Taakoka Island Villas Ltd v Tupangaia [2006] CKHC 25; HC OA 5.2004 (3 February 2006)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT AUCKLAND

OA 5/04

BETWEEN

TAAKOKA ISLAND VILLAS LTD
Applicant

AND

RUTA TEREORA TUPANGAIA & ORS
Respondents

Hearing: 14, 15, 16 and 17 November 2005 and
20 December 2005 (all at Auckland, New Zealand)

Counsel: Mr B Morley and Ms K Harvey for the Applicant
Mr P David and Mr D O'Connor for the Respondent,
R T Tupangaia
(No steps taken by other respondents)

Judgment: 3 February 2006 (New Zealand time)

JUDGMENT OF NICHOLSON J

Introduction

[1] On 2 December 1988, the four owners of nearly 1.7 hectares of lagoon side land at Muri, Rarotonga (the land) gave a 60 year lease of that land to Taakoka Island Villas Limited (Taakoka). It was intended that the land be used for a tourist resort. Taakoka built two tourist villas on the land.

[2] By notice dated 22 December 2003, Ruta Tupangaia (Mrs Tupangaia), owner of a half share of the land, purported to forfeit Taakoka's interest in the land. The stated ground of forfeiture was rent was in arrears. Mrs Tupangaia thereupon claimed and took possession of the land.

[3] On 4 March 2004, Taakoka applied for relief against forfeiture. That application was heard in Auckland in November and December 2005. Judgment was reserved.

Hearing

[4] On 23 December 2004, Williams J, as he then was, ordered that the substantive hearing of the application for relief against forfeiture be heard in Auckland, New Zealand. A fixture was made for the hearing to start on Monday, 5 September 2005. However, on 2 September 2005, I heard an opposed application by Mr P David, who had been recently instructed by Mrs Tupangaia, for an adjournment. I adjourned the hearing to start Monday, 14 November 2005. When the hearing started on 14 November 2005, 23 affidavits had been filed and served. After his opening, Mr Morley, senior counsel for Taakoka, called Roger Lyon (Mr Lyon), Keith Clark (Mr Clark), and Darryl Harvey (Mr Harvey) for requested cross-examination. With leave, he called Marshall Cook (Mr Cook) to give evidence on matters raised in cross-examination.

[5] After his opening, Mr David, senior counsel for Mrs Tupangaia, called Malcolm Taylor (Mr Taylor) and Mrs Tupangaia for requested cross-examination.

[6] When cross-examination finished late on Thursday afternoon, 17 November, both counsel said they wished to make oral final submissions. The hearing was therefore adjourned part-heard until Tuesday, 20 December 2005, when after hearing final submissions, I reserved judgment.

Submissions

[7] Mr Morley's fundamental submission was that the only rent outstanding at the time of the purported notice of forfeiture was the base rent of $7,500 and that as evidenced by Mr Postle's letter of 2 December 2003 Taakoka was able to pay that and wanted to pay that and was simply waiting for a response from Mrs Tupangaia's solicitor as to how the payment should be made. He submitted that Taakoka was at all relevant times, and remains, ready, willing and able to pay outstanding rent and revenue payments. He accordingly submitted that the application for relief against forfeiture should be granted.

[8] Mr David accepted Mr Morley's submission about the applicable law relating to the exercise of the discretion to grant relief against forfeiture but submitted that in the present case there were reasons which individually or in combination amounted to exceptional circumstances which warranted relief being declined. Mr David submitted that the reasons why relief should not be given were:

[a] There is a history of prior non-payment and late payment of rent with a history of promises to perform which have not been fulfilled.

[b] Taakoka is insolvent (or, at the very best, of doubtful solvency). It is most unlikely to fulfil its rental obligations under the lease in the future.

[c] Taakoka's status means that it has no adequate funding in place to carry out the development and meet its obligations under the lease, which is to build luxury villas as originally approved in 1987.

[d] Taakoka has failed to undertake and complete the required motel development within a reasonable time.

[e] Taakoka is incapacitated. Its registration as a foreign enterprise has been revoked and it can no longer carry out its authorised business of developing the land. This situation reflects the current reality - Taakoka will not be able to proceed. The status of its governance is, at best uncertain. The pattern of present failure to perform the obligations under the lease, express or implied, will continue. The lease which was granted for the sole purpose of development will not be performed.

[f] Taakoka's board of directors as properly identified has not authorised the application for relief against forfeiture.

[9] In his final submissions Mr Morley took issue with Mr David's submissions about the reasons why relief should not be given and made detailed submissions in response.

Pertinent facts

[10] From the evidence, much of which was irrelevant and some of which was disputed, I find the following pertinent facts.

[11] In 1986 Mr Clark, an Auckland real estate agent and property development entrepreneur, engaged Tim de Roles, (Mr de Roles) architect, to locate land in the Cook Islands that might be suitable for development. Mr de Roles located the land and information about its ownership. Mr Clark met Mrs Tupangaia and her solicitor, Mr Taylor, along with another landowner, Teina Raki (Mr Raki), in Hastings, in August 1986, and discussed Mr de Roles's development plans (the de Roles plans).

[12] By a written agreement dated 26 November 1986, the four owners of the land agreed with Mr Taylor, as trustee for a company to be incorporated and Alexander Burrell (Mr Burrell), as trustee for the proposed shareholders of that company, to lease the land for a term of 60 years. The owners were Mrs Tupangaia, who had a half-share, and her relatives, Mr Rakei, Tere Dean (Mr Dean), and Maui Ta Pua (Mr Ta Pua), each of whom had a one-sixth share. The consideration was $NZ333,333 and the owners were to have one-third of the total share capital of the company.

