In the matter of Young Fruitgrowers Cool Stores Rural Co-Operative Society Ltd

[2021] NSWSC 886

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Young Fruitgrowers Cool Stores Rural Co-Operative Society Ltd [2021] NSWSC 886

Hearing dates:

23 June 2021

Date of orders:

23 June 2021

Decision date:

23 June 2021

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Special leave granted to liquidator to distribute surplus in respect of the liquidation of the co-operative.

Catchwords:

CORPORATIONS — Winding up of co-operative — Application for special leave under Corporations Act 2001 (Cth) s 488(2) to distribute surplus in the liquidation of the co-operative — Interpretation of co-operative’s rule as to distribution upon winding up.

Legislation Cited:

- Co-operatives Act 1992 (NSW)

- Co-operatives (Adoption of National Law) Act 2012 (NSW)

- Corporations Act 2001 (Cth), s 488(2)

- Corporations (Ancillary Provisions) Act 2001 (NSW)

Cases Cited:

- Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; (1973) 47 ALJR 526; [1973] HCA 36

- CGU Workers Compensation (NSW) Ltd v Ascom Service Automation Australia) Pty Ltd [2005] NSWSC 747

- Donaldson v Natural Springs Australia Limited [2015] FCA 498

- Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640; (2014) 306 ALR 25; (2014) 88 ALJR 447; [2014] HCA 7

- Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; (2015) 325 ALR 188; [2015] HCA 37

- Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71

- Re HIH Services Pty Ltd (in liq) [2012] NSWSC 1188

- Re Hawden Property Group Pty Ltd (In Liq) (2018) 125 ACSR 355; [2018] NSWSC 481

- Toll (FGCT) Pty Ltd v Alphapharm Pty Limited (2004) 219 CLR 165; [2004] HCA 52

Category:

Principal judgment

Parties:

Young Fruitgrowers Cool Stores Rural Co-Operative Society Ltd (in liq) (First Plaintiff)
Steven Priest in his capacity as Liquidator of the Young Fruitgrowers Cool Stores Rural Co-Operative Society Ltd (in liq) (Second Plaintiff)

Representation:

Counsel:
B Douglas-Baker (Plaintiffs)

Solicitors:
Gordon Garling Moffitt Lawyers (Plaintiffs)

File Number(s):

2021/89863

Judgment – ex tempore (Revised 24 June 2021)

Background and affidavit evidence

1. By Originating Process filed on 31 March 2021, Mr Steven Priest, as liquidator of the Young Fruitgrowers Cool Stores Rural Co-Operative Society Limited ("Co-Operative") applies for an order under s 488(2) of the Corporations Act 2001 (Cth), as applied by the Co-Operatives National Law (NSW) ("National Law"), that he be granted special leave to distribute a surplus in respect of the liquidation of the Co-Operative.

2. The application was supported by an affidavit of Mr Trudgett, who has been a member of the Co-Operative since 1974 and was a director of the Co-Operative from about 1987 or 1988 to 2020. Mr Trudgett refers to the history of the Co-Operative, to developments in the fruit growing industry which marginalised its role, and to an amendment to the Co-Operative's Rules which introduced r 102 dealing with the winding up of the Co-Operative and the distribution of any surplus of the Co-Operative on a winding up. This application raises an issue as to the interpretation of that rule to which I will return below.

3. Mr Trudgett also addresses the circumstances in which the assets of the Co-Operative were disposed of. However, there was a delay of several years in the sale of a property of the Co-operative, because a valuation of that property had suggested that it was worth a significantly more than the offers initially received for it, and it took some time for the Co-Operative to reach the view that the market price that could be obtained for that property was less than that valuation and to sell it at its market price. Mr Trudgett also refers to communications with the Registrar for Co-operatives, who has taken steps which have assisted the implementation of a winding up of the Co-Operative, where the delay had the result that there were no "active members" of the Co-Operative who could vote for its winding up. Mr Trudgett's further affidavit dated 18 June 2021 provides additional detail, and corrects typographical errors, in respect of his earlier affidavit.

4. By his first affidavit dated 24 March 2021, the liquidator, Mr Priest, refers to the circumstances in which he became involved with the winding up of the Co-Operative, to the assets of the Co-Operative and the steps which had been taken to realise those assets. He gives a comprehensive account of the manner in which the surplus has originated in the winding up and the proposed distribution of that surplus between to members who were conducting business with the Co-Operative in the five years prior to its ceasing business in late 2011, if r 102 of the Co-Operative's Rules permits a distribution on that basis. By his second affidavit dated 15 June 2021, Mr Priest updates events since his first affidavit, and also provides a further explanation of his evidence as to the manner in which a distribution would be made, explaining the distinction between "dry" or inactive members and "wet" or active members of the Co-operative who would both potentially participate in that distribution. It appears that result arises because a member could be a "dry" or inactive member, by late 2011, although he or she or it had been an active member in the previous five year period, and still be entitled to a distribution of the surplus by reason of his or her activities in that period.

