RUSSELL MANAGEMENT LTD V BODY CORPORATE NO. 341 073 HC AK CIV-2008-404-005960

RUSSELL MANAGEMENT LTD V BODY CORPORATE NO. 341 073 HC AK CIV-2008-404-005960 16 September 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2008-404-005960BETWEEN RUSSELL MANAGEMENT LIMITED Plaintiff AND BODY CORPORATE NO. 341 073 Defendant Hearing: 16 September 2008 Appearances: Mr R Smith and Ms Hansen for plaintiff Mr S A Barker and Ms White for defendant Judgment: 16 September 2008(ORAL) JUDGMENT OF LANG J [on application for interim injunction]Solicitors: Knight Coldicutt, Auckland Buddle Findlay, Auckland[1] The plaintiff, Russell Management Limited ("RML") seeks interim injunctive relief. It seeks an order restraining the defendant body corporate from taking any steps to implement its purported termination on 22 August 2008 of a management agreement. Under that management agreement RML was granted the right to let and manage 16 units in a resort complex situated in Russell. [2] In order to understand the issues that the application raises, it is necessary to set out the factual background in some detail. I take this from the various affidavits that have been filed in support of, and in opposition to, the present application.Factual background[3] The resort development that is the subject of this proceeding is known as Russell Cottages. The developer of the property was a company called Winslow Group Limited, the controlling minds of which were Messrs Kevin and John Andersen. [4] The Winslow group of companies developed a number of resort properties around New Zealand. In respect of each property it was the intention of the group to draw a distinction between the profit that the developer could earn from the sale of individual units and the ongoing income that could be derived on a long term basis through the letting of individual units for rental purposes. [5] In order to keep these investment opportunities entirely separate, the developers created a template under which they incorporated a company that leased the individual units from the registered proprietors in each resort complex. The same company also entered into a management agreement with the body corporate of each complex under which it was given the sole rights to manage and rent out the individual units. It derived income from this arrangement in the form of an annual fee, together with a percentage of all rental income. [6] In the present case, RML was the company that the Andersen brothers incorporated on 7 November 2003 in order to give effect to the arrangements described above in relation to the Russell Cottages complex.[7] At the time that Messrs Andersen entered into the leases and the management agreement in relation to the Russell Complex, Winslow Group Limited was the registered proprietor of all the units. For that reason it was not required to obtain the signature or consent of any other party when it entered into those arrangements. [8] When RML was incorporated, Mr Kevin Andersen was its sole director and shareholder. He deposes that he and his brother always intended, however, that RML would be "folded into an umbrella entity" that would act as overall manager for a number of resort complexes that he and his brother were developing around the country. [9] The Andersen brothers then incorporated a company called Tourism Flair Ltd on 4 August 2005. The original shareholders of that company were two family trusts, one of which was associated with Kevin Andersen and the other of which was associated with his brother John. Each of the trusts originally held 50 per cent of the shares in the company. The shareholding in that company is now held as to 35 per cent by each of the trusts, with the remaining 20 per cent being held by Mr Ronnie Renalde, who is present responsible for the day to day running of the Russell Cottages complex. [10] Significantly, the Andersen brothers did not take steps in August 2005 to assign RML's rights under the management agreement and/or the leases to Tourism Flair. Had they done so at that time, the issues that have given rise to this proceeding may never have arisen. [11] The first five cottages in the Russell complex became available for letting in October 2005. The balance became available a few months later. It seems reasonably clear that, although RML was the manager of the complex in name, nevertheless virtually from the outset Tourism Flair carried out that function to some extent. It also marketed units in the complex to the public, both for rental purposes and for sale.The share transfer[12] Mr Kevin Andersen remained the sole director and shareholder of RML until 31 March 2006. On that date he transferred all of his shares in the company to Tourism Flair. Thereafter he remained the sole director of RML until September 2006, when Mr Renalde was appointed as a second director. [13] As at 31 March 2006, Winslow Group Limited had sold four of the 17 units in the complex to third parties. The remaining units were owned by Winslow Group Limited and Prima Properties Limited, another company that Mr Andersen owned and controlled.The problem arises[14] It appears that no difficulties arose in relation to the transfer of shares in RML until the body corporate held its annual general meeting on 19 June 2008. By that stage Winslow Group Limited had been placed in liquidation and its first mortgagee, Capital + Merchant Investments Limited, had taken a hands-on interest in Winslow's affairs. It held a first mortgage over the seven units owned by Winslow Group Limited. Winslow's liquidators had also disclaimed the leases of the seven units on the basis that they were unprofitable contracts. [15] At the annual general meeting those who were present, including representatives of Capital + Merchant Investments and the unitholders, voted in favour of the following resolution:Resolution 5Resolved the committee of the Body Corporate send a letter to Russell Management Ltd in relation to the change of control of Russell Management Ltd which occurred on 31 March 2006 noting that approval for such change in control was neither sought from nor given by the Body Corporate and seeking such breach of the Management Agreement to be remedied.