[13] Mrs Tupangaia lived in Hastings. Mr Taylor practised as a barrister and solicitor in Hastings and acted, and has continued to act, for Mrs Tupangaia. The agreement said that it was intended that the company would develop the land by constructing a tourist residential complex.

[14] On 30 March 1988, Taakoka was incorporated. Its share capital was $1,000.00 divided into 1000 shares of $1 each. Mrs Tupangaia took 169 shares, Mr Raki, Mr Dean and Mr Ta Pua each took 55 shares and the balance of 666 shares were taken by Export America Limited, an investment company registered in New Zealand. The first directors of Taakoka were Mrs Tupangaia, Mr Taylor, Mr Clark, and Mr Burrell.

[15] On 16 May 1988, Taakoka was registered as a foreign enterprise in the Cook Islands by the Cook Islands Monetary Board.

[16] By deed of lease dated 2 December 1988 (the lease), the four owners leased the land subject to High Court confirmation and Lease Committee approval to Taakoka for 60 years from 1 September 1988, at an annual rental for the first five years of $5000 and thereafter as agreed or otherwise fixed by arbitration (the base rent).The base rent was to be paid on 1 September each year. In addition, Taakoka was to make annual payments of 1.5% of the total annual gross revenue derived by it from tourist business transacted on the land (revenue payment). Consideration of $333,000 was to be paid by Taakoka to the owners upon confirmation and approval.

[17] On 13 February 1989, the lease was approved by the Lease Approval Committee.

[18] On 24 February 1989, Mr Dean died. Mr Rakei also died before December 2003. In her affidavit sworn on 26 September 2005, Mrs Tupangaia said that so far as she knew, no orders had been made for any of the heirs of Mr Dean and Mr Rakei to become successors to their part shares in the land.

[19] On 17 April 1989, the High Court confirmed the lease with conditions.

[20] By share transfer dated 1 May 1990, Export America Limited transferred its 666 shares to Mary Whaley, an Auckland solicitor.

[21] In 1990, the directors considered final plans prepared by Mr de Roles at a cost of approximately $100,000. These were for substantial two storey buildings close to the beach with single storey buildings behind. The directors decided that another architect should be instructed and Mr Cook, an Auckland architect, was instructed accordingly. At a cost of about another $100,000, Mr Cook prepared another development plan which was substantially different from that of Mr de Roles.

[22] On 13 August 1991, pursuit to a deed of declaration of trust (the Taakoka Trust deed), Mary Whaley transferred the 666 shares to Robert Welch of Auckland, solicitor (Mr Welch), as trustee for the Taakoka Island Villas Trust (the Taakoka Trust). The primary beneficiary of that trust was Jodi Ann Clark.

[23] On 28 February 1994, the Cook Islands General Licensing Authority gave approval in principle for an accommodation licence based on Mr Cook's development plans.

[24] In 27 June 1995, Ms Lynsay Francis (Ms Francis), a Cook Islands land consultant, purporting to act on behalf of the landowners, served a notice of forfeiture on Taakoka and sent copies to the Monetary Board, the Cook Islands Licensing Authority, and the Department of Justice.

[25] By letter of 11 August 1995, Mr Taylor advised the Cook Islands Monetary Board that he had instructions to act for the landowners and that it appeared that Ms Francis had "... not been aware of the full circumstances of the matter ..." and that he had firm instructions from landowners to advice that the matter was considered resolved by the landowners and any purported forfeiture of the lease was now absolutely waived and that the status of rental payments to the landowners under and in terms of the lease had been resolved to the satisfaction of the landowners. He asked the General Licensing Authority and the Cook Islands Monetary Board "... to actively co-operate to ensure that no unnecessary obstacles are put in the way of (Taakoka's) resumption of work on the site ...".

[26] By the mid-1990s, some question had arisen over whether Mr Clark remained as a director. Accordingly, by a shareholders resolution dated 19 March 1996 signed by Mr Welch as trustee of the Taakoka Trust and Mrs Tupangaia, Mr Clark was appointed a director of Taakoka from 20 March 1996.

[27] On 9 July 1996, the High Court granted "final, full confirmation" of the lease. In 1996, Taakoka borrowed funds from the ANZ Bank and used these to build two villas according to the Cook development plan.

[28] On 1 April 1999, Ms Francis, again purporting to act for the owners, applied for an interim injunction to restrain John McElhinney (Mr McElhinney), the project manager for Taakoka, and other Taakoka agents, from entering onto or working on the land upon the grounds that the owners had filed a notice of forfeiture and had re-entered and taken possession of the land as the rent was in arrears. Mrs Tupangaia swore an affidavit in support of this application. Taakoka disputed that there were any rent arrears and filed an application for relief against forfeiture. The alleged notice of forfeiture and associated proceeding were subsequently withdrawn.

[29] Because of Mrs Tupangaia's actions, the Taakoka Trust decided that it would be prudent to buy the shareholding of Mrs Tupangaia and Mr Ta Pua.

[30] On 5 July 1999, Mr K McMillan, registered valuer, valued the lease interest of Taakoka in the land at $895,000.