The Co-Operative's submissions

5. I have also had the benefit of detailed submissions from Mr Douglas-Baker, who appears for Mr Priest as liquidator of the Co-Operative in this application. Mr Douglas-Baker explains the way in which s 488(2) of the Corporations Act is applied to the Co-Operative, as an applied provision of the Corporations Legislation pursuant the National Law. The Co-operatives Act 1992 (NSW) ("1992 Act") was repealed by the Co-operatives (Adoption of National Law) Act 2012 (NSW) ("Adoption of National Law Act") on 3 March 2014 and the National Law then commenced. Section 472(1) of the National Law provides that the winding up of a participating co-operative is declared to be an applied Corporations legislation matter for the purposes of Part 3 of the Corporations (Ancillary Provisions) Act 2001 (NSW) in relation to Part 5.4B of the Corporations Act, which contains s 488(2) of the Corporations Act. That section provides that special leave of the Court is required in order that a liquidator may distribute a surplus.

6. Mr Douglas-Baker refers to the history of the Co-Operative and I have referred to the evidence that addresses that matter above. He outlines the issue which arises in respect of the application of r 102 of the Co-operative's Rules, to which I will return below, and notes that a resolution was passed by members of the Co-Operative in early 2011 to cease the Co-Operative's activities and dispose of its assets. He points out that a disclosure statement in respect of that resolution contemplated that those assets would be sold with a view to the Co-Operative ceasing to trade and that no future services would then be available to its members. He also refers to the evidence of the sale of the Co-Operative's assets, and to the later sale of the property to which I referred above. The delay in the sale of that property had the result that, by the time that it was sold and the surplus was realised, there were no longer any "active members" of the Co-Operative, because it had ceased its business operations in late 2011 as I noted above.

7. Mr Douglas-Baker also refers to the perception, understandable in the circumstances, that that delay gave rise to a difficulty because r 102 of the Co-Operative's Rules provided for a distribution to "active members". That difficulty, as will emerge below, is more apparent than real, because that rule does not in fact use the term "active members" and is properly understood as directed to the conduct of business between the Co-operative and its members in the 5 year period prior to the Co-Operative ceasing its activities. Mr Douglas-Baker also refers, at some length, to the scope of the Co-Operative's Rules, although it is not necessary for me to review those in detail, given the limited scope of the issue which is in dispute and the view I have formed as to the construction of r 102 of those Rules. Mr Douglas-Baker also draws attention to correspondence with the Registrar of Co-operatives, in which the issue as to r 102 was raised with the Registrar and to the fact that this application was brought where that issue could not be resolved by administrative action by the Registrar. Mr Douglas-Baker also addresses the steps that have been taken by Mr Priest to identify the way in which a distribution would be made to individual members, if he is correct in the view which he takes as to the proper application of r 102 of the Co-Operative's Rules.

Applicable principles

8. With that background, I should refer to the applicable principles to a distribution of the surplus under s 488 of the Corporations Act, before identifying the difficulty that arises with r 102 of the Co-Operative's Rules and the principles of construction by which that difficulty is to be resolved. Section 488(2) of the Corporations Act, as applied to the Co-Operative by the National Law, deals with the distribution of a surplus in a liquidation. That section requires special leave for such a distribution, and has the purpose of ensuring that there is in reality a surplus, in that creditors' claims have been recognised and met in full, and also to ensure that the correct relativities among contributories have been observed: CGU Workers Compensation (NSW) Ltd v Ascom Service Automation (Australia) Pty Ltd [2005] NSWSC 747; Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355; [2018] NSWSC 481. The phrase "special leave" requires that a special application be made to the Court, as has occurred in this case: Re D S Millard & Son Pty Ltd (1997) 24 ACSR 71 at 72; Re HIH Services Pty Ltd (in liq) [2012] NSWSC 1188 at [10]. I am satisfied that a surplus is established, on Mr Priest's evidence as to the steps which have been taken in order to deal with the assets and debts of the Co-Operative.

9. The particular difficulty which has troubled the Co-Operative and Mr Priest as its liquidator, as I have noted above, arises in respect of r 102 of the Co-Operative's Rules which relevantly provides that:

"If on the winding up or dissolution of the Co-Operative there remains after the satisfaction of all its debts and liabilities (including the amounts paid up on the shares) any property, this shall be paid to or distributed among the members of the Co-Operative in proportion to the amount of business conducted with the Co-Operative over the past five years."

10. The difficulty with this provision is that, if it is to be read as applying to the five years prior to a distribution of the surplus, then it can have no sensible operation here, because no members have conducted any business with the Co-Operative over the past five years, where the Co-Operative ceased its business activities in late 2011, as I noted above, although the process of realisation of its assets continued over that period.

