BETWEEN : LUMEN NOMINEES PTY LTD (ACN 124 369 660)

Corporations - Winding up - Just and equitable - Irretrievable breakdown of relationship between director and members

Corporations Act 2001 (Cth) s 461(1)(k)

1 CHANEY J: The plaintiff, Lumen Nominees Pty Ltd, owns one of two issued shares in the first defendant, Control Centre Pty Ltd (Control Centre). It applies for an order under s 461(1)(k) of the Corporations Act 2001 (Cth) to wind up Control Centre on the ground that it is just and equitable that such an order be made. The plaintiff contends that that ground for winding up Control Centre is established by reason of the fact that there has been a complete breakdown of trust and of the working relationship between the directors of Control Centre, who are also respectively directors of the two equal shareholders of Control Centre.

2 One of the directors, Anthony Palermo, opposes the application. He does not dispute that there has been a complete breakdown of his relationship with the other director, who is his brother, John Palermo. He contends, however, that the order for the winding up should not be made for reasons which are discussed below.

3 As already noted, there are two directors of Control Centre, John Palermo and Anthony Palermo. There are two issued shares in Control Centre. One is held by Gallant (WA) Pty Ltd. The sole director of Gallant (WA) Pty Ltd is Anthony Palermo. The sole shareholder is Maria Palermo, who is Anthony Palermo's wife.

4 The second share in Control Centre is held by the plaintiff. There are five directors of the plaintiff, being John Palermo, John Palermo's wife and their three children.

5 Control Centre was registered on 13 March 2007. According to the uncontradicted evidence of John Palermo, Control Centre has not conducted any trade and business since incorporation, and does not have any assets. Its sole function appears to be its role as appointor of seven trusts of which John Palermo and Anthony Palermo, and the individuals or companies associated with them, are the beneficiaries. In relation to six of those trusts, an independent trustee has been appointed by the Court. The trustee of the seventh trust, known as the Red Trust, is Red Lancer Pty Ltd. An ASIC company extract relating to Red Lancer Pty Ltd shows that it has two directors, being John Palermo and his son, Michael John Palermo, and that each of John Palermo and Anthony Palermo hold one of the two issued shares.

6 The trust deeds of the seven trusts of which Control Centre is the appointor are all in the same form. The trust deeds entitle the appointor to remove any trustee, appoint any additional trustee, appoint a new trustee in the place of a trustee who resigns or ceases to be a trustee by operation of law, and to appoint any additional or substitute appointor. If the is no appointor at any time, then the rights of removing or appointing trustees may be exercised by the trustee.

7 It follows that the effect of a winding up order would be that the role of appointor would fall to the trustee of each trust which, in the case of six of the seven trusts, is the independent trustee appointed by the Court. The appointment of the independent trustee was made because of the breakdown of the relationship between John Palermo and Anthony Palermo, who jointly had control of the previously appointed trustees of each trust.

8 The independent trustee notified the Court through his solicitors that he had no objection to the winding up of Control Centre.

The breakdown of the relationship between directors and shareholders

9 It is wellestablished that an irretrievable breakdown between members of a corporation is capable of meeting the requirements of s 461(1)(k) of the Corporations Act for the winding up of the company. In Nassar v Innovative Precasters Group Pty Ltd,[1] Barrett J said:

As I have also said, it was readily accepted by both counsel for Mr De Oliveira and counsel for Mr Grasso that this is a classic case for the making of a winding up order on the ground that irretrievable breakdown of the relationship between the members makes winding up just and equitable. It is, on the evidence, perfectly clear that this is the case, so that the result should be as recently described by DoddsStreeton JA in Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) 66 ACSR 325 ; [2008] VSCA 86 at [119]:

Winding up is the characteristic remedy in circumstances where a working relationship predicated on mutual cooperation, trust and confidence has broken down. Equity would not ordinarily order the continuation of such an association where it would be a futility, would require continuing supervision or would be tantamount to specific enforcement of a contract of personal services.

10 There can be no doubt that the relationship between John Palermo and Anthony Palermo is entirely dysfunctional. In his affidavit in support of the application, John Palermo identified six other actions in this Court between himself and his brother either in their personal capacities or through corporate entities subject to their control. In response, Anthony Palermo identified 17 different actions in the Supreme Court, the District Court, the Magistrates Court and the State Administrative Tribunal between the two brothers, or their family members or entities under their respective control. In a later affidavit in response, Anthony Palermo foreshadowed further actions to be commenced. A number of companies previously jointly controlled by the brothers have been wound up under s 461(1)(k). I have no doubt that the relationship between the members of Control Centre, and its directors, is such that the company is incapable of functioning and that, on that basis, subject to consideration of Anthony Palermo's contrary arguments, an application to wind up the company is appropriate.

11 Anthony Palermo filed two affidavits in opposition to the proposed orders. Much of the content of those affidavits simply went to confirming the dysfunction of the relationship between the two brothers.

12 One of the actions between them in this Court was CIV 2544 of 2013, which went to trial in December 2013 before McKechnie J. In that action, Anthony Palermo asserted that there was a partnership between himself and John Palermo which undertook various investment and business activities utilising the plethora of companies and trusts which they had jointly established. McKechnie J rejected that contention and declared that the brothers are not in partnership.[2] Anthony Palermo has instituted and appeal against that determination, but that appeal has not yet been dealt with.

13 As I understand Anthony Palermo's submissions, he contends that:

(i) the appeal against the decision of McKechnie J has good prospects of success;

• that will 'determine how all other actions in place should be dealt with by John and Anthony Palermo directly' or indirectly between their related entities;
• that until that position is clarified, the costs of liquidators of companies within the group should be avoided; and
• that there is no present risk to any assets if Control Centre is not wound up;

(iii) he does not intend to exercise any power as a director of Control Centre and is prepared to undertake not to do so even in the event that John Palermo, who has apparently been diagnosed with a serious and terminal illness, were to pass away leaving him as the sole director;

(iv) he is prepared to have John Palermo's son appointed as an additional director albeit on the condition that John Palermo and his son would only have one vote between them as directors; and

(v) the Court should 'err on the side of caution' in making an order in all the circumstances.

14 In my view, the matters raised by Anthony Palermo do not provide a basis to decline to make the order sought by the plaintiff. Central to Anthony Palermo's contention is the proposition that a successful appeal against McKechnie J's decision will determine how all other actions should be dealt with and enable those actions to be consolidated. Given the variety of disputes underlying the many actions identified in the affidavits of John Palermo and Anthony Palermo, the impact, if any, on those actions if Anthony Palermo's appeal were to succeed, is very difficult to identify. What seems clear enough is that, ultimately, even if some partnership were found to exist, it is highly likely that some independent party would be required to wind up the partnership, and to realise its assets. There seems very little likelihood that any degree of cooperation between the warring brothers, or their families, will ever be achieved. In those circumstances, the winding up of the partnership (if it were found to exist) would almost inevitably seem to involve a winding up of the various entities through which that partnership is said to operate.

15 In these proceedings, it is necessary to focus on the question of whether or not it is appropriate for Control Centre to continue to exist. It is clear that the company is incapable of functioning. The undertaking proffered by Anthony Palermo simply confirms that inability.

16 In my view, it is just and equitable that the company be wound up, and there be an order to that effect.

[1] Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343 [132].

[2] Palermo v Palermo [No 2] [2014] WASC 6.