Medical Society of Papua New Guinea Inc v Sapuri [2017] PGNC 431; N8710 (13 January 2017)

N8710

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS 477 OF 2012

BETWEEN:
THE MEDICAL SOCIETY OF
PAPUA NEW GUINEA INC.
Plaintiff

AND:
MATHIAS SAPURI
First Defendant

AND:
SYLVESTER LAHE
Second Defendant

Waigani: Hartshorn J.
2016: 17^th February,
2017: 13^th January

EQUITY –trial – compensation - plaintiff seeking payment of equitable compensation from defendants - whether defendants were in a fiduciary relationship with the plaintiff - whether the defendants owed the plaintiff and its members fiduciary duties - fiduciary duties that were owed by the defendants to the plaintiff and its members include the duty to expend the plaintiff’s monies only for authorised purposes and in a lawful manner; not to profit from their positions; and to keep and maintain proper records relating to income and expenditure of the plaintiff’s funds, including maintaining appropriate files, minutes of meetings, copies of correspondence, bank statements, cheque-books, bank deposit books, financial statements, invoices, receipts, motor vehicles and office equipment – the defendants held positions of trust and fiduciary relationship with the plaintiff and its members - evidence discloses that both defendants failed in their fiduciary duty by receiving income and expending it without appropriate lawful authority and without full and clear acquittal – an order for equitable compensation is appropriate

Cases Cited:
Papua New Guinea Cases

Hilary Singat v. Commissioner of Police (2008) SC910
In the Matter of Bernard Hagoria, Member of Parliament [2003] PGLT 1 N2525
Jacob Simbuaken v. Neville Egari (2009) N3824
Jonathan Mangope Paraia v. The State [1995] N1343
New Guinea Civil and Petroleum Ltd v. West New Britain Development Corporation Ltd (2008) N3292
Papua New Guinea Banking Corporation v. Jeff Tole (2002) SC694
Sogeram Development Corporation Ltd v. Som (2014) N5874

Overseas Cases

Fraser Edmiston Pty Ltd v. A.G.T (Qld) Pty Ltd [1988] 2 Qd R 1
Harrison v. Hearn [1972] 1 NSWLR 428
Henderson v. Merrett Syndicates [1994] UKHL 5
Hospital Products Ltd v. United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Ithaca Ice Works Pty Ltd v. Queensland Ice Supplies Pty Ltd [2002] QSC 222
Lai v. Tiao (No 2) [2009] WASC 22
Porima v. Te Kauhanganui o Waikato Inc [2001] 1 NZLR 472

Counsel:

Mr. G. B. Purvey, for the Plaintiff
Mr. G. Manda, for the First and Second Defendants

13^th January, 2017

1. HARTSHORN J: The first and second defendants are medical practitioners and members of the plaintiff. They were respectively the President and the Secretary of the plaintiff. The plaintiff alleges that the defendants’ breached fiduciary and other obligations that they owe in respect of the plaintiff and its members. The plaintiff claims amongst others over K1.3 million by way of equitable compensation and the return of a motor vehicle.

2. The defendants’ deny the allegations.

Previous applications of the defendants

3. After the conclusion of the evidence of the plaintiff in chief in the substantive hearing of the proceeding, counsel for the defendants’ made an oral no case submission pursuant to Order 10 Rule 14 (1) National Court Rules. This court refused that application. A further application seeking leave for the defendants to adduce evidence in the proceeding was also refused.

Preliminary

4. The defendants submit amongst others that:

a) this proceeding is a nullity and an abuse of process as the plaintiff by suing the defendants is in essence suing itself; and

b) all the members of the plaintiff should have given their written consent or authority to act by way of a resolution in an Annual General Meeting, to the executives of the plaintiff to give instructions to its lawyers to institute this proceeding. In the absence of evidence of this occurring, this proceeding is a nullity, sham and an abuse of process, the defendants submit.

5. As to the submissions that the plaintiff is in essence suing itself, it is admitted by the defendants that the plaintiff is an association duly incorporated under the Associations Incorporation Act and is able to sue in its own name. Further, that the defendants at material times were financial members and executives of the plaintiff does not preclude the plaintiff from suing the defendants. This submission has no merit.

