Palermo v Palermo [No 2]
[2014] WASC 6
•15 JANUARY 2014
PALERMO -v- PALERMO [No 2] [2014] WASC 6
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2014] WASC 6 | |
| 15/01/2014 | |||
| Case No: | CIV:2544/2013 | 17 - 23 DECEMBER 2013 | |
| Coram: | McKECHNIE J | 23/12/13 | |
| 46 | Judgment Part: | 1 of 1 | |
| Result: | Declaration that brothers are not in partnership | ||
| B | |||
| PDF Version |
| Parties: | JOHN PALERMO ANTHONY PALERMO |
Catchwords: | Partnership between two brothers What constitutes a partnership decision to trade through corporate entities and trusts Whether partnership still continues |
Legislation: | Partnership Act 1895 (WA), s 7 |
Case References: | Atwell v Roberts [2013] WASCA 37; (2013) 43 WAR 507 Brooker v Friend & Brooker Pty Ltd [2006] NSWCA 385 Crossman v Taylor (No 3) [2011] FCA 734 Ebrahimi v Westbourne Galleries Ltd (1973) AC 360 Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 Morgan v 45 Flers Avenue Pty Ltd (1986) 5 ACLC 222; (1986) 10 ACLR 692 Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342 Re a Company; O'Neil v Phillips (1999) 2 All ER 961 Re Wondoflex Textiles Pty Ltd [1951] VLR 458 Salomon v A Salomon & Co Ltd (1897) AC 22 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
ANTHONY PALERMO
Defendant
Catchwords:
Partnership between two brothers - What constitutes a partnership decision to trade through corporate entities and trusts - Whether partnership still continues
Legislation:
Partnership Act 1895 (WA), s 7
Result:
Declaration that brothers are not in partnership
Category: B
Representation:
Counsel:
Plaintiff : Mr M D Howard SC & Mr H H Jackson
Defendant : Mr M F Holler & Mr J A Day
Solicitors:
Plaintiff : Gadens Lawyers
Defendant : Rockwell Olivier
Case(s) referred to in judgment(s):
Atwell v Roberts [2013] WASCA 37; (2013) 43 WAR 507
Brooker v Friend & Brooker Pty Ltd [2006] NSWCA 385
Crossman v Taylor (No 3) [2011] FCA 734
Ebrahimi v Westbourne Galleries Ltd (1973) AC 360
Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129
Morgan v 45 Flers Avenue Pty Ltd (1986) 5 ACLC 222; (1986) 10 ACLR 692
Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342
Re a Company; O'Neil v Phillips (1999) 2 All ER 961
Re Wondoflex Textiles Pty Ltd [1951] VLR 458
Salomon v A Salomon & Co Ltd (1897) AC 22
1 McKECHNIE J:
What this case is about
2 Two brothers were once very close and spent 30 years in business intimately involved in decision-making. Activities included an accounting practice, property development, share dealing, corporate consulting and farming. In the last seven years, the trust which keeps any relationship glued together has dissipated and when they faced each other in court (over a five-day hearing), the antagonism was almost palpable. I suspect that each thinks the other has betrayed him.
3 Thousands of documents have been filed attached to many affidavits. The defendant's responsive affidavit dated 11 December 2013 runs to paragraph 2229 and 19 volumes of annexures. Not one of those annexures is a partnership agreement between the parties.
4 The simple issue is whether or not the brothers have been in partnership since 1976. This is an issue of legal status only, though informed by the facts of their relationship. The plaintiff, whom I shall hereafter refer to as John, says not. The defendant, whom I shall refer to hereafter as Tony, says that there was an ongoing contractual relationship between the brothers from before 1976 in terms which amounted to a partnership or a relationship giving rise to fiduciary obligations.
The 'partnership' that dare not speak its name
5 In Tony's eyes this was a partnership that dare not speak its name. He says, in effect: 'I was a partner in the accounting practice of J Palermo & Co but could not say so because the regulatory regime for accountants forbade me to be a partner.
6 'I was a partner in JP Corporate Pty Ltd but could not say so because John chose to incorporate JP Corporate to limit his own liability.
7 'I was a partner in the farm business but could not say so because John needed to have all the farm losses debited to him for tax purposes.
8 'I was a partner in property and share dealings even though we chose to conduct all those dealings using different corporations and trusts'.
9 Tony would like to ignore the complex legal structures set up in order to limit liability, minimise the tax burden and overcome any regulatory problems. This cannot be done. From 1976 the brothers intended to trade in a way antithetical to any partnership. John's declaration must succeed and Tony's alternative must fail.
The trial
10 The trial took place over five days, having been listed urgently because John has a terminal illness and only months to live. I mention the urgency because some allowance should be made for the pressure this has placed on Tony to prepare his detailed response. Both John and Tony were cross-examined on their affidavits, as was Davina Ruland and John's son John Palermo Jnr (John Jnr), who jointly purchased the accounting practice J Palermo & Co in 2006. Tony's son Dean was also briefly cross-examined. Other affidavits were read without the necessity of attendance, with amendments and deletions being made to affidavits by consent. In order to save a vast number of bank documents being tendered, the parties agreed a statement summarising the effect of the banking material.
