Key points
- Even where club directors have a wide discretion to admit nor not admit membership applications, directors must exercise that discretion in good faith.
- A Court will not conduct a “merits review” of a board’s decision to admit or reject a membership application.
- A Club can be held to have engaged in oppressive conduct even if the Club’s constitution has technically been complied with.
To admit or not admit?
How far can the board of a registered club go in refusing membership applications, if the board considers the membership applications to be a branch-stacking operation?
This was the perilous question that faced the board of the Polish Club in the matter of Lukaszewicz v Polish Club Limited [2019] NSWSC 446.
The plaintiffs in this case were two members and two suspended members of the Club. The Club’s board was proposing to sell some vacant land which the Club owned. The plaintiffs and a group of people in the Sydney Polish community opposed the proposed sale of the land.
In the proceedings, the plaintiffs alleged that over a period of just under four years, individual members of Club’s board had embarked on a campaign of:
- suspending and expelling members whom the board saw as allied with the faction opposed to the board’s policies;
- refusing to admit applicants to membership or only admitting applicants to “associate membership” (instead of full membership), on the basis they were associated with faction members; and
- allegedly refusing members of the Club entry to a general meeting to vote on the proposed sale of the land.
The plaintiffs alleged that due to the above conduct, the Club and its board had engaged in oppressive or unfairly prejudicial conduct within the meaning of section 232 of the Corporations Act 2001 (Cth). The individual board members were joined as defendants to the proceedings, along with the Club itself.
In a nutshell, oppressive conduct is conduct which a hypothetical reasonable director would consider commercially unfair. Importantly, a Club’s board can comply with the Club’s constitution to the letter but still be found to have engaged in oppressive conduct.
For example, under the Polish Club’s constitution, the board had a very wide discretion as to whether to admit people to membership of the Club. Notwithstanding that broad discretion, courts have held that the power to admit or reject membership applications must be exercised in good faith.
That is not to say that a board is not permitted to reject a membership application because they think the applicant’s aims or views are not consistent with the objectives of the Club. However a board could not exercise their powers for personal purposes in preference to the best interests of the Club.
While the plaintiffs succeeded in a limited degree in obtaining a declaration that the Club’s affairs had been conducted in an oppressive manner for a short period of time, the plaintiffs failed to prove that the board had rejected the relevant membership applications for an improper purpose and otherwise failed completely in their claims against the individual board directors.
It is critical to note at this point that the Court’s role in these types of cases is not to conduct a merits review of the board’s decisions regarding membership (i.e., decide whether a person should or should not have been admitted based on the merit of that person’s application) but only to determine whether the board acted in good faith or was instead motivated in its decision by some ulterior purpose rather than the Club’s interest.
In closing…
Directors need to exercise care when making any decisions concerning the Club but particularly those decisions which may affect a class of members, and ensure that the Club’s powers are being exercised in good faith and for a proper purpose.