The plaintiff is the Australian Legion of Ex-Servicemen & Women (the Legion).
The Legion seeks the Court's opinion, advice or direction pursuant to s 63(1) of the Trustee Act 1925 (NSW) (Trustee Act) on the questions identified in the Legion's statement. By seeking the Court's opinion, advice or direction, the directors of the Legion appear to have been conscious of the importance of fulfilling their directors' duties in relation to their significant concerns about the nature of the earlier sale of the Property and have taken a disinterested position in relation to what opinion, advice or direction might be provided by the Court.
Given the nature of the application, there are no other parties to the proceedings.
It will be convenient to set out the questions at the outset, although it will be necessary to explain the subject matter of the questions more fully. The questions are:
42. Would the Legion be justified in instructing its solicitors and counsel to consider, and initiate and prosecute legal proceedings against the Licensed Club, former directors of the Legion and/or members of the Willoughby Sub-Branch to allege (a) that the Deed was invalid, whether as ultra vires the Legion's constitutional documents or otherwise; and then (b) that the Legion should either have the Property returned to it or be compensated in respect of its disposal?
43. Would the Legion be justified in applying to have part (a) of the potential proceeding just identified heard separately and in advance of part (b)?
The Legion also invited the Court to advise on any further or other question as the Court sees fit having regard to the contents of the Legion's statement and the accompanying exhibit.
As I understand it, the Property referred to in the first question is a property that is apparently held by the Legion on trust for the members of a sub-branch of the Legion on the terms of the Deed. There is a question as to whether the Deed validly created a trust over the Property. There is also a question concerning who had the beneficial ownership of the Property if the Deed was invalid. The reference to the Licensed Club is a reference to the Willoughby Legion Ex-Services Club Ltd, which appears to have some connection with the Willoughby Sub-Branch of the Legion. There is a question about the identity of the relevant sub-branch, as the Deed refers to the intended beneficiaries as being the members of the Chatswood-Willoughby Sub-Branch. Apparently, a sub-branch by that name has never existed, which introduces a doubt about whether relevant members can be identified. On 29 April 2015, the Legion entered into a deed with the Licensed Club by which it granted a call option to the Licensed Club to acquire the Property for a price of $4,000,000. The deed granting the call option was subsequently vacated, and on 12 September 2016, the Legion transferred the Property to the Licensed Club for a consideration of $10 in settlement of a contract to that effect entered into on 25 July 2016. Apparently, the Legion took these steps at the request of members of the Willoughby Sub-Branch, but there is a question about whether that request was made in accordance with a proper resolution of members following a duly constituted general meeting of members, and particularly as to whether due notice was given of the intention to put the resolution.
The Legion's application for judicial advice is set down to be heard on 26 April 2021. However, at a preliminary hearing on 3 December 2020, the Legion was given leave to file its statement and the accompanying exhibit as then contained in the court book. As the issues raised by the Legion's application were canvassed, counsel for the Legion invited the Court to deal with the application in chambers if it was able to do so. I made an order that the Court would consider the Legion's application on the papers.
The Legion's application for judicial advice has some unusual features that warrant the Court delivering these preliminary reasons to assist the Legion to consider its position and to provide a response to the Court.
I will now state what appear to be the material facts as set out in the Legion's statement or found in the accompanying exhibit. Given the nature of this application, the statement of facts should not be treated as if the Court has formally found that those facts exist.
The Legion was incorporated on 10 October 1944 under the former Companies Act 1936 (NSW) (Companies Act). It is now registered under the Corporations Act 2001 (Cth) (Corporations Act) and, since 3 December 2012, it has been registered with the Australian Charities and Not-for-profits Commission.
The Legion was thus incorporated before the modern laws governing unincorporated associations were enacted in New South Wales. The relevant current act is the Associations Incorporation Act 2009 (NSW).
When the Legion was incorporated, and when the Deed referred to in the questions was executed, the doctrine of ultra vires applied in Australian company law. Consequently, the validity of the Legion's acts depended upon compliance by the Legion with its objects, as stated in its memorandum and articles of association. The validity of the acts of the Legion at relevant times will depend upon whether, on the true construction of its memorandum of association, the particular transaction is objectively capable of falling within the Legion's objects or is reasonably incidental thereto.
The doctrine of ultra vires was abolished in Australia with effect from 1 January 1984. The abolition of the doctrine is now given effect by s 125 of the Corporations Act. The abolition of the ultra vires doctrine did not have the effect of retrospectively validating acts of corporations that were ultra vires when done.
