4507/02 IN THE MATTER OF UNITED MEDICAL PROTECTION OF QUEENSLAND LIMITED (PROVISIONAL LIQUIDATORS APPOINTED)
JUDGMENT
1 HIS HONOUR: These reasons for judgment relate to two matters:
(1) an originating process by which the plaintiff, United Medical Protection of Queensland Ltd ("UMP Qld"), seeks an order that it be wound up and that liquidators be appointed; and
(2) an interlocutory process by which the applicants, David Lombe and John Greig, who are the provisional liquidators of UMP Qld, seek
(a) a direction under s 479(3) of the Corporations Act 2001 (Cth) that they are justified in transferring surplus assets of UMP Qld to United Medical Protection Ltd ("UMP") after paying or providing for the costs of provisional liquidation and liquidation; and
(b) a declaration under s 1322(4) of the Corporations Act that a meeting of members of UMP Qld held on 24 November 2004 was not invalid by reason of the fact that 14 days notice was not given pursuant to the constitution of the company or by reason of any accidental omission to give notice or non-receipt of notice by any person.
Facts
2 UMP and its related company, Australasian Medical Insurance Ltd ("AMIL"), have been the subject of many interlocutory applications since this court decided to appoint a provisional liquidator to those companies in May 2002. After an unusually long period in which the companies were under his control, the appointment of the provisional liquidator was eventually terminated by the court, with the provisional liquidator's consent, as from 15 November 2003.
3 UMP Qld is a company limited by guarantee. Prior to 1 July 1997, its members were medical practitioners, medical students and other persons approved by the governing council of the company. Prior to an amendment to the company's constitution passed on 19 June 1997, there were two classes of membership, namely "voting" and "associate" members. Voting members were entitled, among other things, to receive notice of and to vote at meetings of members of the company. Associate members were not entitled to receive notice of or to attend to vote at meetings of the company.
4 UMP Qld carried on business as a medical defence organisation prior to 1 July 1997, principally by arranging for the provision of discretionary cover to its members through a United Kingdom company. It did not itself provide indemnity insurance or discretionary assistance to its members.
5 As from 1 July 1997, a "merger" of the memberships of three medical defence organisations, namely UMP Qld, United Medical Protection of New South Wales Ltd ("UMP NSW", formerly known as United Medical Defence Ltd), and The Medical Protection Society of New South Wales Ltd ("MPS NSW") was implemented. As part of the merger, UMP became a member of UMP Qld, and became the sole member of the company entitled to vote at company meetings. Associate membership was abolished and replaced by "non-voting membership". The non-voting members of UMP Qld were all members of UMP Qld as at June 1997, other than UMP. Non-voting members were entitled to receive notice of and to attend meetings of the company, but they were not entitled to vote. Consequently UMP Qld came to be controlled by UMP.
6 According to the evidence before me, as at 30 June 1997 UMP Qld had 5,976 members, of whom 5,251 were voting members. Under the terms of the merger arrangements, all current members of UMP Qld automatically became associate members of UMP, entitled to become full voting members of UMP upon completing an application. As from 1 July 1997, 5,658 members of UMP Qld became full or associate members of UMP. The discrepancy of 318 members has been explained by enquiries made on behalf of Mr Lombe, which indicate that in fact the 318 persons had resigned or been excluded or were otherwise no longer members. There has subsequently been a reduction in UMP membership on the part of former members of UMP Qld, who have either resigned or not renewed their membership.
7 At that time UMP Qld ceased to carry on its medical defence business, and the company ceased to have employees. The management of its affairs was vested in a council comprising the current directors of UMP. UMP agreed to manage the run-off of the previous discretionary cover for UMP Qld members and to assume liability for members' claims, under a claims run-off agreement between UMP and the United Kingdom company that had written the cover. This work was carried out by employees of AMIL. Thereafter UMP Qld did not provide services to its members, and did not levy subscription fees. UMP and AMIL carried on business from premises in suburban Brisbane ("the Queensland property") owned and previously used by UMP Qld for its business, and paid rent for their occupation.