[16] Thereafter, on 23 June 2008, the body corporate wrote to RML. The letter pointed out that RML was in breach of Clause 11 of the management agreement, which provides as follows:11. ASSIGNMENT11.1 The Building Manager shall not assign its rights and obligations under this agreement without first obtaining the written consent of the Body Corporate, such consent not to be unreasonably or arbitrarily withheld in the case of a suitable, solvent and respectable assignee. 11.2 Without limiting the discretion of the Body Corporate in terms of the preceding clause, the Body Corporate will not consent to an assignment of rights under this agreement and the Building Manager will not be discharged hereunder unless and until: (a) the proposed assignee has signed a new management agreement containing the same terms and conditions, and prepared by the solicitors for the Body Corporate at the cost of the Building Manager or the assignee; and (b) if the proposed assignee is a company, the shareholders and directors thereof as required by the Body Corporate have personally guaranteed the due and punctual performance and observance of the provisions of the manage agreement, such guarantee to be in a form prepared by the solicitors for the Body Corporate at the cost of the Building Manager or the assignee. 11.3 Where the Building Manager is an unlisted company then any change in the legal or beneficial ownership of any of its shares or issue of new capital whereby in either case there is a change in the effective management or control of the company is deemed to be an assignment of this agreement.[17] The alleged breach arose as a result of the fact that RML had permitted its shareholding to be changed without first seeking the consent of the body corporate to the transfer of shares. [18] RML then formally applied to the body corporate for its retrospective consent to the deemed assignment to Tourism Flair. Thereafter a protracted series of correspondence ensued in which the body corporate sought further information whilst RML protested at the extent to which information was being sought. RML did, however, provide the body corporate with a copy of the annual accounts for Tourism Flair for the year ended 31 March 2007. Those accounts also contained comparative figures for the previous year.[19] In addition, RML provided the body corporate with a draft balance sheet for Tourism Flair as at 31 March 2008. It also provided a CV for its on-site representative, Mr Renalde, as well as a company profile of the Tourism Flair group. [20] The body corporate did not consider that this information was sufficient for its purposes. It sought again the information that it had sought in earlier correspondence. Ultimately, however, RML did not provide that information. On 22 August 2008 the body corporate gave RML notice that it was terminating the agreement with immediate effect. As a result, it required RML to take immediate steps to vacate the complex. [21] Further correspondence ensued in which RML challenged the purported validity of the termination. It indicated that it proposed to issue Court proceedings to protect its position. The body corporate responded to that correspondence, but declined to retract the notice of determination. [22] This proceeding, and the present application for an interim injunction, follow the events that I have described.The claim[23] The statement of claim advances RML's challenge to the purported termination on two fronts. The first is that the share transfer did not result in any change to the effective management or control of RML. The second is an allegation that the termination was wrongful because the body corporate unreasonably or arbitrarily withheld its consent to the transfer of shares to the proposed assignee.The test[24] There is no dispute regarding the test to be applied in relation to the present application. The test is well understood as a result of the often cited case of Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129. [25] The first issue to be determined is whether there is a serious question to be tried in the substantive proceeding. The second issue is whether the balance ofconvenience lies in favour of granting the injunction sought. Overarching both of these requirements is an assessment that the Court must make as to where the overall justice of the case lies. [26] I deal first with the issue of whether there is a serious question to be tried.(i) Is there a serious question to be tried?The allegation that there was no effective divestment of management or control of RML[27] I do not consider that there is a serious question to be tried in relation to this issue. [28] Mr Kevin Andersen deposes that, in reality, he and his brother remained in effective control of both the company and its management notwithstanding the fact that he signed the share transfer in favour of Tourism Flair. That allegation cannot, in my view, be sustained on the facts. [29] The control of any private company rests ultimately with its shareholders. Originally Mr Andersen was the sole shareholder of RML, but after he signed the share transfer the sole shareholder was Tourism Flair. The control of that company in turn remained vested in its shareholders, who at that time were the two family trusts. [30] Mr Andersen clearly has no ability to influence one of those trusts. In addition, the trustees of both trusts must act independently and in accordance with the objects of their respective trusts. It is impossible, in my view, for RML to argue that following the share transfers the company remained in Mr Andersen's effective control. Although he remained a director of RML, he could be removed by the shareholders of Tourism Flair at any time. Moreover, whilst he and his brother may co-operate now, that may not necessarily be the case in the future. It can therefore by no means be certain that the trusts will always work in tandem.