Prasad v Leonard [2015] TOCA 17; AC7 of 2015 (16 September 2015)

IN THE COURT OF APPEAL OF TONGA

CIVIL JURISDICTION AC 7 of 2015

NUKU'ALOFA REGISTRY [CV75 of 2012]

BETWEEN:

1. RUDRA PRASAD
2. MOAPA ENTERPRISES LTD
Appellant

AND:

1. DEREK LEONARD
2. PACIFIC FORUM LINE LTD
3. ECKINGTON LTD
Respondents

Coram: Moore J
Blanchard J
Hansen J

Counsel: Mr. B. Goldsmith & Mrs. P. Tupou for the Appellants
Mr. R. Rzepecky & Mr. R. Stephenson for the
Respondents

Date of Hearing: 9September 2015
Date of Judgment: 16 September 2015

JUDGMENT OF THE COURT

Introduction

[1] The first appellant (Mr. Prasad) is the managing director of the second appellant (Moapa). They allege the first respondent (Mr. Leonard) made false and defamatory statements about them in a series of published emails. They sue him and his employers, the second and third respondents (respectively PFL and Eckington) for defamation, injurious falsehood and making misleading and deceptive statements.

[2] Scott J. struck out the claim by Moapa. He accepted the respondents' submission that Moapa had been illegally trading in Tonga and, as a result, could not recover damages. He held its claim could not succeed and was an abuse of process. Moapa appeals against the decision.

[3] Moapa made a late application for leave to file an amended notice of appeal. The application is not opposed and leave is granted accordingly.

Background

[4] Moapa was controlled by Mr. Prasad and his wife. It traded in Tonga as a grocery wholesaler and retailer. A significant part of Moapa's business involved the importation and distribution of frozen chicken from the USA. The chicken was shipped in refrigerated containers which were trucked to Moapa's store and used to store the chicken. If the containers were held beyond a fixed period, Moapa was required to pay the shipping company a penalty (demurrage).

[5] PFL was one of the shipping companies which provided the service to Moapa. It also acted as agent for other shipping companies. Mr Leonard was the general manager of PFL's business in Tonga and also of Eckington, another shipping company.

[6] In 2012 a dispute arose over demurrage payable by Moapa. Mr. Leonard wrote a series of emails regarding sums allegedly owing by Moapa and recovery action contemplated or taken. It is the contents of these emails that are alleged to be defamatory of Mr. Prasad and Moapa.

Strike out application

[7] The strike out application was founded on an allegation that under the Foreign Investment Act 2002 (the Act) Moapa is a "foreign investor". Under the Act and regulations made under the Act a "foreign investor" is not permitted to engage in certain business activities including the retailing and wholesaling of groceries. Moapa engaged in those activities under business licenses that were procured by failing to disclose that it was a foreign investor. In the circumstances the respondents submitted that Moapa could not recover damages based on loss of profits derived from illegal trading.

[8] The Judge agreed that Moapa had been trading illegally. He rejected a submission that it was a Tongan investor, as defined in the Act, which would have enabled it to lawfully trade as a wholesaler and retailer of groceries. Relying on Mackintosh v Truth [1962] NZLR 137 (CA) he found that Moapa could not recover for damage caused to its business.

[9] The Judge rejected a submission that business licenses had been issued to Moapa when it should have been apparent to the issuing authority that it was controlled by persons who were not Tongan subjects. He found on "the uncontradicted evidence" before him that Moapa had concealed information that would have revealed it was a foreign investor.

[10] The Judge concluded that Moapa could not succeed in its claim and struck it out as an abuse of process under Order 8 Rule 8 of the Supreme Court Rules 2007 (the Rules).

Grounds of appeal
[11] In its amended notice of appeal Moapa identified fourteen grounds of appeal. They can conveniently be considered under the following headings:

a. The judge's power to make strike out orders.

b. The finding that Moapa was trading illegally.

b. Whether the illegality operated to bar the claim.

The Court exceeded its powers
[12] The precise terms of the order made in the court below was: "The claim of the second plaintiff will be struck out". Mr. Goldsmith argued that this is equivalent to an order that the causes of action brought by Moapa should be struck out. He says this is beyond the power of the court as the only power conferred on the court by Order 8 Rule 8 is to strike out a pleading.

[13] Order 8 Rule 8 reads as follows:

"The Court may at any time order that any pleading or part thereof be struck out if:

a) It discloses no reasonable cause of action or defence, as the case may be: or

b) It is scandalous, frivolous or vexatious; or

c) It is unclear or may otherwise prejudice or delay the fair trial of the action; or

d) Is otherwise an abuse of the process of the Court.

And may order the action to be stayed or dismissed, or judgment to be entered accordingly."

[14] In our view there is neither substance nor merit in the submission. "Pleading" includes a statement of claim. The rule empowers the court to strike out any part of it. The judge struck out that part of the pleading which comprised the claim by Moapa. The rule clearly empowered him to do that.

The finding of illegality
[15] It is not in dispute that from 2007 when the Act came into force until at least 2010 more than 25% of the shares in Moapa (in fact 76%) were controlled by Mr and Mrs Prasad who were not Tongan subjects. Moapa clearly came within the definition of "foreign investor". However, it was submitted that, as it was a body corporate incorporated in Tonga, Moapa was also a Tongan investor for the purpose of the Act.