The Deed was dated 11 August 1951. Apparently, the oldest version of the Legion's memorandum and articles of association, and the relevant by-laws governing the organisation of sub-branches that are presently available, were prepared some time in or around the 1950s. For the present, I will assume that the documents contained in the exhibit were in effect at the date of the Deed.
The primary object of the Legion, as stated in clause 3(a) of the memorandum of association is (noting that the Legion is described as the Association in its constituent documents):
To combine into an Association members and ex-members of any naval, military or air force or merchant naval service or similar force or serve (sic), and all persons who have at any time been attached thereto (all of whom whether men or women are hereinafter referred to as "servicemen").
Clause 3(c) of the memorandum of association provided as an object for the Legion to establish local branches, sub-branches, councils or other bodies for the management of the affairs of the Legion.
Clause 3(p) of the memorandum of association provided that it was an object of the Legion "to undertake and execute any trust which may seem to the Association to be conducive to any of its objects".
Clause 3(s) of the memorandum of association contained an object expressed in wide terms authorising the Legion to acquire and deal with "real and personal property of any nature whatsoever but subject to Section 34 of the Companies Act 1936".
Section 34 dealt with the circumstances in which the Governor may grant a licence to authorise a company incorporated under the Companies Act to be registered without the addition of the word "Limited" to its name. The licence could only be given: "Where it is proved to the satisfaction of the Governor that an association about to be formed as a limited company… intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the paying of any dividend to its members…"
Thus, while the Legion's memorandum of association contained a widely expressed object to hold and deal with property, that object was expressly subject to compliance with s 34 of the Companies Act. That was necessary to obviate the risk that the Governor would revoke the licence and require the inclusion of the word "Limited" in the Legion's name.
Relevantly, clause 4 of the memorandum of association provided:
The income and property of the Association whencesoever derived shall be applied solely towards the promotion of the objects of the Association as set forth on 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 Association…
Clause 5 of the memorandum of association obliged every member of the Legion to contribute to the assets of the Legion in the event that it was wound up during the time that the person was a member or within one year afterwards for payment of the debts and liabilities of the Legion.
Clause 9 of the memorandum of association provided that clause 4 contained a condition on which the licence under s 34 of the Companies Act was granted by the Governor.
Clause 6 of the memorandum of association provided:
If upon the winding up or dissolution of the Association there remains after the satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed among the members of the Association but shall be given or transferred to some other Association institution or institutions having objects similar to the objects of the Association…
The articles of association of the Legion provided for the establishment and operation of a State Council and a Federal Council. Articles 81 to 87 provided for the establishment of sub-branches of members of the Legion. Those articles included the following provisions:
81. The State Council may from time to time or at any time establish in any part portion or district of the State or Territory under the jurisdiction of such Council a Sub-Branch for such part portion or district of the State or Territory… and the Committee of any such Sub-Branch shall exercise the powers authorities and discretions conferred on it and be subject to the conditions imposed on it by these Articles and the By-laws made from time to time by the State Council of the State or Territory within which such Sub-Branch is established.
…
82. All members of the Association whose usual place of abode is in the part portion or district of any State or Territory in which a Sub-Branch is established shall be deemed to be members of such Sub-Branch…
83. Every person who after the date of the adoption of these Articles shall become a member of the Association shall become a member of the Sub-Branch in the part portion or district in which such person shall be residing at the time of his becoming a member of the Association…
The articles of association contain provisions that entitle the State Council to make resolutions that have the effect that members will belong to sub-branches within whose territories the members do not live.
By-laws 62 and 64 deal with the formation of sub-branches in the following terms:
62. A Sub-Branch may be formed upon the authority of a resolution of the State Council and a Charter shall be issued under the common seal of the Association setting out: -
(a) The name and date of the constitution of that Sub-Branch.
(b) The area within which it shall operate, and the District Council to which it is attached.
…
64. There shall be a register of Sub-Branch charters, in which shall be entered a copy of the charter of each Sub- Branch, and also a similar register for District Councils.
Article 74 set out in pro forma format the rules that every sub-branch was required to have.
The by-laws do not appear to contain a provision requiring any particular notice to be given to members of the business to be conducted at any general meeting of the members of a sub-branch.
Section 95 of the Companies Act contained provisions concerning the holding of meetings of a company that had effect, in-so-far as the articles of the company did not make other provision. By sub-section (1)(a), a meeting of the company, other than a meeting for the passing of a special resolution, may be called by seven days' notice in writing. Sub-section (1)(b) required the notice to be given in the manner provided for in Table A of Schedule 2 of the Companies Act.
Regulation 42 of Table A required that "in case of special business, the general nature of that business shall be given in manner hereinafter mentioned, or in such other manner, if any, as may be prescribed by the company in general meeting, to such persons as are, under the regulations of the company, entitled to receive such notices from the company".
