IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(CIVIL DIVISION)
MISC. NO. 7/91

IN THE MATTER
of the Companies Act 1970

AND

IN THE MATTER
of an application by a Receiver JOHN DENIS TIERNEY
of AUTOMARINE LIMITED
pursuant to Section 345 of the Companies Act 1970
Applicant

AND

RAYMOND STANLEY PRESTON, Mechanic and
RONGOMATE PRESTON, Married woman,
both of Rarotonga
Respondents

Counsel: J.J. Moore and T. Nicholas for Applicant
V.A.K.T. Ingram for Respondents

Hearing: 20 and 22 August 1991
Judgment: 22 November 1991

JUDGMENT OF ROPER, CJ

These proceedings were commenced by way of an application by Mr Tierney ostensibly acting as a duly appointed receiver pursuant to a deed of debenture dated the 25th February 1987 held by one Bert E. Anderson, a Canadian.

According to Mr Tierney’s affidavit filed in support of the application formal demand was made of Automarine Limited on the 5th April 1991 for the sum of $82,829.42 then owing under the debenture and being in respect of loans said to have been made by Mr Anderson. The demand was not met and on the 26th June Mr Tierney attempted to take possession of Automarine’s premises. He was refused entry and the present application is for an order that the Respondents, as the directors of Automarine, deliver up the premises and the company’s assets.

As the result of a telephone conference on the 19th July I directed that the application was to be heard on the 20th August in Rarotonga. I understand that Mr Ingram, the Respondents’ solicitor, was not in Rarotonga on the 19th July but the Respondent, Mr Preston, was a party to the telephone conference and gave an undertaking that his company would not charge or dissipate its assets pending the hearing.

No step was taken in the proceedings by the Respondents although in a letter of 17th April 1991, shortly after demand for payment had been made, Mr Ingram had written to Mr Tierney as follows:

"Automarine Limited has provided me with a copy of your letter of 12 April, 1991, together with certain other documents all purporting to establish a Receivership with yourself as Receiver.

Having reviewed this matter with my client, I have advised it that I do not consider the appointment of a Receiver as valid and that the entire transaction in any event contravenes the provisions of the Development Investment Act, 1987, and is accordingly invalid.

In the circumstances, therefore, any attempt to control my clients affairs by any person purporting to act as or through a Receiver will be resisted."

It was not until the commencement of the hearing on the 20th August that it became apparent that, quite apart from any statutory defences to enforcement of the debenture, there were other substantial issues to be resolved. For example, were the sums of money advanced to Automarine loans or payments made on some other footing? Was Mr Anderson entitled to the security of a debenture in respect of all or any of the payments? Had circumstances arisen giving him the right to appoint a receiver?

It was apparent that the proceedings as filed were inappropriate to inquire into such matters but as all the witnesses were available I ordered, pursuant to s.69(2) of the Code of Civil Procedure of the High Court, that the matter be heard as though commenced by action. In the result I heard evidence from Mr Anderson, Mr Tierney, Mr Tylor (a member of the firm of solicitors who had acted for Mr Anderson and Mr Preston in their dealings) and Mr Preston.

THE FACTS

It appears that Mr Anderson, who is a frequent visitor to Rarotonga, had known Mr Preston for some years although they had no business dealings until 1986. At that time, Mr Preston’s company was engaged in the importation of cars, motor-cycles and outboard motors from Suzuki in Japan and was experiencing cash-flow problems. To overcome this problem Mr Preston either sought financial help from Mr Anderson, or Mr Anderson volunteered it, it doesn’t matter which, and so on or about the 17th January 1986 $20,000 was paid by Mr Anderson into Mr Preston’s bank account in New Zealand. The transaction was evidenced by this document:

(See Exhibit 2 attached)

And on the 21st January 1986 the following agreement was executed.

(See Exhibit B attached)

The evidence established beyond any doubt that at no stage did Short & Tylor advance any money to Automarine or the Prestons and, indeed, Mr Preston agreed in cross-examination that he always knew that the finance was coming from Mr Anderson.