[16] The question of whether Moapa is a foreign investor and not a Tongan investor is critical to the issue of illegality. By s.3 of the Act foreign investors are not entitled to carry on any business which is a reserved or prohibited activity. The reserved activities established under regulations made under the Act include the activities in which Moapa was engaged, wholesaling and retailing which consists of the distribution of grocery product for final consumption.

[17] A foreign investor carrying on business is required to hold a valid foreign investment registration certificate – s5 of the Act. Unless a foreign investor holds such a certificate it cannot obtain a business license under the Business Licenses Act 2002 – ss 5 and 7 of that Act. It is an offence to carry on business without a valid business licence. It is also an offence to contravene any provisions of the Act. By s15 any person who commits an offence is liable to a fine up to $10,000, in default 18 months imprisonment.

[18] The terms 'foreign investor' and 'Tongan investor' are defined as follows in the Act:

• "foreign investor" means –

(a) ...

(b) ...

(c) In the case of a company-

(i) A company incorporated outside Tonga; or

(ii) A company incorporated in Tonga where a person who is not a Tongan subject controls more than 25% of the company's voting shares

• "Tongan investor" means a Tongan subject or body corporate incorporated in Tonga.

[19] In rejecting the submission that Moapa was a Tongan investor, Scott J said (at [13]) that in his view the clear intention of the Act is to differentiate between a Tongan and non-Tongan investor. "I do not accept it is possible to be both at the same time."

[20] Mr Goldsmith submitted that the interpretation of the Act was 'at the very least' an arguable issue and should not have been determined at the strike out stage. He argued that the Judge was not entitled to 'resort to the apparent intention of the Act'. That, he said, demonstrated the ambiguity and uncertainty of the Act.

[21] We do not agree. The construction of the Act is a pure question of law which the judge was fully entitled to decide. Like the judge, we detect no such uncertainty or ambiguity in the Act. Its scheme and purpose is plainly to reserve certain business activities exclusively for Tongan investors. It would run completely counter to this intention if any company incorporated in Tonga could qualify as a Tongan investor. The distinction between the two categories of investors is critical to the operation of the Act. The broad terminology used in the definition of Tongan investor must be qualified by the words of limitation in the definition of "foreign investor" to exclude a body corporate controlled by non-Tongan subjects.

Whether the illegality barred the claim
[22] Scott J rejected the submission that Moapa did not found its claim on the (alleged) illegal activities or that it did not seek to benefit from its wrongful conduct. For Moapa it was submitted that in reaching this conclusion the judge erred in the legal principles he applied and in his factual findings.

[23] What is often referred to as the ex turpi causa defence is based on public policy and was stated as follows in the oft-quoted dictum of Lord Mansfield CJ in Holman v Johnson [1775] EngR 58; (1775) 1 Cowp 341 at p 343:

"No Court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted. It is upon this ground the Court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff."

[24] The way in which the defence is to be applied has been widely debated and the question of what acts constitute turpitude for the purpose of the defence and the relationship the turpitude must have to a claim has been the subject of conflicting lines of authority. For the purposes of Tongan law the inconsistencies have been authoritatively resolved by the recent decision of the Supreme Court of the United Kingdom in Les Laboratoires Servier v Apotex Inc [2014] UKSC 55; [2015] AC 430.

[25] Lord Sumption's judgment provides clear direction on two pivotal issues in this case. The first concerns the acts that constitute the illegality. The paradigm case, as Lord Sumption said (at 446), is a criminal act. But there is, in addition, a limited category of acts which he described as "quasi–criminal", one of which is the infringement of statutory rules enacted for the protection of the public interest and attracting civil sanctions of a penal character. The rules enacted by the Act are precisely of that category, and if, as we have decided, Moapa is a foreign investor but not a Tongan investor, it has been in persistent breach of the rules in two respects. It engaged in a reserved activity contrary to s.3 of the Act and it failed to obtain a foreign investment registration certificate in breach of s.5.

[26] The second issue concerns the relationship of the illegality to the claim. In Laboratoires the Supreme Court confirmed the earlier decision of the House of Lords in Tinsley v Milligan [1993] UKHL 3; [1994] 1 AC 340 which rejected a test that would require the court to decide whether it would be "an affront to the public conscience" to grant the plaintiff relief. The value judgment required by such a test was recognized as likely to give rise to uncertainty and, potentially, to injustice.

[27] While unanimous in dismissing the public conscience test, the House in Tinsley v Milligan had been divided on what should take its place. The majority preferred the "reliance test" whereby the claim would be barred only if the claimant needed to rely on (i.e. to assert, whether by way of pleading or evidence) facts which disclosed the illegality. The minority preferred a test that would bar any claim tainted by a sufficiently close factual connection with the illegal purpose. For present purposes it does not matter which test is adopted. As Lord Sumption commented in Laboratoires at 442

"Both are intended to exclude those consequences of an illegal act which are merely collateral to the claim. Neither makes the application of the illegality defence dependent on a value judgment about the significance of the illegality or the consequences for the parties of barring the claim. For present purposes, it is enough to point out that neither test is discretionary in nature. Neither of them is based on achieving proportionality between the claimant's misconduct and his loss, a concept derived from public law which is not easily transposed into the law of obligations."

