Application of Gregory Jay Parker (liquidator of Shellharbour Golf Club Ltd... [2006] NSWSC 219 | Case summary

1453/06 APPLICATION OF GREGORY JAY PARKER (LIQUIDATOR OF SHELLHARBOUR GOLF CLUB LTD (IN LIQ)) JUDGMENT 1 HIS HONOUR: By an originating process filed on 15 February 2006, the liquidator of Shellharbour Golf Club Ltd (in liq) ("the Club"), Gregory Parker, claims: 1 A declaration that in accordance with the true construction of clause 6 of the constitution of the Club, and having regard to the events that have occurred, he is entitled to distribute the surplus property of the Club to the Shellharbour Workers' Club Ltd ("the Workers' Club"); and 2 An order that his costs be paid out of the surplus property prior to distribution. 2 The Club was formed as a company limited by guarantee under the Companies Act 1961 (NSW), its memorandum of association bearing the date 28 January 1972. In typical fashion, the objects clause in the memorandum comprises 25 sub-paragraphs, many of which are necessarily powers rather than objects, together with a power to do such things as are incidental or conducive to the attainment of the objects of the company. The provisions that appear to identify the true objects of the Club are the following: "2. The objects for which the Club is established are - … (b) To establish, maintain and conduct a Golf Club for the accommodation of the members of the Club and their friends and generally to afford to them all the usual privileges, advantages, conveniences and accommodation of a Club. (c) To promote the game of golf and other sports and past-times and to encourage social intercourse between the members of the Club. The whole of the accommodation and facilities of the Club shall be provided and maintained from the joint funds of the Club and no person shall be entitled to derive any profit benefit or advantage from the Club which is not shared equally by every member thereof. (d) To promote and hold either alone or jointly with any other association club or persons meetings competitions and matches for the players of golf and any other sports or past times and to provide or contribute towards the provision of prizes awards and distinctions. Provided that no member of the Club shall receive any prize, award or distinction except as a successful competitor of any match, competition or event held or promoted by the Club or to the cost of the holding or promotion of which the Club may have subscribed out of its income or property and which under the regulations affecting the said match, event, or competition may be awarded to him." 3 Clause 3 of the memorandum states: "The income and property of the Club, whensoever derived, shall be applied solely towards the promotion of the objects of the Club as set forth in this Memorandum of Association; and no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise howsoever by way of profit, to the members of the Club. Provided that nothing herein shall prevent the payment in good faith of reasonable and proper remuneration to any officer or servant of the Club or to any member of the Club, in return for any services actually rendered to the Club, nor prevent the payment of interest at a rate not exceeding Ten dollars per centum per annum on money lent, or reasonable and proper rent for premises demised or let by any member to the Club: but so that no member of the council of management or governing body of the Club shall be appointed to any salaried office of the Club, or any office of the Club paid by fees, and no remuneration or other benefit in money or money's worth shall be given by the Club to any member of such council or governing body except repayment of out-of-pocket expenses and interest at the rate aforesaid on money lent or reasonable and proper rent for premises demised or let to the Club. Provided that the provision last aforesaid shall not apply to any payment to any company of which a member of the Council of management or governing body may be a member and in which such member shall not hold more than one-hundredth part of the capital, and such member shall not be bound to account for any share of profits he may receive in respect of such payment." 4 Clause 6 of the memorandum is as follows: "6. If on the winding-up or dissolution of the Club there remains, after satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members of the Club but shall be given or transferred to some other institution or institutions having objects similar to the objects of the Club, and which shall prohibit the distribution of its or their income and property among its or their members to an extent at least as great as is imposed on the Club under or by virtue of clause 3 hereof, such institution or institutions to be determined by the members of the Club at or before the time of dissolution, and in default thereof by the Chief Judge in Equity of the Supreme Court of New South Wales or such other Judge of that Court as may have or acquire jurisdiction in the matter, and if and so far as effect cannot be given to the aforesaid provision, then to some charitable object." 5 The Club was placed in administration on 22 October 2004, and Mr Parker accepted appointment as voluntary administrator. Subsequently the creditors resolved to wind up the Club and on 18 November 2004 he was appointed liquidator, in a creditors' voluntary winding up. 6 In about April 2005 it became apparent to Mr Parker that after payment of all debts and liabilities of the Club there would be a cash surplus. He obtained advice from solicitors, who said it was unclear whether the determination by the members contemplated by clause 6 was to be made at a meeting or by some other procedure such as postal ballot, and if at a meeting, whether the resolution put to the meeting should be an ordinary or special resolution. They suggested that Mr Parker should propose a special resolution for distribution of the surplus to a meeting of members, convened under s 506(1)(f). That provision authorises a liquidator in a voluntary winding up to convene a general meeting of the company " for the purpose of obtaining the sanction of the company by special resolution in respect of any matter". They said that if the members were to fail to pass a special resolution, Mr Parker would have to approach this Court in accordance with clause 6. 