In the matter of St Gregory's Armenian School Inc: Ghougassian v Arnautovic in his capacity as Liquidator of St Gregory's Armenian School Inc

Supreme Court of NSW|2018-06-08

Solicitors: Robert Balzola & Associates (Plaintiffs) Hegarty Legal (Defendant) File Number(s): 2015/190855

Introduction

On 21 June 2010, the Court ordered that St Gregory's Armenian School Inc (the Association) be wound up under s 51(1) of the Associations Incorporation Act 1984 (NSW) (the 1984 Act). [1] Since that time, the plaintiffs, Michael Ghougassian and Daniel Ghougassian, to whom I shall refer by their first names without intending any disrespect, have had somewhat acrimonious dealings with the successive liquidators of the Association, Mr Roderick Sutherland (Mr Sutherland) and Mr Sule Arnautovic (Mr Arnautovic). The current manifestation of that acrimony is the second further amended originating process filed by Michael and Daniel on 29 November 2016 (the Current Process).
The relief claimed in the Current Process is somewhat different from the relief claimed in the originating process that commenced these proceedings on 29 June 2015 (the Original Process). By the Original Process, Michael and Daniel sought declarations that monies received by Mr Sutherland and Mr Arnautovic (together the Liquidators) were held on constructive trust for Michael and Daniel or were held under a "Quistclose" trust for the benefit of Commonwealth or State Government revenues. The Original Process also sought orders in relation to the Liquidators' remuneration.

The legislative framework

The Association was incorporated under the 1984 Act, which was repealed by the Associations Incorporation Act 2009 (NSW) (the 2009 Act). The 2009 Act commenced on 1 July 2010. However, for reasons set out below, both parties proceeded on the basis that the 1984 Act applied to the present proceedings.
Section 7(1) of the 1984 Act relevantly provided that an association formed or carried on for any lawful object and consisting of not less than five members was eligible to be incorporated under the 1984 Act. Under s 3 of the 1984 Act, the term association included a society, club, institution or other body and an association or other body incorporated under the 1984 Act. Section 7(2) provided that certain associations were not eligible to be incorporated under the 1984 Act. It has not been suggested that the Association was not eligible to be incorporated.
Section 51(1)(c) of the 1984 Act relevantly provided that the Court might order the winding up of an incorporated association if it was unable to pay its debts. Under s 51(2), an application for the winding up of an incorporated association could be made by a creditor. Under s 51(3), the winding up of an incorporated association by the Court was declared to be an "applied corporations legislation matter" for the purposes of Pt 3 of the Corporations (Ancillary Provisions) Act 2001 (NSW) in relation to Pt 5.7 of the Corporations Act, subject, relevantly, to modifications referred to in s 52.
Part 5.7 of the Corporations Act deals with the winding up of bodies other than companies. By s 583, which is in Pt 5.7 of the Corporations Act, a Pt 5.7 body may be wound up under Ch 5, which deals with "external administration", and Ch 5 applies to the Pt 5.7 body with such adaptions as are necessary. Under s 9 of the Corporations Act, a "Part 5.7 body" includes, relevantly, a body corporate that is not a company, an exempt public authority or a corporation sole. The effect of those provisions is that a Pt 5.7 body may be wound up:

if the Pt 5.7 body is unable to pay its debts, has been dissolved or de-registered or has ceased to carry on business;
if the Court is of opinion that it is just and equitable that it be wound up; or
if ASIC has stated in a report that, in its opinion, the Pt 5.7 body cannot pay its debts and should be wound up or it is in the interests of the public or of the creditors that the Pt 5.7 body should be wound up.

Under s 52 of the 1984 Act, the text of the Corporations Act was modified, for the purposes of s 51(3), such that a reference to a company or body was to be read as a reference to an incorporated association and a reference to ASIC was to be read as a reference to the Director General of the Department of Fair Trading (the Director General). Thus, whereas on the winding up of a company, reports are required to be made to ASIC, on the winding up of an incorporated association, reports are required to be made to the Director General.
Section 53(2) of the 1984 Act relevantly provided that, in a winding up of an incorporated association, the surplus property of the association was to be distributed in accordance with a special resolution of the association. By s 53(1), a reference in s 53 to the surplus property of an incorporated association was a reference to that property of the association remaining after satisfaction of the debts and liabilities of the association and the costs, charges and expenses of the winding up of the association. Section 5 specified the manner in which a resolution was to be passed to qualify as a special resolution. Where it is made to appear to the Director General that it is not possible or practicable for the resolution to be passed in that manner, a resolution will be a special resolution if it is passed in the manner specified by the Director General.
However, under s 53(2A), any such distribution of surplus property of an incorporated association must be approved by the Director General and is not to be made to any member or former member of the association. Further, under s 53(2B), surplus property or any part of it that consists of property supplied by a Government department or public authority must be returned to the department or authority that supplied it or to a body nominated by the department or authority. Under s 53(3), a person aggrieved by the operation of s 53 in relation to the surplus property of an incorporated association may apply to the Court, which may make such orders as to the disposal of the surplus property as to the Court appears just.
Clause 11 of Sch 4 in the 2009 Act relevantly provides that anything begun before the commencement of the 2009 Act under a provision of the 1984 Act, for which there is a corresponding provision in the 2009 Act, may be continued and completed under the 1984 Act as if the 2009 Act had not been enacted. Subject to that provision, anything done under a provision of the 1984 Act for which there is a corresponding provision in the 2009 Act is taken to have been done under the corresponding provision of the 2009 Act.
Section 63 of the 2009 Act is a corresponding provision of s 51 of the 1984 Act. There may be a question as to whether the termination of a winding up under s 482 can be described as the continuing and completing of the winding up under s 51 of the 1984 Act. The proceedings have been conducted on the basis that s 482 applies to the winding up of the Association.

