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Company Constitutions and natural justice

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The decision of the Queensland Supreme Court on 7 August 2020 in a case involving Soroptimist International Of The South West Pacific, a company limited by guarantee is a timely reminder of the need for not for profit Board members to understand and follow the rules contained in their constitution.

What Occurred

At the relevant time, the applicant in the case, Ms Rosaline Miller was a member of an incorporated association, Soroptimist International of Townsville Incorporated (“the Townsville Club”).  The Townsville Club is a member of Soroptimist International of North Queensland Incorporated and Soroptimist International of the South West Pacific (the Federation)”.

As well as being a member of the Townsville Club, Ms Miller was the secretary and Membership Convenor of the Federation. Under the Federation’s constitution, the Membership Convenor is also a director of the Federation.

On 19 February 2020 an extraordinary directors’ meeting of the Federation was held in the absence of Ms Miller and without notice to her. Resolutions were passed at the meeting terminating her:

  1. Appointment as Company Secretary of the Federation;
  2. Position as Membership Convenor and Director of the Federation; and
  3. Membership as a Soroptimist; effectively her membership of the Townsville Club.

Three letters were sent to Ms Miller informing her of the board’s decisions.  Ms Miller applied to the Court seeking declarations that the purported terminations of her positions as Membership Convenor and director of the Federation, her appointment as secretary of the Federation and her membership as a Soroptimist were void, invalid and ineffective.

The Decision

In granting the declarations, the Court made the findings set out below in relation to each of the decisions.

Membership of the Townsville Club

The Townsville Club is an incorporated association regulated under the Queensland Associations Incorporation Act 1981. The Act requires the rules of natural justice to be applied to any adjudication of the rights of members. Those rules require decision makers to afford procedural fairness to a person whose rights or interests could be adversely affected by the decision being contemplated.

This meant that Ms Miller should have been given notice of the motion put to the directors and an opportunity to present her case. She was not and the termination of her membership was therefore void, invalid and ineffective.

Membership Convenor and Director

The Federation is a public company limited by guarantee regulated under the Corporations Act 2001 (Cth). Sections 203D and 203E of the Corporations Act stipulate that it is the members of a public company that can remove a director not the other directors. Those sections also give someone in Ms Miller’s position the right to:

  1. receive timely notice of the intention to move the motion to terminate her directorship; and
  2. be given an opportunity to put her case to the meeting both in writing and in person.

None of those things occurred. A meeting of the members was not called and Ms Miller was not given notice of, or an opportunity to put her case to, the meeting.

A further problem for the Federation was that under its constitution, Ms Miller was a director by virtue of her position as Membership Convenor but the letter to her advised that her position as Membership Convenor and Director had been terminated.

In fact, the board of directors had not decided to remove her from the office of Membership Convenor. The directors’ resolution was that the office of director had become vacant by virtue of the Membership Convenor “acting negligently and/or failing to act in the best interests of the Federation”.

Not only had the board of directors failed to follow the statutory rules in the Corporations Act, they appear to have misinterpreted the requirements of the constitution and the purported termination was found to be ineffective.

Company Secretary

This issue also turned on the rules in the Corporations Act and the constitution.

The constitution gave the directors the power to terminate the appointment of the company secretary and did not stipulate any procedural steps to be followed that might have given Ms Miller the right to defend her positon.

However, the Corporations Act stipulates that a company’s constitution is effectively a contract between the company and each director and company secretary. Ms Miller’s argument was that the rules of natural justice apply to the exercise of any power to terminate the rights of a party to a contract created by the constitution.

There is some uncertainty about the extent to which the rules of natural justice have to be applied in clubs and associations but the preferred view in Australia is that the rules of those organisations should be construed on the basis that “fair procedures are intended unless there are express words or necessary implication in the rules that could exclude natural justice in whole or in part”[1].

The Federation’s constitution includes procedural protections in some parts of the constitution but not in the rule that allowed the directors to terminate the company secretary’s position.  However, the constitution stipulates that the company secretary:

  1. is entitled to attend all meetings ; and
  2. may speak on any matter.

The Court therefore found that although the constitution does not require the company secretary to be afforded procedural fairness, Ms Miller had a right to attend, and therefore should have been given notice of, the directors’ meeting at which her position was terminated even though she would not have been entitled to speak at that meeting.

The Court made the declaration that she was wrongly deprived in her capacity as secretary of her entitlement to attend the meeting of directors. This was done to correct the “collective set of wrongs in connection with the conduct of the meeting” even though it could not reverse the directors’ decision to terminate her position as company secretary.

Summary

This case demonstrates a number of practical and legal issues relevant to not for profit and charitable organisations:

  1. It is essential that directors, individually and collectively, have a clear understanding of the rules contained in the constitution and the corporate regulatory framework in which they operate;
  2. The rules of natural justice and the associated requirements to afford procedural fairness apply to decisions made under those rules unless they have been excluded;
  3. Board resolutions must be carefully drafted to reflect both the power the directors are purporting to exercise and the decision they are making; and
  4. Failing to apply the constitution and the law has the potential to cause reputational and financial damage to individuals and organisations.

Finally, it is important to recognise that this decision contained no information or findings about any allegations or complaints that may have been presented to the directors of the Federation.  It therefore does not contain any guidance about how directors should respond to allegations against members or directors and there is no doubt that those situations can be difficult for directors, especially volunteer directors, to navigate.

If you would like any further information about the issues discussed above please contact us.

[1] McClelland v Burning Palms Surf Life Saving Club (2002) 191 ALR 759, 785

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