Mr Anderson established two letters of credit with the Nova Scotia Bank in Vancouver to a total value of $NZ127,526; and on the 30th June 1986 a further $35,000 was paid into the Prestons’ bank account in New Zealand. It was accepted by Mr Preston that the total sum advanced was $NZ182,526 and that at the date of hearing Automarine had repaid to Mr Anderson $152,476 by way of principal and interest. In a letter of the 17th August 1990 Automarine’s Accountants advised Mr Tierney that the amount outstanding to Mr Anderson at the 31st July 1990 was $82,849. It was that sum which was referred to in the letter of demand although it appears that Mr Tierney had calculated a somewhat larger sum.

The debenture was executed on the 25th February 1987 although it appears from the typed year in the date that it was prepared in 1986. Short & Tylor is again referred to as the lender and debenture holder. The debenture is in standard form and Clause 2 provides:

"(2) THAT the Company HEREBY COVENANTS AND AGREES with the Debenture Holders that the Company will duly and punctually pay to the Debenture Holders in the manner and at the times agreed upon between the Company and the Debenture Holders and failing agreement upon demand interest on all moneys from time to time payable by the Company to the Debenture Holders or either of them and secured by this Debenture such interest to be calculated on daily basis at the rate of fifteen per centum (15%) per annum from the later of the date of this Debenture and the date or dates upon which such moneys are advanced or made available to or paid on behalf of the Company until the date of payment thereof to the Debenture Holders."

On the basis of the agreement of the 17th January 1986 relating to the $20,000 and the "agreement for loan" of the 21st January 1986 the $20,000 was repayable on the 21st January 1988 and the balance of the $182,526 "upon demand".

On the 5th April 1991 the debenture was assigned by Short &Tylor to Mr Anderson.

THE DEFENCES

(1) Preliminary Points

At the conclusion of the applicant’s case Mr Ingram submitted that the proceedings should be dismissed at that point and advanced three grounds, the first being that there was no proof of Automarine’s incorporation. A perusal of the Company Office file for Automarine, which happened to be available in Court, put paid to that submission. Mr Ingram’s next submission was that the debenture had not been executed by Short & Tylor, which was true enough. A debenture is simply an instrument acknowledging a debt and charging the property of a company. Execution by Short & Tylor was not required. The matter is covered by s.4 of the Property Law Act 1952 (NZ) which is in force in the Cook Islands pursuant to s.637 of the Cook Islands Act 1915. Section 4, so far as is relevant, reads:

"4. Formalities of deed - (1) Every deed, whether or not affecting property, shall be signed by the party to be bound thereby, and shall also be attested by at least one witness, and, if the deed is executed in New Zealand, the witness shall add to his signature his place of abode and calling or description, but no particular form of words shall be requisite for the attestation.

(2) Except where the party to be bound by a deed is a corporation, sealing is not necessary."

Mr Ingram’s third ground was that the right to demand had not arisen because there was no evidence that Short & Tylor had made any loans to Automarine. The Short & Tylor nominee company was simply named in the deed as Mr Anderson’s nominee, a circumstance known to Mr Preston, who acknowledged in evidence that he knew the loans were being made by Mr Anderson. I see no merit in Mr Ingram’s third point. The true nature of the transaction was known to all.

(2) The Document of the 28th January 1986

It was submitted by Mr Ingram that if the debenture was valid and enforceable it applied only to the original advance of $20,000 (which has long since been repaid) and that the later payment of $35,000 and those by way of letter of credit were governed by this document which was produced by Mr Preston.

(See Exhibit "D" attached.)

Mr Preston said that he had discovered the document in his word processor while preparing for trial. He claimed that the original of the document had been signed and that Mr Anderson had taken the original away after signing. Mr Preston said he and his wife had searched diligently for his signed copy without success. If there was such an agreement then the $36,000 payment and those pursuant to letters of credit were in the nature of injections of capital into Automarine, in return for which Mr Anderson was to receive a fixed percentage of profits, in perpetuity, if the document is to be taken at face value.

