Re United Medical Protection of Queensland - [2004] NSWSC 14

No judgment structure available for this case.

CITATION: Re United Medical Protection of Queensland [2004] NSWSC 14

HEARING DATE(S): 29 November 2004

JUDGMENT DATE:
2 December 2004

JURISDICTION:
Equity

JUDGMENT OF: Austin J

DECISION: Orders made for winding up and curing deficiencies of notice, and direction given to liquidators

CATCHWORDS: CORPORATIONS - company limited by guarantee - winding up on just and equitable ground - relevant considerations - whether constitutional provision permitting distribution of surplus assets to a body having the same objects applies where the recipient body is also a member and the constitution prohibits distributions to members - related party benefits - exception for benefits on reasonable arm's length terms - circumstances in which direction to liquidator is appropriate - deficiencies of notice - relevant considerations for making of order under s 1322(4)

LEGISLATION CITED: Corporations Act 2001 (Cth) ss 150, 208, 210, 224, 228, 229, 461(1)(k), 479(3), 491, 494, 1322

CASES CITED: Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 44 ACSR 186
Charlton v Baber (2004) 47 ACSR 31
CIC Insurance Ltd (prov liq apptd) v Hannan & Co Pty Ltd (2001) 38 ACSR 245
Coleambally Irrigation Mutual Co-operative Ltd v Commissioner of Taxation (2004) 210 ALR 475
Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478
Lunn v Cardiff Coal Company (2002) 43 ACSR 649
National Australia Bank Ltd v Market Holdings Pty Ltd (2000) 50 NSWLR 465
National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) (2001) 37 ACSR 629
Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24
Re Australian Home Finance Pty Ltd [1956] VLR 1
Re Contract Corp (Gooch's case) (1872) LR 7 Ch App 207
Re GB Nathan & Co (in liq) Pty Ltd (1991) 5 ACSR 673
Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488
Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207
Re Spedley Securities Ltd (in liq) (1991) 9 ACSR 83
Re Standard Insurance Co Ltd (1963) 80 WN (NSW) 1355
Re Tavistock Iron Works Co (1871) 24 LT 605
Re United Medical Protection Ltd & Ors (2002) 41 ACSR 623
Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104
Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115
Stapp v Surge Holdings Pty Ltd (1999) 31 ACSR 35
Talbot v NRMA Holdings Ltd (1996) 21 ACSR 577
Thomas v McKay Investments Pty Ltd (1996) 22 ACSR 294

PARTIES :
United Medical Protection of Queensland Limited (Provisional Liquidators Appointed) (P)
David John Frank Lombe and John Lethbridge Greig (A)

FILE NUMBER(S): SC 4507/02

COUNSEL: Justin Gleeson SC with Robert Dick (P/A)

SOLICITORS: TressCox (P/A)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

THURSDAY 2 DECEMBER 2004

4507/02 IN THE MATTER OF UNITED MEDICAL PROTECTION OF QUEENSLAND LIMITED (PROVISIONAL LIQUIDATORS APPOINTED)

JUDGMENT

1 HIS HONOUR: These reasons for judgment relate to two matters:

Facts

2 UMP and its related company, Australasian Medical Insurance Ltd ("AMIL"), have been the subject of many interlocutory applications since this court decided to appoint a provisional liquidator to those companies in May 2002. After an unusually long period in which the companies were under his control, the appointment of the provisional liquidator was eventually terminated by the court, with the provisional liquidator's consent, as from 15 November 2003.

3 UMP Qld is a company limited by guarantee. Prior to 1 July 1997, its members were medical practitioners, medical students and other persons approved by the governing council of the company. Prior to an amendment to the company's constitution passed on 19 June 1997, there were two classes of membership, namely "voting" and "associate" members. Voting members were entitled, among other things, to receive notice of and to vote at meetings of members of the company. Associate members were not entitled to receive notice of or to attend to vote at meetings of the company.

4 UMP Qld carried on business as a medical defence organisation prior to 1 July 1997, principally by arranging for the provision of discretionary cover to its members through a United Kingdom company. It did not itself provide indemnity insurance or discretionary assistance to its members.

5 As from 1 July 1997, a "merger" of the memberships of three medical defence organisations, namely UMP Qld, United Medical Protection of New South Wales Ltd ("UMP NSW", formerly known as United Medical Defence Ltd), and The Medical Protection Society of New South Wales Ltd ("MPS NSW") was implemented. As part of the merger, UMP became a member of UMP Qld, and became the sole member of the company entitled to vote at company meetings. Associate membership was abolished and replaced by "non-voting membership". The non-voting members of UMP Qld were all members of UMP Qld as at June 1997, other than UMP. Non-voting members were entitled to receive notice of and to attend meetings of the company, but they were not entitled to vote. Consequently UMP Qld came to be controlled by UMP.

6 According to the evidence before me, as at 30 June 1997 UMP Qld had 5,976 members, of whom 5,251 were voting members. Under the terms of the merger arrangements, all current members of UMP Qld automatically became associate members of UMP, entitled to become full voting members of UMP upon completing an application. As from 1 July 1997, 5,658 members of UMP Qld became full or associate members of UMP. The discrepancy of 318 members has been explained by enquiries made on behalf of Mr Lombe, which indicate that in fact the 318 persons had resigned or been excluded or were otherwise no longer members. There has subsequently been a reduction in UMP membership on the part of former members of UMP Qld, who have either resigned or not renewed their membership.

7 At that time UMP Qld ceased to carry on its medical defence business, and the company ceased to have employees. The management of its affairs was vested in a council comprising the current directors of UMP. UMP agreed to manage the run-off of the previous discretionary cover for UMP Qld members and to assume liability for members' claims, under a claims run-off agreement between UMP and the United Kingdom company that had written the cover. This work was carried out by employees of AMIL. Thereafter UMP Qld did not provide services to its members, and did not levy subscription fees. UMP and AMIL carried on business from premises in suburban Brisbane ("the Queensland property") owned and previously used by UMP Qld for its business, and paid rent for their occupation.

