2460/08 IN THE MATTER OF AUSTINMER BOWLING CLUB LTD (IN LIQ); RUSSELL V RODDEN
JUDGMENT
1 HIS HONOUR: Austinmer Bowling Club Ltd ("the Club") is a company limited by guarantee formed under the Companies Act 1961 (NSW). It is, or was until it went into administration, a registered club for the purposes of the Registered Clubs Act 1976 (NSW). As at 31 May 2007 (the end of the Club's financial year) the Club had 552 members, comprising 7 Life Members, 85 Bowling Members and 460 Social Members. By that time the Club was encountering financial difficulties and the cessation of bowling activities was under consideration. From 1 June 2007 some Bowling Members renewed membership as Social Members or did not renew their membership and joined other bowling clubs, as they believed it was likely that the Club would cease bowling activities. Additionally, some Social Members did not renew their membership.
2 Bowling activities ceased in September 2007. On 22 October 2007 the Club went into voluntary administration and Gregory Russell was appointed administrator. At the time of Mr Russell's appointment as administrator, total membership had fallen to 384, comprising 6 Life Members, 52 Bowling Members and 326 Social Members.
3 Mr Russell investigated various potential amalgamations but was unsuccessful. The Club passed into liquidation and he was appointed liquidator on 11 December 2007.
4 As liquidator, he has sold various assets of the Club including its land. I was informed from the bar table that he anticipates a surplus of about $850,000, after discharge of liabilities and payment of his fees. The issue in the present case is about the distribution of that surplus.
5 On 6 February 2008 Mr Russell sent a letter to all members of the Club setting out two proposals that had been put to him for the distribution of the surplus, and inviting members to send him their proposals for distribution. At that stage, the two proposals were an offer from Thirroul Bowling Leagues & Recreation Club Ltd that they would provide certain benefits to members and transport services to the area in exchange for receiving the surplus funds, and a proposal by Mr Ian Rodden and others who wished to form a sports trust to receive the surplus and support sporting activities (including bowls) in the local community. Thereafter various members made proposals, some supporting one of the two proposals in Mr Russell's letter, some supporting a proposal by Scarborough Wombarra Bowling & Recreational Club Ltd, and some making other proposals, including proposals to divide the surplus into parts and distribute those parts to several destinations. On 12 February 2008 the directors of the Club purportedly met and made recommendations that 60% of the surplus should go pro-rata to the clubs which Bowling and Life Members had joined and 40% should go to a trust fund. There were further refinements of that proposal.
6 In the course of discussion about the destination of the surplus, an issue arose as to how the decision would be made, and in particular, whether the Social Members would be entitled to participate in it.
7 In those circumstances Mr Russell commenced the present proceeding on 23 April 2008, seeking directions as to the convening and conduct of a meeting of members to consider the distribution of surplus. Later the proceeding was changed from being an application by a liquidator for directions, to become a proceeding for binding declarations of right. At the end of these reasons I shall consider whether it is appropriate to grant declarations, as opposed to making orders to determine these matters as questions arising in the winding up, under s 511. But first I shall consider the substantive issues I have been asked to address.
8 The memorandum of association of the Club contains the following provision about surplus:
"6. If upon the winding up or dissolution of the Club there remains after satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed amongst members of the Club but shall be given or transferred to some institution or institutions having objects similar or in part similar to the objects of the Club 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 the Club under or by virtue of the third paragraph hereof. Such institution or institutions shall be determined by the members of the Club at or before the time of dissolution and in default thereof by a Judge of the Supreme Court of New South Wales."
9 In my opinion the word "members" in the last sentence of clause 6 means all the members of the Club, drawing on the concept of membership now found in s 231 of the Corporations Act 2001 (Cth), which was s 16(5) of the Companies Act 1961 (NSW). The memorandum of association does not define the word "members", and does not subdivide the membership into classes. There are several provisions of the memorandum about "members" that signify an intention that the word "members" in the memorandum of association is to apply to the membership as a whole:
· clauses 2(2) and 2(4), referring to the objects of encouraging social intercourse between members and promoting and maintaining a feeling of mutual help and friendship amongst the members, and acting in a manner conducive to their interests and general well-being;
· clause 3, which prohibits distribution of income or property of the Club to any member except by way of remuneration or payment for goods supplied or interest on borrowings or rent;
· clause 5, by which every member undertakes to contribute an amount not exceeding $2 in the event of winding up of the Club;
· clause 7, which provides that the accounts of the Club are to be open to inspection by members.
