McCready v Attorney-General HC Wellington CIV 2010-485-1577
[2010] NZHC 2232
•13 December 2010
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2010-485-1577
BETWEEN GRAHAM EDWARD MCCREADY Plaintiff AND
THE ATTORNEY-GENERAL First Defendant
AND
WHITIREIA COMMUNITY POLYTECHNIC
Second Defendant
AND
DON CAMPBELL Third Defendant
AND
MARK RAISIN Fourth Defendant
AND
IMRAN KAMAL Fifth Defendant
AND
IRITANA NGAWHARAU Sixth Defendant
AND
HAWI REHUTAI Seventh Defendant
AND
LORETTA RYDER Eighth Defendant
Hearing:
8 December 2010
Counsel: Plaintiff in person
R Schmidt for first defendant
A Challis and K Harkess for second to fourth defendants
P J Napier for fifth defendant
K Sullivan for seventh defendant
Judgment: 13 December 2010
RESERVED JUDGMENT OF DOBSON J
MCCREADY V THE ATTORNEY-GENERAL HC WN CIV-2010-485-1577 13 December 2010
[1] This judgment deals with an application by six of the eight defendants in the proceedings to strike out the Statement of Claim against them. In the alternative, some of the defendants seek an order for security for costs before they are required to take any further steps in the proceedings.
[2] In the Statement of Claim dated 26 August 2010, Mr McCready, acting on his own behalf, has pleaded what appear to be breaches of tortious obligations, or obligations imputed as a matter of trust law, owed by each of the defendants in relation to alleged defalcations of funds belonging to the Whitireia Independent Students’ Association (WISA).
[3] The Statement of Claim alleges that over an unspecified period, the sum of
$1 million was taken from WISA in circumstances where Mr McCready alleges each of the defendants is liable jointly and severally for that loss.
[4] The Attorney-General is sued in respect of alleged deficiencies by the Registrar of Incorporated Societies. The Statement of Claim alleges that WISA has not filed its annual accounts with that Registrar since the 2007 year, the Registrar has failed to demand WISA file the 2008 and 2009 financial statements and has failed to take action to strike off the registration of WISA. Those failings are pleaded as “a
breach of public trust and dereliction of duty”.[1] In addition, Mr McCready pleads
that the Registrar of Incorporated Societies had the ability and a duty to strike off WISA and that, in failing to do so, its continued registration “in blatant breach of the Act” enabled WISA to receive money that has subsequently been stolen by “the executive”, it being alleged that the sixth and eighth defendants were the executives of WISA at the time the money was converted.
[1] Statement of Claim, paragraph 11.
[5] As against the second defendant, the Statement of Claim alleges that the Polytechnic is the recipient of course fees from which it pays levies to WISA. Mr McCready alleges a duty of care owed by the Polytechnic in administering and paying funds to WISA, which was allegedly breached by its failure to monitor the absence of accounts filed by WISA with the Registrar of Incorporated Societies and
consequently withhold funds.
[6] The third defendant, Mr Campbell, is sued in his capacity as the Chief Executive Officer of the Polytechnic (the CEO), the allegation being that in that position he is a “deemed trustee” of public funds received from the Government in various forms, including payment of fees on behalf of students by means of student loans. It is alleged that he owed a duty of care “to the taxpayers and to the students”, and breached that by not withholding funds from WISA in circumstances where it is alleged that he was aware that such funds “were at risk”.
[7] The fourth defendant, Mr Raisin, is alleged to be the Chief Financial Officer of the Polytechnic (the CFO). A similar pleading is made to that in respect of the CEO, in that Mr McCready also alleges Mr Raisin is “a deemed trustee for the administration of the public funds flowing into and out of the Polytechnic”. It is alleged that he was put on notice of serious financial impropriety on the part of the President of WISA but failed to act, in breach of trust, and is allegedly personally liable for the loss of funds, as a result.
[8] The fifth defendant, Mr Kamal, is the auditor of WISA. He is alleged to have breached a duty of care described as “a Mandatory, Absolute, Continuous, Never- ending Obligation” to report immediately upon becoming aware of any losses.
[9] The sixth, seventh and eighth defendants are alleged to have been members of the executive of WISA. Mr McCready alleges that the eighth defendant, Ms Ryder, was responsible for defalcations and that the others assisted her inter alia by re-writing the rules of WISA “to enable her and others to empty the Association’s treasury”. The seventh defendant, Mr Rehutai, was alleged to have been the accountant and office manager for WISA and is alleged to have continued approving payments to Ms Ryder, despite his concerns about their legitimacy, and did so in breach of “a Mandatory, Absolute, Continuous, Never-ending Obligation” of trust owed to the members.
