2379/97 - Challenge Foundation of New South Wales Ltd v Windgap Foundation Ltd; 2416/97 - Challenge Foundation of New South Wales Ltd v Crowle Foundation Ltd - [2002] NSWSC 313

No judgment structure available for this case.

CITATION: 2379/97 - CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. WINDGAP FOUNDATION LTD; 2416/97 - CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. CROWLE FOUNDATION LTD; 2417/97 - CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. HORNSBY CHALLENGE FOUNDATION LTD [2002] NSWSC 313

CURRENT JURISDICTION: EQUITY

FILE NUMBER(S): SC 2379/97, 2416/97, 2417/97

HEARING DATE(S): 20/06/01-22/06/01, 25/06/01-29/06/01 & 05/11/01, 06/11/01

JUDGMENT DATE: 9 May 2002

PARTIES :

Challenge Foundation of New South Wales Limited - Plaintiff
The Windgap Foundation Limited - 2nd Defendant in 2379 of 1997
The Crowle Foundation Limited - 2nd Defendant in 2416 of 1997
The Hornsby Foundation Limited - 2nd Defendant in 2417 of 1997

JUDGMENT OF: Bryson J at 1

COUNSEL : A. Murr SC & G.K. Burton - Plaintiff
G.K. Downes QC & G. Blake - 2nd Defendants in 2416 and 2417 of 1997
G. Blake - 2nd Defendant in 2379 of 1997

SOLICITORS: Holman Webb - Plaintiff
Toomey Pegg Drevikovsky - 2nd Defendants in 2416 of 1997, 2417 of 1997 and 2379 of 1997

CATCHWORDS: CORPORATIONS - Directors - exercise of powers in good faith - alleged breach of Directors' duties - Plaintiff was company with charitable objects - directors distributed property to incorporated successors of branches - powers in memorandum included power to do so - after change in control, plaintiff sought to recover property on basis of knowledge of recipients that exercises of directors' powers were not in good faith for purposes of the company - alleged divergence between course taken by directors and course approved by members at Extraordinary General Meeting - on the facts, the directors did not abuse their powers - distribution of money to Windgap was challenged as in breach of clause in memorandum prohibiting distribution of profits - on examination of the mechanism adopted, found that there was no distribution of property of the plaintiff.

LEGISLATION CITED: Companies Act 1936
Real Property Act 1900
Associations Incorporation Act 1984
Company Law Review Act (1998) (Commonwealth)
Corporations (New South Wales ) Act 1998 (NSW)

CASES CITED: Northside Developments Pty Ltd v. Registrar General (1990) 170 CLR 146
Rolled Steel Products (Holdings) Ltd v. British Steel Corporation and Others [1986] Ch 246
Equiticorp Finance Ltd (in Liq) v. Bank of New Zealand (1993) 32 NSWLR 50
Linton v. Telnet Pty Ltd (1999) 30 ACSR 465
Council of the City of Newcastle v. Royal Newcastle Hospital (1956) 96 CLR 493
Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633
Australasian Conference Association Limited v. Mainline Constructions Pty Ltd (in Liq) (1978) 141 CLR 335

DECISION: 2379/97 - give judgment for the second defendant with costs.; 2416/97 - give judgment for the second defendant with costs.; 2417/97 - give judgment for the second defendant with costs.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRYSON J.

THURSDAY 9 MAY 2002

2379/97 CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. WINDGAP FOUNDATION LTD

2416/97 CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. CROWLE FOUNDATION LTD

2417/97 CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. HORNSBY CHALLENGE FOUNDATION LTD & ANOR

JUDGMENT

1 HIS HONOUR: Three proceedings relating to distributions of property of the plaintiff were heard together. The plaintiff (Challenge Foundation) was incorporated on 9 August 1951 as the Subnormal Children’s Welfare Association and was the successor to an unincorporated association of the same name; its name was changed to Challenge Foundation of New South Wales in 1984 and changed again to add the word “Limited” in 1993. It is a company limited by guarantee and has beneficent and charitable objects. There were large changes in its affairs in 1992 and 1993. Before then it provided head office and co-ordinating functions for many branches throughout New South Wales. Challenge Foundation attended to matters of concern for branches generally, including dealing with governments for provision of funds and other assistance, conducting Industrial Relations affairs, and attending to insurance and other business and interests which branches had in common. Property including land used by Challenge Foundation and its branches was vested in Challenge Foundation.

2 Branches were voluntary associations of persons interested in conduct of activities and provisions of services in a particular area. Challenge Foundation had the continuity of an incorporated body, whereas branches had varying fortunes. There were great disparities among branches in numbers of members, intensity and nature of activities and the value of the property employed in those activities. Sometimes branches became inactive and were decommissioned, sometimes new branches were formed and recognised by Challenge Foundation. Some branches were small local groups and some branches maintained high levels of activity, managed long-continuing facilities and employed significant staff. Challenge Foundation had few landholdings; there were significant landholdings at Ryde and at Mt Own near Hornsby, at one time there were office premises in Hornsby, and there is said to have been some land at Box Hill which is not involved in these proceedings.

3 The affairs of Challenge Foundation were governed by its directors. The Board of Directors was an unwieldy body as each branch was entitled to be represented by a director and there were in 1992 about 50 directors including many who represented relatively poorly funded branches at places distant to Sydney, so that meetings of the Board of Directors could not be called readily or take place frequently. There are said to have been over 60 branches, although there were changes almost continuously as branches were formed, dissolved or left Challenge Foundation. The Management Committee exercised functions delegated by the Board. In September 1992 there were significant changes in officeholders and the Management Committee, and a change in policy directed towards reducing the activities of Challenge Foundation while maintaining its existence, forming incorporated bodies to succeed to the Branches, distributing property to the incorporated bodies and enhancing the autonomy of branches. Early in 1994 there were other changes in officeholding and policy; by this time there had been a large change in Challenge Foundation’s activities, the number of members had diminished greatly, a number of branches had been succeeded by autonomous incorporated bodies, and many of these no longer functioned as branches of Challenge Foundation. Although the membership and activities changed greatly the previous incorporated persona of Challenge Foundation continued and still continues.

4 During 1993 there were many transfers of property of various kinds to the incorporated successors of branches. In these three proceedings three of those transfers are challenged.

5 Challenge Foundation is a company limited by guarantee and until 1992 its members were all or almost all individuals. A rare or perhaps the sole exception was Windgap Foundation Limited, which was incorporated on 14 September 1990 and became the successor to the previous unincorporated Eastern Suburbs branch. In 1993 real property at Ryde was transferred to the Crowle Foundation Ltd, a newly formed incorporated body which was the successor to the Ryde Branch of Challenge Foundation, real property at Mt Own was transferred to Hornsby Challenge Foundation Ltd, which was the newly incorporated successor of the Hornsby Branch, and a sum of $100,000 which, in a manner which will be later stated, was derived from funds of Challenge Foundation, was paid to Windgap Foundation. Each of these dispositions is challenged and the plaintiff seeks to recall them. The relevant facts and the issues are not uniform and the claims must be addressed separately.

6 In proceedings 2416 of 1997 the second defendant is The Crowle Foundation Ltd (Crowle Foundation) which was incorporated on 15 March 1993. It continued activities carried out until then by the Ryde Branch also known as the Crowle Home Branch. The first defendant Mr R.J. Corbridge died while the proceedings were pending and the claims made against him were not continued against his estate. Mr Corbridge was a director of Challenge Foundation from 1984 until he resigned on 21 January 1994. He was Chairman of Directors and Chairman of the Management Committee from 26 September 1992 to 21 January 1994. He was also Principal Executive Officer, Secretary and Public Officer of Challenge Foundation from 15 October 1993 until he gave up those offices in January and February 1994. From 1988 onwards he was the Chairman and President of the Ryde Branch and when Crowle Foundation was incorporated he became a Director, Chairman of Directors and Managing Director.

7 On the pleadings and in their presentation, the plaintiff’s claims were not based on contending that any decisions of the Board of Directors or of the Management Committee were ultra vires or in excess of the powers conferred on directors by Challenge Foundations’ constitution, and it was not claimed that the seal was affixed to any deed or transfer without authority to do so. The claims against Crowle Foundation and Hornsby Foundation were based on abuses of the powers of the directors in the sense that the directors’ powers were not exercised in good faith for the purposes for which they were conferred; that in that way there were breaches of fiduciary duties of directors, that the dispositions were void or voidable in equity, and should be avoided as against Crowle Foundation and Hornsby Foundation because they took the property as volunteers, and because they took the property with knowledge of the breaches of fiduciary duties of directors.

8 There are significant observations on the law in this area in judgments in Northside Developments Pty Ltd v. Registrar-General & Ors (1990) 170 CLR 146. In my respectful view it is important to keep under consideration, when considering observations in Northside Developments dealing with knowledge, constructive notice and with inquiries which should have been made, that that case related to a forged mortgage which had not been approved by the directors and bore a false attestation; the difficulties and issues to which the High Court’s attention was directed do not arise in the present case in which the seals on the documents are authentic and are supported by decisions of persons who truly were directors and the Management Committee.

9 At 162-163 Mason CJ cited from the judgment of Browne-Wilkinson L.J. in Rolled Steel Products (Holdings) Limited v. British Steel Corporation & Ors [1986] Ch 246 at 306-307:

Browne-Wilkinson LJ expressed his understanding of the relevant principles in the form of these propositions:

10 In exposition of this passage Mason CJ said at 163:

In Re David Payne & Co Ltd

11 The brief reference by Browne-Wilkinson LJ to constructive notice of excess or abuse of powers alludes in passing to the large subject of circumstances in which something other than actual knowledge of an excess or abuse of power is sufficient to subject a person dealing with the company to equitable remedies and avoidance of transactions. Brown-Wilkinson LJ did not undertake an exposition of what his Lordship referred to as constructive notice in this context. In the present case there is no occasion to address this matter, as on the facts found there was no abuse of powers.

12 In Equiticorp Finance Ltd (in Liq) v. Bank of New Zealand (1993) 32 NSWLR 50 Clarke and Cripps JJA, who constituted the majority, addressed the question of breach of fiduciary duty in a decision of directors who had regard to the interests of a related company rather than of the company the property of which they were dealing with. Although the observations of Clarke and Cripps JJA were made in that somewhat different context they contain expressions which, in my respectful view state the relevant law relating to abuse of powers of directors. Their Honours said at 147-148:

Charterbridge Corporation Limited v. Lloyds Bank Limited

“…Mr Goulding contended that in the absence of separate consideration, they must, ipso facto, be treated as not having acted with a view to the benefit of Castleford. That is, I think, an unduly stringent test and would lead to really absurd results, ie, unless the directors of a company address their minds specifically to the interest of the company in connection with each particular transaction, that transaction would be ultra vires and void, notwithstanding that the transaction might be beneficial to the company.”