Mr Anderson was examined by Mr Ingram on this document at length as follows:

"Q. On the 28th of January 1986 did you and Mr Preston have a further meeting and draw up a further document?
A. We drew up several documents, Mr Preston and I.
Q. Yes, yes, well, I’m referring to a particular one. Did you, on the 28th of January 1986, have a further meeting with Mr Preston, draw up a further document and both sign it?
A. If I look at that - let me look at the document?
Q. Do you recognize that document I am showing to you now?
Exhibit "D" is 28 January 1986.
COURT: Well, what’s the question?
INGRAM: I’m asking if he recognizes the document.
COURT: Do you recognize that document?
ANDERSON: No, I don’t recognize the document.
COURT: You don’t recognize it?
INGRAM: If Mr Preston was to give evidence that the document that you are looking at now was a document that you and he drew up on the day that appears at the top left hand corner of the document, and that you and he both signed it along with Mrs Preston? And that you subsequently took the original away with you? What would you say?
A. Can I read that document here?
Q. Please. Please read it.
COURT: Has that no signatures on it?
INGRAM: It has not.
COURT: You don’t recall that?
ANDERSON: I cannot recall that document.
INGRAM: All right. Is it your evidence that you cannot recall this document dated the 28th of February 1986?
A. No. I cannot see the document.
Q. Do you recall?
A. No.
Q. Having signed it?
A. No.
Q. Do you recall having seen Mr Preston and Mrs Preston sign it?
A. No.
Q. If Mr Preston was to give evidence, and indeed Mrs Preston was to give evidence, that this document dated the 28th of January 1986, a copy of that document that I am showing you, if their evidence was that you had signed a copy of that document what would your answer be to that evidence?
COURT: Do you understand the question?
A. Yes, I understand. In that case I would have seen the document if I signed it.
COURT: Did he say he hasn’t seen it?
INGRAM: He said I would have seen the document if I had signed.
COURT: And he said he hasn’t seen it, that document?
INGRAM: No, no. No, Sir, his first piece of evidence…………
COURT: He doesn’t recall that document?
INGRAM: That’s it. He doesn’t recall it and that he would’ve."

(The measure of confusion apparent at times in the record is accounted for by the fact that Mr Anderson is almost stone deaf.)

It is for Mr Anderson to establish that the four payments were "loans" which were secured by the debenture, and if the only evidence available concerning the document of the 28th January 1986 was Mr Preston’s assertion that it was signed and Mr Anderson’s comments that he could not recall it, then Mr Anderson would not have met the onus upon him. However, there are other circumstances which satisfy me that the document was not signed. Although it does not take the matter very far it is certainly curious that, having had their solicitor prepare the "agreement for loan", which was executed on the 21st January 1986, and which dealt with the original payment of $20,000 and "further advances … whether by cash or by the establishment of letters of credit", they should enter into an entirely different and vague arrangement, in what is obviously a "home-made" document, seven days later.

Of more importance is the fact that despite Mr Preston’s evidence that he discussed frequently with Mr Anderson the latter’s practice of withdrawing money contrary to the terms of the documents of the 28th January 1986, there is not a mention of that in the correspondence which passed between them, and indeed the correspondence is quite contrary to such an arrangement.

For example, on the 24th January 1989 Mr Preston wrote to Mr Anderson as follows:

"Enclosed you will find a schedule of loans, repayments and interest calculations, prepared by Peat, Marwick, Mitchell & Co., chartered accountants, on our behalf. We advise that a further payment will be forthcoming, when the new vehicles recently received, are sold. Should you require any clarification of the figures presented, please contact Peat, Marwick, Mitchell & Co."

and again, on the 18th April 1989, Mr Preston wrote as follows:

"Further to our private discussions on the mornings of Friday, 15 April 1989 and Monday, 17 April 1989, the agreed provisions for repayment of loans, as owing at 31 December 1988 and set out in our annual accounts for 1988, will be scheduled as follows:

1. There will be an immediate payment of Six Thousand Dollars ($6000.00) (Westpac Banking Corporation cheque no. 000029).

2. A Suzuki SJ413 in stock will be credited to Automarine Limited’s loan account at Sixteen Thousand Five Hundred Dollars ($16,500.00) immediately. The vehicle will remain in Automarine Limited’s stock until sold, or for a maximum of six (6) months, when the amount of Sixteen Thousand Five Hundred Dollars will be paid into your account. Any amount made in payment in excess of $16,500.00 will remain with Automarine Limited.

3. Further payments of One thousand dollars will be made monthly beginning at 30 May 1989, until 30 December 1989.

4. Monthly payments will be reviewed and increased as sales permit, from 30 January 1990.

5. The rate of interest on the decreasing balance will be fifteen percent per annum (15% p.a.)

A statement of account, as at today’s date, prepared by Peat, Marwick Limited, is attached."