7 After receiving the solicitors' advice, Mr Parker requested the assistance of the directors of the Club to decide on the institution or institutions to receive the surplus assets. The board resolved on 20 June 2005 to recommend that the surplus should be passed on to the Workers' Club, for three reasons, namely: (1) the Workers' Club satisfies the requirements of clause 6 because it supports sporting activities, particularly golf; (2) the Club was originally formed out of the Workers' Club; (3) two of the directors held informal discussions with the management and board of the Workers' Club, and it was arranged that the Workers' Club would uphold the memory of the old Club by organising a memorial golf charity day on an annual basis, with all profits going to a nominated charity, an outcome that would do more for charities than the making of a lump sum donation of the surplus. 8 Mr Parker proceeded to convene a meeting of the members of the Club, to consider, and if thought fit pass, a special resolution "that the surplus property of the Shellharbour Golf Club Ltd (in liquidation) be transferred to the Shellharbour Workers' Club Ltd". In his circular to members accompanying the notice of meeting, Mr Parker explained the directors' recommendation that the surplus be given to the Workers' Club which, he said, has a "golf sub club". He noted that the original foundation members of the Club were members of the Workers' Club. He pointed out that failure of the members to pass the special resolution would leave him with no alternative but to apply to the Court. 9 The meeting was held on 8 January 2004. The minutes of the meeting are in evidence. There was general discussion about Mr Parker's circular, and the minutes noted: "Mr K Walsh advised that he believed the surplus should be given to handicapped children, namely Peterborough School for Special Purposes". According to Mr Parker, Mr Walsh provided him with a petition on the day of the meeting, signed by 25 persons, requesting that the surplus be distributed to the Peterborough School. Mr Parker said that three of the names on the list were not included in the list of members provided to him by the secretary of the Club, and only six of the persons named on the list attended the meeting. 10 The proposal to distribute the surplus to the Workers' Club was put as a special resolution and there was a vote on a show of hands. 26 members voted in favour, 10 voted against, and two abstained. In other words, 72.2% of the members voted in favour of the resolution, an insufficient number for it to be carried as a special resolution. The chairman declared the special resolution defeated. Subsequently Mr Parker brought the present application. Mr Parker has made a final distribution to creditors, paying them in full, and the surplus is now about $25,000, less the cost of the application. 11 Clause 6 of the Club's memorandum imposes three requirements of the distribution of surplus assets to another institution on winding up, namely: (a) the receiving institution must have objects similar to the objects of the Club; (b) the receiving institution must prohibit the distribution of its income and property among its members to an extent at least as great as imposed on the Club by virtue of clause 3; (c) the receiving institution is to be determined by the members of the Club and in default, by a judge of this Court. Condition (a) 12 The Workers' Club was formed on 10 November 1972. Its memorandum of association contains an objects clause which, like the objects clause of the Club, contains a great many provisions that, on proper analysis, are powers rather than objects. There is an "independent objects" clause and an "incidental objects" clause. The more substantive objects include the following: "(a) To provide for members and for members' guests a social recreational and sporting club with all the usual facilities of a club including residential and other accommodation liquid and other refreshments and provision for musical educational recreational and sporting activities and other amenities and facilities including libraries." "(d) To promote such sports, games, amusements, recreations, entertainments, pastimes and competitions as the Company may deem expedient and to offer and grant or contribute towards the provision of prizes, awards and distinctions and to arrange and control open matches and competitions." 13 In my opinion these are objects similar to the objects of the Club, for the purposes of clause 6 of the Club's memorandum. I note, in particular, the reference to sporting activities and the arrangement of open matches and competitions. Condition (b) 14 Clause 4 of the memorandum of association of the Workers' Club is in terms very similar to clause 3 of the memorandum of the Club. One of the provisos to clause 3 in the case of the Club allows "reasonable and proper" remuneration to an officer or servant, and permits "reasonable and proper" rent for premises let by any member to the Club. While the quoted words are not present in clause 4 of the memorandum of the Workers' Club, they would, in my opinion, be implied in any event. A proviso in the case of the Club permits the payment of interest to a member on money lent provided that the rate of interest does not exceed 10% per annum. The maximum percentage is not specified in the case of the Workers' Club but there would be an implied restriction to prevent excessive interest being charged. Clause 4 in the case of the Workers' Club expressly permits the payment of an honorarium in respect of special honorary services rendered by a member of the board of directors or governing body. There is no equivalent provision in clause 3 of the Club's memorandum. However, as a matter of substance the restrictions are not rendered different by this proviso because it is in terms confined to an honorarium, necessarily a small amount. 15 I am satisfied, having regard to clause 4 of the memorandum of the Workers' Club, that for the purposes of clause 6 of the Club's memorandum, the Workers' Club is an institution which prohibits the distribution of its income and property amongst its members to an extent at least as great as is imposed on the Club by virtue of clause 3. Additionally, I note that as the Workers' Club is a registered club, its rules are deemed to include a rule that any profits or other income of the club shall be applied only to the promotion of the purposes of the club and shall not be paid to or distributed among the members of the club: Registered Clubs Act 1976 (NSW), s 30(1)(i). Condition (c) 16 The receiving institution has not been "determined by the members of the Club" as contemplated by clause 6, for the following reasons. 