8 The UMP liquidator, Mr Lombe, and Mr Greig were appointed, jointly and severally, provisional liquidators of UMP Qld on 10 September 2002, after evidence was given that the directors of the company had formed the opinion that there was no reason why it should maintain a separate existence, and had expressed their desire to resign. Shortly after the appointment of the provisional liquidators, all of the directors of UMP Qld resigned.

9 I note, in passing, that according to a search conducted on 25 November 2004, ASIC's records show that a winding up order has been made and that liquidators were appointed on 9 September 2002. That is an error in ASIC's records, which the provisional liquidators have taken steps to correct. The true position is that no winding up order has yet been made but provisional liquidators have been appointed.

10 The provisional liquidators identified the assets and liabilities of the company and Mr Lombe prepared several reports, which have been filed with the court. In his affidavit of 19 February 2003 Mr Lombe identified external creditors in an amount in excess of $129,000, and on 24 February 2004 the court gave a direction that he was justified in paying those creditors in full. Subsequently there was a settlement with the Commissioner of Taxation as a result of which Mr Lombe entered into a settlement deed with the Australian Taxation Office, after obtaining the approval of the court under s 477(2B). The position now is that all external creditors of UMP Qld as at the date of appointment of the provisional liquidators, 10 September 2002, have been paid in full.

11 At the time of appointment of the provisional liquidators, UMP Qld had two major assets, namely a debt owing by UMP in the sum of $8,751,690.91, and the Queensland property, which is valued at $600,000. The debt owing by UMP was paid on 10 December 2003, after Mr Lombe's appointment as UMP's provisional liquidator was terminated. The Queensland property consists of nine strata lots, which are being sold in three separate parcels. The settlement of the sale of one parcel occurred on 23 November 2004, the purchase price being $404,600. Mr Lombe has accepted an offer for the sale of the second parcel for $581,500. The third parcel is still on the market, but Mr Lombe hopes for a sale shortly. It appears that, when the third parcel has been sold, there will be approximately $9.5 million held by the provisional liquidators in the UMP Qld bank account.

12 Consequently, according to the evidence before me, there are now substantial surplus assets, and UMP Qld needs to retain only sufficient funds to meet the costs of the provisional liquidation and winding up of the company.

The meeting of members

13 Mr Lombe has convened a meeting of members of UMP Qld to make a determination under Clause VI of UMP Qld's constitution (discussed below), which authorises the members to identify a body having similar objects to UMP Qld to which surplus assets may be transferred on winding up. The meeting was held on 24 November 2004. Notices of the meeting and meeting documents were sent to members of UMP Qld as at 30 June 1997 notwithstanding the fact that a significant number of them were no longer current members and were therefore not entitled to receive notice of the meeting under UMP Qld's constitution.

14 A covering letter from Mr Lombe, enclosing the notice of meeting and explanatory statement and report, explained that UMP Qld was solvent but that it was proposed that the company be wound up because it no longer carried on the functions for which it was incorporated. Mr Lombe explained that the company was a company limited by guarantee with a constitution that prohibited the distribution of surplus assets to members, and required those assets to be paid to a body with similar objects as determined by the members. He noted that UMP was the only member having voting rights, although other members had the right to receive notices of meeting, to attend the meeting, and to be heard.

15 Mr Lombe's report explained the structure of UMP Qld and gave a statement of its financial performance and a summary of its assets and liabilities, concluding that the company had a surplus of assets to liabilities.

16 The explanatory statement said that the provisional liquidators had considered whether other bodies would qualify as bodies having similar objects to UMP Qld, and identified five other medical defence organisations. A comparison of relevant provisions of their respective constitutions was attached. The provisional liquidators presented their view that three of the medical defence organisations they had identified as alternatives to UMP were unsuitable because their constitutions did not relevantly contain objects similar to those of UMP Qld. They gave reasons for preferring UMP to the other two medical defence organisations that they had identified. Those reasons included the point that about 95% of the members of UMP Qld as at 30 June 1997 had become members of UMP on 1 July 1997, and approximately 77% of those members remained as current members of UMP.

17 The provisional liquidators also expressed their opinion, in the explanatory statement, that there was no opportunity to deploy the surplus assets for the benefit of members, other than by payment of the surplus assets to UMP to complete the "merger" that had begun in 1997. They also summarised the advice of counsel (considered below) that as the recipient of the surplus assets, UMP would not be receiving a prohibited benefit as a member for the purposes of UMP Queensland's constitution or Ch 2E of the Corporations Act.

18 The provisional liquidators made the disclosures in the explanatory statement after they received the second joint opinion of Justin Gleeson SC and Robert Dick dated 24 September 2004. Counsel advised that provisional liquidators have duties to be independent, to act impartially and to avoid conflict between duty and interest and between duty and duty (citing Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104, at 106, 108-100; National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) (2001) 37 ACSR 629 at [192]-[199]). They emphasised the duty of independence, which requires provisional liquidators to maintain an even and impartial hand between all the individuals or corporations whose interests are involved in the provisional liquidation, being in the present case the members (citing Re Contract Corp (Gooch's case) (1872) LR 7 Ch App 207, at 211; Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488, at 491; Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24, at 28, 30-31; National Australia Bank Ltd v Market Holdings Pty Ltd (in liq), 37 ACSR at [195]). They noted the need for Mr Lombe, having regard to his previous appointment as provisional liquidator of UMP, not to give the appearance of having any conflict of interest arising out of his prior position. They advised that Mr Lombe should consider whether it was appropriate for the surplus to be transferred to some institution other than UMP, satisfying the criteria referred to in Clause VI, having regard to the interests of the non-voting members of UMP Qld. They made some comments on the matters relevant to such a decision.