The main witnesses
John
11 It is clear that John is gravely ill. He gave his evidence in a precise and measured way. I recognise that he now has an emotional antipathy towards his brother which may colour some of his evidence. His evidence is, in fact, largely uncontroversial, the key controversies being in relation to critical conversations, some said to have occurred many many years ago where the fallibility of memory would make me cautious of accepting any evidence about key matters without some assistance from contemporaneous documents or accounts.
12 Much of John's cross-examination was taken up, first with an exploration of his qualifications, and then, laboriously, going through the scrapbook to identify his writing or his initials. He was also taken through his affidavit and asked to expand on various paragraphs.
Tony
13 I have made allowances for the short time in which Tony has had to prepare his response. That said, I regard Tony as an unsatisfactory witness. On crucial points I would not be prepared to accept his evidence without some form of confirmation.
14 There are a number of reasons for this. First, his antipathy to his brother was overt. He often added non-responsive comments to his answers designed to paint his brother in a poor light and to virtually accuse his brother of criminal conduct or at least duplicitous and misleading conduct. This happened sufficiently often to take the answers beyond a mere spontaneous utterance and suggest a deliberate resolve to smear his brother when he could (ts 214 - 215, 232, 235 - 239, 262 - 263).
15 Secondly, Tony maintained an unnecessarily pedantic attitude to questions being asked of him (ts 193 - 194, 201). I have encountered this many times in other cases. Often, it is simply a personal characteristic. Tony clearly is a person who is in command of many details and very precise. However, I formed the clear view that his pedantry went beyond mere precision and amounted to deliberate obstruction (ts 208 - 209) in an effort to divert the questioner if possible (ts 196 - 198). The cross-examiner was not diverted (ts 228) and, on occasions, Tony simply refused to answer what was a simple and clear question, even though it was repeated many times. At other times he was evasive or obfuscatory (ts 211, 213). I draw an adverse inference against his credibility for this and other reasons, examples of which I now set out.
16 The witness was taken to his affidavit of 11 December:
1402. John, as a director of Advantage Telecommunications, became embroiled in an investigation into allegations that Advantage Telecommunications received stolen money from Hong Kong.
1403. Attached hereto and marked AP560 are true copies of subsequent press reports regarding these allegations.
1404. This led to John and I setting up JP Corporate, in about 2001, so that Tomar, which was providing secretarial services to public companies at the time, was not exposed to any possible liability arising from these investigations.
17 In cross-examination the witness agreed that the events described in par 370 of the earlier affidavit in CIV 2110/13:
There may not have at the time, no. There were other issues that were around at that particular time where John's liability was also in question (ts 235).
18 The witness did not accept that par 1404 is wrong. The witness denied it was an invention to deal himself into the incorporation of JP Corporate (ts 236).
19 This passage is part of the accumulation of passages which lead me to reject contentious parts of Tony's evidence. Tony's attempt to explain what is a clear inconsistency in two sworn statements does him no credit.
20 The witness was taken to the newspaper article which was annexed to his affidavit 'The fact sheet says on January 16, 2001, Anthony [Upal Anthony] made an unauthorized loan'. Tony did not accept that was the start of the criminal conduct. He agreed JP Corporate was incorporated in April 2000.
21 His answer:
And so, the story that you have put in various affidavits about Mr Anthony having anything to do with John incorporating JP Corporate just must be wrong, mustn't it?---No, it's not. Because there were other details – other – what I – as I said before, what I call now shady deals that were going on; the public companies were always running out of money and he was always trying to con other people to put money in – pour it out of secretarial fees and everything else, and the company was always dry.
Your hatred for your brother is so intense that you're happy to lie about this - - -?---No.
- - - in an effort to smear him, aren't you?---No. Not at all. Not at all. My hatred for him is not there at all; I think the hatred is the other way. If you look at the faxes that I've sent him the last five months in order to try and meet him to sort things out, I think you will see that the evidence that that's not what you've stated is not correct.
So do you accept on your oath that this had nothing – the (indistinct) Anthony charging had nothing to do with the incorporation of JP Corporate?---No. I think that from what I recall, which is not much, the cogent and all those deals were all happening in the late 1990s.
But the ones you've deposed to and given evidence about concern Mr Anthony, and you say in 1404 that that led to you and John setting up JP Corporate. And I'm putting to you that that cannot be correct and it's a lie?---He would have been concerned in the late 1990s about some of these deals that were going on. I think we hadn't been paid fees for about two years – two and a half years, and he was finding it extremely difficult to raise monies from the public.
So that's all new evidence that you wish to give today for the first time?---Well, I don't know if it's new evidence or not; that's what I recall.
In fact, in FarmerNet I think we went two and a half years without getting paid – which I think was around that period, but without looking at records I don't know.
