New Zealand Electrical Institute (Incorporated) v Westpas New Zealand Limited
[2019] NZHC 1407
•19 June 2019
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2017-404-2814
[2019] NZHC 1407
UNDER the Declaratory Judgments Act 1908 BETWEEN
NEW ZEALAND ELECTRICAL INSTITUTE (INCORPORATED)
Plaintiff
AND
WESTPAC NEW ZEALAND LIMITED
First Defendant
ALAN CUTHBERT
Second Defendant
JOHN HUTTON
Third Defendant
ROGER WHITTAKER
Fourth Defendant
Hearing: 4–5 June 2019 Appearances:
C T Patterson for Plaintiff
L K McKeown for Second to Fourth Defendants
Judgment:
19 June 2019
JUDGMENT OF COOKE J
Table of Contents
Incorporated societies and judicial review[6]
Security for costs[19]
Rules controlling bank account[22]
Election of Council[27]
Minimum number of members[29]
What happened at the AGM?[31]
What was the outcome?[40]
Suspension/closure decision[44]
NEW ZEALAND ELECTRICAL INSTITUTE (INCORPORATED) v WESTPAC NEW ZEALAND LIMITED [2019] NZHC 1407 [19 June 2019]
Reasons for closure[55]
What allegations were put?[58]
Tax[65]
Improper subsidisation[69]
Improperly signed cheque[73]
Conclusion[76]
Recess[77]
Discretion[80]
Conclusion[83]
Result[87]
[1] The New Zealand Electrical Institute Inc (the Institute) operates as a non-profit industry body providing training, support and industry consultation for its electrician members. It is incorporated under the Incorporated Societies Act 1908. It was first founded in May 1940. Historically the Institute has operated within a number of regional branches, including a Wellington Branch.
[2] By decision apparently made in September 2016 the Institute purported to close its Wellington Branch. It commenced these proceedings, initially against Westpac New Zealand Limited, to gain control of the bank account that had been operated by the Wellington Branch. The second, third and fourth defendants, being key members of the Wellington Branch, were then joined to the proceeding. They dispute that the Wellington Branch was lawfully disestablished and resist the claim. That is for two key reasons:
(a)that the persons acting as the Council of the Institute did not comprise a lawfully established Council of the Institute following elections at an AGM in March 2016. As such the decisions of the Council disestablishing the Wellington Branch were not lawful; and
(b)that in any event the disestablishment of the Wellington Branch was not permitted in accordance with the Institute’s rules.
[3] When these proceedings were commenced the Wellington Branch had something in the order of $40,000 in its bank account which would have been built up from member subscriptions over the years. That $40,000 has now been entirely spent,
mainly on the legal costs of these proceedings. At the hearing I was advised that there is now only just over $200 in the account.
[4] Similarly when the dispute with the Wellington Branch emerged in March 2016 the Institute itself appears to have had approximately $135,000 in retained earnings. As at March this year that figure has been reduced to approximately $10,000. Again, that is a consequence of expenditure on legal fees for the Institute’s disputes, although there has been an additional dispute with the Auckland Branch, and a dispute involving a former officer of the Institute that has also contributed to the significant diminishment of funds.
[5] As is apparent this litigation has been hopelessly uneconomic. It has been funded by the contributions of members.
Incorporated societies and judicial review
[6] It is appropriate to first address an issue concerning the appropriate procedure to be used in these kinds of cases — that is, cases involving disputes within incorporated societies.
[7] There was some uncertainty about the procedure being followed in the present proceeding. It was commenced as a claim under the Declaratory Judgments Act 1908. At a hearing before Associate Judge Smith on 10 April 2018 it was determined that the proceeding should be categorised as an ordinary proceeding (which would normally involve a trial with viva voce evidence, cross-examination, and openings and closings). The subsequent agreed directions involved the filing of affidavit evidence, however. Notices requiring the deponents of the evidence to be available for cross- examination were then filed by each side. At the hearing itself, the fixture proceeded as an ordinary action with each of the deponents called and being cross-examined, and the plaintiff and defendants presenting opening and closing submissions.
[8] The key issues in the present proceeding turn on the interpretation and application of the Institute’s rules as an incorporated society. There is a tailor made procedure for such disputes set out in the Judicial Review Procedure Act 2016 (the Act). That includes evidence being given by affidavit evidence with cross-
examination only by leave. There are also carefully formulated procedural controls available to ensure the just and speedy resolution of disputes of this kind, including through directions given under s 14 of the Act.
[9] The position is complicated because a number of cases have said that judicial review is not available to resolve private law matters.1 This includes case law concluding that matters involving incorporated societies cannot be addressed by way of judicial review except in limited circumstances.2
[10] But those responsible for the design of the Act, as originally conceived in its legislative predecessor (the Judicature Amendment Act 1972) expressly extended the reach of the procedure to cover the exercise of powers by bodies such as incorporated societies. The purpose of the Act is set out in the following terms:
3 Purpose of this Act
(1)The purpose of this Act is to re-enact Part 1 of the Judicature Amendment Act 1972, which sets out procedural provisions for the judicial review of—
(a) the exercise of a statutory power:
(b) the failure to exercise a statutory power:
(c) the proposed or purported exercise of a statutory power.
(2)The reorganisation in this Act of those provisions, and the changes made to their style and language, are not intended to alter the interpretation or effect of those provisions as they appeared in the Judicature Amendment Act 1972.
