Hau v Saulala
[2013] NZHC 1622
•1 July 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-7565 [2013] NZHC 1622
BETWEEN FAKA'OSI HAU, VA'ELUA HAKAUMOTU AND MA'ULUPE TU'ITUFU
Plaintiffs
ANDDR LIUFAU SAULALA First Defendant
ANDTOKAIKOLO CHRISTIAN CHURCH TRUST BOARD
Second Defendant
Hearing: 27 June 2013
Counsel: T J Darby for Plaintiffs
P McKendrick for Defendants
Judgment 1 July 2013
JUDGMENT OF KEANE J
This judgment was delivered by on 1 July 2013 at 3pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Date:
Solicitors:
S T Fonua, Auckland
Glaister Ennor, Auckland
FAKA'OSI HAU, VA'ELUA HAKAUMOTU AND MA'ULUPE TU'ITUFU v DR LIUFAU SAULALA [2013] NZHC 1622 [1 July 2013]
[1] In issue in this case, principally, is whether donations by members of the Tokaikolo Christian Church, some 2000 people mainly living in Auckland, have since 2003 have been misapplied by the first defendant, the president of the Church, and by the second defendant, the board of the charitable trust incorporated to serve its purposes, of which the president is one trustee.
[2] The first plaintiff, also a founding member of the church, and until recently also a minister and a trustee, and the two remaining plaintiffs, who are long standing church members, have, they say, made extensive donations over the years in issue, always understanding that the church’s primary need was to clear its mortgage.
[3] They believe that since 2003 the donations solicited for that purpose have been misapplied. The mortgage, they always understood, was meant to be cleared in
2003 - 2004. In those years, they say, they were assured that it had been. The Board’s mortgage liability now appears to be almost three times greater. They point also to at least three other instances where they say money has been misapplied.
[4] Throughout those years, the plaintiffs say, there has been a lack of financial discipline. The Board has not kept proper accounts. In breach of its trust deed, they say, it has never had its annual financial statements externally audited. The statements filed with the Charities Commission, they say, prepared by an internal accountant, cannot be relied on. One church member, the Auditor General of the Government of Tonga, has identified several deficiencies.
[5] After, they say, failing to agree with the defendants a regime to identify the extent of the problem they suspect, and to bring discipline to the Board’s expenditure in the future, they became obliged as they now have, to seek an injunction restraining the defendants from expending church funds. Also orders securing church funds in a trust account, to be controlled by a chartered accountant, and appointing an external auditor.
[6] The three orders the plaintiffs apply for as final relief are each expressed to be ‘until further order’ and are inherently interim. However, the plaintiffs more immediately seek an interim injunction, akin to the first order they seek finally, to
control the Board’s ability to spend money until the case is heard; and an order directing an inquiry and audit to establish the extent to which funds have indeed been misapplied.
Applications opposed
[7] The defendants deny any wrongdoing. The allegations they face, they complain, are unsatisfactorily abstract and impossible to answer. By consent order, dated 5 February 2013, the plaintiffs became obliged to file a more specific statement of claim and affidavits by 14 March 2013. They have not complied.
[8] The defendants oppose the two immediate applications. They do not, the defendants say, complement each other. They cut against each other. That for an interim injunction assumes a serious question to be tried. That for an audit and inquiry relies on the fact that the plaintiffs do not know whether, if at all, the question they raise is more than speculative.
[9] The trust deed, the defendants say, does not oblige the Board to have the annual statements audited externally. The statements may be, and are, audited internally. But, to satisfy the plaintiffs, they agreed late last year to appoint an external auditor to review the last three financial years. More recently they appointed another when the plaintiffs did not consider the first to be independent. That audit will soon be complete.
[10] In their April 2013 application for an audit and inquiry, the defendants point out, the plaintiffs now wish that to extend back to 2003. That, the defendants say, is completely excessive. If the plaintiffs accept the three year audit identifies no issue they should discontinue, as they say that they might. If they remain dissatisfied they must pursue their case by discovery and interrogatories. Liability is not for an audit and inquiry. It is for this Court.
