Plaintiffs v Defendants

2 In the early 1980s, Michele and Antonio fell out with one another. Since that time, there has been a bitter dispute between Michele and Joseph on the one hand and Antonio and Anthony on the other. Michele and Antonio have not seen or spoken to one another since 1991.

3 Despite this, the furniture business continued in operation until 2003, at which time it closed. The only remaining trust assets are three properties at Airport West which have been valued at more than $1 million.[1] The properties are not generating income. Inon has an overdraft liability of about $80,000 and ongoing liabilities of approximately $17,000 per year (which includes amounts for rates and taxes in relation to the properties). The trust no longer carries on any business.

4 Fifty percent of the shares in Inon are held by Joseph with the remaining 50 percent held by Anthony.

5 Michele and Joseph want to bring an end to their financial relationship with Antonio and Joseph through the liquidation of Inon, the winding up of the trust and distribution of 50 percent of the trust assets to their side of the family. They accepted that not all of their objectives could be achieved immediately. Consequently, at trial, the only issue that was pursued was whether Inon should be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) on the ground that it is just and equitable to do so.

Should Inon be wound up on the ground that it is just and equitable?

6 The original directors of Inon were Michele and Antonio. After some years, they were replaced by Joseph and Anthony as directors. A further change was made at a later time, with Michele resuming as a director replacing Joseph. As stated above, the current shareholders of Inon are Joseph and Anthony, who each hold 50% of the shares.

7 For some time, Michele has wanted to retire as a director. Over a lengthy period, he sought to have Joseph (who largely manages his business affairs) replace him. Anthony would not agree to this. Consequently, Michele and Anthony were co-directors for many years until Anthony resigned on 13 October 2011.

8 On 6 February 2012, Joseph was appointed by Michele to fill the casual vacancy left by Anthony's resignation. This was permitted under the company's articles of association. However, the appointment of Joseph is only valid until the next annual general meeting, at which time Joseph is eligible for re-election by the company. In practical terms, Anthony would have to vote for the appointment of Joseph as a director because a special resolution of 75% of the shareholders is required.

9 No annual general meeting has been held since Joseph was appointed as a director. In March 2012, Anthony sought to requisition an extraordinary general meeting for the purpose of a shareholder vote regarding the appointment of Joseph as a director. Anthony has said that Joseph will not be re-elected by the shareholders because he will vote against Joseph.

10 There is no need to determine exactly why the brothers and their sons fell out with one another. Suffice to say that the relationship between the two branches of the family has irretrievably broken down and has been acrimonious for many years. Each branch of the family makes allegations against one or more members of the other branch of the family concerning their conduct, including allegations by Anthony that moneys are missing from Inon's bank account. The relationship is so poor that an apprehended violence order was taken out at one stage by one member of the family against another. That order has expired and has not been renewed, but it gives an indication of the level of antagonism and bitterness between the separate branches of the family. Michele describes the relationship between him and Anthony as poisonous. In Anthony's words, there is longstanding bad blood between the families.

11 There are many examples of the difficulties experienced in managing the trust due to the poor relationship between Michele/Joseph and Anthony. For instance, cheques drawn on the company's bank account were required to be signed by two people (one from each branch of the family). A practice developed whereby Anthony would sign cheques and send them to Michele's solicitors for him to sign. This procedure contributed to the late payment of a number of debts, including rates and expenses associated with the properties. Another example is that the two families have been unable to agree on the appointment of an agent to offer the properties for lease. It seems that at various times, each branch of the family has favoured a sale of the properties, but unfortunately, never both at the same time.

12 The company operates an overdraft account with the Commonwealth Bank of Australia. In early May 2012, the bank stopped all further drawings on the account and two cheques were dishonoured. Joseph alleges that the account was frozen as a result of representations made by Anthony to the bank. Anthony denies this. Shortly before the trial began, the bank informed Joseph that the account was no longer frozen. However, the overdraft limit is $80,000 and as at 1 June 2012, it stood at $79,773.26. Bank fees are regularly debited to the account and interest continues to accrue on the debt. Further, Joseph estimates that the company has ongoing expenses of approximately $17,000 per year for rates, land tax, ongoing maintenance costs, registration fees and accountancy expenses. Michele and Joseph both want the land to be sold as it is incurring costs but producing no income. Anthony will not agree to this.

13 Joseph seeks an order under s 461(1)(k) of the Corporations Act to wind up Inon.[2] That section provides for a company to be wound up if the Court is of opinion that it is just and equitable for that to occur. Anthony opposes the winding up application. He accepts that there are major problems with Inon but says that it should not be wound up. Rather, he contends that State Trustees should replace Inon as trustee of the trust. Joseph opposes the appointment of State Trustees as the new trustee of the trust because he says it will incur unnecessary costs and will perpetuate a financial relationship between the two branches of the family who have no wish to have any further relationship.