[11] The words “statutory power” are defined in the following terms (emphasis added):
5 Meaning of statutory power
(1)In this Act, statutory power means a power or right to do any thing that is specified in subsection (2) and that is conferred by or under—
1 See, for example, Royal Australasian College of Surgeons v Phipps [1999] 3 NZLR 1 (CA);
Wilson v White [2005] 1 NZLR 189 (CA) at [21]–[22].
2 Hopper v North Shore Aero Club Inc [2007] NZAR 354 (CA) at [9] and [12]. Rabson v Transparency International (New Zealand) Inc [2015] NZHC 334, [2015] NZAR 325 at [21]. See, however, Gibson v New Zealand Search and Rescue Dogs Inc [2012] NZHC 1320 at [38] and Middeldorp v Avondale Jockey Club Inc [2019] NZHC 901 at [50]–[55].
(a) any Act; or
(b) the constitution or other instrument of incorporation, rules, or bylaws of any body corporate.
(2)The things referred to in subsection (1) are—
(a) to make any regulation, rule, bylaw, or order, or to give any notice or direction that has effect as subordinate legislation; or
(b) to exercise a statutory power of decision; or
(c) to require any person to do or refrain from doing anything that, but for such requirement, the person would not be required by law to do or refrain from doing; or
(d) to do anything that would, but for such power or right, be a breach of the legal rights of any person; or
(e) to make any investigation or inquiry into the rights, powers, privileges, immunities, duties, or liabilities of any person.
[12]In s 4 the following definition is given (emphasis added):
statutory power of decision means a power or right conferred by or under any Act, or by or under the constitution or other instrument of incorporation, rules, or bylaws of any body corporate, to make a decision deciding or prescribing or affecting—
(a)the rights, powers, privileges, immunities, duties, or liabilities of any person; or
(b)the eligibility of any person to receive, or to continue to receive, a benefit or licence, whether that person is legally entitled to it or not.
[13] It is apparent that these definitions, and accordingly the procedure set out by the Act, covers the exercise of power under the rules of an incorporated society. I say that notwithstanding the alternative view that it strains the language to say the Act applies to this kind of situation.3
[14] Much of the uncertainty about the availability of judicial review as the appropriate procedure for this kind of case was resolved by the later decision of the Court of Appeal in Stratford Racing Club Inc v Adlam.4 That case involved a similar dispute where members of a racing club fell into disagreement, and a decision was made by one group to move the assets of the club into a trust. Amongst the arguments
3 Hopper, above n 2, at [12].
4 Stratford Racing Club Inc v Adlam [2008] NZCA 92, [2008] NZAR 329.
raised was that the relevant decisions could not be challenged by way of judicial review, as they were essentially of a private law character. Reliance was placed on the earlier decision of the Court of Appeal in Hopper v North Shore Aero Club Inc.5 The Court responded to the submission that judicial review was not available in the following terms:
[54] We reject this submission. Hopper is helpful to Mr Adlam’s case, not the club’s. Williams J, at first instance in Hopper, had given some instances where the courts had been prepared to intervene in the running of incorporated societies: at [31] of his judgment. Among those instances which had “attracted the Court’s intervention” were “membership issues”. This court, when reviewing Williams J’s decision on appeal, had quoted that paragraph of his judgment at [5] of its decision. Then, at [11], this court endorsed that particular passage from Williams J’s decision. We consider the committee’s membership decisions in the present case to be prime candidates for review. The way the committee has been exercising its powers has affected not just one prospective member but dozens of prospective members, all of whom, so far as the evidence reveals, are entirely fit and proper persons for membership.
[55] Part of the reason for the courts’ traditional reluctance to intervene in the running of clubs by way of judicial review is that members who consider their club or society is breaching the rules have a remedy under the law of contract: Hopper at [11], citing Peters v Collinge [1993] 2 NZLR 554 at 566. We agree that the contract route is probably preferable, where available, although the outcomes (in contract and judicial review proceedings) are usually likely to be the same. Disappointed applicants, however, are not able to bring a claim in contract, because the club has refused to make a contract of membership with them. Their only recourse is judicial review. It is arguable perhaps that Mr Adlam could have brought this claim in contract, relying presumably on implied terms as to how the power under rule 7 should be exercised. But he was not bound to follow that route. And his essential complaint against the committee, namely that they were acting unfairly and for an improper purpose, is quintessentially the stuff of judicial review.
[15] It should be remembered that judicial review under the Act simply sets out a procedure by which claims can be resolved efficiently. A determination that a particular dispute is appropriately addressed by that procedure does not change the substantive rights that the parties to the proceedings have. For that reason, determining that a dispute of this kind may be addressed by an action of for “judicial review” under the Act does not change the rights that an applicant or respondent have. The primary rights held by parties in a case such as this arise from the rules of the relevant society. Litigation involving the interpretation and application of such rules is appropriately dealt with by way of judicial review procedure. It may be that not just the express
5 Hopper v North Shore Aero Club Inc, above n 2.
rules will be relevant — the courts have also concluded that obligations can be implied, particularly with respect to procedural obligations. Those who follow a purely contractual analysis describe those obligations arising as implied terms.6
[16] Once this is understood, it can be seen that the public/private debate in judicial review may not have practical significance in this kind of case. Even if judicial review is available as a procedure, it will still be necessary to be clear what the express nature of the legal limits of the exercise of powers actually are in a particular case. If the case involves incorporated societies that will usually involve the express rules of the society, or the category of implicit obligations that have been recognised by previous case law. Opening up the judicial review procedure to this category of case does not open up all the potential grounds of judicial review for an applicant.
