Plaintiffs v Defendants

2 The grounds for the removal of the Lotus Almonds were compelling and not opposed by any party. The only issue was the identity of the replacement trustee. It was contended that Dandello had an actual conflict of interest and ought not be appointed. That submission was rejected.

3 I indicated that reasons would be published at a later stage. These are those reasons.

4 The Lotus Almond Hybrid Unit Trust was established on 6 June 2008 to obtain funds from unit holders by way of application prices, invest these funds, and subsequently provide a fixed income to unit holders.[1] Lotus Almonds has acted as Trustee since the Trust's inception, with the second defendant Lotus Securities Limited ('Lotus Securities' or 'the Manager') acting as Manager. The plaintiffs, Mustica Holdings Pty Ltd and West Grove Project Pty Ltd, are corporate trustees for unit holders of the Trust, namely the three Mustica family trusts and the D'Alessandro family trust respectively.

5 Proceedings were instituted in this court on 29 April 2015 seeking an order pursuant to s 48(1) of the Trustee Act 1958 (Vic) ('Trustee Act') appointing a new trustee in substitution of Lotus Almonds as Trustee of the Trust. As previously mentioned, the removal of Lotus Almonds as Trustee was not opposed by any party at the trial.

6 The plaintiffs nominated Dandello as a suitable replacement Trustee. The second defendant opposed the appointment of Dandello on the following grounds -

(a) the Trust Deed provides that, upon removal of the incumbent Trustee, the Manager becomes entitled to appoint another corporation to act as Trustee;[2]

(b) there was a conflict of interest in appointing Dandello as Trustee because;

1. The directors of Dandello are also directors of the plaintiff unit holders in the Trust; and
2. The plaintiff unit holders have failed to pay any instalment payments required under the Trust Deed since 30 September 2012 and consequently are in debt to the Trust a substantial amount of money.

7 The second defendant referred the court to the recent decision of the Supreme Court of New South Wales in Hancock v Rinehart[3] as authority on the general approach to be taken by courts in selecting a replacement trustee. In particular, the court was referred to the following passage from Brereton J (references omitted):

[120] The dominant consideration in appointing (and removing) a trustee is the welfare of the beneficiaries.

[121] Three main considerations inform the court in appointing a new trustee, although these are "general guidelines", or "rules of practice", rather than "hard and fast rules".

[122] The first is the wishes of the persons by whom the trust was created, if expressed or implicit in the trust instrument. Such wishes need not be express, and may be inferred from the terms of the trust, or the identity or description of the original trustee.

[123] The second is that a trustee should not be appointed with a view to promoting the interests of some beneficiaries in opposition either to the wishes of the settlor or the interests of other beneficiaries. This is concerned with avoiding conflict of interest, and is reflected in the court's preference not to appoint a beneficiary, or a relative of a beneficiary, as trustee... However this general preference is not an absolute rule....

[124] The third [consideration] is that in appointing a trustee regard should be had to whether the appointment would promote or impede the execution of the trust.[4]

8 The plaintiffs acknowledged that Dandello was a new entity incorporated by them for the sole purpose of replacing Lotus Almonds as Trustee of the Trust. It was further conceded that both plaintiffs had failed to make any contributions to the Trust since 30 September 2012, although it was said this was justified due to the plaintiffs' loss of confidence in the management of the Trust. Yet whilst accepting this financial circumstance created a potential for conflict of interest between Dandello and the other unit holders in the Trust, the plaintiffs disputed that the appointment itself necessarily led to an actual conflict of interest, and submitted the appointment remained appropriate for two reasons. First, there had been only mild opposition to the appointment from a single unit holder. Second, due to the limited resources remaining in the Trust, there were real concerns about the ability of the Trust to finance an external trustee.

9 As previously noted, the second defendant submitted it was not appropriate to appoint Dandello due to its association with the plaintiffs. It submitted an independent trustee ought to be appointed.[5]

10 Although there is some substance in the second defendant's submission, I accept the submissions made by the plaintiff.

The lack of opposition to the appointment of Dandello from other unit holders

11 On 5 May 2015 the plaintiffs' solicitors sent correspondence to all known unit holders[6] in the Trust advising them of the proceeding, the proposed orders sought, and seeking they indicate whether they consented or opposed the application. Consent responses were received from the PHK Enterprises Pty Ltd and Lindonnici holdings. In conjunction with the plaintiffs' holdings, this results in approximately 62% of the total units held in the Trust being in support of the appointment of Dandello as new Trustee.