[31] For these reasons I am satisfied that there is no serious question to be tried in relation to the first aspect of RML's claim.The allegation that the body corporate unreasonably or arbitrarily withheld its consent to the proposed assignee[32] In considering this issue I have no doubt that the Court will be informed by authorities relating to the relationship between landlord and tenant and, in particular, the circumstances in which a landlord or lessor is prohibited from withholding its consent to a request by a tenant on an unreasonable or arbitrary basis. [33] The principles to be applied in such situations have been expressed in a number of authorities, and were recently considered again in the decision of Winkelmann J in Louis Vuitton (NZ) Ltd v Princes Wharf Property Ltd HC AK CIV 2004-404-3401 17 September 2004. Although that was a case in which the lessor had refused to consent to a change of use, nevertheless Winkelmann J helpfully summarised (at [29] to [36]) the principles applicable in this area of the law. She noted that in Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180 the House of Lords had considered the principles to be applied in assessing a reasonable refusal of consent. The House of Lords distilled the essential elements to the following three propositions: 1. A landlord is not entitled to refuse its consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease. 2. It is not necessary for the landlord to prove that the conclusions which led it to refuse to consent were justified if they were conclusions which might be reached by a reasonable person in the circumstances. 3. In each case it is a question of fact depending on all the circumstances whether the landlord's consent to an assignment has been unreasonably withheld.[34] In the present case I have no doubt that the Court will need to examine closely the relationship between these two parties in order to determine whether or not the body corporate's stance can be categorised as being unreasonable or arbitrary. In particular, the Court will need to have regard to the obligations that Tourism Flair was required to undertake under the management agreement and the manner in which those might be affected by its financial situation. [35] Ultimately the Court will need to decide whether, in terms of paragraph 11.1 of the management agreement, the body corporate was entitled to reasonably conclude that Tourism Flair was not a suitable, solvent and respectable assignee. That, as I have said, will be informed by the obligations that it would need to undertake under the management agreement. [36] In the present case, the body corporate maintains that it was entitled to conclude that the material that RML provided did not establish that Tourism Flair was a suitable solvent and respectable assignee."Suitable and respectable"[37] In reality, however, Tourism Flair has already been operating the Russell Cottages complex for some considerable period, albeit ostensibly under the guise of RML. In addition, it manages a large number of other similar complexes throughout New Zealand. I see nothing in the evidence, other than perhaps its association with Mr Andersen, to suggest that Tourism Flair as an incorporated body was not a suitable and respectable assignee in terms of 11.1."Solvent"[38] Probably the greatest dispute in the present case will be whether Tourism Flair was a solvent assignee. Again, however, that issue must be assessed having regard to the obligations that it would be required to undertake under the agreement. [39] So far as I can tell, the principal obligations of the building manager under the agreement are to provide suitable employees to manage the complex on a day today basis and to receive money on behalf of unitholders. In addition, the building manager is required to pay certain expenses from the rental income and to account to the unitholders for the balance of that income. [40] It is obviously important for the unitholders that the building manager be solvent. If it is not, there is the very real risk that income that belongs to them will be lost within the overdrawn accounts of the building manager. Alternatively, it may be subject to a claim by creditors of the building manager. [41] As Mr Henning, the accountant who acts on behalf of RML points out, the solvency test for present purposes is contained in s 4 of the Companies Act 1993 1993. This section provides that a company satisfies the insolvency test if: a) The company is able to pay its debts as they become due in the normal course of business; and b) The value of the company assets is greater than the value of its liabilities, including contingent liabilities. [42] The financial statements that RML provided for Tourism Flair Ltd showed that in 2006 and 2007 the company made losses of $261,362 and $224,777 respectively. In addition, its balance sheet showed that it had net assets in 2006 of $418,638 and in 2007 of $6,235,315. Importantly, however, the most significant asset in 2007 was an asset described as "management rights", which had a value ascribed to it of $6,926,430. Without that asset, it can be seen that the company's asset liability position was likely to be precarious. [43] There is clearly an issue regarding the value to be ascribed to the management rights. That value must necessarily be expressed in intangible terms because of the nature of the assets. Undoubtedly, however, the asset has some value because it comprises a bundle of rights that Tourism Flair has under a number of agreements that are similar to the management agreement that is the subject of this proceeding. Each of those agreements entitles Tourism Flair to derive a stream of income from a resort complex. Those rights must, in my view, have some value.