And it is obvious from the following letter of the 17th August 1990 that Mr Preston’s own accountants were not aware of any 50% share of profits arrangement.

"Clarkes
Barristers & Solicitors
PO Box 144
RAROTONGA

Re: AUTOMARINE LIMITED

Further to your letter of 16th May and our recent discussions I confirm the following:

1. According to my calculations the amount outstanding to Mr Anderson at 31st July 1990 is $82,829.42 (This is calculated at 15% p.a.).

2. Unfortunately I cannot present a time frame of repayment for this loan. Whilst the present stock at Automarine Limited is receiving more attention from the public than shown in the past, tight credit policies and the financial situation being experienced on the island have resulted in few sales to date. I can only advise that as motorcycles are sold, a portion of the proceeds will be forwarded to you, as per Auto Marine Ltd’s letter of 18th April 1990.

Yours faithfully,
PEAT MARWICK"

I conclude therefore that if the debenture is valid it covers all four payments made by Mr Anderson.

(3) The Development Investment Act 1977

Mr Ingram’s basic submission, and what he advanced as the overriding one in the case, was that Mr Anderson had carried on business contrary to the provisions of the Development Investment Act in advancing money to Automarine and had therefore engaged in an illegal activity with the consequence that his claim for the money advanced was unenforceable by statute.

The Act is aimed at controlling business ventures in the Cook Islands into which foreign capital or foreign management is being injected. The declared purpose of the Act is to encourage the importation into the Cook Islands of foreign capital for development of business activities in the islands, but the overriding consideration is to ensure that such businesses are conducted by and large for the benefit of the Cook Islands and its people. To that end the Development Investment Council was set up (now replaced by the Monetary Council). Its functions are described in full in s.9 of the Act but in short they are to encourage but control overseas investment, so that business carried out with the advantage of funds provided from elsewhere shall in large part be for the benefit of the Cook Islands economy. To achieve this end, s.26 provides:

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

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

Registration as referred to in that section is achieved by the processes set out in s27 and s28. Section 27 allows four months after the commencement of the Act for existing enterprises to apply; but a new enterprise requires approval before commencing business. Application for registration is made to the Monetary Council disclosing full particulars of the nature of the enterprise, when it is to be commenced, who are to be its shareholders and a wide variety of other information. The over-riding scheme requires the Council to investigate whether or not it is appropriate to allow foreign investors to inject capital into the Cook Islands for the purpose of making a profit for themselves. Such a profit is not forbidden provided there is seen to be a substantial benefit to the Cook Islands economy (Sections 3 and 9).

Section 26 prohibits a "foreign enterprise" from "carrying on business" and those terms are defined in the Act as follows:

"Foreign enterprise means:

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

(i) in which 33-1/3 percent or more of the voting shares or power is held or controlled by persons who are not local persons; and

(ii) in which 33-1/3 percent or more of the value or number of the shares are beneficially owned by persons who are not local persons; or

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

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

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

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

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

(Para (d) applies in the present case.)

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

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

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

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

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

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

but an enterprise shall not be regarded as carrying on business by reason solely that it:

(f) is or becomes a party to an action or suit or any administrative or arbitration proceeding or effects settlement of an action, suit or proceeding or of a claim or dispute;

(g) maintains a bank account; or

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

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

(j) collects information or undertakes a feasibility study;

and "carry on" in relation to a business, has a corresponding meaning."

It is common ground that Mr Anderson was not registered as a "foreign enterprise" under the Act although it seems that he believed that such approvals as may have been necessary had been attended to by his solicitors. Mr Tylor gave evidence that not much concern was given to the Development Investment Act in the early years before the development of off-shore activity. I understand that it was actually his then partner, Mr McFadzien, who had acted for Mr Anderson and Preston.

The crucial question is whether the transactions between Automarine and Mr Anderson amounted to "carrying on business" by a "foreign enterprise". There is no doubt that the Act casts a wide net of fine mesh.

Mr Moore submitted that Mr Anderson’s activities did not come within the Act for the following reasons:

1. That Mr Anderson was not a moneylender and only agreed to lend provided the legalities had been complied with.

2. He charged 15% interest, whereas he could have obtained a higher rate in New Zealand.

3. None of the loans were paid in the Cook Islands. They went either to Mr Preston’s bank account in New Zealand or directly to Suzuki in Japan.