10 Counsel for Mr Rodden submitted that the last sentence of clause 6 confers a right on every member of the Club to participate in any determination by members about the distribution of surplus. In my opinion that submission misconstrues the sentence. The sentence addresses the question, who decides the destination of the surplus? The answer given by the sentence is that the decision is for the members and, in default, the Court. The sentence does not deal with the question how the members are to make their decision, or (consequently) with the question whether every member is entitled to participate in the decision. Rather, the sentence says that it is for the members, as a class, to make the decision - by implication, in whatever way members make decisions.
11 Neither clause 6 nor any other part of the memorandum of association deals with the way in which members are to make a decision such as the decision about surplus. That subject is left to the articles of association. The articles of association do not say that the only method of decision-making by members is by voting at a meeting, but they deal in detail with members' meetings and do not deal with any other mode of member decision-making.
12 Counsel for Mr Rodden referred to article 20(b), which says that every member when eligible to vote shall be entitled to vote both on a show of hands and on the taking of a poll and shall have one vote. He made the courageous submission that this article contemplates a process of taking a poll as an alternative to voting at a meeting. But a provision allowing members at a meeting to vote on a show of hands and on the taking of a poll is a standard provision in the constitutions of companies, and envisages that the poll be taken, if validly demanded, for the purpose of voting at the meeting (or upon adjournment). In such a provision, the taking of a poll is not a separate form of decision-making available to be used as an alternative to decision-making at a meeting; it is part of the process of decision-making for the purposes of the meeting. That the standard usage is intended in article 20(b) is plain from the context, for both articles 20(a) and 20(c) are about members voting at meetings, as is article 21.
13 Counsel for Mr Rodden also referred to some provisions of the Registered Clubs Act 1976 (NSW), which permit all members to participate in certain decisions. He cited s 30(1)(a), which deems the rules of a registered club to include a rule requiring that the governing body of the club be elected at an election in respect of which only full members are entitled to vote. By s 30(9), it is not inconsistent with the rule mandated by s 30(1)(a) for the rules of the club to provide, in relation to the election of the governing body, that the members entitled to vote will be such specified class or classes of full members as comprise not less than 25% of the full members of the club.
14 "Full member" is defined in s 4 of the Registered Clubs Act to mean an ordinary member or a life member, and "ordinary member" is defined to mean a person who is elected to membership of the club in accordance with the rule of the club referred to in s 30(1)(g). That rule says the person is not to be admitted as a member unless elected to membership at a meeting of the full members or the governing body. The latter is provided for by article 12 in the present case. Therefore, according to the submission, Social Members are full members for the purposes of the registered Clubs Act and they are entitled to vote on the election of the governing body of the Club under s 30(1)(a).
15 Counsel also referred to s 41J(3), under which a registered club must not dispose of any core property unless, inter alia, the disposal has been approved at a general meeting of the ordinary members of the club - including in the present case, according to the submission, Social Members.
16 Counsel for Mr Rodden submitted that these provisions show that Social Members are entitled to participate in major decisions of the Club, and consequently the Social Members should be entitled to participate in the major decision determining the destination of surplus on winding up. In my opinion, however, the provisions of the Registered Clubs Act are irrelevant to the questions before me for determination. The fact, if it be so, that decisions of members on some other issues, namely election of members of the governing body and disposal of the club's core property, are required to be made by members including social members does not imply or even suggest that a decision on a different issue, upon which there is no legislative prescription, should be made in the same way.
17 Therefore, in my view, the determination by members envisaged by the last sentence of clause 6 of the memorandum is a determination to be made by following the procedure for member decisions set out in the articles of association, and that procedure is for decisions to be made by voting at a meeting of members. I reached substantially the same conclusion, on a very similarly worded clause in the memorandum of association of a club, in Application of Gregory Jay Parker (liquidator of Shellharbour Golf Club Ltd (in liq)) [2006] NSWSC 219, when I said:
"17. Clause 6 does not explain how that determination is to be made. As one would expect, the procedural rules for members to make decisions are found in the Club's articles of association. The articles make provision for only one kind of decision-making by the members, that is decision-making at a general meeting of members. There is no provision for decision by postal ballot or for decision by signing a petition …".
