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High Court of New Zealand Decisions |
Last Updated: 25 July 2011
IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY
CIV-2011-435-96
UNDER rule 19 of the High Court Rules
IN THE MATTER OF an election to the office of President of the
Phoenix Astronomical Society Inc
BETWEEN THE PHOENIX ASTRONOMICAL SOCIETY INC
Applicant
AND RICHARD FREDERICK HALL Respondent
Hearing: 13 July 2011
Counsel: P S Davidson for applicant
D Bleier for respondent
Judgment: 13 July 2011
ORAL JUDGMENT OF DOBSON J
[1] In these proceedings, the applicant (the Society) seeks orders preventing the respondent (Mr Hall), who is a founding member and previous President of the Society, from standing for election to the office of President of the Society, or to stand for any other nominated positions on the Society’s governing Council.
[2] The proceedings were commenced on 18 May 2011, in anticipation of the Society’s annual general meeting that was then scheduled for 18 June 2011. The present Council of the Society has postponed the annual general meeting from
18 June 2011, until the outcome of these proceedings is known, and there is accordingly an imperative to provide the parties with an answer to the issues raised
by the proceedings promptly. It is agreed that the adjourned meeting will occur
THE PHOENIX ASTRONOMICAL SOCIETY INC v HALL HC MAS CIV-2011-435-96 13 July 2011
21 days after my judgment. I am accordingly delivering an oral judgment, having heard argument this morning. I reserve the prospect of making minor alterations to the reasoning before issuing this judgment in final form. I am comfortable proceeding in that way as I have a very clear view as to the substantive merits, notwithstanding the limited time available to appropriately order the detail of my reasoning.
The form of proceedings
[3] The Society has sought to pursue the proceedings by way of an originating application under Part 19 of the High Court Rules. That is an alternative to the standard means of commencing civil proceedings in this Court. The originating application procedure is available in limited circumstances, and requires the leave of the Court in each case. Reliance on the originating application procedure was formally opposed on behalf of Mr Hall.
[4] However, when I raised the nature and extent of prejudice to Mr Hall claimed to arise from the Society’s use of this procedure, Mr Bleier was inclined to accept that the forms of prejudice that had arisen shortly after the proceedings were commenced have now been substantially addressed, and that there is no real prejudice to Mr Hall in addressing the substantive issues required to be determined, because of the absence of the usual interlocutory procedures that would be available to him.
[5] Later, in Mr Bleier’s submissions for Mr Hall, he did raise a concern that the originating application procedure prevented Mr Hall having Mr Gomez cross- examined. Mr Gomez is the incumbent President of the Society and he has sworn two affidavits in support of its case. Mr Bleier suggested that he could have questioned Mr Gomez on the present Council’s mandate to bring the proceedings. I am not satisfied that that is an issue on which I would be helped by having cross- examination. The existing Council has brought the proceedings on the explicit assumption that it is authorised to do so because of the scope of the powers given to it under the Constitution. There is no suggestion that it has sought a mandate by convening a meeting of members generally, or polling them.
[6] In the end, I am satisfied that there has not been any material prejudice to Mr Hall’s interests in the proceedings being brought on for substantive argument promptly in the way that they have.
[7] The Court still needs to be satisfied that the case is an appropriate one for use of the originating application procedure. A recent decision cited by Ms Davidson in which the scope of proceedings that might appropriately be commenced by originating application is that of The Hong Kong and Shanghai Banking Corporation
Ltd v Erceg.[1] After reviewing decisions in respect of the grant of leave to commence
proceedings by originating application, that judgment continued:[2]
These cases show that the type of proceeding suited to the originating application procedure is a straightforward application, not requiring detailed pleadings or interlocutory orders for its fair resolution. Such a type of proceeding tends to be an application under a specific statutory provision, where the issue that arises can be clearly defined, and the issues confined. The procedure is not well suited to the determination of substantive rights involving the application of common law doctrines as distinct from statutory tests. It is not well suited to cases involving multiple parties, and cases where there is the possibility of crossclaims or counterclaims.
[8] As I hope my analysis of the substantive issues will demonstrate, I am satisfied that the issue sought to be litigated by the Society is a confined one of the type that is appropriately advanced expeditiously by way of originating application. The facts have been relatively efficiently addressed in three affidavits, the issues are within a relatively narrow compass, and the delays that would be involved in pursuit of any interlocutory initiatives are not warranted. I therefore consider that the form of proceeding used on behalf of the Society is appropriate, and grant leave for the proceedings to be commenced as they have.
