In the matter of New South Wales Leagues' Club Limited [2014] NSWSC 1610

Winding up 53The plaintiffs seek an order that the Club be wound up on the just and equitable ground pursuant to Corporations Act, s 461(1)(k). They relied upon the accumulation of the following grounds: (1)Failing to comply with the Club Constitution and applicable legislation by reason of: (a)wrongful refusal to convene an Extraordinary General Meeting to allow B members to vote on proposed resolutions for winding up and transfer of surplus assets, (b)wrongful attempt to obtain a surplus assets determination, other than by resolution of the B members, through the referendum, and (c)sale of the Phillip Street property beyond power and in breach of the Club's constitution and the Registered Clubs Act; and (2)Failure of the purposes of the Club, by reason of: (a)the Club no longer serving the purposes or interests of the League, (b)the Club trading at substantial losses; (c)the Club having no sensible plan for the future; and (d)the existence of a genuine dispute between the Club and the League in relation to a debenture. 54A failure by those in control of a company to comply with their constitutional and statutory obligations can, in some circumstances, provide grounds for winding up the company [Loch v John Blackwood Ltd [1924] AC 783; Kurilpa Protestant Hall Pty Ltd [1946] St R Qd 170; Gregor v British-Israel-World Federation (2002) 41 ACSR 641]. Instances of this include where a failure by those in control to comply with their obligations makes it impossible for complainants to exercise rights at a general meeting [McMillan v Toledo Enterprises International Pty Ltd (1995) 18 ACSR 603; Thomas v Mackay Investments Pty Ltd (1996) 22 ACSR 294; Khano v XL Cleaning Services Pty Ltd (2004) 51 ACSR 397]; where the factions are so embedded that any further steps taken by either side are likely to be contested and result in litigation [Gregor v British-Israel-World Federation]; and when those in control have engaged in a sustained pattern of misconduct such that those complaining have a justifiable lack of confidence in their willingness to perform their obligations in the future [Loch v Blackwood]. But more than an isolated breach is required; the cases referred to are characterised by a persistent or sustained disregard of constitutional or statutory obligations, which renders it impossible for the complainants to exercise their rights under the corporate constitution. 55As explained above, the requisition for winding up and surplus resolutions to be put to the Annual General Meeting to be held on 6 May 2014, though signed by the requisite number of B members, was not timely or effective to require those resolutions to be put to that meeting, and the plaintiffs accept that in those circumstances the Club was not obliged to submit the proposed resolutions to the Annual General Meeting. However, they complain that despite Mr Bowden's representations, on 29 April 2014, that the Club would meet with the requisitioning members and, if the matter could not be resolved, convene an Extraordinary General Meeting to consider the proposed resolutions, the Club instead, without convening any such meeting, proceeded with the "referendum" - including members other than B members - to determine a transferee of surplus assets, with the intention of preventing the League from determining the destination of any surplus in the event of a winding up, and thus removing the incentive for the League to pursue a winding up. In addition, the Club disputed that it had any B members, and that they alone were entitled to make a surplus assets determination. 56The Club was entitled not to put the resolutions to the Annual General Meeting, and its refusal to do so cannot found any complaint. Nor can failing to adhere to the stated intention of meeting with B members and convening an Extraordinary General Meeting, in the absence of any legal obligation to do so. While the plaintiffs further complained that the Club has published on its website the constitution of "Club Distributions Limited" as if it were its own, this was plainly an innocent mistake of no significance. 57The plaintiffs originally complained that the decision to sell the Phillip Street property in June 2013 was in contravention of Article 7(5) - in that members in addition to B members voted on the resolution. However, in his oral submissions in reply, Mr Newlinds SC accepted that what occurred appeared to accord with the requirements of (NSW) Registered Clubs Act 1976, s 41J, which requires a decision of all ordinary members and, in that respect, overrides the articles. Accordingly, this does not provide a legitimate ground of complaint. 