19 It is not appropriate, in the present ex parte application, for the court to make a finding as to whether the provisional liquidators, and Mr Lombe in particular, have discharged their fiduciary and other duties in respect of the convening and conduct of the meeting. However, it is appropriate for me to say that the notice of meeting, covering letter, report and explanatory statement, when read together, appear on their face to reflect counsel's advice, and there is nothing in the evidence before me that would suggest otherwise.

20 The meeting resolved that the surplus assets of UMP Qld, after payment of all its debts and liabilities, be paid on the company's winding up to UMP, as a society having objects similar to the objects of UMP Qld for the purposes of clause VI of the company's memorandum of association.

The winding up application

21 The application to wind up UMP Qld was made by the company by originating process filed in this court on 9 September 2002, but it has been adjourned on several occasions, after the appointment of the provisional liquidators. Now that the company's debts have been paid and most of its property has been realised, the provisional liquidators contend that it is appropriate for a winding up order to be made, on the just and equitable ground.

22 The evidence indicates that UMP Qld is plainly solvent, and therefore there is no basis for an order for winding up in insolvency. There are two possible avenues of winding up in such circumstances, namely a voluntary winding up or winding up on the just and equitable ground.

23 The company's ability to proceed to voluntary winding up is placed in doubt by the absence of any board of directors. The company could resolve, by special resolution passed by its voting member (UMP) under s 491(1), that it be wound up voluntarily, but for the fact that there can be no members' voluntary winding up unless a declaration of solvency has been made by the directors of the company and lodged with ASIC pursuant to s 494. The previous board has resigned, and while the order appointing the provisional liquidators has given them all the powers conferred on the board of directors by the constitution of UMP Qld, the order does not, at least in terms, authorise them to make a declaration of solvency under s 494. There is at least some doubt as to the provisional liquidators' power to make such a declaration.

24 To avoid that doubt, it would be necessary to appoint a new board of directors first, if the company were to proceed with a resolution for voluntary liquidation. The appointment of a new board of directors would be problematic, since there would be significant costs, including the costs of obtaining directors' and officers' insurance, and time would be consumed while the new directors familiarised themselves with the company's financial position. It seems desirable to avoid these consequences, if possible, given that the only purpose of appointing a new board would be to obtain a declaration of solvency.

25 Therefore the provisional liquidators, on behalf of the company, have applied to the court for a winding up order on the just and equitable ground. In a judgment given when I dealt with the initial ex parte application by UMP, AMIL and MDU Australia Insurance Co Pty Ltd for winding up on the just and equitable ground and for the immediate appointment of a provisional liquidator (Re United Medical Protection Ltd & Ors (2002) 41 ACSR 623, at [12]), I said:

Ebrahimi v Westbourne Galleries Ltd

26 As it happened, I decided to terminate the appointment of the provisional liquidator of those companies rather than to make orders for their winding up. Here, however, the facts indicate that there is a proper basis for UMP Qld to be wound up on the just and equitable ground, in reliance on the principles established in the "failure of substratum" cases.

27 The key principle of those cases is that a company may be wound up when it has become impossible for it to achieve its main objects, or engage in conduct outside the scope of what was within the general intention or common understanding of the members when they became members. There must be more than a mere discontinuance of the company's business activities, amounting to, in effect, a final and conclusive abandonment of the business: Thomas v McKay Investments Pty Ltd (1996) 22 ACSR 294, at 300-301; see also Stapp v Surge Holdings Pty Ltd (1999) 31 ACSR 35, at [39]-[41]; Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478, at 494; Lunn v Cardiff Coal Company (2002) 43 ACSR 649, at [6]. The lack of a functioning board of directors is relevant if it indicates the absence of any prospect of the company continuing to pursue the objects and purposes for which it was established: CIC Insurance Ltd (prov liq apptd) v Hannan & Co Pty Ltd (2001) 38 ACSR 245, at [13]; Lunn v Cardiff Coal Company (2002) 43 ACSR 649, at [5]-[6].

28 In the present case, the following considerations support the making of a winding up order on the just and equitable ground:

29 These matters establish, in my view, that UMP Qld has long ago ceased to operate for the objects and purposes for which it was formed, and there is no realistic prospect of its re-commencing its operations. The company's undertaking has substantially passed to UMP, and while non-voting members of UMP Qld have remained members in name, they have not received any services from that company nor paid any subscription fees since July 1997. Their relationship has, for all practical purposes, been with UMP since that time, except for members who have subsequently retired or transferred their membership to other organisations. While the company has substantial assets, it is not in a position to make use of those assets for the objects and purposes for which it was established.

Distribution of surplus assets to UMP

30 The provisional liquidators propose, after an order is made for the winding up of UMP Qld and their appointment as liquidators, that they should in the latter capacity cause UMP Qld to transfer its surplus assets to UMP, after paying or providing for the cost of the provisional liquidation and liquidation. By an interlocutory process filed on 29 November 2004, they seek a direction that they are justified in doing so. They wish to rely on the authority of the members' resolution but they also seek a direction from the court under s 479(3) of the Corporations Act.

31 The questions for consideration are whether the members' resolution at the meeting of 24 November 2004 effectively authorised the transfer, and if it did, whether it is appropriate for the court to give the liquidators additional reassurance in making the transfer by making a direction to the effect that they would be justified in causing the transfer to occur. Since it appears that less than 14 days' notice was given of the meeting and there may have been accidental omissions in the procedure for giving notice, the provisional liquidators have applied for a curative order under s 1322(4) to overcome any such procedural difficulty. I shall consider each of these matters in turn.

