Australian Securities and Investments Commission v Commercial Nominees of Australia Limited

Judgment Outline 1These proceedings concern an application to wind up a mutual benefits fund established in 1935 which can no longer be administered in accordance with its Rules. I have already indicated the nature of the orders I intend to make. Facts 2The "Employees of Australian Iron and Steel Limited Mutual Benefits Fund" was apparently established in about 1935 although the earliest copy of the Fund Rules available was issued in 1952 and that put into evidence misses a page. 3New Rules appear to have been introduced in 1954 not much different from the 1952 Rules. How any amendment was made is not clear. The 1954 Rules provided, inter alia: (a) Subject to acceptance by the Executive Committee any employee of Australian Iron and Steel (AIS) at the Port Kembla Steelworks was entitled to become a member; (b) That the control of the Fund would be vested in an Executive Committee consisting of a Chairman, Vice- Chairman, Secretary-Treasurer, and three other members. The Executive Committee was to hold office for one year. The members other than the office bearers were afforded representation by separate departments of the Steelworks; (c) For an Annual General Meeting to be held each year and a balance sheet and report of auditors to be presented at that meeting; (d) That on death of a member each member would pay a levy of one shilling to the Fund. The levy amount was to be used for such of the "undermentioned purposes, as the Executive Committee shall decide": (e) The undermentioned purposes were: (i) to pay a lump sum to any beneficiary or beneficiaries named in the will of the deceased member or any of the next of kin of a member who died intestate; or (ii) to pay the funeral expenses of any such member; or (iii) to pay the funeral expenses only of a member who has died apparently unmarried without leaving a will or any next of kin. (f) Five members would constitute a quorum. 4The Rules were again slightly amended or purportedly amended in 1973 so as to extend the list of possible beneficiaries. 5In 1991 the accountants acting for the Fund wrote to the Australian Taxation Office. They said that the Fund had never lodged tax returns and sought to establish its tax status. Submissions which were referred to subsequently are not in evidence. The Taxation Office, in a helpful reply of 20 January 1992, stated that the Fund was not exempt as it was not created for public charitable purposes. However the letter went on to state that it would be possible for the Fund to qualify as a "poor employees trust" if the Rules were altered to state that it was established to "provide assistance to the dependants of a deceased member who are suffering financial hardship" and also if the Rules were amended to provide that none of the surplus funds on dissolution would be distributed to members but would go cy-près. 6Mr Jenkins, the plaintiff in this action, became a member some time after 1974 and joined the Committee in 1982. In an affidavit sworn on 14 March 2013 he gives evidence of various changes to the Rules over the period and particularly he addresses changes made as a result of the Tax Office advice. As to that he says that in April or May 1992 the Committee met "and voted to amend the rules of the Fund". These amended Rules were presented to the Australian Taxation Office which granted the exemption. By this time the Fund was known as "Employees of B.H.P. Mutual Benefit Fund". The new clauses 8 and 17 were as follows: 8. Subscriptions to the Fund shall be used for any of the undermentioned purposes: (a) To pay a lump sum, as the Committee in its absolute and uncontrolled discretion decides to any one or more of the undermentioned relatives of a Deceased Member, or an unfinancial member who in the opinion of the Committee is suffering financial hardship. Widow Eldest Child Father Mother Eldest Brother Eldest Sister Executor or Executrix of the Estate Other Interested person provided however, that the Committee may authorise payment to be made to any person on behalf of, or in trust for, any of the afore said relatives, or any other interested person. (b) To pay a portion, of funeral expenses of such Member and any further amount as the Committee decides as provided under sub-clause (a) hereof. (c) All claims must be brought to the notice of the Committee within twelve (12) months of such Member's death. ... 17. In the event of the Fund being dissolved or wound-up the amount which remains after such dissolution or winding-up and after the satisfaction of all debts and liabilities shall not be distributed amongst the subscribers but shall be paid to a charitable institution or organisation or fund with similar objectives selected by the Committee. 7None of the copies of the Rules under which the Committee purported to act from time to time contained any power to amend the Rules. There is no evidence any meeting of members authorised changes to the Rules. Certainly the 1992 changes were purported to be made by the Committee. 