58While the recent conduct of the Club, in disputing the status and the rights of the B members, and resorting to the "referendum" in an attempt to circumvent them, was - for the reasons I have given - misconceived, there has been no actual violation of the rights of the B members: they have not been denied a meeting to which they were legally entitled, nor exclusive voting rights at it; and the referendum is legally irrelevant. In those circumstances, there has been no sufficiently sustained or persistent failure to comply with constitutional or statutory obligations as to render it just and equitable that the Club be wound up. 59It is well-established that a company may be wound up where it is no longer possible for it to achieve its main purpose and the real business for which it was formed or, as is often said, its substratum has failed [Re Tivoli Freeholds Ltd [1972] VR 445]. The plaintiffs submit that the purpose of the Club was to provide the amenities of a club for the League, and that its raison d'etre has come to an end, as the League no longer occupies the premises and no longer has any use for the Club. They submit that the Club has ceased to serve the purpose of a club for the League. Moreover, the Club is incurring substantial trading losses which are eroding its reserves of $9 million at the rate of $800,000 per year; it is not economically viable for the Club to continue to trade from its current premises beyond the expiry of its lease in June 2015; yet it has no clear or viable plans for the future, beyond continuing to trade at a loss until the lease expires or its funds are exhausted. 60I accept that the original intent of the corporators of the Club in 1915 was that the Club provide the facilities and amenities of a club for the League. That does not mean that the League must have its offices in premises owned by the Club; nor does it mean that the substratum can be said to have failed a century later when the League maintains its offices elsewhere. Nor does the sale of the premises mean that the substratum has failed: the Club continues to function as a club, providing the amenities of a club for its membership, which is not (and never has been) limited to members of the League, though it continues to include such members. That it does so from leased premises, and at a loss, does not mean that its substratum has failed. While the Club has not yet developed a firm plan for the future, it has substantial assets, with which it is conceivable that it could relocate and re-establish. In my view there is no substance in the contention that the substratum of the Club has failed. 61The plaintiffs raised a number of additional matters in support of the proposition that it is just and equitable that the Club be wound up. It was submitted that the Club proposes to seek to gain a higher return from its investment, and thus threatens to expose it to risk. However, there is no reason to suppose that the directors will act imprudently in the investment of the Club's funds. It was also submitted that there is a genuine dispute as to the existence of a debt said to be owed by the Club to the League in the amount of $12 million, and that there will be no need to resolve this dispute if the Club were wound up and the surplus paid to the League. While that may be so, the admitted existence of such a debt would not be a ground for winding up in the absence of insolvency (of which there is no suggestion), and the existence of a genuine dispute as to whether there is such a debt is even less so. 62The most compelling argument in favour of a winding up, however, was that more than 75% of the B members, who alone are entitled to vote on a resolution that the Club be wound up and could therefore carry a special resolution that the Club be wound up by the Court (under Corporations Act, s 461(1)(a)) or voluntarily (under Corporations Act, s 491)), are before the Court as plaintiffs and seek the winding up the Club. The real issue is whether the requirements of the just and equitable ground are satisfied where a special majority, that is entitled by special resolution to procure a voluntary or compulsory winding up, applies to the Court for the company to be wound up without having invoked the internal corporate decision-making process to carry a special resolution to that effect. 63In In re Langham Skating Rink Company (1877) 5 Ch D 669, it was held (on appeal) that the petition of a number of shareholders should have been dismissed as demurrable, because it did not allege any of the specific grounds mentioned in the first four sub-sections of (UK) Companies Act 1862, s 79, and the allegations were insufficient to bring it within the fifth, being the just and equitable ground. Jessel MR said (at 683-4): The 79th section of the Companies Act, 1862, states five cases, being the only cases in which the Court is empowered to make a compulsory winding-up order. The first four of them are very distinct. The first is, "whenever the company has passed a special resolution requiring the company to be wound up by the Court;" the second is, "whenever the company does not commence its business within a year from its incorporation, or suspends its business for the space of a whole year;" the third is, "whenever the members are reduced in number to less than seven;" the