[10] The relief sought is for an order that the defendants jointly and severally pay into the Public Trust or other trust account approved by the Court an amount of
$1 million in general damages, plus $1 million in punitive damages. Mr McCready also seeks indemnity costs to be paid into the account of a charitable trust board he is
apparently associated with and completes his prayers for relief with the following statement:
The plaintiff does not seek any financial reward for his work. He is just discharging his mandatory, absolute, continuous never-ending obligation as a member student and New Zealand citizen with the skills and experience to recover the money and bring the tort fessors [sic] to justice.
[11] On 7 December 2010, Mr McCready filed an application for an adjournment of argument on the various defendants’ applications to strike out the proceedings. He claimed an entitlement to be represented by counsel and that his attempts thus far to find suitable counsel who would act on legal aid had been unsuccessful.
[12] All of the defendants represented opposed any adjournment. Counsel for the second to fourth, and fifth defendants had travelled from Auckland and were provided with Mr McCready’s application only after arriving in Wellington for the hearing. After hearing Mr McCready and counsel, I indicated that I would not grant his application for an adjournment. The defendants represented have already been put to not insubstantial expense in respect of claims that, on any view, have substantial flaws. The presence of the proceedings is no doubt a cause of stress to the individual defendants, and if there is a future for the proceedings, they need to be regularised and contested promptly. I accordingly declined Mr McCready’s application for an adjournment.
[13] These are not the first proceedings in which Mr McCready has sought relief from the Court in respect of the conduct of WISA. He has also commenced proceedings seeking an order winding up WISA. On 11 October 2010, that proceeding was declared to be a plain abuse of the Court’s processes and it was dismissed with costs. In addition, Miller J ordered Mr McCready to be restrained from acting in any way as the agent of WISA unless and until he is so appointed by
the executive or elected by a duly constituted meeting of WISA.[2]
[2] McCready v Whitereia Independent Students Association Inc HC Wellington CIV-2010-485-
1576, 11 October 2010 at [13], [14].
[14] Mr McCready purports to ignore the effect of that determination on the basis that he has appealed Miller J’s decision. In any event, he says that these present claims do not require him to assert status as an agent of WISA.
[15] The tests to be applied on an application for striking out are uncontroversial:[3]
[3] Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267.
(a) the factual allegations in the Statement of Claim are assumed to be true, subject to limited scope to challenge factual allegations that can clearly be refuted by incontrovertible evidence;
(b)to warrant striking out, causes of action must be so clearly untenable that they cannot possibly succeed, and the Court has to be mindful of the prospect of repair, by amendment to a deficient pleading;
(c) the jurisdiction is to be exercised sparingly and only in clear cases where the Court is satisfied that it has the requisite material;
(d)a strike out should not be resisted merely because difficult issues of law are raised and require extensive argument.
[16] On the present applications, each of the participating defendants has focused on the specific deficiencies that render the particular cause of action against that defendant or defendants as being clearly untenable. To a greater or lesser extent, the applications to strike out either explicitly or implicitly include challenges in various forms to the standing that Mr McCready would require to pursue causes of action for up to $1 million, where he has had a maximum of $135 at stake, and does not include any pleading that depends on an alleged entitlement for return of that money.
[17] A significant number of the more specific criticisms reflect the inappropriateness of Mr McCready bringing causes of action that complain of losses suffered by WISA, without either the authority to sue on its behalf or purporting to seek recovery for its benefit.
[18] The terms of Mr McCready’s prayers for relief are telling. He sues for losses that he does not claim to have suffered himself. His pleading avoids the issue of whether, indeed, he would even have a claim for return of the $135 that is the only sum he had paid, relevant to amounts that might have been misappropriated by office holders or staff of WISA.
[19] None of his causes of action raises any prospect that a claim for repayment of a student’s subscription to WISA (compulsorily deducted by the Polytechnic) could arise where there was a complete failure of consideration, for instance because the monies were not spent on matters advancing the interests of students, but rather, say, on support for a political party. There is no suggestion of such a cause of action, and even if it might justify a different claim for return of $135, it is entirely divorced from any bases that might exist for a claim that any of the defendants are obliged to pay into a trust sums representing those allegedly misappropriated from WISA on a suit commenced by a student compelled to pay a single subscription to WISA.
[20] If Mr McCready asserted an entitlement to sue on behalf of WISA (which he expressly disavowed) then he would be forbidden from pursuing litigation in that capacity by the terms of the order in Miller J’s judgment of 11 October 2010.
