Plaintiff v First Defendant

Supreme Court of Victoria|2010-04-16|Before: DAVIES J

CORPORATIONS - Whether valid resolution to appoint an administrator - Whether administration should end because Church is insolvent - Standing to bring an application under ss 447A, 447C and 447E of the Corporations Act 2001 (Cth).

2 In the originating process, the substantive relief was only claimed under s 447A of the Corporations Act 2001 (Cth) ("the Corporations Act"). At the commencement of the hearing, counsel for Mr Taylor made application to amend the originating process to claim relief in the alternative under s 447C and/or s 447E of the Corporations Act. Leave was granted to rely on a claim under s 447C but I reserved the question of leave on the claim under s 447E.

3 The grounds on which the application were based were that:

(a) the resolution of 5 November 2009 was invalid because the Board of Directors was invalidly constituted; and

4 The standing of Mr Taylor to make the application was challenged by the administrator. Mr Taylor contended that he is a creditor of the Church and thus has standing under ss 447A, 447C and 447E, that he also has standing as "an interested person" under s 447A and has standing as a "member" of the Church under s 447E. The question of standing was argued concurrently with substantive merits of the application and is dealt with more conveniently in these reasons for decision after consideration of the grounds supporting the relief claimed.

A. Was the Board of Directors invalidly constituted?

5 The Rules of the Church provide that the Board is to consist of at least seven members of the Church comprised of:

(iv) not less than three Deacons, one of whom must be the Chairman of the Council of Deacons;

(v) and may also consist of up to two additional persons ("ordinary members") who can be invited at any time by the Elders to serve on the board for any period of up to two years as nominated by the Elders.[1]

6 Mr Taylor contended that he was the Senior Pastor at the time that the resolution was passed. He was not at the meeting and he did not vote. He claimed therefore that the resolution was invalidly passed.

7 The contention that he was the Senior Pastor at the time cannot be accepted.

8 It was common ground that Mr Taylor had been Senior Pastor of the Church until April 2008 when he offered to stand down from the position for an indefinite period because of an incident and had his offer accepted by the Elders. Mr Taylor claims that he was reinstated as the Senior Pastor in August 2008. The evidence he put forward to establish that fact lacked any probative value and was contradicted by contemporaneous documents containing:

(a) the minutes of a meeting of the Elders on 12 November 2008 at which the Elders resolved that they would not reinstate Mr Taylor at that time to the position of Senior Pastor or any other ministry position but would be willing to meet with Mr Taylor in 12 months time to discuss possible Ministry options;

(b) a copy of a letter dated 13 November 2008 from the Elders to Mr Taylor informing him of their resolution; and

9 I do not accept Mr Taylor's claim that he was reinstated to the position of Senior Pastor in August 2008 or at any later date.

10 I also reject Mr Taylor's claim that he held the office of Senior Pastor as at 5 November 2009 because he had never resigned from the position or been "terminated" from that position as provided for in rule 20.1(2) of the Rules of the Church. Rule 20.1(2) provides:

The Senior Pastor, subject to these rules, holds office until he:

(a) resigns his position as an officer, or

(b) is removed from his position as an officer by a three quarter majority vote at a general meeting of the Assembly upon a motion moved on behalf of the Elders.

(c) is (if applicable) removed from such position of officer at an ordinary meeting of the Elders.

It is not to the point that Mr Taylor says that he did not resign or was not removed from office. Rule 20.1(2) does not confine the circumstances under which a person may cease to hold the office.

11 In my view, Mr Taylor ceased to hold that office when he stood down. Upon standing down, he lost the authority to act as, and discharge the functions of, Senior Pastor. When he stood down, a vacancy in the position was created which the Elders were entitled to fill using their authority under rule 20.1(3). Rule 20.1(3) provides:

In the event of a casual vacancy in [the office of Senior Pastor] the Elders may appoint a person suitably qualified to the vacant office and the person so appointed may continue in office until the position is otherwise filled in accordance with the rules herein.

