Australian Securities and Investments Commission (ASIC) v Lewski

Supreme Court of NSW|2020-09-11|Before: Rees J, Mr J

Ramsay's Principles of Corporations Law (online, July 2020) Winifred Murray, 'The role of company boards: Are they to blame for excessive executive remuneration?' (2009) 23 Australian Journal of Corporate Law 178 Category: Principal judgment Parties: Jeffrey Shute as liquidator of the Maitland Benevolent Society Ltd (in liquidation) (Plaintiff) United Protestant Association (First Interested Party) Royal Freemasons' Benevolent Institution (Second Interested Party) Representation: Counsel: Mr J Darams (Plaintiff) Mr S Wallace, Solicitor (First Interested Party) Mr A Fernon (Second Interested Party)

Solicitors: Moray & Agnew Lawyers (Plaintiff) Hall & Wilcox (First Interested Party) O'Neill McDonald Lawyers (Second Interested Party) File Number(s): 2020/159500

Judgment

HER HONOUR: The Maitland Benevolent Society Ltd is a not for profit organisation which owned and operated an aged care facility, Benhome Residential Aged Care Facility, in Maitland and also provided home care services and respite places. In 2019, The Maitland Benevolent Society sold the land and its business to the Royal Freemasons' Benevolent Institution Ltd. The Maitland Benevolent Society has since been wound up and the liquidator, Jeffrey Shute, seeks an order under section 23 of the Supreme Court Act 1970 (NSW) or a direction under section 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) (Insolvency Practice Schedule (Corporations) to pay the surplus - some $8.15 million - to the Royal Freemasons Benevolent Institution.
The application is, unsurprisingly, supported by the Royal Freemasons Benevolent Institution. Another charity, United Protestant Association of NSW Limited, also appeared and sought half or, alternatively, a quarter of the surplus. Affidavits were read by Mr Shute, Frank Price, the chief executive officer of Royal Freemasons' Benevolent Institution and Stephen Walkerden, general manager of United Protestant Association.

Constitution of Maitland Benevolent Society

According to its constitution, the mission of The Maitland Benevolent Society was to enhance the quality of life of aged and frail people by providing care to its residents and clients: clause 2.2. Whilst "residents" and "clients" are not defined in the constitution, I take residents to refer to people living at "Benhome" and clients to refer to those who received home care services or respite places.
The objects of the company were specified in clause 2.3 of the constitution, including to: 2.3.1 Provide suitable and appropriate accommodation for our residents. 2.3.2 Provide a service for the frail aged in their own homes. 2.3.3 Provide the necessary resources to meet any and all care needs of our residents and clients. 2.3.4 Maintain an atmosphere that is conducive to the lifestyles and needs of all our residents and clients. 2.3.5 Provide activities that encourage residents to participate in social events, whilst encouraging and developing community links. 2.3.6 Encourage family members and carers to be involved with Benhome. … 2.3.8 Provide a safe and secure environment for all involved with Benhome …
Clause 3 provided that the company must not make any distribution to any members, whether by way of dividend, surplus on winding up or otherwise.
Clause 21 provided: The Company must not pay any fees to a Director for performing that person's duties and responsibilities as a Director. The Company must not pay any amount to a Director unless that payment has been approved by the Directors.
In the event of a winding up, the constitution provided: 105. On a winding up of the Company, the Members must determine one or more companies, associations or institutions whose constitution: (a) requires it to pursue only objects similar to those in Clause 2 and to apply its income in promoting those objects; (b) prohibits it from making distributions to its members to at least the same extent as in Clause 3; (c) if a company, prohibits it from paying fees to its directors and requires its directors to approve all other payments the company makes to its directors; (d) is a public benevolent institution; and (e) holds accreditation with the Australian Taxation Office as a Deductible Gift Recipient, to whom the liquidator must give or transfer any surplus on dissolution or winding up. 106. If the Members fail to make a determination under Clause 105 within 20 Business Days of the winding up of the Company, the liquidator must make an application to the Supreme Court in the jurisdiction the Company is taken to be registered to make that determination.
There is no dispute that the members of The Maitland Benevolent Society have failed to make a determination under clause 105 within 20 business days of appointment of a liquidator and thus Mr Shute must bring this application.
As to the eligibility of the Royal Freemasons' Benevolent Institution or United Protestant Association to receive the surplus, there is no dispute that the Royal Freemasons' Benevolent Institution satisfies each of the criteria in clause 105. An issue remains as to whether the United Protestant Association meets the requirement of clause 105(c), which I have considered at [51].

