REGISTRAR OF INCORPORATED SOCIETIES V HEARING ASSOCIATION WHANGAREI BRANCH INCORPORATED HC WHA CIV 2007-488-406

REGISTRAR OF INCORPORATED SOCIETIES V HEARING ASSOCIATION WHANGAREI BRANCH INCORPORATED HC WHA CIV 2007-488-406 25 October 2007IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY CIV 2007-488-406IN THE MATTER OF The Incorporated Societies Act 1908 and the Companies Act 1993 BETWEEN THE REGISTRAR OF INCORPORATED SOCIETIES Plaintiff AND THE HEARING ASSOCIATION WHANGAREI BRANCH INCORPORATED Defendant Hearing: 25 October 2007 (Heard at Whangarei) Appearances: SNB Wimsett for Plaintiff C Muston for Defendant Judgment: 25 October 2007ORAL JUDGMENT OF ASHER JSolicitors: Meredith Connell, PO Box 2213 Auckland C Muston, PO Box 1905 WhangareiIntroduction[1] This is an application to liquidate the defendant, the Hearing Association Whangarei Branch Incorporated ("the Hearing Association"), brought by the Registrar of Incorporated Societies ("the Registrar") pursuant to ss 25-26 of the Incorporated Societies Act 1908. [2] The ground put forward is that it is "just and equitable" (s 25(e)) that the defendant be put into liquidation, based on the following grounds: a) The defendant is not being administered in a financially prudent manner: i) Real estate owned by the Hearing Association has been sold to one of its members at an undervalue; ii) Funds belonging to the Hearing Association have been temporarily transferred to the personal bank account of a member and then transferred back to the Hearing Association without interest being paid; iii) The Hearing Association's overall expenditure has far exceeded its income. b) If the Hearing Association continues to operate in its current manner it will inevitably become insolvent. c) Disputes between the Hearing Association's current committee, its former committee and former and current committee members have stifled its ability to manage itself effectively. [3] The Registrar filed a detailed affidavit in support of the application. The Hearing Association then filed a statement of defence as well as an affidavit from Erika Kemp, the president of the Hearing Association, in reply.[4] The Hearing Association was incorporated on 13 February 1981 and is currently a registered incorporated society. Its objects include the promotion and advancement of the educational economic, vocational, physical and social welfare needs and aspirations of people with hearing loss. [5] The Hearing Association appears to be administered on a day-to-day basis by a management committee, which is elected at the Association's annual general meeting. In March 2005 a new committee was elected. In his affidavit in support, the Registrar states that there is a perception among previous committee members that the present committee members all have an affiliation with the current president, Ms Kemp, and her partner, Mr Whitfield, and members of their family. [6] In December 2006, as a result of complaints being made to the Attorney General, the Registrar initiated the investigation that has led to this application. The allegations of the Registrar are in essence that since the new committee took over, the Hearing Association has been grossly financially mismanaged. The Registrar criticises certain specific transactions as being very irregular and points to a gross reduction in the assets of the Hearing Association over the last two years. It is submitted that if the current situation continues the Hearing Association will fast lose all its funds and become insolvent. [7] In the last few days before this hearing, counsel for the Hearing Association, Mr Muston, advised the Court that he would seek leave to withdraw. Mr Muston appeared today and formally sought that leave, advising that the Hearing Association no longer opposed the application for an order for liquidation. I granted Mr Muston leave to withdraw. Nevertheless, given the wide public interest in the application and the serious issues that arise, I now set out the reasons for my decision on the application to liquidate.The grounds for liquidation[8] Section 26 of the Incorporated Societies Act 1908 provides that the Registrar may apply for the appointment of a liquidator of an incorporated society. Section 25 sets out the substantive basis for such an application. It reads:25 High Court may put society into liquidationA society may be put into liquidation by the appointment by the High Court as liquidator of a named person or of an official Assignee for a named district under the following circumstances, that is to say: (a) If the society suspends its operations for the space of a year; or (b) If the members of the society are reduced in number to less than 15; or (c) If the society is unable to pay its debts; or (d) If the society carries on any operation whereby any member makes any pecuniary gain contrary to the provisions of this Act; or (e) If the High Court or a Judge thereof is of the opinion that it is just and equitable that the society should be put into liquidation.The ground relied on by the Registrar is the "just and equitable" ground referred to in s 25(e). [9] A "just and equitable" ground also exists in relation to the liquidation of companies under s 241(4)(d) of the Companies Act 1993. (put this together with the following in one paragraph) There are numerous authorities on the application of this provision. They must be approached with caution, however, as Cooke J pointed out in Finnigan v NZRFU[1985] 2 NZLR 159 at 178 (in relation to ultra vires), referred to by Randerson J inAtchinson v Aviation New Zealand Wing Incorporated HC AK CIV 2004-404-2043 29 October 2004: the law or practice relating to limited liability companies is not necessarily a helpful analogy when considering the position of that incorporated society "where the raison d'etre of an organisation is not to make profits but to promote a certain activity".