Having considered the competing contention his Lordship went on to say:

“…The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.”

That was the test which was applied by Giles J and all parties have advised this Court that the same test should be applied on the appeal. Although we are content to deal with the issues in the case upon the basis put by counsel we should indicate that we have reservations about the test proposed by Pennycuick J. The directors are bound to exercise their powers, bona fide, in what they consider is in the interests of the company and not for any collateral purpose. Whether they did so or not is a question of fact .

The traditional approach of the courts to this question is best explained by Viscount Finlay’s statement in Hindle v John Cotton Ltd (1919) 56 Sc LR 625 at 630-631 which was cited in Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 at 77:

“Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting in from some bye motive, possibly of personal advantage, or for any other reaso n.”

(See also Re Halt Garage (1964) Ltd [1983] 3 All ER 1016 per Oliver J at 1032.)

Of course it should be borne in mind that the directors are involved in making a business decision and courts have traditionally not pronounced upon the commercial justification for such decisions. Specific reference was made to the reluctance of courts to interfere in business decisions in Howard Smith (at 74):

“There is no appeal on the merits from management decisions to courts of law; nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.”

(See also Gower, The Principles of Modern Company Law , 5th ed (1992) at 586; Re Smith and Fawcett, Ltd [1942] Ch 304 at 306 and Kinsela (at 733).)

13 I give emphasis to their Honours’ observations to the effect that the powers are to be exercised bona fide in the interest of the company and not for any collateral purpose, and to Viscount Finlay’s contrast between honestly acting in discharge of powers in the interests of the company and acting from some bye-motive or for any other reason.

14 Charterbridge, to which their Honours referred, has unfortunately but repeatedly come to be cited in this context although Pennycuick J in that case was dealing with the altogether different subject of ultra vires. In my opinion the objective test – how would an intelligent and honest man have acted? – has a place in cases where breach of the fiduciary duty of directors in exercise of powers is alleged only because establishing that an intelligent and honest man could not have reached the conclusion which the directors reached is a means of proof that they were not (because they could not have been) honestly acting in exercise of their powers in the interests of the company; it is a means of demonstrating that the directors could not have had the relevant state of mind. Clearly Clarke and Cripps JJA did not regard the objective test as the test required by law, although they applied it because they were led to do so by the manner in which the parties had conducted the proceedings. A similar course led to the objective test being applied in Linton v. Telnet Pty Ltd (1999) 30 ACSR 465; see Giles JA at 472.

15 The application of the principles requires the large step of accommodating consideration of the interests of the company to the nature of Challenge Foundation and the objects in its Memorandum of Association, some of which are plainly beneficent. Ordinary commercial concepts of the interests of a company do not apply and the objects of Challenge Foundation can be attained by giving property away.

16 The claims against Crowle Foundation relate to the Crowle Home site at Ryde. This is a generally rectangular parcel of land with frontage on the north-west to Belmore Street, on the north-east to Junction Street and on the south-east to Porter Street, Ryde. The Crowle Home site is made up of land in several different certificates of title; the transfer of the large parcel at the north-eastern end with frontage to Junction Street, now in Folio Identifiers 12 and 13/51349 formerly in Certificate of Title Vol. 4881 Folio 211 is subject to some grounds of attack which do not affect land to its south-west in the same way; they are the parcels in Folio Identifiers 11/51349, 1/921633 and Certificate of Title Volume 1829 Folio 159. On the north-eastern parcel development comprises, in the north-western corner Lindsay Cottage, which is the subject of the German School Lease, then to its south-east an oval or playing fields, then a car parking area, and then in the north-eastern corner of the parcel the building called Lacy House, before and since 1993 the offices of Challenge Foundation. Behind Lacy House there are playing fields on an open grassed area, and an access drive to buildings on the remaining land which are not the subject of the same contentions. Also on the land in Folios 12 and 13/51349, or partly on it, is a swimming pool structure with a shelter. On the remaining land there are a number of buildings including the Alan Penney building, the E.F. Edwards building, the Dulcie Johnston Hall, administrative offices, wards, a main workshop and other buildings, and a memorial garden.

17 The Crowle Home land was transferred to Challenge Foundation by transfer dated 9 May 1952 and registered on 26 September 1952 from Lorna May Crowle in accordance with a Deed dated 30 April 1952 between the said Lorna May Crowle and Cecile Napier Crowle (there referred to as trustees) and Challenge Foundation. Recitals in the Deed show that the trustees had held the land on trusts created in 1944; the trustees declared that by reason of financial circumstances and other reasons it had become impracticable for the trusts to be carried on and continued and accordingly they had ceased. By the operative clauses of the Deed the trustees were forthwith to transfer the land and other assets to Challenge Foundation, no consideration in money was payable and Challenge Foundation gave to the trustees some undertakings relating to continuing the name and maintaining the memorial garden, continuing Rudolf Steiner education methods, discharging accounts and liabilities of the trust and: “2(c) That it shall not transfer or assign any property formerly under the trusts of the Trust Deed to any other organisation or charity without first obtaining the consent thereto of the Retiring Trustees or the survivor of them or the executors of such survivor.”

18 The Deed recorded that the trust created in 1944 had ceased, did not create any new trust, and did not limit the powers of Challenge Foundation to deal with the land; the undertaking not to assign without consent was enforceable (if it was enforceable at all, which is doubtful) only by the Retiring Trustees or executors of their survivor. The contention that some remedy for Challenge Foundation arises out of this Deed was referred to during the hearing but not pressed in submissions and in my opinion there was no basis for it.

19 A licence agreement of 18 March 1958 between Challenge Foundation and trustees of the Crowle Home Branch, which is the same as the Ryde Branch, granted an exclusive licence to occupy “ALL THOSE the premises known as ‘W.A. Crowle Home’ 76 Belmore Street Ryde in the said State and all outbuildings fixtures furniture fittings and equipment thereincontained” at a licence fee of 1 pound per year. The land so described was the whole of the Ryde land. Clause 3 contained provisions for revoking the licence or determining it by mutual consent in stated ways and the evidence does not show that it has ever been determined.

20 Lacy House was later constructed by Challenge Foundation, with funds provided by Challenge Foundation and not by Ryde Branch, and at all times until 30 June 1993 and since has been occupied by Challenge Foundation as its central administration offices, and no branch officers or recognisable branch activities operated there. Activities in the building brought with them some use of the land around the building, for access, car parking and otherwise incidentally to use of the building, but no evidence has shown that there was a defined boundary to the activities associated with the building.

21 Challenge Foundation granted a lease of Lindsay Cottage dated 20 December 1991 to German School Johannes Gutenberg; that lease was for three years from 1 January 1992 and the property leased was described so as to refer to Lindsay Cottage and the land appurtenant thereto, shown in an annexed sketch and part of the land in Certificate of Title Volume 4881 Folio 211, now Folio Identifiers 12 and 13/51349. The lease at Exhibit A, Vol.2 p409 includes the sketch at p413. The Crowle Information Digest of August 1992 included in the Branch President’s Annual Report a statement “Site Utilisation” which includes “In view of the changing physical activities of our clients as they grow older, it was recognised that we no longer were making good use of all the Crowle property and we agreed to lease about a quarter of our site to the German School which was looking for more suitable accommodation.” Although under the lease the rent was payable to Challenge Foundation, it was in fact paid to or treated as payable to the Ryde Branch. The evidence of those directors of Crowle Foundation who gave evidence was to the effect that they saw the Ryde Branch as using the German school land because the Ryde Branch received income from the rent.

22 The objects for which Challenge Foundation was established are stated in cl.3 of its Memorandum of Association. Object (a) is:

To further the interests, train, educate and promote the welfare generally of sub-normal children and ensure they will be adequately and sympathetically cared for during their lifetime.

23 Objects (b) and (c) include a number of matters relating to advancing the interests of sub-normal children and meeting their special needs. There are also objects relating to (d) acquisition of property, (f) undertaking trusts, obtaining gifts and grants from government and public bodies; and a number of other objects relating to raising money and issuing bills of exchange, establishing and disestablishing divisions and branches, joint working and co-operation with other bodies having similar aims, and investment. Objects now particularly under notice are:

(g) From time to time subscribe or contribute to any patriotic or charitable benevolent or useful object.

(m) In furtherance of the objects of the Foundation to make and carry out any arrangement for joint working or co-operation with any other association, society or body, whether incorporated or not, having similar aims to the Foundation.

(p) To establish and support or aid in the establishment and support of associations institutions funds trust activities and conveniences calculated to benefit sub-normal children, employees and ex-employees of the Foundation, or the dependants or connections of any such persons, and to grant pensions and allowances and make payments towards the life assurance or endowment of any such persons.

24 The matters in paras.(g), (m), (p) and (q) are objects for which Challenge Foundation was established, and when conduct of directors is examined for consideration whether it was for the purposes of Challenge Foundation the attainment of objects in the Memorandum is the source from which it is to be understood what the purposes of Challenge Foundation were. The current activities of Challenge Foundation, their continuation and success were not the relevant purposes, except so far as they were related to an object in cl.3.

25 Clause 4 of the Memorandum includes:

4. The income and property of the Foundation, whencesoever derived, shall be applied solely towards the promotion of the objects of the Foundation as set forth in this Memorandum of Association and no portion thereof shall be paid or transferred directly or indirectly by way of dividend, gift division bonus or otherwise howsoever by way of profit to the members of the Foundation.

26 Clause 8 of the Memorandum obliges every member to contribute up to $2 to a winding-up. Clause 9 provides for distribution of property remaining after winding-up or dissolution to institutions with similar objects. There has not been a winding-up or dissolution and the transactions under challenge were not acts under cl.9.

27 In the Articles of Association provisions relating to general meetings do not empower a general meeting to control or limit the exercise by directors and the Management Committee of powers conferred in accordance with the Articles.

28 Article 30 Powers and Duties of Directors is in these terms:

30. The business of the Foundation shall be managed by the directors, who may pay all expenses incurred in getting up and registering the Foundation, and may exercise all such powers of the Foundation as are not by the Act, or by these articles, required to be exercised by the Foundation in general meeting, subject nevertheless to any such regulations, being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the Foundation in general meeting; but no regulation made by the Foundation in general meeting shall invalidate any prior act of the directors which would have been valid if that regulation had not been made.

