New South Wales Supreme Court CITATION : St Michaels Golf Club v Donald Bell [2002] NSWSC 61 FILE NUMBER(S) : SC 5484/01 HEARING DATE(S) : 5th February 2002 JUDGMENT DATE : 18 February 2002 PARTIES : St Michaels Golf Club Donald Bell JUDGMENT OF : Gzell J at 1 COUNSEL : Mr R D Wilson for the Plaintiff Mr T Lynch for the Defendant SOLICITORS : CATCHWORDS : Corporations Act - qualification of audit report - article proscribing remuneration to directors - no breach - limited to individual - honorary treasurers duties - auditor proper contradictor - annual general meeting forum does not exclude power to grant declaration - no inhibition of auditor's duties - authority to commence proceedings - sufficient utility in threat of report to ASIC and future payment LEGISLATION CITED : Corporations Act 2001 Supreme Court Act 1970 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 Aisnworth v Criminal Justice Commission (1991-1992) 175 CLR 564 Russian Commercial and Industrial Bank v British Bank of Foreign Trade Ltd [1921] 2 AC 438 CASES CITED : Morgan's Brewery Co. v Crosskill [19102] 1 Ch 898 Cyclists' Touring Club v Hopkinson [1910] 1 Ch 179 Re William Thomas & Co Ltd [1915] 1 Ch 325 Forster v Jododex Pty Ltd [1972] 127 CLR 421 DECISION : See paragraphs 39, 40, 53 and 54 - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION 5484/01 Gzell J 18 February 2002 ST MICHAELS GOLF CLUB v Donald BELL Judgment 1 His Honour: The plaintiff, as its name suggests, is a golf club. It is a company limited by guarantee. The defendant is its auditor. The plaintiff seeks declaratory relief arising out of the defendant's qualification of the financial report of the plaintiff for the year ending 30 June 2001. 2 Except for one matter to which I will return, the facts are not in issue. Domenic A Cutrupi is the honorary treasurer of the plaintiff. He is a chartered accountant and is a director and shareholder of Stafford & Partners Services Pty Limited ('Stafford'). Apparently he also has an interest in Stockford Accounting Services Pty Ltd ('Stockford') which is said to be the new name for Stafford. The company search which was in evidence does not show these details. 3 In the year ended 30 June 2001, the plaintiff paid Stafford $4,860.00 and Stockford $600.00 for accounting services. Some of the work was performed by Mr Cutrupi. $4,500.00 of the payment to Stafford related to the preparation of the financial accounts for year ended 30 June 2000, preparation of an asset register and depreciation schedule and the creation and updating of the plaintiff's corporate register. The remaining $360.00 related to the preparation of the September 2000 quarter Business Activity Statement ('BAS') and the preparation of depreciation schedules for October and November 2000. Stockford's charge of $600.00 related to services provided from 1 December 2000 to 31 March 2001 in maintaining the corporate register including lodgement of change of director forms with the Australian Securities & Investments Commission ('ASIC') and preparation of monthly assets/depreciation schedules. Stockford has accrued, but not charged the plaintiff, $5,000.00 with respect to the preparation of the accounts of the plaintiff for the year ended 30 June 2001. 4 Attached to each invoice was an analysis of time/fee/disbursements which show that the fee charged to the plaintiff was highly discounted. The total charge out figures for the three invoices were $6,565.10, $742.30 and $954.60 respectively. Of these amounts, Mr Cutrupi's charge-out time was $3,510.00, $877.50 of $1,373.50 before write-offs and $340.00 respectively. 5 Note 17 to the financial statements of the plaintiff for the year ended 30 June 2001 contained the following statement: 'During the year Stafford & Partners, a firm of which Mr Domenic Cutrupi is a principal, provided accounting services under normal commercial terms and conditions. The total fees rendered amounted to $5,460.00 and an additional $5,000.00 has been accrued in respect of the preparation of the 2001 year accounts.' 6 The financial report of the plaintiff was the subject of an independent audit report by the defendant dated 25 October 2001. Under a heading 'Qualification' reference was made to Accounting Standard AASD1017 and Statement of Accounting Concepts SAC 2. The report continued: 'Following from the above we draw the members' attention to Note 17 of the financial statements detailing director related transactions and advise that it is our opinion that the remuneration reported in this note was received by an honorary member of the Committee in contravention of Article 74 of the Club's constitution as detailed below and that this breach was not detailed in the note.' 7 Article 74 of the constitution of the plaintiff ('article 74') was then set out: 'No member of the Committee will receive any remuneration for his services but each member will be entitled to repayment out of the funds of the Club for out-of-pocket expenses and disbursements reasonably and properly incurred, including (in the case of the Honorary Treasurer) salary or wages paid for clerical or other assistance. The expression "remuneration" in this article does not include any amount which may be paid by the Club pursuant to articles 113 and 114 hereof. In the event of a person being employed by the Club as a treasurer, the member for the time being filling the position of Honorary Treasurer will continue as a member of the Committee notwithstanding the employment of the treasurer. No employee will be entitled to vote at any meeting of the Committee or to take part in the deliberations of the Committee further than the Committee allows.' 