Butterell v Docker Smith Pty Ltd

Affidavit evidence

1. The application is supported by substantial affidavit evidence, which indicates the comprehensive process which has been undertaken by the Liquidators to identify HammondCare as the proposed recipient of the transfer of the relatively small amount held in the Gift Fund and the substantially larger amount of the surplus derived from the winding up of the Foundation.
2. The Plaintiffs first read the affidavit dated 13 June 2023 of Mr Rapsey, who is one of the Liquidators, who refers to the circumstances in which the Foundation was wound up by the Court on just and equitable grounds. In summary, that occurred after the Foundation had disposed of its major asset, an aged and disability care and accommodation facility, by reason of operational difficulties with that facility, and adverse action which had been taken by regulators in that respect. After that had occurred, the directors of the Foundation failed to reach agreement as to how the surplus should be distributed, which led to an application by one of the interests associated with the Foundation for it to be wound up on the just and equitable ground, and the making of the winding up order.
3. Mr Rapsey draws attention to the scope of the Foundation's constitution ("Constitution"), to which I have been taken in the course of the application. Clause 3.4(a) of the Constitution relevantly provides that the Foundation is established to pursue charitable purposes only. Clause 3.4(b) provides that its income, property and other assets must be applied solely towards the promotion of the object and purpose of the Foundation. Clause 4 specifies the object of the Foundation, which included providing accommodation, community care and other services to aged or disabled persons, in particular ethnic persons or persons who were experiencing acute economic hardship, and identified a number of other objects of the Foundation which were broadly ancillary to that object, and again provided that the income and property of the Foundation could be solely applied to promote those objects and the relevant purpose.
4. Clause 5.1 of the Constitution in turn referred to the establishment and operation of the Gift Fund, where the Foundation was an ATO Endorsed Entity, as defined. I note that the Foundation has since lost that status. That clause required gifts of money or property made to the Foundation, while it held that status, to be maintained in a separate bank account, and there is evidence as to the inquiries which the Liquidators have made to confirm the position in that respect. Clause 5.2 of the Constitution provided that, relevantly, on the Foundation ceasing to be an ATO Endorsed Entity, any surplus assets of the Gift Fund must be transferred to one or more ATO Endorsed Entities, as the board in its discretion determined. Two things should be noted about that clause. The first is that it expressly contemplated the fact that the moneys held in the Gift Fund, as surplus funds, could be transferred to either one or more than one ATO Endorsed Entities. The second is that it contemplated a board determination, which in fact was not made. There was no provision in default for a liquidator to make that determination or for the Court to make that determination if the board had not done so.
5. Mr Rapsey also refers to cl 34 of the Constitution of the Foundation which refers to the steps which are to be taken in a winding up. Clause 34.3 provides for the distribution of a surplus on a winding up, and requires that such a surplus be given or transferred to another body corporate which satisfies four specified requirements, which was to be determined by the board at or before the winding up or, in default of that occurring, by application to the Court. That decision was not made by the board before the winding up and the Liquidators now seek the Court's decision as to that matter as conferred by that clause. I will refer below to case law which has addressed similar provisions in similar circumstances.
6. Mr Rapsey then addresses the steps which were taken to identify a suitable recipient of the surplus in the Gift Fund, and the surplus in the winding up. Those steps were thorough, as is appropriate given the relatively substantial size of that surplus. The Liquidators initially formed an advisory committee comprising several former directors of the Foundation and an independent chair, who was plainly well qualified for the task. The Liquidators published an advertisement in the Australian Financial Review and the Newcastle Herald, being a local newspaper in the region where the Foundation conducted its operations, seeking expressions of interest to receive the surplus from organisations which satisfied the eligibility requirements in the Constitution for a distribution of the surplus on the winding up. Mr Rapsey refers to an expression of interest submitted by HammondCare, and a more detailed expression of interest subsequently submitted by that entity, and to the features of that entity which have led both the advisory committee and the Liquidators to conclude that HammondCare is the entity that is best qualified to receive the distribution of the surplus.