Court’s jurisdiction to intervene
[9] The next point taken on behalf of Mr Hall was that the Courts have been reluctant to intervene in the affairs of an incorporated society, and that it would be
inappropriate for the Court to assume jurisdiction to do so here. Mr Bleier cited the
decision of the Court of Appeal in Hopper v North Shore Aero Club Inc, in which the
Court of Appeal acknowledged:[3]
Where the activities of a private entity are private in nature, the courts have demonstrated a reticence to interfere with matters of internal management or regulation.
[10] That is not authority for the proposition that the Court does not have jurisdiction to grant relief in cases such as the present, but rather that the private nature of issues gives rise to meaningful considerations as to whether the Court ought to intervene. Indeed, it is clear that the Court has jurisdiction to intervene in the affairs of an incorporated or charitable society.[4]
[11] Accordingly, I do not accept that the nature of the dispute is one that the Court cannot entertain. This point is really a factor against the Court intervening, rather than raising a basis on which the Court is prevented from doing so.
The substantive issue
[12] The Society was registered as an incorporated society on 12 November 1998 and has subsequently also been registered as a charitable entity under the Charities Act 2005. Mr Hall and his then wife established the Society and he was the Society’s President from its incorporation until June 2008.
[13] The initial objectives specified in the Society’s Constitution are to encourage interest in astronomy and related subjects, and to facilitate astronomical research and observational astronomy.
[14] According to Mr Hall, in the Society’s first 10 years or so, membership grew to over 600. The current President, Mr Gomez, has deposed that the current membership is some 350 and that it ranks as the second largest astronomical society
in New Zealand.
[15] The Society has clubrooms, observatories and a structure known as Stonehenge Aotearoa at a property on Ahiaruhe Road, out of Carterton in the Wairarapa. Those facilities are located on a property owned by Mr Hall and his former wife. The Stonehenge structure is a full-scale adaptation of the ancient Stonehenge structure on Salisbury Plain in England. It appears that the Society attributes astronomical and seasonal relevance to the layout of the stones, and Mr Gomez assesses Stonehenge as increasingly becoming a tourist attraction which generates the bulk of the Society’s gross income.
[16] Stonehenge Aotearoa was built in 2005 with funding provided by The Royal Society of New Zealand for materials and some professional services, and most of the labour being contributed free by Society members.
[17] Mr Gomez also deposed that the Society has a lease from Mr Hall and his estranged wife for the part of the property on which its clubrooms and observatories are located, but that the validity of that lease is now disputed by the estranged wife. I understand there is no formal tenancy in relation to the part of the land occupied by Stonehenge Aotearoa.
[18] Mr Hall deposes that he decided to step down as President due to “some difficulties in my marriage” and because, “considering my difficulties, I thought it best if someone else was in control of the Society”. Mr Gomez succeeded him as President, and it appears that that change occurred in 2008.
[19] At some point after standing down as President, Mr Hall and other members of the Society pursued an initiative to operate the Stonehenge facility via a company, having a contract to do so from the Society. A company called Starlore Limited (Starlore) was incorporated in November 2010. All five of the members of the Society who became shareholders hold 20 per cent each of the shares in Starlore, and each of them are directors. These include Ms Kay Leather, Mr Hall’s current partner, who was a member of the Council of the Society, at least throughout the period since Mr Hall resigned as President.
[20] In November 2010, a heads of agreement was negotiated between those about to form Starlore and the Society, pursuant to which Starlore would take over the management and operation of the Stonehenge astronomy centre, to develop and run the astronomical, historical and cultural programmes for the public. From Mr Hall’s perspective, this enabled arrangements to pay the Society members who contributed to running Stonehenge. Under the heads of agreement, Starlore pays the Society a royalty of three per cent of gate sales charged for the “visitor experience” at Stonehenge. The heads of agreement is to apply until 2 December 2011, with the parties to it committed to resolving a full contract not later than that date.
[21] Since the heads of agreement was concluded, Mr Hall has become disenchanted with the governance of the Society by Mr Gomez and the present Council. He cites lack of initiatives and a drop in the Society’s membership.
[22] The Constitution of the Society provides for annual elections of a President, other executive officers comprising a Vice President, Treasurer and Secretary, and three “ordinary Council members”. The Constitution also provides that the executive officers are to be elected as a team, so that a member proposing to stand as President would join with others proposing to stand as Vice President, Treasurer and Secretary as a “ticket”.