[31] After negotiations with Mrs Tupangaia, through her solicitor, Mr Taylor, and Mr Ta Pua, through his Tokoroa solicitors, agreement was reached for the sale of Mrs Tupangaia's 169 shares to the Taakoka Trust for $150,000, and for Mr Ta Pua's 55 shares to be similarly sold for $38,840.

[32] In 1999, Mr Clark took steps to have a Canadian investor provide finance for the next stage of the development and to take 51% of the Taakoka shares. However, when in 2000 it became apparent that the Canadian investor was unlikely to contribute, Mr Clark arranged for Mr Lyon, an Auckland businessman and a New Zealand construction company, Cabella Construction Ltd, to invest. When Cabella did not make a final commitment, Mr Lyon agreed to make an increased contribution. He advanced money to the Taakoka Trust to enable completion of the purchase of the shares from Mrs Tupangaia and Mr Ta Pua and full payment was made to them accordingly.

[33] During 2002, Taakoka agreed to increase the ground rent to $7,500 p.a.

[34] Taakoka sought funding from Westpac Bank. When it appeared that Westpac would finance part of the cost of the next stage of development, Mr Lyon obtained an estimate of the cost of that stage as being in the region of $2,300,000 and then agreed to contribute $1,153,882, being 50% of the estimated cost. On 22 May 2003, Mr Lyon arranged a bank cheque for this amount. He also provided other funds to Taakoka.

[35] By October 2003, Mr Harvey, a director of Project Economics Limited, a quantity surveying and project management company based in Auckland and which was contracted to Taakoka to act as quantity surveyor and project manager for development of the land, had completed plans for the next stage of the development involving the construction of 12 further units, together with a restaurant, bar, swimming pool and sewerage treatment plant and had sent plans to contractors who were invited to tender for the work. Tender prices from interested contractors were received in November 2003. Project Economics interviewed the tenderers and prices for approximately two-thirds of the contract work were negotiated and agreed in November 2003.

[36] In late November 2003, after receiving a report from Mr Harvey, Mr Clark and Mr Lyon travelled to the Cook Islands to meet Mr McElhinney and Mr T Smith, the manager of Westpac Bank in the Cook Islands, and negotiated an agreement that if Taakoka obtained private funding to cover 50% of the construction costs for the next stage of the development, then Westpac would contribute the other 50% on a "dollar for dollar" basis. Mr Lyon agreed to provide Taakoka with sufficient funds to cover 50% of the construction costs subject to receiving building consent after a revised environment impact assessment report had been prepared. It was anticipated that construction work on the second stage would start in early 2004.

[37] As project manager for Taakoka, Mr McElhinney was responsible for taking bookings for the two villas on the land. Following a request from Mrs Tupangaia, Mr McElhinney agreed that she and her family could occupy the two villas rent free over the Christmas period from 13 December 2003 to 3 January 2004.

[38] By letter of 2 December 2003, Mr Postles, the accountant for Taakoka, advised Mr Taylor about development progress and that a contractor had been appointed and work would proceed under the supervision of Project Economics Limited as soon as clearance was received. He said that funding had been secured for the work. Mr Postles concluded his letter by stating:

4. You will probably be aware that Ruta has the use of both existing units for Xmas, as from 13.12.03.

5. According to my records, Land Rent of $7,500 was due on 30^th September last. Could you please confirm that payment direct to the indigenous Owners is acceptable - the original idea of payment to the Land Court seems to be ponderous and archaic!

[39] Mr Taylor sent a copy of this letter to Mrs Tupangaia before she left for Rarotonga.

[40] When Mrs Tupangaia arrived in Rarotonga, Mr McElhinney walked around the area of the next construction stage with her and she appeared to be quite happy with the proposed development. She did not indicate that she thought that the rent was in arrears.

[41] On 27 December 2003, Mr McElhinney received an email from Travis Moore, (Mr Moore), stating:

We act for the majority of the present Landowners of the above property.

On 22 December 2003 the Landowners did re-enter the property, take possession thereof and forfeited the lease of December 1988.

The Notice of Forfeit was presented to the Registrar of the High Court and stamped by and accepted by him for registration on 23 December 2003.

[42] Mr Moore requested transfer of Taakoka records and information.

[43] This email was the first notice that anyone associated with Taakoka received of purported forfeiture, re-entry and possession. Acting on information received from a cleaner of the villas, Mr McElhinney went to one of the villas where Mrs Tupangaia was staying and retrieved a notice which was attached to it. The pertinent parts of this notice said:

NOTICE OF FORFEIT

TAKE NOTICE that I, RUTA TEREROA TUPANGAIA, and THE LANDOWNERS of ALL [the land] ... have this day re-entered, posted with this notice, and taken possession of ALL that land ON THE GROUNDS that THE BASE RENT IS IN ARREARS THE 1.5% OF GROSS INCOME PAYMENTS (RENTALS) ARE IN ARREARS

DATED at Rarotonga this 22.12. day of December 2003

To: The Registrar of the Land Division, High Court or to whom it may concern:

....

SIGNED by the said LANDOWNERS:

[Signature]

BY: RUTA TEREROA TUPANGAIA

Witness:

[Signature]

Travis Moore

Vaimaanga Rarotonga

Consultant

[44] In the affidavit which he swore on 16 March 2004 in opposition to the application for relief against forfeiture, Mr Moore said that he was a land consultant and agent for Mrs Tupangaia and that she " ... retained my services towards the end of 2003 to see if I could bring to a close once and for all her attempts over many years to free her land ..."