Order or directions

In Application of Gregory Jay Parker (liquidator of Shellharbour Golf Club Ltd (in liq) [2006] NSWSC 219, Austin J considered a similar application where the liquidator of a not for profit club sought a declaration that, on the true construction of the constitution of the club and having regard to the events that had occurred, he was entitled to distribute the surplus property to the Shellharbour Workers' Club Limited. The club's constitution required the surplus funds be distributed to an institution with similar objects and prohibited the distribution of assets to its members. Due to a disagreement between members as to the recipient of the surplus funds, the members failed to pass a special resolution and the club's constitution required the Court to make a determination. His Honour noted at [22]: That being so … A judge of this Court has jurisdiction under the clause to determine the institution or institutions to receive the surplus.
The liquidator sought declaratory relief. However, Austin J considered that the correct approach was to give a direction to the liquidator that he would be justified in distributing the surplus to the Shellharbour Workers' Club. At [24]: … 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 [& Co Pty Ltd (in liq) (1991) 9 ACLC 1291] (at 1295).
Such directions are now given under section 90-15(1) of the Insolvency Practice Schedule, which provides that the Court may make such orders as it thinks fit in relation to the external administration of a company, including determining any question arising in the external administration: section 90-15(3)(a). As liquidator, the plaintiff has standing to bring this application as an officer of the company: section 9, Corporations Act; section 90-20(1)(d), Insolvency Practice Schedule.
The principles in relation to applications for directions were summarised by Black J in In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9] and Gleeson JA in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) (2018) 125 ACSR 355; [2018] NSWSC 481. The Court may give directions where it will be "of advantage in the liquidation": Dean-Willcocks v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79 at 81 per Young J. The Court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision, when no legal issue is raised or where there is no attack on the propriety or reasonableness of the liquidator's decision but may do so where there is the prospect of such an attack: In the matter of 7 Steel Distribution Pty Limited (in liquidation) (receivers and managers appointed) [2013] NSWSC 669 at [20] per Black J; In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083 at [17]. A direction protects the liquidators from liability for breach of duty or unreasonable behaviour if full disclosure is made to the Court: Re Daniel Efrat Consulting Services Pty Ltd (receiver appointed) (in liq) (1999) 91 FCR 154; [1999] FCA 412 at [13]; Re Ansett Australia Ltd (2001) 39 ACSR 355; [2001] FCA 1439 at [59]-[62] per Goldberg J; In the matter of Dungowan Manly Pty Ltd (in liquidation) (2017) 124 ACSR 218; [2017] NSWSC 1771 at [3] per Black J.
As Gleeson JA explained in Hawden Property Group, section 90-15 of the Insolvency Practice Schedule accommodates the determination of substantive rights although the Court would not do so without affording potentially affected parties an opportunity to be heard: at [8] citing Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd [2007] FCA 1443 at [49]-[51] (French J, referring to Australian Securities Commission v Melbourne Asset Management Pty Ltd (Receiver and Manager Appointed) (1994) 49 FCR 334 at 352 (Northrop J)); Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125 at [45]-[46] (Davies J); In the matter of ICS Real Estate Pty Ltd (in liq) (2014) 14 ASTLR 382; [2014] NSWSC 479 at [25] (Brereton J).
Given the manner in which the constitution of The Maitland Benevolent Society is framed, Mr Shute cannot proceed to distribute the surplus without either an order or direction. The liquidator has notified all relevant parties of the hearing today, including other local charities who were invited to apply to be paid the surplus, some of whom initially expressed interest but have not subsequently chosen to participate in the hearing. Thus, those affected by the orders sought have been heard. Taking the approach of Austin J in Shellharbour Golf Club Ltd, I will proceed by way of a direction rather than a determination, although either approach is available in this case.