Did FarmerNet have anything to do with Mr Anthony?---Not that I know of.
Why do you mention it then?---I mentioned that because – to demonstrate that in fact the public companies were always bled dry and monies always had to be raised, otherwise the companies would go to the wall.
And what has that got to do with somebody criminally embezzling $16 million?---I have no idea. It has got nothing to do with it.
Well, why did you mention it?---To demonstrate that in fact at times we had to go for long periods of time to keep the companies afloat, otherwise they would go to the wall.
But what has that got - - -?---And John - - -
What has that got to do with this?---What has that got to with it? Well, John – at the time, they couldn't raise monies from anyone. And I think, looking back now, John took the money knowingly, in ATC.
Could you repeat that please?---I think at the – looking back now, and because funds were difficult to raise, or they found it difficult to raise, I think John was prepared to take the money from anywhere he could, otherwise the companies went to the wall.
But there's no hatred on your part towards your brother?---I don't think so. If you look – as I said, if you look at what I've done – look, the only reason why these – the matters of ATC and the varied documents came about is that that was a confidential fax that I sent to him, where he said to me, “Get these documents out of your place.” I didn't want them out in my place, I hadn't read the documents, he told me what they were about, and he told me to get rid of them to somewhere where no-one can find them, and that's all. But following that fax, I said readily, I'm quite willing to give them to the court, to give them to anybody. I do not want them in my possession (ts 237 - 239).
22 The witness was taken to par 1606 which reads:
Up to about 2008 or 2009, the income that Tomar (then Empal and JDP Admin) received for secretarial fees was distributed to the trusts of the group entities held by me, so that the income was not linked to John and John would not, therefore, need to disclose it.
23 The witness sought to clarify the affidavit:
[W]hat I don't understand is what you are actually saying. So can you tell us, you are talking – I thought in 1606, just reading the words, that you were talking about income that Tomar received from public companies?---The income that Tomar used to receive from the public companies (ts 244).
24 He said:
So that – as I understand it, this evidence, now that we have got it clear, is that John told you that these things had to happen because he wanted to avoid disclosing it – or he wanted to avoid having to disclose it through the public company?---That's correct.
And so it's another instance of your evidence of your brother's shady behaviour?---I think now I would consider that to be correct (ts 235).
25 The witness was taken to his drawing of a cheque in his favour at a time when the Tomar account at NAB was significantly overdrawn.
26 48 Lonsdale Street, Yokine was sold. This was a property that was sold by Tony:
And so the bank – when the proceeds came in, the bank took the $700,000 and applied it to the credit of Tomar's account?---Yes.
And notwithstanding that those funds came into Tomar's account and were applied by the bank to the credit of Tomar, which is an entity that you say is a partnership entity, don't you?---Yes.
You nonetheless regarded that $700,000 as remaining yours solely?---The proceeds from 48? Yes.
And so you then, without reference to John, paid yourself the $700,000 by drawing a cheque on Tomar?---Yes (ts 277).
27 The property had been offered as security:
[it] was never intended that the bank was going to do what they subsequently did (ts 278).
28 The witness was taken to the fact that he drew 13 cheques on 23 November 2011. The witness agreed that he paid himself out of Tomar on that day $349,498 in addition to the $700,000 (ts 287).
29 In his affidavit:
2156. In November 2011, the Tomar account, which had an overdraft facility of $1.2 million, was overdrawn with a balance of approximately $2.436 million.
30 In evidence:
If you have a look at paragraph 2156 of your affidavit of 11 December 2013?---Paragraph 2?
2156?---Yes.
You say there that the Tomar account was overdrawn, with a balance of approximately 2.436 million?---Yes.
So the receipt of the 700,000 from 48 Lonsdale Street would have reduced its overdraft facility to be back within guidelines?---No. The cheques that we issued were always within the guidelines.
No. Mr Palermo, just listen to my question. My question is that the proceeds of the 700,000, or the $700,000 which were proceeds from 48 Lonsdale Street - - -?---Yes.
- - - would have brought that account – well, they wouldn't have quite, but they would have contributed to bringing that account into being regular?---At the time I issued the cheques - - -
Mr Palermo?---Well, you're not correct.
I'm asking you a different question?---What is the question?
The question is, the $700,000 from 48 Lonsdale Street would have taken, by itself, the overdrawn amount down by $700,000, wouldn't it?---Below the 1.2.
Well, it wouldn't have got below 1.2, would it?---It would have been – it would not been above 1.2 because the bank would not allow it to go below 1.2.
Well, your evidence in paragraph 2156 was that it was overdrawn at that stage by 2.436 million?---But there are reasons for that transaction, because the bank made a mistake.
Mr Palermo?---Well, I'm not going to accept what you say, because the bank made a mistake. Perhaps the bank manager can come and answer it.
Well, are you telling me that paragraph 2156 of your evidence is wrong?---Well, what I'm stating in paragraph 2156 is the – is the fact as it was appearing on the bank statement. Those – those – that 2.436 – there were credits made by the bank to reverse it to bring it back into order, that were arranged and initiated by Steve Brown, not me.