[23] Mr Hall deposes that at the beginning of May 2011, he submitted an application to stand for President and nominated a team of members who would stand on “his ticket” as Vice President, Treasurer and Secretary. In addition, three other members were proposed as the ordinary members of Council for that “ticket”. Kay Leather was the nominated member standing on Mr Hall’s ticket for Secretary.
[24] Mr Hall also deposes that the details of his team’s candidacy were not published in the Council’s newsletter for May, which he anticipated in accordance with the usual practice. Instead, the existing Council asked Mr Hall and his team to withdraw their nominations. From Mr Hall’s perspective, the action has been taken by the present Council because they do not wish to face an election against Mr Hall’s team.
[25] Mr Gomez deposes to certain concerns from the existing Council’s perspective. They considered Mr Hall’s nomination unacceptable because Mr Hall’s interest under the heads of agreement as a director and shareholder in Starlore would create an “unmanageable and irremediable” conflict. The present Council takes the view that the operations of Stonehenge are discussed at every Council meeting, and that it so dominates the affairs of the Society that it is unthinkable for a director and shareholder of Starlore (cast by the current executive as being a commercial organisation) also holding office as President of the Society. The present Council see an inevitability of the need for on-going negotiations between the Society and Starlore, to an extent that it would not be tenable for a President of the Society to discharge the obligations of that office whilst recognising an obligation to absent himself from any dealings with Starlore.
[26] The Society’s Constitution does not contain any provisions to regulate conduct in circumstances where an officeholder has a conflict between his or her fiduciary obligations to act in the best interests of the Society, and a personal interest potentially in conflict with that. In essence, the proceedings have been brought on terms inviting the Court to recognise that is a relevant omission, and to supplement what could have been a provision in the Constitution, forbidding the holding of office where there was an on-going, material conflict of interest that would impede an officeholder from discharging the fiduciary obligations owed to the Society.
[27] The parties take different views as to the relative significance of this conflict of interest. The perspective of the current Council is that the conflict would arise constantly, and would disqualify officeholders who were interested in Starlore to an extent that they could not expect to discharge their obligations to the Society because of the constant requirement to exclude themselves. Ms Davidson submitted that one of the on-going functions of the Council is to monitor the performance of Starlore under the heads of agreement, with a view to enforcing the obligations owed under it to the Society.
[28] In addition, in the coming months, the Council is required to negotiate a “fully binding” contract for the provision by Starlore of the services covered by the heads of agreement, implicitly on a longer-term basis. Ms Davidson argued that
these responsibilities constitute such a large part of what will be expected of the President and Council, that it is untenable for someone to stand for that office when they would be disqualified from participating in it.
[29] For Mr Hall, it is argued that this characterisation of the importance of the conflict of interest has been advanced in “overblown and emotive” terms. The essentials of the relationship between the Society and Starlore were negotiated quite satisfactorily by the present Council with the directors of Starlore, and in all likelihood the longer term contract will adopt the material provisions from the heads of agreement. The original bargain was struck on arm’s length terms, and it seems the concept of a royalty paid to the Society, irrespective of whether Starlore breaks even on the operation, was and remains appropriate.
[30] On Mr Hall’s view of the scope of presidential responsibilities, he sees no difficulty in exempting himself from the Council’s activities in dealing with Starlore, and that that would not prevent him discharging his duties owed to the Society. He argued that this would particularly be the case given the manner in which the present Council have elevated the importance of the issue.
[31] If he and his team are permitted to stand, Mr Hall anticipates that there would now be a thorough and well-informed debate at the annual general meeting of relatively how important the conflict of interest is, and whether the membership at large would be comfortable with his proposals for avoiding the conflict of interest. On his approach, if the members then elect him and his team, they would be doing so on a fully informed basis, and the level of sensitivity would ensure that Mr Hall respected the need to maintain a separation of his own and the Society’s interests.
[32] The Society’s rejoinder to this approach was to argue that it demonstrated how unrealistic Mr Hall was in relation to the pervasive nature of the conflict of interest, and that his attitude demonstrated that he really did not appreciate the significance and extent of the conflict of interest at all.
[33] I am satisfied that a material and on-going conflict of interest is very likely to arise for Mr Hall, if he were elected as President of the Society and attempted to
fulfil all parts of what goes with that office. The activities at Stonehenge are likely to continue to be a very important element of the Society’s overall activities, and they are certainly the distinctive feature that is likely to give the Society a profile with those who are likely to be interested in astronomy.