12 It was common ground that the Elders of the Church appointed Geoff Sprott as a "transitional" Senior Pastor in July 2009. Mr Taylor claimed that Mr Sprott was not validly appointed because he was not appointed as Senior Pastor in accordance with the process prescribed in rule 34 which required appointment at a general meeting of members of the Church. But Mr Sprott did not have to be appointed by the process prescribed in rule 34. It was plainly permissible for the Elders to exercise their power of appointment under rule 20.1(3) in the circumstance where Mr Taylor had stood down from the position and had ceased to perform the duties of that office. His standing down had created a casual vacancy.

13 Accordingly I reject the contention that the resolution on 5 November 2009 was invalid because Mr Taylor, as Senior Pastor, did not vote. Mr Sprott was the person holding the office of Senior Pastor in accordance with the Rules with the authority to vote in his capacity as holder of that office.

14 Next it was contended by Mr Taylor that other persons who voted as members of the Board of Directors had no authority to vote. The persons who voted on the resolution to place the Church into administration were: Mr Sprott in his capacity as Senior Pastor, Karan Mulcahy and Melanie Scaffidi in their capacity as Elders, Jenny McLellan in her capacity as Deacon (and a continuing board member) and Mark Conibear in his capacity as an ordinary member (and continuing board member). Mr Taylor claimed that Ms Mulcahy and Ms Scaffidi were not Elders, that Ms McLellan was not a Deacon and that there was no evidence that Mr Conibear had been appointed as an ordinary member.

15 It was common ground that Ms Mulcahy and Ms Scaffidi were not elected Elders in accordance with the process defined in rule 34.2. However, evidence showed that they were appointed as "transitional" Elders on 14 April 2009 by the then extant Council of Elders under rule 20.4(d) which provides for the filling of casual vacancies on the Council of Elders in the same terms as rule 20.3(3) in relation to the office of Senior Pastor. I reject Mr Taylor's claim that Ms Mulcahy and Ms Scaffidi were not Elders at the relevant time.

16 Mr Taylor then claimed that "transitional" Elders did not have authority under the Rules to vote at a meeting of the Board of Directors. I reject that contention. The Rules do not confine the function that may be performed by a person appointed to fill a casual vacancy.

17 The basis of Mr Taylor's claim that Ms McLellan was not a Deacon was that Deacons hold office for a period of two years and Ms McLellan's two year period was scheduled to expire in August 2009. This argument assumes that the two year period must elapse two years from the date of election. The fair reading of rule 34 is that the two year period expires when the AGM in that year is held and the election of the Deacons occurs. The AGM in 2009 was held on 22 November 2009, which was after the resolution to place the Church into administration.

18 Finally no basis was put forward by Mr Taylor to refute that Mr Conibear had been appointed as an ordinary member. There is no reason not to accept that Mr Conibear had been duly appointed as an ordinary member.

19 That leaves the question as to whether the Board of Directors was sufficiently constituted for the resolution to be passed, as required by rule 20.6. It is apparent that the Board members at the time the relevant resolution was passed comprised only the persons who voted because of vacancies which had not been filled, thus falling short of the seven members prescribed by rule 20.1(6). The proceedings of the Board prescribed in rule 21 nonetheless made it permissible for the Board to act notwithstanding the vacancies, as the extant Board members were all present and thus constituted a quorum for the transaction of business at the meeting.[2]

20 Accordingly I find that the Board was validly constituted when it resolved to place the Church into administration and that the resolution placing the Church into administration was validly made.

21 The basis of the claim that the Church is solvent is that the Church owns properties that have a market value greatly in excess of the liabilities of the Church. It was argued that the properties are realisable and, if realised, that the proceeds would be sufficient to pay off the Church's debts. Reliance was placed by Mr Taylor on a valuation of the properties by a certified practicing valuer, who gave an indicative market value range of between $2.5 to $3 million dollars.

22 The argument about solvency can be dealt with very shortly. The administrator filed an affidavit in which he deposed to the following:

From a review of the books and records that have been supplied to me I note that:

(a) At the time of my appointment there was a bank account with National Australia Bank standing to the credit of the Association in the sum of $348.33.

(b) There were a total list of creditors outstanding for payment in the sum of $8,512.72.

(c) The Association owned the land upon which the Church sits which is comprised in the following Certificates of Title:

(i) Volume 10640 Folio 894 which was the subject of a mortgage to the National Australia Bank registered number AC827232D.

(ii) Volume 10913 Folio 617.

(iii) Volume 10913 Folio 616.