And you knew when you took out – when you paid or caused to be drawn and debited from Tomar's account, you knew that that was the position?---No. I did not know it was going to go to 2.436, because that was an error that was made by the bank and corrected by the bank in the bank's own handwriting; I've got the deposit slips.
And then the explanation you give for your unilateral actions, because you didn't consult John on any of these, did you?---No, I didn't, because he didn't consult me on what he was hiding and what he was taking from other group entities as well (ts 288 - 289).
31 Paragraph 2186.3 of Tony's affidavit:
JDP Admin was owed approximately $350,000 in unpaid fees earned by me, which is now the subject of District Court Action CIV 3233 of 2012.
32 Tony was cross-examined about this statement:
Mr Palermo, JDP Admin was not owed the $350,000 in 2186.3 form Tomar, was it?---That's correct. But had JDP Admin - - -
But nonetheless - - -?---- - - collected the funds, they would have ended up back in Tomar.
Nonetheless, you decided to help yourself to that money?---I issued the cheques as John issued the cheques and took money from the other group entities.
So one group of people owe you money, you say, and you decided to take it out of Tomar?---It was common practice for us to make those sort of adjustments in those quantums out of Tomar.
You knew Tomar didn't owe you the money that you said was owed to you in those District Court proceedings, didn't you?---No. That's not correct. We make those – we made those adjustments via the Tomar loan accounts.
You knew that Tomar did not owe you the money that was claimed in District Court proceedings CIV 3233?---It had a direct relationship with all of our group entities.
Well, is there a reason you won't answer the question?---I'm trying to tell you what we did in – with Tomar and with our adjustments.
You took money - - -?---And that was one of those adjustments.
- - - out of Tomar in respect of a debt that Tomar did not owe you?---Tomar did owe me. There were credit loan accounts in Tomar.
That was money – in 2186.3, that was money that you knew you were not entitled to from Tomar?---No. That's not correct. My loan account in Tomar stood in excess of $1 million, and that could have been repaid and taken at any time.
And Tomar couldn't pay you at that stage because it owed the bank money that it couldn't meet?---I think that at that stage Tomar could meet its obligations, if we had agreement with John to do certain things.
…
So in the past, had you taken money out of Tomar that was owed by a third party?---Not by a third party.
So what you did as you deposed to in 2186.3, that was new?---Yes (ts 289 - 291).
33 Two things may be said about this passage. First, it indicates that Tony is quite capable of deceit and acting to his own advantage when it suits him. He knew he had no right to take the money out of Tomar when it was owed by a third party. He could not satisfactorily explain why he did so. Secondly, it goes against his claim that there was a partnership or fiduciary arrangement in place as at November 2011.
34 Some of his other answers in relation to specific questions about his affidavit, where inconsistencies were put to him, were not believable.
35 Where there is a conflict between the evidence of John and Tony on a particular issue, I prefer the evidence of John over Tony.
36 However, the bulk of the evidence from Tony is not in material contest. It sets out the corporate structures, trusts and financial accounts in minute detail. It does not lead to the resulting legal status which Tony asserts, but which John denies.
Matters in issue and not in issue
37 Although the affidavit material is voluminous there is less in actual dispute than might at first be imagined.
38 Moreover, there is some evidence in controversy that is unnecessary to resolve, given the limited basis of this action for a declaration of legal status. A lot of the evidence in controversy does not advance either party's overall contentions.
39 Clearly from 2006 whatever trust had existed between the parties was dissipating. By the time 2011 arrived it had evaporated. Tony's departure seems to have had some element of premeditation about it (Dean ts 301). There are claims and cross-claims about the production or non-production of various books of account and other papers. There are disputes about what has been said more recently between the two brothers. The actions of the NAB in putting receivers into Tomar Pty Ltd has had a significant effect on the fortunes of each brother. None of these issues needs to be resolved to determine the form of declaration.
40 The parties have written to each other and to others, such as Ms Ruland, extensively by email continuing to voice their differences. The tone of some of the emails is instructive as to the depth of antagonism.
What started this action
41 The genesis was a letter written by Tony's solicitors to John's solicitors on 23 April 2013:
2. Partnership
The relationship between John and Tony was, and remains, that of partners.
We are instructed that the partnership relationship was formed in about 1975 on the foundation of their personal relationship as brothers, their mutual confidence and trust in each other and their mutual desire to conduct business together with a view to creating a wealth base for their respective families.
This partnership between Tony and John exists outside and beyond the companies through which the Businesses were, and are, conducted.
Under this partnership relationship, John and Tony owed mutual fiduciary duties to each other including the duties of co-operation, trust, loyalty and confidence.
Critically, John and Tony have a mutual duty to act for and on behalf of, or in the interests of, the other in exercising powers which will affect the interests of that other in a legal or practical sense. That duty exists when John and Tony act, or have acted, in their capacities as, amongst others, appointors, directors, shareholder or as registered legal owners. See Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41.