6. As to there not being evidence of authority for the plaintiff to commence this proceeding, Dr. Glen Mola gave the following written evidence of what occurred at the plaintiffs Annual General Meeting held on 6^th September 2011 in Kimbe:

“21. At the plaintiff’s Annual General Meeting held in Kimbe on 6 September 2011, the first defendant presented a financial report, but it was overwhelmingly rejected by the plaintiffs member’s. I presented a report of the period 2009-2010, which was overwhelmingly accepted by the members. As the accepted financial reports showed that K820,614.00 in payments and K297,802.20 in cash had been made and received by the first and second defendants, without acquittal, the plaintiff resolved to take action to recover those monies.”

7. This was confirmed by Dr. Mola in cross and re-examination. There is no rebuttal evidence. Further, I make reference to the Supreme Court case of Hilary Singat v. Commissioner of Police (2008) SC910 in which the Court said amongst others:

“In our view, a lawyer who files documents in any court proceedings for and on behalf of a party or gives notice that he or she is acting for a party is deemed to have the necessary instructions if not the actual instructions, at least, his clients ostensible authority to so act.”

8. Consequently, this submission is rejected.

Whether a fiduciary duty exists

9. It is admitted that both defendants were at all material times medical practitioners and financial members of the plaintiff. It is further submitted that:

a) the first defendant was elected President of the plaintiff in or about September 1999, was re-elected in 2004 and 2007 and served as President until 2010 when he was voted out;

b) the second defendant was elected as Secretary of the plaintiff in or about 2000, was re-elected in 2004, 2006 and 2009 and as at the date of the defence filed, was still the Secretary.

10. The defendants deny generally that they were in a fiduciary relationship and were obliged to perform certain duties, and deny generally that they were in breach of their fiduciary and other obligations by reason of their membership of, and offices held on the executive of the plaintiff.

11. The plaintiff submits that the defendants owed a fiduciary duty to the plaintiff to:

a) expend the plaintiff’s monies only for authorised purposes and in a lawful manner;

b) not profit from their positions; and

c) keep and maintain proper records relating to income and expenditure of the plaintiff’s funds, including maintaining appropriate files, minutes of meetings, copies of correspondence, bank statements, cheque-books, bank deposit books, financial statements, invoices, receipts, motor vehicles and office equipment.

12. Both the plaintiff and the defendants cited cases in regard to a fiduciary and a fiduciary relationship. Reference was made to amongst others, the following passage of Mason J in Hospital Products Ltd v. United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 96-97:

“The accepted fiduciary relationships sometimes referred to as relationships of trust and confidence or confidential relations (cf. Phipps v. Boardman [1966] UKHL 2; (1967) 2 AC, at p127), viz, trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”

13. In regard to whether committee members of an association have a fiduciary relationship and owe a fiduciary duty to the association and its members, in Lai v. Tiao (No 2) [2009] WASC 22, Johnson J at [84] said:

“It has been said that, in relation to an association, the committee members are in the same position as a director toward a company. It has also been suggested, although the principle is not established by authority, that it is probable that committee members owe in the same measure, the common law and equitable duties which law and equity have imposed on company directors, ...... Fletcher KL, The Law Relating to Non-profit Associations in Australia and New Zealand (1986) 289.”

14. Also in Australia, in Harrison v. Hearn [1972] 1 NSWLR 428, Helsham J at 435 said as to members of a students’ council at Mcquarie University:

“It may not be very wide of the legal mark to categorise these funds as trust funds nor the members of the students’ council as persons owing a fiduciary duty to the persons whom they represent. It is important to bear in mind the limitations which these factors place upon what might otherwise be thought, ..... to be the autonomous powers of the students’ council within the limits of activities drawn only by the constitution to deal with the funds at its disposal.”

15. In New Zealand in Porima v. Te Kauhanganui o Waikato Inc [2001] 1 NZLR 472 at [112], Hammond J held that members who had been elected to a committee of an incorporated society were in a “trustee-like” fiduciary position in respect of their duties to the society.

16. On the above authorities which are persuasive in this jurisdiction, from the evidence given on behalf of the plaintiff and in the absence of any specific pleading by the defendants as to why they were not in a fiduciary relationship and owed fiduciary duties or obligations to the plaintiff and its members, I am satisfied that the defendants as members and officeholders of the plaintiff at all material times had a fiduciary relationship and owed a fiduciary duty to the plaintiff and its members.