I do not see it as relevant that the solicitors did not comply with the legalities. If there was such default then Mr Anderson’s remedy lies in another quarter although such default may have some bearing on a grant of relief under the Illegal Contracts Act if that Act can be called in aid. It may be that Mr Anderson could have obtained a higher rate of interest in New Zealand but there can be no doubt that he regarded his dealings with Automarine as a serious business venture to the extent that he sought to control Automarine’s finances. Furthermore, the dealings were not limited to a single loan. It was contemplated from the beginning that Mr Anderson might become a shareholder in Automarine. The fact that money was not paid in the Cook Islands does not help. What is important is that repayment was certainly to come from the Cook Islands economy.

It is very difficult to imagine an economic activity which would not be caught by the Act having regard for one of the activities referred to under the definition of "Carrying on Business" in s.2 which is not to be regarded as carrying on business, namely:

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

Mr Moore submitted that what was required was the maintenance or establishment of a substantial presence in the Cook Islands, but I cannot agree. I conclude, with some regret I might say, that Mr Anderson’s activities required registration pursuant to s.26.

Section 42 of the act provides that a foreign enterprise which carries on business in contravention of s.26(1) commits an offence and is liable on conviction to a fine not exceeding $5,000 with a further fine of $500 per day for a continuing offence.

It follows that prima facie Mr Anderson’s claim is based on an illegal contract and is unenforceable. That was the conclusion of Speight CJ in the case of Foote v Rolls (No. 21/82; judgment 9th August 1983) being the only other case to my knowledge in which the provisions of the Development Investment Act have been considered.

Mr Moore submitted that Foote v Rolls could be distinguished or, alternatively, should not be followed on the ground that Speight CJ did not consider or refer to the cases of Shaw v Groom (1970) 1 All ER 702 and Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd 21 ALR 585 (HC). There is nothing special about these cases. They are simply examples of the many cases dealing with the enforceability of contracts prohibited by statute. A contract is not automatically rendered illegal as performed merely because some statutory requirement has been violated in the course of its completion. What must be ascertained is whether the object of the statute is to forbid the contract and that involves a matter of statutory interpretation unless, of course, the contract is expressly forbidden. In some cases the statute may deprive a party of a remedy under the contract in addition to, or instead of, imposing a penalty; while in others the contract may remain enforceable while imposing a penalty. Mr Moore submitted that the present contract was in the latter class. Shaw v Groom was an example of that class. It concerned a claim by a landlord for arrears of rent. The tenants pleaded, inter alia, that no rent was recoverable by the landlord in that the latter had not provided a rent book as required by the Landlord and Tenant Act 1962, s.4 of which provided that failure to supply a rent book constituted a criminal offence with a maximum fine of 50 pounds. Harman CJ concluded that there was nothing illegal in the contract letting itself and that the existence of the rent book was no part of the contract of letting. It was held that the intention of the legislature was that non-compliance with the statutory requirement should render the landlord liable to a fine, not that it should deny him access to the Courts.

Shaw v Groom is to be contrasted with Cope v Rowlands (1836) M & W 149, which concerned a statute which provided that any person who acted as a broker in the City of London without first obtaining a license should forfeit and pay to the City the sum of 25 pounds for every such offence. The Plaintiff, who was unlicensed, sued the Defendant for work done in buying and selling stock. In delivering judgment for the Defendant, Parke B said:

"The legislature had in view, as one object, the benefit and security of the public in those important transactions which are negotiated by brokers. The clause, therefore, which imposes a penalty, must be taken … to imply a prohibition of all unadmitted persons to act as brokers, and consequently to prohibit, by necessary inference, all contracts which such persons make for compensation to themselves for so acting."

As for the Yango Pastoral case, the basic facts as set out in the head note are as follows:

"Section 8 of the Banking Act 1959 as amended provides: ‘Subject to this Act, a body corporate shall not carry on banking business in Australia unless the body corporate is in possession of an authority under the next succeeding section to carry on banking business. Penalty: Ten thousand dollars for each day during which the contravention continues.’

The respondent lent to the appellant a sum of money secured by mortgage. Default having been made in repayment, the respondent sued the appellant on the personal covenants in the mortgage. The appellant argued that the mortgage was rendered illegal and void by the provisions of s.8 of the Banking Act 1959. The case proceeded in the Supreme Court on agreed assumptions that the respondent was, at the time the transaction was entered into, carrying on the business of banking contrary to s.8."