17 Clause 6 does not explain how that determination is to be made. As one would expect, the procedural rules for members to make decisions are found in the Club's articles of association. The articles make provision for only one kind of decision-making by the members, that is decision-making at a general meeting of members. There is no provision for decision by postal ballot of for decision by signing a petition of the kind presented by Mr Walsh to Mr Parker. 18 The articles provide for the convening and holding of general meetings at which members consider "business" (see articles 61, 64, 65 and 68). The decisions of members in respect of that business are made by resolutions at the meeting, and article 69 provides that resolutions are to be decided on a show of hands, unless a ballot is demanded. The articles contemplate that a decision may be by a particular majority (article 69) or by a simple majority of those present and voting (articles 69 and 71). No provision is made in the articles for proxy voting, but at the time of formation of the Club and at all subsequent times members have had a statutory right to appoint a proxy (Companies Act 1961 (NSW), s 141 and corresponding subsequent provisions). 19 Like the modern Corporations Act, the Companies Act 1961 (NSW) required that certain decisions by the members be made by special resolution. "Special resolution" was defined in s 144 of the Companies Act as a resolution "passed by a majority of not less than three-fourths of such members as being entitled so to do vote in person, or where proxies are allowed, by proxy, at a general meeting of which not less than twenty-one days' notice specifying the intention to propose the resolution as a special resolution has been duly given". It was open to the drafter of the memorandum to specify that the decision of members referred to in clause 6 be by special resolution, but no such requirement was made (compare Associations Incorporation Act 1984 (NSW), s 53, which expressly provides that the surplus property of an incorporated association is to be distributed in winding up in accordance with a special resolution of the association). 20 Although a decision as to the distribution of surplus assets on winding-up is a matter of importance, it is not self-evident that a special resolution should be required in the case of a company limited by guarantee, whose members may not have the incentive to maintain a close interest in its affairs throughout the liquidation process. It seems to me that, in circumstances where the memorandum merely stipulates that a decision be made by the members, without more, the natural inference is that the decision be taken in such a manner as is permitted by the company's constitutional rules for decision-making by members. This reasoning suggests that a decision by ordinary resolution of the members would be sufficient to constitute a determination of the purposes of clause 6. 21 However, it is unnecessary for me to reach a firm conclusion on this point. The resolution put before the members was in the form of a special resolution, whether or not a special resolution was required. They voted on the basis, therefore, that the resolution would not be carried unless it was approved by a three-quarters majority. The resolution was not carried by the majority required for a resolution of that type. Therefore there was no valid determination by the members of the purposes of clause 6. 22 That being so, the default provision of clause 6 applies. A judge of this Court has jurisdiction under the clause to determine the institution or institutions to receive the surplus. Decision 23 In my opinion the correct decision is to direct Mr Parker that he would be justified in distributing the surplus to the Workers' Club. I say so for the following reasons: (i) this accords with the recommendation of the board of directors of the Club; (ii) it is supported by the reasons advanced by the directors for their recommendation, relating to the origin of the Club, the Workers' Club's intention to hold an annual memorial golf charity day, and the probability that in this way charity would be benefited; (iii) it also accords with the views of a substantial majority of the members who thought the matter sufficiently important to attend the meeting on 8 January 2006; (iv) the Workers' Club has the object of supporting sporting activities including golf; (v) a registered club supporting sporting activities provides a social and sporting environment comparable to the social and sporting environment of a golf club; (vi) the only alternative proposal that has been advanced is in favour of a charitable body which, though no doubt very worthy, has no particular linkage with the objects of the Club. 24 The liquidator's originating process seeks a declaration that he is entitled to distribute the surplus to the Workers' Club. Mr Parker's solicitors recently wrote to all the members of the Club who attended the meeting on 8 January, informing them that he would approach the Court, but there was no appearance on their behalf and none of the members made any inquiry to the solicitors. Nevertheless it seems to me inappropriate in this case to make a binding declaration of right, for the reasons given by McLelland J in Re GB Nathan & Co Pty Ltd (in liq) (1991) 9 ACLC 1291. There is an alternative form of order that seems to be satisfactory in the circumstances, namely a direction under s 511(1), under which the court is empowered to give directions comparable to the directions it may give to a court-appointed liquidator under s 479(3). Such a direction gives the liquidator the degree of protection explained by McLelland J in GB Nathan (at 1295). 25 The order for costs sought in the originating process is an appropriate order. **********

Application of Gregory Jay Parker (liquidator of Shellharbour Golf Club Ltd (in liq)) [2006] NSWSC 219

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