Fiduciary duties owed

17. As to the extent and nature of the fiduciary duties owed, I take into account the following passage of Lord Browne-Wilkinson in the House of Lord’s decision in Henderson v. Merrett Syndicates [1994] UKHL 5 at 42:

“....... the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties.”

18. In this instance however, the constitution of the plaintiff is not in evidence. Consequently, there is nothing for this court to consider, apart from the provisions of the Associations Incorporation Act, to determine whether there is any fetter upon the fiduciary duties owed by the defendants.

19. Consequently the submissions of counsel for the defendants to the effect that the defendants did not breach any duty owed to members of the plaintiff because of certain provisions in the constitution of the plaintiff, are not able to be considered as the subject constitution is not before this court.

20. As to the provisions of the Associations Incorporation Act, from a perusal of that Act, I am satisfied that there are no provisions which would have the effect of fettering any fiduciary duty that a member of an executive of an association incorporated under that Act, may owe. Further, no submissions were made to the contrary.

21. As to what the fiduciary duties are that the defendants owed to the plaintiff, the plaintiff pleads that the defendants were obliged to amongst others, keep and maintain proper records relating to income and expenditure of the plaintiff’s funds, including maintaining appropriate files, minutes of meetings, copies of correspondence, bank statements, cheque-books, bank deposit books, financial statements, invoices, receipts, motor vehicles and office equipment.

22. The plaintiff also pleads that the defendants breached their fiduciary obligations by amongst others:

a) failing to produce any proper records relating to the income and expenditure of the plaintiff’s association;

b) failing to provide a full acquittal of the expenditure of the plaintiff’s monies; and

c) failing to produce the plaintiffs fixed assets including motor vehicles, furniture, fittings and office equipment and failing to provide any acquittal of those assets.

23. As referred to, the defendants deny generally that they were in a fiduciary relationship and were in breach of their fiduciary obligations. Notwithstanding that the defendants were refused leave to adduce evidence, if they had been granted leave to adduce evidence, as the defendants in their defence have not pleaded specifically why they deny that they were in a fiduciary relationship and had obligations and why they were not in breach of their fiduciary and other obligations, they have not pleaded matters that they allege make the plaintiff’s claims not maintainable, or have not pleaded matters that should have been otherwise the plaintiff would be taken by surprise. As they have not so pleaded all material facts on which they intended to rely at trial, they would not have been entitled to give any evidence of those facts at the trial. I refer in this regard to Order 8 Rule 14 National Court Rules; Sogeram Development Corporation Ltd v. Som (2014) N5874; Jacob Simbuaken v. Neville Egari (2009) N3824 and Papua New Guinea Banking Corporation v. Jeff Tole (2002) SC694.

24. Counsel for the plaintiff relied upon the cases of Boardman v. Phipps [1967] 2AC 46, Hospital Products Ltd v. United States Surgical Corporation (supra) and Salvation Army (PNG) Property Trust v. Jorgensen (1997) N1644.

25. It is submitted that a fiduciary relationship is a relationship of trust and confidence or confidential relations. The critical feature of a fiduciary relationship is that the fiduciary undertakes or agrees to act for and on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. Further, a fiduciary relationship is a relationship which gives the fiduciary a special opportunity to exercise power or discretion to the detriment of that other person, who is accordingly vulnerable to abuse by the fiduciary of his position. A fiduciary duty is an equitable duty to act in good faith for the benefit of another. Persons subject to a fiduciary duty are not permitted to profit from their positions or to put themselves in a position where the fiduciary duty and personal interest conflict.

26. On the above authorities, a consideration of the evidence filed on behalf of the plaintiff and in the absence of specific pleadings of the defendants as to any fiduciary duties or obligations owed or why such duties or obligations as pleaded have not been breached, I am of the view that the obligations as pleaded and submitted by the plaintiff are the fiduciary duties that were owed by the defendants to the plaintiff and its members. They are:

a) to expend the plaintiff’s monies only for authorised purposes and in a lawful manner;

b) not to profit from their positions; and

c) to keep and maintain proper records relating to income and expenditure of the plaintiff’s funds, including maintaining appropriate files, minutes of meetings, copies of correspondence, bank statements, cheque-books, bank deposit books, financial statements, invoices, receipts, motor vehicles and office equipment.