29 Article 32 The Seal is:

The seal of the Foundation shall not be affixed to any instrument except by the authority of a resolution of the board of directors, and in the presence of a director and of the secretary or such other person as the directors may appoint for the purpose; and that director and the secretary or other person as aforesaid shall sign every instrument to which the seal of the Foundation is so affixed in their presence.

30 Article 36 provides:

The Board of Directors shall be composed solely of duly constituted branch representatives. At the Annual General Meeting of each branch, the financial members may elect from their number a person to fill the position of director of the Foundation. When such person is elected the branch Secretary shall forthwith notify the name, address and occupation to the registered office of the Foundation, and the director shall be entitled to take his seat on the Board immediately after the date of the Annual General Meeting of the Foundation each year.

31 Article 46 Proceedings of Directors is:

The directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit; any committees so formed shall, in the exercise of the powers so delegated, conform to any regulations that may be imposed on them by the directors.

32 Minutes of the Meeting of the Board of Directors held on 26 September 1992 (Exhibit A Vol.1 p53) show that the Chairman then was Mr K. Kelly, the meeting was attended by 27 directors or proxies for directors as well as by Mr Kelly and that there were apologies from 12 other directors. A resolution that the directors had no confidence in the Chairman and Management Committee was passed, Mr Kelly stood down, Mr Corbridge was elected Chairman and a new Management Committee was elected. The minutes show the following resolution:

33 A number of papers in evidence expressed dissatisfactions which led to these events, including that the organisational structure did not allow appropriate branch autonomy or recognition of the needs of the Branches in contrast to central control. It was said that branches were leaving and more were preparing to follow. The case for a large change in the way Challenge Foundation’s affairs were arranged and conducted was put by Mr Corbridge in a letter to members of 22 October 1992 Exhibit 1 Tab 75. The considerations he put included the liability of Challenge Foundation for the debts of each branch and the susceptibility of the assets of a solvent branch to be taken away to meet the debts of Challenge Foundation, including other branches. Some branches were insolvent, there had been several branch failures and others were known to be on the brink of failure; large amounts of money were invariably needed to carry on or close down insolvent branches; so far it had been possible to find the funds to do this but the reserves were not inexhaustible; the situation must be changed and “[b]ranches must have their autonomy restored and ownership of their assets returned to them.”

34 Mr Corbridge circulated to directors on 23 October 1992 proposals for restructuring Challenge Foundation in which branches would become separately incorporated companies retaining membership of the restructured Challenge Foundation. The activities of Challenge Foundation and the services provided by it would be altered and in significant ways would be reduced.

35 Accompanying the Notice of Extraordinary General Meeting dated 17 November 1992 which notified members of the meeting of 12 December 1992 was a statement by Mr Corbridge as Chairman which strongly urged members to support the proposed resolution. The statement was in these terms:

The enclosed notice of an Extraordinary General Meeting of the members of Challenge Foundation has been called by the Board of Directors so that members may determine the future course of the Foundation. It is a watershed in the history of the Foundation and probably the most important meeting of members that will ever be held.

The Board has recognised that the present legal structure of Challenge, though appropriate in its earlier years, has brought about such internal stresses that already several branches have seceded and a number more are poised to leave and only refraining from doing so because they are hoping that significant changes will be made at this meeting. Every Branch that leaves adds to the financial problems of the Foundation and increases the burden that has to be carried by the remainder. The extremely expensive legal steps taken in the past to prevent Branches from leaving have all proved totally ineffectual. The proposals upon which you are being asked to vote are the last chance to save Challenge from total disintegration.

The resolution to which you are being asked to give your support sets out to approve of the Directors doing three principal things:

1) To assist each Branch to set up its own independent company to operate its services.

2) Each of the new companies will then be given all the assets it uses for its services and will take over the liabilities of the Branch. Where a Branch is in financial straits the Board will negotiate suitable arrangements to ensure that the Branch is not disadvantaged by the change.

3) The Board will draft a new constitution for the Foundation that will reflect its new structure and this will include the six objects numbered 3(a) to (f). You will see from these that stripped of all unnecessary corporate activities of the present structure, there is every intention of continuing and enhancing the services of Challenge, whilst there will no longer be the legal pressures that have resulted in increasing centralisation at the expense of Branch autonomy.

There will be a number of cost savings for Branches and for the central services of the Foundation. No Branches will be disadvantaged by these changes. The responsibilities of the managing committees of the new companies will be little different from the responsibilities of present Branch Executive Committee members.

This explanation of the proposals has been made as simple as possible. However, if you would like to receive more extensive information, please contact Corporate Administration staff at Ryde.

36 At the Extraordinary General Meeting of Challenge Foundation held on Saturday 12 December 1992 the following resolution was passed by 1079 votes to 198 after a poll.

3. RESOLUTION

That this meeting approves the intention of the Board of Directors to:

1. Exercise the powers contained in paragraph 3(p) of the Memorandum of Association to assist Branches of the Foundation to establish separate corporate identities with the status of public benevolent institutions for the purpose of assuming responsibility for the services operated by those Branches with effect from 1 July 1993 (or such other date as may be determined by the Directors).

2. Exercise the powers contained in paragraphs 3(g), 3(m) and 3(p) of the Memorandum of Association to donate and transfer to the corporations established by each Branch of the Foundation in accordance with paragraph 1 above, all those assets which shall be in use by that Branch on 30 June 1993 (or such other date as may be determined by the Directors) subject to the existing liabilities of the Branch and to such conditions as the Directors shall deem necessary to protect the interests of the clients of Branches and the interests of the Foundation.

37 At a Management Committee meeting on 21 January 1993 Item 3 of the Minutes records discussion of the establishment of independent branches and consideration of a draft deed for transfer of ownership of assets.

38 The minutes of a meeting of the Board on 13 February 1993 include a lengthy verbatim record at Item 4.1 of discussion on the establishment of independent branches and in the course of this discussion the following motion was carried (Ex A, vol.1 p121):

… that the Management Committee be empowered to enter into such agreements effective from such dates as it deems necessary and appropriate to give effect to clauses 1 and 2 of the resolution passed at the Extraordinary General Meeting of Members of the Foundation held on 12 December, 1992.

39 In the Minutes of the Meeting the Management Committee of 22 February 1993 under Item 3.1 Establishment of Independent Branches the discussion recorded includes the following:

The Chairman reported that the land on which the Corporate Administration office is sited is part of the original Crowle Deed. When Ryde Branch transfers out Challenge Foundation will be given a 99 year lease of the site or until Challenge Foundation moves off site. In the future if the land is sold then an appropriate portion of the sale proceeds will be paid to Challenge Foundation.

Mr Condon stated that it was his understanding that provided the Board’s equity in property assets is being used for current services delivery then it transfers to the new entity. However if the property is sold then the equity is returned – which is the same position as Commonwealth equity in assets.

The Directors agreed that this was their understanding.

Mr Patterson confirmed that Hornsby Branch would be adhering to this policy if Mt Own was ever sold.

40 The Minute goes on to record a resolution to affix the company seal to a number of transfers some of which related to real property.

41 Mr Corbridge’s paper of 22 April 1993 (Exhibit A Vol. 2 p.414-415) gave the following account of the history of the Ryde property:

Some 40+ years ago, after discussions with Mr. E. Edwards, the Crowle family decided that they would donate their property at Ryde for the establishment of a service for subnormal children.

At that time the only corporate body available to be registered as the holder of the title to the property was the SCWA. The notions of Branch Trustees or the Deed of Covenant had not then been conceived otherwise there is no doubt that one or the other would have been employed to recognise the clear intention of the donor that the property belong to the service that grew up there.

This intention was formally recognised by the SCWA in the only way then seen as appropriate by the granting of a peppercorn lease of the entire property to the Ryde Branch. No SCWA funds were ever expended to acquire the asset.

At that time the SCWA operated from a small office in the City but as the number of Branches increased larger premises became necessary. It was decided to build new premises on the property at Ryde, though this occupation was never formally recognised by modification of the lease with Ryde Branch.

The rights of Ryde Branch to the benefits of the property were recently recognised by Challenge when it formally acceded to the leasing of part of the property to the German School, the rent being payable to Ryde Branch.

Under the lease between Challenge and Ryde Branch, the Branch is entitled to sole use of the entire property. To fulfil the recent resolution of members approving proposals to transfer assets in use by Branches the title to the property should be transferred to Crowle Foundation Ltd, which has been formed to take over the activities of the Ryde Branch. However, it is agreed that recognition must to be given to the situation of Central Office.

42 The paper then went on to state options; one was subdivision followed by transfer to Crowle Foundation of the portion of the property not occupied by Central Office and the other was transfer of the entire property to Crowle Foundation and leasing back the portion occupied by Central Office with a payment to recognise that Challenge Foundation bore the original cost of the building. (The references to the lease to Ryde Branch should be understood as references to the licence of 18 March 1958).

43 The Minutes of Meeting of the Management Committee of 23 April 1993 include at Item 4.5 the following:

4.5 RYDE

The Chairman presented a paper on options for the proposed Heads of Agreement to transfer of property utilised by both Corporate Administration and Ryde Branch to Crowle Foundation Ltd. It was RESOLVED to seek the advice of Clayton Utz on this matter.

44 The advice which the Management Committee resolved to seek on 23 April 1993 was given in a letter from Messrs Clayton Utz to Challenge Foundation dated 18 May 1993 and discussed at the Management Committee Meeting of 21 May 1993. Messrs Clayton Utz referred to two options which had been identified, subdivision and transfer only of the portion not occupied by Central office, and transfer of the entire property subject to a lease. Clayton Utz expressed the view that the preferable option would be for Challenge Foundation to retain that portion of the property on which the Central Office facility was currently located and transfer the balance. They referred to the possibility of giving Crowle Foundation a right of first refusal of the property retained and pointed out advantages. The letter of advice expressed the firm’s view of which was the preferable option but did not state any conclusive or strong consideration adverse to the long-term lease option. The Management Committee came to its decision with the benefit of this letter of advice and must be taken to have addressed the considerations referred to in it.

45 In the Minutes of the Management Committee meeting of 23 April 1993 Item 7 Notation of Documents Signed under Common Seal notes sealing of documents relating to a property at Waitara which, it would seem, was occupied by a client or clients of the Hornsby Branch. The property was of course owned by Challenge Foundation but the Deed was attributed to the Hornsby Branch.

46 Minutes of a meeting of the Management Committee on 21 May 1993 include the following at item 3.1:

3. Corporate

3.1 Future Role of Challenge Foundation

Mr Moy’s letter on the future of Challenge Foundation, which had been sent to all Directors, was tabled and disclosed. It was RESOLVED that the Chairman will respond to this letter and provide all Directors with a copy of his response.