Validity of the members' resolution

32 Clause III of the memorandum of association of UMP Qld (originally called "The Medical Defence Society of Queensland") states the objects for which the company was established. They are objects concerning the promotion of the interests of the medical profession. Two of the objects are particularly relevant here:

33 Clause V contains some restrictions on the application of the income and property of the company. It provides:

"The income and property of the Society, however derived, shall be applied solely towards the objects of the Society, as set forth in this Memorandum of Association, and no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus, or otherwise howsoever by way of profit to the persons who at any time are or have been members of the Society, or to any of them, or to any person claiming under or through them. Provided that nothing hereinbefore contained shall prevent payment in good faith of remuneration or salary to officers in or servants of the Society, or to any member thereof or other person in return for any services actually rendered to the Society."

34 Clause VI deals with the distribution of surplus assets on winding up. It provides:

"If upon the winding up or dissolution of the Society there remain, after payment of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members, but shall be transferred to some other society, institution, or association having objects similar to the objects of this Society, to be determined by the members of the Society or at or before the date of dissolution, and in default of such determination by the Supreme Court of Queensland."

35 Three arguments might be advanced to support the view that the members' resolution is ineffective to authorise the liquidators to distribute UMP Qld's surplus assets to UMP:

36 The provisional liquidators have received written advices from Justin Gleeson SC and Robert Dick ("counsel"), which address these matters.

(a) Clause V

37 As to question (a), counsel gave a joint opinion dated 6 June 2003 on the question whether the provisional liquidators have the power to transfer the assets of UMP Qld to UMP, answering that question in the affirmative but advising that the court's directions should be obtained. In fact, as it happens, the provisional liquidators have not purported to transfer the assets in that capacity, but instead, they propose to do so as liquidators after a winding up order has been made. It is not necessary for me to express any opinion as to the power of the provisional liquidators to transfer surplus assets, and I shall not do so.

38 In the course of their reasoning, counsel addressed the construction of Clause V. They returned to the proper construction of Clause V in their second joint opinion dated 24 September 2004, in the course of considering the question whether, if the court ordered that UMP Qld be wound up, the terms of Clause VI would prohibit a distribution to UMP.

39 There are two parts to Clause V, namely the requirement that the income and property of UMP Qld be applied solely towards the objects of the company, and the prohibition on payment or transfer of that income or property by way of dividend, bonus, or otherwise by way of profit to present or past members.

40 As to the first part, counsel expressed the view that the transfer of the assets of UMP Qld to UMP would be, within the wording of Clause V, an application of the company's income and property "solely towards the objects of the Society", namely the objects identified by subclauses III.12 and III.11. Under subclause 12, it is an object of UMP Qld, if at any time it may be found desirable to do so, to "support" by the application of assets, or "combine" its assets with, or "amalgamate" with, any other company having objects altogether or in part similar to those of the company and prohibiting distribution of income and property amongst members to an extent at least as great as is imposed by the constitution of UMP Qld. Under subclause 11, it is an object to amalgamate, federate or co-operate with any institution having objects wholly or in part similar to those of the company.

41 I agree with counsel that the transfer of UMP Qld's surplus assets to UMP would fall within the words "support", "combine" and "amalgamate" under subclause 12, and it would also be an amalgamation or co-operation for the purposes of subclause 11. As far as the word "amalgamate" in both subclauses is concerned, I agree with counsel that the transfer of surplus assets upon the winding up of UMP Qld would be the final step in the process of amalgamation that was initiated and partly completed in 1997, in circumstances where a large inter-company debt owing by UMP to UMP Qld was created by the transfer of investments by UMP Qld to UMP in the 2001 financial year and was later repaid by UMP. That leaves the questions whether (for the purposes of both subclause 12 and subclause 11) UMP's objects are wholly or in part similar to those of UMP Qld, and whether (for the purposes only of subclause 12) UMP's constitution prohibits the distribution of its income and property amongst its members to an extent at least as great as is imposed by the constitution of UMP Qld.

42 UMP's objects include to take over, as a going concern, the Australian medical defence operations carried on by the Medical Defence Society of Queensland, and to protect the interests of legally qualified health care practitioners. There are other provisions closely similar to provisions of the objects clause of UMP Qld's constitution, more fully compared by counsel in their advice. I agree with them that, for the purposes of subclauses 12 and 11 of UMP Qld's objects clause, UMP has objects wholly or in part similar to those of UMP Qld.

43 The question, whether (for the purposes of subclause 12 of UMP Qld's objects clause) UMP's constitution prohibits the distribution of its income and property amongst its members to an extent at least as great as is imposed by the constitution of UMP Qld, leads us to consider other provisions of UMP's constitution. The UMP constitution includes provisions preventing the distribution of UMP's income or property to members (Clauses 4 and 6(a)) and requiring that surplus assets on winding up be transferred to some other institution having similar objects which prohibits distributions to members to an extent at least as great as the prohibition made in UMP's constitution (Clause 6). There are closely similar provisions in UMP Qld's constitution, but the constitutions of the two companies differ from one another in one respect, which is significant here. Clause 6(b) of UMP's constitution, which has no counterpart in UMP Qld's constitution, authorises a distribution of surplus assets to the ordinary members of UMP if, on winding up, surplus assets cannot be distributed to another body having the same or similar objects without breaching the mutual status of the company.

44 I do not think it can be said, for the purposes of subclause 12, that UMP's constitution prohibits the distribution of its income and property amongst its members "to an extent at least as great" as is imposed by the constitution of UMP Qld. Clause 6(b) allows a distribution of surplus assets to members of UMP, albeit in unusual circumstances, which would not be permitted under the more absolute language of the constitution of UMP Qld. Since, however, there is no similar limitation in subclause 11, that subclause of UMP Qld's objects clause is applicable. Therefore, for the purposes of Clause V of UMP Qld's constitution, the transfer of surplus assets as now proposed would be an application of the income and property of UMP Qld solely towards an object of that company (that is, the object set out in subclause 11), and so the first part of Clause V would be satisfied.