27. The plaintiff submits that the parties were in an accounting relationship as the defendants as fiduciaries received or expended money on behalf of the plaintiff. It is further submitted that:

a) there is a general duty imposed on a fiduciary “not to obtain any unauthorised benefit from the relationship”: Breen v. Williams (1996) 186 CLR 71, 113 at [41]; and

b) there is a complementary principle of equity that a fiduciary must account for any benefit obtained or received by reason of his fiduciary position: Chan v. Zacharia [1984] HCA 36; (1984) 154 CLR 178 at [23].

28. In the present circumstances, as there is a clear accounting relationship, the plaintiff is entitled to receipt of, and/or an accounting for, the money received by the defendants on behalf of the plaintiff, and expended by the defendants, and the defendants should provide a full accounting or acquittal of expenditure and receipt of the plaintiff’s funds, the plaintiff submits.

Whether fiduciary duties breached

29. Evidence was given on behalf of the plaintiff that the new executive of the plaintiff elected in September 2013, having concerns about the administration of the plaintiff, undertook to examine its records. This examination found that the records were incomplete and what documents were available showed significant deficiencies and discrepancies. The audited accounts relied on by the defendants for the years of 2007 - 2009 were presented in draft form only.

30. Despite substantial funding to the plaintiff during 2007 - 2010 the examination was unable to find any proper records as to what had happened to the funds or the expenditure of the funds. To aid the new executive in the examination, the treasurer requested the plaintiff’s bank to provide banking records for the years 2007 – 2010. This period was when both defendants were executive officers of the plaintiff.

31. The bank statements supplied revealed that:

a) there were a large number of over-the-counter cash withdrawals, without explanation or authority in the total sum of K297,802.20 by the first defendant, with the counter signature of the second defendant during the term of the first defendant;

b) there was an over-the-counter cash withdrawal of K100,000 after the term of the first defendant’s Presidency had expired;

c) there were a large number of payments in the total sum of K820,614 made by the first defendant without reference to the payments, narration as to the purpose or circumstances of the payments, explanation, documentation or reason for the payments.

32. Despite written requests by the treasurer for an explanation for and acquittal of the expenditure, none has been forthcoming by the first or second defendant. The defendants neither sought nor were granted authority from the executive by way of any resolution, to make any of the payments. Despite responses from the first defendant that he would provide a full accounting of the monies, and no response being received from the second defendant, none has been provided other than statements that records are contained in the audited accounts.

33. There were two vehicles purchased by the plaintiff for the use of the plaintiff as follows:

a) A Nissan Sunny for the use of the first defendant, being the President. The first defendant however gave the Nissan to the second defendant without authority, consent or resolution of the executive. Despite a request by way of a resolution of the executive for the Nissan’s return, the Nissan has not been returned.

b) A Toyota van for the general use of the plaintiff. The Toyota was sold by the first defendant, without the authority, consent or resolution of the executive of the plaintiff;

c) The Toyota was allegedly sold for K10,000 by the first defendant but the first defendant says that only K6,000 was actually paid. No money or acquittal of the circumstances surrounding the sale have been provided by the first defendant despite request.

34. In 2009 a symposium was held in Port Moresby. About K100,000.00 was paid by the plaintiff’s members as subscription fees. There is no record of any funds being deposited into the plaintiff’s bank account in respect of the Port Moresby symposium and despite requests, no satisfactory acquittal has been provided by the first defendant in relation to those funds that were collected and placed under his control.

35. In 2010 a symposium was held in Wewak. Registration fees in the sum of K 100,750.00 were given to and placed under the control of the first defendant. Only K11,737.42, collected after the expiration of the first defendant’s term of office, was deposited into the plaintiff’s bank account. There is no record of any funds being deposited into the plaintiff’s bank account in respect to the Wewak symposium and despite request, no satisfactory acquittal has been provided by the first defendant in relation to those funds collected and placed under his control.

36. The plaintiff pleads that the defendants’ breached their fiduciary obligations as referred to, and after a consideration of the above evidence I am satisfied that on the balance of probabilities the plaintiff has satisfactorily made out that the defendants have breached their fiduciary obligations to the plaintiff and its members.