The Chairman presented a timetable for finalisation of the restructure of Challenge Foundation. It was RESOLVED to recommend to the next Board meeting that the Directors approve (i) the change of financial year to 31August 1993; (2) the transfer of assets to Challenge Foundation Support Services Inc; and (iii) the calling of a meeting of members to change the name and enter into voluntary liquidation. Further RESOLVED to recommend to the Board that all Directors except the Management Committee resign on June 30; Directors transfer assets to new company on 1 July; the Extraordinary Meeting of members to change name and go into voluntary liquidation be held on 7 July; and, commence operating new Challenge on 1 July.

47 At Item 4.4 is the following:

4.4 RYDE

Discussion took place on advice received from Clayton Utz about the transfer of the property utilised by Corporate Administration to Ryde Branch. It was RESOLVED to transfer the entire property to Crowle Foundation Ltd and lease back the portion occupied by Corporate Administration on a 99 year lease, as per proposed Heads of Agreement tabled at the meeting of the Management Committee held on 24 April 1993.

48 The Minutes of the Meeting of the Board of 5 June 1993 include at Item 1.2 a resolution referring to the Minutes of Management Committee meetings on 13 February, 22 February, 18 March, 19 March, 23 April and 21 May 1993 and resolving “… that the actions of the Management Committee recorded in those minutes be ratified.”

49 A deed made on 1 July 1993 Exhibit A2, p437 between Challenge Foundation and Crowle Foundation dealt with a number of matters including the transfer of property to Crowle Foundation. Statements in the Recitals included statements to the following effects. The Ryde Branch had provided services to people with intellectual disabilities for many years and had requested Crowle Foundation to take over and assume responsibility for the services currently operated and provided by the Branch and to act as the auspicing body and Crowle Foundation was ready, willing and able to do so. In order to carry out the request of the Branch, Challenge Foundation was to transfer assets of the Branch to Crowle Foundation subject to conditions in the Deed. By cl.2, in consideration of the covenants of Crowle Foundation, Challenge Foundation as beneficial owner transferred and assigned the assets of the Branch absolutely to Crowle Foundation with warranties relating to freedom from encumbrances and obtaining good title. Crowle Foundation was to grant Challenge Foundation a lease of 8 Junction Street, Ryde, in the form of the attached lease. Crowle Foundation was to undertake all the liabilities of the Branch in place of Challenge Foundation, was to give Challenge Foundation an indemnity for liabilities of the Branch, was to assume responsibility for acting as the auspicing body and was to enter into agreements with the Commonwealth and the State as necessary for that purpose. Crowle Foundation was to maintain books and records and to prepare and deliver to Challenge Foundation audited accounts of the Branch. Crowle Foundation gave Challenge Foundation a number of warranties. Schedules identified the property transferred as the fixed assets of the Branch as recorded in the accounting records and documents of the Branch and acquired prior to 1 July 1993 and the Crowle Home land, and the transfer was subject to the lease to the German School. Registered proprietorship was transferred by transfer at Exhibit A, Vol.2 p445; there seems to have been some delay after lodgement of the transfer; it was re-lodged on 25 October 1993 and registered thereafter. An effect of the transfer of the registered proprietorship is that Crowle Foundation became legally bound and benefited by the lease to the German School.

50 The lease referred to in the Deed was granted by Crowle Foundation to Challenge Foundation and registered; it creates a term of 99 years commencing on 1 July 1993 of Lacy House, which is the building known as 8 Junction Street, Ryde, at a rent of $1 per annum. The lease contains at clause 16 a Break Clause under which Crowle Foundation is entitled to determine the lease if it wishes to dispose either of the whole of the land in Certificate of Title Volume 4881 Folio 211 (which is the north-eastern-most parcel and is now in Folio Identifiers 12 and 13/51349) or if it wishes to disposes of the whole of the land, and it is to give three months’ notice and pay twice the value of the annual fair market rent determined in according to a stated formula.

51 The Minutes of the Management Committee of 25 June 1993 include at Item 5 a list of documents under the heading “For notation of signing under Common Seal.” Authorisation to fix the seal at meetings of the Management Committee is impliedly included in the authorisation conferred by the Board Minute of 13 February 1993 which empowered the Management Committee to enter into agreements. This list includes:

52 The Minutes were signed by Mr Corbridge as Chairman on 30 July 1993.

53 At a later point I set out Item 6 which relates to the Hornsby Branch. The terms of Item 6 and its resolution about the contents of the deed to be executed relating to Hornsby show that Item 5 does not mean that the documents had already been signed, but means that the Management Committee approved their being signed.

54 The Seal Register of Challenge Foundation shows that on 25 June those documents, and a lease of premises at 8 Junction Road Ryde (meaning Lacy House) from the Crowle Foundation to Challenge Foundation were sealed on the signatures of Mr Condon and Mr Cochrane for the documents affecting the Ryde Branch and of Mr Corbridge and Mr Condon for the documents affecting the Hornsby Branch.

55 The Minutes of the Board of Directors of 30 July 1993 include this passage

4. CORPORATE

4.1 ESTABLISHMENT OF INDEPENDENT BRANCHES

The Chairman reported that (a) all Branches except Parkes, Inverell and Moruya had signed Deeds. Parkes Branch is expected to be finalised within a week. Inverell Branch is waiting on its separate incorporation to be confirmed. Moruya Branch has unique problems due to the holiday cottage being part of an estate; and, (b) that the Deed to transfer all the assets except $1000,000 of Challenge Foundation of New South Wales had been signed by both parties. Mr. McDonald requested that the minutes of this meeting show that he protested this action in so much as the assets transferred to Challenge Foundation Support Services Incorporated, and the land title to properties known as Crowle and Mt. Own belonged to Branches that have now separately incorporated.

56 In the Minutes of the Meeting of the Board of Directors of 20 August 1993 there is the following passage at Item 1 relating to the adoption of the Minutes of 30 July 1993.

1. MINUTES OF DIRECTORS’ MEETING

The Chairman observed that the Minutes of the Meeting held on 30 July 1993 were not a true and correct record. He said that the Board agreed to adopt the recommendations set out in Attachment 3 to the agenda papers for that meeting, and in particular it was resolved to transfer all the liquid assets of the Foundation (save for the sum of $100,000 sufficient to discharge all known liabilities of the Foundation) to Challenge Foundation Support Services Incorporated subject to its executing a deed of indemnity in the terms set out in the said Attachment 3 to the agenda papers of that meeting.

Ms. Stewart noted a further error in that figure of $1,000,000,00 appearing in section 4.1 of the Minutes of that meeting should have been $100,000.00.

RESOLVED to adopt the minutes of the meeting held on 30 July 1993, subject to the corrections referred to by the Chairman and Ms. Stewart, as a true and correct record.

Mr. McDonald asked this his opposition to the resolution be recorded.

57 The Minutes of 30 July 1993 of the Directors Meeting also include the following at Item 7.2

7.2 TRANSFER OF PROPERTY TO CROWLE FOUNDATION LTD

Mr McDonald requested a copy of the original deed of the property by Mr Crowle and the document that transferred the property to Crowle Foundation Ltd. The Chairman agreed to forward these documents to Mr McDonald.

58 The Minutes of the Board of Directors Meeting of 20 August 1993 includes the following at Item 3:

3. CORPORATE

RESOLVED to withdraw the authority of all Branch Executive Committees as from today.

After considerable discussion, the motion was carried by 11 votes to 8, there being 19 directors voting personally or by proxy. The following directors asked for their opposition to the motion to be recorded: Budden, Gardner, Grabham, Kelly, McDonald, Shorter, Thrift, Woods.

59 The Amended Statement of Claim filed on 23 September 1999 makes allegations of the grounds of the claim against Crowle Foundation in terms which refer to other allegations on which the claim against the late Mr Corbridge was based. The contentious allegations against Crowle Foundation begin at para.14 which alleges, in summary, that Crowle Foundation is affected with knowledge that the transfer of the Crowle Home site was made in breach of duty by Mr Corbridge to Challenge Foundation being breaches of duty as described in paras 10 and 11 of the Amended Statement of Claim. Particulars of the means of knowledge are to the effect that Mr Corbridge was a director and officeholder of Crowle Foundation and of Challenge Foundation at the time of the transfer “… and instigated, led or participated on behalf of both entities in the activities required to carry out the transfers and distributions … including the transfer of the Crowle Home site.” Paragraph 10 so adopted cannot be in point as it related to alleged failure by Mr Corbridge to account for dealings, the alleged failure being later in time than the distribution and transfer. Paragraph 11 alleges to the effect that procuring the transfer was a breach of duties set out in para.3 and owed by Mr Corbridge to Challenge Foundation. Particulars of the breaches are these:

(1) The first defendant did not take reasonable care to ensure that the transfers described in paragraph 6.1 were in accord with the in-use resolution described in paragraph 4, including by ensuring that all the property known as the Crowle Home site transferred to the second defendant was in use by that entity (as the successor to the Ryde Branch) as at 30 June 1993 and, further and in the alternative, that the relevant consent to transfer was not obtained; the plaintiff relies on the matters described in paragraphs 19 and 21 as further particulars in respect of breach of duty.

(2) Alternatively, in disregard of the in use resolution, the first defendant proceeded to effect the transfers described in paragraph 6.1.

or significant possibility of

60 Paragraph 15 of the Amended Statement of Claim alleges that by reason of the matters so alleged Crowle Foundation is liable to account to Challenge Foundation in respect of the Crowle Home site or to hold that property subject to a constructive trust.

61 Paragraph 16 of the Amended Statement of Claim restates the allegations in para.14 in terms of participation in the breaches of duty.

62 Paragraphs 18, 19 and 20 of the Amended Statement of Claim allege that the transfer of property or of the Crowle Home site is void or voidable by reason that the transfer was not empowered or authorised by the resolution of 12 December 1992 “… since the said part was not in use by the second defendant as at 30 June 1993.” The power of the directors of Challenge Foundation to deal with its property did not depend on authorisation by resolution of a general meeting, and the constitution of the company does not provide for the members to impose terms or conditions on exercise of the power. These three paragraphs if true show no grounds for relief. Paragraph 21 and para.22 allege that the transfer is void for want of consent of the trustees under the deed of 30 April 1952. This contention has no substance. Paragraph 23 alleges that Crowle Foundation holds the property on a resulting or constructive trust for Challenge Foundation as a volunteer and as it had knowledge of the matters alleged in paras 19 and 21. There are no grounds for this contention.

63 The Amended Defence to the Amended Statement of Claim contains admissions and passages traversing allegations. It also introduces some fresh matters as grounds of defence. Paragraph 6 alleges that there was no breach of duty by Mr Corbridge to Challenge Foundation by reason of a number of matters acting together or alternatively. One is the provisions of Art.33(f) of Challenge Foundation’s Articles of Association.