45 The second part of Clause V prohibits payment or transfer of income or property of the company by way of dividend, bonus or otherwise by way of profit to present or past members of UMP Qld. UMP is a member of UMP Qld. The question is whether the transfer of surplus assets, as proposed, would be prohibited by this part of Clause V.

46 Counsel have carefully considered this question, and have reached the conclusion that the transfer of UMP Qld's surplus assets to an entity which happens to be a member of the company is not prohibited by Clause V, where the recipient has similar objects to UMP Qld, is required to apply its income and property for the collective benefit of its members, and is prohibited from making distributions by way of dividend, bonus or other profit to its members. In counsel's view, the second part of Clause V is directed towards prohibiting a distribution to members for their personal use and enjoyment without any fetter.

47 I generally agree with this construction, although I prefer to express the point in my own words. The second part of Clause V prohibits payment or transfer of UMP Qld's income or property "directly or indirectly, by way of dividend, bonus, or otherwise howsoever by way of profit to the persons who at any time are or have been members of the Society, or to any of them, or to any person claiming under or through them". Such a constitutional prohibition is a characteristic of non-profit companies. Often the clause has been adopted so as to found an application to the Australian Securities and Investments Commission or its predecessor for the exercise of the Commission's discretion, now conferred by s 150 of the Corporations Act, to dispense with the use of the word "Limited" in the company's name: see ASIC Policy Statement 50; Australian Corporation Law: Principles and Practice (Butterworths, looseleaf), [2.8.0040]. The purpose of the clause, when read together with other constitutional provisions, is to mark the distinction between a company that exists for the purpose of earning profits or otherwise making gains to distribute to its members, and a company whose assets are accumulated for the collective benefit of members and are to be applied, in winding up, to bodies with similar objects which, likewise, do not exist for the purpose of making gains to distribute to members. Both UMP Qld and UMP are non-profit companies in this sense.

48 Where, therefore, the transaction is a transfer of the whole of the surplus assets of one such company to another such company, as part of a process of amalgamation expressly contemplated by the objects clause of the constitution of the transferring company, the transaction is not apt to be characterised as a transfer by way of dividend, bonus or otherwise by way of profit for the purposes of Clause V. This conclusion does not depend upon the way in which the transfer is accounted for by the transferring company or the recipient company. It may be that in an appropriate case, there will be a transfer by way of dividend or profit for the purposes of Clause V although the payment is sourced from surplus capital rather than on revenue account. Instead, the conclusion depends on the fact that the implementation of amalgamation with another like company gives effect to a stated object of the transferring company as a non-profit entity.

49 Further, a transaction of this kind is not apt to be characterised as a distribution "to the persons who … are or have been members [of the transferring company] or to any of them …". It is a transfer to an entity properly characterised as the non-profit body into which the transferring entity is to be amalgamated, rather than a transfer to a recipient in its character as a member of the transferring body.

50 Clause 6(b) of UMP's constitution does not derogate from this reasoning. That provision is consistent with the characterisation of UMP as a non-profit body, because its operation is confined to circumstances undermining the company's mutual status. The presence of Clause 6(b) does not prevent the transaction from falling within one of the objects stated in UMP Qld's constitution, namely the object in subclause 11.

51 I have been referred to a line of taxation cases, in which the question has arisen whether contributions paid to a body such as a co-operative or other mutual organisation by its members are assessable income in the hands of the recipient body. The cases have developed a "principle of mutuality" for the purpose of determining assessability to income tax. A recent example is Coleambally Irrigation Mutual Co-operative Ltd v Commissioner of Taxation (2004) 210 ALR 475. Cases such as Coleambally are not, in my view, of any particular assistance in the proper construction of provisions such as Clause VI, although the relevant clause in that case was in substantially the same terms. However, Coleambally is consistent with the conclusion I have reached on the question of construction, because there, the Full Federal Court recognised that such a clause does not permit the transfer of surplus funds in winding up to any member for their personal use.

(b) Clause VI

52 Clause VI requires that the surplus assets on winding up of UMP Qld are not to "be paid or distributed amongst the members", but must be transferred to some other body having objects similar to the objects of UMP Qld, to be determined by the members of the company or in default, the Supreme Court of Queensland. For the reasons I have already given, UMP qualifies as an appropriate recipient body within the latter part of Clause VI, as a body having objects similar to the objects of UMP Qld. There has been a meeting of members of UMP Qld, which has purported to determine that it should be the body to receive the distribution of surplus assets. Subject to questions of procedural irregularity (considered below), the decision of the meeting satisfies Clause VI.

53 The question is whether the prohibition on distributing any of UMP Qld's property amongst the members, contained in Clause V, applies to prevent distribution of the surplus to UMP under Clause VI, given that UMP is a member of UMP Qld. Counsel have expressed the view that Clause VI does not prohibit a transfer of surplus assets on winding up to a body having objects similar to UMP Qld and thereby satisfying Clause VI, as in such a case the transfer is not made to the recipient in its character as a member of UMP Qld. I agree, for the reasons set out above. As I have said, Clause V itself is inapplicable to the proposed distribution of surplus assets, partly because the distribution will be made to UMP not in its character as a member of UMP Qld, but in its character as a body having similar objects which is subject to the non-profit constraints of its constitution.