37. The plaintiff submits that for a full acquittal to be performed by the defendants, it should include details of items procured and supporting documents including receipts, bank statements, invoices, corresponding cheque payments; and resolutions or minutes of the executive authorising the expenditure. Reliance is placed upon the decision of In the Matter of Bernard Hagoria, Member of Parliament [2003] PGLT 1 N2525 in this regard. It is submitted that the defendants have not produced any of the items required for a full acquittal.

38.There is no evidence that the defendants have provided any of the items necessary for a full acquittal to be made.

Equitable compensation

39. In a case such as this where there is a clear inadequacy in the provision of items necessary for a full acquittal by the defendants, the plaintiff submits that this court should exercise its inherent jurisdiction and award equitable damages in lieu of ordering an inquiry.

40. Reliance is placed upon the case of Fraser Edmiston Pty Ltd v. A.G.T (Qld) Pty Ltd [1988] 2 Qd R 1. The Court held:

“That a court of equity had an inherent jurisdiction in appropriate cases to award equitable damages in lieu of ordering an inquiry”

Then at 13 the Court said:

“Because of the absence of any proper books of account, because of the absence of primary records relating to the business, and because of the unreliability of the evidence of the Husseys on financial matters it is virtually impossible to calculate what allowance should be made. ....

I can see little point in directing that such an enquiry be made in this case; if I were to do so the Master would have no detailed material on which to make findings, and would be in no better position that (sic) I to determine what constituted an equitable and proper allowance to make in all the circumstances.”

The Court further said at 14:

“Therefore, whilst there was no agreement that I should assess equitable damages in lieu of ordering an inquiry as to profits or damages, ..... there was no real objection to my assessing damages if I thought that the more appropriate remedy. Thomas J in Markwell Bros v C.P.N Diesels held that the court had an inherent jurisdiction in a case such as this to award equitable damages in lieu of ordering an inquiry, and I am prepared to adopt his conclusion”

41. As to there being some guess work required of the court as to the appropriate amount of compensation, counsel for the plaintiff referred to Ithaca Ice Works Pty Ltd v. Queensland Ice Supplies Pty Ltd [2002] QSC 222 at [17] in which the Court said:

“The Court must do the best it can on the evidence available...... In appropriate cases, the assessment of compensation will be a “guesstimate”.”

42. These comments are similar to those expressed in the cases of Jonathan Mangope Paraia v. The State [1995] N1343, and New Guinea Civil and Petroleum Ltd v. West New Britain Development Corporation Ltd (2008) N3292 concerning the court having to do the best it can in assessing damages where precise evidence is not available.

43. The plaintiff submits that in the present circumstances, where there has been repeated failure of a number of years to provide a full and accurate accounting, and the complete absence of reliable records, an order for an accounting would not produce any satisfactory result, so that an order for equitable compensation is the appropriate remedy.

Conclusion

44. I am satisfied that by virtue of the first and second defendants’ positions on the executive of the plaintiff, they held positions of trust and fiduciary relationship with the plaintiff and its members. The evidence discloses that both defendants failed in their fiduciary duty by receiving income and expending it without appropriate lawful authority and without full and clear acquittal.

45. Specifically:

a) Money was received on behalf of the plaintiff by the first and second defendants;

b) That money was expended by the first and second defendants without the lawful authority of the plaintiff;

c) Over-the-counter cheques were cashed from 2007 - 2010 by the first defendant with the second defendant’s counter signature;

d) A K100,000 cash withdrawal was obtained over-the-counter by the first defendant on 1^st September 2010 after the expiration of his term as President;

e) No authority was provided by the plaintiff for the first and/or second defendants to expend any of those monies on behalf of the plaintiff; and

f) No substantial accounting or acquittal has been provided by the first and/or second defendants in respect of the above.

46. Consequently an order for equitable compensation in my view is appropriate.

Orders

47. The court orders that the defendants jointly and severally:

a) make payment of equitable compensation to the plaintiff in the sum of K1,317,428.70 together with interest at the rate of 8% per annum from 5^th May 2012 on the said sum or any part thereof until payment in full;

b) return to the plaintiff Nissan Sunny Motor Vehicle registration no. NCARO39;

c) pay the costs of the plaintiff of and incidental to this proceeding, to be taxed if not otherwise agreed;

d) time is abridged.

_____________________________________________________________
Young & Williams Lawyers: Lawyers for the Plaintiff
Greg Manda Lawyers: Lawyers for the First and Second Defendants