The Association

In 1970, the Armenian Catholic community in Sydney established an Armenian school on land in Cabramatta. During the 1970s, funds for the establishment of a school to be known as "St Gregory's Armenian School" were raised from members of the Armenian community, including Michael and Daniel, and from the Armenian Catholic Benevolent Society. In 1984, the land at Cabramatta on which a school had been established was sold and the proceeds were applied for the purposes of the proposed St Gregory's Armenian School.
The Association was incorporated under the 1984 Act on 17 January 1986. A parcel of some 10 hectares of land at Rouse Hill (the School Land) was purchased, school buildings were erected on the School Land and, in 1987 or 1988, an Armenian school (the School) was established by the Association. The School was officially opened on 12 March 1989 and for some time it appears to have been quite successful.
However, by late 2004 there appears to have been a breakdown in relations between the Armenian Catholic Church, on the one hand, and the management of the Association, on the other. On 20 December 2004, a Deed of Release (the Deed of Release) was entered into between the Trustees of the Roman Catholic Church for the Archdiocese of Sydney, as trustee of church property of the Armenian Catholic Church, on the one hand, and the Association, on the other. The Deed of Release recited disagreement between the Armenian Catholic Church and the Association as to financial transactions and recited that the Armenian Catholic Church had agreed to accept payment of the sum of $100,000 in full settlement of all amounts owing by the Association to the Armenian Catholic Church or vice versa. The Deed of Release contained mutual releases and provided for the Armenian Catholic Church to deliver to the Association the certificate of title in respect of the School Land.
Two days after the Deed of Release was executed, the Association resolved to borrow $1 million from Michael and Daniel in order to provide working capital for the Association and to assist in the construction of new buildings for the School. On 6 May 2005, a Deed of Loan was entered into between Michael and Daniel, on the one hand, and the Association, on the other. The loan was made and, on 23 June 2005, a mortgage of the School Land by the Association to Michael and Daniel was registered, securing the repayment of the loan.
In 2006, the School had 142 pupils. However, the number of pupils declined to 97 and 72 in 2007 and 2008 respectively and fell further in 2009. Such a major decline in enrolment is indicative of a loss of confidence by parents.
As at 5 November 2008, the Association had an overdraft with the Commonwealth of Bank of Australia (the CBA) for a sum in excess of $800,000. The overdraft was secured by a mortgage over the School Land. At that time, families of pupils at the School owed the Association in excess of $550,000 for unpaid fees, some of which were more than six years old, suggesting that the Association had significant problems in collecting money owed to it. For the 2008 year, the Association incurred a trading loss of something in the order of $790,000. By December 2008, the Association was unable to meet its debts as and when they fell due.
In early November 2008, several employees of the Association were advised that, because of low enrolments for the following year, they would be made redundant from the end of the 2008 school year. However, while they were advised that their entitlements would be paid no later than 30 January 2009, no entitlements were paid by that time. On 27 August 2009, orders were made by the Chief Industrial Magistrate requiring the Association to pay the entitlements of certain employees within 28 days. The Association did not comply with those orders.
In September 2009, the CBA commenced proceedings against the Association, seeking a money judgment as well as orders for possession of the School Land and, on 14 December 2009, judgment by default was entered against the Association. However, on 19 March 2010, the default judgment was set aside by Harrison AsJ. Her Honour had regard to a claim foreshadowed by the Association that the CBA had misapplied monies that the Association claimed ought to have been available to it to pay entitlements to its employees. Directions were given for the Association to file and serve a defence to the CBA's claim and any cross-claim that the Association wished to bring. Notwithstanding various extensions of time, the Association failed to file a defence or cross-claim. Finally, on the application of former employees of the Association, White J made the order that the Association be wound up on 21 June 2010. [2]
Sometime after the order for the winding up of the Association was made, the CBA took possession of the School Land and exercised the power of sale under its mortgage. A sum in excess of $7 million was realised and that sum was paid into Court. On 10 May 2011, Barrett J ordered that $4,600,000 be released to Mr Sutherland as liquidator of the Association. [3] A significant part of that sum has been appropriated to the payment of costs and expenses incurred by the Liquidators in the course of the winding up of the Association, including costs incurred in litigation between Daniel and Michael, on the one hand, and the Liquidators, on the other. That litigation has resulted in judgments of the Court as follows:

29 February 2012 - Sutherland v Ghougassian and Ors [2012] NSWSC 125;
14 March 2012 - Sutherland v Ghougassian (No 2) [2012] NSWSC 325;
30 March 2012 - Sutherland v Ghougassian and Ors (No 3) [2012] NSWSC 334;
9 October 2012 - Re St Gregory's Armenian School Inc [2012] NSWSC 1215;
10 July 2015 - Re St Gregory's Armenian School Inc [2012] NSWSC 1042;
7 October 2015 - Re St Gregory's Armenian School Inc [2015] NSWSC 1465;
16 November 2015 - Re St Gregory's Armenian School Inc [2015] NSWSC 1701; and
26 February 2016 - In the matter of Sutherland, Arnautovic and Civil [2016] NSWSC 754.

It is not necessary, at this stage, to recite the issues involved in each of the proceedings described above. It is fair to say that the litigation involved considerable acrimony between Michael and Daniel, on the one hand, and the Liquidators, on the other.

Stay or termination of a winding up

The only question in these proceedings is whether the Court should make an order under s 482 of the Corporations Act in respect of the Association. Section 482(1) relevantly provides that, at any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on the day specified in the order. An application may be made, relevantly, by the liquidator, a creditor or contributory of the company. On such an application, the Court may, before making an order, direct the liquidator to give a report with respect to a relevant fact or matter. Under s 482(3), where the Court has made an order terminating the winding up, the Court may give such directions as it thinks fit for the resumption of the management and control of the company by its officers, including directions for the convening of a general meeting of members of the company to elect directors of the company to take office upon the termination of the winding up.
The language of s 482 can be traced directly to s 383 of the Companies (New South Wales) Code 1981. No power to terminate a winding up of a company was to be found expressed before the enactment of that provision. However, an analogous power to make an order, after a winding up order had been made, staying all proceedings in relation to the winding up, was to be found in s 243 of the Companies Act 1961 (NSW), which followed the language of s 256 of the Companies Act 1948 (UK), which, in turn, was based on s 89 of the Companies Act 1862 (UK). That provision conferred a power to be exercised on principles similar to those governing the power to annul a bankruptcy by reference to the interests of creditors and considerations of commercial morality. Under s 243 and its predecessors, a stay of a winding up could be ordered for the purposes of the reconstruction of the company after a winding up order had been made. [4]
Section 243 and its predecessors could be used for reconstruction, for example, where a company wanted to raise further capital to pay its debts and resume business. An order could be made under the provision staying all proceedings in the winding up, except for the necessary purposes of ascertaining and satisfying the debts, and directing meetings of the members, which could vote on the election of a new board of directors. The nature of an indefinite stay of a winding up would, in effect, be to place the control of the company back in the hands of its shareholders. The winding up process would be brought to an end, thereby permitting the company to carry on business in accordance with its constitution, notwithstanding that, when such an order was made, the winding up order remained on foot and unrevoked. An order that a winding up be terminated is probably of little practical difference from an order permanently staying the winding up. The distinction between a stay order and a termination order is a purely semantic one which has no practical significance. The same general considerations of the interests of relevant parties and commercial morality as apply to the making of a stay order would also apply to the making of a termination order. [5]
In that regard, s 482(2A) throws some light on the intended operation of s 482. Section 482(2A) applies where an application for a stay or termination is made in relation to a company that is subject to a deed of company arrangement. In such a case, the Court must have regard to several matters, including any document that accompanied a notice of the meeting under section 439A when the company was under administration.
Section 439A is in Part 5.3A of the Corporations Act, which has the object of providing for the business property and affairs of an insolvent company to be administered in a way that maximises the chance of a company, or as much as possible of its business, continuing in existence or, if it is not possible for the company or its business to continue in existence, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. [6] Those objects are consistent with an application under s 482 being made at a time when a decision has to be made that the company or its business continue in existence or that a better return be available for creditors and members. That situation has long since passed in the case of the Association.
Under s 153A of the Bankruptcy Act 1966 (Cth), if the trustee in bankruptcy of a bankrupt is satisfied that all the bankrupt's debts have been paid in full, the bankruptcy is annulled, by force of s 153A, on the date on which the last such payment was made. Under s 153B, if the Court of Bankruptcy is satisfied that a sequestration ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the official receiver, the Court may make an order annulling the bankruptcy. Subject to any bona fide disposition lawfully made by the trustee in bankruptcy prior to the annulment and subject to any conditions imposed by the Court, the effect of an annulment is to remit the bankrupt to his or her original situation, as though the sequestration order had not been made. That is to say, the object of an annulment is to bring about, as near as possible, a situation where the sequestration order or bankruptcy had not occurred. [7]
Ordinarily, of course, delay in making an application for annulment of the bankruptcy must be explained before any annulment would be ordered. In the present case, some five years elapsed between the time when the winding up order was made and the time when the Original Process was filed. That would be another reason why, in the exercise of discretion, a stay or termination of the winding up would not be ordered at this stage, when the winding up is almost complete.
It follows that, in so far as the making of a stay or termination order in respect of the winding up of a company is designed to put the operation of the company back into the hands of the directors, it must be necessary to demonstrate that there exists a continuing undertaking of the company, the operation of which can be returned to the directors. The same principle must apply to the staying or termination of a winding up of an incorporated association under the 1984 Act or under the 2009 Act. That is to say, the object of s 482 is, in an appropriate case, to return to the control of the former members and directors of a company, the undertaking of the company as a going concern (or at least an undertaking capable of being restored to a going concern). Having regard to the stage that has been reached in the winding up of the Association, I have considerable reservations as to whether s 482 has application in the present circumstances.