42 After taking instructions John's solicitor replied on 14 May 2013:
It is correct that for a time a partnership did exist between Mr John Palermo and Mr Anthony Palermo commencing from about 1972/73 through to about 1976 wherein joint names they acquired various properties and developed the same. For this purpose they maintained bank accounts at both the Commonwealth Bank and Town & Country Building Society. These partnership enterprises entailed acquiring and developing properties in Scarborough, Tuart Hill, Joondanna and Yokine.
However, upon the incorporation of Tomar Holdings Pty Ltd ('Tomar') in 1976, there existed no partnership going forward, unless (and I am awaiting instructions) those properties referred to above had not been sold and indeed they did not acquire any property from that date, either as partners or otherwise.
Upon Tomar being incorporated and becoming a trustee of the Tomar Unit Trust, whatever joint enterprise they had was thereafter conducted in part (varied somewhat as described in this letter) through that medium. The units in the unit trust were owned equally by the trustees from time to time of each of the J Palermo Family Trust and the A Palermo Family Trust, which eventually became PAJ Investments Pty Ltd (PAJ) as trustee of both trusts. PAJ as trustee for both trusts for tax purposes filed partnership returns, albeit that in our view is not a legal partnership.
43 The two letters reflect, broadly, the position of the parties through to trial.
44 Tony's position modified at trial, and moved on from the original letter.
45 In opening counsel for Tony, Mr Holler:
[I]t's not a question of whether a partnership was formed in 1976 but whether in fact the old partnership was terminated. … We say there's an admitted partnership through 1976, there's no evidence of termination, all we have is that it carried on through a different form, which is the company, Tomar Holdings.
…
[T]omar Holdings was a central treasury of a much wider arrangement. The income from Tomar serviced borrowings, which we say were restricted not just to property development but to other activities, including share trading. And when we say partnership-like, your Honour, what we are driving at there is that before the codification of partnership law under the Partnership Act took place, there was separate administration of law and equity in England. …
…
Now, when we say partnership-like, we are not talking about, with respect, the people in the company-type arrangement that your Honour referred to. When we say partnership-like, what we're saying is that if your Honour finds that the inferred agreement and its inferred terms over the course of 40 years of conduct, falls short of the partnership definitions of partnership, in which case the Act would plug any gaps, we say there is still an arrangement. If it falls short of partnership, that there's still a contract that gives rise to fiduciary obligations between the two brothers.
…
If for some reason your Honour feels it doesn't amount to a partnership, we say it's still a contract that's partnership-like and (ts 60 - 62)
…
McKECHNIE J: Well, it comes back to the letter of your instructing solicitors, I suppose.
HOLLER, MR: Well, with respect, we have moved on from that, your Honour. The more important document is this inferred terms document now. This is a refinement of that letter, having had access to a lot more of the evidence (ts 67).
46 In cross-examination Tony conceded that the partnership had ended:
And do you say that the partnership agreement that you assert remains on foot today?---I think there's going to be a point in time when – or a point in time or a date in time when all matters must end. I think what that point in time was is open to question.
But it has ended, hasn't it?---I would have to say today that there is no chance of anything being reconciled, that's why we're here, and I think - - -
But the agreement that you assert has come to an end?---I think that's correct, yes.
And when did it come to an end?---Look, I think that came to an end as soon as probably John started issuing some of these proceedings or soon thereafter (ts 292).
47 In final submissions Mr Holler submits:
8. Tony accepts on the evidence that upon the incorporation in 1976 of Tomar the former partnership ceased as a matter of law. However, their relationship continued and evolved.
…
11. Tony is not asserting that he was, in a strict legal sense, a partner in the business of the accounting practice, J Palermo & Co (accounting practice).
48 The essence of the dispute between the parties can be seen in the declaration which each contends for:
Plaintiff's Proposed Further Declarations
1. A declaration that the Plaintiff and Defendant have not operated in a partnership whether as described in the letter dated 23 April 2013 from Talbot & Olivier addressed to Gadens Lawyers otherwise save for certain acquisition of properties undertaken in their own names up to and about 1976 (nb: this is as per the Originating Motion dated 11 October 2013).
2. A declaration that there was not a partnership between the Plaintiff and the Defendant over any part of the accounting practice conducted as 'John Palermo trading as J Palermo & Co', or under any other name or, alternatively, that there was no such partnership since April 2000, or in the further alternative since August 2006.
3. A declaration that there was not a partnership between the Plaintiff and the Defendant over the business which was the provision of corporate consulting services performed by the Plaintiff, or alternatively there was no such partnership since April 2000, when such business began to be conducted by JP Corporate Pty Ltd, or in the further alternative since May 2011.