By-law 74(40) provided:
PROPERTY.
Real property of the Sub-Branch shall be vested in the Association and shall be dealt with by it on behalf of the Sub-Branch upon such trusts as it shall declare.
It was in these circumstances that the Legion executed the Deed on 11 August 1951 under its common seal. The Deed referred to the Legion as the Company and provided:
WHEREAS it the said Company is the Registered Proprietor of the land situated in the County of Cumberland Parish of Willoughby being the whole of the land in Certificate of Title Volume 6068 Folio 109 NOW THIS DEED WITNESSETH that the said Australian Legion of Ex-Servicemen and Women DOTH HEREBY DECLARE ACKNOWLEDGE AND ADMIT that it is and shall be possessed of and interested in the said land UPON TRUST for the members for the time being of the Australian Legion of Ex-Servicemen and Women constituted by and associated as the Chatswood-Willoughby Sub-Branch subject to the rules regulations and by-laws and its Memorandum and Articles of Association PROVIDED HOWEVER that in the event of the liquidation of the said Australian Legion of Ex-Servicemen and Women then and in that event the said lands shall be deemed to be held and to always have been held upon trust for the members of the Australian Legion of Ex-Servicemen and Women at the date of such liquidation who are resident in the suburbs of Chatswood and Willoughby beneficially.
This wording gives rise to uncertainty as to the validity of the Deed. On the one hand, the memorandum of association of the Legion prohibits the income and property of the Legion being transferred to its members, including on the winding up of the Legion. By-law 74(40) seems to contemplate that sub-branches cannot hold property separately, and such property must be vested in the Legion. The by-law permits the Legion to hold the property of sub-branches "upon such trusts as it shall declare". There is thus a question about whether the Legion's own property is intended by its constituent documents to be treated differently from the property of sub-branches vested in the Legion, but held on various trusts for the members of sub-branches. It is arguable that the Deed was inconsistent with the constitution of the Legion.
It appears from documents in the exhibit that a question arose concerning the future ownership of the Property, as a result of the declining membership of the Willoughby Sub-Branch. It is not necessary for present purposes to consider the effect of those documents in detail.
As mentioned above, on 29 April 2015 the Legion entered into a deed by which it granted the Licensed Club a call option to acquire the Property for a price of $4,000,000.
An issue then arose as to whether the Legion was entitled to sell the Property or whether the Property should have been given to the Licensed Club at the request of the members of the Willoughby Sub-Branch.
In a letter dated 25 October 1999 written for the Legion by A.O. Ellison & Co Solicitors, the solicitors raised concerns about the validity of the Deed. In a letter dated 4 April 2016 written for the Legion by Pigott Stinson, the solicitors raised similar concerns, recommended caution and referred to a search that they had carried out at the Land Titles Office that yielded a statutory declaration that asserted that the Chatswood Willoughby Sub-Branch referred to in the Deed was never constituted. These concerns also appear to have been raised with the Legion by counsel both before and since the sale of the Property. The position asserted in this Statutory Declaration appears to be supported by minutes of Legion State Council meetings from 1945 and 1951 which concern, first, the establishment of the 'Willoughby Sub-Branch' and, second, the Legion entering into the Deed in respect of the 'Willoughby Sub-Branch'. No evidence has been provided to the Court that indicates that a Legion sub-branch including the name 'Chatswood' has ever been constituted.
The minutes of the general meeting of the Willoughby Sub-Branch of the Legion held on 17 May 2016 records the following general business:
The matter of Sub- Branch land was put to the members, and after lengthy discussion, it was resolved that all land and buildings owned by the Sub-Branch be given to the Willoughby Legion Ex-Services Club Ltd, with following conditions;
1. That the Sub-Branch and its members be at all times accommodated within the club.
2. Should the Licensed Club fail, all property and buildings to revert back to Sub-Branch ownership
3. The Licensed Club to arrange for the conveyance of the Deeds from State Branch Office
There was discussion of this matter at meetings of the State Council of the Legion, and ultimately, as mentioned, the deed creating the call option was vacated and the contract was entered into and completed for the sale of the Property to the Licensed Club for $10.
Apparently, the membership of the State Council has changed since these events occurred and there is now a concern as to whether the Legion has acted properly. This has led to the questions set out above being put to the Court.
The questions that have been put to the Court on this application raise difficult and uncertain questions of fact and law. I appreciate that the Court is not required to determine these questions, but only to decide whether it is proper for the Court to advise the Legion that it is authorised to act in the manner posed by the questions. However, it is still necessary for the Court to have a sufficient understanding of the likely facts and the parameters of the legal issues, and the possible practical consequences to make a proper judgment about the reasonableness of the course of action proposed by the Legion.