The present application

Assuming that s 482 of the Corporations Act is otherwise applicable in the present circumstances, Mr Arnautovic opposes the making of an order under that provision on the preliminary ground that neither Michael nor Daniel have standing to make the application. Each of Michael and Daniel claims to have standing on the basis that he was a creditor of the Association at the time when the winding up order was made. Mr Arnautovic contends that, for an order to be made under s 482, it must be demonstrated that the applicant was a creditor at the time when the application is made and is still a creditor at the time when any order is made. I consider that the relevant date for assessing a person's eligibility to make an application under s 482 is the date of the application. That is to say, a person who is a creditor at the time of the application has standing under s 482 to make the application for a stay or termination.
Mr Arnautovic accepts that each of Michael and Daniel was a creditor at the time of the winding up order. He initially contended that each also ceased to be a creditor prior to the filing of the Original Process but later abandoned that argument in relation to Daniel and conceded that at the time of the filing of the Original Process, Daniel was still a creditor of the Association. However, while Michael had been a creditor at the time of the winding up order in the sum of $55,000, Mr Arnautovic contends that Michael ceased to be a creditor on 31 March 2014, when a costs order in the sum of $195,553.50 was registered in the Court. However, there had been no agreement to set off that judgment debt against the debt of $55,000 that was owed by the company to Michael as at the date of the winding up.
In the circumstances, I am satisfied that each of Michael and Daniel was a creditor of the Association as at 29 June 2015. If s 482 has application in the present circumstances, each had standing to make an application for a permanent stay or termination of the winding up order made on 21 June 2010.
By their second further amended statement of claim filed on 23 October 2016 (the Statement of Claim), Michael and Daniel seek an order staying the winding up of the Association either indefinitely or for a limited time or terminating the winding up on a day specified in the order. Thus, the Statement of Claim seeks an order staying the winding up as well as, in the alternative, the termination of the winding up, notwithstanding that a stay of the winding up is not claimed in the Current Process or in the section of the Statement of Claim specifying the prayers for relief. The proceedings have been conducted on the basis that Michael and Daniel seek a stay or termination, in the alternative.
In the course of the hearing, Michael and Daniel formulated the orders sought by them in the following terms: "1. Order terminating 28 days after the date of these orders the winding up of St Gregory's Armenian School Inc [in liq] pursuant to Corporations Act section 482(1). 2. Alternatively to 1, Order staying the winding up of St Gregory's Armenian School Inc [in liq] pursuant to Corporations Act section 482(1) on terms that: a. Note the quantum of outstanding costs orders is agreed at 70% of the claims of the Liquidator and the Plaintiffs specified in the letter dated 1 6 2018 from the Plaintiffs' solicitor to the Defendant's solicitor; b. That the Plaintiffs pay the balance of outstanding costs within 14 days of today's date; c. Fourteen days thereafter, Order terminating the winding up of St Gregory's Armenian School Inc [in liq] pursuant to Corporations Act section 482(1). 3. Direct that the management and control of St Gregory's Armenian School Inc be resumed by its officers being: a. Hrair Bedalian [sic] b. Arshak Bedalian [sic] c. Gilbert Verdian d. Michael [Ghougassian] the first plaintiff e. Dr Daniel Ghougassian the second plaintiff. 4. Direct that a general meeting be convened of the members of St Gregory's Armenian School Inc such eligibility for membership to be determined as at 28 days after the date of these orders to elect directors of St Gregory's Armenian School. 5. Order that the Defendant pay the costs of the proceedings."
The Statement of Claim specified grounds upon which Michael and Daniel seek a stay or termination. The grounds specified in the Statement of Claim were as follows: 1. no report has been given to the Court by the liquidator or by ASIC; 2. no report that has been lodged with ASIC by the Liquidators that contains an allegation that an officer of the Association, including Michael and Daniel, has engaged in misconduct; 3. the creditors have not resolved that the Association execute a deed of company arrangement; 4. the Association was never under administration; and 5. the Association is solvent and is able to meet its debts as and when they fall due.
Those grounds were expanded in a document in the following terms that was provided to the Court by Michael and Daniel on 11 April 2018: "1. Deliberate delay a. Failure to pay the secured debts of the Applicants including indemnity costs as ordered against the liquidator up to and including 5 June 2014 knowing such debts were secured [4 years]; b. Failure to provide access to the accounting books and records of the School [in liq] upon request being made to the liquidator to assist the Applicants to lodge their creditor claims prior to 6 March 2015 [date of orders of Black J]; ... c. Failure upon the determination of Black J of 16 November 2015 as to the proofs of debt and the expiry of the appeal period of 28 days to pay out the debts of the School [in liq] [2.5 years]; … 2. Negligent delay: a. Failure to pay the secured debts of the Applicants including indemnity costs as ordered against the liquidator up to and including 5 June 2014 when such debts were secured and ought to have been paid as a priority [4 years]; b. Failure to take any or sufficient steps [to] provide access to the accounting books and records of the School [in liq] upon request being made to the liquidator to assist the Applicants to lodge their creditor claims prior to 6 March 2015 [date of orders of Black J]; … c. Failure upon the determination of Black J of 16 November 2015 as to the proofs of debt and the expiry of the appeal period of 28 days to take any or all reasonable steps to pay out the debts of the School [in liq]. … 3. Abuse of process: a. Failing to pay the secured debt of the Applicants except upon taking of accounts and orders of White J; Particulars of Refusal to Acknowledge Mortgage Debt (a) The Defendants refused to accept the existence of the mortgage debt of the Plaintiffs set out for a sum certain of one millions dollars [sic] in the School's deed of loan dated 6 5 2005 ab initio after being appointed ie on and as from June 2010 to December 2010 when the School's land was sold following payment of the Bank's secured debt; (b) Failing between June 2010 to J5 June 2014 [sic] to give effect to the terms of the Deed of Priority dated 2008 between the School, the Plaintiffs and the Defendant which required the School to pay the Bank, and then the Ghougassians the agreed secured sums; (b) Between June 2010 to 5 June 2014 in denying and failing to pay the Plaintiffs' secured claims for their secured payments in their filed accounts until ordered by White J with indemnity costs on 29 2 2012 and on 14 3 2012. b. Delaying the termination of his appointment on the ground of avoiding or deferring threats of further litigation against himself; … c. Asserting threats by his creditors when no such threats had been made; …"