8Up until 1998 the Committee was filled as required by the Rules. In 1998 there was only one member apart from the office bearers and later that year, as a result of resignations, only Mr Jenkins as Chairman and Mr Parkinson as Secretary-Treasurer remained. No other members could be found to join the Committee. Mr Parkinson died in 2007 and since that time Mr Jenkins has done all he could to administer the Fund. The last Annual General Meeting was held in 1999. 9Mr Jenkins has approached two funeral funds and the AMP to take over the control of the Fund. None were willing to do so. As a result he has managed the Fund himself. 10There are at present about 1,050 fund members on the books but it is likely a number of those are dead. In the past 14 years there have been fewer than 100 claims on the Fund; and 23 claims in the past 3 years. Davlauros Audit & Assurance Services Pty Limited has provided auditor services to the Fund and has produced audited accounts for the year 30 June 2013 which show the Fund having net assets of $635,620. These assets include monies in bank accounts of about $124,000 and share holdings of about $508,000. 11I think it important to add here that, apart from one matter to which I will come, there is no suggestion that Mr Jenkins has acted in any way which was not for the benefit of the members of the Fund. 12Mr Jenkins called a meeting of Fund members for 13 December 2011. He sent notice of the meeting to all known Fund members at their last known address and advertised the meeting in the Illawarra Mercury and in the Sydney Morning Herald. Two hundred and thirty-six notices were returned to sender. 13Forty-four members attended the meeting on 13 December 2011. That meeting resolved, inter alia: (a) To seek Court approval and orders for the winding up of the Fund. (b) To seek judicial advice as to the distribution of the Fund. (c) To authorise Mr Jenkins to instruct Messrs Kells Lawyers to take the necessary proceedings. (d) That the cost of the proceedings and the cost of the winding up should be paid from the Fund. 14The Summons in these proceedings was filed on 27 March 2013 claiming: 1. By way of judicial advice: (a) pursuant to section 63 of the Trustee Act 1925 an order that upon the winding up of the Fund the plaintiff would be justified in distributing the assets of the Fund pursuant to rule 17 of the Fund's current rules; (b) in the event that order was not made, an order that upon the winding up of the Fund the plaintiff would be justified in distributing the assets of the Fund to the current members of the Fund; and (c) in the event the second advice was given then advice as to the composition of the class of members and the entitlement of those members. 2. By way of orders: (a) an order relieving the plaintiff from any liability in respect of past breaches of trust; and (b) an order for the winding up of the Fund pursuant to section 583 of the Corporations Act 2001 (Cth). 3. In the event that that order was not made, then an order for winding up pursuant to the inherent jurisdiction of the Court. 4. That a receiver be appointed to distribute the surplus assets. 5. Then finally, orders as to costs. 15On 16 April 2013 Sackar J ordered first that notice of the proceedings and a copy of the Summons be forwarded to the last known address of the members and that a notice to members be placed in the Illawarra Mercury and the Sydney Morning Herald stating that any person having any interest in the Fund should lodge claims with Messrs Kells by 28 May 2013; and secondly ordering that the Attorney General for New South Wales be given notice of the proceedings and a copy of the Summons. 16As a result of the advertisement and notices to members, 162 written claims were received by 28 May 2013 and 70 have been received since then. Nothing turns on this distinction now. A letter has been received from the Crown Solicitor's Office acting on instructions from the Attorney General which includes the following paragraphs: On the basis of the Summons, evidence and other information provided, I am instructed to inform you that my client does not wish to be involved in these proceedings, as they do not relate to a charitable trust. In the material provided by you, there is a question raised as to the validity of the amendments to the Rules in the early 1990s, which introduced the financial hardship requirement. This was one of the issues relevant to my client's consideration of the matter, noting, in particular, the evidence of Mr Jenkins at paragraphs 14 to 17 of his affidavit, as well as Harington v Sendall [1903] 1 Ch. 921 and Radmanovich v Nedeljkovic [2001] NSWSC 492. However, should it become apparent that the Court takes a different view regarding the validity of the amendments, or for some other reason considers the Fund to be a charitable trust, I am instructed to request that you or your client inform me of same immediately, as my client will then need to reconsider whether or not he should be involved in the proceedings. 