8 The audit report continued: 'The subject of the above non disclosure relates to a fee paid in relation to the preparation of the annual accounts for the year ended 30 June 2000, the cost of which was known at the time the accounts were prepared. The effect of this is that the profit for the year ended 30 June, 2000 was overstated by $5,460. Upon instruction from this Firm, the cost of preparing the current year accounts was accrued in an amended version of the financial statements.' 9 There followed a qualified audit opinion in the form that except for the effects on the financial report of the matter referred to in the qualification, the financial report of the plaintiff was in accordance with the Corporations Act 2001 ('Act') including giving a true and fair view of the company's financial position as at 30 June 2001 and of the performance for the year ended on that date and complied with Accounting Standards and with other mandatory professional reporting requirements. 10 The matter in issue was the belief of the defendant that Mr Cutrupi would undertake the accounting services in an honorary capacity. Following a recommendation of Garry Keleher, the president of the plaintiff, accepted by his co-directors, a decision was made to separate the accounting and audit functions. Until the year ended 30 June 2001, the defendant had performed both functions and charged a commercial fee for them. 11 Mr Keleher swore an affidavit in which he said that from June through to August 2000 the new General Manager of the plaintiff together with Mr Cutrupi and at least two other directors spent many hours trying to unravel the accounts and put them into order. Mr Keleher said that Mr Cutrupi was involved almost daily. He worked in the office at the Club sometimes after work on a week night and for a number of hours both on Saturday and Sunday. He did not charge for this work. Mr Keleher said that during August 2002 it became apparent to him that the plaintiff would not be able to meet targets for preparation of the end of year accounts and it was, therefore, in or about September 2000 that Stafford was retained by the plaintiff to finalise the preparation of its financial accounts for the year ended 30 June 2000. 12 Mr Anthony Bell swore an affidavit in which he deposed to a meeting at the Club on 26 June 2000 at which Mr Cutrupi and Mr Keleher were present. Mr Anthony Bell said that he and the defendant were informed that Mr Cutrupi would be preparing the accounts for the year and doing the working papers for the audit. Mr Anthony Bell said that Mr Keleher said: "We are not intending to take anything away from you. Domenic is going to prepare all the internal working papers himself as honorary treasurer." Mr Anthony Bell was not cross-examined on this assertion. 13 The defendant's recollection was that the meeting took place in about March 2000 and it was Mr Cutrupi who said: "I am the treasurer of the Club. I will prepare the accounts." In cross-examination the defendant said that Mr Cutrupi had said he would not be charging for presenting working papers to the auditor. 14 In cross-examination Mr Keleher said he did not recall an assertion being made at the meeting that Mr Cutrupi would produce the working papers in his capacity as honorary treasurer. 15 Because of the view I take of this matter it is unnecessary for me to resolve this issue. If it were necessary for me to do so, however, I would find that the defendant held the belief that Mr Cutrupi was to prepare working papers for the audit of the plaintiff for the year ended 30 June 2001 on an honorary basis in his capacity as honorary treasurer. 16 At the centre of the dispute between the plaintiff and the defendant is article 74. The reference to articles 113 and 114 can be ignored. They do not arise in the instant circumstances. 17 The term 'Committee' which is used in article 74 is defined in article 1 to mean the management committee of the Club whose members are directors for the purposes of the Corporations Law. Article 3 also provides that the members of the Committee are the directors of the Club. Article 75 provides for the election of the Committee. Mr Cutrupi was elected to the Committee under that article. 18 The defendant took the view that the payments to Stafford and Stockford referred to above contravened article 74. He also took the view that they should have been accrued in the accounts of the previous year. He was not totally accurate in this latter assertion. As is indicated above, $960.00 related to accounting services for the year ended 30 June 2001. 19 Roger Zande swore an affidavit on behalf of the defendant. He is an employee of Bell Partners Chartered Accountants and he assisted in the technical compliance of the audit of the plaintiff for the year ended 30 June 2001. He said that on 19 October 2001 he telephoned ASIC and made a general inquiry as to the implications where a breach of a company's articles had occurred. I ruled the content of the conversation inadmissible. 