[28] At the forefront of Mr. Goldsmith's arguments was a submission that a final decision on whether a claim should be barred for illegality should not be made until trial. He contended that facts could emerge at trial that could materially affect the question of illegality and its relationship to the claim. He said that his researches had not uncovered any case where the defence of ex turpi causa had been determined in advance of trial. There may be other explanations for that including a preference in earlier times for a test that involved a significant subjective component. But there is no reason why, in a proper case, the issue cannot be determined in advance of trial as long as any necessary factual findings can be made on the basis of uncontested or incontrovertible evidence. Stone and Rolls Limited(in liquidation) v Moore Stephens (a firm) [2008] EWCA Civ 644; [2009] 1 AC 1391 (HL) to which we refer later (at [33]) is such a case.

[29] Moapa accepts that it was controlled by Mr and Mrs Prasad and that they were not Tongan subjects. It accepts that it carried on a business that was not on the reserved list and that it did not obtain a foreign investment registration certificate. Mr. Goldsmith sought to persuade us (as he had Scott J) that Moapa's claim was nonetheless not founded on an illegality because it had obtained the requisite licences under the Business Licenses Act 2002. But those licences were themselves obtained illegally. As a foreign investor Moapa was not entitled to obtain a licence unless it held a valid foreign investment registration certificate which, by s.8(2) of the Act, would not in any event have been issued in respect of a reserved activity. From 2 April 2007 when the Act came into force, Moapa was able to operate its business only by ignoring or circumventing legislation directed to regulating the involvement of non-Tongans in Tongan commerce.

[30] Mr. Goldsmith further contended that it was relevant to consider whether the unlawful actions of Moapa were deliberate or innocent. The motives of Mr. Prasad, who admits to being the "guiding mind" of Moapa, cannot affect the illegality of its actions. Regardless, there was ample evidence to support the judge's finding that Moapa "concealed" that it was a foreign investor and "evaded" the reserved activity regulations.

[31] Mr. Prasad swore an affidavit for the purpose of an application for security for costs in which he deposed that on 20 May 2012 he and his wife transferred 76% of the shares in Moapa to two Tongan subjects pursuant to a memorandum of understanding and management agreement. That was the last date by which Tongan companies could apply to re-register under the Companies Act (Amendment Act) 2009. The memorandum has all the hallmarks of a sham, its essential character confirmed by Mr. Prasad's admission that he retained control of the company and the production of accounts which showed Mrs. Prasad held shares with 100% of the voting rights. The evidence, which included an affidavit from the Registrar of Companies and Business Licensing for the Ministry of Commerce Business and Labour (the Registrar), who was cross-examined, was consistent with the respondents' hypothesis that the share transfer took place in order to conceal from the Registrar (who was also responsible for issuing business licenses) that Moapa was a foreign investor.

[32] It is unnecessary for us to reach any concluded view on these aspects of the appeal. It is sufficient to say that we find the judge's findings to be fully supported by evidence which Mr. Prasad chose not to answer. The uncontested facts are sufficient to found the finding of illegality.

[33] The final argument advanced by Mr. Goldsmith on the imputation of illegality to Moapa was that it should not be fixed with the (allegedly) fraudulent acts of Mr. Prasad. While the general rule is that it would be unjust to fix a company with the fraudulent intention of its directors, that does not apply when the director is the beneficial owner and directing mind and will of the company – Stone and Rolls Limited (in liquidation) v Moore Stephens (afirm) (above at [28]).

[34] It remains to consider whether, as required by the tests in Tinsley v Milligan, there was the requisite reliance on the illegality or a sufficiently close connection between the claim and the illegal activity.

[35] The legal basis for the connection is not in issue. A company can sue for defamation in respect of statements which affect its business or trading reputation. Statements which suggest wrongdoing, dishonesty or insolvency are actionable. However, companies can only be injured in their pocket and can recover damage only in respect of actual or probable financial loss arising from loss of income or damage to goodwill.

[36] Moapa submits that the issue of whether there is a sufficient relationship between the illegality and the claim is also a matter for trial. We disagree. In our view the judge was able to determine this issue, and with it the strike out application, on the uncontested evidence available to him.

[37] Moapa's wrongdoing went to the root of its business. Indeed, it would not have had the business if it had not, since 2007, persistently disregarded (to use a neutral term) the law governing the business activities of foreign investors. It would have made no profits. It would have had no business reputation to injure. Its ability to bring the claim is founded entirely on its illegal activities. It falls squarely into that category of cases – of which Mackintosh v Truth is an example - where any recoverable losses are totally dependent on the illegal activity. That is as much the case with a loss of goodwill as it is with a loss of income where any goodwill has been built up, as here, solely by the illegal trading activities.

Result
[38] For these reasons the appeal is dismissed. The respondents are entitled to costs to be taxed if necessary by the Registrar.

Moore J

Blanchard J

Hansen J