(iv) Volume 10913 Folio 615.

Those properties are described as 43-49 Nyora Road, Eltham, Victoria, 3095.

(d) As at the date of my appointment the amount due to the National Australia Bank was approximately $250,000.00. That mortgage has now been refinanced with the Churches of Christ Property Corporation who have taken a mortgage over all of the land.

(e) Whilst the Association would appear to have a significant amount of assets in the form of land exceeding the value of the liabilities of the Association, I note that the Association has no source of income other than donations from its members.

(f) In the months leading up to my appointment as Administrator the monthly income was approximately $800.00 - $900.00 although there were ongoing expenses paid to staff, mortgage payments and expenses for the upkeep of the premises including payments for rates. The financial accounts for the financial year ended 30 June 2008 showed a loss of $108,401.21. Now produced and shown to me and marked "GSA-2" is a copy of the profit and loss for the year ended 30 June 2008.

(g) Proper financial statements were not maintained and I was not supplied with up to date accounts or balance sheets.

(h) There are no financial statements that show that Mr Taylor is a creditor of the Association.

On the basis of the information which is supplied to me in my capacity as Administrator I am of the view that Nillumbik Community Church Inc was insolvent at the time of my appointment and remains insolvent. The Association has no source of income other than donations from members in order to meet the ongoing expenses.[3]

23 I am not persuaded that the administrator's view that the Church was insolvent at the time of his appointment and remains insolvent should not be accepted because of the valuation of the properties. Importantly, the administrator in forming his view took into account that the Church has assets in the form of land that exceeds the value of the liabilities of the Church.

24 The applicable principles for determining solvency were summarised succinctly in Playspace Playground Pty Ltd v Osborn[4] where Reeves J stated:

Section 95A of the Act provides that a person is solvent: "... if, and only if, the person is able to pay all the person's debts, as and when they become due and payable". It also provides that a person who is not solvent, is insolvent.

As Mandie J observed in Plymin (at [370]), this is the "cash flow test" of insolvency. His Honour described that test in the following terms: "The cash flow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liabilities. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cash flow insolvency, will consider whether the company is actually paying its debtors".

The question of Toy Shed's solvency, or insolvency, has to be determined objectively upon the whole of the admissible evidence: see Lewis (as liquidators of Doran Constructions Pty Ltd (in liq) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 (Lewis) at [103] and Re Damilock Pty Ltd (in liq); Lewis and Carter as liquidators of Damilock Pty Ltd (in liq) v VI SA Australia Pty Ltd [2008] FCA 1801; (2009) 252 ALR 533 (Damilock); [2008] FCA 1801 at [15]. What has to be established is that the company has an endemic inability to pay its debts as and when they fall due: see Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 (Sandell); Southern Cross Interiors Pty Ltd v DCT (2001) 53 NSWLR 213 at [54] and Damilock at [18].

This determination is not to be limited to a simple analysis of Toy Shed's current assets and liabilities, or a consideration of its liquidity (or lack thereof) at a particular point in time. Instead, it must involve a consideration of Toy Shed's financial position in its entirety and include matters such as expected profits and other sources of income and funding that Toy Shed may be able to avail itself of: see Sandell at 670; Quick v Stoland Pty Ltd [1998] FCA 1200; (1998) 29 ACSR 130 at 139; Emanuel Management Pty Ltd (in liq) v Foster's Brewing Group Ltd [2003] QSC 205; (2003) 178 FLR 1 at [73] and following; and the comprehensive review of the authorities in Plymin at [369]-[380] per Mandie J.

In Plymin, Mandie J adopted a checklist of indicators of insolvency which were put forward by one of the expert witnesses in that case. See also Damilock at [16]. They are as follows (at [386]):

Continuing losses.
Liquidity ratios below 1.
Overdue Commonwealth and State taxes.
Poor relationship with present bank, including inability to borrow further funds.
No access to alternative finance.
Inability to raise further equity capital.
Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.
Creditors unpaid outside trading terms.
Issuing of post-dated cheques.
Dishonoured cheques.
Special arrangements with selected creditors.
Solicitors' letters, summons[es], judgments or warrants issued against the company.
Payments to creditors of rounded sums which are not reconcilable to specific invoices.
Inability to produce timely and accurate financial information to display the company's trading performance and financial position, and make reliable forecasts.