[10] Morris J noted that caution in Hunt v Border Fancy Canary Club of NZ (Inc)(2000) 8 NZCLC 264,140. He stated at [55], having referred to Finnigan v NZRFU:The same may be said for winding up an incorporated society on "just and equitable grounds". Company law provides some guidance for the winding up of incorporated societies. It must be kept in mind that often committee members are unpaid volunteers, with little or no professional training. White in The Law Relating to Associations Registered under the Incorporated Societies Act 1908 (Unpublished Thesis, Victoria University, March 1972,182) notes the winding up of a society under s 25 provides a measure of protection for members in the event of oppression or deadlock within the society or the destruction of the substratum of the society.As noted by Randerson J in Atchinson v Aviation New Zealand Wing Incorporated, Brookers Commentary to the Companies Act at para CA241.03 sets out a number of categories of cases where the just and equitable ground may be made out. Among these, two categories are especially relevant here: lack of confidence in the conduct and management of the company (Morgan Roche Ltd v Registrar of Companies(1987) 3 NZCLC 100,189) and oppressive or prejudicial conduct (Flett v JH Flett Ltd (1999) 8 NZCLC 261,893). It is convenient to consider the allegations of the Registrar in this context, bearing in mind, of course, the differences between limited liability companies and incorporated societies. [11] The questions that therefore arise are whether the actions of the Hearing Association over the last two years can on an objective basis be said to give rise to a justifiable loss of confidence in its conduct and management, or a justifiable conclusion that its affairs have been conducted in a way which is oppressive or unfairly prejudicial. This could include conduct by those in control of the Association in breach of their fiduciary duty to the Hearing Association. [12] The considerations that relate to incorporated societies may have a different focus to those relating to companies. For instance, the broader objectives of an incorporated society might mean that in addition to considering the interests of members, the Court could consider the expectations of donors or other interested parties. Therefore, the concept of lack of confidence can be measured against not only the interests and reasonable expectations of members, but also potential donors.The specific groundsFailure to administer in a financially prudent manner[13] The affidavit evidence filed discloses three transactions which, on their face, appear to lack a sound commercial rationale. They also appear to financially favour an employee and member of the Hearing Association, Mr Whitfield, who is the partner of its president. Mr Whitfield, in addition to being a member of the HearingAssociation, is also employed by it as a hearing adviser and PTA tester. He has held this position for some time. [14] Mr Whitfield purchased a property at 13 Henry Street, Whangarei, from the Hearing Association in early 2007 for $298,525. That property had been previously purchased by the Hearing Association in 2006 for $315,195. In the course of the Hearing Association's ownership of the property, a new garage had been erected, or an agreement had been made to erect such a garage, for the sum of $19,122. Documents obtained by the Registrar show that when Mr Whitfield borrowed money from his bank to finance the purchase, a valuation was obtained showing that the value of the property was $341,000 including chattels. Thus on the face of it the house was sold to Mr Whitfield by the Hearing Association for less than the Hearing Association paid for it and for considerably less than its value, if the valuation is correct. On the face of this transaction Mr Whitfield, a member and employee of the Hearing Association and the partner of its president, has financially benefited from a purchase from the Association. [15] The second transaction followed. The property at Henry Street was then leased back to the Hearing Association for $2,600 per month. The Registrar in his affidavit says he has difficulty in seeing how such a rent could be justified, and his concern is easy to understand. If indeed the $2,600 per month is more than a market rental than that would be to the profit of Mr Whitfield. Moreover, there is no indication that a house is even necessary for the conduct of the affairs of the Hearing Association. [16] The third transaction relates to the purchase by the Hearing Association from Mr Whitfield of a Holden Commodore SS motor vehicle in 2006 for $40,000. On 25 January 2007 that same vehicle was traded in by the Hearing Association for $18,000. There are two surprising aspects of this transaction. First, there is the real possibility that the Holden Commodore was sold to the Hearing Association at an overvalue, to Mr Whitfield's profit. The second aspect is that the trade-in was for the purchase of a $83,000 Toyota Land Cruiser vehicle. Given the modest assets of the Hearing Association, it seems a very expensive purchase.[17] There are a number of other financial transactions queried by the Registrar, which I will only mention briefly, although they again seem to lack a commercial rationale and are unexplained. There was a $13,000 payment to the Auckland Business School for a course completed by Mr Whitfield. The Registrar has not been able to locate any invoice in the Hearing Association's records relating to this course. On 23 April 2007, $60,000 was paid from the Association into Mr Whitfield's account in an attempt to pre-empt any steps by the Registrar to freeze the Association's assets. This rationale is explicitly stated in the Minutes of the committee of 18 April 2007. The money was ultimately repaid to the Hearing Association after five months, but without interest. On 26 April 2007, $21,092 was paid to Mr Whitfield for wages in advance to the end of 2007. The Minutes again indicate that this was an effort to pre-empt any steps to freeze the Hearing Association's assets. Further, on 26 April 2007, $10,400 was paid to Mr Whitfield, being four months' rent in advance. The same reason was given in the Minutes. On 18 May 2007 a lump sum of $16,089.60 was paid to Ms Kemp for wages to