Kimberley College Ltd v Davis 2018 FCA 1102 (24 JULY 2018)
This recent decision of Greenwood J in the Federal Court of Australia highlights the importance of reading and reviewing a company’s constitution when providing advice to the company.
In the case proceedings were commenced by Kimberley College, a company limited by guarantee operating as an independent school in Queensland, in addition to four individuals that had been appointed as Directors of the College (“the Plaintiffs”). The four individuals involved in the proceedings had been appointed to the Board of Directors of Kimberley College on four separate occasions between 2014 and 2017.
The Plaintiffs sought an order from the Court (pursuant to section 1322(4)(a) of the Corporations Act 2001 (Cth) (“the Act”)) that the appointment of the four Directors was valid despite any alleged contravention of the Constitution.
The four directors had been appointed under the 2001 Constitution. Clause 16.2 of the 2001 Constitution required that the composition of the Board of Directors had to be comprised of at least half parent members, as appointed by ordinary resolution.
A new constitution was adopted on 28 November 2017 under which all directors were required to be members of the Company.
According to the Register of Members current as of 12 June 2018, each of the four Directors had been admitted as members of the company on or about 28 March 2018.
The Court had to deal with two actual or potential contraventions of the company’s Constitution.
Was there a contravention between the period 28 November 2017 and 28 March 2018 of the requirement for each Director of the company to be a member ? Had the four directors been validly admitted to membership ?
Clause 13.1 of the Constitution required an application for membership to be seconded by a member in order to be valid.
Each of the four Directors had made applications for membership seconded by Ms Deborah Horn whom, according to the Register of members had been a member since 2 January 2017. The evidence raised questions as to whether Ms Horn was actually able to be the seconder of the membership applications.
Greenwood J had to consider the requirements of Section 1322(6) of the Act which provides that the Court cannot make an order (under Section 1322(4)) unless it is satisfied that the order is essentially of a procedural nature, the parties involved in the contravention acted honestly, or it is just and equitable for the order to be made.
In every case it is a necessary requirement that no substantial injustice has been or is likely to be caused to any person.
Greenwood J noted that at all times since the respective appointments, the four Directors had been operating and acting upon the assumption that they were valid Directors of the company and had acted in the roles of Directors throughout.
He also noted that the other members of the company had demonstrated recognition of the four individuals as Directors, as evidenced in the minutes of the Annual General Meeting held on 28 November 2017.
Greenwood J noted that there was no suggestion that the making of an order confirming the validity of the appointment of the four Directors would cause substantial prejudice because, in effect, the order would only be confirming a state of affairs that was previously assumed to be valid by all the relevant parties and accordingly no one would be adversely impacted.
His Honour therefore made the order requested by the Plaintiffs pursuant to Section 1322(4) of the Act.
The aim of all not for profit companies is that they do not waste time or resources on internal governance disputes. Care should be taken to comply with the express provisions of the constitution at all times, and if a “new” constitution is being implemented, an audit of its provisions should be measured against past practice, to ensure no inadvertent breaches.