[21] To the extent that the majority of Mr McCready’s causes of action allege a breach of tortious obligations (he accepts that is the only basis against all but the second to fourth defendants), then making out loss is a necessary element of the cause of action. On the terms of his own pleading, there is not the remotest prospect of Mr McCready making out a loss beyond whatever part of $135 he might make out as paid on his behalf in circumstances where there has been a partial failure of consideration.
[22] Equally, the ambitious prayer for $1 million in exemplary damages would require the pleading of some circumstances in which Mr McCready has, as a plaintiff, suffered from conduct of the defendants amounting to subjective recklessness in a way that bore some relationship to material financial losses he had also suffered.[4] The pleadings do not contemplate any such prospect.
[4] Couch v Attorney-General (No 2) [2010] NZSC 27, [2010] 3 NZLR 149.
[23] I had relatively extensive exchanges with Mr McCready about the possible scope of claims that might be contemplated in his pleading against the third and fourth defendants, respectively the CEO and CFO at the Polytechnic. His allegations against both of them include that they are “deemed trustees” of public funds, and I tested him on the prospects for any possible basis on which obligations arising out of trust law could ever be imputed in the factual circumstances pleaded.
[24] Mr McCready frankly acknowledged that he was not aware of any basis on which he could contend a trust obligation and rather defended the pleading in the form it appears as his intuitive reaction to the situation and because it seemed that the CEO and CFO should be accountable in that way.
[25] The relevant duties of the Polytechnic’s CEO and CFO will mostly be governed by contractual obligations owed by them to the Polytechnic as conditions of their employment. In certain respects, to the extent that either of them is responsible for discharging the Polytechnic’s obligations under statute, and particularly under s 229A of the Education Act 1989, then there could be a statutory overlay to the obligations arising under their contracts of employment. In that context, there appears no tenable prospect for overlaying obligations that treat the employees of the Polytechnic as trustees of funds they are handling, in favour of the members of WISA as beneficiaries. Some obligations of that sort would be required before any prospect of a cause of action invoking obligations under trust law could tenably arise.
[26] Responding to my dialogue with Mr McCready, Ms Challis submitted in reply that there were no circumstances in which any form of trust law obligation could be imputed against the CEO or CFO. She submitted that the relevant constraints on handling the funds transferred by the Polytechnic to WISA are obligations imputed to the organisation, and not to individuals. That is so, both in terms of the statutory obligations in s 229A of the Education Act, and also, apparently, in terms of service agreements between the Polytechnic and WISA that were not made available to the Court.
[27] Ms Challis disputed Mr McCready’s characterisation of a dispute that has apparently arisen between the Polytechnic and WISA over the payment of fees to WISA. Mr McCready suggested fees were, for some period, withheld by the Polytechnic, notwithstanding its obligations to pay them under s 229A, and that it was the threat of enforcing the duty under s 229A that caused the Polytechnic to capitulate. To the contrary, Ms Challis characterised the dispute as arising over the terms of a service agreement operating as a contract between the Polytechnic and WISA in relation to services provided by the Polytechnic.
[28] In reflecting on all prospects for amendment to these causes of action in the Statement of Claim, I am satisfied that there are no amendments that could possibly transform them into tenable causes of action in respect of which Mr McCready had any prospect of asserting the requisite standing.
[29] I am accordingly satisfied that Mr McCready lacks the standing to bring any of the causes of action pleaded and that the whole of the claim is appropriately struck out.
[30] In the event that I have overlooked some basis on which Mr McCready might possibly make out standing to pursue claims without the authority of WISA or a pleading of personal loss, I will consider briefly the grounds for strike out on a cause of action specific basis, as raised in the argument of counsel for all but the sixth and eighth defendants.
Claim against the Attorney-General/Registrar of Incorporated Societies
[31] Putting to one side any valid concerns about the inappropriateness of suing the Attorney-General in respect of alleged errors by the Registrar, the cause of action in respect of omissions on the Registrar’s part depends on a breach of an alleged obligation to follow up the absence of filing by WISA of annual returns.
[32] That expectation ignores the status of WISA as an entity under the Charities
Act 2005, which exempts it from the obligation to file annual returns under the
Incorporated Societies Act.[5] Instead, as a charitable entity, WISA is required to make filings with the Charities Commission under s 41 of the Charities Act and those obligations are currently up to date.
[5] Incorporated Societies Act 1908, s 23(4).
