Westpac Mortgage or the Westpac Debenture, and to remedy any breach of which it is given notice by Westpac in accordance with the terms of that notice;

(b) To restrict its total borrowing from Westpac and/or any other bank, financier or creditor to a Debt to Equity Ratio of 4:1 or less, except for the specific written content of the Trustees of Kotaa.

and provided it is and remains at all time in compliance with the provisions of this clause may substitute Westpac and the Westpac Debenture and the Westpac Mortgage with another lender and other securities having the same priority as the securities of Westpac or add not more than one lender (and securities) and Kotaa shall execute further deeds of priority as may be necessary to give it effect to this provision."

[31] The Respondent indicated in her notice of opposition that she did not oppose the Court making an order as to the respect of priorities of the Trustees Securities and Perkins/Hurley Securities and put forward no evidence or submissions as to how the question of priorities should be resolved. I take it from that that the Respondent, in essence, has chosen to abide the decision of the Court on this issue.

[32] The Applicants have, of course, since the commencement of these proceedings purchased the Trustees Securities. The evidence of Mr Branigan, the Applicants' account, is that at the time the Crown Beach issued the Perkins/Hurley Securities (19 April 1999) the debt/equity ratio of Crown Beach Executive Villas Limited was well in excess of 4:1. Attachment A to Mr Branigan's brief of evidence is a draft calculation of the debt/equity ration of Crown Beach as at 19 April 1999 prepared by Crown Beach's receivers. Mr Branigan proposed that although the calculation was still in draft form, he was unable to argue against in any substantive manner and it appeared certain that the debt to equity ratio of 4:1 had not been maintained.

[33] Given that state of appears, it is quite clear on the terms of clause 12 of the Securities Agreement between Crown Beach and Kotaa Garden Trust that the Trustee's securities rank ahead of the Perkins/Hurley securities in priority.

[34] The effect of that determination so far as the Respondent is concerned is that, as calculated by Mr Branigan, if the Trustee Securities had priority over the Perkins/Hurley Securities, the amount available for distribution to the Perkins/Hurley Securities debenture holders was $17,351.00.

Distribution of Funds available for Perkins/Hurley Debenture Holders

[35] The Respondent accepts (paragraph 3 of her affidavit and again paragraph 7 of her submissions) that she accepts that any recovery by her would be on a pro-rate basis taking into account that she has contributed and the amount contributed by Mr and Mrs Perkins under the Perkins/Hurley Securities. This is the correct approach.

[36] The best case scenario for the Respondent on the evidence before me is set out in as in attachment I in Mrs Perkins' affidavit. This is a list of the respective advances made by the Respondent and the Applicant. Accepting its accuracy at face value for the time being, shows that the Respondent has contributed $127,977.62 of a total contributions under the Perkins/Hurley Securities of $686,724.53 the balance being provided by Mr and Mrs Perkins.

[37] The Respondent's contribution amounts to 18.64% of the advances made to Crown Beach under the Perkins/Hurley Securities. 18.64% of the $17,351.00 available for distribution to the Perkins/Hurley debenture holders equates to a return for the Respondent, on the best case scenario for her, of $3,233.52.

[38] There remains, however, to consider whether the Respondent has in fact received repayments from Crown Beach resort that exceed the amount that would otherwise be owing to her. As noted above Mr Perkins asserted in his evidence that the Respondent had already received $91,752.50 from the Crown Beach Resort. He produced a schedule of transaction details called a "quickbook" which showed payments totally the alleged amount to the Respondent or her company HHUA LLC. Three payments totally $58,781.36 were made from an ANZ bank account to the Respondent's company, HHUA LLC in September, October and November 1999. The last of the three payments was in the amount of $20,221.36 and was made the day before Zandra Perkins closed the account and left the Cook Islands for the United States and 7 days before the appointment of the Receivers.

[39] Mr Perkins gave evidence, which I accept, that he and his wife had no knowledge about the opening of the ANZ account, nor about the transfer of Crown Beach Resort funds to that account by Zandra Perkins or the payments from the ANZ account to the Respondent's company.