[45] Mr Moore delivered a letter dated 23 December 2003 to the Development Investment Board which said:

I am writing you on behalf of the Landowners of the above property, as instructed by Ms Ruta Tupangaia, majority Landowner.

We have had a chance to review the DIB file for Taakoka Island Villas Limited and spell out chronologically below what we see as a wholesale failure on the part of this Registered Foreign Investor to meet it's approvals.

....

We can see no reason why this Foreign Enterprise should not be de-registered at the next meeting of the DIB, if not sooner. The Landowners hereby make that demand.

[46] By email of 27 December 2003, Mr McElhinney, on behalf of Taakoka, advised Mr Moore:

Have no authority to release any information such as requested in your email on this matter. The major shareholder in the Company is issuing instructions to his solicitor to sue Ruth Tupangaia and anyone else responsible for yet another landowner instigated delays, for any loss incurred by this action, as contracts for construction in the order of $2,200,000 have been let and finance arranged to commence the construction of the next stage - we are only awaiting the Environmental approval following the delivery of the EIA to the Council on the 19^th Dec 2003. Both you and Ruth Tupangaia are fully aware of this situation. This is not the first time Ruth has been badly advised on this matter - the last time cost her a lot in legal fees and so will this action. Her solicitor in NZ only a week or so ago was informed of the process in the development. I am aware of the background to this and who you are really acting for.

We have bookings for January so will expect Ruth and her family out on the agreed date of the 3^rd Jan. The company has a lease on the property and will expect this to be done. An application for relief against forfeiture will also be forthcoming. Incidently [sic] Ruth has only half of the shares in the land.

[47] By email of 31 December 2003, Ms Harvey of Brown Gibson Harvey PC, Barristers, Solicitors and Notaries Public, advised Mr Moore:

John McElhinney has instructed us in relation to the attempted forfeiture of lease of the above land. Contrary to the notice (which has not been served on the company), all rents have been paid other than the ground rent due on 30 September 2003. The Company's accountant, Bryce Postles, wrote to Malcolm Taylor, who we understand is the landowners solicitor in New Zealand, regarding that rental on 2 December 2003 seeking instructions as to whether it was acceptable for the rent to be paid directly to the landowners, as has always been done in the past, rather than to the High Court. Mr Postles said in his letter "According to my records, land rent of $7500 was due on 30^th September last. Could you please confirm that payment direct to the indigenous owners is acceptable." No response has been received to that letter. If you were to provide us with a fax number we would be happy to forward a copy of that letter to you.

It is evident that the lessee company is able and willing to pay the rent upon receipt of instructions as to where the payment should be made. On that basis, we are confident that an Application for Relief against Forfeiture will be successful. In light of the correspondence to the landowners solicitor however, we trust that such an application will not be necessary and the notice will be immediately withdrawn. We also require the locks to be reinstated and that Ms Tupangaia will vacate the property on 3 January 2004 as originally agreed with the lessee company as guests are booked to arrive on that day.

[48] In March 2004, Mrs Tupangaia's son, Parau, visited the Cook Islands. He claimed to be an alternate director of Taakoka for his mother. On 3 March 2004, Parau Tupangaia and Mr Moore met at the restaurant of the Rarotongan Beach Resort & Spa and there purported to hold a meeting of directors of Taakoka. According to the purported directors' resolution signed by Parau Tupangaia and Mr Moore:

When it was clear there was no quorum, Director Tupangaia, in accordance with the Articles of Association, Paragraph 101, did co-opt Travis Moore, builder and land consultant, as a casual Director for the meeting as called and for any adjournments thereof.

Mr Moore accepted his appointment and Director Moore reached a consensus with Director Tupangaia that Director Tupangaia would serve as Chairman of the Board.

[49] Mr Tupangaia and Mr Moore then purported to pass six resolutions which included resolutions that Mr McElhinney be advised that any contract be had with Taakoka was suspended, that Taakoka's lawyers be instructed to cease any further action on behalf of Taakoka, and that Mr Moore write to the legal and beneficial owners of 667,000 shares of Taakoka that were unpaid, demanding payment.

[50] On 4 March 2004, Mr Moore, purporting to act as a director of Taakoka, faxed Taakoka's Auckland lawyers Hesketh Henry advising the purported resolution to call up unpaid shares and demanded payment of $670,000 in compliance with the call, to be made within 14 days to the law offices of Mr John McFadzien, Rarotonga.

[51] On 5 March 2004, Ms K J Harvey of Brown Gibson Harvey PC filed the application for relief against forfeiture as solicitor for Taakoka, together with affidavits of Mr McElhinney and Mr Postles in support.

[52] On 8 March 2004, the Development Investment Board revoked the foreign enterprise registration of Taakoka. In its letter of 19 May 2004 to Ms Harvey advising her of the revocation, the Board said:

In considering the above decision, the Board of Directors would like to advice Taakoka Island Villas Ltd that it is welcome to submit a new Foreign Enterprise Registration Application at any time.

[53] On 17 March 2004, there was a shareholders' resolution by Mr Welch as trustee of Taakoka Trust, representing 666 shares, and Trustee of Taakoka Trust and attorney for Mrs Tupangaia and Mr Te Pua, pursuant to the share sale and transfer agreement between each of them and the Taakoka Trust, representing 169 shares and 55 shares respectively, confirming the appointment of Mr Clark as a director, appointing Mr Lyon as a director, removing Mrs Tupangaia as a director, and resolving:

Parau Tupangaia, claiming and purporting to have been appointed on a date unknown as an alternate director for Ruta Tupangaia is hereby removed as a director.

