Ovchinnikov v Baikal Sports Club Inc

1. [1]

   MITCHELMORE JA: This application for leave to appeal arises from a general meeting of the respondent, the Baikal Sports Club Incorporated (the Club), on 26 March 2023, in the course of which a number of special resolutions were passed, including that the Club be wound up voluntarily and a liquidator appointed. The Club is an incorporated association, and its constitution is registered under the Associations Incorporation Act 2009 (NSW) (the Associations Incorporation Act). The applicant, Mikhail Ovchinnikov, is the holder of Class “A” debentures that the Club issued between 1994 and 1996 (the debentures).

2. [2]

   It was common ground that at the time the debentures were issued to the applicant, he was a member of the Club, membership being a condition of applying for the debentures. The Club contended that between 30 June 1993 and 31 December 2022, there were 35 debenture holders, including the applicant, who at some stage during that period had not paid the annual membership fee for which the constitution made provision. The Club submitted that it followed, under the constitution, that each of those persons ceased to be members of the Club and their names were removed from the register of members. It also followed, the Club submitted, that the votes they cast at the March 2023 meeting were not to be counted in determining the outcome of the special resolutions.

3. [3]

   The resolutions at the March 2023 meeting only received the percentage of votes required for their passage if the Club’s contentions prevailed. By its amended originating process, the Club sought a number of declarations including that only members were entitled to vote in meetings of the Club, and that the special resolutions passed at the March 2023 meeting were valid. The applicant opposed that relief and, in turn, brought a cross-claim in which he sought declarations including that the constitution of the Club adopted on 27 October 2016 was invalid.

4. [4]

   The primary judge found that the terms and conditions of the debentures conferred on the debenture holders a right to vote at a meeting of the Club irrespective of whether they remained members of the Club. However, his Honour also found that the votes cast by debenture holders whose membership of the company had ceased, by reason of their non-payment of fees, were not to be counted in determining the passage or otherwise of resolutions put to a vote at Club meetings. It followed that the special resolutions passed at the March 2023 meeting were valid, and his Honour so declared. His Honour dismissed the applicant’s cross-claim.

5. [5]

   In his draft notice of appeal, the applicant contends that the primary judge should have found that on the proper construction of the Club’s constitution, the terms and conditions of the debentures, and s 39 of the Associations Incorporation Act:

   1. (1)

      a debenture holder who is a member of the Club does not lose their membership by not paying the relevant annual subscription fee (proposed ground 1);

   2. (2)

      a debenture holder remains a member of the Club by reason of their continuing status as a debenture holder (proposed ground 2(i));

   3. (3)

      clause 1 of the Club’s constitution, which defines a “debenture holder” as a member of the Club, conferred an operative right on a debenture holder to continuing membership of the Club where they would otherwise lose their membership under the provisions of the Club’s constitution (proposed ground 2(ii)); and

   4. (4)

      a debenture holder’s vote would not be disregarded in determining the outcome of a resolution under, relevantly, s 39 of the Associations Incorporation Act, from which it followed that the votes of the debenture holders should have affected the outcome of the special resolutions at the March 2023 meeting (proposed grounds 3 and 4).

6. [6]

   Leave to appeal is required because the appeal does not satisfy the condition in s 101(2)(r) of the Supreme Court Act 1970 (NSW). The applicant sought an extension of time to file a summons seeking leave to appeal until 26 June 2024. That extension of time was not opposed and should be granted. However, the application for leave to appeal should be dismissed. The application does not raise an issue of principle, or questions of general public importance, or an injustice that is reasonably clear in the sense of going beyond what is merely arguable: Jaycar Pty Limited v Lombardo [2011] NSWCA 284 at [46]; Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 at [32]-[38].

Factual Background

1. [7]

   The primary judge summarised the background to these proceedings in [2]-[11] of the reasons, the correctness of which both parties accepted.