17As part of the Summons contained an application for judicial advice, quite properly an advice of Mr D Barlin of counsel was put before the Court which has been of considerable assistance in this matter. Questions for Judicial Advice 18Question 1 - The validity of the 1992 amendments, particularly clause 17. The Rules make no provision for amendment. It follows that the Committee had no power to amend. It follows that the purported addition of clause 17 was not a valid amendment and must be treated as not having been made. No doubt the members in a general meeting could have made the amendment but that did not happen: neither was the amendment to clause 8 validly made. The result of this is that no valid charitable trust was created in respect of the Fund. It was and remains a private non-charitable Fund. The answer to the question in paragraph 1 of the Summons is no. 19Question 2 - Whether on the winding up of the Fund the plaintiff would be justified in distributing the assets to the current members. I consider the answer to the question to be that the plaintiff alone could not be so justified. It is possible a properly constituted committee could be so authorised but that is not the position here. Mr Jenkins is not qualified to determine claims of creditors, including any claims by the Taxation Office. The answer so far as he is concerned is no. 20On the basis of these answers question 3 does not arise. Claim for relief under s 85 of the Trustee Act 21There is no need for a s 85 order in respect of any breach by Mr Jenkins who was in the position of a trustee as Chairman of the Committee and eventually as sole member of the Committee in making any distribution which was made. There has been no claim by any member, as a beneficiary, for breach of trust. If there were, the matter could be reconsidered, but on the evidence at the present time there has been no loss to the Trust. 22The accounts show that an honorarium has been paid to the Secretary since at least 1981. The figure in that year was $500. In 1995 it was $900. Mr Jenkins in an affidavit sworn on 19 September 2013 deposed that at a meeting between himself and two retired committeemen in 2006 it was agreed that the stipend would be increased by $100 per annum until it reached $1,250 and that it has now reached $1,200. These payments were not authorised, but again no claim has been made for breach of trust. It is however possible there may be some liability. I think that Mr Jenkins has acted honestly and reasonably. It is clear that as a trustee committeeman he has benefited the Trust. He ought to be excused from any breach in respect of the honorarium payments whether to himself or others. He would have had no understanding he needed the direction of the Court to make or accept such payments. 23Insofar as he was paid or has paid himself special remuneration of $5,312 since he commenced working on this action, the present position is that, acting on legal advice, that money has been repaid to the Fund. There is no present claim for that remuneration and no authority to grant remuneration for future work. At the present time there can be no claim for breach as the amount has been repaid. Winding up of the Fund 24An order is sought that the Fund be wound up pursuant to provisions of Part 5.7 of the Corporations Act 2001 (Cth), in particular s 583(c)(ii). 25For these provisions to be brought into play, the Fund must be a Part 5.7 body. Under the definition in s 9 of the Corporations Act, Part 5.7 body means in part: (a) (b) (c) a partnership, association or other body (whether a body corporate or not) that consists of more than 5 members and that is not a registrable body. 26The Fund is not a "registrable body" as that term is defined in s 9 of the Corporations Act and it has more than five members. In a somewhat circular definition, "body" is defined to mean "a body corporate or an unincorporated body and includes, for example, a society or association". 27While there have been some cases which suggest that an association not formed for business purposes does not fall within the meaning of "association" it seems to me that the definition of "body", although somewhat circular, makes it apparent that the Fund in question is a Part 5.7 body. Re David Jones Mutual Aid Society (1984) 9 ACLR 130 supports this. It follows that a winding up order can be made if it is just and equitable to do so. 28The Fund cannot be administered in accordance with its Rules. It requires a committee of five and there are not five members prepared to be appointed to the committee. It is akin to a case of deadlock. Even looking at the matter from a trust perspective, a trust is wound up by distribution of the trust assets to the beneficiaries. Mr Jenkins cannot act as sole trustee and it is quite unlikely any member would accept appointment as trustee having regard to the obligations which might be involved in this case. I only state this as I have been searching for some means of avoiding the cost of liquidation. 