Interim injunction applied for
[11] In their application, dated 18 December 2012, the plaintiffs sought an interim
injunction prohibiting the defendants ‘from expending trust funds in breach of the
provision of the Trust Deed dated 24 October 1993 until the determination of this
proceeding’.
[12] The plaintiffs now seek an interim injunction, as in the statement of claim, restraining the defendants ‘by themselves or their agents from expending any trust funds in their possession until further order of the Court’. But subject to this alleviating proviso. They may ‘continue to expend funds in payment of essential day-to-day outgoings such as necessary wages, salaries, taxes, interest, rates and insurance premiums’.
[13] I questioned whether the word ‘interest’, and the other instances of permitted expenditure in the proviso proposed, would authorise the Board to meet its mortgage liability, which might, for instance, require the Board to pay capital as well as interest. The plaintiffs accept that the Board must be able to meet that liability in whatever form.
[14] The defendants oppose any interim injunction and the order the plaintiffs now seek, they say, is not merely unjustifiable, it serves no purpose and is unduly abstract. It serves no purpose because it obliges the Board to comply with the terms of its constitutive deed. It is unduly abstract because it does not specify what the Board must not do.
[15] The defendants also say that the very fact of an injunction, once known in the Tongan and wider community, will prevent the Board from carrying out its prescribed functions. The plaintiffs disagree. They say the issue is already well known within the community.
Principles of injunctive relief
[16] To succeed on its application for interim injunctive relief the plaintiffs must establish that they have some serious question to be tried, and that the balance of convenience lies in favour of granting them relief. Ultimately, the overall justice of
the case must be considered.1
1 Klissers Farmhouse Bakeries Limited v Harvest Bakeries Limited [1985] 2 NZLR 140 (CA) 142.
[17] As to whether there is a serious question to be tried, the issue is whether there is ‘a tenable combination of resolutions of the issues of law and fact on which the plaintiffs could succeed’.2 It has to be a question which is 'neither frivolous nor vexatious'3; that rests on relevant statements in the affidavit evidence that 'have
sufficient prima facie plausibility to merit further investigation as to their truth.'4
[18] Assuming a serious question to be tried, surviving such an analysis, the issue then becomes where the balance of convenience lies and that involves identifying what has been described as the ‘balance of the risk of doing an injustice’.5
[19] If an award of damages would compensate the plaintiffs for any loss they might suffer before trial, assuming they succeed at trial, and assuming also for that purpose that the defendants are solvent, that could well prove fatal to their application, ‘however strong their claim appeared to be’.6
[20] If, conversely, damages will not compensate, that must be taken into account in assessing the overall justice of the case.7 In this instance, too, the public interest in the due administration of charitable trusts has to be relevant.8
Overall justice
[21] The question the plaintiffs seek to have tried, whether and to what extent the plaintiffs may have misapplied trust funds, is serious in itself. It goes to whether the defendants are in grave breach of trust. An extreme breach could attract the sanction of the criminal law. To assess such a possibility the Attorney-General may make an
inquiry,9 as may the Charities Commission.10 Sanctions can ensue.
[22] Assuming such a serious question, the balance of convenience and overall
2 Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309, 311.
3 Eng Mee Yong v Letchumanan [1980] AC 333 (PC) at 337.
4 At 341.
5 Cayne v Global Resources plc [1984] 1 All ER 225 (CA), 237.
6 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 510.
7 Ashmont Holdings Ltd v Bayer New Zealand Ltd (HC AK, CIV 2007-404-3518, 10 September
2007).
8 Finnigan v New Zealand Rugby Football Union Inc (No 2) [1985] 2 NZLR 181 (HC) at 188.
9 Charitable Trusts Act 1957, s 58.
10 Charities Act 2005, s 10(i).
justice might well favour interim injunctive relief, especially where damages would not compensate. The plaintiffs do not claim damages. They wish only, and representatively, to ensure that the defendants are held to account and that the Board’s expenditure is confined to its proper purposes.
[23] The critical question on this application is whether the plaintiffs have, in their affidavit evidence, demonstrated that the question they pose with compound illustrations has sufficient plausibility; and the very fact that they are seeking also an order for inquiry has to be a reason for pause.