2. [8]

   From 25 August 1994, the Club was incorporated under the name Russian Sports Association Incorporated and was governed by rules contained in the document entitled “Rules for the Russian Sports Association Incorporated” (1994 Rules). The 1994 Rules were registered under the Associations Incorporation Act 1984 (NSW) (the 1984 Act), which was repealed by the Associations Incorporation Act (see s 108 of the latter as enacted).

3. [9]

   On 21 March 1995, the applicant became a member of the Club: at [2]. Between August 1994 and January 1996, the Club issued the debentures to 61 then members of the Club, including the applicant, with a total value of $133,000: at [3].

4. [10]

   On 21 March 1996, the Club sent members a letter stating that “as a Debenture Holder, you are required to pay membership fees annually. Failure to do so will disentitle you to vote at meetings”. The primary judge described the latter proposition as “perhaps imprecise”, having regard to provisions of the 1994 Rules which were replicated in the two subsequent constitutions and to which I will turn shortly: at [4].

5. [11]

   At an annual general meeting of the Club in September 2006, members approved changing the Club’s name to “Russian Sports and Social Club Incorporated” and resolved to adopt a new constitution (2008 Constitution). The 2008 Constitution was accepted for registration under the 1984 Act and took effect on and from 21 February 2008: at [7].

6. [12]

   In October 2016, the Club passed a number of special resolutions including to amend the constitution and change the Club’s name to Baikal Sports Club Inc. The new constitution (2016 Constitution) was accepted for registration under the Associations Incorporation Act and took effect on and from 27 October 2016: at [8].

7. [13]

   On 16 October 2022, the Club held an AGM at which a special resolution was passed to amend cl 46(4) of the 2016 Constitution, which deals with the distribution of the Club’s property on a winding up. A resolution was also passed to incorporate a new entity named Baikal Youth Assistance Charity Fund Ltd (the BYA Charity Fund): at [9].

8. [14]

   On 2 March 2023, the Club sent a notice about the March 2023 meeting to members of the Club and debenture holders including those whom the Club contended had ceased to be members and whose names had been removed from the register of members. Special resolutions were proposed for the voluntary winding up of the Club and appointment of a liquidator, ratification of the special resolution passed at the AGM on 16 October 2022 amending cl 46(4) of the constitution, and for the distribution of surplus property to the BYA Charity Fund: at [11].

9. [15]

   For each of those three resolutions, 60 votes were returned: 44 votes were returned in favour of each resolution, including 10 votes by debenture holders whose membership was recorded as having ceased; and 16 votes were returned against the resolutions, including 11 votes by debenture holders whose membership was recorded as having ceased: at [11].

The decision of the primary judge

1. [16]

   The primary judge summarised the Club’s claim for relief as involving the following two questions: at [19]. The first question was whether the Club’s constitution(s) entitled debenture holders who had not paid membership fees to vote at general meetings of the Club. His Honour accepted that “the Club’s constitution(s) condition both the right to vote and the continuance of membership on payment of membership fees”. However, acknowledging that it did not necessarily follow that debenture holders did not have an independent right to vote at general meetings that arose from the terms and conditions of the debentures, the second question was whether those terms and conditions allowed a debenture holder who had not paid membership fees the right to vote.

2. [17]

   As his Honour observed at [18], the principles of construction applicable in answering those questions are well-established:

3. [18]

   The primary judge’s description of the Club’s constitution(s) as a public document reflected its status under the Associations Incorporation Act. The Act establishes a scheme for the registration of associations that are constituted for the purpose of engaging in small-scale, non-profit and non-commercial activities, and makes provision with respect to the corporate governance and financial accountability of associations registered under the scheme: s 3. Of particular relevance to his Honour’s consideration of the issues which the Club raised in the present case were ss 38 and 39, which provide:

4. [19]

   Section 4 of the Associations Incorporation Act defines “constitution” as meaning “the constitution that is recorded in the Register of Incorporated Associations in relation to the association”. As I noted above, each of the Club’s 1994 Rules, the 2008 Constitution and the 2016 Constitution was accepted for registration (the 1994 Rules and 2008 Constitution under the 1984 Act). There is no definition of “member” in the Associations Incorporation Act, nor was the term defined in the 1984 Act.