In what follows, I set out a number of preliminary considerations that may need to be taken into account by the Legion in prosecuting its application for judicial advice. Matters that I will raise may not be exhaustive of all relevant considerations. Had I waited till the hearing that has been fixed for 26 April 2021 and then raised these matters, it is likely that the Legion would have been unable to give a considered response. My object in providing this preliminary response to the application has been to facilitate the efficient and satisfactory determination of the Legion's application.
It is appropriate to start with the purpose of the provision of judicial advice to a trustee under s 63 of the Trustee Act. That purpose is primarily to enable trustees to ascertain in advance whether particular conduct that they contemplate will be in accordance with their duties as trustees. If trustees then act on the advice, they will not be liable for breach of trust provided that in obtaining the advice they have fairly disclosed all relevant circumstances to the Court.
A subsidiary purpose concerns the usual right of a trustee to be indemnified from the trust fund for the trustee's costs of performing the trustee's duties. If the subject matter of the judicial advice is that the trustee is authorised to prosecute or defend legal proceedings, then the trustee will be entitled to recoup the trustee's legal costs from the trust fund.
The Legion is not, of course, a trustee for its own property. The management of the Legion's affairs is within the authority of the State Council and other decision-making bodies in accordance with the Legion's constitution. The State Council can make its own decision as to the expenditure of the Legion's funds and will be responsible for that decision. Accordingly, to the extent that the Legion may contemplate prosecuting any proceedings in its own interests, that will be a matter for the State Council, and not a proper subject for the provision of judicial advice under s 63 of the Trustee Act.
I mention that consideration because in this case the only relevant trust is the trust created by the Deed. As matters stand, the property that originally constituted the trust fund, being the Property, has been transferred to the Licensed Club for a price of $10. Consequently, the present trust fund should be a sum of $10 or thereabouts.
While the value of the trust fund does not limit the propriety of a trustee deciding what should be done to protect the fund, and for that purpose to seek judicial advice in an appropriate case, the value of the trust fund will be a fundamental consideration to the reasonableness of any particular conduct that may be contemplated in performing the trustee's duties.
In this case, the trust fund under the Deed will only have a value of $4,000,000, being the price under the call option, or such other amount as the Property may be worth on the open market, if the contract for the sale of the Property to the Licensed Club and the subsequent transfer for $10 are actually set aside. If the transfer is not set aside, then the Licensed Club will remain the owner of the Property, and any action by the Legion will relate only to a trust fund of $10 or thereabouts.
The Licensed Club is now the registered proprietor of the Property, so the question will be whether the Legion has a ground at law or in equity for setting aside the transaction. That question must be answered in the light of the fact that, prior to the transaction, the Legion was the registered proprietor of the Property, whether it was beneficially entitled to the Property or it held the Property on trust for the members of a sub-branch.
If the Legion were to successfully prosecute a claim against the Licensed Club for an order setting aside the transaction, the trust fund would then have a value of $4,000,000 or thereabouts, and the question of whether the Legion should be entitled to indemnify itself for its costs of the proceedings would then have relevance. If the claim against the Licensed Club failed, then the Legion would probably be ordered to pay the costs of the Licensed Club, and the entitlement of the Legion to indemnify itself out of the trust fund valued at $10 would be moot.
It must be remembered that this is not a case where a replacement trustee wishes to take action to set aside a transaction entered into by a former trustee in breach of trust. The Legion is the only party that has been trustee of the Property, and the membership of the State Council is the only thing that has changed, not the identity of the trustee.
If the sale of the Property to the Licensed Club did involve a breach of trust, that breach of trust was committed by the Legion.
This consideration gives rise to the challenging question of whether a defaulting trustee has a right to set aside the sale of trust property to a third party on the ground that the circumstances in which the sale took place involved a breach of trust. There would be other subsidiary questions such as whether it could be shown that the purchaser had notice that the sale involved a breach of trust.
It may be arguable that the sale of the Property to the Licensed Club involved a breach of trust by the Legion because: (a) the sale was at an obvious undervalue; (b) the sale at the price paid required the beneficiaries of the trust to give their authority for the sale; (c) the giving of valid authority required full and fair disclosure of all relevant circumstances to members; (d) authorisation could only be decided by the members at a meeting held in accordance with the constitution of the Legion; and (e) due notice of the meeting may not have been given to all members. It is likely to be a detailed matter of fact whether the sale involved a breach of trust by the Legion with the knowledge of the Licensed Club.