[44] The body corporate makes the valid point that the bundle of rights was valued in a valuation on an "as is" basis by CB Richard Ellis in October 2007. That valuation put the value of these rights at $3.3 million. This obviously stands in stark contrast to the value that the directors themselves have placed on that asset. [45] If the value of $3.3 million dollars is applied to the figures shown in the statements as at 31 March 2007, the net assets of the company reduced to just under $ 3 million dollars. Again, however, that figure is subject to the accuracy of the other figures. I accept that this matter may be subject to challenge in future. [46] The draft balance sheet as at 31 March 2008 also values the management rights at $6.9 million dollars. It shows that net assets amount to $6,857,291. Again, applying the reduced value of $3.3 million dollars to that figure, the figure is reduced to approximately $3.3 million dollars. Again, I accept that the balance sheet as at 31 March 2008 is necessarily unaudited and in draft form. Nevertheless, it does not show a marked difference to the position as at 31 March 2007. [47] I accept, for present purposes, that RML has arguably established that Tourism Flair has assets that are greater than the value of its liabilities including contingent liabilities. That conclusion is to an arguable level only, and will obviously be subject to the challenge that will inevitably be made to it at trial. [48] I do not consider that I can go behind the material that has been made available in support of the present application in reaching this conclusion. Similarly, there is no evidence before me to suggest that Tourism Flair is not able to pay its debts as they become due in the normal course of business. I accept, of course, that that may change in the future. [49] The accountant who prepared the accounts quite properly pointed out in a note attached to the accounts that the financial stability of the company depends at present on the continued support of its banker and shareholders. There is no evidence before me, however, to suggest that Tourism Flair's banker is about to withdraw its support or that it faces any other current or imminent threat. There isno suggestion, either, that it is subject to liquidation proceedings or that it has failed to comply with statutory demands. [50] Much of the concern that is expressed by the body corporate appears to revolve around the apparent continued involvement of Mr Kevin Andersen in the affairs of RML and Tourism Flair. However, he now no longer acts in any official capacity in relation to either company. In my view, Tourism Flair needs to be assessed for present purposes on its own merits and in accordance with the material that it has provided. Although Mr Andersen's personal position may be parlous, I am not satisfied that this is necessarily also the case so far as Tourism Flair is concerned. [51] For these reasons, I have reached the conclusion that RML has arguably established that Tourism Flair was solvent in terms of s 4 of the Companies Act 1993 on the basis of the material that it provided to the body corporate. I am therefore satisfied that there is a serious question to be tried in the present case. Having said that, I would not categorise the claim as particularly strong. It will no doubt be the subject of vigorous challenge at trial.(ii) Balance of convenience[52] I now turn to the issue of the balance of convenience. Arguments run both ways in this context. First, there is the fact that RML may not have a particularly strong case once the financial position of Tourism Flair is examined in greater detail than has been possible in the context of the present application. [53] Secondly, there is the ongoing delay that resolution of this proceeding will cause and the difficulties that will arise from that delay for individual unitholders. They obviously want to have the matter resolved as quickly as possible. [54] There are, however, a number of matters pointing to an opposite conclusion. First, there is the fact that it would appear that Tourism Flair has, to a large extent, been responsible in practical terms for the management of the affairs of the complex for some time.[55] Secondly, there is no apparent or overt complaint regarding its performance to date. I perceive that dissatisfaction with Tourism Fair's and RML's performance may well be a factor that is driving the opposition of the unitholders to the continued involvement of both companies in the management of the units. The body corporate has, however, terminated the agreement solely on the basis that RML was unable to satisfy it that Tourism Flair was a suitable, solvent and respectable assignee. [56] Next, there is the fact that RML is currently the building manager. It would appear to have in place all the necessary procedures and computer software to appropriately manage the complex's affairs. If it is removed as building manager at this stage, the unitholders will need to appoint another manager and they will need to do this before the summer months arrive. This will inevitably cause some disruption although, no doubt, the unitholders would prefer that disruption to the continued involvement of RML in their affairs. [57] If RML is effectively removed at this stage, however, its claim to be entitled to continue as the manager of the complex will effectively be finally determined at an interlocutory stage. In that event the body corporate will undoubtedly enter into a new arrangement with another building manager. This will effectively prevent the Court from permitting RML and/or Tourism Flair from continuing in that role even if RML's claim is ultimately upheld. [58] Finally, I do not consider that any great harm can come to either the body corporate or the individual unitholders as a result of RML remaining in its current position for a short period. There are no claims that it has mismanaged the complex's affairs in such a way that would warrant immediate removal. It will continue to be under an obligation to report to the unitholders and to ensure that future bookings are maintained to the best of its ability. It will also be required to meet ongoing expenses and to account to unitholders for net rental income. [59] The issue of delay can also, I think, be dealt with by the allocation of an early trial date.