5. [20]

   The primary judge concluded that the debenture terms and conditions conferred a right to vote on debenture holders irrespective of whether they remain members of the club and whether their vote would be recognised under the Club’s constitution or under s 39 of the Associations Incorporation Act: at [32]. His Honour thus declined to make the first declaration that the Club sought, which was formulated by reference to an entitlement to vote: at [33]. However, his Honour determined, favourably to the Club, that:

   1. (1)

      pursuant to the Club’s constitution, debenture holders who did not pay the annual membership fees ceased to be members of the Club: at [21];

   2. (2)

      in circumstances where the voting requirements in the constitution rested on membership, any votes cast by those debenture holders would not be counted: at [27]; and

   3. (3)

      those votes would also not be counted under s 39 of the Associations Incorporation Act, which was formulated by reference to the votes cast by members of the association: at [34]. The section did not give effect to any entitlement of debenture holders to vote that arose as a matter of contract under the debenture terms and conditions and not the Club’s constitution, and those votes thus did not affect the outcome of the resolutions at the March 2023 meeting: at [38].

6. [21]

   Rather than address his Honour’s reasons separately, it is preferable to address them in the context of the application for leave to appeal.

The application for leave to appeal

1. [22]

   The applicant did not make submissions on the individual proposed grounds. Rather, the applicant addressed the central point that his application for leave to appeal was said to raise, namely, whether, as a debenture holder who had not paid his membership fees, he had an entitlement to vote at the March 2023 meeting and to have that vote count in determining the outcome of the special resolutions. His starting point was the general proposition that in the case of an association, “debenture-holders may in substance be members”, relying on the following passage from F H Callaway’s work, Winding up on the Just and Equitable Ground (1978, Law Book Co) at 116-117:

2. [23]

   Contrary to the emphasis that the applicant gave to the second sentence in this extract, it is the statement with which the extract concludes that is significant on the present application. The applicant’s proposed grounds of appeal were premised upon the terms and conditions of the debentures that the Club issued to the applicant operating, in effect, co-extensively with the provisions of the Club’s constitution. However, the debentures did not, and could not, qualify or condition the provisions of the Club’s constitution. In accordance with s 26(1) of the Associations Incorporation Act, the constitution bound the Club and its members “to the same extent as if it were a contract between them under which they each agree to observe its provisions” (emphasis added).

3. [24]

   Contrary to the applicant’s submissions, which commenced with the terms and conditions of the debentures, it is necessary first to examine the Club’s constitution, relying on the terms of the 2016 Constitution unless otherwise specified. The constitution contains a number of provisions which make it clear that voting rested on membership of the Club, and that a person’s membership could cease for non-payment of annual fees. In particular, Part II makes provision for membership qualification (cl 3), nomination for membership (cl 4) and cessation of membership (cl 5).

4. [25]

   Importantly for present purposes, cl 5 provides:

5. [26]

   Clause 9(2) provides:

6. [27]

   For the purposes of the issues on appeal, these clauses were materially the same in the 1994 Rules and the 2008 Constitution. Clause 6 is also relevant, and provides:

7. [28]

   The Club’s constitution thus requires “members” of the Club to pay an annual fee; and failure to pay by the prescribed date operates to terminate a person’s membership. Where a member ceases to hold membership, the secretary is required to make an appropriate entry in the register of members “recording the date on which the member ceased to be a member”.