fourth is, "whenever the company is unable to pay its debts." No one of these four things is alleged to have happened. The ground upon which the Court is, therefore, asked to act is the fifth, namely, "whenever the Court is of opinion that it is just and equitable that the company should be wound up." Now there is no doubt that this last clause gives the power to the Court to wind up a company in cases not coming within any of the first four heads, but, as was laid down in the case of In re Suburban Hotel Company (1), it is a power which must not be acted upon unless there is very strong ground for acting upon it, and for this reason, that these companies are governed by a majority of their own members, and where there is a domestic tribunal which has power to decide upon a question, it should, if possible, be left to that domestic tribunal. Now a majority of three-fourths at one meeting, confirmed by an absolute majority at a second meeting, can wind up the company voluntarily under sect. 129, sub-sect. 2, or require the company to be wound up compulsorily under the 1st sub-section of the 79th section. Therefore the shareholders have an absolute power of saying by a majority of three-fourths whether the company shall go on or not, and a majority, without being a majority of three-fourths, can elect directors, or direct the presentation of a petition, which would, no doubt, receive every attention from the Court. 64James LJ said (at 685-6): I am entirely of the same opinion. It really is very important to these companies that the Court should not, unless a very strong case is made, take upon itself to interfere with the domestic forum which has been established for the management of the affairs of a company. Inderwick v. Snell [2 Mac. & G. 216] is a striking instance of the reluctance of the Court to interfere with the right of shareholders in companies to manage their own affairs. The Legislature has not authorized a mere majority to say that they will capriciously discontinue the undertaking which has been begun, it was not thought right that people when advancing money in undertakings of this kind should be left at the mercy of a mere majority of their brother shareholders, and those who wish to wind up must get a majority of three-fourths. The Petitioners might have called a meeting of shareholders, who might have considered the case, and said, "It is for the interest of the shareholders generally that the company shall be forthwith wound up." That has not been done; and the substance of this petition is, that the Court is asked to say that it is for the interest of the shareholders generally that the company shall be wound up when the statutory majority of three-fourths has not been obtained. 65In Re Anglo-Continental Produce Co [1939] 1 All ER 99, Bennett J said (at 102-3): When one gets down to the real facts of the case, the reason for which it is said that it has now become "just and equitable" to wind up this company is that the majority of the shareholders desire to have repaid to them the money which they have got tied up in it. Their money is not at the moment earning for them any interest or any dividend, and it is said that their reason for wanting it back is not capricious. That is the first ground. The second ground is that there is a state of deadlock and friction which makes it impossible for the business of the company to be carried on. I think that it is clear from what was said by James LJ, in Re Langham Skating Rink Co that the mere wish of the majority of the shareholders, not being a three-fourths majority, to be repaid the money which has been advanced by them to the company is no ground whatever for making a winding-up order on the footing that it is just and equitable so to do. ... It is clear, therefore, to my mind, that the mere fact that a majority want to get their money back does not make it just and equitable that the company should be wound up in order that they may get it back. There must be something more than that. I think that one gets an indication of what is required from what was said by Lord Clyde, Lord President, in Baird v Lees, a case which was cited in Loch v John Blackwood Ltd. In the judgment of the Privy Council, delivered by Lord Shaw of Dunfermline in the latter case, this is the passage which, at pp 793, 794, is cited from the judgment of Lord Clyde, Lord President, in Baird v Lees at p 92: 'I have no intention of attempting a definition of the circumstances which amount to a "just and equitable" cause. But I think I may say this. A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the court to wind up the company.' I do not think there is any case, or at least none has been cited to me, in which a court has made a winding-up order on the ground that it is just and equitable to make it unless it has been proved, either that some wrong has been done to the company and the company is deprived of its remedies in respect of it because the voting power has been so used as to prevent the company from