64 Article 33 relates to circumstances in which the office of a director shall be vacated, one being that he is directly or indirectly interested in the profits of any contract with Challenge Foundation; paragraph (f) refers to s.129 of the Companies Act 1936 which has no relevant operation but creates some presently irrelevant exceptions to the concept of an interest in a contract. There is no basis for any view that Mr Corbridge had an interest of any kind in the profits (if there could be any profits) of the Deed of 1 July 1993. A proviso to para.(f) creates an exception where a director shall have declared the nature of his interests at the meeting of directors at which the question of entering into the contract is first taken into consideration: see subs.129(2). Mr Corbridge was not in need of that proviso but in any event his association with the Ryde Branch and with the Crowle Foundation must have been well known to all members of the Board and the Management Committee as Mr Corbridge had been the representative of the Ryde Branch since 1988. Because of the manner in which the Board of Directors was constituted and the fact that each represented a branch the interest such as it was of each director in dealings between Challenge Foundation and the director’s Branch was obvious to the Board, so obvious that a particular disclosure would be no more than a formality; and this would be especially obvious in the case of Mr Corbridge who was the Chairman. The knowledge of board members and the obvious nature of that knowledge appear from a passage in the Minutes of the Board Meeting of 13 February 1993 at p16 in these terms:

MR MANSELL: Just one highly technical thing. It might not be a bad idea if we were to simply note in the minutes that all directors acknowledge their conflict of interests in any situation in which as directors they are dealing with transference of assets subject to liabilities from the Foundation to companies incorporated by their branches – just a little safeguard.

65 Article 33(f) after dealing with the proviso goes on to say: “A director shall not vote in respect of any contract in which he is interested or any matter arising thereout and if he does so his vote shall not be counted.” Although this statement is buried in a context of circumstances in which the office of a director is to be vacated, it appears to be a general requirement for the conduct of directors and for counting votes at meetings of directors. Amended Defence para.6 also alleges to the effect that there was no conflict in that the interests of Challenge Foundation and Crowle Foundation coincided. In my opinion Mr Corbridge did not have a direct or indirect interest in the transaction because he did not stand to gain or lose any material advantage if the transaction did or did not go ahead. His position as a member of Crowle Foundation could not realistically bring him any profit or other material advantage. The question whether Mr Corbridge acted in breach of fiduciary duty or other like duty to Challenge Foundation should be determined according to substance and not according to form, and his membership of Crowle Foundation and the offices he held in it should not as a matter of substance be regarded as an interest of any kind in a donation to it as there was no realistic basis on which he could gain any material advantage from the donation. His actual association with the Crowle Foundation and its affairs must have been well known to directors of Challenge Foundation.

66 By para.10 of the Amended Defence Crowle Foundation raises several grounds on which it claims to be exempt from any equitable remedies. These grounds are reliance on s.42 of the Real Property Act 1900 as registered proprietor, entitlement under s.164(3)(f) of the Corporations Law to assume that Mr Corbridge had properly performed his duties to Challenge Foundation, affirmation by Challenge Foundation of the Deed and Transfer by a series of later events and conduct, and acquiescence laches and delay. By para.10 the later conduct and affirmation earlier relied on are again relied on as acquiescence, laches and delay. By para.12 Crowle Foundation raises discretionary grounds for refusal of relief. Reliance on s.42 of the Real Property Act is further spelt out in para.18 of the Amended Defence. There are several more general grounds of defence set out in paras 16, 17 and 19.

67 Some general observations on the resolution of 12 December 1992 should be made. It does not govern or limit exercise by the directors of their powers. Its terms show that the members did not attempt to do so. It is not the source of any power of the directors. It expressed approval of the intention of the Board of Directors to exercise powers and draft a new constitution. The directors’ powers existed irrespective of whether their intention to exercise them had been approved by a general meeting, but it was prudent to obtain an expression of approval of the members before embarking on far-reaching changes, for reasons that were not related to the existence of power to make the changes; obtaining such approval was a prudent step in the internal politics of Challenge Foundation. The intention to exercise powers referred to in para.1 of the resolution could, within both the power and the expression of intention, extend to transferring property to the contemplated separate corporate identities, because that could on any reasonable view be part of a process of establishing them for the purpose of assuming responsibility for the services operated by branches.

68 It would be a misreading of the resolution to suppose that it was only para.2 which deals with approval of intention to transfer property; the transition from para.1 to para.2 is a transition from a general approval to an additional and more particular approval, without any expression or context which excludes or limits any part of the first approval. The resolution of 12 December does not refer to any class of assets which were reserved or in any way earmarked to be retained by the Challenge Foundation so as to be beyond the reach of the directors’ intended action. The intention approved in the second paragraph is approved in terms which show that there were subjects for choice and decision by the directors who, to act in accordance with the intention, would necessarily have to adopt some position with respect to the definition of an asset, the recognition of each asset’s being in use by a branch, determination of a date at which the asset was to be in use, recognition of liabilities as liabilities of a branch and selection of conditions necessary to protect the interests referred to. The directors’ determinations and the facts to which they were to apply were all in the future. The resolution cannot reasonably be understood as an attempt to confine closely areas of decision which directors would necessarily encounter when they addressed any question relating to disposition to newly established corporations of assets of Challenge Foundation.

69 It is clear from para.3 that it was contemplated that Challenge Foundation would be a continuing entity with something to do. The objects of the new constitution the drafting of which was referred to in cl.3 indicate a body with roles ancillary and subsidiary to the provision of services, and the new constitution is in that way related to the scheme of establishing separate corporate identities for the purpose of assuming responsibility for the services referred to expressly in cl.1 and relating to corporations which are the subjects of cl.2.

70 A wide range of things can be recognised as assets, tangible and intangible; interests in land, interests in other property, commercial opportunities; and there are difficulties of definition, illustrated in the case of the Ryde land by the land’s being the subject of four different Certificates of Title or register folios and hence capable of being dealt with separately but also readily susceptible of definition as one asset. Recognition of use by a branch also involves choice in a context which is objectively imprecise, as there are wide ranges of activities and of intensities of activity which could be thought of as use of an asset; use by a branch may be concurrent with or exclusive of use by Challenge Foundation or by some other person, and the concept of a branch as the user of an asset is not a precise concept because Branches were voluntary associations with changing bodies of members, officers, staff and clients; land and other assets were vested in Challenge Foundation and any use of an asset was subject to overriding legal rights and opportunities for intervention by Challenge Foundation. An attempt to treat para.2 of the Resolution of 12 December 1992 as a control and to conform to it could not be successful, because in the attempt to conform the directors would be faced with a succession of choices and leeways to which the terms of the resolution did not provide answers.

71 The statement which accompanied the Notice of Extraordinary General Meeting contained some strong expressions, and said that the meeting was a watershed in the history of the foundation, there were internal stresses, branches had seceded and others were poised to leave, an expression of hope for significant changes at the meeting, and the view that the proposal was the last chance to save Challenge Foundation from total disintegration. The statement by Mr Corbridge of the effect of what members were asked to give support to was not, according to its terms, an attempt to state completely the effect of the proposed resolution or to substitute for the resolution. Its terms show, as would be obvious to the reader, that Mr Corbridge gave the three principal things which the directors would do and stated what the principal things were in terms which did not express fully everything which, according to the terms of the proposed resolution was an intention of the directors which was to be approved of. Mr Corbridge’s para.1 was obviously less than and different to what para.1 in the proposed resolution said was to be an approved intention of the Board. The same is true of Mr Corbridge’s para.2. Mr Corbridge’s para.2 goes beyond being an epitome or summary of para.2 of the proposed resolution, and its reference to negotiating arrangements to ensure a branch is not disadvantaged where a branch is in financial straits is a clear indication that Mr Corbridge talked about the prospect of the directors’ doing things beyond what were referred to in the proposed resolution, reflecting that the proposed resolution was not, according to its own terms, to limit or confine the activity of directors. The second sentence of Mr Corbridge’s para.2 clearly showed that there was a prospect that a branch might receive something other than all the assets the Branch used for its services. There was no attempt to expound the meaning of the proposed resolution, or to expound the meaning of its reference to “all those assets which shall be in use by that branch on 30 June 1993 …” (and those words do not express a concept that assets in use were confined to assets used for the Branch’s services). Mr Corbridge’s para.3 also and obviously goes beyond an attempt to expound para.3 of the proposed resolution and this would clearly appear to the reasonable reader.

72 In my opinion there is no sound reason why the terms of Mr Corbridge’s statement should have any place in the construction of the resolution. On the terms of the resolution there is no limitation of assets to the assets which a branch uses for its services, and there is no ambiguity or difficulty of interpretation of the resolution which would make it appropriate to refer to travaux preparatoires or steps in drafting stages for assistance in its interpretation. If such reference were appropriate, a statement by the Chairman circulated to members and powerfully urging support would in my opinion not have a place as part of the preparatory material, or of the drafting process, or as an address to purposes to be achieved which could throw light on the meaning of the final document.

73 Another document which has at least as much claim for consideration is a report in writing made by Mr Corbridge and received and endorsed by the Board at its meeting on 6 November 1992 on the restructuring of Challenge which, as well as making a recommendation in which “… the assets and liabilities in use by Branches … will be transferred to them” Mr Corbridge recommended: “Challenge Foundation will retain all the accumulated investments of Corporate Administration, the income from which will be used to fund ongoing operations.” At a later point under “Outline of implementation“ this report says “All branches will complete their accounts at 30 June, and formal transfer of net assets will take place upon their finalisation.” As not unusually happens, resort to preparatory instruments can be seen as serving to do no more than to enhance obscurities, but it is notable that this document refers only to accumulated investments of corporate administration in references to what Challenge Foundation is to retain, while net assets are to go to branches.

74 On behalf of the plaintiff it was submitted as follows:

3.1 The only reasonable interpretation of ‘in use’ was that expressed as the intention of the directors in Mr Corbridge’s explanatory statement accompanying the notice of EGM. In the context of delivery of services to clients at a particular point in time (30 June 1993), the only reasonable meaning when tangible assets were referred to was physical use of that asset for service delivery at the relevant point in time. Excluded from falling within that parameter was retention for possible future use, non-physical use (income derivation which was not necessarily tied to service delivery) and general preservation of amenity.

