Ms Farheen Qureshi (in her capacity as Liquidator of Edgware Constitutional Club Ltd) v Association of Conservative Clubs Ltd

JurisdictionEngland & Wales
CourtChancery Division
JudgeSarah Worthington
Judgment Date09 May 2019
Neutral Citation[2019] EWHC 1165 (Ch)
Date09 May 2019
Docket NumberCase No: HC-2017-002846

[2019] EWHC 1165 (Ch)

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS IN ENGLAND AND WALES

COMPANIES COURT (ChD)

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Sarah Worthington QC(Hon) sitting as a Deputy High Court Judge

Case No: HC-2017-002846

Between:
Ms Farheen Qureshi (in her capacity as Liquidator of Edgware Constitutional Club Limited)
Claimant
and
Association of Conservative Clubs Limited
Defendant

Michael Bowmer (instructed by Kennedys Law LLP) for the Claimant

Mark Hubbard (instructed by Thomson Snell & Passmore LLP) for the Defendant

Hearing dates: 12, 13 November 2018

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

THE HONOURABLE Sarah Worthington QC (Hon) Sitting as a Deputy High Court Judge

Sarah Worthington QC(Hon):

1

The question in issue in this application is whether the current members of an incorporated club can decide to sell off the club's assets, wind up the club's operations and distribute the club's hefty surplus amongst themselves. The alternative, especially if the club is part of a network of similar clubs engaged in the same endeavours, is that the accumulated funds must remain dedicated to achieving these clubs' broad social and philosophical objects. These alternatives reflect the competing approaches advanced by the Claimant and the Defendant in this application. Which approach is correct depends on the application of statute, the general law and the liquidating club's own constitutional rules.

2

The Defendant is the Association of Conservative Clubs Limited (“the Association”), a company limited by guarantee. Its objects are promoting Conservatism and providing support to its member clubs.

3

The Claimant is the liquidator of the Edgware Constitutional Club Limited (“the Club”), a local conservative club. Its objects are to “carry on the business of a Club and, in so doing, to promote by all proper means the principles of Conservatism and the implementation of the Conservative Party's policies”. The Club is expressly affiliated to and inter-affiliated with the Association and subject to the Association's rules and regulations, including restrictions on amending certain of its own Rules unless it has the approval of the Association.

4

The application before the court is brought by Ms Qureshi of Parker Getty Limited as Liquidator of the Club. It seeks a declaration as to the legality of certain past and proposed distributions of the Club's surplus assets on a members' voluntary winding up. These include interim distributions already made to members (amounting to £890,500 — or £6,500 per member — of which the net sum distributed so far is £832,000); the intended final distribution to members (of approximately £250,000); and the payment of the expenses of liquidation, including the legal expenses of this application. These distributions are challenged by the Association, which claims it is entitled to the surplus assets.

5

The application was made by way of a Part 8 Claim issued on 27 October 2017. Although not stated explicitly on the Claim Form, the Liquidator has indicated that the application is properly to be regarded as made under s 112 of the Insolvency Act 1986 (“ IA 1986”), by which a liquidator may apply to the court to determine any question arising in the winding up of a company. A liquidator making such an application has a duty to put all relevant evidence before the court.

The legal issues

6

In broad outline, the position of the Club is that it is engaged in a solvent members' winding up that is governed by the IA 1986. That Act provides that surplus assets should be distributed to the Club's members unless the Club's Rules provide otherwise, and they do not. Accordingly, having ensured all creditors were paid, the liquidator has made an interim distribution to members and proposes to make a further final distribution after paying the costs of the liquidation.

7

By contrast, the position of the Association is that the Club is not properly in a winding up, and while it is operating as a going concern its Rules do not permit it to distribute its assets to its members at all. Alternatively, even if the Club is engaged in a winding up, its surplus assets should not be distributed to its members because either (a) the Club's Rules required the surplus assets to have been distributed to the Association before the winding up commenced, and if that was not done then the liquidator must now do it; or (b) the Club's rules gave the Club a discretion while it was a going concern to distribute its surplus assets to the Association, and that discretion was not exercised (or perhaps not exercised appropriately), so the liquidator must now exercise that discretion properly, which would require distribution of the surplus assets to the Association. Furthermore, since the liquidator is now conflicted in carrying out this exercise of discretion (having made earlier errors), the court should exercise this discretion itself.

