Fairfax Media can reveal state councillors have moved to establish a $100,000 war chest to retain the services of top Sydney barrister Dennis Cowdroy in an increasingly bitter fight with the national RSL.

State councillors were last month internally "charged" by the national RSL with working against the interests of members and bringing the league into disrepute amid allegations of a cover-up of Mr Rowe's financial alleged indiscretions.

NSW Police have begun a fraud investigation into the matter. Fairfax Media can also reveal that a sixth state councillor, Bill Humphreys, has stood down.

Minutes of a secret state council meeting held at the headquarters of Resolve litigation lawyers on Phillip Street in Sydney, show the state council, led by president John Haines, voted to engage Mr Cowdroy and two of Resolve's dispute resolution principals, Michael Daniel and Nicola Nygh, to lead their case.

Minutes of the January 20 meeting record the state council agreeing that "payment of the legal fees of the Hon. Mr Cowdroy and Resolve Litigation Lawyers be made out of the funds of the RSL NSW".

An internal email chain seen by Fairfax Media shows Mr Haines asked an employee to transfer $99,000 to a trust account operated by Resolve lawyers. The NSW RSL has an annual budget of $80,000 a year for legal bills.

Mr Haines did not return calls on Tuesday.

The council's move will infuriate sub-branches like Rooty Hill, which this week passed a motion for the immediate suspension of the state council and calling on its members not to use RSL money to fund their legal defences.

Rooty Hill sub-branch president Sean Plunkett wrote in an email to other sub-branches that the state council had "completely lost focus on the ideals and aims of the league" and said the overwhelming question from young veterans today is "why should they join a perceived corrupt old boys club".

NSW Veterans Affairs Minister David Elliott is understood to be livid with state councillors using $100,000 for their own internal legal defence when the NSW branch rebuffed his request for $50,000 in seed funding for a state government-backed bid to host Prince Harry's Invictus Games for wounded veterans.

Fairfax Media revealed on January 18 that nine state councillors, including Mr Haines, had been asked to "show cause" as to why the national league should not move against them.

An official "charge sheet" noted that the council told members that Mr Rowe had resigned in late 2014 due to "ill-health" when evidence shows the council was aware of allegations against him possibly amounted to fraud.

Between 2009 and 2014, Mr Rowe ran up a credit card bill of $475,000, including $213,000 in cash withdrawals, all paid for by the NSW RSL. He also provided mobile phones to five family members at a cost of $38,000.

In response to the state council, the national RSL has now engaged the law firm Henry Davis York.

It is unusual for external lawyers to be used in an internal discipline matter. The NSW league's regulations say a person facing a disciplinary hearing has "the right to have a non-legally qualified support person present at the hearing".

The RSL national bylaws say that "a state branch under investigation has a right to be heard and may be represented", though it does not specify by qualified lawyers. They also say disciplinary matters "must be referred to and finally determined by League entities".

Fairfax Media can also reveal that state councillor Mr Humphreys has stood down, becoming the sixth to do so since news of the financial scandals now embroiling the league broke. Some are under investigation and others have resigned on principle.

Advice to RSL NSW from Henry Davis York in October recommended that Mr Humphreys and another councillor Bob Crosthwaite stand aside pending a board of inquiry into their receipt of tens of thousands of dollars each in consulting fees from the league's aged care arm.

They are among eight current and former NSW councillors to share in about $2.5 million in consulting fees paid out over about a decade by RSL LifeCare, including recent national president Rod White, who has also now stood aside.

Mr Humphreys told Fairfax Media he had agreed to stand aside about two weeks ago after receiving "certain information so I could make an informed decision".

He declined to say what information he had received.