75 I do not accept this submission. There is no ground for regarding use for the Branch services as the only reasonable interpretation of “in use”. The terms of the proposed resolution do not set a context of delivery of services to clients at a particular point in time, or refer to tangible assets or physical use for service delivery, or indicate the exclusion to which the submission referred. The proposed resolution plainly and according to its own terms did no more than approve an intention expressed in general terms, and looked to future decisions and conduct of the directors in exercise of their powers, without any attempt at limiting the choices and decisions involved in pursuing an intention referred to in broad and general terms in the proposed resolution.

76 I was referred to a number of authorities in which concepts of use of land and similar expressions have been employed in rating statutes. In my view these are inherently incapable of assisting in the interpretation of the resolution, which in nature, subject, context and purposes is far removed from legislation. The most assistance that can be gained from the rating cases, in my opinion, is found in this sentence from the judgment of Taylor J in Council of the City of Newcastle v. Royal Newcastle Hospital (1956) 96 CLR 493 at 515: “The word ‘used’ is, of course, a word of wide import, and its meaning in any particular case will depend to a great extent upon the context in which it is employed.” This was in substance repeated by Gibbs ACJ in Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633 at 637.

77 Much of the plaintiff’s advocacy seemed to be directed to establish, or to proceed on the assumption that departure by the Board or Management Committee from implementation according to its terms of the resolution of 12 December 1992 is a demonstration that there was a departure from the exercise, in good faith and for the purposes for which they were conferred, of powers conferred on the board of directors by the constitution of Challenge Foundation, or of powers delegated to its Management Committee. In development of this, actual or imputed knowledge of such departures held by directors of Crowle Foundation was put forward as showing that Crowle Foundation participated in application of Challenge Foundation’s property in breach of fiduciary duty or other duty of directors of Challenge Foundation, or received property with knowledge that there had been such breaches. The difficulties of these propositions included the absence of any indication of any kind that directors of Challenge Foundation acted for dishonest or corrupt purposes in any way; there was no suggestion of any such matter throughout the whole lengthy hearing, nor was there any suggestion of intended abuse of power or conscious wrongful diversion of property. The difficulties also include the difficulties of perceiving that there had been some breach of fiduciary duty in a factual context in which the resolution of 12 December 1992 did not according to the constitution of the company bind the directors or confine the powers conferred on them, and did not do so according to the terms of the resolution itself. They also included the difficulty that the resolution approved an intention which was referred to in terms which contemplated significant leeways of choice in the implementation of the intention, in identification of each asset, in recognition of whether it was in use by the Branch, and in the overriding question whether it was appropriate to donate and transfer it to the Branch; all this where the directors’ powers did not derive from the resolution. In the absence of any suggestion of dishonest or corrupt exercise of power, the difficulties of proving or attributing knowledge of abuse of power are very great; there are really no circumstances which could indicate objectively that there had been or that there must have been an exercise of power other than in good faith or other than for the purposes which the power was conferred, in the plenitude of the range of choices and decisions open.

78 Much attention and time were given to proving the history of ownership, development and occupation of the various properties at Ryde and their association with Challenge Foundation or with the Ryde Branch, an exercise in classification which assumes dichotomy between the Foundation and the Branch which, while the Branch existed, did not have a clear basis. As there was extensive reliance on the history of acquisition and use of landholdings I will deal with it. I attribute limited importance to it, as the directors in deciding what property to donate and transfer to Crowle Foundation or Hornsby Foundation were not prisoners of the earlier history of the organisations and were not bound or limited and did not need to be affected at all by concepts of merits or claims to pieces of property or other advantages arising out of past decisions and dealings. Directors could take such things into account if they thought right, but only as they thought right.

79 The process referred to in cl.2 of the resolution of 12 December 1992 involves donating and transferring assets which shall be in use by branches to new corporations, the donations and transfers being subject to the existing liabilities of the Branches, and to conditions to protect the interests of clients of branches, and to conditions to protect the interests of Challenge Foundation. The whole exercise is plainly and on its face not an exercise in recognising and giving effect to existing legal rights or to defined claims or entitlements; the whole subject is one of donation. The resolution does not contain any expression showing contemplation that assets may be apportioned or subdivided. The width of the range of matters open for decision is inherent in the exercise and recognised by the terms used, involving association of a separate corporation with a branch, definition of assets, association of assets by their being in use by a branch, on a future date which is open to determination, with an attribution of liabilities to branches although on a legal analysis they are liabilities of Challenge Foundation, and with conditions the determination of which involves a wide range of choices, as to what is necessary, as to what interests of clients are to be protected, as to what interests of Challenge Foundation are to be protected, and how the protection is to operate. If there had been any indication in the language used of an attempt to control and define what the directors were to do, the terms of cl.2 would make it almost impossible to recognise whether the controls had been complied with or exceeded; not entirely impossible as the entirely extraneous could perhaps be recognised, but almost impossible.

80 A decision to donate or transfer property to a newly incorporated successor to a Branch under Memorandum cl.3(p) is not a decision to recognise or carry out or give effect to some pre-existing right or claim of the Branch to that piece of property. The Ryde Branch had no right or claim to become the owner of any land or other property at Ryde, Crowle Foundation had no such right either, and although the directors could reasonably form and have regard to some concept of expectations, merits or claims arising out of past dealings in the land or past and present use of the land they had no obligation to do so. They could give matters of history and use whatever weight they thought appropriate, and the validity of a decision under cl.3(p) is not to be tested by an endeavour by the Court to appraise the quality of their consideration or to address what force ought to be attributed to particular elements. Leaving aside irrational extremes, and dishonest or corrupt purported exercises, decisions of directors in exercise of their powers are not subject to limits imposed by the Court

81 Except for Lindsay Cottage, the playing fields leased to the German School and Lacy House and its undefined associated land there is no basis for any debate or question against the view that the land at Ryde was in use by the Ryde Branch for client service delivery within the plaintiff’s claim at its highest reach. The plaintiff’s claim seems to require that the land in Folios 12 and 13/51349 should have been classified as a different asset to the remaining land at Ryde, that the land in Lots 11 and 12 should not have been classified as in use by the Ryde Branch and that these propositions are so clearly right that adopting another view would constitute a failure to exercise the powers of directors of Challenge Foundation in good faith for the purposes for which they were conferred and would show the directors of Crowle Foundation that there had been such a failure. If conformity with the resolution of 12 December 1992 were a test of validity, treating the land leased to the German School as in use by the Ryde Branch was well within the range of reasonably available applications of the resolution; the premises and land leased to the German School were the subject of an unrevoked licence to the Ryde Branch, the Ryde Branch had agreed to the lease and received the rent, and while a decision on the application of the resolution could go either way, there is nothing unreasonable or strained or forced at all about treating the land leased to the German School as part of assets in use by the Ryde Branch.

82 With respect to Lacy House the question of classifying the asset under consideration is less simple. The view is reasonably open that the whole of the Ryde land is one asset and that it was in use by the Branch, and that view would no less be open because some part of the asset was not in use by the Branch. Much the same view is open for the land in Folios 12 and 13; if they were classified together as one asset, and the view is formed that the part occupied by the German School and playing grounds was in use by the Ryde Branch, the fact that part of the same asset being Lacy House was not in use by the Ryde Branch would not make it unreasonable to treat the asset as in use by the Branch. If some classification of assets were adopted in which Lacy House is an asset on its own that reasoning would not be available; but characterising Lacy House as an asset on its own is quite difficult in the absence in 1993 of any lot of land in subdivision on which it stood separately from the rest of the land.

143 The agenda for the board meeting of 30 July 1993 does not establish anything about conditions of the transfer with which the Deed of 30 July 1993 deals.

144 Notice of a general meeting of members of Challenge Foundation was given by notice dated 3 August 1993 (Ex A1, p195) to be held on 28 August 1993 to consider special resolutions (A) that the name of Challenge Foundation of New South Wales be changed to CFNSW Ltd; (B) that the company be wound up voluntarily; and ordinary resolutions dealing with the winding-up including “[t]hat the liquidator be requested to dispose of surplus assets of CFNSW Limited by transfer to Challenge Foundation Support Service Incorporated.”

145 The Proposed General Meeting for 28 August 1993 did not take place. The events are sufficiently recorded in the Minutes of the Meeting of the Management Committee of that date. Item 1 is:

1 MEMBERS’ MEETING

It was agreed that the apparent loss of a large number of proxy forms had made it impossible to have allowed the meeting to proceed to business. The Chairman undertook to ascertain what had happened to the missing documents which he had personally seen delivered to the Company’s office and knew that the representative of the auditors who was present at the time was aware of the delivery.

It was decided that legal advice should be sought to determine whether the aborted meeting could validly be held at a future date.

It was also agreed that it was imperative that the membership records be brought up to date as there appeared to be a number of discrepancies in the recording of subscriptions for the current year.

A discussion took place concerning the complications created by the failure to approve the resolutions to wind-up, in particular, the position regarding the annual accounts.

146 In the Minutes of the Meeting of the Management Committee of Challenge Foundation of 10 September 1993 Item 1.1 is as follows:

Current Situation

The Chairman reported that the missing proxies that had been the cause of the cancellation of the Members meeting on 28 August had been found in the offices of the Auditors. He also stated that the total proxy votes that would have been cast in favour of the Special Resolutions for voluntary winding-up amounted to 65% of the proxies received.

The Chairman also reported that he had received advice that it was not legally possible to continue the aborted Members Meeting. In any case this would seem unnecessary in view of the result of the proxy count. However, as it would now be necessary to produce accounts for the year to 28 February it would seem appropriate that an Annual General Meeting should be held as soon as the accounts had been audited and proposals for the future of the Foundation and a new Constitution be included in the agenda.

147 Under Item 2.2 the Minutes record:

2.2 Action needed following the rejection of the liquidation proposals

148 The document tabled is headed “Proposed Distribution of Surplus Funds” (Ex A1, pp211 to 214). It set out a scheme for distribution of surplus funds on the basis adopted for the Corporate Levy so as to reflect financial contributions actually made by former branches, with a ceiling of $100,000 for large branches which had benefited from a ceiling on the levy. Windgap Foundation and the Eastern Suburbs branch are not mentioned in the document, which contains a summary showing amounts of proposed distributions to 53 branches. The document assumes that there will be about $2,200,000 in liquid assets after paying all creditors; that is to say the document speaks as if the Deed of 30 July 1993 and its distribution of all assets in excess of $100,000 had not taken place.

149 Mr Corbridge the Chairman made a report dated 6 October 1993 entitled “Report on the present situation of the company” – ExA1, pp226-229. This report reviewed the circumstances in which the Extraordinary General Meeting had not been held, and various consequence of the proposed resolutions’ not having been passed. After dealing with several other matters the report said at p3, ExA1, p228.

Articles of Association

The present Articles of Association are now in desperate need of change. Unless revised to recognise the new situation the company will become virtually inoperable at the end of the year.