(c) Financial benefit

54 UMP Qld is a public company for the purposes of Ch 2E. It is a company limited by guarantee, and therefore cannot issue shares: s 124(1). Because it does not have a share capital, it cannot be a proprietary company: s 112(1). It is therefore a "public company" within the meaning of s 9. This will remain so notwithstanding the making of an order for its winding up: Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 44 ACSR 186, at 198; Charlton v Baber (2004) 47 ACSR 31, at [26]-[28]. The exception from the concept of "public company", for the purposes of Ch 2E, of a company that does not have the word "Limited" in its name, is inapplicable because UMP Qld has that word as part of its name, even though it has constitutional provisions frequently found in the case of companies licensed to dispense with the word "Limited" under s 150.

55 Section 208(1) applies where a public company gives a "financial benefit" to a "related party of the public company". "Financial benefit" is defined in s 229. The transfer of surplus assets as proposed would clearly amount to the giving of a financial benefit by UMP Qld to UMP: see s 229(3)(a). According to s 228(1), an entity that controls a public company is a related party of the public company, and s 228(5) states that an entity is a related party of public company at a particular time if the entity was a related party of the public company because it controlled the public company at any time within the previous six months. "Control" is defined in s 50AA, which says that an entity controls a second entity if the first entity has the capacity (determined by recourse to practical influence and any practice or pattern of behaviour) to determine the outcome of decisions about the second entity's financial and operating policies.

56 In their second joint opinion dated 24 September 2004, counsel took the view that UMP is a related party of UMP Qld by reason of its capacity to determine the outcome of decisions about the financial and operating policies of UMP Qld through the exercise of its right to vote at a meeting of members as the sole voting member of UMP Qld. I am not sure that this is a correct analysis of the position that now exists, since termination of Mr Lombe's position as provisional liquidator of UMP. At the present time UMP is under management which is independent of Mr Lombe, and Mr Lombe and Mr Greig, as the provisional liquidators of UMP Qld, are the persons who determine the financial and operating policies of the latter company. I doubt that a member in general meeting, even if it is the sole voting member, has the capacity as such to give directions to the provisional liquidators of the company on financial and operating matters. The position may arguably have been different when Mr Lombe was the provisional liquidator of UMP as well as joint provisional liquidator of UMP Qld, but that ceased to be the case more than six months ago, and therefore need not be further considered.

57 However, it is unnecessary for me to determine whether UMP is a related party of UMP Qld. Assuming that it is, I agree with counsel that the proposed distribution of surplus assets is a transaction exempted, by virtue of s 210, from the requirement in s 208 that related party benefits be approved by members. According to s 210, member approval is not needed to give a financial benefit on terms that would be reasonable in the circumstances if the public company and the related party were dealing at arm's length. Clause VI contemplates that the surplus property of UMP Qld remaining at the conclusion of its winding up will be transferred, necessarily for no consideration, to an entity having similar objects to UMP Qld. What is contemplated is, in effect, a gift of the surplus assets to an eligible recipient selected by the members. Apart from the requirement that the recipient is eligible on the ground that it has similar objects to UMP Qld, Clause VI does not impose any terms upon the transfer that it contemplates. Thus, the terms on which UMP will receive the surplus property of UMP Qld are the same terms that would apply if it were not a related party and were dealing at "arm's length".

58 Admittedly there is an element of artificiality in applying s 210 to the proposed transaction in the present case, but in my opinion, that artificiality arises from the fact that Ch 2E does not appear to take into account the position of a company limited by guarantee, to which (arguably) the whole structure of Ch 2E is inapposite. But as a matter of construction and application of the statutory provisions, the proposed distribution of surplus assets is exempted by s 210. Were the position otherwise, s 208 would require a meeting of members at which the only voting member, UMP, would be precluded from voting by s 224, in the absence of an exemption from ASIC.

Whether the court should make a direction under s 479(3)

59 Section 479(3) authorises a liquidator appointed by the court to apply to the court for directions "in relation to any particular matter arising under the winding up". The nature and scope of the court's power to give directions under this provision were explored by McLelland J in Re GB Nathan & Co (in liq) Pty Ltd (1991) 5 ACSR 673, at 675-9. His Honour observed (at 678) that:

"… the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or propitiatory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the directions."

60 The provisional liquidators of UMP Qld, who will be the liquidators of the company when the direction takes effect, seek a direction under s 479(3) in their capacity as liquidators in order to obtain this protection.

61 In exercising its discretion to grant or withhold directions under the subsection, the court draws a distinction between giving guidance to the liquidator on matters of law or principle or to protect him or her against accusations of acting unreasonably, and giving a direction or guidance as to the liquidator's commercial decision. The court does not normally give directions or otherwise pronounce upon the commercial prudence of the liquidator's proposed transaction: Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207, at 232 per Street CJ in Eq; Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, at 117 per Young J; Re Spedley Securities Ltd (in liq) (1991) 9 ACSR 83, at 85 per Giles J; generally, see MacPherson's The Law of Company Liquidation (4th ed, 1999), p 352-355.

62 Where, however, the liquidator encounters difficulty in the course of administration of the winding up outside the sphere of commercial judgment, such as to make it reasonable for him or her to seek the protection of a direction, the court will ordinarily assist and it may even be the liquidator's duty to approach the court. In Re Tavistock Iron Works Co (1871) 24 LT 605, Lord Romilly MR said (at 605):

Commissioner for Corporate Affairs v Harvey

Pace v Antlers Pty Ltd (in liq)

63 The directions of the court may be appropriate in cases where there is some legal uncertainty as to the proposed course of conduct: Re Australian Home Finance Pty Ltd [1956] VLR 1; Re Standard Insurance Co Ltd (1963) 80 WN (NSW) 1355.