Travis Moore, claiming and purporting to have been co-opted by Parau Tupangaia on 3 March 2004 as a casual director of the company under Article 101 of the company's Articles of Association is hereby removed as a director.

[54] On 29 March 2004, Mrs Tupangaia signed a document appointing Parau Tupangaia as her attorney and a document in which she purported to act as a director of Taakoka and appoint Parau Tupangaia "to act as my alternate director in my absence from Cook Islands".

[55] By deed dated 30 April 2004, Mr Welch retired as the trustee of Taakoka Trust and Mr Lyon was appointed as a new trustee in his place.

[56] On 23 December 2004, Williams J, as he then was, ordered that the substantive hearing of Taakoka's application for relief against forfeiture be heard in Auckland.

[57] By email of 30 June 2005, Mr McFadzien advised that he had ceased to act for the respondent in the relief proceeding since the venue decision of Williams J.

[58] On 14 July 2005, Mr Moore filed an application for an order striking out Taakoka's relief against forfeiture proceeding "for want of prosecution". That application was adjourned for consideration at the substantive hearing.

[59] On 19 October 2005, Mr McFadzien, acting on behalf of Taturoanui Graham Crocombe (Mr Crocombe), applied to the Leases Approval Tribunal to approve an agreement to lease the land by Mrs Tupangaia and Mr Ta Pua to Mr Crocombe for 60 years from 1 March 2006. The consideration was $375,000 or as reviewed pursuant to the agreement to lease and the annual rental was $7500 plus 1.5% of resort income and transfer consideration. The agreement to lease contains the following terms:

5. This agreement is subject to proceedings filed in the High Court by the former lessee Taakoka Island Villas Limited for relief against forfeiture being unsuccessful so that the landowners are, after such proceedings have been determined in their favour, in a position to enter into the Deed of Lease hereby contemplated.

9. The Landowners and the Lessee agree, that on the settlement date (being the date upon which the goodwill is paid) the Landowners and Tata shall on production of valid invoices have taken into account actual and reasonable legal and other expenses paid by each of them to forfeit the lease held by Taakoka Island Villas Limited and to assist in and further the defence of the application for relief filed by that company from the time notice of forfeiture was given in December 2003 until the date on which the lease contemplated by this agreement shall be confirmed by the High Court. For the purposes of taking such sums into account, the Landowners shall on settlement be entitled to add legal and other expenses paid by them to the goodwill payable hereunder and the Lessee shall then be able to deduct legal and other expenses paid by the Lessee from that total.

13. In the event that the application for relief against forfeiture herein before referred to shall be successful, or if Leases Approval Tribunal shall not approve the proposed lease or if the High Court shall on application for partition award to the Landowners an area that is in the opinion of the Lessee significantly less than that which is contemplated by this agreement (or this Agreement as modified by clause 7), then the Lessee may at the Lessee's sole option cancel this agreement ...

[60] The only rent payable by Taakoka in December 2003 was the ground rent of $7500, which became payable on 1 September 2003. Taakoka was able and willing to pay that rent and in his letter of 2 December 2003, Mr Postles for Taakoka sought directions as to the mode of payment. That base rent and base rent and revenue payments which have subsequently become due have been either paid into Court or held in a trust account available for payment, if directed by the Court.

Pertinent law

[61] Term 8 of the lease provides:

If the rental hereby reserved or any part thereof shall be in arrear and unpaid for the space of three calendar months after the same shall become due or if the Lessee for a like period fails to observe or perform any of the covenants or conditions on its part hereinafter contained or implied it shall be lawful for the Lessors thereupon or at any time thereafter to re-enter upon the said land and terminate this lease but without prejudice to the rights of the Lessors to recover any rent which may be in arrears or unpaid at the date of such termination.

[62] The New Zealand Property Law Act 1952 (the Property Law Act) applies in the Cook Islands - Section 637 Cook Islands Act 1915. Section 118 of the Property Law Act governs lease forfeiture, re-entry and relief against forfeiture. However, s 118(3) provides:

(3) Except in a case where the lessee is bankrupt this section shall not affect the law relating to re-entry or forfeiture in case of non-payment of rent.

[63] Therefore if the sole basis for the purported forfeiture and re-entry in this case was non-payment of rent then the relief against forfeiture application is to be decided in exercise of the Court's equitable jurisdiction to grant relief.

[64] The general principle upon which the discretion to grant relief is exercised was described by Jenkins LJ in Gill v Lewis [1956] EWCA Civ 2; [1956] 2 QB 1, 13:

...save in exceptional circumstances, the function of the Court in exercising this equitable jurisdiction is to grant relief when all that is due for rent and costs has been paid up, and (in general) to disregard any other causes of complaint that the landlord may have against the tenant. The question is whether, provided all is paid up, the landlord will not have been fully compensated; and the view taken by the Court is that if he gets the whole of his rent and costs, then he has got all he is entitled to so far as rent is concerned, and extraneous matters of breach of covenant, and so forth, are, generally speaking, irrelevant.

But there may be very exceptional cases in which the conduct of the tenants has been such as, in effect, to disqualify them from coming to the court and claiming any relief or assistance whatever.