[17] The decision of the Court of Appeal in Stratford Racing Club v Adlam helpfully clarifies the appropriate approach in this respect.7 There the Court of Appeal held that these types of cases should be dealt with as applications for judicial review under the Judicature Amendment Act 1972. The only concern that I would respectfully suggest arises from the approach outlined in Adlam is the suggestion that an action for judicial review, and an action in contract are alternative remedies, and that it is possible that the remedy chosen could lead to different results, albeit that this was noted as unlikely.8 Whilst an action for review and a claim in contract involve different procedural routes, the substantive principles of legality should be identical. All discretionary powers have legal limits. When contracts give discretionary power, such powers have legal limits.9 That is equally so when power is given by rules of an incorporated society. Whether the language of contract or the language of judicial review is used, the ultimate task remains the same — identifying the legal limits on the exercise of power. The procedural path chosen to ventilate the issue should not matter.
[18] It also seems to me that the procedure contemplated by the Act is preferable to that adopted for an ordinary action for this kind of case. Accordingly it may well be appropriate in cases where parties bring an action as an ordinary proceeding in contract
6 Peters v Collinge [1993] 2 NZLR 554 at 556–567 (HC).
7 Stratford Racing Club Inc v Adlam, above n 4.
8 At [55].
9 See Stephen Kós “Constraints on the Exercise of Contractual Powers” (2011) 42 VUWLR 17.
for the Court to utilise the power in s 12 of the Act so that the proceedings be treated as an application for judicial review under the Act. That may be appropriate in order to avoid the type of procedural confusion, and unnecessary complexity, that has arisen in the present case.10
Security for costs
[19] There is a further preliminary point to address. The week before the hearing the second to fourth defendants made an application for security for costs under r 5.45 of the High Court Rules 2016. Leave was required for the application to be addressed because of the late stage at which the application was made. Prior to the trial Mallon J declined an application to adjourn the fixture and ordered that the application be dealt with at the commencement of the fixture. After hearing from the parties at the commencement of the hearing I indicated I would consider the application and deal with it in the Court’s judgment.
[20] There is a proper basis to contend that the plaintiff may not pay a costs award in favour of the second to fourth defendants given it has very little in reserve funds at this point. It can, however, call upon its members to provide further funds to it. Mr Patterson frankly accepted that if a costs award was made in favour of the second to fourth defendants, the plaintiff would need to consider all its options, including the potential that it would wind-up the Institute. That concession in itself reflects just how uneconomic this litigation has become.
[21] I nevertheless decline to order that security be provided. The main reason is that the dispute between the parties needs to be brought to an end. Both sides have wasted considerable funds originating from the members. To simply stay the proceedings in order to require security to be paid, with the potential that judgment would be delayed and might not be issued altogether, is contrary to all parties’ interests. Moreover whilst the financial results for the 2019 year have only just become available to the second to fourth defendants, it was apparent from previous financial results that the plaintiff’s financial position was in significant decline. A potential issue about the payment of the costs award was apparent at an earlier stage.
10 See also [80]–[81] below.
In all the circumstances I consider it too late for a security for costs order to be made. Accordingly I dismiss the application.
Rules controlling bank account
[22] I now turn to the substantive issues raised by the parties. As indicated the plaintiff is seeking control of the Wellington Branch’s bank account following what it contends was the lawful disestablishment of that Branch.
[23] The relevant rules that governed the relationship between the parties at the time that the Institute purportedly disestablished the Wellington Branch are set out in a set of rules in existence as at September 2009 (the Rules). As the Rules provide, one of the objects of the Institute is to set up Branches (r 2(b)). The Rules then contemplate the branches having a degree of authority for the activities of the Branch. This is generally contemplated by section 7 of the Rules. That section includes the following:
SECTION 7 – BRANCHES
(1)The Institute shall set up Branches and such Branches shall at all times be under the control of the Council and shall abide by any decisions made from time to time by the Council.
…
(6)Notwithstanding anything to the contrary herein expressed or implied it shall be lawful for any Branch to conduct the meeting of such Branch and to open and to operate a banking account for and on behalf of any such Branch.
…
(8) Every Branch shall elect a Committee which shall —
…
(b) Administer the business of the Branch according to a set of rules approved by the Council.
…
[24] In the present case the Wellington Branch was duly established and operated under its own rules approved by the Council of the Institute under r 7(8)(b).
[25] The Rules also contain the following further provisions concerning disbanding a branch:
…
(10)Where any Branch fails or makes no satisfactory attempt to meet [its] obligations to the Institute, the Council may order an investigation in respect of the management of such Branch or disband the Branch.
(11)Where any charge of mismanagement of a Branch is laid before the Council, such charge shall be investigated and the Council may order any measure or measures considered proper for the wellbeing of the Institute, and any decisions of the Council in respect of that shall be final.
(12)If it shall appear to the Council that any Branch has ceased to function or has gone into recess, all property both real and personal and including cash funds of that Branch shall become subject to the control of the Institute which may thereupon take control of any and all such property and funds and shall hold the same in trust for the said Branch for a period of five (5) years. If during the period of five years the Branch under review shall again become active, all funds and property shall be reconveyed to the Branch. If subsequent to the five year period the Branch under review shall again become active, it may make application to the Council in accordance with (Institute) Rule 7, Clause 7 for financial assistance up to the limit of any funds which were taken over either as an outright gift or an interest free loan.
…
[26] The plaintiff says it duly disestablished the Wellington Branch under these Rules in September 2016 and it is entitled to possession or control of the bank account. The second to fourth defendants dispute that such decisions were lawfully made. I will address the arguments the second to fourth defendants have advanced in chronological order.