Present status of the Foundation
The intention to operate with a new company with the same name as the old was designed to crystallise all the liabilities, real and contingent, that exist in the old company. At the same time the new company was to operate under a constitution that reflected the new structure.

However, the unfortunate atmosphere of suspicion and animosity that has arisen since last December has led to a situation where the prospects for a successful continuation of the Foundation in any worthwhile form are very doubtful. Most of the new companies appear to be very reluctant to participate in what they now see as a very tainted organisation.

Funds transferred to Challenge Foundation Support Services Inc
The funds that were transferred to Challenge Foundation Support Services Inc remain intact and the directors of that company have undertaken to hold them, subject to the payment of present operating costs, until a way out of the present impasse has been found. It was never intended that those funds would be used other than for the continuation of the work of Challenge.

Future Operations

150 The Report went on under “Action required” to contemplate business at an annual general meeting including adoption of new articles.

151 At the directors’ meeting of Challenge Foundation of 15 October 1993 this Report was tabled and discussed. The Minutes record discussion under Item 5 “Future of the Foundation Proposals for the donation of assets to former branches” including:

The Chairman then asked the meeting if it was in favour of distributing the cash assets among the former branches according to some agreed formula. There was unanimous approval.

152 There is then recorded discussion about reaching agreement on a distribution formula and the Minute notes (at p219) the following:

The following time-table was agreed:

153 In the papers of Challenge Foundation and in evidence are several further forms of the Summary of Proposed Distribution of Surplus Funds which is part of the documents tabled on 10 September 1993. One of these which existed on 12 September 1993 included Eastern Suburbs Branch and showed a proposed distribution of $99,697.00, while another which existed on 5 November 1993 showed proposed distribution to Eastern Suburbs Branch of $100,000.

154 The treatment in these minutes of property in the hands of CFSS Inc. is not clear. Overall Mr Corbridge’s Report of 6 October 1993 and discussion in the minutes appears to proceed on the basis that it is for the directors or Management Committee of Challenge Foundation to decide what distribution should be made for funds amounting to about $2,200,000. There is no statement however of the basis on which the distribution of those funds was a matter to be decided by the directors of Challenge Foundation. References to those funds in Mr Corbridge’s Report of 6 October 1983 do not clearly proceed on the basis that CFSS Inc. was obliged to dispose of funds as directed by Challenge Foundation, nor on the contrary basis, and do not express any reasons why the transfer to CFSS was not fully effective, or any reasons why CFSS was obliged to conform or could be expected to conform with decisions of Challenge Foundation. The general lack of clarity was probably related to the fact that the members of the Management Committee of Challenge Foundation and the directors of CFSS were the same group of individuals.

155 The minutes of the meeting of the Management Committee of Challenge Foundation of 5 November 1993 record under the heading “Further Distribution of Asset” as follows:

Further Distribution of Assets

A paper prepared by the Chairman was tabled and discussed.

It was agreed that there was about $2,300,000 surplus to requirements for continuation on a caretaker basis whilst there remained any possibility of services wishing to re-establish an association and that the surplus would be best employed if donated to former Branches for direct use in their client sercices.

156 The paper prepared by the Chairman has not been clearly identified in evidence but it is probably the document “Summary of Events leading to the Distribution of Surplus Funds held by Challenge Foundation Support Services Incorporated” at Ex A1, pp231-233. The detailed proposal for distribution on the basis of corporate levies mentioned in this minute has not been clearly identified but it is probably the document at Ex A1, pp224 and 225 which, among many other branches shows a proposed distribution to Eastern Suburbs branch of $100,000.

157 Minutes of the Meeting of the Committee of CFSS Inc. held on 5 November 1993 show that the meeting was attended by the same six persons as attended the meeting of the Management Committee of Challenge Foundation on the same day. The Minutes include the follows:

The chairman tabled details of the current liquid position of the company and also that of Challenge Foundation of NSW Limited. It was noted that the latter company showed an estimated deficiency of liquid resources amounting to approximately $14,000. Under then terms of the agreement for the transfer of funds from Challenge Foundation of NSW to CFSS Inc the latter company had undertaken to discharge any such deficiency.

After recognising the obligation to meet that deficiency and allowing for all known liabilities, including those held in trust for old dormant Branches, it was noted that the company had a surplus amounting to about $2,510,000. As it now appeared that former branches of Challenge Foundation were not prepared to support the company in the way that had been expected when it was formed, it was agreed that surplus funds amounting to $2,350,000 could best be applied for the benefit of clients by their distribution as soon as possible to the new companies that had taken over previous Branch services and had entered into an acceptable form of agreement with Challenge Foundation. It was noted that the Board of Challenge Foundation had approved in principle that surplus funds should be distributed.

158 The Minute stated some matters which were noted as essential details of the formula, referred to the preparation of the letter to accompany distributions and concluded “It was anticipated that the distribution cheques could be mailed before 12 November.” The details of the formula for distribution of surplus tabled have not been clearly identified but it is probably the same document dated 5 November 1993.

159 It was not contended that the Deed of 30 July 1993 was beyond the powers of Challenge Foundation or of its directors and in my view could not be so contended. I hold that the the transfer of property to CFSS Inc. was within the powers of Challenge Foundation in accordance with objects in cll.3(g) and 3(p) of the Memorandum of Association. Apart from this transaction there was no other source from which CFSS Inc. derived property of any significant value and it appears to have had no significant activities apart from holding and investing and disposing of that property.

160 At ExA1, p230 is a copy of a letter from Mr Corbridge on the letterhead of CFSS Inc. to the Chairperson of Challenge Tamworth forwarding cheques for the Tamworth, Gunnedah, Muswellbrook branches. The letter was written and the cheques were forwarded by CFSS. Enclosed with the letter was a copy of the paper “Summary of events leading to the distribution of surplus funds held by Challenge Foundation Support Services Incorporated” (Ex A1, pp231-233).

161 At or about this time a cheque for $100,000 was sent to Windgap Foundation by CFSS Inc. It was probably enclosed with a letter like the letter to Challenge Tamworth. Accounting records of CFSS Inc. show a payment to Windgap Foundation on 9 November 1993 of $100,000 as “Distribution of surplus”: see Ex A3, p91. Windgap Foundation banked the cheque on 10 November 1993 and applied the funds in carrying out its activities during the then current financial year. The payment to Windgap Foundation was not made on the application of or on solicitation by Windgap Foundation, and was not anticipated by the officers of Windgap Foundation.

162 The minutes of the Meeting of the Board of Directors of Challenge Foundation of 12 November 1993 include:

2. MATTER ARISING

Mrs. Grabham queried the distribution of funds from Challenge Foundation Support Services Inc prior to the resolution of this meeting. The Chairman ruled that this matter would be addressed as an agenda item.

3. PROPOSALS FOR THE DISTRIBUTION OF SURPLUS ASSETS

The Chairman explained that the reason for the distribution of funds prior to this meeting was that no alternative proposals had been received by the Management Committee at their last meeting, and it was thought that further delay would serve no good purpose. The reasons for withholding funds from Inverell, Moruya and Picton branches were explained. Monies held in trust for Picton ($90,000.00), Port Stephens ($111,000.00) and Singleton ($90,000.00) branches remain intact. The Chairman then discussed the remaining assets of the Foundation as at 5.11.93 and explained that the deficit will be borne by Challenge Foundation Support Services Inc.

163 Soon after this there seem to have been very decided shifts of opinion in the Board. The auditors reported to the Australian Securities Commission on the failure of the company to hold its Annual General Meeting within the time allowed, Mr Corbridge wrote to the Chairman of the Australian Securities Commission on 26 November 1993 giving an account of the company’s affairs, minutes of a meeting of the Board and of the Management Committee of 10 December 1993 show a state of conflict, and advice of solicitors was obtained on whether an application could be made to the Supreme Court for winding-up. Mr Corbridge made a report dated 16 December 1993 for the purpose of instructing solicitors to advise in terms which appear to assume the effectiveness of the transfer to CFSS – see Ex A3, p75. Mr McDonald as a Director made a requisition on 10 January 1994 requiring a meeting of directors to be held on 22 January 1994. Mr Corbridge did not attend the meeting and resigned at about the that time.

164 Notes to the accounts of Challenge Foundation for the year ended 30 June 1994 include a statement at Note (b) about the transfer of assets to CFSS Inc. and the distribution that the majority of the assets and also states

In March 1994, Challenge Foundation Support Services Inc returned assets to the value of $48892 to the company. The remaining net assets of Challenge Foundation Support Services Inc, amounting to $147498 are to be returned to the company after the liquidation of Challenge Foundation Support Services Inc is completed.

165 Although the Amended Statement of Claim appears to rely on alleged breaches of fiduciary duty by Mr Corbridge and on receipt by CFSS Inc. with knowledge of the breaches of duty, the case relied on in counsel’s submissions is the case set out in para.11 of the Amended Statement of Claim in these terms:

166 The plaintiff is not in a position to claim a constructive trust of the fund of money paid to Windgap Foundation as the fund does not exist separately and is not traceable. Its claim is to be entitled to repayment of the amount of money so paid (and also interest) as a remedy for breach of the statutory contract.

167 If the Deed of 30 July 1993 and the transfers of property in accordance with it had the effect that CFSS Inc. was the legal and equitable owner of the property transferred the claim in para.11 of Amended Statement of Claim is not made out. If CFSS Inc. held the property on trust for or in some other way on behalf of Challenge Foundation the payment to Windgap Foundation would be in breach of cl.4 and of the statutory contract between a member and a company and Challenge Foundation would be entitled to recover the amount paid. Contractual effect as between the company and each member was given to provisions of the Memorandum by subs.180(1) of the Corporations Law.

168 On behalf of Challenge Foundation it was submitted that the Deed of 30 July 1993 was expressed to be in anticipation of the winding-up of Challenge Foundation and was conditional on that occurrence. The references to winding-up in the Deed are these. In Recital C there is a statement of the effect of cl.9 of the Memorandum of Association relating to disposition of property on winding-up. Recital H refers to a similar requirement for distribution of assets of CFSS Inc. on a winding-up under s.63 of the Associations Incorporation Act 1984. Recital I (set out higher) is to the effect that Challenge Foundation has determined that CFSS Inc. meets criteria for distribution of property after satisfaction of all debts and liabilities of Challenge Foundation. By cl.6(2) CFSS Inc. recognises that it must meet any liabilities of Challenge found to exist on or after the winding-up of Challenge in excess of the assets of Challenge remaining after the transfer of assets. Clause 8 contained provisions to operate in the event of the winding-up of CFSS.