8 The UMP liquidator, Mr Lombe, and Mr Greig were appointed, jointly and severally, provisional liquidators of UMP Qld on 10 September 2002, after evidence was given that the directors of the company had formed the opinion that there was no reason why it should maintain a separate existence, and had expressed their desire to resign. Shortly after the appointment of the provisional liquidators, all of the directors of UMP Qld resigned.
9 I note, in passing, that according to a search conducted on 25 November 2004, ASIC's records show that a winding up order has been made and that liquidators were appointed on 9 September 2002. That is an error in ASIC's records, which the provisional liquidators have taken steps to correct. The true position is that no winding up order has yet been made but provisional liquidators have been appointed.
10 The provisional liquidators identified the assets and liabilities of the company and Mr Lombe prepared several reports, which have been filed with the court. In his affidavit of 19 February 2003 Mr Lombe identified external creditors in an amount in excess of $129,000, and on 24 February 2004 the court gave a direction that he was justified in paying those creditors in full. Subsequently there was a settlement with the Commissioner of Taxation as a result of which Mr Lombe entered into a settlement deed with the Australian Taxation Office, after obtaining the approval of the court under s 477(2B). The position now is that all external creditors of UMP Qld as at the date of appointment of the provisional liquidators, 10 September 2002, have been paid in full.
11 At the time of appointment of the provisional liquidators, UMP Qld had two major assets, namely a debt owing by UMP in the sum of $8,751,690.91, and the Queensland property, which is valued at $600,000. The debt owing by UMP was paid on 10 December 2003, after Mr Lombe's appointment as UMP's provisional liquidator was terminated. The Queensland property consists of nine strata lots, which are being sold in three separate parcels. The settlement of the sale of one parcel occurred on 23 November 2004, the purchase price being $404,600. Mr Lombe has accepted an offer for the sale of the second parcel for $581,500. The third parcel is still on the market, but Mr Lombe hopes for a sale shortly. It appears that, when the third parcel has been sold, there will be approximately $9.5 million held by the provisional liquidators in the UMP Qld bank account.
12 Consequently, according to the evidence before me, there are now substantial surplus assets, and UMP Qld needs to retain only sufficient funds to meet the costs of the provisional liquidation and winding up of the company.
The meeting of members
13 Mr Lombe has convened a meeting of members of UMP Qld to make a determination under Clause VI of UMP Qld's constitution (discussed below), which authorises the members to identify a body having similar objects to UMP Qld to which surplus assets may be transferred on winding up. The meeting was held on 24 November 2004. Notices of the meeting and meeting documents were sent to members of UMP Qld as at 30 June 1997 notwithstanding the fact that a significant number of them were no longer current members and were therefore not entitled to receive notice of the meeting under UMP Qld's constitution.
14 A covering letter from Mr Lombe, enclosing the notice of meeting and explanatory statement and report, explained that UMP Qld was solvent but that it was proposed that the company be wound up because it no longer carried on the functions for which it was incorporated. Mr Lombe explained that the company was a company limited by guarantee with a constitution that prohibited the distribution of surplus assets to members, and required those assets to be paid to a body with similar objects as determined by the members. He noted that UMP was the only member having voting rights, although other members had the right to receive notices of meeting, to attend the meeting, and to be heard.
15 Mr Lombe's report explained the structure of UMP Qld and gave a statement of its financial performance and a summary of its assets and liabilities, concluding that the company had a surplus of assets to liabilities.
16 The explanatory statement said that the provisional liquidators had considered whether other bodies would qualify as bodies having similar objects to UMP Qld, and identified five other medical defence organisations. A comparison of relevant provisions of their respective constitutions was attached. The provisional liquidators presented their view that three of the medical defence organisations they had identified as alternatives to UMP were unsuitable because their constitutions did not relevantly contain objects similar to those of UMP Qld. They gave reasons for preferring UMP to the other two medical defence organisations that they had identified. Those reasons included the point that about 95% of the members of UMP Qld as at 30 June 1997 had become members of UMP on 1 July 1997, and approximately 77% of those members remained as current members of UMP.
