Know thy rules: The importance of governing documents

Print Friendly, PDF & Email

By Carlie Alcock, Associate

The recent decision in Christine Moala and Others v Free Wesleyan Church of Tonga in Australia (Victoria) Inc (Moala) is a pertinent reminder of the importance of a not-for-profit’s governing documents, in particular its constitution. 1
A not-for-profit’s constitution directs its decision making and marks the path for its operations. Without precise and clear drafting, the decisions of the organisation can be entirely unravelled. Although a well-drafted document on its own is not enough – it is also crucial that all stakeholders are kept informed of their obligations and rights under the constitution.

The issues in Moala arose after a dispute broke out in 2014 in the congregation of the Free Wesleyan Church in Melbourne, which led to a number of people walking out of a meeting and independently worshipping at a new location in Weribee.

The church had been known as a Fellowship up until its incorporation as an Association in March 1991 (Association). The issue before the Court centred, firstly, around a determination of who the members were at the time of incorporation, as those members automatically became members of the Association under the Associations Incorporation Act 1981 (Vic). Both parties also agreed that, aside from a possible exception for six of the individual plaintiffs, no new members had joined the Association between the date of its incorporation in 1991 and 18 July 2015, because the membership requirements had not been properly observed.

A decision as to the members was important, as the second issue for the Court was whether a meeting held on 18 July 2015 was validly held. The validity of that meeting would in turn determine whether the new rules and membership admission procedures adopted at that meeting were also valid. The plaintiffs (a number of members of the congregation) claimed that the meeting had not been validly held, as notice had not been given to all members and a number of people who were not members had participated in and voted at the meeting.

Who were the members?

The Court’s decision on the membership rule turned on two separate considerations:

  • whether it was a requirement of membership that a member’s name be entered into the Registry Book; and
  • whether persons in the congregation were required to attain the status of Lotu Fehu’i, a certain spiritual role within the church, before they were eligible to be a member.

Despite reference to the Registry Book in the Fellowship’s constitution, the Court found that the entry of a person’s name in the Registry Book was not a requirement of membership. The 1986 constitution read ‘Membership is open to anyone wishing to join, but names must be registered and listed in the Registry Book’, and the 1984 version of the constitution had read ‘provided their names are registered in the Fellowship’s Registration Book’. However, there was conflicting evidence over whether such a book existed or had been properly kept, and the Court was not satisfied on the evidence that the book produced by the plaintiffs was in fact the Registry Book.

Ultimately, the Court held that the wording in the constitution did not make entry into the Registry Book a pre-condition of membership, but rather imposed a “requirement for the recording of membership already conferred”.2 It determined that the obligation to enter a member’s name into the Registry Book belonged to the Fellowship, as the prospective member had no authority to ensure their name was entered in the Registry Book, or that such a book even existed or was accurately maintained. Moreover, the evidence suggested that there had been no established practice of entering members’ names into the Registry Book, but that custom and practice of the Fellowship had accepted that people were members regardless of whether their names were entered into the Registry Book.

In its decision, the Court referred to the principles outlined in Project Blue Sky v Australian Broadcasting Authority,3 noting that the principles for determining the effect of a failure to comply with a rule “pointed away from invalidity, particularly where those affected by the non-compliance were neither responsible for nor aware of the non-compliance, or where that non-compliance was with a rule that was not expressed as an ‘essential preliminary’”.4

Does custom and practice make a rule?

The second issue concerning membership was whether persons in the congregation were required to attain the status of Lotu Fehu’i before they were eligible to be members. The argument made by the defendant was that it was the custom and practice of the Fellowship that only persons who were Lotu Fehu’i could be members, despite there being no mention of such a condition in the constitution. In coming to a decision, the Court made mention that “the express written text of a rule may be read with or supplemented by unwritten customs or practices”, provided that the customs or practices were “established, well-known and unquestioned”.5

In considering the parties’ positions, the Court looked to the objectives of the Fellowship’s 1984 and 1986 constitutions, “such as: “To maintain lasting relationships that are peaceful, joyful and loving between all members”.“. In considering the objectives, the Court took the view that the limitation of membership to only those who had attained Lotu Fehu’i would operate to exclude other regular attendees of the church from the benefits of those objectives, which had clearly not been the intention of the objects when drafted. Moreover, there was nothing in the constitution that linked Lotu Fehu’i to membership.

The defendant had also argued that the requirement of Lotu Fehu’i for membership was demonstrated by the fact that only Lotu Fehu’i could vote at quarterly meetings. However, in reviewing the evidence, the Court found that the quarterly meetings appeared to be meetings held specifically for the spiritual leaders in the congregation and that other evidence suggested that Lotu Fehu’i was not required to vote at other congregational meetings, including the meetings held to adopt the 1984 and 1986 constitutions.

The Court therefore found that the membership rule applying during the Fellowship required persons to be baptised and to have had at least three months active participation in the Fellowship’s activities, demonstrated through regular attendance at services and class group meetings.

Was the meeting validly held?

Having determined the membership rule applying to the Fellowship, the Court then considered the effect of the application of this rule to the meeting held on 18 July 2015, at which the Association (as it was by then) purported to adopt new rules and new procedures for admission to membership.
In explaining its decision, the Court noted that, where a meeting is conducted by a governing body in which the rules with respect to the giving of notice have not been complied with, “the meeting is null and void to all intents and purposes and no business can be validly transacted at the meeting.” As the notice of the meeting had not been given to all members, because the incorrect membership rule had been applied in compiling the list of members entitled to receive it, the Court held that the meeting was not validly convened and the resolutions passed at it were invalid.

Is there any remedy?

As noted above, an additional argument was made by six of the plaintiffs, who claimed that the Association had knowingly led them to believe that they were voting members and that, in acting under that assumption, they had contributed time and money to the church which they would not have otherwise done (a claim of estoppel).
In considering this issue, the Court accepted that the plaintiffs bringing the claim were indeed under an assumption that they were voting members. However, it found that the assumption was invalidly held and that the whole Association had shared in this incorrect assumption as to the membership rule. Therefore, it could not be said that the Association knowingly induced the plaintiffs into believing that they were voting members.

Considerations

The case of Moala is a timely reminder to all not-for-profits of the importance of a well-drafted constitution and of the benefits in ensuring that all stakeholders are kept well informed of the rules and procedures of the organisation. Where there has been a misunderstanding as to the membership rules, resulting from unclear drafting or out-dated documents, organisations run the risk of having their important decisions entirely unravelled, potentially unwinding months or even years of decision making and progress.

In light of the decision in Moala, not-for-profits need to consider the following points in relation to their governing documents:
Is the organisation’s constitution well-drafted with clear and precise provisions, particularly around membership and voting rights;
Are the governance board, the members and management kept informed of the organisation’s rules and their rights and obligations under the constitution; and
Does the organisation have in place well-documented processes and procedures for implementing the rules under the constitution?

1 [2019] VSC 205.
2. Ibid 125.
3. [1998] HCA 28; (1998) 194 CLR 355.
4. Ibid 133.
5. Moala 254.

For further information, please do not hesitate to contact us.

Get the latest news insights and articles straight to your inbox, simply enter your details.

*
*
*
*Required Fields

Not-for-Profit & Social Enterprise

Changes to the classification of software as a medical device