Election of Council
[27] The second to fourth defendants first contend that the three persons who operated as the Council of the Institute that made the decision to disestablish the Wellington Branch were not lawfully elected to the Council at the AGM, and accordingly the purported decision by them disestablishing the Branch was unlawful.
[28] The requirements for the election of the Council of the Institute are also set out in the 2009 Rules. They relevantly provide as follows:
SECTION 11 – THE COUNCIL
(1)The affairs of the Institute shall be governed by a Council which shall consist of a President, one Vice President and up to four (4) members together with Immediate Past President.
(2)There may be a Patron who shall hold office at the pleasure of the Council.
(3)The President, Vice President and member/s of the Council shall be elected at each Annual Meeting and shall hold office until their successors have been appointed.
(4)Subject to the provisions of Clause 9 of Section 7 hereof, any financial member of a Branch is eligible for nomination as a member of the Council.
(5)Except as proved for in Clause 7 hereof, any financial member may nominate one member for Council, subject to the following provision:
(a) The nominees who shall be financial members may be nominated for the position of President, Vice President or member of Council.
(b) All nominations which shall be in writing on the prescribed form and countersigned by the nominee, must be in the hands of the Secretary not less than forty (40) days prior to the Annual Meeting.
(6)A complete list of nominations received for Council Office shall be circulated to all members not less than thirty (30) days prior to the Annual Meeting and in the event of there being more than the required number of nominations, a ballot shall be taken.
(7)In the event of there being insufficient nominations such members as have been nominated shall be declared elected and nominations to complete the required number shall be received from the members present at the Annual Meeting.
Any member elected to Council under the provisions of Clause 5 hereof, shall be eligible for re-nomination by such member’s Branch.
…
Minimum number of members
[29] There is an initial interpretation issue concerning these provisions. They do not spell out how many members of the Council there must be, and accordingly when it will be necessary to have further members elected from the floor of the AGM in accordance with r 11(7).
[30] Part of the answer to that interpretation question is provided by r 12(1). This rule provides that there is a quorum of four persons for any meeting of the Council. If a quorum is not present, the Council cannot act. It follows that a Council only having three members would not be lawfully comprised, and that at least one further member would need to be elected from nominations from the floor under r 11(7). Moreover having the bare minimum of Council members comprising a quorum may also not be “sufficient” under r 11(7) given the risk that not every member can attend every meeting. In such circumstances it seems to me that it would be open to the members at the AGM to elect more members. Ultimately it seems to me that the number of people to be so elected as a consequence of nominations from the floor would be for the members themselves to decide at the AGM (subject to the ultimate limit of four additional members under r 11(1)).
What happened at the AGM?
[31] The record of what happened at the AGM is obscured by the fact that the relevant formal documentation that would normally be expected for such meetings is almost completely absent. There are no formal minutes of the meeting, the notices sent out to members prior to the meeting were not provided in evidence (if they ever existed), and other relevant documentation said to have been produced in that connection was neither referred to in evidence, nor discovered. By itself that is surprising.
[32] After I raised my surprise that there were not at least minutes of the meeting given that there was a dispute as to what had happened at it, a document was produced which purports to be a form of minute of the meeting. This document was not discovered by the Institute. It was apparently discovered by Westpac and then rediscovered by the second to fourth defendants. When Mr Horan was recalled to give evidence about it he said it had not seen it before, and that it appeared incomplete. It obviously is incomplete as it does not record events that plainly occurred at the meeting from the evidence I have heard. It seems to be a record of the meeting formulated in a manner consistent with the Institute’s arguments, and I suspect it was supplied by the Institute to Westpac during the Institute’s attempts to gain control of the Westpac bank account. I do not accept it as a formal minute of the meeting — no
witness said that it was, and it has not been subject to the formal approval procedures that you would normally expect of such a minute.
[33] In terms of what transpired at the AGM this was addressed by two witnesses, Mr Horan for the plaintiff, and Mr Knight for the second to fourth defendants. They both attended the meeting. Given that Mr Horan says that he was voted in as President, and the challenge advanced by the second to fourth defendants to his election and the election of Messrs Brothers and Ackerstaff, his evidence was surprisingly unclear. In his initial affidavit he gave evidence that there were no nominations made prior to the AGM, and accordingly both he and Messrs Brothers and Ackerstaff were elected to their positions as a consequence of nominations from the floor. He said that they were the only persons nominated for those positions, and accordingly were elected by the meeting unopposed.
[34] When he came to give his evidence, however, he said that formal written nominations in accordance with the Rules for each of the positions had in fact been given prior to the meeting. He said that his evidence to the contrary in his affidavit was in error. I am not prepared to accept this, not only because of what his original affidavit evidence said, but because no such written nominations have been provided in evidence, or even discovered. Moreover even on his own revised evidence he accepts that the suggested written nominations meeting r 11(5)(b) were not sent out to members as would have been required. It is clear, therefore, that the matter needed to be addressed from nominations from the floor of the AGM.
[35] In terms of what happened at the meeting, and again based on Mr Horan’s evidence, a process for election of the members of the Council occurred first. This proceeded on the basis that there was no need for a vote as only the existing Council members — Messrs Horan, Brothers and Ackerstaff were standing for office. So without a vote it was declared that they were re-elected as the members of the Council. This position is complicated by the fact that Messrs Horan, Brothers and Ackerstaff were to occupy different official positions, with Mr Horan now being the President rather than Mr Brothers who would now be Vice-President.