169 In my opinion the Deed is not on its terms expressed to be in anticipation of the winding-up of Challenge Foundation, notwithstanding that it contains some provisions which would operate in the event of the winding-up of Challenge Foundation. There is no indication in the terms of the Deed that it is not to operate if Challenge Foundation is not wound-up. It is not a correct view of the meaning and effect of the Deed that the transfer of property is conditional on the winding-up of Challenge Foundation. There is no expression of any such idea. The Deed does in cl.2 express a qualification of the assignment, that is that the assignment was subject only to any claim of the Commonwealth or State government, and this tends to indicate that it was not otherwise conditional.

170 It was further submitted by counsel for Challenge Foundation that failure of the purpose of the transfer gave rise to an express or resulting trust in favour of Challenge Foundation, or a personal obligation of CFSS Inc. to repay the funds. There was said to be a Quistclose Trust. The nature of a Quistclose Trust appears from the following passage in the judgment of Gibbs ACJ in Australasian Conference Association Limited v. Mainline Construction Pty Ltd (in Liq) (1978) 141 CLR 335 at 353.

Barclays Bank Ltd v. Quistclose Investments Ltd

171 In my opinion there is no expression in the Deed of 30 July 1993 of any purpose related to prospective winding-up of Challenge Foundation, and it cannot be said that the transfer was by the Deed made subject to fulfilment of any such purpose, or of any limited purpose. Certainly there is no express trust, and there are no expressions of a purpose for the transfer from which a trust in the nature of a Quistclose Trust can be implied for repayment of the proceeds if the purposes are not carried out. There is no expression of any purpose which Challenge Foundation looks to CFSS to achieve with the funds, and the structure of the obligations in which indemnities are given by CFSS against various obligations of Challenge Foundation is inconsistent with Challenge Foundation having an entitlement to direct the application of the funds, or to call for their repayment, or to require them to be expended in a particular way.

172 It was further submitted by plaintiff’s counsel that the Committee of CFSS was congruent with the plaintiff’s Management Committee, meaning that the same persons comprised both, and that the plaintiff’s Board approved the distribution in principle and ratified the subsequent distribution. Incidental to this submission it was observed that Challenge Foundation’s Board did not know how Windgap Foundation came to be included in the summary.

173 In my opinion the legal ownership and beneficial ownership of the assets transferred under the Deed of 30 July 1993 and actually paid over to CFSS Inc. at or about that time are to be established by the terms of the Deed itself together with any evidence which establishes an intention substantially contemporaneous with the transaction that the beneficial interest was not to be transmitted in the manner which the terms of the Deed would show that it was. Assumptions held and acted on by directors or the Management Committee of Challenge Foundation in September, October and November cannot establish what intention existed on 30 July 1993 as to the beneficial interests to be created by the Deed. If the Board minutes, Management Committee minutes and the papers tabled at meetings of Challenge Foundation are regarded they are altogether ambiguous as to whether they show an assumption or belief of the directors and Management Committee that funds held by CFSS were at the disposition of or in some sense belonged to Challenge Foundation. While their taking the funds under consideration and making decisions about them is consistent with the view that the directors of Challenge Foundation believed that they could decide how the funds held by CFSS Inc were to be disposed of, the minutes and other documents are at least equally consistent with the view that CFSS Inc. could be relied on to act in ways which directors of Challenge Foundation thought right. This would be an altogether natural assumption to make as the membership of the Committee of CFSS Inc. and of the Management Committee of Challenge Foundation was identical. The documents do not contain any assertion of the basis on which Challenge Foundation had an entitlement to dispose of the funds held by CFSS Inc. and there are no expressions which give CFSS Inc. directions as if CFSS Inc. would be bound to comply; there are for example no statements, either in the various documents prepared and tabled by Mr Corbridge from time to time or anywhere else, that the Deed of 30 July 1993 was qualified by any other arrangement or was not a complete expression of the transaction and the rights between the parties.

174 It should not in my view be found that there were some collateral arrangement or qualifying circumstances which meant that the Deed had a different effect to what it has on its face, as there is no substantial proof of any such arrangement or events. No witness or document contemporaneous with the Deed speaks of any such arrangement or events and no later record asserts that there was any. Assumptions, not clearly expressed and perhaps not well considered, made by directors of Challenge Foundation some months after July 1993 (if indeed they did make such assumptions) would not justify finding, on the basis of probability, that there had been such a qualifying arrangement; the finding would be based on no more than speculation and the nature of the arrangement could not be known.

175 In any event the Minutes of the Committee of CFSS Inc. of 5 November 1993 speak in terms appropriate to a fully empowered decision to dispose of funds of CFSS Inc. itself. The passages in the Minute which are set out above include the statement that Challenge Foundation had a deficiency of liquid resources, which could not be true if Challenge Foundation had an entitlement to the funds in the hands of CFSS Inc. The Minute went no further than noting that the Board of Challenge Foundation had approved in principle that surplus funds should be distributed; the particular plan of distribution which was adopted had not been approved by the Board of Challenge Foundation and it was plain, on the terms of their own decision, that the Committee of CFSS Inc. was adopting a plan of distribution on its own authority.

176 By proceeding in this way on 5 November 1993 the Board of CFSS Inc. showed a considerable sense of independence in that on 15 October 1993 the Board of Directors of Challenge Foundation had adopted a timetable for considering the distribution of cash assets which was to lead to the scheme being put to an Annual General Meeting to be held in December. The Management Committee of Challenge Foundation and the committee of CFSS Inc. at their meetings of 5 November 1993 disregarded this scheme and the Board of Challenge Foundation on 12 November 1993 endorsed this action, and in that way affirmed or ratified payment. If the authority of Challenge Foundation for making the payments had been necessary, the payments were ratified.

177 There is no indication in the evidence that the payment to Windgap was preconcerted as of 30 July 1993 and that notwithstanding its terms the Deed of 30 July 1993 was a step in carrying out some preconcerted arrangements. The plaintiff did not make a contention to this effect.

178 In the circumstances it was in my view not correct to submit, as the plaintiff’s counsel submitted that there was no more than a nominal role for CFSS Inc. in the distribution to Windgap, or that CFSS did not take the role of making an independent decision to pay, or that CFSS merely gave a recognition that it was present custodian of the funds.

179 Accordingly I am of the view that in no sense was the sum of $100,000 paid by cheque to Windgap Foundation on 9 November 1993 an application of property of Challenge Foundation, or a payment or transfer direct or indirect of any property of Challenge Foundation to a member. Notwithstanding the provisions of cl.4 of the Memorandum of Association, Windgap Foundation has incurred no obligations to Challenge Foundation in respect of the payments.

180 It was contended by Counsel for Windgap Foundation that subss.162(2) and 162(7) of the Corporations Law as in force in 1993 limit the proceedings in which an exercise of power contrary to a restriction in a company’s constitution may be challenged to the classes of proceedings mentioned in subs.(7). As s.162 was repealed with effect on 1 July 1998 it would be for consideration whether its provisions can now be relied on or whether they lack continuing effect because they were procedural or for some other reason. This matter does not require adjudication. (For the repeal of s.162 see Company Law Review Act (1998) (Commonwealth) s.3, sched.(1), s.1 and Corporations (New South Wales ) Act 1998 (NSW) s.7(a)).

181 Windgap Foundation raised a number of other matters of defence which do not require adjudication.

182 My orders are these:

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Last Modified: 05/15/2002

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Citations

2379/97 - Challenge Foundation of New South Wales Ltd v Windgap Foundation Ltd; 2416/97 - Challenge Foundation of New South Wales Ltd v Crowle Foundation Ltd [2002] NSWSC 313

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CITATION:	2379/97 - CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. WINDGAP FOUNDATION LTD; 2416/97 - CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. CROWLE FOUNDATION LTD; 2417/97 - CHALLENGE FOUNDATION OF NEW SOUTH WALES LTD v. HORNSBY CHALLENGE FOUNDATION LTD [2002] NSWSC 313
CURRENT JURISDICTION:	EQUITY
FILE NUMBER(S):	SC 2379/97, 2416/97, 2417/97
HEARING DATE(S):	20/06/01-22/06/01, 25/06/01-29/06/01 & 05/11/01, 06/11/01
JUDGMENT DATE:	9 May 2002
PARTIES :	Challenge Foundation of New South Wales Limited - Plaintiff The Windgap Foundation Limited - 2nd Defendant in 2379 of 1997 The Crowle Foundation Limited - 2nd Defendant in 2416 of 1997 The Hornsby Foundation Limited - 2nd Defendant in 2417 of 1997
JUDGMENT OF:	Bryson J at 1

COUNSEL :	A. Murr SC & G.K. Burton - Plaintiff G.K. Downes QC & G. Blake - 2nd Defendants in 2416 and 2417 of 1997 G. Blake - 2nd Defendant in 2379 of 1997
SOLICITORS:	Holman Webb - Plaintiff Toomey Pegg Drevikovsky - 2nd Defendants in 2416 of 1997, 2417 of 1997 and 2379 of 1997
CATCHWORDS:	CORPORATIONS - Directors - exercise of powers in good faith - alleged breach of Directors' duties - Plaintiff was company with charitable objects - directors distributed property to incorporated successors of branches - powers in memorandum included power to do so - after change in control, plaintiff sought to recover property on basis of knowledge of recipients that exercises of directors' powers were not in good faith for purposes of the company - alleged divergence between course taken by directors and course approved by members at Extraordinary General Meeting - on the facts, the directors did not abuse their powers - distribution of money to Windgap was challenged as in breach of clause in memorandum prohibiting distribution of profits - on examination of the mechanism adopted, found that there was no distribution of property of the plaintiff.
LEGISLATION CITED:	Companies Act 1936 Real Property Act 1900 Associations Incorporation Act 1984 Company Law Review Act (1998) (Commonwealth) Corporations (New South Wales ) Act 1998 (NSW)
CASES CITED:	Northside Developments Pty Ltd v. Registrar General (1990) 170 CLR 146 Rolled Steel Products (Holdings) Ltd v. British Steel Corporation and Others [1986] Ch 246 Equiticorp Finance Ltd (in Liq) v. Bank of New Zealand (1993) 32 NSWLR 50 Linton v. Telnet Pty Ltd (1999) 30 ACSR 465 Council of the City of Newcastle v. Royal Newcastle Hospital (1956) 96 CLR 493 Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633 Australasian Conference Association Limited v. Mainline Constructions Pty Ltd (in Liq) (1978) 141 CLR 335
DECISION:	2379/97 - give judgment for the second defendant with costs.; 2416/97 - give judgment for the second defendant with costs.; 2417/97 - give judgment for the second defendant with costs.