Amended Declaration Sought by Defendant
…
There was an ongoing contractual relationship between the plaintiff and the defendant from before 1976 in terms which amounted to a partnership or
C. The alleged inferred terms of that contract are as follows:
1. Note: 'group entities' means the companies, trusts and other businesses described in the attached list.
2. Note: 'they' or 'them' means each of John and Anthony:
(a) in their personal capacity;
(b) as directors of the companies within the group entities (including of companies acting as a trustee of a trust);
(c) as appointors or guardians under the trusts within the group entities; and
(d) as shareholders of the companies within the group entities.
(a) with the aim of generating wealth for both of them to be shared equally;
(b) on the basis that the group entities bank borrowings would be obtained through Tomar Holdings Pty Ltd;
(c) on the basis that the group entities would provide the income to service the group entity bank borrowings;
(d) on the basis that distributions of income and profit are made, on a tax effective basis:
(i) across the group entities
(ii) to each of them; and
(iii) their families;
(e) with Anthony to primarily operate:
(i) the property development business;
(ii) the accounting practice from the about 1992 to 2006;
(iii) the corporate secretarial services business with John;
(iv) the farming business;
(v) the property holding business;
(vi) the settlements agency business;
(vii) the building business;
(f) with John to primarily operate:
(i) the corporate consulting business;
(ii) the share trading business;
(iii) the corporate secretarial business with Anthony;
(iv) the accounting practice to about 1992;
(g) on the basis that income to John personally from the group entities and public companies was to be sufficient to qualify him as a sophisticated investor for the purposes of the Corporations Act so that he could take up share placements for the group entities;
(h) on the basis of consultation about important matters and decisions affecting their joint interests;
(i) consistent with the duties owed by a fiduciary, being the:
(i) duty to act honestly in the best interests of them jointly;
(ii) duty to avoid a conflict of interest between their own interests and joint interests; and
(iii) duty not to use their position (as a director, appointor, guardian, shareholder or personal trustee) to:
A. gain a personal benefit: or
B. dishonestly confer a benefit on another or others.
5. As to how each of the group entities were to operate:
(a) (i) either or both of them were to be directors (or their nominee);
(ii) only one of them was to be a director in circumstances in which they wanted to:
A. quarantine liability from the other; or
B. avoid disclosure problems for John in his capacity as board members of various public companies,
with the director or directors to act consistently with the terms described above;
- (b) one of them (or a nominee of them) was to be the appointor, guardian or default appointor or default guardian with the appointor or guardian to act consistently with the terms described above.
50 In his Affidavit of 10 October 2013 John deposes:
33. At no time have I ever said to and heard from Anthony words to the effect that all enterprises we have been involved in are in a partnership or in a joint enterprise on a 50/50 basis.
51 The evidence deposed to by Tony shows an arrangement over 30 years whereby the two brothers worked together to enhance their wealth. Much of Tony's evidence about the financial dealings within the various corporate entities and trusts is not contested by John and is accepted by me. The scrapbook, Exhibit A, is a record maintained by Tony over many years and a lot of pages are initialled by John. It is a reconciliation of cash. It does not record income, profit and loss. It records an adjustment of cash taken from kitty (Tony XXN ts 220). It supports the evidence of John in the affidavit of 10 October 2013:
31. When Anthony and I were discussing doing property developments under separate entities as trustees of discretionary trusts, we also had a discussion as to how the profits of those discretionary trusts would in the future be distributed. We said to each other and agreed words to the effect that:
31.1 where there were corporate entities of which Anthony and I were each the shareholders, the profits could be distributed to those corporate entities where those corporate entities had available tax losses;
31.2 the profits could be distributed to Tomar; or
31.3 where we agreed to distribute the profits to a company where, for example, I was the sole shareholder or my family the sole shareholder, an equivalent amount would also be distributed to Anthony or an entity of Anthony's nomination.
52 John deposes in his affidavit of 10 October 2013:
13. Sometime in 1976, I caused Tomar Holdings Pty Ltd ('Tomar') (then known as Palermo Holdings Pty Ltd) to be incorporated and appointed as trustee for the Palermo Unit Trust. Tomar as trustee of each of the J Palermo Family Trust and the A Palermo Family Trust was the sole unit holder of the Palermo Unit Trust holding ten units for each of the J Palermo Family Trust and the A Palermo Family Trust. Attached hereto and marked 'JP2' is a true copy of the Deed of Settlement of the Palermo Unit Trust dated 24 September 1976. After this time I do not recall that Anthony or I bought any further properties together.
14. In incorporating Tomar I intended to use it as a vehicle to undertake a property development business rather than doing so in my and Anthony's name ('property development business'). I recall Anthony and I having discussions to this effect.
15. Until recently, Anthony and I were the only directors and shareholders of Tomar.
16. Tomar has not undertaken any business or activity as far as I am aware, save as trustee of the trusts referred to in paragraph 13 above.
17. In the next few years Anthony and I pursued a property development business or purchasing properties through Tomar, developing them by constructing home units under licence for a builder named Victor Miraudo and then selling the completed home units.
…
20. The profits made by Tomar from the property development business were to be distributed equally to the unit holders of Palermo Unit Trust.