20 The annual general meeting of the plaintiff took place on 24 November 2001. Mr Keleher made a statement with respect to the defendant's qualification of the plaintiff's financial report. He referred members to a note forwarded to them indicating that the Committee did not agree with the defendant's view that a breach of the constitution had occurred. He informed the meeting that the matter was to be heard in court. The annual accounts were then adopted by the meeting subject to the qualification that it was noted that the assertion by the defendant that there had been a breach of the Club's constitution was being contested by the Committee and would be resolved by the court in due course. 21 The evidence reveals confusion as to the status of Stafford and Stockford. They were referred to as a company and a firm. The tax invoices, the subject of the payments in question, were issued by companies: Stafford on the one hand and Stockford on the other. 22 Article 103 of the constitution of the plaintiff is in the following terms: 'The Honorary Treasurer will cause to be kept correct accounts and books showing the financial affairs of the Club and the particulars usually shown in those types of accounts and will cause to be paid to such bank account as the Committee may from time to time direct to the credit of the Club all monies received and will submit a statement of the financial affairs of the Club to the annual general meeting in each year which statement has been previously vouched by the auditor. The Honorary Treasurer will also present to the Committee at each monthly meeting of the Committee a summary of the financial position of the Club.' 23 A director owes a fiduciary duty to the company to avoid placing himself in a position of actual or possible conflict between his duty to the company and his own interests. Subject to the constitution of the company, a contract made in breach of this fiduciary duty will be voidable at the option of the company unless the director makes a full disclosure of the nature of his interests in the contract to the members of the company at general meeting who approve the contract by ordinary resolution (Woolworths Ltd v Kelly (1991) 22 NSWLR 189). 24 It is usual that the constitution of a company will attenuate this strict duty. Article 73 of the constitution of the plaintiff is such a provision. It is as follows: 'No officer will be disqualified by reason of his office from contracting or entering into any arrangement with the Club either as vendor or purchaser or otherwise nor will any such contract or contracts or arrangements entered into by or on behalf of the Club with any officer or in which any officer is in any way interested be avoided for that reason. An officer so contracting or being so interested is not liable to account to the Club for any profit realised by any such contract or arrangement by reason only of that officer holding that office or of the fiduciary relationship thereby established. Except where an officer is constrained by the Law from voting an officer may vote in respect of a matter in which the officer has a personal interest. An officer who is interested in any contract or arrangement may, notwithstanding the interest, attest the affixing of the seal to any document evidencing or otherwise connected with the contract or the arrangement.' 25 The term 'Officers' is defined in article 1 of the constitution of the plaintiff to mean the president, captain, honorary treasurer, secretary/manager and members of the Committee but does not include the auditor. 26 The general exemption from the conflict rule in article 73 of the plaintiff's constitution is cut down by article 74: a Committee member is not entitled to remuneration for his services. 27 The defendant submitted that the highest billing person giving rise to the Stafford and Stockford invoices was Mr Cutrupi and because he was a principal of Stafford and Stockford, he was being paid for his services in contravention of article 74. 28 The first question which arises is to what services does article 74 relate? In my view it must mean services as a Committee member. In light of article 73 it would be absurd to say that a Committee member could not sell a block of land to the plaintiff just because he was a Committee member. Equally, if the honorary treasurer happened to be a director of a company which sold greenkeeper's tools it would be absurd to say that the Club had to go elsewhere for its supplies. 29 That leads to a second question: what services are required of an honorary treasurer? Article 103 of the plaintiff's constitution does not require the honorary treasurer to keep accounts and books, to bank moneys, to prepare financial statements to be laid before annual general meetings or to prepare summaries of financial position for Committee meetings. The obligation is not to do these things but to cause them to be done. For example, the honorary treasurer performs his function if financial statements and summaries prepared by others are presented by him to the annual general meeting on the one hand and to Committee meetings on the other. 30 There is no special qualification required of a member of the plaintiff for election to the office of honorary treasurer. A lay person could not be expected to prepare financial statements in accordance with the requirements of the Act and relevant Accounting Standards. 