Basecove Pty Ltd v Dolores Lavin Management Pty Ltd & ors

Basecove Pty Ltd (plaintiff) PARTIES : Dolores Lavin Management Pty Ltd (first defendant) Luxe Studios Pty Ltd (second defendant) Luxe Productions Pty Ltd (third defendant)

COUNSEL : Mr M Pesman w Mr D Eardley (plaintiff) Mr P Braham (defendants)

SOLICITORS : Beazley Singleton Lawyers (plaintiff) James Tuit & Associates (defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EXPEDITION LIST

5046/09 Basecove Pty Ltd v Dolores Lavin Management Pty Ltd & ors JUDGMENT (ex tempore) 1 HIS HONOUR: The plaintiff Basecove Pty Limited, of which Ms Toppi is the principal, and the first defendant Dolores Lavin Management Pty Limited, of which Ms Lavin is the principal, are the equal and only unit holders in the Luxe Unit Trust, the chief asset of which is a property at Darlinghurst which is purpose-designed for use as photographic studios, and of which the second defendant Luxe Studios Pty Limited is the trustee. Ms Toppi and Ms Lavin each hold one of the two issued shares and are the directors of Luxe Studios. The trust property is occupied by the third defendant Luxe Productions Pty Limited, in which each of Ms Toppi and Ms Lavin holds one of the two issued shares, and each is also a director. 2 The relationship between Ms Toppi and Ms Lavin has broken down, and the affairs of the entities that between them they own are deadlocked. The financial position of the trust is tenuous at best. Its balance sheet for the year ended 30 June 2009 shows a deficiency of $660,000, and that is based on attributing to land and buildings a value greater than that which the evidence suggests they have. The trust traded at a loss of $332,000 in the 2008 financial year, and $84,000 in the 2009 financial year. Luxe Productions has, according to its latest balance sheet, a deficiency of funds of $137,000; it traded at a loss of $56,000 in the 2008 financial year and $137,000 in the 2009 financial year. Luxe Productions manages the property, by arranging for users to book and use studios in the premises. There is no formal lease between it and Luxe Studios. In the past, it had paid some sums by way of what might be called rent. In more recent times, Luxe Studios has been supported by loans made to it by Ms Lavin. 3 The property is subject to a mortgage between Luxe Studios as mortgagor and the National Australia Bank as mortgagee, securing a principal debt of $7.6 million; presumably, a further debt of $110,000 due to the National Australia Bank in respect of an equipment and goods mortgage would also be caught by an all moneys clause in the mortgage. On any view of the evidence, the amount of that mortgage exceeds the value of the property. 4 Under the trust deed, while it is open to the trustee to redeem all or any of the units of a unit holder, a unit holder is not entitled to insist upon having its unit redeemed. There is also provision for a unit holder to extricate itself by giving a transfer notice, the effect of which is to constitute the trustee an agent for sale of the vendor's units, initially at least to the other unit holders before there can be a sale on the market. The mechanism for determining the price is essentially at the discretion of the trustee, based on a formula which involves deducting the value of the trust's liabilities from the value of its assets and dividing the difference by the number of units. If no purchaser takes up the offer pursuant to the transfer notice, then there is no means by which a unit holder can insist on being extricated. 5 By summons filed on 23 October 2009, Basecove seeks the appointment of receivers and managers to the second defendant, the third defendant and the trust. By cross-summons filed on 29 October 2009, Dolores Lavin Management seeks the appointment of a new trustee. 6 It is common ground that some step needs to be taken to resolve the deadlock that has arisen. The fundamental dispute between the parties is whether that step should be the appointment of receivers and managers with a view to winding up the trust, paying out the creditors and bringing the relationship between the parties to an end; or the appointment of a new trustee, on the basis that that may resolve the immediate issue of deadlock and provide an opportunity for the trust to continue to operate. This question is to be resolved according to the respective advantages and disadvantages, in the commercial context, of each, having regard also to the legal rights of the parties according to the trust deed. 7 It was said that the appointment of receivers and managers would address the issues in respect of all entities, while the appointment of a new trustee to the trust would leave unresolved the position of the third defendant, which would remain deadlocked. While I accept that the position of the third defendant is, in the overall scope of things, a relatively minor consideration, I also agree that this is an advantage, albeit a slight one in the circumstances, of the appointment of receivers and managers. 8 It was said that a new trustee would not be bound by the trust deed. However, it is not clear that this is accurate, nor whether, if so, it would be an advantage or disadvantage. The appointment of a receiver and manager would not enable the parties to escape from their respective obligations under the trust deed. However, a receiver and manager of the trust assets would not be a trustee and would not owe the same obligations to the beneficiaries as would a trustee. It is not clear to me that that is necessarily an advantage in the present context. 9 The appointment of a new trustee would enable the transfer notice process, already instituted by the plaintiff, to be completed. The new trustee would be able to make a determination as to the current unit value, and it would then be possible for the price to be determined, and the deemed offer to be made and potentially accepted by the other unit holder, Dolores Lavin Management. On the evidence currently available, it would seem very dubious that any substantial price or value at all could be stipulated. Indeed, application of the formula to the current balance sheet, let alone the suggested true value of the real property, would result in a negative value. Accordingly, it is possible that the first defendant might as a result acquire the plaintiff's units for nothing or practically nothing. It is also possible that the first defendant would decide that it did not wish to acquire further units in a practically insolvent trust at all, leaving the plaintiff "locked in" to an insolvent trading trust. 10 It was said that appointment of a new trustee would preserve the potential for some value to be found in the trust and for it to continue to trade, reducing the potential burden on the parties, imposed by their personal guarantees secured by mortgages over their personal property, whereas appointment of a receiver and manager would crystallise their personal liabilities now. That submission is correct. The question, again, is whether it is an advantage or a disadvantage. 11 Ultimately, it seems to me that the decisive factors are these: first, the entities, if they are not technically insolvent, are, on the evidence, apparently affected by a substantial deficiency of funds and are trading at losses, and one cannot have the slightest confidence that that is going to be reversed. Secondly, despite the trust and corporate structure involved, the arrangement between the parties is really that of a quasi-partnership in which the relationship between them has broken down, and superimposed on that financial disaster is looming from the deficiency of funds and ongoing losses. Thirdly, there is no guarantee that the transfer process notice will succeed, in which case for practical purposes the plaintiff will be locked into entities in which the financial position is deteriorating and in which the personal assets of Ms Toppi remain at risk as security. Fourthly, if the transfer notice process does nonetheless succeed, then Ms Toppi will be excluded from management and influence in the business, but her personal assets will remain in jeopardy as a result of the guarantee and mortgage given over these assets, from which she will not be released, all in the context that, on the probabilities, the entities that are already in significant financial distress will further deteriorate. 12 In those circumstances it just and equitable, in the conventional sense, that the relationship between these parties be brought to an end, rather than requiring one party, against its will, to leave its assets in jeopardy while the position progressively deteriorates. For that reason I have come to the conclusion that the preferable course is the appointment of receivers and managers. 13 I make orders in accordance with paragraphs 1, 2, 3, 4, 5 and 8 of the summons. 14 It seems to me that in the way the issues have evolved, both parties have recognized the need to do something about the situation. The costs have been incurred by a not unreasonable debate between two prospective solutions, and the appropriate course is the costs of both parties be paid out of the trust assets. 15 Accordingly, I order that the costs of both parties be paid out of the assets of the second and third defendants. 16 I reserve liberty to the parties, and to the receivers and managers, to apply in the event of any difficulty arising in the implementation of these orders. **********

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