[36] The evidence further establishes that following the apparent election of those members as the Council there was unhappiness from some members. A vote of no confidence was put to the meeting. That vote was defeated. That was followed by a third phase of the meeting at which further nominations were made for Council members, following which Messrs Heappey and Chandler were elected as additional Council members.
[37] Mr Blee had been the former President on the Council up until this AGM. Under r 11(1) the immediate Past President is automatically on the Council. The stance of Messrs Horan, Brothers and Ackerstaff was that, following the rotation of positions involving Messrs Horan and Brothers it was Mr Brothers became a member of the Council by virtue of him being the immediate Past President, and Mr Blee was no longer a member of the Council. It seems that Mr Blee was not told of this at the time, but he was advised of this subsequently.
[38] Furthermore, following the AGM it would appear that Messrs Horan, Brothers and Ackerstaff decided to reverse the decision taken at the conclusion of the AGM by the members. Mr Horan described the position in the following terms:
66. The Council, or at least myself, John Brothers and Gerry Ackerstaff subsequently determined that the election of Mr Heappey and Mr Chandler to the Council had to be treated as invalid. It could not simply be let-ride. The election of the Council had already occurred and closed, followed by the motion of no-confidence, before the nominations for Mr Heappey and Mr Chandler were put forward. We determined that accordingly the nomination and elections of Mr Heappey and Mr Chandler were invalid, and advised them and members accordingly.
[39] So the plaintiff’s argument is that the election of the members of the Council was completed following the first phase of the meeting, and that the subsequent elections of additional members from the floor was invalid.
What was the outcome?
[40] I do not accept the plaintiff’s contentions on the outcome of the AGM. In particular:
(a)Because there had been no formal nominations for any of the positions for the Council in accordance with r 11(5) and (6), all members of the Council needed to be nominated from the floor of the meeting. That is expressly contemplated by r 11(7), if necessary supplemented by an election procedure that implicitly could be followed if there were too many nominations.
(b)In any event, the number of persons said to have been elected to the Council at the beginning of the meeting was insufficient to be a quorum, and accordingly did not comprise a duly elected Council.
(c)It does not matter at what time during the meeting elections satisfying the requirements of r 11(7) occur. The fact that the election of the subsequent members occurred at the third phase of the meeting does not prevent them being validly nominated/elected to so comprise a quorum.
(d)Furthermore Messrs Horan, Brothers and Ackerstaff had no authority to simply declare the decision made by the members at the AGM to be illegitimate.
[41] For this reason alone I accept the argument by the second to fourth defendants that Messrs Horan, Brothers and Ackerstaff were not properly elected as members of the Council at the AGM. It also follows that Mr Blee was improperly excluded from the Council.
[42] Moreover the decision to exclude Messrs Heappey and Chandler was undertaken without any lawful authority, and was itself unlawful.
[43] For this reason the decision taken by the “Council”, being a group involving Messrs Horan, Brothers and Ackerstaff disestablishing the Wellington Branch, was without any lawful authority and was illegitimate.
Suspension/closure decision
[44] I next consider the closure decision itself. The evidence relating to the actual decisions made to close the Wellington Branch is also unsatisfactory. Once again there is no written record of the decisions made by the Messrs Horan, Brothers and Ackerstaff. With decisions of this significance it would be necessary for formal resolutions of the Council to be passed.
[45] By an email to all Wellington Branch members dated 12 July 2016 Mr Horan advised of the “suspension” of the Branch. He said at the end of this email:
Council look forward to positive feedback you can give us, but we will be pushing through if we do not get the support for changes required for growth. Your response is required within one month of the date of this letter.
[46] A response to the suggested suspension was sent to solicitors who were then instructed to act for the Wellington Branch in a letter dated 21 July 2016. This was a detailed letter responding to contentions that had been put by Messrs Horan, Brothers and Ackerstaff which I deal with in greater detail below. It asked for any correspondence concerning this issue to be directed to the firm of solicitors.
[47] There was no response to this letter from Messrs Horan, Brothers and Ackerstaff. But some months later, by email dated 13 September 2016, Mr Horan advised all Wellington Branch members that:
As per our previous correspondence, the date of a response/feedback has passed and at this time not one reply was received. If it has been the case that your Executive Committee advised you to not respond, that was a mistake on their part as the NZEI Council has now made a final decision with regards to the Wellington Branch.
[48] This was self-evidently incorrect given the response sent in the three page letter from the Wellington Branch’s solicitors dated 21 July 2016. Nevertheless Mr Horan’s email went on to say:
From this point on, the Wellington Branch is formally closed and no longer exists.
[49]There are two additional problems with the suggested decision.
[50] First these decisions were not in accordance with the Rules. There is no provision in the Rules for the suspension of a Branch pending consultation. The Rules contemplate an investigation and then a decision. Furthermore if a decision was made to “disband” the Branch following an investigation in accordance with r 7(10)–(12), the Rules contemplate that the Institute will take control of the funds and property of the Branch, but hold them on trust for a period of five years. The reestablishment of the Branch would then allow the property to be provided back to the Branch. At the very least that should have been conveyed in any decision made by a properly comprised Council.
[51] In any event there is a more fundamental problem. As indicated from the findings already made, Messrs Horan, Brothers and Ackerstaff could not make decisions as the Council. Rule 12(1) provides:
The Council shall meet half yearly or as often as the business of the Institute may require and at every meeting, four shall constitute a quorum.