31 In cross-examination Mr Keleher said, as one would expect, that the preparation of the annual accounts would normally be done by an accountant, whether an accountant employed by the plaintiff or an outside firm and would not be done personally by the honorary treasurer. Until the year ended 30 June 2001 it was done by the defendant. The reference to an employed treasurer in article 74 clearly points to the division of responsibility between the professional engaged to prepare financial statements and the honorary treasurer who must cause them to be prepared and then present them to the appropriate organ of the company. 32 In my view, therefore, the services performed by Stafford and Stockford the subject of the invoices and the subject of the accrual, were not services required of the honorary treasurer and their payment and projected payment did not and will not infringe article 74. 33 Because of my view of the scope of article 103 and its effect with respect to article 74, it is unnecessary for me to deal with the argument that article 74 is limited to payments to individuals. In my view, however, there is a lot to be said for that contention. 34 In terms, article 74 is limited to remuneration received by a Committee member and a Committee member must be an individual. Article 73 contemplates the making of a contract by the company with an entity in which a Committee member has an interest. Article 74 proscribes remuneration for services provided by a Committee member to the Club. If article 74 is construed to extend the prohibition to entities in which a Committee member has an interest, it is in conflict with article 73. In my view article 74 is limited to a prohibition against the receipt of remuneration for services performed by an individual as a member of the Committee qua that position. 35 This construction does not do damage to the salary or wage reimbursement to an honorary treasurer for which provision is made in article 74. It is salary or wages paid by an individual honorary treasurer for clerical or other assistance that is the subject of the reimbursement. 36 The construction is congruent with the operation of article 73 which does not prevent a contract between the Club and an Officer or an entity in which an Officer has an interest by reason only of that office. However, if the contract were to provide remuneration to a Committee member for his services to the Club qua his position on the Committee it would, in my view, infringe article 74. 37 It follows from the above that in my view the defendant's qualification of the plaintiff's financial report for the year ended 30 June 2001, in so far as it was based upon article 74, was erroneous. In this respect I am of the view that whether or not the defendant believed that Mr Cutrupi would prepare the accounts in his capacity as honorary treasurer is irrelevant. 38 The relief sought by the plaintiff in its summons is as follows: '1. A declaration that upon a true construction of the Articles of Association ('Articles') of St Michaels Golf Club Ltd ('the plaintiff'), the plaintiff had power to pay to Stafford and Partners Pty Limited ('Stafford') an amount of $5,460 during the 2001 financial year for accounting services rendered to it in circumstances where Mr Domenic Cutrupi ('Cutrupi'), a principal of Stafford is also a member of the Committee of the plaintiff. 2. A declaration that upon a true construction of the Articles, the plaintiff has power to pay Stockford Accounting Services Pty Ltd ('Stockford') an amount of $5,000 in respect of accounting services rendered to it during the 2002 financial year in circumstances where Cutrupi, a principal of Stockford is also a member of the Committee of the plaintiff. 3. A declaration that in the circumstances which have occurred and upon a true construction of the Articles, the payment of an amount of $5,460 to Stafford during the 2001 financial year was not in breach of Article 74 of the Articles. 4. A declaration that in the circumstances which have occurred, the defendant erroneously qualified the Financial Report of the plaintiff for the year ended 30 June 2001 when he stated in the Independent Audit Report of Bell Partners, chartered accountants, dated 25 October 2001 that the remuneration reported in note 17 (being for fees of $5,460 paid to Stafford) 'was received by an honorary member of the Committee in contravention of Article 74 of the Club's Constitution'. 5. Such further or other orders or directions as the nature of the case may require.' 39 The form of declaration in paragraphs 1 and 2 is, in my view, too wide. The question of power potentially raises the issue of ultra vires, a matter which was not agitated before me. 40 Paragraph 3 requires some amendment in view of the $600.00 payment to Stockford. I am prepared to make a declaration in like terms with respect to the prospective payment to Stockford of $5,000.00 in the year to end on 30 June 2002. 41 The defendant contends that the construction of the plaintiff's constitution is not a matter that concerns him qua his position as auditor. 