The Court held that on a proper construction of s8, and having regard to the scope and purpose of the statute, it did not vitiate or render unenforceable contracts made by a body corporate in the course of carrying on banking business in breach of the section.

Gibbs ACJ, at p.587, referred to the four main ways in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful as follows:

"(1) the contract may be to do something which the statute forbids; (2)the contract may be one which the statute expressly or impliedly prohibits; (3)the contract, although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful; or (4)the contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits."

Gibbs ACJ then continued:

"In the present case we are not concerned with the first of these possible situations. Clearly s.8 does not render it unlawful to borrow or lend money or to give and take a mortgage, supported by guarantees, to secure its repayment. The contract sued upon was therefore not to do anything which s.8 forbids. The principal question in the case is whether s.8, on its proper construction, prohibited the making or performance of the contract."

And Mason J said at p."596:

"The first question is: Does s.8 expressly prohibit the making of a contract of loan? The question must, I think, be answered in the negative. The section makes no reference to contracts or transactions. Consequently, if it contains a prohibition against the making of contracts of loan, that prohibition must be ascertained or identified by a process of implication. The defendants seek to avoid this conclusion by saying that, because the lending of money on mortgage in the course of carrying on what is admittedly banking business itself amounts to the carrying on of banking business, as the lending of money on mortgage is central to that business, the making in the course of such a business of a loan and the taking of a mortgage by which the money is agreed to be repaid themselves fall within the prohibition. It is said that the express prohibition against the carrying on of any banking business is necessarily a prohibition against entry into the very transactions which constitute banking business, at least when they are central to that business. So it is argued that the lending of money on mortgage, though not distinctive of banking business, being one of the transactions central to that business is therefore prohibited. Although this argument provides some support for saying that the lending of money on mortgage falls within the prohibition, it does not in my view establish that the prohibition is express rather than implied. The prohibition against the making of contracts, if there be one, can only arise by way of necessary inference, there being no reference at all in the provisions of the section to contracts as such."

The circumstances in the present case are quite different. There is no need to resort to inference to determine whether the contracts between Mr Anderson and Automarine are prohibited. The agreement between them was to do something which the Development Investment Act specifically forbids. It is no answer to say that s.26 of the Act does not specifically prohibit contracts. That section forbids the carrying on of business and that activity was performed in the present case by contract. Even if the Court had found it necessary to resort to inference it would not have helped Mr Anderson.

There is ample authority for the proposition that if the object of the statute is the protection of the public, or the furtherance of some aspect of public policy, as is the case here, a contract that fails to comply with the statute may be implicitly prohibited.

I conclude, therefore, that the agreements between Mr Anderson and Automarine were illegal and of no effect, unless the Illegal Contracts Act 1987 can be called in aid. That Act applies to contracts made before or after the commencement of the Act and s.6, so far as is relevant, reads:

"6. Court may grant relief - (1) Notwithstanding the provisions of Section 5, but subject to the express provisions of any other enactment, the Court may in the course of any proceedings, or on application made for the purpose, grant to-

(a) Any party to an illegal contract; … such relief by way of restitution, compensation, variation of the contract, validation of the contract in whole or part or for any particular purpose, or otherwise howsoever as the Court in its discretion thinks just.

(3) In considering whether to grant relief under sub-section (1), the Court shall have regard to-

(a) The conduct of the parties; and,

(b) In the case of a breach of an enactment, the object of the enactment and the gravity of the penalty expressly provided for any breach thereof; and,

(c) Such other matters as it thinks proper; but shall not grant relief if it considers that to do so would not be in the public interest.

(4) The Court may make an order under subsection (1) notwithstanding that the person granted relief entered into the contract or committed an unlawful act or unlawfully omitted to do an act with knowledge of the facts or law giving rise to the illegality, but the Court shall take such knowledge into account in exercising its discretion under that subsection.

(6) Any order made under sub-section (1) or any provision of any such order, may be made upon and subject to such terms and conditions as the Court thinks fit.

(7) Subject to the express provisions of any other enactment, no Court shall, in respect of any illegal contract, grant relief to any person otherwise than in accordance with the provisions of this Act."