7. Mr Rapsey also there refers to HammondCare's constitution, which is in evidence, and to the fact that its objects and constitutional provisions satisfy the requirements in cl 34.3 of the Constitution for it to be an eligible body to which the surplus can be distributed, namely that it has objects similar to those of the Foundation; that it is required to apply any profits or income to promoting those objects; that it is prohibited from making any distribution of its income or property to its members. HammondCare is also, as a matter of fact, an ATO Endorsed Entity as required by that clause. Mr Rapsey there refers to HammondCare's proposed use of the funds, once a distribution is made to it. I proceed on the basis that it was a matter for the Liquidators to reach an assessment as to which of the parties that had sought a distribution should be the recipient of that distribution, aided as they have been by a comprehensive process and the use of an advisory committee, and it is not necessary for the Court to re exercise the discretion which the Liquidators have exercised. Having said that, there is nothing in Mr Rapsey's evidence which would cause any concern as to the rationality of the view that the Liquidators have formed, in considering that HammondCare is an appropriate recipient of the distribution of the surplus. Mr Rapsey also refers to the fact that the arrangements for the transfer of the Gift Fund have been documented in a transfer deed which has been approved by creditors of the Foundation, although it is conditional upon an appropriate approval having been obtained from the Court in respect of that transaction, which is the approval now sought.
8. By an affidavit dated 7 September 2023, Ms Di Stephano, who was formerly the company secretary of the Foundation, refers to the operation of the Gift Fund and identifies the accounts in which that Gift Fund had been held, providing support for the identification subsequently undertaken by the Liquidators of moneys held in that Gift Fund.
9. By a second affidavit dated 14 September 2023, Mr Rapsey addresses the financial position of the Foundation, referring to the position as it existed in the last financial statements and management accounts which were prepared by the Foundation prior to his appointment, and to subsequent steps which occurred in respect of the sale of the Foundation's property and business and the treatment of the sale proceeds. It is again apparent that the Liquidators have carefully investigated the dealings with those proceeds and they have satisfied themselves that the balance of those proceeds held by the Foundation, after payment of the creditors which has occurred, are properly available to be distributed as a surplus at this point.
10. Evidence is also led to establish service of the proceedings upon interested parties, and I have referred above to the position of the Attorney General and a submitting appearance lodged by the Attorney General. I should also note that the Attorney General, by letter dated 19 October 2023 from the Crown Solicitor's Office on its behalf, recorded the view, first, that the only aspect of these proceedings which are strictly in the nature of charitable trust proceedings is the distribution of the Gift Fund, because that fund was held upon charitable trust. That letter indicated that the Attorney General had no objection to the distribution of the Gift Fund to HammondCare, but noted the possibility that the proper mechanism for such a distribution would be a cy-pres scheme, because the Foundation's board had not, and now could not, approve the proposed recipient of the distribution for the purposes of cl 5.2 of the Constitution. That letter rightly noted that the mechanism in cl 5.2 of the Constitution did not provide for an application to the Supreme Court in default of the board of the Foundation determining the recipient, unlike the provision in respect of the treatment of surplus on a winding up, although I will note below that that does not seem to me to be the end of that matter. That letter also noted the possibility, which I need not pursue, that an application could have been made by the Liquidators to the Attorney General under s 12 of Charitable Trusts Act, and noted that the Attorney General did not propose to take an active role in the proceedings in respect of the small amount in the Gift Fund. The Attorney General, for completeness, took the view that the distribution of the surplus of the Foundation was not, strictly, a charitable trust proceeding for the purposes of the Charitable Trusts Act, because the surplus was not held subject to a trust in the strict sense. That view seems to me to be correct, and the Attorney General has not expressed a view as to how the surplus should be distributed. No other persons appeared at the hearing.