Facts

The circumstances in which the surplus has arisen are important. On 8 September 2018, following information received from the Australian Aged Care Quality Agency, the Commonwealth Department of Health identified that there was an immediate and severe risk to the health, safety and wellbeing of residents at "Benhome" and imposed sanctions on The Maitland Benevolent Society under the Quality of Care Principles 2014 made under section 96-1 of the Aged Care Act 1997 (Cth), including revoking its accreditation unless an administrator was appointed to assist the society to comply with its responsibilities. An administrator was promptly appointed.
In December 2018, the board of The Maitland Benevolent Society took the view that the best course of action was to sell the facility to a larger, well-resourced professional provider and, to that end, engaged Russell McGree of StewartBrown Advisory to assist with the sale. Seven large providers submitted offers to buy "Benhome" including the Royal Freemasons' Benevolent Institution, which submitted an expression of interest for $26.32 million. Apparently, the United Protestant Association also submitted an expression of interest, although the evidentiary reference to support submissions to that effect has proved elusive.
After submitting its expression of interest, a representation was made to the Royal Freemasons' Benevolent Institution that, after completion of the acquisition and on the winding up of The Maitland Benevolent Society, surplus funds were expected to be distributed to the successful purchaser, as long as those funds were to be used primarily for improvements and refurbishment of the facility and services at "Benhome". The Royal Freemasons' Benevolent Institution increased its offer by some $6.9 million, submitting a revised offer of $33.223 million. As part of its bid, the Royal Freemasons' Benevolent Institution committed to regain accreditation and to substantially refurbish and redevelop buildings at Benhome at an estimated cost expenditure of $5.7 million to $11.2 million, including to refurbish Pender House, knock down and rebuild the Curtis Wing and refurbish and improve the dementia wing known as Rose Court.
On 20 March 2019, representatives of two short-listed bidders met with the board of The Maitland Benevolent Society and were advised that the surplus on winding up would be returned to them for the purposes of, primarily, capital improvements at "Benhome". Mr McGree's file note of the meeting recorded, "unanimously resolved that any surplus on wind up will be [transferred] to purchaser, subject to conditions - won't form part of main contract". After the meeting, The Maitland Benevolent Society issued a letter to the Royal Freemasons' Benevolent Institution stating: Letter of Intent with respect to Surplus funds from the sale of Benhome The matter of the distribution of surplus funds, as part of the windup of The Maitland Benevolent Society Limited, was discussed at the Board meeting on the 20th March 2019 with the short listed prospective purchasers as part of the interview process. The Board indicated that any decision on the distribution of funds would be a matter separate to any sale contract and would consider it at a later date as to the best process to do this. However, the Board did pass comment that the purchaser of Benhome would likely be the recipient of these funds as part of the process (subject to special conditions about the usage of these funds at Benhome) but such a decision is obviously subject to further consideration and a final decision by the Board.
On 27 March 2019, Mr Price met with the Department of Health and advised that, in order to start to remedy the matters the subject of the sanction, the Royal Freemasons' Benevolent Institution had committed several senior clinical staff to begin rectifying problems at "Benhome". On 1 April 2019, contracts were exchanged to sell "Benhome" to the Royal Freemasons' Benevolent Institution. A business sale contract was also exchanged in respect of the sale of the society's business and business assets.
On 1 May 2019, the sale was completed. A Deed of Assignment was also executed between The Maitland Benevolent Society and the Royal Freemasons' Benevolent Institution in respect of residency agreements, being agreements entered into between The Maitland Benevolent Society and "Benhome" residents. Under the deed, the Royal Freemasons' Benevolent Institution agreed to indemnify The Maitland Benevolent Society in respect of any claims arising out of the residency agreements.
A draft trust deed was prepared to hold the surplus for the purposes of providing support for residents of "Benhome" and for the advancement of the Benhome Residential Aged Care Facility. On 3 May 2019, the draft trust deed was provided to the Royal Freemasons' Benevolent Institution. On 22 May 2019, Mr Shute met with directors of The Maitland Benevolent Society, who were then considering approaching the Court to have a trustee or receiver appointed - according to one director - "to enable the surplus funds to be distributed to the purchaser … However, I am not sure whether the residents of Benhome would be required to have a say in the distribution of the surplus funds given they had provided funds to the company in the form of Refundable Accommodation Deposits …".
On 13 June 2019, a director of The Maitland Benevolent Society wrote to Mr McGree in respect of the proposed trust deed noting, "I do believe that [Royal Freemasons' Benevolent Institution] will end up with the surplus funds once all aspects are finalised". On 17 July 2019, Mr Shute met with the board of The Maitland Benevolent Society to discuss the proposed trust deed. According to Mr Shute, the board was concerned to ensure that the surplus was held for the sole purpose of "Benhome" and not used for working capital for the general business of, or other facilities maintained by, the Royal Freemasons' Benevolent Institution.
On 20 August 2019, the board of The Maitland Benevolent Society signed its financial report for 30 June 2019, noting, "the Board did pass comment that the purchaser of Benhome would likely be the recipient of these funds …". The directors of The Maitland Benevolent Society resolved to convene a meeting of members to consider a voluntary winding up.
On 20 August 2019, The Maitland Benevolent Society also wrote to the Royal Freemasons' Benevolent Institution requesting a copy of its constitution to ensure that it met the requirements for receipt of surplus funds on the winding up of The Maitland Benevolent Society. Further: (emphasis in original) Should [Royal Freemasons' Benevolent Institution] constitution meet the requirements set out above, and should the Board of Directors of [The Maitland Benevolent Society] resolve to distribute any or all of the surplus funds to [Royal Freemasons' Benevolent Institution], it is requested that you provide written confirmation that: The Royal Freemasons' Benevolent Institution would honour the wishes of the Directors of Maitland Benevolent Society Ltd that the funds were to be spent only at 30 Regent Street Maitland NSW 2320, for the benefit of those aged care recipients residing at that address; and further that these funds would not be distributed to any other facility owned and operated by the Royal Freemasons' Benevolent Institution. Further to the above, the Royal Freemasons' Benevolent Institution would accept liability for any third party claims brought against Maitland Benevolent Society Ltd, and make available the surplus funds received (or any portion of them required) to meet any such claims.