Background

8

There is no substantial dispute of fact between the parties, although the supporting evidence before the court was often sparse.

9

The Club was incorporated in February 1934 and is now registered under the Co-operative and Community Benefit Societies Act 2014 (“CCBSA 2014”), and previously under its predecessor Acts. These Acts require the Club's rules to be registered, and no amendment to the rules is valid until the amendment has been registered (see CCBSA 2014 s 16(1) and the predecessor Industrial and Provident Societies Act 1965 ss 9 and 10). The Club's registered rules are those registered on 8 October 1982 (“the 1982 Rules”). As discussed later, the Association made much of facts indicating that a proposed change to the Club's rules appears to have been considered in 2011, but these proposed amended rules (“the 2011 Rules”) are not the registered rules of the Club.

10

The Club owned and operated premises at 49–51 Manor Park Crescent, Edgware Middlesex, HA8 7LY (“the Club House”) for many years. These are the premises referred to in the 1982 Rules.

11

The 1982 Rules provide for the Club to be run by a Committee of either 7 or 8 Officers (e.g. President, Treasurer, Secretary) and 12 Committeemen (Rule 25), each to remain in office until their successors are elected (Rule 25), with elections held annually for the Officers and biennially for the Committeemen (Rules 25 and 34), with 5 members required for a Committee meeting quorum (Rule 34). These Officers and Committeemen are the people given primary conduct of the business of the Club.

12

The Club ceased filing annual returns in 2012, that last return indicating that the Club then had 162 members and had traded at a small loss. The Club also ceased accepting new members in 2012, seemingly because of a suspicion that new members were joining in anticipation of a sale of the Club's assets. Winding up had been under informal discussion from 2011/12.

13

The process of winding up the Club extended from July 2015 until August 2018. This involved a number of crucial acts undertaken by the Club's Officers and its Committee, and resolutions passed at three general meetings held over that period. The first of these meetings of members agreed that steps should be taken to wind the company up, the second agreed to the winding up itself, and the third ratified the resolutions passed at the second meeting. A major plank in the Association's case is that there were such significant procedural flaws in all these various endeavours that the Club did not successfully embark on any process of winding up, and accordingly the distribution rules that might apply on a winding up are not relevant at all. The detail is considered later in this judgment.

14

On 13 January 2016 the Club House was sold.

15

On 7 June 2016 the liquidator made an interim distribution of £6,500 to each of the 137 known members of the Club (totalling £890,500). Only £832,000 was actually paid out, with £52,000 recorded as returned.

16

On 29 July 2016 the Association's solicitors objected to the distribution and claimed that the Association was entitled to the surplus. In March 2018, the Association expressed further concerns following receipt of the liquidator's witness statement.

Relevant law on the winding up of a registered society

17

Section 123 of the CCBSA 2014 makes it clear that the IA 1986 applies to companies which are registered societies. Such societies may be wound up as if the society were a company, subject to certain adjustments that are immaterial for present purposes. Section 84(1)(b) of the IA 1986 thus enables the Club to be wound up voluntarily if its members so resolve by special resolution.

18

Section 107 of the IA 1986 then sets out the crucial rule governing the distribution of the Club's property on a voluntary winding up:

“107. Distribution of company's property

Subject to the provisions of this Act as to preferential payments, the company's property in a voluntary winding up shall on the winding up be applied in satisfaction of the company's liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company.” [emphasis added]

19

Whether the Club's articles “otherwise provide” is thus critical. The Club's registered constitution is its equivalent of a company's articles. In the Club's registered 1982 Rules, the relevant provision is Rule 74:

“74. Any surplus of the Club shall be applied in such manner as the Committee consider best (a) in the interests of the Club and furtherance of the objects of the Club, or (b) in assisting the local Conservative and Unionist Association and Conservative and Unionist Central...

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