It is apparent from the above that Michael and Daniel complain about the conduct of the Liquidators. In that regard, it is not insignificant that, in proceedings heard by Brereton J in June and July 2012, Michael and Daniel sought an order for the removal and replacement of Mr Sutherland as liquidator of the Association or alternatively, for an inquiry into his conduct and for leave to commence proceedings against him for damages for conversion of goods. Those proceedings were dismissed with costs. [8] It has not been suggested in the present proceedings that Michael and Daniel seek the removal of Mr Arnautovic as liquidator of the Association. The only relief sought is an order under s 482 of the Corporations Act. It is not easy to understand, in those circumstances, the relevance of the complaints particularised above.
On 7 March 2018, Mr Arnautovic provided to the Director General a report in accordance with ASIC Form 524 (the March Report). The March Report disclosed that all priority creditors of the Association had been paid in full and that unsecured creditors had been paid 75 cents in the dollar of their debts as follows: 29 March 2017 $302,507.90 11 April 2017 $453,761.87 21 August 2017 $378,134.91 Thus, unsecured creditors are still owed amounts totalling $378,135.02.
The March Report also disclosed that Mr Arnautovic still held a balance of $2,827,107.17, representing receipts of $7,777,650.89, from which total payments of $3,493,268.06 had been made. Of those payments, remuneration to the Liquidators amounted to $1,426,312.06.
The School ceased operating when the winding up order was made and the Association has not resumed the conduct of a school. It has been more than eight years since the Association ceased conducting the School and all of the Association's property has now been realised and converted into money. There is, therefore, no present operational undertaking of the Association in existence.
Michael and Daniel, however, point to proposals for the establishment of another school for the Armenian community. On 11 January 2018, a meeting attended by Daniel and Michael, as well as Mr Hrair Bedelian, Mr Arshak Bedelian and Mr Albert Verdian (as proxy for Mr Gilbert Verdian) was held at Michael's residence (the January Meeting). Messrs Bedelian, Verdian and Bedelian are the other three persons proposed in the Current Process as directors of the Association if the winding up of the Association is stayed or terminated. Those five individuals were the directors of the Association at the time when the winding up order was made on 10 June 2010. Each of them has sworn an affidavit indicating his willingness to serve as a director of the Association if the liquidation is stayed or terminated. A further meeting of the same persons occurred on 25 March 2018 (the March Meeting).
The minutes of the March Meeting record that Michael presented a 91 page document said to be an example of a recent application for commencement of a school in New South Wales. The minutes then went on to set out 21 steps for "the development of St Gregory's Armenian School". It is fair to say that the 21 steps are of a somewhat preliminary and general character. For example, the first step was to make an application to the NSW Department of Education stating the type of school, the location, the number of students expected and the teaching staff required. No particulars of those matters were suggested in the minutes of the March Meeting. The second step was the fixing of policies for the running of the proposed school, covering teachers, curricula development, enrolment procedures, disciplinary proceedings and staff meetings. The policies were to be "sourced and submitted, to the Department of Education" but no actual policy was suggested in the minutes.
The minutes of the March Meeting then outlined the steps that would be required in order to establish a school with the approval of the Department of Education. No concrete proposal was suggested, except that it was proposed that the initial school capacity would be 300 pupils and the staff required would be a ground keeper/cleaner, a secretary, five female English teachers, two male English teachers, two Armenian teachers and two Armenian preschool teachers. The difficulty of finding Armenian language school teachers was noted. Doubtless, the steps represent the initial planning proposals for the establishment of a school but there was no concrete proposal. Thus, it is clear that, at present, there is no school in operation. It seems likely that the establishment of any proposed school would be entirely dependent upon the surplus likely to be realised when the winding up of the Association is complete.
There was also evidence of another proposal to establish a new Armenian school. It appears that Michael represents an entity known as Nareg Armenian School Inc, which has applied for initial registration of a proposed non-government school, to be known as "Nareg Armenian School". A letter of 1 June 2018 to Michael from the NSW Education Standards Authority (the Authority) indicates that an inspector from the Authority is presently assessing the application in order to determine the capacity of Nareg Armenian School Inc to comply with the requirements for registration and to make a recommendation relating to the application. The letter indicates that the inspector has expressed concern that the necessary documentary materials to support the application have not been provided despite the inspector's request for such documentation. The letter indicates that an opportunity to provide further evidence of compliance was afforded on 11 May 2018 and gives formal notice that, based on the information currently available, a recommendation to refuse the application was being considered.
The above evidence indicates that, while there are proposals in existence for the establishment of an Armenian school, neither of the proposals appears to be feasible at present. Doubtless the surplus that is likely to arise upon the final winding up of the Association would be of assistance in the establishment of such a school if it were available for that purpose. However, under the regime established by the 1984 Act, that would be a matter for the approval of the Director General, a matter that is not presently before the Court. In effect, Michael and Daniel seek to bypass the operation of s 53 of the 1984 Act. The orders sought by them in the present application represent a substitute for the final winding up of the affairs of the Association and its dissolution.
It is significant that, under s 54 of the 1984 Act, the Director General may cancel the incorporation of an incorporated association if satisfied that the association is not in operation. However, under s 54(2) an association's incorporation is not to be cancelled under that provision if the association is in the course of being wound up under s 51. Before cancelling an association's incorporation under s 54, the Director General must cause notice of the proposed cancellation to be given to the association stating the ground or grounds. Thus, even if an order were made permanently staying or terminating the winding up of the Association, it is difficult to see how it could be said that the Association would then be in "in operation".
I do not consider that it is the function of s 482 of the Corporations Act or its predecessors to bring to an end, by stay or termination order, the winding up process when it is virtually complete. That appears to be the object of the present application. It has not been suggested by Michael and Daniel that there are no members of the Association who could pass a resolution under s 53(2) of the 1984 Act.
As I have said, the Association has nothing but money. It has no undertaking. While it engaged in the not for profit enterprise of conducting the School, the School no longer exists. There is no physical school building. There are no teachers. There are no pupils. In the circumstances, I do not consider that this is an appropriate case in which to make an order under s 482. Certainly, s 482 refers to an application being made "at any time". Nevertheless, having regard to the stage that has been reached in the winding up of the Association, I do not consider that it is appropriate to make any order under s 482.