On 30 August 2019, the Royal Freemasons' Benevolent Institution replied, advising it was happy to accept these terms but, in respect of making the surplus available to meet third party claims, sought a declaration from the directors of The Maitland Benevolent Society, or a notation within the minutes of the annual general meeting, as to whether they were aware of any facts or circumstances which might give rise to such a claim. Further to the above, [Royal Freemasons' Benevolent Institution] will indemnify Maitland Benevolent Society Ltd in respect of third party claims made against it on the following terms:- 1. Provision of a declaration by the company that the company is not a party to any litigation, arbitration or mediation, the company is not aware of any circumstances that exists that is likely to give rise to any proceeding or claim by a third party and there is no unsatisfied order, judgment or award against the Company; 2. Limited to value being the amount of the surplus funds which remain undisbursed at the time the claim is made; and 3. Limited to time being the timeframe between when the surplus funds are received and when the surplus funds are totally disbursed. For the avoidance of doubt, [Royal Freemasons' Benevolent Institution] intends the indemnity to cease to exist when all of the surplus funds have been disbursed and the only amount available in respect of the indemnity is that amount of the surplus funds not yet disbursed at the time the third-party claim is made.
There appears to have been no reply, although on 4 September 2019, the secretary of The Maitland Benevolent Society reported to Mr McGree that the board was finalising an agreement with the Royal Freemasons' Benevolent Institution "who are likely to receive 95%" of the surplus.
On 18 September 2019, the members of The Maitland Benevolent Society resolved to appoint a liquidator. All members abstained from voting on the resolution in respect of distribution of the surplus. Mr Shute attended the meeting and recalls that the members were concerned about liability for potential claims that may arise in the future as a result of royal commissions into the aged cage sector. The members considered that it would be better for the liquidator to make an application to the Court in accordance with the constitution so that they could not be seen in any way to be breaching their duties as directors if something went wrong. A member of the Society said he would like to take the conservative approach and have the Court make the decision so that the board could not be held liable for making an incorrect decision regarding the distribution of the funds. Mr Shute's notes of the meeting also record that the members wished the surplus funds to stay in the Maitland region. Mr Shute says that, at no stage prior to the meeting, did any board member discuss with him potentially distributing the funds to any party other than the Royal Freemasons' Benevolent Institution.
On 30 September 2019, Mr Shute reminded the members that, unless they decided to whom the surplus funds should be distributed, he was obliged to make an application to the Court. Mr Shute did not receive a response.
On 2 December 2019, Mr McGree provided the liquidator with details of the representations which had been made by The Maitland Benevolent Society to the Royal Freemasons' Benevolent Institution on 20 March 2019 and suggested that the board had made a commitment that any surplus would be returned to the successful tenderer to fund much needed refurbishment, also said to be the most logical use of the funds. Mr McGree expressed the view that the board of The Maitland Benevolent Society had an obligation to meet this commitment and sought the liquidator's assistance to avoid a legal dispute. On 18 December 2019, the Royal Freemasons' Benevolent Institution's solicitors wrote to Mr Shute requesting the surplus funds, having regard to the representations made during negotiations to acquire "Benhome" and pointing to operating losses sustained since taking over "Benhome" and expected capital costs to improve the facility.
In January 2020, the liquidator wrote to various charities, including the Royal Freemasons' Benevolent Institution and United Protestant Association, asking whether they would be interested in receiving part of the surplus. Five charities replied. In its response, the Royal Freemasons' Benevolent Institution suggested rather ominously: Without the receipt of the surplus funds, there will be operational pressure at Benhome and [Royal Freemasons' Benevolent Institution] will need to review its ongoing commitment at Benhome.
On 4 February 2020, Mr Shute met with a director of The Maitland Benevolent Society to confirm the board's intention prior to commencing these proceedings and was instructed that it was the board's intention to distribute the funds to the Royal Freemasons' Benevolent Institution but on condition of an indemnity. In support of the application, Mr Shute says he has reviewed the company's constitution and compared it to the constitutions of other applicants for the surplus funds. In light of the frequent reference to "our residents" and "Benhome" in clause 2 of the constitution, and because the Royal Freemasons' Benevolent Institution acquired Benhome and its business, Mr Shute is of the opinion that it is the only entity that can fulfil the strict requirements of the constitution. But, if this interpretation is too strict, then Mr Shute considers that the only other two parties who met the criteria were Anglican Care and PACE Aged Care. Both charities were informed of these proceedings but have not participated.
In support of its application to have the surplus paid to the Royal Freemasons' Benevolent Institution, Mr Price described proposed alterations to Pender House involving converting existing vacant offices to 10 new assisted living units at a cost of some $4.45 million; knocking down and rebuilding the Curtis Wing at a cost of between $3.5 and $4.5 million; refurbishing and improving the dementia wing at a cost of between $3.2 and $4.2 million; and removing contaminated soil on site at a cost of between $49,500 and $108,000. Quotations and building reports were tendered to support these proposals and costings. Mr Price said that the surplus would be applied to these projects as well as costs generally associated with the operation and development of Benhome. Mr Price also proffered an undertaking on behalf of the Royal Freemasons' Benevolent Institution in the following terms: The Royal Freemasons Benevolent Institution (RFBI) undertakes to the Court and to the Maitland Benevolent Society Limited (In Liquidation) (MBSL) that the surplus funds to be paid from MBSL to RFBI will: 1. Be used exclusively for the benefit of aged care recipients currently residing, or who will in the future reside, at the Benhome Aged Care Facility located at 30 Regent Street, Maitland; 2. Not be distributed or otherwise utilised in respect of any other facility owned or operated by RFBI; 3. Not be utilised as part of general revenue by RFBI.
Mr Walkerden put forward three proposals for the surplus. The first proposal was to sell an existing retirement village in Maitland and build another at a cost of some $8.5 million. More modest projects included establishing a community garden for the elderly at a cost of some $2 million or establishing a long day care program at a cost of some $1 million to assist the elderly to stay in their homes. Advantages of these proposals were said to be that the money would stay within the Maitland community and residents of Benhome could also avail themselves of these facilities.