As Mansfield J observed in Damilock (at [16]):

In any particular case, one or more of those factors, or other factors, may have particular significance and one or more of them may not exist. The absence of one or more of those factors does not, of itself, establish solvency. [5]

Mr Taylor, in this case, does not discharge the onus of demonstrating that the Church is solvent simply by establishing that its assets exceed its liabilities. The important point here is that the company has no cash flow other than from donations, ongoing expenses cannot be met out of existing cash reserves and it made a substantial loss for the year ended 30 June 2008.

25 In determining the solvency of the Church, it was argued for Mr Taylor that his offers to satisfy the mortgage and all other debts to creditors should be taken into account. I reject that submission. In appropriate circumstances, the willingness of a third party to meet the liabilities may be a relevant consideration. This is not one of those cases. In Lewis v Doran[6] Palmer J observed that such willingness on the part of a third party:

[W]ould have to be cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality.[7]

Mr Taylor's evidence provides no material on which the Court could be satisfied that he has the means and capacity to pay off the debts. The Court could not conclude that the Church is solvent simply on the basis that Mr Taylor said he would pay the debts.

26 For these reasons I am not satisfied that the Church is solvent.

27 Mr Taylor claimed that he is a creditor of the Church. In my view, he has failed to discharge the onus of proving that he is a creditor. The evidence relied on amounts to no more than assertion on his part that he is a creditor. There is no probative evidence before the Court to enable the Court to draw any conclusion in favour of Mr Taylor.

28 I take into account the evidence of Ms Eggum and Mr Crock to the effect that Mr Taylor has told them that he purchased various items of equipment used by the Church for which he expected to be "reimbursed".[8] Evidence of what Mr Taylor may have told others does not substantiate that he is a creditor.

29 Accordingly, I am not persuaded that Mr Taylor had standing to make application under s 447C of the Corporations Act for a declaration that the appointment of the administrator was invalid. Accordingly it is appropriate that the leave I granted at the hearing to amend the application to include a claim under s 447C be revoked.

30 In view of my conclusion that the Church was not solvent, there is no need to consider whether Mr Taylor had standing to make the application under s 447A as someone who was an "interested person" as prescribed by s 447A(4)(f). However, in case it becomes necessary, I express the view that Mr Taylor's membership of the Church may constitute a sufficient basis to make him an "interested person" within s 447A(4). The expression "interested person" is of wide scope and should be construed liberally in the context of s 447A.[9]

D. Leave is not granted to bring a claim under s 447E

31 No relief was sought by Mr Taylor under s 447E additional to the relief that was sought under ss 447C and 447A. The claim was sought to be made for the collateral purpose of securing an order that Mr Taylor had no standing to obtain under s 447C. Leave is refused on that basis and on the basis that he has failed to establish entitlement to any relief.

(1) Leave to amend the application to rely on a claim under section 447C of the Corporations Act is revoked.

(2) Leave to amend the application to rely on a claim under section 447E of the Corporations Act is refused.

(3) Order 2 of the orders made on 10 December 2009 is discharged.

33 Subject to any argument, I propose to order that the plaintiff pay the defendants' costs of the application, including reserved costs, such costs to be taxed in default of appointment.

[1] Exhibit GDT-1 of the Affidavit of Grant Desmond Taylor sworn 9 December 2009, Nillumbik Community Church Rules, r 20.1(6).

[2] Exhibit GDT-1 of the Affidavit of Grant Desmond Taylor sworn 9 December 2009, Nillumbik Community Church Rules, r 21(4) and the addendum to rule 21 that:

"Subject to sub-clause (4) the Board may act notwithstanding any vacancy on the Board."

[3] Affidavit of Gregory Stuart Andrews sworn 26 March 2010 [4]-[5].

[4] [2009] FCA 1486 (Unreported, Reeves J, 11 December 2009).

[8] Affidavit of Damian Crock sworn 10 December 2009 [5]; Affidavit of Annette Eggum sworn 12 March 2010 [25].

[9] Allatech Pty Ltd v Construction Management Group Pty Ltd [2002] NSWSC 293; (2002) 41 ACSR 587, 591 [18]-[20](Austin J).

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