What do not-for-profits, zombies and werewolves have in common?

Posted on 06 Jul 2020

By Chris Borthwick, thinker in residence, Our Community

CaseWatch
As part of the Institute of Community Directors’ commitment to good governance, this ongoing series of articles dubbed “Case Watch” highlight court disputes that offer lessons for other not-for-profits.

When people phone Our Community asking about how to sort out glitches in their meetings, my usual response is that nobody really cares – not in a legal or regulatory sense, anyway. I tell them that provided they can get to a reasonable outcome through good faith negotiations, they should do just that, and apologise later for any borderline unconstitutionalities involved in the process.

Every now and again, though, that approach breaks down, and lawyers get a chance to use the organisation in question as a chew toy. See, for example, two cases involving Bankstown Community Childcare: Bankstown Community Childcare Inc [2006] NSWSC 612, and Bankstown Community Child Care Inc [2008] NSWSC 173.

This not-for-profit childcare centre found it was having trouble hiring suitably qualified staff and couldn’t continue. That’s sad, but it’s not illegal. The association held a general meeting and by a large majority agreed to close and call in a liquidator. All well and good, but…

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Somebody (it’s not clear who) objected. Yes, the meeting had passed the motion to close down, but had it passed it as a special resolution, as the Act required? The chair hadn’t, apparently, at the time said it was one. It wasn’t clear that the necessary 21 days’ notice had been given. So off to court it went, where the judge considered the matter carefully and ruled that “the evidence did not permit a finding that a ‘special resolution’, as defined by s 5 of the Act, had been passed”.

This was, in practice, a distinction without a difference, as the court promptly ordered the winding up of the childcare centre under a completely different section of the Act, meaning that all that had happened was the addition of an extra level of inconvenience and expense. But at least it was over, right?

No. Two years later, the organsation was back before the bench. The last meeting of the association had had not one but two jobs – one the shutting down of the place, the other disposing of any leftover money, and both of them were carried by special resolutions that the judge had found were technically invalid. So who got the money?

The association could just have met and passed another special resolution dotting the Ts and crossing the Is, but the problem was that the constitution said that the members were the parents using the centre, and as there hadn’t been a centre for two years there were thus no valid members. This gave the court the opportunity to show off a little:

“But the Bankstown Association …. has no members. That raises a metaphysical question: does the Bankstown Association now exist?”

As lawyers so much enjoy doing, the judge wandered through the musty precedents. Blackstone, writing in 1765, and Kyd, in 1794, would have said it didn’t. On the other hand, ever slightly more recently:

“Writing a century ago, Cecil T Carr, in ‘The General Principles of the Law of Corporations’, Cambridge, 1905, imagined a dinner at Trinity College Cambridge at which the master, fellows and scholars who make up the whole of the corporators ‘are suddenly poisoned by the negligence or caprice of their cook’. He asked: ‘Is the corporation at an end? Or does it exist “passively” in spite of the momentary loss of members?’”

His answer: “The corporation is not dead, but temporarily in abeyance.”

Not-for-profits have apparently joined zombies, werewolves and mummies as a category of the undead.

In the end, the judge left that philosophical question in the air, passing out the money more or less the way the members of the association had wanted it to go under another section of the Act – again, with maximum inconvenience to everybody.

The lesson, therefore, is that where money is concerned it costs nothing to do things by the book, and your successors (or their zombies) will thank you for it. That, and run a police check before hiring a cook.

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