[52] Given that, Mr Horan’s own evidence is that on the view of Messrs Horan, Brothers and Ackerstaff only three people were elected at the AGM. The Council did not have a quorum and could not lawfully made the decision that it made.
[53] The plaintiff sought to respond to the difficulty concerning the lack of quorum by relying on the suggestion that the Rules of the Institute were changed by special meeting of the Society in December 2016. Those new rules removed the quorum requirement. There are three problems with this argument:
(a)Any such changes to the Rules occurred only after the decision was made, and could not cure the defective decision.
(b)It would appear that the special meeting to adopt the new rules was not lawfully called. Under r 14(2) a special meeting is convened either by the Council itself, or by request of 20 members. There does not appear to have been a request by 20 members in the present case. The meeting needed to be called by the Council. Here the meeting was called by Messrs Horan, Brothers and Ackerstaff, but they did not comprise a
quorum. As such it does not appear to have been a meeting properly called in accordance with r 14(2).
(c)Moreover the new rules, had they been properly adopted, did not continue the provisions allowing the Institute to take the bank account under the control of a disbanded Branch. Indeed the whole concept of branches was done away with under the new rules. As I see it, unless a lawful decision had been made by the Council giving it ownership of the bank account prior to the changing of the Rules, under the new rules the Institute effectively abandoned any ability to get ownership of the bank account. So this argument does not resolve the plaintiff’s fundamental problem.
[54] For these further reasons, therefore, the decision to disband the Wellington Branch was unlawful.
Reasons for closure
[55] There is a final element of the second to fourth defendants defence to the plaintiff’s claim. The second to fourth defendants say that no reasons justifying closure were apparent. The argument has two interrelated dimensions. First, the second to fourth defendants contend that the rules of natural justice were not followed. Second they say that the reasons put forward by Messrs Horan, Brothers and Ackerstaff did not justify the closure of the Branch under the Rules.
[56] As to the first point, a major decision of this kind — closure of a legitimately established Branch of the Institute — would require the rules of natural justice to be followed. There is an analogy with a decision to exclude a person from membership of an incorporated society.11 The Rules themselves set out procedural requirements. Rule 7(10) empowers the Council to “order an investigation” if a branch “fails or makes no satisfactory attempt to meet its obligations to the Institute”. Rule 7(11) speaks of a “charge of mismanagement” being “laid before the Council” and indicates
11 See, for example, Hopper, above n 2 at [5] and [11]; Peters v Collinge, above n 6; Gibson v New Zealand Search and Rescue Dogs Inc, above n 2, at [38]–[40].
that such charge “shall be investigated”. It seems apparent from these Rules that a decision to disband a branch occurs only when it has been alleged that the branch makes no satisfactory attempt to meet obligations to the Institute, that such an allegation must be formulated in a charge approved by the Council, and that the charge must then be investigated before a decision is made by the Council. Rule 7(10) does contemplate a decision to disband a branch without an investigation, but in context it seems to me that would only arise in situations where an investigation with procedural protections would be a pointless exercise because the breach is admitted, or it is self- evident. The more detailed procedure, incorporating implied obligations of natural justice, would need to be followed in all other cases.
[57] In particular it seems clear to me that the present case required the charges to be put to the Branch, and that the Branch be given the opportunity to respond to the allegations.
What allegations were put?
[58] It does appear that Messrs Horan, Brothers and Ackerstaff did put to the Wellington Branch some suggested failures. By letter dated 2 February 2016 Messrs Brothers and Horan sent an email stating as follows:
The items that Wellington have not adhered to are breaches of the Societies Office, the Institute Rules and tax laws. Please find below a list of some of the breaches:
TAXES
The branch has not paid tax and not filed any tax returns for a period of at least five years (possibly longer).
SOCIETIES OFFICE
Members fees have been subsidised which breaches the Societies Office rules. A not for profit organisation cannot benefit financially a select few. Each branch is an autonomous body as I understand the rules.
WELLINGTON RULES
1. Rule 13.4 states that “The Branch shall pay all subscriptions due to the Institute by its Life Members.” We cannot find any evidence that the Life Members subscription has ever been paid by The Branch. We have listed R W Stannard, A G Cutherbert and H T Knight.
2. Rule 10.3 states that “All cheques shall be signed by the Treasurer and President or such other members who may be appointed by the Branch. Any two members to sign.” We recently received a capitation cheque that was signed by H Knight and J Knight (presumably Harold’s wife). Why are the cheques not signed by John Hutton who has been elected the Treasurer?
[59]The letter also then asked for the last three years financial records.
[60] Mr Knight responded by email dated 15 February 2016 responding to these matters for the Branch. There were then further exchanges by emails dated 22 February 2016, 23 February 2016 and 8 March 2016. By letter dated 4 April 2016 Messrs Horan, Brothers and Ackerstaff then wrote stating:
As a follow up from the AGM the Council requests the following information from the Wellington Branch Executive:
1. Bank Statements
2. Financial Statements
3. Meeting Minutes
4. AGM Minutes
5. Investment Documents
We require your last 10 years records of the above within 3 Weeks as Council would like to carry an audit of the branch as reference from AGM. The cost will be borne by Wellington Branch. Council believes that control of the branch should be run by us to make the branch compliant.
Re previous emails prior to AGM regarding the state of the branch, do you still have confidence your members are compliant in regards to NZEI Rules, Tax and Incorporated Society Rules and are going to carry on running the Branch yourself or adhere to our directives?
Your response to this matter is required ASAP to move forward.