17 The provisional liquidators also expressed their opinion, in the explanatory statement, that there was no opportunity to deploy the surplus assets for the benefit of members, other than by payment of the surplus assets to UMP to complete the "merger" that had begun in 1997. They also summarised the advice of counsel (considered below) that as the recipient of the surplus assets, UMP would not be receiving a prohibited benefit as a member for the purposes of UMP Queensland's constitution or Ch 2E of the Corporations Act.
18 The provisional liquidators made the disclosures in the explanatory statement after they received the second joint opinion of Justin Gleeson SC and Robert Dick dated 24 September 2004. Counsel advised that provisional liquidators have duties to be independent, to act impartially and to avoid conflict between duty and interest and between duty and duty (citing Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104, at 106, 108-100; National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) (2001) 37 ACSR 629 at [192]-[199]). They emphasised the duty of independence, which requires provisional liquidators to maintain an even and impartial hand between all the individuals or corporations whose interests are involved in the provisional liquidation, being in the present case the members (citing Re Contract Corp (Gooch's case) (1872) LR 7 Ch App 207, at 211; Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488, at 491; Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24, at 28, 30-31; National Australia Bank Ltd v Market Holdings Pty Ltd (in liq), 37 ACSR at [195]). They noted the need for Mr Lombe, having regard to his previous appointment as provisional liquidator of UMP, not to give the appearance of having any conflict of interest arising out of his prior position. They advised that Mr Lombe should consider whether it was appropriate for the surplus to be transferred to some institution other than UMP, satisfying the criteria referred to in Clause VI, having regard to the interests of the non-voting members of UMP Qld. They made some comments on the matters relevant to such a decision.
19 It is not appropriate, in the present ex parte application, for the court to make a finding as to whether the provisional liquidators, and Mr Lombe in particular, have discharged their fiduciary and other duties in respect of the convening and conduct of the meeting. However, it is appropriate for me to say that the notice of meeting, covering letter, report and explanatory statement, when read together, appear on their face to reflect counsel's advice, and there is nothing in the evidence before me that would suggest otherwise.
20 The meeting resolved that the surplus assets of UMP Qld, after payment of all its debts and liabilities, be paid on the company's winding up to UMP, as a society having objects similar to the objects of UMP Qld for the purposes of clause VI of the company's memorandum of association.
The winding up application
21 The application to wind up UMP Qld was made by the company by originating process filed in this court on 9 September 2002, but it has been adjourned on several occasions, after the appointment of the provisional liquidators. Now that the company's debts have been paid and most of its property has been realised, the provisional liquidators contend that it is appropriate for a winding up order to be made, on the just and equitable ground.
22 The evidence indicates that UMP Qld is plainly solvent, and therefore there is no basis for an order for winding up in insolvency. There are two possible avenues of winding up in such circumstances, namely a voluntary winding up or winding up on the just and equitable ground.
23 The company's ability to proceed to voluntary winding up is placed in doubt by the absence of any board of directors. The company could resolve, by special resolution passed by its voting member (UMP) under s 491(1), that it be wound up voluntarily, but for the fact that there can be no members' voluntary winding up unless a declaration of solvency has been made by the directors of the company and lodged with ASIC pursuant to s 494. The previous board has resigned, and while the order appointing the provisional liquidators has given them all the powers conferred on the board of directors by the constitution of UMP Qld, the order does not, at least in terms, authorise them to make a declaration of solvency under s 494. There is at least some doubt as to the provisional liquidators' power to make such a declaration.
24 To avoid that doubt, it would be necessary to appoint a new board of directors first, if the company were to proceed with a resolution for voluntary liquidation. The appointment of a new board of directors would be problematic, since there would be significant costs, including the costs of obtaining directors' and officers' insurance, and time would be consumed while the new directors familiarised themselves with the company's financial position. It seems desirable to avoid these consequences, if possible, given that the only purpose of appointing a new board would be to obtain a declaration of solvency.