11. Mr Douglas-Baker draws attention to the principle expressed in the Co-operatives legislation that a construction that would promote the co-operative principles is to be preferred to a construction that would not promote those principles. He refers to the applicable co-operative principles, which include member economic participation and benefitting members in proportion to their transactions with a co-operative. He submits that a reading of r 102 of the Co-Operative's Rules which did not allow a distribution of the surplus would not promote those principles. Although Mr Douglas-Baker rightly recognises that the rules of a co-operative are neither provisions of that legislation nor of the regulations, I accept that the co-operative principles form part of the context in which a co-operative's rules should be interpreted.

12. In any event, the co-operative principles to which Mr Douglas-Baker refers are broadly consistent with wider principles as to the construction of constitutions which in turn draw on principles of contractual construction. Those principles, as summarised in Donaldson v Natural Springs Australia Ltd [2015] FCA 498 include that a constitution should ordinarily be read and construed as a whole; general principles of construction of commercial contracts are applicable to a constitution, and the commerciality of a particular construction may tip the balance in its favour where it is implausible that the parties could be taken to have intended otherwise; a constitution should not be construed narrowly or pedantically; and a construction of a provision which gives a congruent operation of its various provisions should be preferred to another which does not:

13. Those principles of construction draw upon well-established principles of contractual construction, although greater restraint will be exercised in having regard to extrinsic evidence in respect of a constitution than in respect of a contract. In Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109; [1973] HCA 36, Gibbs J (as his Honour then was) observed that the Court's role, in construing a contract, was to give effect to unambiguous terms of a contract, but that, "if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust." These principles have since been considered by the High Court in Toll (FGCT) Pty Ltd v Alphafarm Pty Limited (2004) 219 CLR 165; [2004] HCA 52, and in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; (2014) 306 ALR 25; [2014] HCA 7 at [35], where the Court referred to the need to have regard to what a "reasonable business person" would have understood relevant terms to mean. In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; (2015) 325 ALR 118; [2015] HCA 37, the High Court again emphasised that construction should commence with the language used by the parties, although construction in a contractual context would also have regard to the objective surrounding circumstances.

14. It seems to me that, having regard to the general principles applicable to the construction of a constitution and, relevantly, here the Rules of the Co-Operative, and the co-operative principles to which Mr Douglas-Baker refers, the construction of r 102 does not give rise to the difficulty which has troubled the Co-Operative and the liquidator and the liquidator is correct in the view he now takes as to the proper application of that rule. That rule requires, in its terms, that the surplus, determined in the particular manner, be paid or distributed among the members of the Co-Operative "in proportion to the amount of business conducted" with the Co-Operative over the specified five year period. That rule cannot operate, sensibly or at all, for a period in which the Co-operative has ceased to conduct business with its members. It should be read as directed to the latest five year period in which business was conducted by the Co-Operative with its members, which here is the period prior to the cessation of its business activities in late 2011. No reasonable business person, construing that rule in its context, would have understood it as leading to the result that the surplus could not be distributed, because there was no ability to calculate the relevant proportion because no business was conducted by members with the Co-Operative over the relevant period. That reading of the rule is consistent with its terms, but treats the reference to the five year period in it as not necessarily referring to the five year period immediately prior to the distribution, but extending to the last five year period in which the business was conducted between the Co-Operative and its members.

15. For these reasons, it seems to me that a surplus exists which is appropriately distributed to members of the Co-Operative, and the liquidator has proceeded on a correct basis in determining the persons to whom that surplus will be distributed and the proportions in which they will be distributed, by reference to the amount of business conducted with the Co-Operative in the five years prior to the cessation of its business activities in later 2011.

16. Mr Douglas-Baker has referred in submissions to the fact that there may be further calculations required in respect of the amount to be distributed, and I also note that the liquidator may need to have regard to the requirements applicable under the Corporations Regulations and the Supreme Court (Corporations) Rules to a distribution of the surplus, including a possible requirement to annex Form 551 to the Court's orders. That may turn on questions of the extent to which those rules and regulations are incorporated by the National Law in respect of the distribution of a surplus of the Co-Operative. I will reserve liberty to the liquidator to apply, on one business days' notice, in case the liquidator considers that the form of order needs to be expanded or modified to address questions of that character. Mr Douglas-Baker has indicated that no order is required in respect of the liquidator's remuneration, as the liquidator's costs have been approved by the Registrar of Co-operatives.

17. Accordingly, I make the following orders:

1. Pursuant to s 488(2) of the Corporations Act 2001 (Cth) and s 488 of the Co-Operatives National Law (NSW), Mr Steven Priest as liquidator of the Young Fruitgrowers Cool Stores Rural Co-Operative Society Ltd be granted special leave to distribute the surplus in respect of the liquidation of the Co-Operative.

2. Reserve liberty to the liquidator to apply, on one business days' notice.

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Decision last updated: 22 July 2021