Discretionary matters

Successive decisions under s 482 of the Corporations Act have been made by this and other courts in Australia on the basis that certain considerations are relevant considerations to be taken into account in considering an order under s 482. [9] While Courts have warned against too rigid an application of those factors, [10] the parties have proceeded on the basis that they are the appropriate considerations.
The relevant considerations are as follows:

whether the applicant has made out a positive case for the favourable exercise of the Court's discretion;
the current trading position and general solvency of the entity;
the nature and extent of the creditors and whether all debts have been discharged;
the attitude and interests of the creditors, including future creditors whose interests might be prejudiced if the entity were released from winding up;
the interests of the liquidator, particularly with regard to remuneration;
the interests of contributories, such that an order will not generally be made unless each member either consents to it or is bound not to object to it or his or her rights are properly secured;
the public interest, including matters of commercial morality, and whether a full explanation of any non-compliance by the directors of their statutory duties has been provided; and
whether the general background and circumstances leading to the winding up order have been explained.

For the reasons indicated above, I do not consider that Michael and Daniel have made out a positive case for the favourable exercise of the Court's discretion. The winding up of the Association is almost complete and there is no undertaking to be returned to the members and directors, simply a fund of money.
There is no evidence that any of the creditors of the Association, other than Michael and Daniel, have been consulted in relation to the orders sought by the Current Process. Since all creditors will be paid in full, their interests would not be prejudiced by the making of an order under s 482. While not all debts have yet been discharged, it is clear that there will be sufficient funds to enable all creditors to be paid in full. However, that result is the consequence of the realisation of all of the property of the Association. The reference to the attitude and interest of creditors and the question of whether their interest might be prejudiced by termination or stay of the winding up supports the proposition that s 482 has no application to a case where the winding up of the entity is almost complete.
The interests of the Liquidators will not be prejudiced, since there are adequate funds for their remuneration to be paid. Michael and Daniel complain that the Liquidators have received excessive remuneration. Whether or not there is any substance in that complaint, that is not a relevant consideration in the exercise of the discretion conferred by s 482.
Since the Association is not a company and there are no shareholders, it has no contributories. However, there has been no evidence as to who the members of the Association are or whether any members, other than Michael and Daniel, assuming they are members, support or oppose the making of an order for a stay or termination of the winding up of the Association.
A broad matter that emerges from the above considerations is the question of whether it would be reasonable to entrust the affairs of the entity to the directors under whose management it previously failed. [11] Questions of the public interest, commercial morality and the general background and circumstances leading to the winding up require a consideration of the conduct of Michael and Daniel, and the other three proposed directors, that led to the making of the winding up order.
I was not impressed favourably by the evidence given by either Michael or Daniel. Some of their answers in cross-examination appeared to be quite divorced from reality. It may be that each of them is motivated by good intentions and a desire to re-establish a school for the Armenian community. However, the affairs of the Association, the conduct of the School and the discharge of their duties as directors of the Association leave a great deal to be desired.
Michael's knowledge or recollection of the Association's compliance with its obligations to the Australian Taxation Office (ATO) was poor. He did not recall that the Association had fallen behind in lodgement of returns in 2004, 2005 and 2006. He did not recall that the ATO had obtained a judgment against the Association in February 2008 in the sum of $908,000. He disputed that the Association owed tax in excess of $908,000 in February 2008, despite being shown a copy of the judgment for that amount entered against the Association.
Michael maintained that he had seen documents from the ATO that showed that the total sum owing by the Association was no more than $172,000. That is quite inconsistent with letters from the ATO sent to him pressing for payment of outstanding tax. Michael's assertions that the ATO was "in agreement with [the Association]" was at odds with contemporaneous correspondence from the ATO.
Michael also asserted that he was not aware that, at the time of the winding up, teachers employed by the Association were owed sums totalling in the order of $200,000. When asked whether he was aware that the entitlement of teachers had not been paid, he endeavoured to deflect responsibility from himself by asserting that some of the teachers had probably not received the money from the CBA.