8. [29]

   Unsurprisingly, membership is central to the meeting provisions in the Club’s constitution. Clause 29(1) provides that no item of business is to be transacted at a General Meeting “unless a quorum of members entitled under these rules to vote is present during the time the meeting is considering that item”. Clause 33, which addresses special resolutions, provides that “[a] resolution of the Club is a special resolution if”:

9. [30]

   Clause 34 regulates voting. A member has one vote only (cl 34(1)). Relevantly, cl 34(4) provides that “[a] member or proxy is not entitled to vote at any General Meeting of the Club unless all money due and payable by the member or proxy to the Club has been paid”.

10. [31]

    There are references to debenture holders in some provisions of the constitution, but nothing in those provisions suggests that debenture holders have a status that is separate from, or independent of, membership of the Club such that the membership requirements in Part II do not apply. To the contrary, membership of the Club is central to the definition of “debenture holder” in cl 1(1), which provides:

11. [32]

    Of the provisions in the Club’s constitution which refer to debenture holders, a number refer to members who are debenture holders, including:

    1. (1)

       cl 16(8), which provides that on the calling of the ballot for election of the committee, “each member who at the date of the ballot is a fully paid up member debenture or ordinary shall be entitled to one vote in the ballot” (emphasis added);

    2. (2)

       cl 29(2), which provides that “[f]ive members present in person … of which all of whom shall be debenture holders” constitute a quorum (emphasis added); and

    3. (3)

       cl 35(1), which deals with the appointment of proxies and relevantly provides that “[a] member who is a debenture holder shall only be able to give their proxy to another member who is also a debenture holder” (emphasis added).

12. [33]

    There are also a number of provisions which refer to debenture holders and “ordinary members”, the latter being defined to mean “a member of the Club who is not an office-bearer of the Club, as referred to under clause 15” (cl 1(1)). Those provisions include:

    1. (1)

       cl 15(1), which provides that the committee of the Club is to consist of at least six members who are debenture holders and five from the ordinary membership (I note that cl 16(7) is worded in similar terms although it refers to six members who are debenture holders and five other members who may not be debenture holders); and

    2. (2)

       cl 17(1), which permits the president of the Club to be elected from debenture holders or from ordinary members who have been elected to the Committee in the ballot under cl 16.

13. [34]

    However, as the Club contended below, and as the primary judge accepted, those provisions “do not displace any requirement for debenture holders who are members of the Club to pay membership fees, since they could readily apply to debenture holders who pay their membership fees and remain members of the Club”: at [21].

14. [35]

    The Club’s constitution recognises that some members of the Club hold debentures and some members do not. However, the applicant contended that he was entitled to vote at Club meetings and to have that vote count as that of a member merely because he held a debenture. In support of that contention he relied primarily on the terms and conditions of the debentures. As the Club submitted, those terms and conditions do not, without more, operate to amend the constitution. Otherwise, the restriction on the amendment of the Club’s constitution by way of special resolution (in cl 39) would be rendered otiose: cf In the matter of Lesso Building Material Trading (Sydney) Pty Ltd (administrators appointed) [2018] NSWSC 1486 at [20]-[23].

15. [36]

    Further, and in any event, the terms and conditions of the debentures that the applicant relied upon did not rise to the level to which he sought to elevate them. He submitted that debenture holders in the position of the applicant were in substance members, and remained so notwithstanding the non-payment of annual fees, having regard to the following aspects of the terms and conditions:

    1. (1)

       Only members of the Club could apply for the debentures (cl 5).

    2. (2)

       The debentures were issued for a period of 10 years, and a debenture holder was required to provide the Club’s Treasurer with a written request at least 12 months before maturity if the holder did not wish to roll over their debentures for a further 10 years (cl 6, 8).

    3. (3)

       Debenture holders could only sell, transfer or assign their debentures with the written permission of the Committee (cl 9).