There can be no doubt that Mr Anderson could have sought relief under that Act but on the 1st July 1991 an amendment to the Development Investment Act 1977 came into force. It reads:

"Illegal Loans and Contracts - The Development Investment Act 1977 is amended by adding after section 45 the following new section-

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

The question is whether Mr Anderson has retained his right to apply for relief.

Mr Moore submitted that the amendment was ultra vires in that it offended against Article 64(1)(b) and (c) of the Cook Islands Constitution which provide:

"64. Fundamental human rights and freedoms (1)It is hereby recognised and declared that in the Cook Islands there exist, and shall continue to exist, without discrimination by reason of race, national origin, colour, religion, opinion, belief, or sex, the following fundamental human rights and freedoms:

(b) The right of the individual to equality before the law and to the protection of the law;

(c) The right of the individual to own property and the right not to be deprived thereof except in accordance with law."

Mr Moore argued that the breach of para (b) unfairly and improperly penalized foreigners who have acted in good faith. I cannot accept that submission. The submission was made on the basis that the 1991 amendment has retrospective effect, an issue which I will consider shortly. As for the alleged breach of para (c), Mr Moore argued that the property Mr Anderson had been deprived of was the right to recover under the Illegal Contracts Act. In fact, Mr Anderson had no "right" to recover under the Act, but merely a right to apply for discretionary relief, which, in my opinion, is not "property".

In my opinion, the real issue is whether the amendment has retrospective effect. Does it apply to the case where an individual, who had been party to an illegal contract entered into before the passing of the amendment, had an existing right to apply for relief?

Mr Ingram argued that relief under the Illegal Contracts Act only arose when the Court declared that the contract was illegal which, in the present case, was after the amendment had been passed, but I do not accept that. In the instant case the contract was illegal at its inception and the right to apply for relief arose then.

In Smith v Callender [1901] AC 297 at p305 Lord Ashbourne said:

"Of course, it is obviously competent for the Legislature, if it pleases, in its wisdom to make the provisions of an Act of Parliament retrospective; but before giving such a construction to an Act of Parliament one would require that it should either appear very clearly in the terms of the Act, or arise by necessary and distinct implication."

And in The Queen v Ipswich Union (1877) 2 QBD 269 at p270 Cockburn CJ said:

"It is a general rule that where a statute is passed altering the law, unless the language is expressly to the contrary, it is to be taken as intended to apply to a state of facts coming into existence after the Act."

The presumption against retrospectivity can be rebutted by express terms in the enactment, or by necessary implication from the language employed, but there is nothing whatever in the amendment under consideration to indicate that the legislature intended that it should have a retrospective operation. The effect the amendment does have is to indicate to foreigners intending to carry on business in the Cook Islands, and their advisers, that they proceed at their peril.

I therefore conclude that it is open to Mr Anderson to seek relief under the Illegal Contracts Act.

In considering whether to grant relief the Court is required by s.6(3) to have regard for certain matters and the first is the conduct of the parties. I see nothing in Mr Anderson’s conduct to debar him from relief or to limit the extent of the relief. He believed that any formalities required to be met before he entered into the arrangement had been complied with. The next matter to be considered where, as in this case, the breach was of an enactment, is the gravity of the penalty provided for breach. Section 42 of the Development Investment Act provides for a fine on conviction of $5,000 and $500 per day where the offence is a continuing one. A breach of the Act is certainly regarded seriously but where the breach was not wilful (although that is not an element of the charge) I see no reason why the gravity of the penalty should prohibit or reduce relief. The third matter referred to in subs (3) is "Such other matters as (the Court) thinks proper; but shall not grant relief if it considers that to do so would not be in the public interest." I do not see a grant of relief in the circumstances of this case as being contrary to the public interest. Apart from that, I do not see it as just that Automarine should receive an undeserved windfall.

I think it also relevant that at this stage Mr Anderson is no longer "carrying on business" and validation of the contract with Mr Preston will result in nothing more than an activity which is not regarded as "carrying on business", namely, securing or collecting debts or reinforcing his rights in regard to any securities. In other words, validation will not result in the continuance of an illegal activity.

I therefore direct validation of the contract and hold that the debenture is a good security for the sum of $82,829 as at the 5th April 1991.

I make no order for costs.

ROPER CJ