12 Only one unit holder responded to object to the appointment of Dandello. Dr Eric Poon, on behalf of BEEP Investments Pty Ltd, indicated in a letter sent in reply to the plaintiffs' solicitors on 5 May 2015 that he held concerns that Dandello would adequately represent all the unit holders fairly.[7] On that basis he was opposed to Dandello becoming the new Trustee.

13 Notwithstanding Dr Poon's clearly stated concerns, I accept the plaintiffs' submission that his opposition to the appointment of Dandello has not been an active one.[8] He was invited by the plaintiffs' solicitors to appear at court to be heard in the proceeding, and with ample opportunity he has chosen not to do so. In these circumstances, it is in my view fair to say that there has been no real opposition to Dandello's appointment. In any event, if Dandello fails to act in the best interests of all unitholders it may be removed as Trustee.

The cost-saving benefit to unit holders in appointing Dandello

14 There was a marked paucity of financial documents available to the court from which to ascertain the Trust's current financial position. The most recent audited accounts of the Trust were those completed for the financial year ending 30 June 2012.[9] The balance sheet contained within these accounts recorded the Trust as having a mere $422 in cash at its disposal. Nothing was put forward by either party during the hearing to suggest that the present financial position of the Trust would be substantially different.[10] In light of the apparent limited funds available, the plaintiffs expressed doubt as to the capacity of the trust to finance an external trustee. It was indicated that Dandello, if it were appointed, would perform the necessary work without charging fees to the Trust, save for the costs of any disbursements incurred.[11]

15 The second defendant submitted that the lack of funds available to the Trust was a direct consequence of the plaintiffs' decision not to make any instalment payments from 30 September 2012. It was further submitted that if these outstanding contributions were called in the funds available to the Trust would increase exponentially.

16 I am unable to agree with the suggestion that the Trust's financial hardship has arisen as a consequence of the plaintiffs' failure to pay in their contributions. As was noted by the plaintiffs, the auditor of the 2012 report had voiced concerns regarding the ongoing financial viability of the Trust at a time when both plaintiffs were in credit with respect to their individual contributions. Further, having considered the available evidence regarding past use of Trust funds by the Manager I am not persuaded that it was desirable for further funds to be paid into the Trust at this time.

17 It is, of course, always desirable to keep costs to a minimum. I further accept that on the available evidence there is real doubt as to the capacity of the Trust to finance an external trustee.[12] To that end, I am satisfied that the appointment of Dandello, who will act as Trustee without fee, will provide a practical benefit to all unit holders in the Trust.

18 Accordingly, I am of the view that, with suitable safeguards in place, Dandello ought be appointed as Trustee of the Lotus Almonds Hybrid Unit Trust under s48(1) of the Trustee Act.

19 Whilst I accept there is potential for conflict of interest, given the connection between Dandello and the plaintiffs who represent only some of the unit holders in the Trust, Dandello's obligations under the Trust Deed, together with its obligations under the general law, and the broad reach of the liberty to apply order, will enable interested parties to come to court for relief. This will, in all of the circumstances, provide adequate protection to minority unit holders should a conflict of interest develop. Weighing this against the enormous expense which would be incurred in appointing an external trustee, in circumstances where there are legitimate doubts as to the Trust having the financial resources to pay, I believe the appointment of Dandello is expedient and in the welfare of the beneficiaries of the Trust, and I so order.

20 Ms McCabe applied for leave to appear and make submissions on behalf of Lotus Almonds, in her capacity as sole director and secretary. Leave was required pursuant to rule 1.17 Supreme Court Rules[13] which reads as follows:

Rule 1.17(1) 'Except where otherwise provided by or under any Act or these Rules, a corporation whether or not a party, shall not take any step in a proceeding save by a solicitor.'[14]

21 The rule, however, is not absolute.[15] In Worldwide Enterprises Pty Ltd v Silberman & Anor,[16] Forrest J held that in determining whether there are circumstances which warrant a departure from the rule, the following matters are relevant:

(i) The manner in which the case has progressed at the time that the application is made;

(ii) The manner in which the case can proceed in the future without a solicitor;

(iv) Whether the lack of disciplinary measures in relation to the person seeking to represent the company will affect the administration of justice;

(v) Whether the case can be conducted in an orderly and responsible fashion without a solicitor;

(vi) Whether there are financial considerations which would inhibit a company from obtaining legal representation;

(viii) Whether the defendant is likely to expend more funds in defending the claim absent a solicitor acting for the company; and

(ix) What effect, if any, permitting a company to appear without a solicitor will have on Court resource and, particularly, the effect upon other litigants in the Court List.[17]

22 In the circumstances, I consider that leave should not be granted. First, Ms McCabe only made her request for leave to appear at the conclusion of the hearing, and without any prior notification. Secondly, in my opinion, Ms McCabe is not suitably qualified, and it is not desirable given the issues involved, to permit her to make submissions or to represent the company in this proceeding. Further, as a director, Ms McCabe was unhelpful in relation to the financial position of Lotus Almonds. No financial information was forthcoming. This is most disappointing given the nature of the application.

23 The plaintiffs seek their costs against both defendants, on the standard basis, and concede that in relation to such costs the defendants be indemnified out of the Trust. Otherwise, the defendants should, without indemnity, bear their own costs of the proceeding.

24 The second defendant submitted that it had acted properly in effectively conceding the desirability of the appointment of a new trustee and was a necessary and proper contradictor in relation to the conflict of interest issue.

25 The first defendant should pay the plaintiffs' costs. It did not appear and has been responsible for the diabolical position the Trust is in. It made no concessions whatsoever and there is absolutely no reason why it should not pay the plaintiffs' costs, if necessary by indemnification out of the Trust. It should bear its own costs without indemnity.

26 The second defendant should also pay the plaintiffs' costs. The proper concession (or more accurately non-opposition) that it made, having been involved in the proceeding, was only made on the morning of the trial. It was a contradictor but lost the argument. On the evidence, there is clearly an inextricable relationship between the defendants. There is no reason why the second defendant should not pay the plaintiffs' costs, if necessary by indemnification out of the Trust. It should bear its own costs without indemnity.

[1] Affidavit of Dr Andrew Ludekens dated 21 July 2015, [10].

[2] Given the obvious inextricable relationship between the Trustee and the Manager I would not under any circumstances permit the Manager to appoint the new trustee.

[3] [2015] NSWSC 646; (2015) 106 ACSR 207.

[5] Although advocating the appointment of an independent trustee, the second defendant tendered only one proposal, a Mr Anthony Hermez of Hermez Financial Services. It was conceded that in his letter dated 16 September 2015 Mr Hermez did not outline any relevant experience as a trustee or his rates, rendering the proposal of limited assistance to the court.

[6] Although no formal register of unit holders was available, the identity of unit holders and the size of their holdings had been reconstructed by Mr Mustica from the available financial statements of the trust and detailed at [44] of his affidavit dated 26 March 2015. One unit holder, Glenfield Pty Ltd, was found to have been deregistered on 18 November 2012.

[8] Transcript of Proceedings, Mustica Holdings Pty Ltd v Lotus Almonds Pty Ltd (Supreme Court of Victoria, SCI 2015 02055, Justice Sifris, 16 September 2015) 10. .

[9] Exhibit P1, D423-437. In the course of proceedings the court was informed of the subsequent deregistration of the author of the accounts, which called into question their reliability. They were, unfortunately, all that was available.

[10] Indeed, in her affidavit dated 20 May 2015 at [22], Ms Maura McCabe, the current director of Lotus Almonds, had deposed that there had been no further audits of the financial records of the Trust since the financial year ending 30 June 2012, because of minimal activity in the trust fund.

[11] See also affidavit of Guiseppe Mustica dated 26 March 2015, [70].

[12] The plaintiffs provided the Court with a Consent of Liquidator form prepared by the firm Worrells Solvency & Forensic Accountancy. It is sufficient to say the projected costs of such appointment were well in excess of the anticipated funds available to the trust.

[13] Supreme Court (General Civil Procedure) Rules 2005 (Vic).

[15] Worldwide Enterprises Pty Ltd v Silberman & Anor [2009] VSC 165.