16. [37]

    The submission as it was developed orally emphasised the difficulty of redeeming or transferring the debentures, relying upon Redhead Grange Incorporated v Davidson (2002) 55 NSWLR 14; [2002] NSWSC 90. In that case, Brownie AJ was concerned with the purported resignation of the defendants from their membership of the plaintiff association. His Honour stated at [7]:

17. [38]

    Save for the last sentence, which is of general application, this passage does not assist the applicant, not least because his Honour was dealing with the constitution of the association and not a separate contractual document. Such difficulties as may arise from redeeming or transferring the debentures under the terms and conditions on which they were issued cannot relevantly affect the terms of the Club’s constitution to which I have referred above.

18. [39]

    The applicant placed the greatest emphasis on cl 7 of the debenture terms and conditions, which was in the following terms:

19. [40]

    His reliance on cl 7 was consistent with the primary judge’s conclusion that the clause conferred a right to vote on debenture holders irrespective of whether they remain members of the Club, paying particular regard to the first sentence: at [32]. Reading the clause as a whole, an alternative construction of cl 7, which in my view is preferable, is that it limits the votes of debenture holders to one vote irrespective of the number of debentures they hold or the value of the debentures they hold, jointly or otherwise. The clause does not confer a right to vote, nor does it need to: debenture holders need to be members of the Club, and the constitution confers on each member a right to one vote, as an incident of membership.

20. [41]

    This alternative construction is consistent with the text of cl 7 and avoids the anomalous consequence by which debenture holders whose membership has ceased were entitled (by implication from cl 7) to be given notice of a general meeting, and to vote at such meeting, but with that vote having no practical utility because they were no longer members: at [37]-[38]. For present purposes, it is sufficient to conclude that cl 7 does not assist the applicant in his application for leave to appeal.

21. [42]

    As to the proper construction of s 39 of the Associations Incorporation Act, the applicant submitted that it is directed at specifying the test for the validity of a special resolution by reference to votes cast by members “entitled to vote”, rather than by reference to ascertaining who is (or is not) a member of the Club. He submitted that the latter question is to be determined from a reading of the Club’s constitution “and any other constitutive rule or document – including, in this case, the debenture certificates”. The characterisation of the debenture terms and conditions as a “constitutive document” is wrong for the reasons I have already given. Further, the entitlement to vote to which s 39 refers is the entitlement of “members”. Still further, even if the sole focus of s 39 was a person’s entitlement to vote, it would not assist the applicant in this case. Clause 34(4) of the Club’s constitution would have precluded the applicant from voting: as the primary judge observed at [27], he had not paid all money due and payable by him to the Club.

Conclusion

1. [43]

   There is no merit in the grounds that the applicant proposed in the draft notice of appeal. I would refuse leave to appeal.

2. [44]

   The applicant accepted that costs would follow in the event that he was unsuccessful. Accordingly, I propose the following orders:

   1. (1)

      Extend time for the applicant to file the amended summons seeking leave to appeal to 26 June 2024.

   2. (2)

      The amended summons is dismissed with costs.

3. [45]

   STERN JA: I agree with Mitchelmore JA and the orders her Honour proposes and with the additional observations of Basten AJA.

4. [46]

   BASTEN AJA: I agree with Mitchelmore JA that leave to appeal should be refused. What follows does not conflict with the reasoning set out above.

5. [47]

   The reasons to refuse leave are both procedural and substantive. The procedural reason is that, although the draft notice of appeal was ambiguous as to the relief sought, it appeared that the applicant pursued a declaration that the constitution adopted by the Club on 27 October 2016 was “invalid and without legal effect”. If that were so, then presumably the prior constitution, adopted on 21 February 2008, would not have been replaced and would have remained in force. One result of that would have been that the Club had failed to change its name, but otherwise the applicant was unable to indicate any significant change in the terms of the constitution. There would be no reason to grant leave to pursue such relief.