18 Counsel for both parties referred me to Re Buck, deceased [1964] VR 284, at 289, where Hudson J considered the extent to which recourse may be had to the articles of association when construing the memorandum. His Honour observed that, while the memorandum is the dominant instrument and where there is any conflict it must prevail, "reference may be made to the articles to explain that which is ambiguous in the memorandum, or to supplement it as to that upon which it is silent". That principle is applicable here, for the memorandum is silent as to the way in which the members as a whole make their decision about the surplus, and so the memorandum is supplemented by the provisions about member decision-making in the articles.
19 Darvall v North Sydney Brick & Tile Co Ltd (1988) 14 ACLR 474, to which counsel for Mr Rodden referred, was in my view an application of that part of Hudson J's principle according to which the memorandum of association prevails over the articles. It is of no assistance here, because on the construction that I take, clause 6 leaves it to the articles to prescribe the method of decision-making by members and does not purport to give Social Members a right to participate in the decision.
20 Both parties urged me to construe the memorandum and articles of association as a business document so as to give the document reasonable business efficacy, in preference to a result that would or might prove unworkable: National Roads and Motorists' Association Ltd v Parkin (2004) 49 ACSR 485, 495 per Ipp JA, citing Holmes v Keyes [1959] Ch 199 at 215. But they differed sharply as to what reasonable business efficacy requires in this case.
21 Counsel for Mr Rodden contended that as clause 6 gives all the members a right to make a determination and there is nothing in the articles to make provision for a determination by all the members (as the articles only deal with meetings, from which Social Members are excluded), I should either:
· construe clause 6 so as to imply a procedure for determination otherwise than at a meeting (for example, by postal ballot), or
· hold that there is no impediment to Mr Russell giving effect to the members' entitlement to participate in the decision-making by some means other than a meeting.
He said that to exclude Social Members from participating in the decision as to surplus would be an unreasonable and unworkable result, in that the Social Members would be liable for any deficit upon winding up (under clause 5 of the memorandum) but would have no right to influence the distribution of any surplus.
22 I have several difficulties with that submission. First, for the reasons I have given, my view is that on its proper construction, clause 6 does not give each member a right to participate in a determination about the surplus. Secondly, in my view it would not be permissible for the Court, purporting to adopt a construction of clause 6 that would give it reasonable business efficacy, to imply into that clause an entire procedure for decision-making, such as by postal ballot, not otherwise mentioned in the memorandum or articles, or to leave it to Mr Russell to create a new procedure for determination by members outside a meeting. Thirdly, I see nothing unreasonable or unworkable in finding that Social Members are excluded by the corporate constitution from participating in a decision as to surplus even though they are liable to contribute to a deficiency. These are different matters. Moreover, it is not unreasonable to confine decision-making as to surplus to those members who are involved in the sporting activities (which are at the heart of the objects of the Club) as well as its social activities, and who pay membership fees reflecting that level of participation (in the present case, the annual fee for Bowling Members is 10 times the annual fee for Social Members). A fortiori, where the contribution of members to a deficit on winding up is limited to $2 per member.
23 Since, therefore, the members' decision about surplus is to be taken at a meeting of members, one turns to the articles of association to find out how the meeting is to be conducted and who may attend and vote. Article 4 says that the membership of the Club is divided into Ordinary members, Life members, Honorary members and Temporary members. Article 5 says that Ordinary membership consists of the following classes or classifications:
(a) Bowling Members;
(b) Social Members;
(c) Junior Members.
24 Article 6 stipulates that a Bowling Member is entitled to attend and vote at any meetings of the Club, but a Social Member or a Junior Member is not entitled to attend or vote. A Life Member is entitled to attend and vote (article 7), but an Honorary or Temporary member is not (articles 8 and 9).
25 Those provisions are reinforced by article 20(a), which says:
"Only the following members shall be entitled to attend and vote at any meetings of the Club:
(i) Bowling Members.
(ii) Life Members."
26 In summary, under the articles of association of the Club the Social Members cannot attend and vote at meetings. Therefore they cannot attend and vote at a meeting convened to deal with the destination of the surplus in winding up under clause 6 of the memorandum of association.
27 There is one final complication to address. Article 2 is as follows:
"The number of members of the Club is declared not to exceed one thousand [1000] but the Board may from time to time increase or decrease the number of members in accordance with the Registered Clubs Act provided that in no circumstances shall the number of Full members entitled to attend and vote at meetings of the Club as hereinafter provided be less than the majority of the total number of Full members."
28 "Full member" is defined in article 1 to mean a person who is an Ordinary member or Life member of the Club. As I have mentioned, under clause 5 the Ordinary membership of the club consists of Bowling Members, Social Members and Junior Members.