64 In my opinion this is a case where it is appropriate for the liquidators to seek the court's directions and for the court to provide directions as sought. The amount involved in the transaction is large. After the sale of the remaining parcel of the Queensland property, the distribution of the surplus assets will be the only major step involved in the liquidation of UMP Qld, since creditors have already been paid and the assets have been ascertained and will have been collected. Some legal uncertainty has been encountered by virtue of the terms of Clauses V and VI of UMP Qld's constitution and the scope of Ch 2E of the Corporations Act. The applicants believe, on reasonable grounds and with the support of the considered opinions of senior and junior counsel, that their proposed transaction is lawful and appropriate, but the matter is not clear-cut. Having considered the issues, the court has formed the view that the conclusions of counsel are correct and that, in circumstances where the identity of the recipient of the surplus assets has been chosen at a meeting of members, the lawful and appropriate course for the liquidators is to act on the members' determination by distributing the surplus assets accordingly.

Procedural irregularity

65 The interlocutory process filed on 29 November 2004 also seeks a declaration under s 1322(4) that the meeting of members of UMP Qld held on 24 November 2004 was not invalid:

66 Under the constitution of UMP Qld, non-voting members (that is, all members other than UMP) are entitled to receive notice of and to attend meetings of members of the company, although they are precluded from voting: Article 2(e). In National Australia Bank Ltd v Market Holdings Pty Ltd (2000) 50 NSWLR 465, at 476 Young J said (in relation to the analogous position of creditors at a meeting of creditors who could not vote), that their right to address the meeting was of value and could affect the outcome of the meeting on the basis that "even the most hardened shareholder may be affected by what the opposition puts forward". Consequently, notice of the meeting of 24 November 2004 has been given to the non-voting members of UMP Qld.

67 Some problems have arisen in the process of giving notice. Discrepancies have emerged between a list of members previously prepared and a list prepared in October 2004 for the purpose of giving notice of the meeting. There were some names on the later list that were not present on the earlier list. The precaution has been taken of giving notice to the greater number. Given the uncertain state of membership lists, however, there appears to be a risk that some members might not have been given notice of the meeting.

68 Article 21 of the constitution of UMP Qld provides that 14 days' notice (exclusive of the day on which the notice is served or deemed to be served, and exclusive of the day for which notice is given) is required for the holding of a general meeting. Article 66 allows notice to be given through the post and states that proof of posting is proof of service as on the day on which such a letter would have been delivered in the ordinary course of post. These provisions are now subject to s 249H of the Corporations Act, which provides that at least 21 days' notice must be given of a meeting of a company's members, although members with at least 95% of the votes that may be cast at the meeting may agree to a shorter period of notice beforehand.

69 Notice of the meeting and explanatory materials were posted to members on 8 November 2004. The evidence indicates that, in the case of a letter sent from Sydney to Queensland, the letter will ordinarily be received two or three days after posting, whether the address is in Brisbane or in a country town. If one allows for three days after 8 November for delivery of notices, the notices are deemed to have been served on 12 November. A meeting would comply with the 14 day period required by the constitution, on my calculation, only if it were held no earlier than 28 November, excluding (as required by article 21) the day of service and the day of the meeting. On this reasoning, the meeting was held four days too early. A fortiori, the meeting was held too early to comply with the 21 day period required by s 249H.

70 Thus, there are two procedural problems about the meeting, namely the risk that some members may not have received notice, and the inadequacy of the period of notice.

71 Under s 1322(3), a meeting notice of which is required to be given in accordance with the provisions of the Act is not invalidated only because of the accidental omission to give notice of the meeting or the non-receipt by any person of notice of the meeting, unless the court upon application declares the proceeding at the meeting to be void. That provision mirrors article 21 of UMP Qld's constitution, which says that the non-receipt of a notice of meeting by, or accidental omission to give such notice to, any member shall not invalidate the proceedings of any general meeting. I am satisfied that any failure to give notice of the meeting to an individual member of UMP Qld would have been an accidental omission to do so. It seems to me, therefore, that any problem arising out of failure to notify a member and non-receipt of a notice in this case is overcome by s 1322(3) and article 21 without any necessity for the court to make an order. Since, however, the applicants wish to rely on the validity of the decision at the meeting as constituting a determination of the identity of the recipient of substantial surplus assets for the purposes of Clause VI, it is appropriate to make an order in positive terms if there is power to do so under s 1322(4).

72 By s 1322(2), a proceeding under the Act is not invalidated because of any procedural irregularity, unless the court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the court, and by order declares the proceeding to be invalid. A meeting of a company formed under the corporations legislation or its predecessor legislation, and held under the corporate constitution, is a meeting governed by Part 2G.2 and is therefore a proceeding under the Corporations Act for the purposes of s 1322(2): see, for example, Talbot v NRMA Holdings Ltd (1996) 21 ACSR 577, at 579-80 per Burchett J. A defect, irregularity or deficiency of notice or time falls within the definition of "procedural irregularity": s 1322(1)(b)(ii). Therefore the deficiency of notice does not invalidate the decision of the meeting unless the court intervenes by order on the ground of substantial injustice. Once again, however, given the applicants' wish to act upon the basis that the members' decision made on 24 November 2004 is valid, there is sense in making a curative order under s 1322(4) if it is available for that purpose.

73 Section 1322(4) empowers the court, on application by an interested person, to make any of a variety of orders. The applicants, who were the provisional liquidators of UMP Qld at the time of the application and have become its liquidators by virtue of my orders made on 29 November 2004, had the standing to seek orders under s 1322(4) at the hearing on that day.

74 Two parts of s 1322(4) are pertinent here. Subparagraph (a) permits the court to make an order declaring that anything purporting to have been done in relation to a corporation is not invalid by reason of a contravention of a provision of the Act or of the constitution of the corporation. In my opinion, the deficiency of notice in this case amounts to a "contravention" of s 249H and article 21, for the purposes of subparagraph (a), and therefore subparagraph (a) is an available source of power to make a curative order. Additionally, subparagraph (d) empowers the court to make an order abridging the period for doing anything in relation to a corporation. In my opinion subparagraph (d) is also available in the present case.