Assuming for the sake of argument that a defaulting trustee is entitled to rely upon its own default in suing a purchaser of trust property from the trustee to set aside the sale, the commencement of proceedings may be likely to generate a cross-claim by the purchaser against the trustee.
If it is assumed that the Deed is valid, a successful action to set aside the transfer would only restore the status quo. The Legion would then continue to hold the Property on trust for relevant members of the sub-branch. It would remain available to the members to resolve, by a constitutionally valid resolution of members, to request the Legion to transfer the Property to the Licensed Club on the same or similar terms to the sale that has already taken place.
That consideration would suggest that the preferable course would be for the Legion to ensure, before the commencement of any proceedings, that a constitutionally valid meeting of members of the sub-branch has been called for the purpose of giving the members the opportunity to decide, after full and fair disclosure of the circumstances, whether or not they should ratify the sale that has already taken place. That course would obviate the risk that the sale could be set aside because of some defect in the process, only for it to be found that the members in a constitutionally valid way still wanted the sale to occur.
One consideration that the members would be entitled to take into account is the legal costs of the Legion commencing proceedings against the Licenced Club to set aside the transfer, as, if the Legion succeeded, the shortfall in the Legion's costs, after the Licensed Club satisfied an order against it to pay the Legion's costs, would have to be reimbursed to the Legion out of the Property. If that amount were substantial enough, then the Property may need to be sold in order to fund the Legion's costs.
Other matters may complicate this process. One is that a judgment would need to be made on the facts as to the prospects of success of the Legion's claim against the Licensed Club. One important issue would be the determination of what has in fact been done by the Licensed Club with the Property since the transfer on 12 September 2016. Equity will generally not make orders setting aside transactions unless it is possible, by other orders, to restore the status quo before the transaction took place.
Another matter to be addressed is the appearance that the Legion will have a conflict of interest. The Legion can only challenge the validity of the transfer of the Property to the Licensed Club on a basis that involves the transfer encompassing a breach of trust by the Legion. As I have noted, the claim may provoke a cross-claim against the Legion. That may put the Legion in a conflicted position, as it will wish to prove a breach of trust in its claim against the Licensed Club, but in a way that avoids its own liability to the Licensed Club.
The conventional way to deal with this problem would be for the Legion to retire as trustee of the trust created by the Deed, and to be replaced by a suitable new trustee. A practical problem would be that, at present, the trust fund only has a value of $10 or thereabouts, so it is unlikely that a new trustee would take the risks of litigation without having a full indemnity from the Legion.
These considerations have all assumed that the Deed validly created a trust over the Property.
The question then arises as to whether the Court should give the Legion advice that it is authorised to challenge the validity of the Deed.
Before the Court could give that advice, it would require assistance as to whether such advice would be inconsistent with the duty imposed upon trustees not to impeach the validity of the trust instrument or the title of the beneficiary: see Jacobs' Law of Trusts in Australia (8th edition) LexisNexis Butterworths at [17-03].
Assuming that the Legion may be permitted to impeach the validity of the Deed and argue that it did not create a valid trust of the Property, then complicated questions of fact may need to be addressed as to the circumstances in which the Property was acquired. That may give rise to serious forensic difficulties given that the Property was acquired more than 60 years ago. There is some evidence to suggest that the Legion acquired land including the Property from its own funds and then, by means of the Deed, sought to declare a trust over the Property in favour of the members of the Chatswood-Willoughby Sub-Branch. If that is correct, then there is an argument that the Deed was void as it was ultra vires, because it was inconsistent with the Legion's memorandum of association in that it provided for the Property on a particular contingency to be held for members.
However, it is possible that because the Property was acquired with funds generated by the members of the sub-branch, it became vested in the Legion because of the operation of by-law 74(40). If that were the case, there would be an argument about whether the Property should be treated as being property of the Legion and therefore subject to the constraints contained in the memorandum of association, or whether it should be treated as the property of the members and therefore the subject of a legitimate trust created by the Legion as permitted by by-law 74(40).
These will be difficult questions to answer, and I raise them in order to flag the possibility that members of the Legion may be beneficiaries of a trust of the Property notwithstanding the constraints in the Legion's memorandum of association.
I note that an aspect of the questions put to the Court is whether the Legion should initiate and prosecute proceedings against former directors of the Legion. Directors (assuming they take the place of members of State Council) could only be liable for breaching their duties as directors to the Legion. The question of their potential liability to the Legion could only be given proper consideration after it is ascertained that the Legion itself is liable for some breach of duty and the basis for that liability is identified.
In the circumstances, there are no orders to be made as a result of these reasons.
[3]
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Decision last updated: 15 April 2021