6. [48]

   The substantive reason why that relief would not be granted is that the applicant failed to demonstrate an arguable basis upon which s 14 of the Associations Incorporation Act 2009 (NSW) would not have effect. That section provides:

7. [49]

   Section 53 of the Interpretation Act 1987 (NSW) provides:

8. [50]

   There is no dispute that the 2016 constitution was registered. Although s 10 of the Associations Incorporation Act provides that a change in an association’s name, objects or constitution may only be made pursuant to a special resolution, it is by no means clear that, by raising a doubt as to the validity of the special resolution passed in October 2016, the applicant can retrospectively undo the operation of s 14. There was no application to correct the register. To warrant a grant of leave to appeal, the applicant must establish a more than merely arguable case that those statutory hurdles can be overcome: Cheng v Motor Yacht Sales Australia Pty Ltd t/as the Boutique Boat Company. [1] These issues were simply not addressed.

9. [51]

   Otherwise, the applicant’s substantive case rested on the proposition that the holders of a debenture issued by the Club were entitled to vote at general meetings of the Club even if, pursuant to the constitution, they were no longer members. The relevant provisions have been set out by Mitchelmore JA and need not be repeated. There was, the applicant said, a disconformity between the provisions of the constitution permitting current members of the Club to vote and cl 7 of the debenture, which conferred on a debenture holder a right to vote, even if he or she were not a member of the Club. The applicant submitted that the debenture should prevail. There are two reasons for rejecting that proposition.

10. [52]

    First, the power to obtain funds by issuing debentures will now depend upon the combined operation of ss 19 and 20 of the Associations Incorporation Act and the terms of the constitution. The terms and conditions of the debenture are therefore to be read harmoniously with the powers of the Club. One limitation on the legal capacity and powers of the Club is found in s 10(2) of the Associations Incorporation Act, namely that the constitution can be changed only pursuant to a special resolution passed by the Club. The constitution cannot, therefore, be changed by a contract between the Club and an individual member or a third party. That is, a contract cannot confer a right to vote at general meetings of the Club on someone who is not eligible to vote in accordance with the constitution. The applicant’s contention that the terms of the debenture governed such matters was untenable.

11. [53]

    Further, the applicant’s construction of cl 7 of the debenture should be rejected. It states that debenture holders “are entitled to one vote only on a poll or any other vote when called for as laid down in the Associations [sic] rules …”. (At the time the debentures were issued, the association had “rules” not a “constitution”.) The purpose of cl 7 was to confine the debenture holder to one vote only. The qualifying clause (“when called for as laid down in the Association’s rules”) demonstrates that there was no intention to change the rules, but merely to indicate that a debenture holder, who had certain rights under the rules, was limited to one vote.

12. [54]

    The 1994 rules conferred certain rights on persons identified as “debenture holders”. That was a defined term: the definition commenced, “‘debenture holder’ means a member of the association who …”. Clause 5 stated that a person “ceases to be a member of the association if the person … (d) does not pay the annual membership subscription fee…”. Accordingly, a person who was the holder of a debenture but who ceased to be a member of the Association was no longer a “debenture holder” for the purpose of the rules. He or she not only had no right to vote at a general meeting, but no longer held any of the rights attaching to debenture holders.

13. [55]

    Further, as the primary judge noted, ss 38 and 39 of the Associations Incorporation Act define both an ordinary resolution and a special resolution as resolutions supported by the relevant proportion of “the votes cast by members of the association who, under the association’s constitution, are entitled to vote on the proposed resolution.” (Emphasis added.) The debenture cannot operate inconsistently with the statute.

14. [56]

    There is no available construction of the legislation and these documents which could be said to raise an issue beyond the “merely arguable”; there is therefore no basis for a grant of leave to appeal.

15. [57]

    The primary judge came to the implausible conclusion that debenture holders had a contractual “right to vote” at meetings of the Club, but the rules precluded their votes from being counted. That conclusion was incoherent. For the reasons set out above, the debenture did not give a right to vote to a person who was not a member of the Club at the time any vote was taken. Indeed it carried no special rights under the constitution if the holder were not a member.