25 Therefore the provisional liquidators, on behalf of the company, have applied to the court for a winding up order on the just and equitable ground. In a judgment given when I dealt with the initial ex parte application by UMP, AMIL and MDU Australia Insurance Co Pty Ltd for winding up on the just and equitable ground and for the immediate appointment of a provisional liquidator (Re United Medical Protection Ltd & Ors (2002) 41 ACSR 623, at [12]), I said:
"Here the applications for winding up are not on any ground in insolvency but on the just and equitable ground. The just and equitable ground is a very broad ground which permits the court to exercise, in the statutory context, what has been described by the House of Lords as a broad equitable discretion: see Ebrahimi v Westbourne Galleries Ltd [1973] AC 360; [1972] 2 All ER 492. It is not necessary to bring new circumstances squarely within any of the existing categories for the exercise of that discretion. The circumstances in which the order can be made are infinitely various. However, once this case comes to trial for a winding up order, it seems to me likely that there will be an analogy between the circumstances of the case and the so-called failure of substratum cases, if it appears that an order is an appropriate at all."
26 As it happened, I decided to terminate the appointment of the provisional liquidator of those companies rather than to make orders for their winding up. Here, however, the facts indicate that there is a proper basis for UMP Qld to be wound up on the just and equitable ground, in reliance on the principles established in the "failure of substratum" cases.
27 The key principle of those cases is that a company may be wound up when it has become impossible for it to achieve its main objects, or engage in conduct outside the scope of what was within the general intention or common understanding of the members when they became members. There must be more than a mere discontinuance of the company's business activities, amounting to, in effect, a final and conclusive abandonment of the business: Thomas v McKay Investments Pty Ltd (1996) 22 ACSR 294, at 300-301; see also Stapp v Surge Holdings Pty Ltd (1999) 31 ACSR 35, at [39]-[41]; Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478, at 494; Lunn v Cardiff Coal Company (2002) 43 ACSR 649, at [6]. The lack of a functioning board of directors is relevant if it indicates the absence of any prospect of the company continuing to pursue the objects and purposes for which it was established: CIC Insurance Ltd (prov liq apptd) v Hannan & Co Pty Ltd (2001) 38 ACSR 245, at [13]; Lunn v Cardiff Coal Company (2002) 43 ACSR 649, at [5]-[6].
28 In the present case, the following considerations support the making of a winding up order on the just and equitable ground:
(a) since 1 July 1997, when the "merger" took effect, UMP Qld has ceased to provide services to its members or otherwise act in accordance with its objects;
(b) on 1 July 1997, most of the members of UMP Qld became members of UMP;
(c) since 1 July 1997, UMP has been the sole member entitled to vote at meetings of UMP Qld;
(d) the members of UMP Qld as at June 1997 remained members of the company after the "merger", and many of them are still members, but they are non-voting members who are entitled to receive notice of and attend meetings of the company, but not to vote;
(e) UMP Qld has not levied any subscription fees on its members since 1 July 1997;
(f) since July 1997, the run-off of cover previously arranged for members by UMP Qld has been administered by UMP, under an agreement with the insurer;
(g) all employees of UMP Qld ceased employment with that company after 1 July 1997 and became employees of AMIL;
(h) since 1 July 1997, the only activity of UMP Qld has been leasing the Queensland property to UMP and AMIL, and the parcels of that property have either been sold or will shortly be sold;
(i) since 1 July 1997, the management of the affairs of UMP Qld has been vested in a council appointed from the current directors of UMP, and there are currently no directors of UMP Qld, the previous board having resigned subsequently to the appointment of the provisional liquidators;
(j) UMP Qld is not licensed under the Insurance Act 1973 (Cth) to provide medical indemnity insurance or any other kind of insurance;
(k) the constitution of UMP Qld authorises amalgamation with a body with similar objects (as noted below), in circumstances where the transfer of the company's surplus assets to UMP is now proposed.