Unaudited annual accounts
[24] The plaintiffs are able plausibly to put in issue whether the Board is in breach of its trust deed in relying on financial statements that are not externally audited. Clause 11 of the deed states this:
The Board shall at its annual meeting appoint one or more auditors who shall audit the accounts of the Board once every year and such auditor or auditors shall have access at all reasonable times to the books and accounts of the Board and shall make a report to the Board on the accounts and state whether the same exhibit a true and correct record of the affairs of the Board.
[25] It is not in question that apart from an external audit in 2006 required by a lender, the Board has relied on the scrutiny given its financial statements by its
‘internal accountant’, Reverend Samani, a trustee since 1999 and presently the treasurer. In annual financial statements he typically says this in his attached report:
The financial statement has not been audited, but I am the internal accountant ... chosen and authorised by the Trust Board to compile the financial statement ...
He then explains that his role:
... involves ... verification ... from receipt books and cheque butts and bank statements. Bank reconciliation has been done from the cash books by the church office before the presentation of that information.
In concluding his report he says this:
I .... accept responsibility for the correctness of the figures according to the information given by the Trust Board.
[26] Reverend Samani says that funds donated are counted, receipted, recorded in the journals and banked and he is not involved in that process. To preserve his independence he reconciles the bank statements against the primary records quite separately. That, he says, in the Board’s view, suffices. The cost of an external auditor is disproportionate. The 2006 audit cost $3,000 for two days work.
[27] The contrary view is expressed by Pohiva Tui’Onetoa, a member of the church in Tonga since 1981, and the Auditor General for the Government of Tonga for 29 years. He also expresses concern about how the Board collects, manages, invests, spends and disburses donations, its main source of funding; and he says he has found the financial statements, in some instances, both inaccurate and incomplete.
[28] The deed most plausibly requires an external auditor, in my view. But I have not heard submissions as to how it is to be construed, set against evidence as to what is conventional; and I am told that the Charities Commission does not require an external audit. Whether the Board is in breach is at most a question that will need to be resolved.
Three misapplication issues
[29] The first misapplication issue that the plaintiffs raise depends on their understanding that between 2004 - 2006 the defendants agreed to invest $1M with an investment consultant, David Hobbs; and that he ran a Ponzi scheme in Australia resulting in significant loss to 700 investors.
[30] They appear also to say that while the defendants did attempt to gather a fund to invest through Mr Hobbs, that did not happen and that he invested $1M on the Board’s behalf. They do not say that the Board retains any residual liability. Further, the defendants deny any such investment was ever made.
[31] According to the defendants they did in 2004 invest at Mr Hobbs’ suggestion
$100,000 in a Merrill Lynch pool investment scheme in the United States, which was later frozen by the United States Government because it should not have involved
offshore investors. The fund is not lost, they say. It is held in trust, they expect to obtain it eventually, and they have received dividends.
[32] Secondly, the plaintiffs contend that the Board funded the school on its land in breach of the trust deed. To that the defendants reply that the deed permits that and that the school is run by a distinct charitable trust, the Tokaikolo Education Trust, incorporated on 28 April 2005.
[33] Thirdly, the plaintiffs say, in 2003 the first plaintiff was paid by credit card
$20,000 in breach of trust. The defendants say they cannot respond, because this allegation is too abstract. But in 2003 $20,000 was spent to purchase health supplements and vitamins for church members and a credit card was the required medium.
[34] In each of these three instances all that the plaintiffs can do is say what they understand the position to be and speculate. They lack hard information and the defendants deny outright what they say. In none, on my review of the evidence, as it is presently, do the plaintiffs identify plausibly any serious question to be tried.
Fundamental misapplication issue
[35] The fundamental question that prompted the plaintiffs to bring this case is the last; that donations gathered since 2003 were to repay the mortgage and have been misapplied in breach of trust. The defendants accept that over those years funds were solicited. They deny this was ever only to repay the mortgage. The church has a wide variety of other expenses.
[36] Here too the difficulty the plaintiffs face is that they lack hard evidence. They cannot point to any contemporary document recording what funds were solicited for or what donations were elicited, when and in what amount. Their case rests entirely on what they, and others, recall. Nor are the plaintiffs able, presently, to say first hand, from such records as there may be, why the Board’s mortgage was not extinguished in 2003 - 2004 and now stands, as it seems, almost three times larger. That may be a symptom of a breach of trust. It may equally be completely legitimate.