Michael could not recall the Association being pressed by Mr Sutherland for completion of a return as to affairs in relation to the Association. His evidence was inconsistent with the contemporaneous documents. It was not until proceedings were commenced by Mr Sutherland that a return as to affairs was finally furnished in compliance with the statutory obligations of the directors of the Association. While he asserted that he was unable to comply with the orders sought, he was in fact able to comply after an order was made by the Court.
Daniel's answers to questions in cross-examination were frequently non-responsive. At times he refused to accept propositions that were obviously true. Thus, for example, he refused to accept a proposition that the School had significant problems in collecting money owed to it, despite having attempted to collect unpaid fees of nearly $558,000 in 2008 by using a debt collector. Daniel also gave evidence that he did not understand that the Association owed CBA more than $900,000, despite bank statements showing that amount to be owing. He also asserted that the Association did not owe money to the ATO and that the ATO had not brought any proceedings against the Association. Those assertions were quite contrary to contemporaneous records and despite the fact that, on 11 February 2008, the ATO obtained a judgment against the Association for a sum in excess of $908,000. His evidence that the ATO had suggested that the Association should not bankrupt parents is fanciful in the light of the contemporaneous documents.
Daniel also asserted that the CBA had "inappropriately" frozen the Association's account and had prevented access to funds received from the Commonwealth to pay teachers. In fact, the CBA simply refused to allow the Association further drawing on its overdraft. While there was some evidence that sums had been paid into the overdrawn account, the amounts were nowhere near the amounts owed by the Association to its teachers.
A report under s 482(2) of the Corporations Act was provided on 7 October 2016. An updated report was provided on 25 October 2017. I have also referred above to the March Report. Those reports indicate that all creditors of the Association will be paid in full and that there will be a significant surplus.
On 7 November 2011, Mr Sutherland filed a report under s 533 of the Corporations Act with the Director General. The report detailed various contraventions of s 530A and s 530B(3) of the Corporations Act as well as the 2009 Act. The contraventions related to failures to keep proper records, potential related party transactions and pecuniary gain, potential failure to disclose conflicts of interest and failure to deliver books and records or provide relevant information once a winding up order had been made. Despite that report, no adequate explanation or response has been provided by either Michael or Daniel.
The only real response made in submissions on behalf Michael and Daniel is that no authority has instituted proceedings against either of them in relation to the possible contraventions. Be that as it may, the information contained in the reports demonstrates that this is not an appropriate case for the termination of the winding of the Association. The reports constitute a somewhat critical picture of the management of the Association by Michael and Daniel and their lack of co-operation with the Liquidators from the time of the winding up.
The other three individuals proposed as directors of the Association do not appear to have taken any active interest in the running of the Association and the School, although they attended meetings convened by Michael and Daniel. No material has been put forward that would enable the Court to be satisfied that, if the Association were returned to the control of its former directors, the Association could trade solvently and successfully in the future.
As I have indicated, it is clear that there will be a significant surplus available for distribution when the winding up is complete. There are adequate funds to pay all creditors in full whose proofs have been admitted. To that extent, the Association now has liquid assets that exceed its liabilities. However, that position has been achieved because of the winding up. Clearly, at the time of the winding up, the Association was unable to pay its debts as and when they fell due. It was clearly insolvent. At the time of the winding up, the undertaking of the Association had stalled. There were only six pupils, most of whom were relatives of Michael and Daniel. The Association had been insolvent for some time and it was clearly not a viable, going concern. The fact that, following the realisation of its capital assets, all of its creditors will be paid in full, is not to the point.
The Association has no premises from which to operate a school and there is no evidence that there would be any substantial body of pupils who would be in a position to pay fees to support the ongoing viability of such a school. No realistic explanation has been put forward by Michael and Daniel as to how the Association could recommence operating a school in a manner that would give any comfort as to the security of future creditors. For example, one might have expected to see estimates of capital expenditure required to establish a school together with cash flow projections of income to support the expenses of conducting a school. No such evidence has been adduced.
Mr Arnautovic points to the following matters as discretionary factors against the making of any order under s 482:

