What happens to a charity’s assets upon winding up is an important question that charities and NFPs generally do not pay sufficient attention to. While few people start a charity or NFP with view to “ending” its operations in the foreseeable future, the reality inevitably is that many charities’ operations are wound up.
In this insight, we use a recent case determined in the NSW Supreme Court to highlight how winding up clauses in charities’ constitutions can be crucial in determining what happens with surplus funds and why it is therefore crucial to consider these from inception. If the final destination of surplus funds is important to your organisation, it is crucial to consider whether governing documents reflect your organisation’s intention.
The recent case of In the matter of Maitland Benevolent Society Limited (in liquidation) determined by Justice Rees of the NSW Supreme Court (the Court) on 21 September 2020 dealt with a common winding up provision in a Charity’s constitution.
The facts of the case were as follows:
- The action was brought by the Liquidator of Maitland Benevolent Society Ltd (Maitland) a not for profit organisation which owned and operated Benhome Residential Aged Care Facility (Benhome), an aged care facility in Maitland.
- An Administrator had been appointed to Maitland following compliance action by the Australian Aged Care Quality Agency (regulator) which “identified that there was an immediate and severe risk to the health, safety and wellbeing of residents at Benhome.”
- Following the Administrator’s appointment, the board of Maitland decided to sell the facility to a larger aged care provider to ensure that the facility could be better resourced and continue operating.
- Expressions of interest were sought from other aged care providers and the Royal Freemasons’ Benevolent Institution (Royal Freemasons) submitted their interest to purchase.
- Royal Freemasons subsequently increased their offer when it was made known that Maitland would be wound up and the anticipated surplus funds and assets would be transferred to the successful bidder provided the funds were put towards improvements at Benhome.
- On 1 May 2019, the sale was completed, and the Royal Freemasons became the new owner of Benhome, the business and its assets.
- However, a concern arose for the members of Maitland about the need to make allowance from the proceeds of sale for possible claims arising out of past practices at Benhome that might be exposed by the Aged Care Royal Commission.
- On 18 September 2019, the members of Maitland appointed a liquidator, to assist the board with reaching a decision as to the distribution of the surplus funds, and to avoid any possibility of the board members breaching their duties as directors.
- At the same meeting, all members abstained from voting on the resolution in respect of distribution of the surplus to the new owners of Benholme apparently out of concern about potential liability for future claims.
- In the absence of a decision by the members to approve the distribution of funds on the winding up, the Liquidator was obliged under the charity’s constitution to apply to the Court for directions on how the surplus funds should distributed.
- On application, the Court was informed another entity known as the United Protestant Association, sought half or, alternatively, a quarter of the surplus.
The Court was required to determine which organisation was entitled to receive the surplus funds of Maitland upon winding up. In doing so, the Court considered whether both parties were entitled to receive any surplus on winding up, in light of clause 105 of Maitland’s constitution – which read:
- On a winding up of the Company, the Members must determine one or more companies, associations or institutions whose constitution:
- requires it to pursue only objects similar to those in Clause 2 and to apply its income in promoting those objects;
- prohibits it from making distributions to its members to at least the same extent as in Clause 3;
- if a company, prohibits it from paying fees to its directors and requires its directors to approve all other payments the company makes to its directors;
- is a public benevolent institution; and
- holds accreditation with the Australian Taxation Office as a Deductible Gift Recipient, to whom the liquidator must give or transfer any surplus on dissolution or winding up.
- If the Members fail to make a determination under Clause 105 within 20 Business Days of the winding up of the Company, the liquidator must make an application to the Supreme Court in the jurisdiction the Company is taken to be registered to make that determination.
The Court also had regard to the following matters:
- Which objects in the constitutions of the two competing organisations seeking distribution of the charity’s funds were most closely aligned with those of Maitland?
- What did each entity intend to use the surplus funds for? Did this intended use further the objects of expressed in Maitland’s Constitution?
Interestingly, the Court noted that where a determination is made in favour of one or more interested parties – then it is not required to distribute funds equally among eligible recipients as in Bankstown Community Child Care Incorporated  NSWSC 173. The Judge noted that case was decided on the basis that two charities were content to receive the surplus in equal shares.
The decision in the Maitland case came down to a strict interpretation of Maitland’s constitution and the charity’s intentions for the use of surplus funds when the charity’s assets were sold. The Court held that the United Protestant Association’s Constitution differed from the Maitland constitution in that it contained provisions allowing for the payment of directors fees in some circumstances whereas the Maitland constitution did not, and Maitland’s intent was to ensure the surplus funds were directed towards improvements of the aged care facility. Strictly speaking, only Royal Freemasons constitution met the criteria in the distribution clause of the Maitland constitution.
The Court concluded that the surplus funds were to be distributed in full to the Royal Freemasons’ Benevolent Institution. No orders were sought or made in respect of the concerns of Maitland’s directors about potential future liability.
We recommend that all NFP’s re-check the winding-up/dissolution clauses in their constitution. If the final destination of surplus funds is important to your organisation – due regard should be had to whether your governing documents adequately reflect your organisation’s intention.
If you would like to discuss your organisation’s Constitution or your winding up clause with our NFP Team, please do not hesitate to contact us on (02) 9018 1067.