…
31. When Anthony and I were discussing doing property developments under separate entities as trustees of discretionary trusts, we also had a discussion as to how the profits of those discretionary trusts would in the future be distributed. We said to each other and agreed words to the effect that:
31.1. where there were corporate entities of which Anthony and I were each the shareholders, the profits could be distributed to those corporate entities where those corporate entities had available tax losses;
31.2. the profits could be distributed to Tomar; or
31.3. where we agreed to distribute the profits to a company where, for example, I was the sole shareholder or my family the sole shareholder, an equivalent amount would also be distributed to Anthony or an entity of Anthony's nomination.
HOWARD, MR: And then there came a point in time where the decision was made, I think because of land tax, that it would be more efficient for there to be special purpose companies?---Yes.
And each of those special purpose companies was the registered owner of the land?---In a different capacity.
But you agree with me that it was the registered owner of the land?---At Landgate or the old titles office records. Yes.
And its ownership of that particular property was subject to a trust?---Yes.
And in each case, I think it's correct, isn't it, that the trust was what is commonly known as a discretionary trust?---Yes.
And the discretionary trust will have, generally speaking, a class of beneficiaries, or different classes of beneficiaries?---Yes.
And it's in the discretion of the trustees, so the corporate trustee, whether it makes any distribution of income to any particular beneficiary?---Without reading each trust, that's generally correct.
And it's also within the discretion of the trustee as to whether it appoints or distributes any capital to anybody within the class of beneficiaries?---Yes.
And the class or classes of beneficiaries are usually quite wide?---Yes.
And it's the case that nobody who is within the class of beneficiaries has any particular right to any particular part of the property which is subject to the trust?---Subject to the content of the trustee, that's generally correct.
So that a beneficiary who is – or a person who is within the class of beneficiaries can't put up his or her or its hand and say “I own that piece of land”?---Correct (ts 191 - 192)
54 The Palermo Unit Trust was created on 21 September 1976. The original unit holders were Palermo Holdings Pty Ltd as trustee for the J Palermo Family Trust, 10 units; Palermo Holdings Pty Ltd as trustee for the A Palermo Family Trust, 10 units.
55 The intention of the brothers is crucial. Their intention to work together to create wealth for themselves and their families can be accepted. However, the vehicle by which the wealth was to be created and distributed is all important. From 1976 it was not by partnership. The methods used were the antithesis of a partnership. The brothers gave up partnership for directorship. Thereafter their arrangement was governed through the legal structures they had created, not through any overarching contract or relationship as asserted by Tony.
56 This was a deliberate decision. There is no acceptable evidence that John and Tony ever assumed joint liability for all debts and obligations of a partnership after 1976. On the contrary, one of the main purposes for commencing Tomar Pty Ltd and trading thereafter was to limit personal liability:
I can't remember the exact words, no, that I had with him in 1976, other than we were disillusioned with our job. We wanted to start investing in real estate. I was the one that was mainly interested in real estate, even at that young age. John, I can't remember whether he was an accountant in that year or the following year, so he suggested for, as a protection or personal liability, we should incorporate a company, and I was pretty well led by him as far as the structure was concerned (Tony, ts 202).
57 Tony gave evidence that the property bought in Scarborough, their first venture together would be owned together and with a joint responsibility for debt and an equal share of profit. Despite the submission by Mr Howard, counsel for John, that one transaction does not necessarily evince an intention to trade into the future, I am satisfied that the brothers were in a partnership to develop property prior to 1976 and the incorporation of Palermo Holdings Pty Ltd. Then Palermo Holdings Pty Ltd, later to become Tomar Pty Ltd, was established.
58 In Tony's affidavit of 11 December 2013:
77. Tomar (at the time known as Palermo Holdings) was established in 1976, to be the main vehicle through which John and I would purchase our development properties and develop them. Tomar as trustee of the Palermo Unit Trust was the main borrowing entity for those property developments and has remained as our borrowing entity.
59 I am quite satisfied that one of the reasons for changing from a partnership to a company was the limitation of personal liability. True it is that directors' guarantees are often required by a finance institution (Tony XXN ts 210). This is a different source of liability and is in any event limited to the amount borrowed.
Legal principles which govern the relationship
60 It is convenient to start with some basic principles. A partnership is the relation which subsists between persons carrying on a business in common with a view to profit. In deciding whether a partnership does or does not exist in any particular case, the court shall have regard to the true contract and intention of the partners as appearing from the whole facts of the case: Partnership Act 1895 (WA) s 7.
61 A defining characteristic of a partnership is unlimited liability for each of the debts incurred by the partnership. It was the desire to limit liability that was the progenitor of the Joint Stock Company. From the 19th Century, the English, and subsequently Australian Parliaments, enacted various forms of corporations laws enabling an artificial person to be created. The body so created was separate from its members who joined together being bound by the Articles of Association: Salomon v A Salomon & Co Ltd (1897) AC 22. Crucially, the formation of a company limited the liability of its members to the amount unpaid on any shares. Hence the name, 'proprietary limited company'. The contrast with a partnership could not be plainer.