[33] Accordingly, the initial premise on which any alleged breach of duty depends is misconceived and the cause of action against the first defendant should be struck out, irrespective of the fatal absence of sufficient standing that I have already identified. Having heard Ms Schmidt address her submissions on the point, Mr McCready conceded that he had drafted the claim being unaware of WISA’s charitable status, so that the claim against the Attorney-General was misconceived.
Claim against the second, third and fourth defendants
[34] The essence of the claims against the Polytechnic, its CEO and CFO is that they failed to respond to circumstances they ought to have appreciated would justify a suspension of payments to WISA. That proposition depends on the existence of a discretion for the Polytechnic to withhold fees payable to WISA. Each of these defendants submitted that a cause of action depending on that proposition is untenable because they were forbidden by statute to withhold such payments. Section 229A of the Education Act 1989 provides as follows:
229A Institutions at which membership of students association is compulsory
(1) This section applies to every institution at which membership of a students association is compulsory.
(2) The students association that, at the commencement of this section, is recognised by the Council of the institution as being the institution's students association for the purpose of representation on the Council, is the students association at that institution for the purposes of section
171(2)(e), this section, and sections 229B and 229C.
(3) The Council must, if asked to by the institution’s student association, collect the membership fees of the association, but only if the association provides the Council with—
(a) a copy of its current constitution; and
(b) an independently audited set of financial accounts of the association for the last financial year.
(4) The Council must pay all membership fees collected on behalf of the students association to the association in a timely manner, but may charge the association for the actual and reasonable costs incurred by the Council in collecting the fees.
(5) A students association may, on the grounds of hardship, exempt any student from the obligation to pay the membership fee of the association; and a student so exempted may nonetheless be a member of the association.
(6) A students association may exempt any student from membership of the association on the grounds of conscientious objection; and, if exempted, the association must pay the student’s membership fee to a charity of its choice.
(7) Every students association must ensure that information about the rights in subsections (5) and (6) is available to students before enrolment, and must make rules for dealing in a fair, timely, and consistent way with applications for exemption under either subsection.
[35] As analysed by Ms Challis, the only opportunity for resisting the course of events that has ensued would have been for the Polytechnic under subs (3) to have resisted collecting membership fees for WISA until it had been provided with a set of audited accounts for WISA. The record of its filings with the Charities Commission show that it has filed annual audited accounts, so that whether or not the procedural requirements of subs (3) were insisted upon by the Polytechnic, WISA was in a position to comply with them. Once it had done so, the Polytechnic had no discretion to withhold membership fees it had collected on behalf of WISA because subs (4) obliged the Polytechnic to pass them on.
[36] I have already reflected on the difficulties of standing, for any cause of action against the third and fourth defendants that raises any form of trust law obligation. There would be fatal flaws in the preliminary premise that the individuals in their capacity as employees, were fixed with the obligations as trustees for the benefit of individual student members of WISA, by virtue of the fact that the funds being credited to WISA are “public funds”. That proposition does not justify serious consideration on the current state of New Zealand trust law.
Claim against fifth defendant
[37] The claim against the auditor of WISA relies upon a tortious duty of care owed by the auditor to a current student in respect of the adequacy of previous audits, and potentially also lack of peremptory action in relation to the current year’s accounts.
[38] Liability for auditors is generally claimed as a matter of negligent misstatement in relation to errors or omissions in auditors’ reports presented to the entity whose accounts have been audited. Imputing a duty of care to categories of potential claimant beyond the audited entity paying for the report requires a case- specific analysis of the extent of proximity between the auditor and any particular claimant.
[39] In the context of auditors’ duties owed in relation to company audits, the Courts have been wary of extending duties beyond existing shareholders, where the auditors ought reasonably to have had them in contemplation in the competent completion of their audit reports.[6]
[6] See generally Stephen Todd (ed) The Law of Torts in New Zealand (5th ed, Brookers, Wellington,
2009) at [5.8.05(1)].
[40] In addition to a relationship having the requisite proximity for it to be reasonable to impute an awareness of reliance by the claimant on the auditor’s competence, a duty of care would not be imposed in a novel situation such as the present without reflecting on the policy consequences of doing so.
[41] Mr McCready’s Statement of Claim does not allege circumstances in which any previous audit reports by Mr Kamal were lacking. Nor does it contemplate any circumstances in which a relationship of appropriate proximity arose between the auditor and a student paying fees at the Polytechnic in 2010.
[42] For the auditor, Mr Napier was inclined to accept that a duty of care would be owed by the auditor to WISA, but emphasised how different that was from any duty
to individual students. The scope of that duty would depend on the terms of the
retainer. The fact that defalcations have allegedly occurred does not create any presumption that the auditor’s duties were breached. At best for Mr McCready’s argument, individual students are analogous to individual shareholders of a company, in relation to the auditor’s responsibilities in auditing the company accounts. I incline to the view that there is less proximity in the present situation. The students are involuntary contributors of small amounts, with no financial interest in the “success” of their “investments”.