29 Counsel for Mr Rodden submitted that article 2 expressly prohibits circumstances in which only a minority of the total number of Full members of the Club are entitled to attend and vote at meetings of members. He said that this is precisely the situation that would arise if the Court were to decide that Social Members could not vote on the determination of the distribution of the Club's surplus, since there are many more Social Members than Bowling and Life Members.
30 On its proper construction, article 2 confers on the Board of the Club the power to increase or decrease the number of members in accordance with the Registered Clubs Act, subject to a proviso. The words requiring that the number of Full members entitled to attend and vote be the majority of the total number of Full members do not state an independent requirement, but only a proviso qualifying the Board's power. If, therefore, the number of Full members entitled to attend and vote is a minority of the total number of Full members, it may be that the directors have exceeded their power to the extent of admitting new non-voting members, as from the point when the voting members became a minority. In other words, there might be an issue as to whether the Board in the present case has permitted the appointment of too many Social Members. But the proviso to clause 2 does not operate to adjust the voting rights, or absence of voting rights, dealt with in other provisions of the articles.
31 The originating process in its current form seeks declaratory orders as follows:
"1. A declaration that any determination by members of the Austinmer Bowling Club Ltd (in liq) for the purposes of clause 6 of the Club's Memorandum of Association can only be made at a meeting of members convened and conducted in accordance with the provisions of the Club's Articles of Association.
2. A declaration that at any such meeting of members of the Club, only Bowling Members and Life Members of the Club shall be entitled to attend and vote."
I agree with the substance of those two propositions.
32 The remainder of the originating process seeks directions concerning the convening and conduct of the meeting and directions as to the distribution of surplus. The parties have agreed that at this stage, I should not deal with those matters. I shall stand the proceedings over to a later date when those matters can be addressed, to the extent necessary. The immediate question is whether I should make the two declarations.
33 On 26 May 2008, consent orders were made under Part 7, rule 6 of the UCPR appointing Mr Rodden as a defendant to the proceeding, to represent the Social Members of the Club. The orders required Mr Russell to send a circular to all members of the Club informing them of Mr Rodden's joinder and of Mr Russell's intention to seek a declaration binding all members concerning the entitlement of members to attend and vote at any meeting of members convened for the purpose of passing a resolution for the distribution of the surplus. Mr Russell complied with this requirement by distributing his circular to members dated 30 May 2008. Only one reply was received. On 25 June 2008 a member wrote to Mr Russell asking to withdraw from present or future proceedings dealing with the Club and the disposition of its remaining assets.
34 It is not clear to me whether that person is a Social Member or a Bowling or Life Member. The question whether, if he is a Social Member, the making of a declaration would bind him, is not presently before me for decision. However, his letter has caused me to reflect on the structure of the proceeding. Mr Russell is seeking a binding determination of the questions whether the members' decision must be at a meeting, and if so, whether the Social Members should be permitted to attend and vote. The representative order permits the court to make a declaration binding Social Members, but at present there is no machinery in place for the order to bind the Bowling and Life Members. Presumably no representative was appointed for them because Mr Russell intended to put before the Court, and has put before the Court, the case that the members' decision must be made at a meeting at which only the Bowling and Life Members may attend and vote. But it is far from clear to me that I am in a position to make an order binding a class of members of the company simply because the company, by its liquidator, has presented a case which appears to reflect the interests of that class.
35 I think the best course is to receive supplementary written submissions on this point. If I am persuaded, upon further consideration, that it is appropriate to make binding declarations of right, then I shall make orders in chambers, in terms of the declarations sought in paragraphs 1 and 2 of the further amended originating process. However, I am presently inclined to confine the relief to orders under s 511(1)(a), or perhaps s 511(1)(b) in conjunction with s 479(3). In my view it is open to the Court to substitute relief in that form in the present circumstances.
36 As to costs, it was a condition of Mr Rodden's consent to his joinder as a representative defendant that Mr Russell would seek no order for costs against him, regardless of the outcome of the proceeding. At the hearing, counsel for Mr Rodden made an application that, regardless of the outcome, Mr Rodden's costs should be costs in the liquidation of the Club. Counsel for the liquidator did not oppose that application. It seems to me appropriate that such an order be made, as the issues upon which I have received submissions are difficult and uncertain, and Mr Rodden has acted appropriately in putting to the Court submissions which, upon full analysis, I have found to be incorrect.
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