Submissions

The plaintiff seeks the imprimatur of the Court to distribute the surplus funds to the Royal Freemasons' Benevolent Institution. Mr Shute is of the opinion that the surplus funds should be distributed to the Royal Freemasons' Benevolent Institution because it is his understanding that it was in fact the desire of the members that the Royal Freemasons' Benevolent Institution receive the funds but, because of the unresolved issue of whether the Royal Freemasons' Benevolent Institution would accept liability for third party claims, the members did not pass such a resolution or make any determination that the Royal Freemasons' Benevolent Institution receive the funds. Further, the Royal Freemasons' Benevolent Institution satisfies the conditions in clause 105 of The Maitland Benevolent Society's constitution. Mr Shute is not otherwise aware of any matter that would preclude Royal Freemasons' Benevolent Institution receiving the surplus funds. Nothing put forward by the United Protestant Association has caused Mr Shute to alter his opinion.
The Royal Freemasons' Benevolent Institution supported the plaintiff's application. Whilst the Royal Freemasons' Benevolent Institution satisfies all requirements of clause 105, the United Protestant Association does not. The United Protestant Association's constitution does not prohibit payment of fees to its directors, a requirement of clause 105(c). Further, the objects of the Royal Freemasons' Benevolent Institution, as contained in its constitution, and its intended use of the surplus, most closely aligned with those of The Maitland Benevolent Society. The residents, and "Benhome" itself, are the subject of The Maitland Benevolent Society's objects. As Benhome's new owner and operator, only the Royal Freemasons' Benevolent Institution can satisfy their needs for accommodation and care. The United Protestant Association proposes to use a portion of the surplus to fund a range of uses that have no association with Benhome or its residents. Whilst its proposals relate to Maitland, where Benhome is located, they are not associated with Benhome.
The Royal Freemasons' Benevolent Institution proposes to use the surplus for the betterment and upkeep of Benhome for the benefit of its residents. The surplus has been generated from the sale of Benhome to the Royal Freemasons' Benevolent Institution and paid for by the Royal Freemasons' Benevolent Institution in anticipation of receiving the surplus. To the contrary, the United Protestant Association has contributed nothing to Benhome; was a failed tenderer; yet seeks the benefit of the Royal Freemasons' Benevolent Institution's funding, risk and effort made towards the acquisition, refurbishment and operation of Benhome. Its request for funding should be rejected.
The United Protestant Association submitted that, while its constitution did not have a clause equivalent to clause 21 of The Maitland Benevolent Society's constitution, its constitution permits payment of reasonable and proper remuneration for staff or members for services actually rendered but does not envisage directors' fees. The practical effect of its constitution was to provide the same safeguards to prevent payment of directors' fees. It was submitted that the United Protestant Association's constitution had more protections than that of The Maitland Benevolent Society because the latter constitution permitted the directors to approve payments to themselves, whilst the former required payments to directors to be approved by the members. Thus, it was submitted that the United Protestant Association's constitution substantially satisfied the criteria specified in clause 105 of The Maitland Benevolent Society's constitution.
On finding one or more interested parties to be eligible, the surplus ought to be distributed equally, relying on Bankstown Community Child Care Incorporated [2008] NSWSC 173, where the Court gave directions that the liquidator would be justified in distributing a surplus to two charities in equal shares. Alternatively, the United Protestant Association submitted that the Court may consider the competing proposed use of funds vis-a-vis the promotion of The Maitland Benevolent Society Limited's objects. It was submitted that the United Protestant Association has a long history of providing quality home care services to members of the frail and aged community in Maitland. In circumstances where The Maitland Benevolent Society was being wound-up and no longer provided aged care services, the term 'our residents' and 'clients' ought to be read broadly as referring to the frail and aged community in Maitland. The proposals for a community garden and long day care centre provided services to members of the aged community in Maitland who, in the present and future, may be or become 'residents' of a Maitland residential aged care facility. Many of the residents already in an aged care facility, including residents of "Benhome", could enjoy these facilities.
Finally, it was submitted that the Royal Freemasons' Benevolent Institution had no presence in Maitland prior to purchasing Benhome. The intended use by the Royal Freemasons' Benevolent Institution related solely to the redevelopment of buildings within the Benhome facility whilst the United Protestant Association's proposed use of funds reached the wider frail and aged people within Maitland. There was nothing to stop the Royal Freemasons' Benevolent Institution from selling Benhome, nor any certainty any remaining surplus would remain in the Maitland community. The Court had wide and discretionary powers under section 23 of the Supreme Court Act 1970 and section 90-15 of the Insolvency Practice Schedule and the Court's determination ought not to be burdened by any unduly strict interpretation of The Maitland Benevolent Society's constitution but rather exercised to ensure a just and fair distribution taking into account the charitable objects and the parties' proposed use of the monies for the benefit of the Maitland community.