Distribution of the Gift Fund

1. I have referred above to the position in respect of the Gift Fund, in which the amount of $1,952.17 is presently held, which the Liquidators proposed should be distributed to HammondCare. Notwithstanding the relatively small amount held in the Gift Fund, it is the most complex aspect of this application. As I have noted above, and as the Attorney General also noted in the letter to which I referred above, cl 5.2 of the Constitution provides for a distribution of surplus assets of the Gift Fund to one or more ATO Endorsed Entities as the board in its discretion determined. I have noted above that HammondCare satisfies the requirement of being an ATO-Endorsed Entity, but the board has not exercised the discretion specified by the clause, and there is no express default permitting the exercise of that discretion by the Liquidators or by the Court.
2. I have considered whether, in the relevant circumstances, the Liquidators have the capacity to exercise the discretion which is vested in the board under the Constitution. There is at least some authority that suggests that they do not have that capacity. In Butterell v Docker Smith Pty Ltd (1997) 23 ACSR 149, McLelland CJ in Eq expressed the view that a power conferred on "the board" under the rules of a society could not be exercised by the liquidator on a winding up. In Re Dungowan Manly Pty Ltd (2017) 124 ACSR 218; [2017] NSWSC 1771 at [44], I applied that decision in holding that a power conferred upon directors under a company's articles of association also could not be exercised by the liquidator on a winding up. I will proceed, for present purposes, on the basis that that is the position here, so that the constitutional power to distribute the Gift Fund is not available to the Liquidators, because they cannot exercise the discretion vested in the board of the Foundation to determine the party to which that distribution should be made.
3. That is, however, not necessarily the end of the matter, because the proposition that the Liquidators cannot exercise the board's constitutional power to exercise that discretion would only be conclusive if the constitutional power was the only basis upon which the Liquidators could make such a distribution. It seems to me that it is at least arguable that the Liquidators here have statutory powers to make such a distribution, so far as the Gift Fund may arguably be subject to the liquidator's wider powers under s 477 of the Act. In particular, s 477(2)(m) of the Act confers power on a liquidator to do all such other things as are necessary for the winding up of the affairs of a company and distributing its property. However, I also recognise that it may be put that the moneys held in the Gift Fund are not property of the Foundation, so far as they are held on charitable trust, although the act of distributing them is still an act that is arguably necessary for winding up the Foundation's affairs.
4. It is plain enough that the Foundation's affairs cannot be wound up without dealing with the Gift Fund, by a distribution, which the Liquidators here contemplate making in a manner analogous to that undertaken in cl 5.2 of the Constitution. I recognise, of course, that the Attorney General has pointed to alternative possibilities, namely that an application could have been made under s 12 of the Charitable Trusts Act for the establishment of a cy-pres scheme, or that such a scheme could be addressed by the Court. Having said that, it seems to me that there is little attraction in that course, as the Attorney General has implicitly recognised in his letter, in respect of the amount of $1,952.17 held in the Gift Fund. It is very likely that, by the time those steps have been taken, the costs incurred in taking them would have exhausted the amount that would otherwise have been distributed to HammondCare in the Gift Fund.
5. In these circumstances, I am satisfied that, irrespective of whether the Liquidators have a power under s 477 of the Act to distribute the Gift Fund, I can appropriately make a direction to them under s 90-15 of the Insolvency Practice Schedule (Corporations) ("IPSC") that they are justified in making such a distribution. I will refer here to the scope of the Court's power under that section, which are relevant both to this aspect of the application and the second aspect of the application, dealing with the surplus. That section relevantly 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. The Liquidators have standing to bring an application for such a direction under s 90-15 of the IPSC. I have addressed the principles applicable to such a direction in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9], and Gleeson JA has also done so in Re Hawden Properties Group Pty Ltd (in liq) (2018) 125 ACSR 355; [2018] NSWSC 481. Both of those decisions were noted, with approval, by Rees J in Re Maitland Benevolent Society Ltd (in liq) [2020] NSWSC 1284 ("Maitland") at [13] to which I will refer below. The case law recognises that such a direction can properly be made where a legal issue is raised by a liquidator's proposed course of action; where there is a risk of attack on the propriety or reasonableness of the liquidator's decision; and the making of such a direction will protect the liquidator from liability for breach of duty for that action or decision if full disclosure is made to the Court.
6. Here, as I have noted above, it seems to me that it would be perverse for the Liquidators to incur costs, in seeking to distribute the amount of $1,952.17, which would likely exhaust that amount, so that HammondCare, which would otherwise receive and apply that amount for charitable purposes, could not do so. In those circumstances, it seems to me that even if the Liquidators are strictly without power to make the relevant distribution, they would nonetheless be justified in doing so, and they should not be exposed to personal liability for doing so. I will therefore make the direction that is sought in respect of the transfer of the relatively small amount in the Gift Fund to HammondCare.