29 These matters establish, in my view, that UMP Qld has long ago ceased to operate for the objects and purposes for which it was formed, and there is no realistic prospect of its re-commencing its operations. The company's undertaking has substantially passed to UMP, and while non-voting members of UMP Qld have remained members in name, they have not received any services from that company nor paid any subscription fees since July 1997. Their relationship has, for all practical purposes, been with UMP since that time, except for members who have subsequently retired or transferred their membership to other organisations. While the company has substantial assets, it is not in a position to make use of those assets for the objects and purposes for which it was established.
Distribution of surplus assets to UMP
30 The provisional liquidators propose, after an order is made for the winding up of UMP Qld and their appointment as liquidators, that they should in the latter capacity cause UMP Qld to transfer its surplus assets to UMP, after paying or providing for the cost of the provisional liquidation and liquidation. By an interlocutory process filed on 29 November 2004, they seek a direction that they are justified in doing so. They wish to rely on the authority of the members' resolution but they also seek a direction from the court under s 479(3) of the Corporations Act.
31 The questions for consideration are whether the members' resolution at the meeting of 24 November 2004 effectively authorised the transfer, and if it did, whether it is appropriate for the court to give the liquidators additional reassurance in making the transfer by making a direction to the effect that they would be justified in causing the transfer to occur. Since it appears that less than 14 days' notice was given of the meeting and there may have been accidental omissions in the procedure for giving notice, the provisional liquidators have applied for a curative order under s 1322(4) to overcome any such procedural difficulty. I shall consider each of these matters in turn.
Validity of the members' resolution
32 Clause III of the memorandum of association of UMP Qld (originally called "The Medical Defence Society of Queensland") states the objects for which the company was established. They are objects concerning the promotion of the interests of the medical profession. Two of the objects are particularly relevant here:
"11. To amalgamate, federate or co-operate with any institution, society, or association having objects wholly or in part similar to those of the Society."
"12. If at any time it may be found desirable to establish, promote or support by the application of funds or other assets by the Society (whether by way of grant, loan or otherwise), or to combine its assets and operations (in whole or in part) with, or subscribe to or become a member of, or to found, take over and carry on or amalgamate with any other company or association having objects altogether or in part similar to those of the Society and which shall prohibit the distribution of its or their income and property among its or their members to an extent at least as great as is imposed on this Society under or by virtue of the Memorandum and Articles of Association of the Society."
33 Clause V contains some restrictions on the application of the income and property of the company. It provides:
"The income and property of the Society, however derived, shall be applied solely towards the objects of the Society, as set forth in this Memorandum of Association, and no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus, or otherwise howsoever by way of profit to the persons who at any time are or have been members of the Society, or to any of them, or to any person claiming under or through them. Provided that nothing hereinbefore contained shall prevent payment in good faith of remuneration or salary to officers in or servants of the Society, or to any member thereof or other person in return for any services actually rendered to the Society."
34 Clause VI deals with the distribution of surplus assets on winding up. It provides:
"If upon the winding up or dissolution of the Society there remain, after payment of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members, but shall be transferred to some other society, institution, or association having objects similar to the objects of this Society, to be determined by the members of the Society or at or before the date of dissolution, and in default of such determination by the Supreme Court of Queensland."
35 Three arguments might be advanced to support the view that the members' resolution is ineffective to authorise the liquidators to distribute UMP Qld's surplus assets to UMP:
(a) such a distribution is prohibited by Clause V of UMP Qld's constitution, either because it is an application of income and property of UMP Qld otherwise than solely towards the objects of the company, or because the distribution would constitute a transfer of UMP Qld's income and property by way of dividend, surplus or otherwise by way of profit to a member of the company;
(b) the distribution would not be authorised by Clause VI of the constitution because, although UMP has similar objects to UMP Qld, it is also a member of UMP Qld;
(c) the distribution would amount to an unlawful conferring by a public company of a financial benefit on a related party, contrary to Ch 2E of the Corporations Act.
36 The provisional liquidators have received written advices from Justin Gleeson SC and Robert Dick ("counsel"), which address these matters.