[37] In the face of the defendants’ adamant denials, I conclude here too that on this critical issue, on the evidence as it is presently, the plaintiffs are unable to raise a plausible question to be tried. That is fatal to their application for interim injunctive relief.
Audit and inquiry application
[38] In their application for an inquiry and audit, dated 14 March 2013, the plaintiffs seek an audit of the Board’s accounts from 1 January 2003 either by an auditor selected by the Court or by the defendants’ auditor jointly with an auditor they themselves nominate.
[39] Since then there has been a part compromise. The defendants did not appoint their then nominee, to whom the plaintiffs objected. They appointed another, but without consulting the plaintiffs, and only to make a three year audit. An audit of that length, they say, was all that the plaintiffs first wanted last year. The plaintiffs complain that they were not consulted and remain concerned that the audit will be confined. They do not question the independence of the auditor.
[40] The plaintiffs also now recognise that an audit will not capture unrecorded donations and they seek a forensic inquiry, if only preliminary in character, into what donations the Board has received, both recorded and unrecorded, and whether they have been applied legitimately or misapplied. The defendants oppose any such order. The plaintiffs, they say, seek an inquiry into liability, the very question the Court has to resolve; and that is beyond the Court’s power to direct.
Audit and inquiry principles
[41] Rule 16.2 is widely expressed. It enables this Court:
On the application of any party, before, at, or after the trial of a proceeding, order an account or inquiry, whether or not it has been claimed in that party’s pleading.
[42] In the Newmans Tours case in 1992, speaking of r 384, from which r 16.2
derives and with which it is effectively identical, however, Fisher J said:11
Rule 384 is not there to establish liability. Only if liability had been established would it be appropriate to consider whether the making of an inquiry would be the appropriate method of establishing the quantum of the remedy.
[43] In Rod Milner Motors Ltd v AG the Court of Appeal was equally emphatic.12
Though the Court agreed that, under the rule, ‘the potential subject-matter for inquiry is not restricted by definition’, it also agreed with the commentary in McGechan on Procedure that it must be confined to ‘matters of detail which cannot conveniently be dealt with in the context of the normal course of trial’. Classically, the Court said, it will be an inquiry into damages. The power to order an inquiry, the Court concluded, ‘should not be used as a method of obtaining separate hearings on liability and damages’.
[44] I agree with Doogue AJ, in In Worldtel NZ v Cho,13 where he held that, where liability is in issue, the Court can order discovery and interrogatories but not an inquiry; and though an inquiry can be directed before trial, that can only be into damages and may well prove a waste of time.
Impermissible audit and inquiry
[45] The audit and inquiry the plaintiffs seek is impermissible under the rules. It is not into the quantum of any remedy to which they may be entitled, once liability is established. They seek an audit and inquiry as a means of establishing liability. That has to be fatal to their application.
[46] The audit and inquiry they seek is not confined to matters of detail the Court should be spared having to resolve. It is an ambitious forensic inquiry, extending well beyond the audited statements, calling for interviews of church members, who have made donations since 2003, and others. It extends well beyond the scope of any
audit and inquiry ever authorised. That too has to be problematic.
11 Newmans Tours Ltd v Ranier Investments Ltd [1992] NZLR 68 at 106.
12 Rod Milner Motors Ltd v AG [1999] 2 NZLR 568 at 581.
13 Worldtell NZ v Cho (2009) 19 PRNZ 844.
Conclusion
[47] The plaintiffs seek an interim injunction without evidence sufficient to establish that they raise a serious question that the respondents may have been misapplying donated trust funds. To redress that the plaintiffs seek an audit and inquiry into that very issue of liability. I decline their two applications.
[48] If the plaintiffs consider, after the three year audit is completed by the defendants’ auditor, that they do have grounds to pursue the defendants for breach of trust, advancing their case conventionally by discovery and interrogatories, they may also care to consider whether to apply to the Attorney-General or to the Chief Executive of the Charities Commission.
[49] The defendants are entitled to an award of costs in scale 2B and disbursements as fixed by the Registrar.
P.J. Keane J
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