the failure on the part of the Association to lodge statements regarding accounts with the Director General as required by the 1984 Act. A summary of financial affairs for 1998 to 2004 was lodged in 2004 but no returns were lodged thereafter;
the Association failed to meet its obligations to the ATO as indicated above;
the Association failed to ensure that its employees were paid their entitlements in the circumstances outlined above;
Michael and Daniel failed to provide the Liquidators with proper assistance to enable them to ascertain the true position of the Association. It was only after orders were made by the Court that a return as to affairs of the Association was finally provided to the Liquidators.

Mr Arnautovic accepts that Michael and Daniel lent substantial sums to the Association. However, they did not keep adequate records of the amounts they lent or of repayments. The records of the Association showed substantial debit to Michael and Daniel and companies owned or controlled by Michael that were not, on their face, identified as payments to Michael and Daniel or their company. They did not appear in any records kept by them or by the Association.
Those considerations lead me to the conclusion that I would not have any confidence that Michael and Daniel have the capacity to act as directors of an entity engaged in the conduct of a school. Even if I considered that it was appropriate to make an order under s 482 in relation to the Association, I would not be disposed to order that control of the Association and its surplus property be returned to the former directors of the Association.

Conclusion

For the reasons outlined above, I do not consider that an order should be made under s 482 of the Corporations Act in relation to the winding up of the Association. There is every justification for the winding up to be completed and the surplus property of the Association being distributed in accordance with s 53 of the 1984 Act. The Current Process should be dismissed. Michael and Daniel should pay the Liquidators' costs of the proceedings.

Endnotes

Vartanians v St Gregory's Armenian School Inc [2010] NSWSC 701.
Vartanians v St Gregory's Armenian School Inc [2010] NSWSC 701.
(1) Vartanians v St Gregory's Armenian School Inc (2) Commonwealth Bank of Australia v Michael Ghougassian [2011] NSWSC 406.
See McAusland v Commissioner of Taxation (1993) 47 FCR 369 at 382-383 (McAusland).
See McAusland at 383-384.
See Corporations Act s 435A.
See Re Lawson (1939) 11 ABC 137; Bailey v Johnson (1872) LR7 Ex. Cases 263 at 265.
See Re St Gregory's Armenian School Inc [2012] NSWSC 1215.
See Modena Imports Pty Ltd (in liq), In the matter of; Leveraged Capital Pty Ltd (R&M app) (in liq) v Modena Imports Pty Ltd (in liq) [2010] NSWSC 739 at [13], Re CNL Transport Pty Ltd (in liq) Hunt v Smith & Anor [2017] NSWSC 291 at [22]; Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533; In the Matter of Glass Recycling Pty Ltd [2014] NSWSC 439 at [15].
See Dubulo Pty Ltd (t/as Fender Signs) v Codrington Investment Corp Pty Ltd (1998) 26 ACSR 723 at 725.
See Re Data Holmes Pty Ltd [1972] 2 NSWLR 22 at 26. 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 July 2018

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