75 Under s 1322(6), the court must not make an order unless it is satisfied that no substantial injustice has been or could be caused to any person. Additionally, in the case of an order under subparagraph (a), the court must be satisfied that the act, matter or thing in question is essentially of a procedural nature, that the persons concerned in the contravention acted honestly, and that it is just and equitable that the order be made.

76 I am satisfied all these matters in the present case, and more generally, I am satisfied that it is appropriate to exercise my discretion to make an order under s 1322(4). The matters in the present case are essentially of a procedural nature. There is nothing in the evidence or the circumstances of the applications to suggest that the applications have been made otherwise than honestly. The making of a curative order will not cause injustice to any person, and is a just and equitable outcome from the point of view of the members of UMP Qld.

77 UMP is the sole member of UMP Qld with the right to vote at the meeting, and could have exercised the statutory power to abridge the notice period. The evidence before me indicates that the meeting was widely advertised, particularly in places where medical practitioners would be likely to see the advertisement, and that some inquiries were made before the meeting and were adequately dealt with. According to the evidence, the major concern expressed by persons who made contact was whether the proposal to transfer the surplus assets and wind up UMP Qld would affect medical indemnity insurance cover. Obviously it will not do so, given the existence of the run-off agreement between UMP and the United Kingdom insurer and the fact that UMP Qld has not carried on business since June 1997. None of those who made contact expressed any opposition to the proposal, and no opposition was expressed at the meeting itself. The members of UMP Qld as at 19 June 1997 have been given the opportunity to become and remain members of UMP and many have done so. They will benefit from the transfer of surplus assets pursuant to the resolution of the meeting, in their capacity as members of UMP.

Conclusion

78 At the hearing of the applications on 29 November 2004, I was satisfied that proper grounds had been established for the making of the orders sought in the originating process and the interlocutory process. I therefore made orders for the winding up of UMP Qld and the appointment of Mr Lombe and Mr Greig as liquidators, and an order under s 1322(4) concerning the deficiency of notice and any accidental omission to give notice, and I gave a direction under s 479(3) that the liquidators would be justified in transferring UMP Qld's surplus assets to UMP in the manner proposed. I now publish my reasons for making these orders and directions.

79 ASIC was given notice of the applications and indicated that it neither supported nor opposed them and did not wish to be heard. It has not been necessary for me to address the taxation consequences of the transfer, either for UMP Qld or UMP, although I note that in the explanatory statement the provisional liquidators expressed their opinion, having taken advice, that the transaction was unlikely to create any tax consequences for UMP Qld.

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Last Modified: 07/16/2007

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Citations

Re United Medical Protection of Queensland [2004] NSWSC 14

Most Recent Citation

In the matter of JTS Property & Investments No. 1 Pty Ltd ACN 113 271 426 (In Liquidation) and JTS Property & Investments No. 2 Pty Ltd ACN 113 271 408 (In Liquidation) [2011] NSWSC 1210

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CITATION:	Re United Medical Protection of Queensland [2004] NSWSC 14
HEARING DATE(S):	29 November 2004
JUDGMENT DATE:	2 December 2004
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Orders made for winding up and curing deficiencies of notice, and direction given to liquidators
CATCHWORDS:	CORPORATIONS - company limited by guarantee - winding up on just and equitable ground - relevant considerations - whether constitutional provision permitting distribution of surplus assets to a body having the same objects applies where the recipient body is also a member and the constitution prohibits distributions to members - related party benefits - exception for benefits on reasonable arm's length terms - circumstances in which direction to liquidator is appropriate - deficiencies of notice - relevant considerations for making of order under s 1322(4)
LEGISLATION CITED:	Corporations Act 2001 (Cth) ss 150, 208, 210, 224, 228, 229, 461(1)(k), 479(3), 491, 494, 1322
CASES CITED:	Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 44 ACSR 186 Charlton v Baber (2004) 47 ACSR 31 CIC Insurance Ltd (prov liq apptd) v Hannan & Co Pty Ltd (2001) 38 ACSR 245 Coleambally Irrigation Mutual Co-operative Ltd v Commissioner of Taxation (2004) 210 ALR 475 Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 Lunn v Cardiff Coal Company (2002) 43 ACSR 649 National Australia Bank Ltd v Market Holdings Pty Ltd (2000) 50 NSWLR 465 National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) (2001) 37 ACSR 629 Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24 Re Australian Home Finance Pty Ltd [1956] VLR 1 Re Contract Corp (Gooch's case) (1872) LR 7 Ch App 207 Re GB Nathan & Co (in liq) Pty Ltd (1991) 5 ACSR 673 Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488 Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207 Re Spedley Securities Ltd (in liq) (1991) 9 ACSR 83 Re Standard Insurance Co Ltd (1963) 80 WN (NSW) 1355 Re Tavistock Iron Works Co (1871) 24 LT 605 Re United Medical Protection Ltd & Ors (2002) 41 ACSR 623 Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104 Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 Stapp v Surge Holdings Pty Ltd (1999) 31 ACSR 35 Talbot v NRMA Holdings Ltd (1996) 21 ACSR 577 Thomas v McKay Investments Pty Ltd (1996) 22 ACSR 294
PARTIES :	United Medical Protection of Queensland Limited (Provisional Liquidators Appointed) (P) David John Frank Lombe and John Lethbridge Greig (A)
FILE NUMBER(S):	SC 4507/02
COUNSEL:	Justin Gleeson SC with Robert Dick (P/A)
SOLICITORS:	TressCox (P/A)