14 There are many circumstances in which the Court will wind up a company on the just and equitable ground. Such circumstances include where there is a deadlock between those who control the company and where there has been a breakdown of the personal relationship between them.[3]

15 In my opinion, this is a case where it is just and equitable that Inon be wound up taking into account the following:

(a) although the company has been able to function as trustee of the trust for over 20 years, despite the two branches of the family having been estranged during that time, this has now become untenable. Whilst Joseph and Michele are currently directors, Anthony has made it clear that he will not agree to Joseph's ongoing role as a director. This leaves Michele as the only director with any certainty of position. He is now an elderly and frail man. He does not want to continue as a director;

(b) the level of antagonism and distrust is such that there is no prospect of holding a constructive shareholders meeting between Anthony and Joseph for the purpose of appointing future directors. There has been a complete breakdown in the relationship between the two shareholders;

(c) although there are valuable assets in terms of the Airport West properties, the bank account is close to its overdraft limit; the properties are not generating any income yet expenses continue to accrue;

(d) there is no evidence that Inon's position as trustee would terminate should the company be placed into liquidation;[4]

(e) a liquidator will be well placed to investigate Anthony's allegations of inappropriate payment of moneys from the bank account and other relevant allegations concerning the trust that have been made by the parties against one another;

(f) a liquidator would also be in the best position to investigate and determine what action ought be taken in relation to the trust and the trust property;

(g) a liquidator would be independent of the two family factions;

(h) the company does not have an ongoing business that might be affected adversely by the appointment of a liquidator.

16 As I have said, Anthony would prefer that State Trustees be appointed in place of Inon as trustee. The appointment of an independent trustee may address some of the difficulties in relation to the ongoing operation of the trust. For example, it would reduce the need for the members of the two branches of the family to have ongoing personal dealings and to make joint decisions about the operation of the trust. However, this step would not resolve what is to happen with the company. Whilst it would have no ongoing business or role as trustee if it was replaced, Inon's affairs would still need to be brought to a conclusion by realising its assets (primarily, it would seem, its right of indemnity out of the trust assets protected by a lien over those assets) and payment of its creditors. In my opinion, the best and most efficient course initially is for a liquidator to attend to the winding up of Inon and to determine what should occur in relation to the trust. Should it be necessary, the liquidator would have power to seek directions or other relief from the Court in relation to the trust.

17 Joseph had provided to the Court a consent to act as liquidator by two appropriately qualified persons. However, it appeared from that consent that they had met previously (albeit briefly) with representatives from Joseph's side of the family. Whilst this would not necessarily disqualify them from acting, given the level of distrust between the two branches of the family, it seems to me to be preferable for a liquidator who has had no dealings with either branch of the family to be appointed. The Prothonotary has nominated Luke Christopher Targett of the firm PKF Chartered Accountants to act as liquidator. Both Mr Targett and his colleague, Rachel Elizabeth Burdett-Baker, have signed a consent to act as liquidators in which they state that they are not aware of any relevant relationship with Inon or an associate of Inon.[5]

18 I will order that Inon be wound up on the just and equitable ground and that Mr Targett and Ms Burdett-Baker be appointed as liquidators.

[1] Herron Todd White provided a Court ordered valuation of the properties in January 2012. They valued the property at 25-27 Hawker Street, Airport West at $500,000, the property at 26 King Street, Airport West at $325,000 and the property at 28 King Street, Airport West at $325,000.

[2] As a shareholder, Joseph has standing to bring such an application: s 462(2)(c) Corporations Act. Anthony having resigned as a director after this proceeding commenced, Joseph did not press at trial an application that he originally made under s 232 of the Corporations Act for relief from the alleged oppressive conduct of Anthony. Nor did he and Michele press their application for the appointment of a receiver and manager of the trust assets and other relief in respect of the trust.

[3] See, for example, Malos v Malos [2003] NSWSC 118; (2003) 44 ACSR 511; Khamo v XL Cleaning Services Pty Ltd [2004] NSWSC 1134; (2004) 51 ACSR 397; Clarke v Bridges [2004] FCA 394, Booker v You Run the Business Pty Ltd [2008] FCA 1762 and Galanopoulos v Moustafa & Ors [2010] VSC 380. See also Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd [2008] VSCA 86; (2008) 66 ACSR 325 at [119].

[4] The copy of the trust deed that was in evidence was in some parts illegible. The Court was informed that there are no better copies available. None of the witnesses gave evidence that would support the contention that the appointment of the company as trustee would terminate automatically if it was placed into liquidation.

[5] Section 60 (2) Corporations Act.