having its remedy in respect of it, or that it is a case in which the sub-stratum of the company has gone, or that the case has been one in which it has been impossible, owing to the way in which the voting power is held and to the feelings of the directors towards one another, for the business of the company to be carried on. 66In Re Surrey Garden Village Trust Ltd; Re Addington Smallholders Ltd [1964] 3 All ER 962, Plowman J said (at 969): I approach the matter bearing in mind the following well-settled principles: (i) That prima facie it is for the society itself to decide within the ambit of its own rules whether it shall be wound up, and a very strong case must be made out before the court will bypass the domestic forum and make a winding-up order on the "just and equitable" ground: see, for example, Re Langham Skating Rink Co; Re Gold Co. (ii) That misconduct or mismanagement by the management committee, if misconduct or mismanagement there be, is not of itself a ground for making an order on the petition of a member: see, for example, Re Anglo-Greek Steam Co; Re Diamond Fuel Co. (iii) That where other remedies are available, such as calling a general meeting, arbitration under the rules, an action for a declaration or an injunction, or an application to rectify the register, a winding-up petition is misconceived: see, for example, the two cases last cited and Charles Forte Investments, Ltd v Amanda. 67Those cases illustrate a number of relevant principles which, for present purposes, may be summarised as follows. 68First, a special majority (75%) of shareholders is entitled by special resolution to cause a company to be wound up voluntarily or compulsorily. While it is open to a simple majority to direct presentation of a petition for winding up, as the legislature has stipulated for a special resolution, the mere wish of a simple majority to withdraw their capital is insufficient to render it just and equitable that the company be wound up. 69Secondly, except in a very strong case, the Court should not interfere with or bypass the domestic forum - the general meeting - which has been established for the management of the affairs of a company and to which decisions by the membership as to its continuance or winding up are primarily entrusted. The grounds in s 461(1)(a) and s 491 require not merely the support of 75% of members, but a special resolution. The requirement for a special resolution bespeaks not only the support of 75%, but also the engagement of the corporate democratic decision-making process, with the requisite notice of the resolution and a duly convened meeting, at which there will be an opportunity for discussion and debate. 70Thirdly, there may be a case for acting on the wishes of a simple majority (or less), and/or bypassing the domestic forum, where the members are being prevented from exercising their rights under the corporate constitution. 71Thus if no more appears than that a special majority of 75% favours winding up, that would be insufficient warrant to resort to the just and equitable ground and bypass the requirement for a special resolution. But it may well be otherwise if the members are being prevented or hindered in the exercise of their internal rights and remedies. 72In the present case, it appears that the requisite special majority seeks the winding up of the Club. However, is there any reason to justify bypassing the "domestic forum" by, in effect, dispensing with the requirement for a special resolution, and the internal deliberative process that that involves? Had there been a refusal of a valid requisition to convene a meeting to consider the proposed resolutions, that may well have afforded sufficient reason, because there would be a combination of a special majority of voting members with a refusal to permit them to exercise their rights. But as has been explained, there has been no valid requisition. That leaves the attempt to pre-empt the rights of the B members by the "referendum", coupled with the position adopted in these proceedings of disputing the status and rights of the B members. In these respects, the Club's position was apparently adopted upon legal advice, and there is no reason to suppose that the Club, once informed of the correct legal position by this judgment, will persist in it any longer. Despite the misconceived position adopted by the Club, the rights of the B members have not in fact been violated. 73In my view, therefore, the B members have not been "deprived of the ordinary facilities which compliance with the Companies Acts ... would provide them with for the extrication of their rights". Nothing has precluded them, or now precludes them, from validly requisitioning a meeting to consider the proposed resolutions. In those circumstances, a sufficiently strong case for bypassing the internal corporate processes to which a decision by members that the company be wound up is primarily entrusted has not been established.

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