[34] I accept that the financial significance of the activity is not assured. As Mr Bleier submitted, although the gross takings from Stonehenge activities in the years ending 31 March 2010 and 2011 were some $74,600 and $40,300 respectively, after payment of expenses the financial outcome was a deficit in 2010 of some
$1,500, and a modest surplus of some $618 in 2011. Those financial outcomes are not necessarily indicative of the future significance of the activity, and from the Society’s perspective, the Stonehenge activities may well assume a significance beyond the financial outcomes.
[35] However, I am not satisfied that the Court should intervene because of that prospect to prevent Mr Hall standing for the office of President, because the present Council can make out the possibility of it occurring. The decision is quintessentially one to be made by the fully informed membership of the Society. The prospect for procedures to be put in place that would enable the conflict to be managed cannot be ruled out. It is not for the Court in the circumstances as they have developed, to deprive the membership of the Society of the choice to opt for a President who would be materially impeded by conflicts of interest, but otherwise has attributes that a majority of the members would want to secure, notwithstanding the impairment to his acting in all roles as the President.
[36] The correspondence attached to Messrs Gomez and Hall’s affidavits certainly reveals spirited differences of opinion and a potentially destructive stand-off between the existing Council on the one hand, and Mr Hall and those supporting him on the other. Ms Davidson guardedly accepted my suggestion that the relationship between the Society and Starlore is potentially a symbiotic one, which, if managed on both sides with positive attitudes, could be mutually beneficial on an on-going basis. That is not to denigrate the importance of potential conflicts of interest. It does, however, illustrate that they are not necessarily going to occur in the constant and on-going manner in which the present Council pessimistically predicts.
[37] The correspondence includes a prospect as to how Ms Leather could remain on the Council and manage the conflict arising from her interest in Starlore. Mr Gomez apparently is now not so sure that that proposal was appropriate, and it could be argued that the conflict would be more acute for the President than for a member of the Council. However, it remains illustrative of the prospect of working around conflicts if there is a will to do so.
[38] Provided the membership is fully informed, and able to make decisions as to who should lead their Society in light of procedures that would be put in place to deal with the conflicts of interest as they arise, then the Society’s membership should be afforded the opportunity to do so.
[39] Part of the Society’s criticism of Mr Hall is its view that he has failed to appreciate the extent to which he would have a conflict of interest, and because of that, I was invited to assume that he would not be competent to manage circumstances of conflict as they arose. Again, however, provided the membership has adequate opportunities to debate how such conflicts are to be dealt with, then Mr Hall would not have a final say on such procedures.
[40] Small and essentially voluntary organisations such as the Society may be able to resolve for themselves a sufficient rationalisation of interests to accommodate contributions from those seen as having both something to contribute to the organisation, as well as some personal interest of potential gain from dealings with it.
[41] Ms Davidson has not persuaded me that assumption of office as President by Mr Hall inevitably creates a material breach of fiduciary obligations that would require him to be peremptorily excluded from that office before the members of the Society have had the opportunity to consider and vote on the issue.
[42] I have tested this instinctive analysis against the approach adopted by the
Courts in somewhat similar situations. First, in New Zealand Netherlands Society “Oranje” Inc v Kuys and The Windmill Post Ltd,[5] the Privy Council upheld a Court of Appeal analysis which declined to find a breach of fiduciary duty by Mr Kuys and his company, where he had an arrangement with the appellant society to publish a news sheet of interest to members of the society. That decision illustrates that the scope of fiduciary duties, and breach of them, will be dependent on the transactions
involved. Sanctions or remedies cannot be predicated in advance.
[43] Here, it is premature to eliminate the prospect of arrangements between the Society and Mr Hall that would regularise his involvement with Starlore, or at the very least not constitute an on-going breach that would disqualify him from holding office as President.
[44] So, too, in Turner v Pickering.[6] There, emphasis was placed, in the context of incorporated societies, on the contractual basis for regulating relationships as between members, and an onus existed on claimants to show that any irregularities were not of a type covered by the “internal management” rule, and therefore not susceptible to confirmation by a majority of the members.
[45] Then in Finnigan v New Zealand Rugby Football Union, this Court observed:[7]
The rule of internal management which originated in company law is
applicable to incorporated societies equally as to companies...
...[claimants] cannot complain of acts which are valid if done with the approval of the majority of shareholders, or are capable of being confirmed by the majority, and can only maintain their action when the acts complained of are of a fraudulent character, or are ultra vires the company, mere irregularity or informality which can be remedied by the majority being insufficient.