[40] The 6 payments made from the Westpac Bank Account to HHUA LLC totalled $32,970.94. Westpac was Crown Beach Resort's regular and only banker. I infer that Mr Perkins knew, or could easily have found out about the payments from the Westpac account to the Respondent's company.

[41] The Respondent says in her affidavit that any and all sums received by HHUA LLC from Crown Beach were payments for supplies purchased by the Respondent for Crown Beach Resort and paid for by HHUA LLC. She further says that such supplies were purchased and transported to the Resort on at least 4 occasions. Mr Perkins responds that he is aware of only two occasions where supplies were provided by HHUA LLC and 2 payments of $4,740.44 and $1,708.60 respectively were made by Crown Beach Resort to reimburse HHUA LLC in respect of those supplies. 2 payments in those amounts are recorded as 2 of the 6 payments from the Crown Beach Westpac account to HHUA LLC on the quickbook transaction record produced by Mr Perkins.

[42] The Respondent refers to, but does not produce, invoices relating to the provision of these supplies to Crown Beach by HHUA LLC.

[43] I am prepared to accept that the 2 payments from the Westpac account to HHUA LLC totally $6,449.04 were repayments to HHUA LLC by Crown Beach for supplies paid for by HHUA LLC. It is quite possible that the other payments to HHUA LLC recorded from the Westpac account on the quickbook transaction schedule were also for similar supplies but I make no formal findings as to those payments on the evidence before me.

[44] However, the payments to HHUA LLC from the Crown Beach ANZ account are a different matter. The timing of these payments being in the lead up to Zandra Perkins' departure from the Cook Islands and the appointment of receivers, the size of the 3 payments (being much larger than any of the payments from the Westpac account) and the routing of the payments through a bank account that was unknown to other directors of the Crown Beach Resort leads me to accept the Applicants' contention that these were not reimbursement payments for supplies.

[45] There was no explanation in the Respondent's affidavit as to the unusually timing and quantum of these payments, nor any invoices supplied by the Respondent that would support the contention that they were in fact payments for supplies purchased by HHUA LLC. Neither is there any affidavit from Zandra Perkins explaining the nature of the payments from the ANZ account. I note that the evidence before me is that Zandra Perkins had lived with the Respondent since her return to the United States from the Cook Islands in November 1999.

[46] I therefore find that the payments from the ANZ accounts totally $58,781.36 were, in design or at least in effect, repayment to the Respondent of some of the monies advanced by her under the Perkins/Hurley Securities.

[47] Accordingly, I find on the evidence that:

• (a) At best the Respondent is entitled to $3,233.52 of the $17,351.00 available for distribution to the Perkins/Hurley security holders;
  
• (b) In any event, the Respondent has already received considerably more than that amount and is therefore not entitled to any further payment.
  

[48] In those circumstances, I declare that all of the $137,000.00 held in trust pending the resolution of these proceedings is to be paid by the Receivers to the Applicant whether in their capacity as the security holders of the Trustee Securities or the Perkins/Hurley Securities.

[49] It will be clear by the way that I have approached the matter that it is not necessary to enter into a discussion about whether, and if so to what extent, the Respondent was entitled to a credit for alleged advances made to Crown Beach Resorts by way of accounting services provided by her, management fees paid to Zandra Perkins and payments made to reduce the overdraft of the Crown Beach Resort.

[50] I am satisfied that the Applicants have met the evidentiary burden lying upon them to prove their case on the balance of probabilities.

Result – Orders

[51] For the reasons set out above, this Court rules and declares as follows:

(1) That the Debenture and Mortgage both dated 17 September 1998 (the Kotaa Trustee Securities) have priority over the Debenture and Mortgage both dated 19 April 1999 (the Perkins/Hurley Securities).

(2) That the Respondent has received payment in excess of her entitlement and therefore is not entitled to a payment out of the monies paid into Court.

(3) That the Registrar be directed to release the $137,000 paid into Court together with any accrued interest to the Applicants or their solicitor, Mr A N Manarangi.

(4) The Applicants are entitled to costs. A memorandum is to be submitted within 14 days as to the appropriate quantum of those costs.

Signed at Auckland on April 22, 2003 at 4pm

David Williams J