Directors' fees

The constitution of The Maitland Benevolent Society does not define directors' fees, nor does the Corporations Act. As the Australian Institute of Company Directors notes (Director Tools, 'Directors' fees - Board composition', 31 October 2017): The wider community and the media often seem to be confused about directors' fees and executive remuneration. There are significant differences between the two. Directors may be classified as non-executive directors or executive directors. Executive directors are full-time employees of the company with day-to-day responsibilities. … Non-executive directors are remunerated for their role as directors of the company. This remuneration is paid for the time they spend on directional duties, their experience, reputation and other skills they bring to the board, and for the risk they accept for being a director. … Executive remuneration refers to salaries and bonuses paid to executives as senior company employees and forms part of the executive's employment contract with the organisation. The board of directors determines executive remuneration and bonuses. Where senior executives are also legal directors (that is executive directors) they usually receive no extra fee for serving on the board.
Directors are not entitled to payment for services unless provided for in the constitution or approved by members. This is because, historically, directors as fiduciaries have no right to be paid for their services and any monies paid to directors were considered a gratuity. As Bowen LJ explained in Hutton v West Cork Railway Co (1883) 23 Ch D 654 at 671-2: But what is the remuneration of directors? I think it is pretty clear that … it is a gratuity. A director is not a servant. He is a person who is doing business for the company, but not upon ordinary terms. It is not implied from the mere fact that he is a director, that he is to have a right to be paid for it. In some companies … there is a special provision for the way in which the directors should be paid; in others there is not. If there is a special provision for the way in which they are to be paid, you must look to the special provision to see how to deal with it. But if there is no special provision their payment is in the nature of a gratuity … Directors, under those circumstances, often do get money. But whenever they get it it is in the nature of a gratuity voted.
As Lindley LJ explained in Re George Newman & Co [1895-9] All ER Rep Ext 2160; [1895] 1 Ch 674 at 686: Directors have no right to be paid for their services, and cannot pay themselves or each other, or make presents to themselves out of the company's assets, unless authorized so to do by the instrument which regulates the company or by the shareholders at a properly convened meeting. See also Hawcroft v Jamieson [2017] NSWSC 1478 at [139] per Gleeson JA; R P Austin, I M Ramsay, Ford, Austin & Ramsay's Principles of Corporations Law (online, July 2020) at [7.350]; Winifred Murray, 'The role of company boards: Are they to blame for excessive executive remuneration?' (2009) 23 Australian Journal of Corporate Law 178 at 183; Australian Securities and Investments Commission (ASIC) v Lewski (2018) 266 CLR 173; [2018] HCA 63 at [71] per the Court.
As to the constitution, the company's constitution has contractual force as between the company and its directors and, if the constitution provides for the remuneration of its directors, the contract displaces the general law rule that a director, as a fiduciary, has no right to be paid: section 140, Corporations Act; Gerard Cassegrain & Co Pty Ltd v Cassegrain [2011] NSWSC 1594 at [7]-[8] per Barrett J; Kelly v Commissioner of Taxation (2013) 213 FCR 460; [2013] FCAFC 88 at [114] per Lander, Siopis and Gilmour JJ. As the Australian Institute of Company Directors explains in 'Directors fees - Board composition', constitutions may provide that all directors may not be paid or only non-executive directors be paid, or specify a process by which an amount is paid to the entire board to approve distribution to specific directors.
As to approval by members, section 202A of the Corporations Act provides: 202A Remuneration of directors (replaceable rule - see section 135) (1) The directors of a company are to be paid the remuneration that the company determines by resolution. Note: Chapter 2E makes special provision for the payment of remuneration to the directors of public companies. (2) The company may also pay the directors' travelling and other expenses that they properly incur: (a) in attending directors' meetings or any meetings of committees of directors; and (b) in attending any general meetings of the company; and (c) in connection with the company's business.
Of course, section 202A(1) is a replaceable rule and may be varied in the constitution. Section 202B of the Corporations Act, which is not a replaceable rule and thus applies to all companies, allows for members to obtain information about payments to directors. For listed companies, section 300A of the Corporations Act requires the company to account each year for directors' fees as well as remuneration paid to senior management.
For listed companies, ASX Listing Rule 10.17 defines directors' fees (in respect of non-executive directors) as all fees payable by a company for acting as a director of the company including attending and participating in any board committee meetings and includes superannuation contributions and fees which a director agrees to sacrifice for other benefits. It does not include reimbursement of genuine out-of-pocket expenses, genuine "special exertion" fees paid in accordance with the constitution or securities issued to the directors with the approval of members. Recognising the different roles of non-executive and executive directors, the ASX Corporate Governance Council suggests that non-executive directors should not receive performance-based remuneration as it may lead to bias in their decision-making and "conflict with their obligation to bring an independent judgement to matters before the board": 'Corporate Governance Principles and Recommendations' (4th edition, February 2019), Recommendation 8.1.
For charities, the Australian Charities and Not-for-profits Commission allows charities to pay their directors as long as such payments are in furtherance of the charity's charitable purpose, permissible under the charity's rules and properly authorised within the charity. The commission notes that most charities do not pay their directors and many donors and supporters may have expectations that the charity's directors are not paid for their service. The commission's guide, 'Remunerating charity board members' (July 2017) notes: Charities should consider how a decision to pay board members may be viewed by supporters and the public and whether it carries a risk to its donations or reputation. A charity that pays its board members should be able to justify payments in the context of it pursuing its charitable purpose and explain how the payments will assist in achieving a charity's purpose. … Whether board members are paid - and if so, how much? - is often a point of interest for a charity's members, donors and supporters, and even for the general public too. For charities that pay board members, considering how the payments will be determined, accounted for and reported is important. Charities should have a clear policy that outlines the manner in which remuneration is determined and the process for its approval. Such a policy should also contain steps for addressing concerns or disputes regarding board remuneration.
The Australian Charities and Not-for-profits Commission suggests that accountability for board payments is crucial and may mean publishing details of board payments in a remuneration report for presentation at the annual general meeting or submitting details of board payments to members for approval noting, "A charity that pays its board members should be prepared to publicly justify the payments and explain why there are appropriate".
Returning to The Maitland Benevolent Society's constitution, clause 21 prohibits the payment of directors' fees. Otherwise, clause 21 envisages the payment of "any amount" to a director if approved by the directors. I take "any amount" to be a reference to reimbursement of expenses although, strictly speaking, "any amount" could be payment for anything other than directors' fees.