[61] Mr Whittaker responded by email on 5 April for the Branch saying that before the Branch would respond to such information requests the Branch required information from the Institute. Messrs Horan, Brothers and Ackerstaff essentially repeated their requirement for the information by email in response dated 8 April. There were then further exchanges later in April.
[62] In the meantime Messrs Horan, Brothers and Ackerstaff arranged for a meeting with the Inland Revenue Department (IRD) to discuss the tax issue. As a result of that meeting IRD sent correspondence indicating that a separate IRD number for the Wellington Branch was to be discontinued, and that its separate certificate of exemption from resident withholding tax had been cancelled.
[63] All Wellington Branch members of the Institute were then advised of the “suspension” of the Branch by the email dated 12 July 2016. This led to the letter from the Branch’s solicitor of 21 July which was not responded to that I have referred to above.
[64] I accept that the above process means that the Wellington Branch were given an opportunity to respond to the allegations made against them. But I nevertheless conclude that the rules of natural justice were not followed. This is because the allegations or “charges” themselves were unclear, and no genuine attempt was made by Messrs Horan, Brothers and Ackerstaff to consider the responses provided by the Branch. That was particularly true of the letter from the Branch’s solicitors. Indeed I have reached the conclusion that there was ultimately nothing of substance in any of the allegations made against the Branch, and that they did not justify the decision to disband the Branch. I explain those findings by addressing the three key allegations.
Tax
[65] The first key allegation related to tax — or as put in the original email of 2 February 2016 “the Branch has not paid tax and not filed any tax returns for a period of at least five years (possibly longer)”.
[66] I did not receive submissions from the parties on what the correct tax position concerning incorporated societies or the branches of incorporated societies was. For that reason, nothing said in this judgment should be taken to identify the correct position. I note, however, that the Laws of New Zealand records that it is the society itself that is the relevant taxpayer, although branches may obtain a separate GST registration.12
12 Ian Millard QC Laws of New Zealand Incorporated Societies and other Associations at [41].
[67] Before me it was accepted that it was the Institute itself that would be responsible for filing tax returns and paying any tax. It follows that the allegation made by Messrs Horan, Brothers and Ackerstaff was misconceived. The Branch had no obligation to pay tax or file tax returns. That was, in fact, the obligation of the Institute. It is apparent, however, that neither the Institute, nor the Wellington Branch had any true understanding of what the requirements were. So it was a situation of mutual misunderstanding. The exchanges between the parties during the investigation did not create any greater clarity. But in any event any criticism by the Institute of the Branch in this respect was unwarranted. It would be the Institute itself that would have to take the lead resolving what would be, in the end, a failure by it to meet any relevant obligation.
[68] There was also no practical significance arising from this matter. Mr Horan confirmed in evidence that as a consequence of the meeting with IRD it had advised that no issue would be taken about any suggested historic tax liability and the focus would be on resolving the matter for the future. Given that it seems to me that any suggestion that the Wellington Branch had failed to meet its obligations to the Institute on this matter was unfounded.
Improper subsidisation
[69] The second criticism of the Wellington Branch is a suggestion that the Branch was subsidising the membership of particular members, and particularly life members. This was said to be a breach of the Institute’s Rules, and the Wellington Branch’s own rules. The nature of the suggested subsidisation or the breach of the rules was not clear. Once again the exchanges during the investigation did not clarify the position.
[70] The way that the arrangement for membership fees worked involved members of the Branch paying their annual subscriptions that included both the national subscription, and a separate subscription for the Branch. The Institute would then effectively bill the Branch for the national membership subscriptions.
[71] Mr Horan accepted in evidence that the Branch had paid all amounts that were due to the Institute for subscriptions. Given that it is difficult to understand how the Branch was failing to meet its obligations to the Institute. I understood Mr Horan to
suggest that the Branch must have been using its reserves to pay the national membership subscriptions for life members of the Wellington Branch who still needed to pay Institute membership subscriptions. If that is the criticism I see very little substance to it, and it certainly would not justify a decision to disband the Branch.
[72] In that context it should be remembered that one of the objects of the Institute is to set up such Branches (r 2(b)). The Branch represented a significant group of members of the Institute. So it seems to me that a reasonably substantial issue would be necessary before taking a step that would otherwise be inconsistent with the objects of the Institute.
Improperly signed cheque
[73] The final matter was the alleged breach of r 10.3 of the Wellington Branch rules requiring all cheques to be signed by the Treasurer and the President (or another member appointed by the Branch). There is no dispute that there was a cheque signed by Mr Knight that was also signed by his wife as a second signatory. The signature by his wife was inconsistent with the requirement of the Wellington rules in relation to signing of cheques. It is accepted that this occurred, with an explanation provided that no proper counter-signatory was available. Again not much constructive analysis was engaged in during the investigation stage.
[74] The cheque in question was a cheque to the Institute itself for the annual subscriptions. So it was not a cheque delivered externally. Moreover it is not suggested that this was any more than a one-off situation. I have real doubts whether this could be said to be a failure of the Branch to meet its obligations to the Institute at all — the cheque was duly presented and honoured. But even if it is, it is clearly well short of a breach that would justify the disbanding of the Branch.
[75] I should also mention that during the investigations Messrs Horan, Brothers and Ackerstaff appeared to add a further allegation that the Branch had not achieved a substantial increase in membership. I agree with the submissions of the second to fourth defendant there can be no suggestion that that involve a breach of any obligation to the Institute.