[43] I am accordingly satisfied that this is not a situation in which a duty of care would be imputed to the auditor.
[44] In addition to the absence of material loss (beyond $135), Mr Napier also argued that there is no tenable prospect of Mr McCready making out that the mode of conduct of the audit, and any deficiencies in it, was causative of loss to Mr McCready when there was no basis for treating it as a material and substantial
cause of such loss.[7] I apprehend that the causation argument advanced is probably
subsumed within the prior point that Mr McCready has suffered no material loss.
Claim against seventh defendant
[7] Citing Price Waterhouse v Kwan [2000] 3 NZLR 39 (CA) at 46 and 47.
[45] The position of Mr Rehutai is dealt with together with those who have not pursued the initiative to strike out, in that all were treated as members of the executive of WISA. Mr Rehutai credibly denies that that status can be attributed to him. He was an accountant and has opposed the prospect of any duty being owed by him to individual students, on the basis that as an employee his only obligations were to his employer. It would follow that any breaches of duty are enforceable only by WISA as his employer. It would be entirely novel and beyond the contemplation of incremental recognition of relationships in which both sufficient proximity, and assumption of responsibility, were imputed to an employee in his position.
[46] Assuming on his pleading that Mr McCready could make out that Mr Rehutai had grounds for, and did, worry about the propriety of the way in which WISA funds
were being allocated to, or for the benefit of, executives, his was not a position in which he could ever be attributed with a duty owed to individual students.
[47] I accept that this analysis also renders the cause of action against Mr Rehutai untenable.
Outcome
[48] Accordingly, I am satisfied that Mr McCready does not have standing to bring any of the claims pleaded in his Statement of Claim. That finding applies equally to the sixth and eighth defendants who have taken no steps, as it does to those who pursued the initiatives to have the claim struck out. The whole of the Statement of Claim is to be struck out.
[49] Even if I were wrong on standing, I am also satisfied that there are insurmountable hurdles that Mr McCready could not overcome, in attempting to establish a tenable cause of action against any of the defendants who pursued the present arguments.
[50] That outcome renders it unnecessary to consider the alternative application pursued on behalf of the second to fourth defendants, for an order for security for costs.
Costs
[51] On behalf of the fifth defendant, Mr Napier sought an order for increased costs on the basis that all aspects of the claim were very clearly untenable, and Mr McCready had, in the course of argument, accepted that there were matters that he should have thought through and considered further before commencing the proceedings. Mr Napier’s argument is that the proceedings should not have been commenced at all with such inadequate preparation. The pleading against the auditor included serious personal criticisms, and it was to be expected that he would react by taking all reasonable steps to protect his reputation.
[52] Mr McCready opposed an order for costs. In relation to the auditor, he acknowledged that he had thought very carefully about his position and had included the auditor for reasons including Mr McCready’s understanding that the auditor had been in possession of information suggesting misapplication of funds for some six months before doing anything about it. Mr McCready’s rejoinder reflected a belief in a basis for valid criticism of the auditor, as distinct from any belief in the existence that he had grounds to pursue such a claim.
[53] Increased costs may be ordered where there is failure by the paying party to act reasonably.[8] By a narrow margin, I am not prepared to award increased costs. Mr McCready was at least realistic at the hearing in appreciating the difficulties raised with him. He claims to have acted in the interests of students whom he feels have been badly let down, and did not seek any personal or collateral advantages from the proceedings. By now he should certainly know that he cannot assume an interest to pursue claims that are not his. He is warned that this costs determination is probably an indulgence that will not be repeated.
[8] Bradbury v Westpac Banking Corporation [2007] 3 NZLR 400 (CA) at [27].
[54] My costs decision is not in any way to derogate from my accepting the position of the various defendants, namely that these were proceedings that should never have been brought.
[55] I order one set of costs on a 2B basis in favour of each defendant or group of defendants that were separately represented. In the case of the second to fourth defendants, and the fifth defendant, I order that disbursements recoverable are to include travelling expenses for one counsel in respect of the second to fourth
defendants, and one counsel for the fifth defendants.
Solicitors:
G M McCready, 25/494 Broadway, Miramar, Wellington
Crown Law, Wellington for first defendant
McElroys, Auckland for second to fourth defendants
Keegan Alexander, Auckland for fifth defendantWilson & Co, Wellington for seventh defendant
Dobson J
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