29I have also considered whether it would be appropriate to appoint a receiver to the Fund to collect and distribute the Fund assets. That, however, is not the usual function of a receiver although it may be in a managed investment scheme, and the Fund would continue to exist, albeit without assets. I have concluded that liquidation is the appropriate way to proceed. 30The Summons somewhat indirectly seeks orders or advice as to the composition of the class of members and whether the Fund should be distributed to the members in equal shares or to members in accordance with their contributions. I consider the former is the appropriate method. There are cases decided on a trust basis of distribution in proportion to contributions. This may be appropriate in some cases: see for example Australian Securities and Investments Commission v Commercial Nominees of Australia Limited (2002) 42 ACSR 240. In circumstances which are based in contract, as is the position with members bound by the Rules of the Fund in question here, equal distribution is appropriate. One reason for this is that had any payments been made on behalf of the deceased member those amounts were fixed by the Committee: length of membership did not determine the sum payable; another reason is the great difficulty in establishing the actual amounts contributed by any particular member; and the third reason is that length of membership and amounts of contributions are really irrelevant for the purposes of the Fund and the interests of the beneficiaries in the Fund. Cases such as In re Sick and Funeral Society of St John's Sunday School, Golcar [1973] Ch 51 and In re GKN Bolts & Nuts Limited (Automotive Division) Birmingham Works Sports and Social Club [1982] 1 WLR 774 at 783 support such a decision. In this particular instance, if a winding up order is to be made, which I think it should be, then a declaration should be made that the distribution should be made to the members at the date of the liquidation in equal shares so that the liquidator is bound by that determination. Advice, Orders and Declarations 31(1) The Court advises and answers the questions in the Summons as follows: a. Question 1. Upon the wind-up of the Fund, would the plaintiff be justified in distributing the assets of the Fund pursuant to rule 17 of the Fund's current rules? No. b. Question 2. Upon the wind-up of the Fund, would the plaintiff be justified in distributing the assets of the Fund to the current members of the Fund? No, because the distribution should not be done by the plaintiff. c. Question 3. Does not arise. (2)The Court orders that, pursuant to section 85 of the Trustee Act 1925, the plaintiff be relieved of any liability for breach of trust in paying or receiving amounts paid as an honorarium for work done for the Employees of BHP Mutual Benefits Fund (the Fund) or its predecessors. (3)The Court orders that the Fund be wound up pursuant to section 583(c)(ii) of the Corporations Act 2001 (Cth). (4)The Court orders that Steven Nicols be appointed liquidator of the Fund. (5)The Court declares that the members of the Fund at the date of winding up are entitled to have the net assets of the Fund distributed to them in equal shares. (6)The Court orders that in the winding up of the Fund the liquidator distribute the net assets to the members in accordance with the declaration in the immediately preceding paragraph. (7)Pursuant to section 583 of the Corporations Act 2001 (Cth), the Court makes the following adaptations and gives the following directions to the liquidator: (a) where notification is required, and pending the liquidator's final determination of the members of the Fund, and solely for the purposes of these orders, the liquidator is to inform all people listed as members in the records for the Fund as maintained by the plaintiff; (b) the liquidator is to have all of the powers given to a Court-appointed liquidator under Chapter 5 of the Corporations Act 2001 (Cth), with the following adaptations: i. any reference to the term "company" is to be replaced with "the Employees of the BHP Mutual Benefits Fund" ii. substitute "members" for "creditors" in sections 473(3)(b)(i), 473(4), 473(4A) and 473(12); iii. dispense with the requirements of section 475; iv. dispense with the requirements of section 476; v. dispense with the requirement in section 488(2); vi. section 509 shall not apply; vii. section 513A applies to this wind-up ordered under section 583; viii. substitute "12 months" for "6 months" where the latter first appears in section 539 and add the word "member" before "creditor" in section 539(5). (8)The Court orders that the liquidator is released upon the events in section 480(a) of the Corporations Act 2001 (Cth) happening. (9)The Court orders that the costs of the plaintiff be paid out of the assets of the Fund on the indemnity basis.