Constitution of United Protestant Association

Clause 2.6 of the constitution of the United Protestant Association sets out its objects, which include "to offer within a Christian environment, services and facilities for people in need, including aged and/or disabled people …".
The board of the United Protestant Association comprises the President, two Vice Presidents, the General Manager, other Regional Directors and a Staff Representative Director: clause 7.4. The President, Vice Presidents and Regional Directors have to be members: clauses 6.6(c), 6.6(d), and 12.4. Clause 2 of the constitution of the United Protestant Association restricts the ability of the Association to make payments to members as follows (emphasis in original): … 2.8 Income and Property All income and property of the [UPA] shall be applied solely towards the promotion of the objects of the [UPA] as set out in this Constitution; and no portion shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise, to the members of the [UPA], provided that nothing in this Constitution shall prevent the payment, in good faith, of: (a) reasonable and proper remuneration to any Staff of the [United Protestant Association], or member of the [UPA] in return for any services actually rendered to the [UPA] … 2.9 Prohibited Acts The Company does not have the power to: … (b) pay, transfer, apply, directly or indirectly, any portion of the income and property of the Company, by way of dividend, bonus or otherwise by way of profit, to or for the benefit of a member. (c) The Company must not be operated for the purpose of the profit or gain of any member. The constitution does not define "dividend" or "bonus".
Two directors - the General Manager and Staff Representative Director - are not members but employees. Clause 22.3 provides: The determination of all salaries and conditions relating to [United Protestant Association] staff shall be under the supervision of the Board.
Clause 37 of the United Protestant Association's constitution provides: 37.6 In the event that a Director or a business, corporation, society or association in which they have an interest (other than an excluded interest) enters into a contract with the [United Protestant Association] then the details of such contract, conditions of such contract and remuneration payable pursuant to such contract shall be ratified by a General Meeting of the [United Protestant Association] … 37.9 The appointment, conditions of service, remuneration of, and the supply of goods and services by a Director are to be ratified at the [United Protestant Association] Annual General Meeting and must be disclosed in the annual accounts and minutes of the Annual General Meeting of the [United Protestant Association].
Whilst Mr Walkerden accepted that the constitution of the United Protestant Association did not contain the equivalent of clause 21, he said that the association does not in fact pay any directors' fees to directors for exercising their duties and responsibilities. All director positions are strictly voluntary and directors have no entitlement to a director's fee under any other policy of the association. Since his employment as general manager in 1995, Mr Walkerden is not aware of the association paying directors' fees. Some directors, including Mr Walkerden, are also employees and receive remuneration as employees, such remuneration being determined under supervision of the board in accordance with clause 22.3 of its constitution.