Conclusion
[76] Having considered the “charges” or criticisms made of the Branch I conclude that they were without any substance, that the allegations were confusing, and that Messrs Horan, Brothers and Ackerstaff did not genuinely make any attempt to assess whether there had been a breach, or the seriousness of any breach. There was no basis for suspending the Branch, and the rules of natural justice were not followed. It follows that the decision to disband the Wellington Branch was unlawful for this further reason as well.
Recess
[77] In his closing submissions, Mr Patterson for the plaintiff advanced an alternative argument, perhaps sensing that the plaintiff’s claims were likely to fail. He argued that the position now was that the Wellington Branch had effectively ceased to exist, such that it had disbanded under r 7(12) of the Rules. He also pointed to certain documents suggesting that those behind the Wellington Branch had taken an aggressive stance during this dispute. One email recorded:
If the worst comes to the worst, we can go to Court and expend our retained funds fighting for justice, rather than allow them to be squandered elsewhere (Auckland).
[78] I agree that this email, and perhaps others, suggest that an unnecessarily aggressive stance may have been adopted by some, effectively matching the attitude of Messrs Horan, Brothers and Ackerstaff. But that does not mean that there was a breach of the Rules, or that the Branch ceased to exist.
[79] It is true that a new society exists effectively as a substitute for the Wellington Branch. But it seems to me that the Branch has continued, at least in notional form. It has also been undertaking one active role, which is to fund the second to fourth defendants’ defence to these proceedings. The objects set out in the Branch rules include to “uphold and maintain the just claims of its members, both individually and collectively” (r 3(d)), and “to subscribe to or affiliate with any society having similar objects” (r 3(h)). The Branch funded the proceedings to uphold the claims in relation to the suggested improper closure of the Branch, and the Institute’s desire to take the
proceeds of its bank account. Such steps were legitimate, and demonstrate that the Branch has still been active. The Branch has otherwise become closely associated with the other society, as its rules permit. Accordingly I reject Mr Patterson’s alternative argument.
Discretion
[80] I heard submissions from the parties as to whether the Court should apply a discretion in relation to relief. In particular Ms McKeown argued that even if the plaintiff established that the Branch had been disbanded, the Court should decline relief. She relied on the following observation of Hammond J in Kung v Country Section NZ Indian Association Inc:13
In the sporting clubs and social and professional organisation cases attempts to sandbag or take over meetings and control of an organisation are not unheard of. But in my view a Court must still ask whether, even if everything has been done “according to the book”, such a plaintiff has acted fairly and appropriately in all the circumstances before granting the relief sought.
[81] As indicated above, in my view cases such as the present should be addressed by an action for judicial review under the Act. One of the advantages of doing so is that the provisions concerning the discretion as to relief can be applied. They include provisions saying that relief may be declined for a defect in form or technical irregularity, and the decision validated (s 19), and the more general provisions concerning relief and the discretion as to relief in ss 16–18. There is also well- developed case law on the exercise of the discretion in the judicial review context. All of this is appropriately applied in relation to decisions involving incorporated societies. It is not obvious how a discretion in relation to relief arises if the such cases are analysed purely under the law of contract, and assessed as breaches of contract. It is a further illustration why the Act should be used for this kind of case.
[82] Apart from making that observation, it seems to me that any suggestion concerning the discretion as to relief is not relevant in the present case. The actions by the persons purporting to act as the Council of the plaintiff were plainly unlawful, and for many separate reasons.
13 Kung v Country Section NZ Indian Association Inc [1996] 1 NZLR 663 at 666 (HC).
Conclusion
[83] The proceedings were originally brought as an attempt by Messrs Horan, Brothers and Ackerstaff to get the money in the Branch’s the bank account. This action fails. In any event there is now no money in the bank account.
[84] At one stage in the argument there was perhaps the suggestion that further action might be pursued against individual members of the Wellington Branch for allegedly disbursing money from the account improperly. I accept, however, that the spending of the money in the account on these proceedings was a legitimate function of the Branch. Furthermore any further litigation in this matter should be avoided. It has involved a significant waste of members’ money on both sides. Indeed it would now seem that the Institute is close to insolvency.
[85] It is not the function of the Court to decide how all those involved should see the future. I note that the report of the Law Commission into Incorporated Societies said the following in relation to branches:14
4.39 The cases illustrate that the current legislative scheme may lead to disputes between societies and branches, or lead to relationships and administrative arrangements that neither the society nor the branch are satisfied with. It would be helpful if the legislation provided clearer guidance on respective branch and society rights and obligations, or at the very least mandated a process for resolving differences over these, should they arise.
[86] The Commission recommended new legislation, including a recommendation that branches should themselves incorporate as a separate society.15 In the present case it seems to me that is probably the appropriate way forward for the present parties. Effectively that is what has already happened as the Wellington Branch now continues as a separate society. That is hardly surprising given the steps initiated by Messrs Horan, Brothers and Ackerstaff who presently seem to have gained control of the Institute.
14 Law Commission A New Act for Incorporated Societies (NZLC R129, 2013).
15 At 61.
Result
[87]For the above reasons the plaintiff’s claims are dismissed.
[88] The second to fourth defendants are entitled to costs. I will receive memoranda if costs cannot be agreed, with any memorandum claiming costs to be filed within 15 working days (10 pages maximum) and any response 10 working days thereafter (10 pages maximum).
Cooke J
Solicitors:
Lateral Lawyers, Auckland for Plaintiff Simpson Grierson, Auckland for First Defendant
Johnson Lawrence Lawyers, Wellington for Second, Third and Fourth Defendants
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