Distribution of the surplus

1. Although the amount of the surplus in respect of the Foundation is substantially larger than the amount held in the Gift Fund, the legal issues which arise in respect of its distribution are straightforward. I have referred above to cl 34.3 of the Constitution, which permits the distribution of the surplus to another body which has specified characteristics, and I have noted above that HammondCare has those characteristics. That clause contemplates that, in default of a determination by the board at or before the winding up, an application will be made to the Court for such a determination.
2. That position has arisen in other cases, including Application of Gregory Jay Parker (liquidator of Shellharbour Gold Club Ltd (in liq)) [2006] NSWSC 219 ("Shellharbour"), in analogous circumstances, and in Maitland. In Shellharbour, which was in turn considered by Rees J in Maitland at [10], a liquidator of a not-for-profit club sought a declaration that, on the true construction of the club's constitution and having regard to the events that had occurred, he was entitled to distribute the surplus property to a similar body. The club's constitution had a similar provision to that which is in issue here, requiring that surplus funds be distributed to an institution with similar objects which prohibited the distribution of assets to its members. That clause required the members to reach the relevant decision, but they had not done so because of disagreements between them, and the club's constitution provided for an application to the Court in default of such a decision. Austin J there held that, where the constitution had that provision, a judge of the Court had jurisdiction to determine the institution or institutions which should receive the surplus. His Honour there held that that jurisdiction was appropriately exercised, not by making a declaration, but by giving a direction to the liquidator that he or she would be justified in taking the particular course. In Maitland at [10]-[12], Rees J referred to that decision with approval, and noted, rightly in my view, that that jurisdiction is now exercised under s 90-15 of the IPSC having regard to the matters to which I have referred above.
3. I have referred above to the evidence led by the Liquidators as to the comprehensive process which has been undertaken to assess potential recipients of a distribution, which included the appointment of an advisory committee, to which I referred above, to consider the expression of interest from potential recipients, comprising a well-qualified chair and several former directors of the Foundation. The evidence establishes that that committee ranked HammondCare as the best qualified of the potential recipients to receive the distribution, having regard to the material which those potential recipients had put before the Liquidators and the Foundation in response to the expression of interest process. It is plain that the Liquidators have also directed attention to that matter, having regard to their review of the characteristics of HammondCare, but appropriately giving weight to the view formed by that advisory committee. The Court should in turn appropriately give weight to the view formed by that advisory committee, and the view formed by the Liquidators, in exercising the jurisdiction under s 90-15 of the IPSC to give the relevant direction. Such a direction does not require that the Court re-exercise the Liquidators' decision, but that it be satisfied that that decision was an appropriate one as to which such a direction should properly be given.
4. I am satisfied that such a direction should be given here, both because it is necessary to complete the process which cl 34.3 of the Constitution contemplates, that the Court will make a determination as to that matter, and because the Liquidators would appropriately be protected in making such a distribution, where the exercise is one which has a degree of complexity about it, and where there are other potential recipients which will not receive distribution of the surplus or part of it where the distribution of all of that surplus will be made to HammondCare. I note, for completeness, that it is plain that the relevant clause contemplates that a distribution may be made to one recipient and, in Maitland, Rees J rejected any suggestion that it would ordinarily be preferable to divide a surplus of a fund among multiple applicants. It seems to me that that position is self-evidently correct, since the distribution of a relatively large amount to one entity may allow that entity to significantly benefit the community, in a way that a distribution of smaller amounts split between several entities will not. I have referred above to the evidence here that addresses the manner in which HammondCare proposes to apply the funds which it will receive. I am satisfied, having regard to the process adopted by the Liquidators and these matters, that there is no apparent error and no lack of rationality in their view that the surplus should be distributed to HammondCare.
5. For these reasons, that the second direction sought by the Liquidators should be made. I will, however, delete the words in the proposed order "in such amount as the Court determines is the surplus", because that determination is properly made, and has been made, by the Liquidators.

Leave to distribute the surplus

1. Third, the Liquidators seek leave, implicitly under s 488(2) of the Act to distribute the surplus of the Foundation following its winding up to HammondCare in the manner contemplated by the direction made under the IPSC to which I have referred above.
2. Section 488(1) provides for the making of rules or regulations to enable or require all or any of the powers and duties conferred and imposed on the Court by Pt 5.4B of the Act or the IPSC in respect of, inter alia, the distribution of any surplus among the persons entitled to it, to be exercised or performed by the liquidator as an officer of the Court and subject to the control of the Court. Section 488(2) provides that, despite anything in such rules or regulations, a liquidator may distribute a surplus only with the Court's special leave. I had originally considered, and it is certainly possible, that special leave is not required in the particular circumstances. That possibility is open because, here, the surplus is not to be distributed among persons entitled to the surplus, because HammondCare has no such entitlement, although it will be the beneficiary of the proposed distribution. Having said that, it also seems to me arguable that s 488(2) may extend beyond the scope of s 488(1) to require approval of the distribution of a surplus, irrespective of whether it is to be distributed to a person with an entitlement to it. On that basis, I will, against the contingency that leave is required, consider the question of whether such leave should be granted.
3. The principles applicable to leave to distribute a surplus under s 488(2) of the Act are well established. That provision is intended to ensure that there is in reality a surplus, in that creditors' claims have been recognised and met in full and that, in an issue that does not arise here, the correct relativities among the contributories have been observed. The requirement for "special leave" requires that a special application be made to the Court, and that has occurred here. The case law indicates that, in order to make an order under the section, the Court will generally need to be satisfied that it is appropriate in all the circumstances that the distribution be made. I am satisfied that the Liquidators have adopted an appropriate process to satisfy themselves that there is a surplus, and that creditors' claims have been met; I am satisfied that an appropriate process has also been undertaken to identify bodies to which the relevant distribution could be made, and to address the question of the appropriate recipient of the distribution of the surplus, and that the decision which the Liquidators have made, after following that process, is one which provides a proper basis for the proposed distribution of the surplus. To the extent that it may be necessary, I will therefore grant special leave under s 488(2) of the Act to distribute the Foundation's surplus in the manner proposed.

Costs

1. Finally, the Liquidators seek costs of and incidental to the Amended Originating Process as costs in the winding up. Such an order is plainly properly made, where the application was one which was necessary to advance the winding up, and was properly brought on that basis.

Orders

1. For these reasons, I have substantially made the orders sought by the Liquidators in the Amended Originating Process

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: 09 November 2023