Conclusion

The United Protestant Association's constitution does not prohibit the association from paying fees to its directors. A portion of the board - indeed the majority of the board - are required to be members and are thus covered by the restrictions in clauses 2.8 and 2.9. However, clause 2.8(a) does not prohibit or exclude the possibility of directors' fees, which meet the description of "reasonable and proper remuneration … in return for … services actually rendered".
Clause 22.3 of the United Protestants Association's constitution - which applies to executive directors - does not prohibit directors' fees. Fairly read, I do not think that "salaries and conditions" extends to directors' fees. Thus, clause 22.3 does not encompass the board authorising directors' fees to executive directors.
More importantly, whilst clause 37 requires contracts with directors or the appointment, conditions of service and remuneration of a director to be ratified at the annual general meeting and disclosed in the annual accounts, the clause does not prohibit the payment of directors' fees to a director. The clause is sufficiently broadly worded to encompass the payment of such fees, albeit approved by the members and disclosed in the accounts. Whilst, in practice, the United Protestant Association has not and does not pay directors' fees, the constitution does not prohibit it from doing so and, consistently with the general law, leaves the power to approve such fees with its members.
Nor does the constitution require the association's directors to approve all other payments made by the association to its directors. Whilst the board determines the salaries and conditions of executive directors, and the members ratify contracts with directors and the appointment, conditions of service, remuneration of and supply of services by a director, this does not encompass, from example, reimbursing a director for expenses and nor does the constitution require that such payments be approved by the directors. Thus I do not think the United Protestant Association's constitution can be said to have more protections than that of The Maitland Benevolent Society
Therefore, the United Protestants Association's constitution does not meet the criteria in clause 105(c) of The Maitland Benevolent Society Constitution. Thus, the United Protestant Association is not eligible to be considered by the members of The Maitland Benevolent Society to receive the surplus. Nor do I accept that the Court's determination ought not be burdened by a strict interpretation of The Maitland Benevolent Society's constitution. Where the members have not been able to make a determination themselves, the role of the Court is to make a determination in accordance with the constitution. The constitution of The Maitland Benevolent Society is a contract between the society and each member, between the society and each director, and between the members themselves: section 140(1), Corporations Act 2001 (Cth). The Court's role is to enforce that contract according to its terms.
If my construction of the constitutions of The Maitland Benevolent Society and the United Protestant Association is wrong, then I would not have been minded to divide the surplus between the Royal Freemasons' Benevolent Institution and the United Protestant Association in any event. A good illustration of how the Court may approach such an application is that of Austin J in Shellharbour Golf Club, where his Honour concluded at [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.
Here, the evidence of the inclination of the directors and members of The Maitland Benevolent Society is all one way: the directors and members had in mind to distribute the surplus to the Royal Freemasons' Benevolent Institution. The reason why the directors wished the surplus to be placed in the hands of the Royal Freemasons' Benevolent Institution was to adhere to the objects of the company, including to "provide suitable and appropriate accommodation for our residents" and "provide a safe and secure environment for all involved with Benhome" in circumstances where the facilities at "Benhome" had been found wanting in recent times. The best way to achieve those objects was to provide the purchaser of the facility with the means to rectify the problems identified by the sanction, including by undertaking capital improvements. The evidence suggests that the Royal Freemasons' Benevolent Institution has concrete plans to undertake such works. Paying half, quarter, or any part of the surplus to another charity, albeit a worthy charity, will commensurately reduce the ability of the purchaser to undertake those works and thereby achieve the objects of The Maitland Benevolent Society.
As to Bankstown Community Childcare, Barrett J observed in respect of two eligible charities: [31] It is clear that each of BCRG and MCCS is an appropriate recipient of funds that were initially raised ….. for the purpose of assisting families and providing day care for children. Division of the Bankstown Association's surplus assets between them will see the funds redeployed for like community purposes and in circumstances where private gain continues to be excluded. This is consistent with the philosophy reflected by s 53(2A)(b). … [33] I am satisfied that it is just that the surplus property of the Bankstown Association be divided equally between BCRG and MCCS. I do not read Barrett J's judgment as authority for the proposition that a surplus must or should be distributed equally amongst qualifying charities but simply that there were two such charities in that case which were content to receive the surplus in equal shares: at [30].
The capital projects proposed by the Royal Freemasons' Benevolent Institution are directed towards substantially improving existing facilities and buildings, including to provide better services. I think there is something to be said for fixing and improving an existing aged care facility so that its residents are well cared for in favour of embarking upon the provision of new services such as a community garden or day care centre, particularly where it will mean that the existing facility may not be improved to the extent that it otherwise could be. To the extent that concerns were expressed that the Royal Freemasons' Benevolent Institution is new to the Maitland area and that the surplus funds may not stay in the area, this concern is addressed by the undertaking given by the Royal Freemasons' Benevolent Institution to the Court.
For these reasons I make the following orders: 1. Direct pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) (Schedule 2 of the Corporations Act 2001 (Cth)) that the applicant is justified in paying the balance of the money standing in the Maitland Mutual bank account BSB 646-000, Account No. 100031349 and Account No. 100008698 upon completion of the winding up of The Maitland Benevolent Society Limited (in liquidation) to the Royal Freemasons' Benevolent Institution. 2. Order that the costs of the application be costs in the liquidation of The Maitland Benevolent Society Limited (in liquidation).

Amendments 22 September 2020 - Coversheet: Representation: Mr S Wallace (Solicitor) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 September 2020

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Judgment (11 paragraphs)

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