[65] In Studio X Ltd v Mobil Oil New Zealand Ltd [1996] 2 NZLR 697, Hammond J comprehensively considered the English and New Zealand cases on the discretion to grant relief against forfeiture. His findings are succinctly and correctly summarised in the headnote on page 698 of the report and apply equally to the s 118 and equity discretion to grant relief.

2 ...... A number of factors had to be considered in exercising the discretion to grant relief. These included: whether the breach had been deliberate; whether the breach had been beyond the tenant's control; whether the breach had involved an immoral or illegal use and whether the tenant had made or would make good the breach of the covenant or was able and willing to fulfil his obligations in the future; the conduct of the landlord; the personal qualifications and financial position of the tenant; sometimes the position of the third parties; the gravity of the breach; whether it had occasioned lasting damage to the landlord; and the proportionality of damage suffered by the landlord compared to the advantages if no relief was granted.

Decision

[66] The evidence satisfies me that Taakoka was able to, and wished to, pay the outstanding rent of $7,500 in December 2003 and its failure to do so arose solely because it was waiting to hear from Mrs Tupangaia's solicitor about her payment preference.

[67] A history of late payments of rent was the subject of considerable evidence and submissions. In my view such late payments as did occur arose either from a common belief that it was not possible to make rental payments until the lease has been finally confirmed by the High Court or, dispute about whether the landowner shareholders were liable to contribute to Taakoka's running costs. They did not arise out of financial inability by Taakoka to make such payments. The difficulties were ultimately resolved to common satisfaction by the final confirmation of the lease, and the agreements reached involving the sale by Mrs Tupangaia and Mr Ta Pua of their shares.

[68] The financial position of the lessee is a factor that may be taken into account in deciding whether to grant relief against forfeiture. Even if the lessee is insolvent that is only one factor to be considered in all the circumstances and it does not follow that relief should be declined for that reason - McKenna v North Harbour Taverns Limited Wylie J AKHC, CP459/91, 22 July 1991.

[69] Mr David based his insolvency submission on the affidavit evidence of Grant Graham a Chartered Accountant partner in Ferrier Hodgson & Co. Mr Graham expressed his opinion based on the affidavit evidence and in particular Taakoka's financial statements for the years ended 31 December 2003 and 2004, that Taakoka was insolvent and in that its assets were insufficient to meet its undisputed liabilities, that Taakoka does not have the ability to meet its ongoing obligations to pay rent from its own resources, that it has no ability to generate business (apart from the two units) and asset values are over-stated in regard to depreciation and potentially in regard to expenses accrued as "building" assets.

[70] In response Taakoka filed an affidavit by Michael Carr an Accountant practising in Rarotonga as the residential director of the firm KPMG in Rarotonga. Mr Carr disagrees with the insolvency opinion of Mr Graham. He stated that Mr Graham appeared to apply the theoretical solvency test applied in New Zealand under the Companies Act 1993 and said that the position in the Cook Islands was different as under Cook Islands law the applicable solvency test is that set out in the Companies Act 1955. That test requires that a company be able to pay its debts as they fall due. Thus, under Cook Islands law, a company will not necessarily be insolvent because its liabilities exceed its assets.

[71] In my view the relevant financial consideration is whether in reality Taakoka will be likely to be able to continue paying base rent and revenue payments under the lease and to comply with its other obligations under the lease. In this regard it is important to bear in mind that Taakoka is a development company and that it expended considerable money before December 2003 in preparing for the development of a tourist resort on the land and implementing some of that development. Its major liabilities are the advances of shareholders made for that purpose. Also, its major asset is a lessee interest in the land, which in 1999 was valued at $895,000. Mr Lyon has made substantial financial contribution to Taakoka and I am satisfied that if relief against forfeiture is granted Mr Lyon will continue financial support by making further advances. I consider that it is highly likely that if relief against forfeiture is granted Taakoka will continue to receive financial support which will enable it to meet its ongoing rent, revenue and other obligations under the lease.

[72] I am satisfied that Taakoka had adequate funding in place to carry out the second stage of the development and indeed had taken appropriate steps to do so when Mrs Tupangaia and Mr Moore intervened in December 2003 with the purported forfeiture, re-entry and taking of possession. Had this not happened it was very likely that the second stage of the development would have continued and have been completed before now. I am further satisfied that with Mr Lyon's continued financial support it is highly likely that if relief against forfeiture is granted, Taakoka will continue with the development of a tourist resort on the land.

[73] Mr David submitted that failure to build the promised resort is a breach of an implied term in the lease and that such a breach can be considered under either the Property Law Act or under the Court's equitable jurisdiction. He submitted that a term should be implied in the lease that the resort should be build within a reasonable time and that the implied period should be five years from the date of entry into the lease.

[74] In support of his submission Mr David referred to the judgment of Quilliam CJ in Pa Ariki, High Court of the Cook Islands A.O. No. 4/97, 10 November 1997. In that judgment Quilliam CJ made declarations that the lessee was in breach of its lease obligation to complete construction of a four-star resort and golf course (the Sheraton project) within three years from the commencement of the lease. However, Quilliam CJ reached that decision by construction of the terms of the lease, which made specific provision for the completion of the hotel, and the fact that construction had started shortly after the lease was signed but had stopped after the hotel was about 80% completed due to the insolvency of the first contractor and then the inability of the lessee to meet payments due under the second construction contract. The provisions of the Sheraton lease and the factual matrix of that case are so different from those in the present case as to make the judgment not relevant in deciding it.