42 Section 75 of the Supreme Court Act 1970 provides that no proceedings shall be open to objection on the ground that a merely declaratory judgment or order is sought thereby and the court may make binding declarations of right whether any consequential relief is or could be claimed or not. 43 The scope of the inherent power to grant declaratory relief is wide but there must be a real controversy, an appropriate contradictor and utility in the judgment. In Ainsworth v Criminal Justice Commission (1991-1992) 175 CLR 564 at 581-582 it was said: 'It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which "[I]t is neither possible nor desirable to fetter ….. by laying down rules as to the manner of its exercise." ( Forster v Jododex Aust Pty Ltd (1972) 127 CLR 421 at p 437, per Gibbs J). However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be direct to the determination of legal controversies and not to answering abstract or hypothetical questions (see In re Judiciary and Navigation Acts (1921) 29 CLR 257). The person seeking relief must have a "real interest" ( Forster (1972) 127 CLR at p 437, per Gibbs J; Russian Commercial and Industrial Bank v British Bank for Foreign Trade, Ltd [1921] 2 AC 438 at p 448, per Lord Dunedin) and relief will not be granted if the question "is purely hypothetical", if relief is "claimed in relation to circumstances that [have] not occurred and might never happen" ( University of New South Wales v Moorehouse (1975) 133 CLR 1 at p 10, per Gibbs J) or if "the Court's declaration will produce no foreseeable consequences for the parties" ( Gardner v Dairy Industry Authority (NSW) (1977) 52 ALJR 180 at p 188, per Mason J; see also p 189, per Aickin J; 18 ALR 55 at pp 69,71 respectively).' 44 In Russian Commercial and Industrial Bank v British Bank of Foreign Trade Ltd [1921] 2 AC 438 at 448 Lord Dunedin said: 'The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor, that is to say, some one presently existing who has a true interest to oppose the declaration sought.' 45 It has been held that a company may commence proceedings for the construction of it constitution (Morgan's Brewery Co v Crosskill [1902] 1 Ch 898, Cyclists' Touring Club v Hopkinson [1910] 1 Ch 179, In re William Thomas & Co Ltd [1915] 1 Ch 325). In my opinion the defendant is a proper contradictor. He must have the constitution of the plaintiff in mind when he performs the statutory audit functions. In performing those functions he has taken a view of the operation of articles 74 contrary to that of the Committee. He has a true interest in opposing paragraph 4 of the summons, which he exercised in calling evidence before me. Underpinning that claim to relief was the controversy with respect to the interpretation of article 74. In these circumstances I hold the defendant to be a proper contradictor to the declarations that I have thus far indicated I am prepared to make. 46 As to paragraph 4 of the summons, the defendant submitted that that was a matter for resolution by a general meeting of the members of the plaintiff and hence inappropriate for declaration by the court. The mere fact that the issue might be resolved in another forum does not deprive the court of jurisdiction and in the circumstance of a genuine controversy between the parties I propose to proceed. 47 It was submitted that the duty of the auditor was to express an opinion under s308 of the Act and any opinion based on reasonable grounds was beyond the power of the court as an inhibition upon the performance of a statutory function. 48 The fact that some other independent function is to be performed does not exclude the jurisdiction of the court to make declarations. In Forster v Jododex Pty Ltd [1972] 127 CLR 421 the High Court upheld a decision of Street CJ in Eq ([1971] 2 NSWLR 299) to grant a declaration in a matter that was pending before a mining warden. 49 Section 311 of the Act provides that an auditor must notify ASIC if the auditor has reasonable grounds to suspect that a contravention of the Act has occurred and believes that the contravention has not been or will not be adequately dealt with by commenting on it in the auditor's report or bringing it to the attention of the directors. 50 It is not immediately apparent that non-compliance by the plaintiff with article 74 of its constitution constitutes a contravention of the Act. The constitution has effect as a contract between the company and each member pursuant to s140 and thus, a breach of article 74 would usually give rise to no more than a breach of contract. 51 Nevertheless, the threat of investigation by ASIC upon complaint by the defendant is real and the fact that the defendant has already made inquiries of ASIC means that that threat is more than a mere possibility. Furthermore, a declaration with respect to prospective payment to Stockford has utility. 52 It was also submitted on behalf of the defendant that the auditor is appointed by a general meeting and not by the Committee and, in consequence, the plaintiff is not a proper party because the proceedings were initiated by the Committee. 53 A company is a legal abstraction which may only operate by persons representing organs of that abstraction. One such organ is the general body of members, another is the Committee in which is vested the day to day operations of the abstraction. The Committee as the board of directors has authority to commence proceedings in the name of the company, and the company is an appropriate party to seek the relief. The fact that the defendant is appointed by the general body of members and reports to a general meeting is beside the point. I am prepared to make a declaration in terms of paragraph 4 of the summons. 54 I order the defendant to pay the plaintiff's costs of and incidental to the application. I direct the plaintiff's counsel to bring in short minutes of order in terms of these reasons for judgment. ooOoo Last Modified: 02/20/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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