[46] Those analyses clearly signal the reluctance of the Court to intervene in internal management of an incorporated society and that reluctance must be even greater where concerns are raised in an anticipatory form.
[47] One discrete concern raised for the Society is that its charitable status is of significant importance to it. Because of the terms of recent enquiries made of the Society by the Charities Commission, Mr Gomez deposed to concerns that if Mr Hall held office as President when also having interests as a shareholder and director of Starlore then, given the company’s commercial focus, the Charities Commission is likely to view that as compromising the charitable status of the Society, thereby putting it at risk.
[48] It is beyond the scope of these proceedings to form any view on whether the link between the Society and Starlore would be viewed materially differently in terms of the criteria for charitable status in the Charities Act 2005 if Mr Hall was President. I am not in a position to predict that Mr Hall’s election as President would cause the Society to lose its charitable status. That may indeed be so, or if Mr Hall and his team were elected, it may well be that redefinition of the scope of charitable activities of the Society could be achieved in a way that does not jeopardise the status as presently enjoyed. As I raised with Ms Davidson in reply, the Court is familiar with situations in which charities have been forced to separate the genuinely charitable from the quasi commercial activities to preserve their charitable status.
[49] The additional consideration of possible impact on charitable status is not sufficient, on its own or when added to the concerns at the prospect of breach of fiduciary duties, to justify intervention by the Court.
[50] A somewhat different point raised by Ms Davidson in relation to the Society’s charitable status was that the Court has a general supervisory jurisdiction in relation to charities, so that the Court might more readily intervene to prevent any wrongdoing in the administration of a charitable organisation, than if the entity did not have that status.
[51] Mr Bleier argued that the nature of the charitable activities undertaken by the Society did not warrant the Court adopting any different approach to intervening. He contrasted the character of the activities that qualified the Society for charitable status, being largely educational in character and internal in their effect within the membership of the Society, with more outward looking charitable organisations such as the Cancer Society, which existed to raise charitable donations to assist those non- members suffering ill-health. In a sense, Mr Bleier’s response was a further appeal to the Court to respect the internal management rule that interference in relation to activities giving rise to the concerns here is not warranted when they were matters that ought to be left to a fully informed membership to decide for themselves.
[52] I am not satisfied that the Society’s charitable status justifies intervention to prevent the members having the opportunity of choosing between Mr Hall and his “ticket” for election to office, and the other “tickets” that may oppose them in a ballot.
[53] Accordingly, I decline to make the orders sought on behalf of the Society in its originating application.
Costs
[54] Both parties have sought costs if successful, against the other. There is no reason why costs ought not to follow the event and I order costs in favour of Mr Hall against the Society, on a 2B basis. Whether Mr Hall enforces the extent of the order he is entitled to is a matter for him.
[55] Mr Bleier has argued that if I reach this point, I ought to grant him leave to file submissions in support of an application that Mr Hall be entitled to a costs order against the present members of the Council, in their personal capacity. I will grant him leave to file such submissions. If he does so, they should be filed within 14 days and Ms Davidson would thereafter have a further 14 days in which to file a memorandum in response.
[56] However, I should flag that my provisional view is to find the prospect of such a personal costs order less than attractive. Whilst Mr Hall may wish to attack the bona fides of the Council members responsible for the initiative taken in the name of the Society, they have done so, assuming it was an appropriate step for the Society to pursue. In the absence of any warning earlier in the proceedings that, if his position was vindicated, Mr Hall would seek costs personally against the Council members, it seems unlikely that they would contemplate this adverse consequence arising from a failure in the Society’s proceedings. I leave Mr Hall and his advisers to reflect on the point.
Dobson J
Solicitors:
K Daniels, Masterton for applicant
Tanner Keys & Co, Carterton for respondent
[1] The Hong Kong and Shanghai Banking Corporation Ltd v Erceg HC Auckland CIV-2010-404-2835, 23 July 2010.
[2] At
[25].
[3]
Hopper v North Shore Aero Club Inc [2006] NZCA 308; [2007] NZAR 354 (CA) at
[10].
[4] See
Turner v Pickering [1976] 1 NZLR 129 and Finnigan v New Zealand Rugby
Football Union
(No 2) [1985] 2 NZLR 181 (CA).
[5] New Zealand
Netherlands Society “Oranje” Inc v Kuys and The Windmill Post Ltd
[1973] 2 NZLR 163
(PC).
[6]
Turner v Pickering [1976] 1 NZLR 129 at
141.
[7]
Finnigan v New Zealand Rugby Football Union ) [1985] 2 NZLR 159 at
172.
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