[75] It is plain that when the lease was made all parties intended that Taakoka would use the land as the site for building and operating a tourist resort. However, there was no term or covenant in the lease which required that Taakoka do that and particularly what that resort was to be and when it was to be completed. Furthermore, the circumstances were such that in my view the conditions necessary to imply a contractual term that Taakoka would erect a tourist resort as designed by Mr de Roles, and do so within five years, are not satisfied - BP Refinery (Western Port) Pty. Limited v Shire of Hastings [1910] ArgusLawRp 71; (1997) 16 ALR 363(PC); Devonport Borough Council v Robbins [1979] NZLR 1 (CA).

[76] Even if there were a contractual obligation on Taakoka to construct a tourist resort on the land within a reasonable time I do not consider that there was a breach of such an obligation by Taakoka given the decision made by the directors who included, at the time, Mrs Tupangaia and her lawyer Mr Taylor, not to proceed with the de Roles development plan but obtain another development plan from Mr Cook, the delays and expenses caused by Mrs Tupangaia's efforts to forfeit the lease in 1995 and 1999 and the difficulties in obtaining the necessary development and building consents.

[77] Mr David submitted that the revocation of Taakoka's foreign enterprise registration by the Development Board on 8 March 2004 means that Taakoka cannot carry on business in the Cook Islands and this disabling factor is a compelling objective fact.

[78] However, it must be borne in mind that when the revocation decision was made Taakoka's interest in the land seemed to have been forfeited and it appeared to be no longer in possession of the land and able to continue with development on the land.

[79] In responding to Mr David's submissions about deregistration Mr Morley appropriately referred to the concluding statement in the Development Investment Board's letter of 12 May 2004 advising revocation that:

In considering the above decision, the Board of Directors would like to advise Taakoka Island Villas Limited that it is welcome to submit a new foreign enterprise registration application at any time.

[80] Mr Morley also referred to the affidavit evidence of Bret Gibson, a Solicitor Principal in Brown Gibson Harvey PC, that if Taakoka is successful in obtaining relief then he would expect that a new application for foreign enterprise registration would be immediately filed and then considered in accordance with the investment code. Mr Gibson understood that the proposed development would not be inconsistent with the investment code as it currently stood. He said that even if the Board was not prepared to grant foreign enterprise registration for the purposes of completing the development that would not prevent Taakoka owning the land and that he would expect, as has been done in the past, that the Board would issue a limited foreign enterprise registration for the purposes of enabling Taakoka to sell its interest in the land.

[81] I consider that the fact of deregistration is not a sufficiently significant factor to warrant refusal to grant relief against forfeiture, as such deregistration was consequent on Mrs Tupangaia's and Mr Moore's action in purporting to forfeit the lease and Mr Moore then engineering a successful application for deregistration. The Board has clearly left the door open for a fresh application for registration and should relief against forfeiture be granted then it is likely that in that situation fresh registration will be granted, although that of course is a matter for determination by the Board and not by this Court.

[82] Mr David said that his submission that the Board of Directors of Taakoka as properly identified, had not authorised the application for relief against forfeiture, arose from the invalid nature of the sale of shares by Mrs Tupangaia and Mr Te Pua upon which the appointment of Mr Clark and Mr Lyon as directors, was based. He submitted that Taakoka was dysfunctional.

[83] Mr Morley's detailed submissions in response directly and effectively countered these submissions. I find that decisive factors on this aspect are:

(i) As agreed by Mr Taylor in cross-examination, the resignations of Mr Taylor and Mrs Tupangaia as directors of Taakoka became effective on the signing of the agreement for the sale and purchase of Mrs Tupangaia's shares on 27 November 2002.

(ii) That the acts of Mr Paru Tupangaia on 3 March 2004 as a purported director of Taakoka were invalid as Mrs Tupangaia did not purport to appoint him as her alternative director until 29 March 2004 and consequently Mr Paru Tupangaia's purported appointment of Mr Moore as a casual director on 3 March 2004, was also invalid.

(iii) The appointment of a casual director could be made only by the directors, not by a director.

(iv) That even if Mr Paru Tupangaia and Mr Moore were directors of Taakoka on 3 March 2004 they, and particularly Mr Moore who was acting as agent for Mrs Tupangaia as a lessor, were obviously in a conflict of interest situation and the resolutions which they purported to pass were patently against the interests of Taakoka and in favour of Mrs Tupangaia and were made in breach of a director's fiduciary duty.

(v) There was a valid shareholders resolution on 17 March 2004 confirming the appointment of Mr Clark as a director, appointing Mr Lyon as a director and extinguishing any position which Mrs Tupangaia, Mr Paru Tupangaia and Mr Moore then held as directors of Taakoka.

[84] Such dysfunctionality as existed within Taakoka initially arose from the actions of Mrs Tupangaia in seeking to forfeit the lease in 1995 and 1999 and this was resolved by the purchase of her shares and those of Mr Te Pua in 2002. Such further alleged dysfunctionality was created by Mr Moore in March 2004.

[85] I find that the relief proceeding was validly commenced and has been validly pursued by the appropriate directors of Taakoka with the authority and support of the majority, at least, of the Taakoka shareholders. Such dysfunctionality as existed or appeared to exist within Taakoka has been as the result of the actions of Mrs Tupangaia and Mr Moore and has been effectively countered by those who have real, legal and genuine concern for the welfare of Taakoka, being primarily Mr Lyon and Mr Clark.