the end of 2007 and PAYE was paid in advance. A clothing allowance was paid to Mr Whitfield and Ms Kemp amounting to $2,000 each. $10,000 was paid to Ms Kemp for a "feasibility study".The financial position of the defendant[18] The financial position of the Hearing Association has undergone an astonishing decline over the last two years. In 2005 it owned a property at Deveron Street, Whangarei, which was sold for $473,370 before the replacement property at Henry Street was acquired. In addition it had cash on hand of $50,860. Its assets therefore came to approximately $520,000. Following the transactions to which I referred earlier and the general running of the Hearing Association, the Association now owns no house property, has funds remaining of $91,000 and the Toyota Land Cruiser that was purchased at the beginning of the year for $83,000. It has some other more minor chattels. It seems likely that its assets are in the vicinity of approximately $185,000. Thus it has lost over 60 per cent of its assets in this short timeframe.[19] Its income position reflects this decline. During the 31 December 2005 income year, the Hearing Association earned income of $23,967 and incurred expenditure of $57,516. In the 2006 financial year it earned revenue of $18,658 and incurred expenditure of $107,985. In addition it spent $119,000 in the purchase of additional plant and equipment and the Holden Commodore SS motor vehicle. No financial statements for the 2007 financial year are yet available, but it seems likely that the deficit will be, if anything, worse than the 2006 deficit. [20] I make it clear that in this judgment I am not making any findings as to the impropriety on the part of the Hearing Association's officers and employees. It would not be appropriate that I reach any such conclusions. The factual allegations made have not been fully tested and my concern in this case is to see whether the s 25 threshold is crossed, and no more.Discussion[21] I bear in mind this statement as to the lack of confidence ground in relation to companies made in Loch v John Blackwood Ltd [1924] AC 783 at 788:It is undoubtedly true that at the foundation of applications for winding up, on the 'just and equitable' rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this conduct must be granted on the conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Further more the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on the lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the state just and equitable that the company be wound up.[22] I consider that the matters that I have referred to do give rise to a loss of confidence in the conduct and management of the Hearing Association. On the face of the material before the Court there has been a gross mismanagement of the Hearing Association's affairs. If it continues, it would seem that the Hearing Association will be insolvent in a short period of time. A real question arises as to the probity of the transactions to which I have referred. The state of affairs to which I have referred also warrants a conclusion that the affairs of the Hearing Associationare being conducted in a manner that is oppressive to those members who are not in control of it. [23] It is to be noted that in the affidavit filed on behalf of the Hearing Association its president, Ms Kemp, attempted to justify the actions that had been taken. I agree with the description given by Mr Wimsett for the Registrar that the explanations demonstrated a naivete and a lack of commercial intelligence. There appears to be no recognition of the disastrous consequences of the financial decisions that have been taken. It does not, therefore, seem that those in control of the Hearing Association will take alternative course to remedy the severe problems that it faces. [24] For these grounds alone I consider that it is just and equitable that the Hearing Association be placed into liquidation. [25] I put to one side the Registrar's third complaint, which is the alleged disputes between the current committee and current members and the former committee and former members. The information available to the Court on this issue is far less clear and it has not been the primary focus of the Registrar's submissions. [26] There is one final matter to which I should refer. The Registrar has pointed out that there is an ongoing valuable bequest available to the Hearing Association made in the will of Grace O'Keeffe of 21 June 1999. Under that will the sum of approximately $200,000 is available at present. It gives rise to an income per annum of approximately $8,500 per annum and the capital will be available for the Hearing Association in 2017. This bequest has been treated as being for the benefit of the Hearing Association, although the legatee is described in the will by a name that does not exactly correspond to that of the Hearing Association. [27] It is possible that the benefit of this bequest could be lost to the hearing impaired of Whangarei by virtue of the Association's liquidation, although that is by no means certain and will be a matter for further consideration. However, if the order for liquidation sought by the Registrar is not made, the benefit of the bequest will be lost in any event, as the Hearing Association appears to be heading towardsinsolvency. Therefore, while the bequest is a matter of legitimate concern it is not a reason to refuse to make an order for liquidation. [28] I am satisfied, therefore, that on the just and equitable ground in s 25(4) of the Incorporated Societies Act 1908, an order should be made for the liquidation of the Hearing Association. I have been handed a consent to the appointment of Stephen Kim Bennett and Timothy John Hoyle, Chartered Accountants of Whangarei.Result[29] The Hearing Association Whangarei Branch Incorporated is placed into liquidation under s 26 of the Incorporated Societies Act 1908. [30] Stephen Kim Bennett and Timothy John Hoyle, Chartered Accountants of Whangarei, are appointed as liquidators. [31] The Registrar does not in the circumstances seek costs... Asher J