[60] For these reasons I am satisfied that the balance of convenience in the present case favours the retention of the status quo. I reach that conclusion notwithstanding the fact that there are also some practical factors that detract from the position so far as RML is concerned. Included in these is the fact that the disclaimer of the leases of seven units by the liquidators of Winslow Group Limited may well mean that those units are not available to RML to rent in the future. That, however, is a matter that RML will need to take into account in considering its overall position. [61] For these reasons I am satisfied that the application should be granted, albeit on strict terms.Terms[62] I grant interim relief in terms of paragraph 1 of the application dated 11 September 2008. At this stage I see no reason to make any further order to protect RML's position. [63] The proceeding will be the subject of a two-day trial commencing on 9 February 2009. The duration of the trial will be the subject of further consideration when the matter is next called. [64] RML is to pay into Court the sum of $20,000, being a form of bond that it has offered to guarantee due performance of its continued obligations under the management agreement [65] In addition, I make the following ancillary orders in order to protect the interests of unitholders during the period leading up to trial: a) RML shall hold all moneys received or deemed to be received by it, including deposits (cash, cheque, EFTPOS and accepted credit cards), from customers for the letting of units at Russell Cottages as bare trustee for unitholders and, within seven days of the end of each month, remit to unitholders all such moneys less commission and authorised unitholders' expenses.b) Pending payment, RML shall forthwith upon receipt deposit all moneys referred to in paragraph a) above in a trust account designated "Unitholders Trust Account", separate and distinct from any other bank accounts of RML with a bank approved by unitholders or in such other bank account as unitholders may direct. c) RML shall be responsible to unitholders for any money lost, destroyed, stolen or otherwise unaccounted for, which RML has received on behalf of unitholders. d) RML will use an electronic network to keep full, accurate and up-to- date records of lettings. The unitholders will be provided with login access enabling the unitholders to access these records online from the Tourism Flair Limited ("TFL") website, at www.russellcottages.co.nz. Should the unitholders be unable to access these records online at the time they are needed, RML will, whilst these orders remain in force, during the term of this Agreement, provide a copy of these records or access to these records to the unitholders upon request as soon as reasonably practicable in the circumstances. RML will not charge for the provision of reports in such circumstances. e) RML shall provide a detailed reconciliation itemising how the Gross Letting Revenue has been calculated (including a breakdown of letting sales and all amounts retained, such as commissions, within 3 business days of the last day of each letting. f) RML and TFL shall forthwith direct the Bank of New Zealand to notify the body corporate of any breach, between 16 September 2008 and 9 February 2009, of any covenant in any facility or any arrangement to which either company is a party, whether or not such breach is waived by Bank of New Zealand.Joinder of Tourism Flair Ltd as second plaintiff[66] Counsel agree that it is appropriate for Tourism Flair Ltd to be joined as a second plaintiff. This will enable it to be involved in the discovery process and will also bind it to any orders that might be made for security for costs. [67] I therefore make an order joining Tourism Flair Ltd as a second plaintiff in this proceeding. [68] I direct also that, within seven days of today's date, Tourism Flair Ltd is to file an undertaking as to damages on the same form as that provided by RML.Security for costs[69] The body corporate has signalled its intention to apply for security. I direct that any such application, together with supporting affidavits, is to be filed and served no later than 24 September 2008. [70] Documents in opposition are to be filed and served by 3 October 2008, with affidavits in reply (if any) to be filed and served by 12 noon on 7 October 2008. [71] The application for security will be heard before me on Wednesday 8 October 2008 at 2.15 pm (one half day allocated). [72] At the conclusion of that hearing I will give any further directions that might be needed to advance the matter to trial.Leave reserved[73] Leave is reserved to both parties to ask the Registrar to arrange a telephone conference before me on 24 hours notice should any issue arise regarding the implementation of the orders that I have made today. [74] I also reserve leave specifically to the body corporate to apply for rescission or variation of the interim injunction should any issue arise, or any new informationcome to light, between now and 9 February 2009 regarding the solvency of RML and/or TFL.Costs[75] Although the usual convention is to deal with costs on interlocutory matters immediately, counsel for RML have suggested that costs be reserved and be determined at the conclusion of the proceeding. In the particular circumstances of this case I agree that that is appropriate, and costs are reserved accordingly. Lang J