[86] I move on to consider the factors of whether the breach was inadvertent or deliberate, the conduct of the lessors, the gravity of the breach, damage to the lessors and proportionality. The only breach, and that on which the forfeiture was based, was failure to pay base rent of $7,500 on 1 September 2003. Taakoka was willing and able to make that payment and on the date of purported forfeiture was waiting to hear from Mrs Tupangaia about her preferred mode of payment. The breach was not deliberate.

[87] The breach was not of significant gravity and had Mrs Tupangaia considered it to be so, she could have obtained payment within a matter of a day or so by simply answering the query about how the payment was to be made. It became clear in her cross-examination that Mrs Tupangaia was not concerned about the arrears of rent when she signed the notice of forfeiture and indeed before she signed it she did not ring Mr Taylor to see what the rental position was. There is strong evidential foundation for Mr Morley's submission that the conduct of Mrs Tupangaia and her agents left much to be desired, involving duplicity and manipulation to terminate Taakoka's lease for an ulterior purpose namely the benefits to be obtained from leasing the land again. The evidence establishes that Mr Moore played an active role in arranging and implementing the purported forfeiture, obtaining deregistration of Taakoka and attempting to disable Taakoka from obtaining relief against forfeiture. There are considerable question marks about Mr Moore's motives and financial interests in doing this. In cross-examination Mrs Tupangaia said that she believed that Mr Moore worked for Mr Crocombe but she was not aware of that at the time. However, it is unnecessary and inappropriate for me to make findings about Mr Moore's motives and financial interests in this matter and I therefore do not do so.

[88] So far as the conduct of the lessors is concerned, I go no further than accepting the submission of Mr Morley and find that the evidence establishes that the conduct of Mrs Tupangaia and her agents in this case left much to be desired. There will be no legitimate damage to the landowners if relief against forfeiture is granted as I accept that Taakoka fully intends to pursue development of the land as soon as reasonably possible if relief is granted. The landowners did not obtain a significant difference in the terms of a replacement lease with Mr Crocombe. Their only significant loss will be failure to obtain a doubling up of consideration. The proportionality of loss suffered by Taakoka if relief is not granted, namely inability to use the land, far outweighs any legitimate loss which would be suffered by the landowners.

[89] Mr Morley made submissions about the legality of the purported forfeiture of the lease by Mrs Tupangaia. Mr David argued that Taakoka's application for relief involved it accepting the forfeiture and re-entry as being valid. In support of that proposition Mr David referred to the decision of the NZ Court of Appeal in Amity Inns Limited v RH & PL Papps Limited (1992) 2 NZ ConvC 191, 371. However in the Amity case the Court of Appeal stated that the steps taken by the lessee may have been aimed at achieving the earliest reinstatement of possession, not as a communication of abandonment of claims for damages for wrongful re-entry. Therefore the lessee could not be regarded as having abandoned the right to challenge the validity of the re-entry simply by filing and serving the application for relief against forfeiture. Whether Taakoka is to be regarded as having abandoned the right to challenge the validity of the re-entry simply by filing and pursuing the application for relief against forfeiture, is an issue which need not be decided unless and until it is raised in a separate proceeding. The issue of whether the purported forfeiture and re-entry was valid has not been considered and decided in determining the application for relief. The application has been considered and decided on the hypothesis that the purported forfeiture and re-entry was valid. That hypothesis may or may not be correct.

[90] Having regard to the proceedings and the conduct of the parties and all the circumstances of the case, I find that it is appropriate to grant the application for relief against forfeiture, and I do so. The basic factors are that Taakoka was, and is, willing and able to pay all outstanding base rent and revenue payments and that none of the grounds put forward by Mrs Tupangaia either singly or in combination, make this an exceptional case in which the conduct of Taakoka has been such as to in effect disqualify it from obtaining relief against forfeiture. Taakoka is entitled to forthwith re-enter the land and resume exercise of all of its rights as lessee.

[91] The application to strike out was not pursued. It is dismissed.

[92] Mr Morley is to provide Mr David with a schedule of alleged outstanding base rent and revenue payments within 28 days of receiving this judgment. If Mrs Tupangaia does not agree with all or any of the amounts stated in the schedule Mr David is to advise Mr Morley within 28 days of receiving the schedule. If counsel cannot then agree on the outstanding base rent and revenue payments leave is given for memoranda to be filed for determination of outstanding base rent and revenue payments by me by consideration of the memoranda filed. If Mr David does not challenge the figures given by Mr Morley within the stated time then all outstanding base rental and revenue payments not already paid into the High Court as advised by Mr Morley are to be paid into the High Court within 28 days of the expiry of the time for Mr David to advise disagreement.

Costs

[93] As Taakoka has succeeded in its application for relief against forfeiture and having regard to the conduct of the parties I consider that Mrs Tupangaia should pay costs to Taakoka and I so order.

[94] If Taakoka pursues such costs then it is to file and serve a costs memorandum within 28 days of receiving this judgment. Mrs Tupangaia may then file and serve a costs memorandum in response within 28 days of receiving Taakoka's costs memorandum. Taakoka can file a costs memorandum in reply within 28 days of receiving that memorandum. I will then decide costs in accordance with this judgment and by consideration of the costs memoranda filed.

C M Nicholson J