62 When enterprises incorporated, it was common for former partners to become sole shareholders and directors of the company. No doubt they carried on business in much the same way. However, there was now a crucial difference: They were no longer partners but shareholders and directors.
63 As the law developed, the limited liability of shareholders in small companies became illusory to a degree because many people dealing with them would require personal guarantees.
64 Shareholdings could be expanded to other members of the family or a unit trust for which the proprietary limited company was trustee.
65 However, none of these devices affected the essential change that occurred when two persons dissolved their partnership in order to become shareholders and directors of a proprietary limited company.
66 As well as the introduction of limited liability as against unlimited liability, the legal relationship between the persons who were formerly partners changed completely. A partnership attracts fiduciary duties of trust, confidence and honesty, in part because the decisions of one partner in dealing with outsiders can have a cataclysmic effect on the assets of other partners due to the unlimited liability each partner assumes.
67 Once the business of the partnership was taken over and carried on by a company corresponding, duties were owed, not to the other party, but to the corporation, particularly by the directors.
68 This does not mean that a shareholder in a small company who is being oppressed by the actions of the majority is without remedy. The remedy however is to be found in corporations law by actions for oppression and the like.
69 In Re a Company; O'Neil v Phillips (1999) 2 All ER 961 (Lord Hoffmann):
In the case of s 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith (966 - 967).
70 The remedy is confirmed in Re Wondoflex Textiles Pty Ltd [1951] VLR 458. Smith J also contrasted the literal meaning of the articles with the true intentions of the parties:
It is also true, I think, that, generally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles … To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him … But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the Court to relieve a party from his bargain in such cases (467).
There is no continuing contractual relationship outside of the corporation
71 There are a series of cases that establish there is no continuing contractual relationship: Ebrahimi v Westbourne Galleries Ltd (1973) AC 360 (Lord Wilberforce):
It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to 'quasi-partnerships' or 'in substance partnerships' may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words 'just and equitable' sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in (379 - 380).
72 In Morgan v 45 Flers Avenue Pty Ltd (1986) 5 ACLC 222; (1986) 10 ACLR 692, another case about brothers, in words that are apposite, Young J:
Unfortunately it very often happens in cases in this Court that a person has arranged his affairs for commercial or fiscal reasons employs a particular structure which with respect to creditors and the Government he expects to be recognised as no sham but when it comes to a dispute with his former wife or former business associates it is not in his interest to maintain the structure and he pleads before this Court that one must not look at the structure at all but rather at the 'realistic' or 'practical' effect of what has happened … So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better or worse for richer or poorer in commercial sickness or commercial health (224 - 225).
73 In Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129:
The appellant also submits that equity does not impose fiduciary duties between the parties to a deliberate commercial decision to adopt a corporate structure in which they would owe duties, but to the corporation and as directors. Why, it is asked, should equity intervene in such a fashion when the Company, by which Mr Brooker and Mr Friend carried on the business, failed and, in the result, their personal losses will not be in equal amounts? That submission is to be accepted [86].
74 This brief review of authorities indicates there is no scope at law for the sort of contract which Tony asserts should be inferred.
75 The point is made clearly in Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342 (Barrett J):
In the present case, the three parties had no relevant relationship before they joined together as co-directors and co-shareholders. As individuals, they never carried on any business in common; nor did their family companies. And their obvious intention was to obtain, so far as was possible, the benefit of limited liability that comes from being a shareholder in a company – an intention that was, to some extent, thwarted by the practical need for personal guarantees to be given to some creditors. In that way and to that extent, there was personal exposure to the debts of the businesses. But this was a matter of necessity that they did not seek [74].
76 The passage I have just cited is not a complete answer to the claim because John and Tony did have a relevant relationship before they joined together. However, one of their intentions was to obtain limited liability (Tony ts 202).
77 Nassar v Innovated Precasters Group Pty Ltd was a case of oppression within a company (Barrett J):
That, in my view, is a fair reflection of the situation in this case, with 'majority controlled' understood as encompassing the ability of any two of the three to direct a course not favoured by the third. The parties were not partners. Nor were they merely co-shareholders brought together by the circumstance of having happened to buy shares in the same company on the stock exchange. They had elected to associate together through and by means of shareholdings in and directorships of three companies in circumstances where they looked to the companies alone for their financial rewards. And those rewards were to be the consultancy fees paid to the family companies for providing the services of the individuals (akin, in concept, to salaries) and, no doubt, dividends as a normal incident of shareholding (I have referred to the dividends actually paid in July 2007). The parties had not subscribed to any contract among themselves, apart from the contracts inherent in the companies' constitutions. But they were in a situation which, of its very nature and because of the informality that attended the day-to-day relationships, warranted mutual co-operation and a level of trust [78].
78 This passage may have direct relevance to the activities of Tomar Pty Ltd but that is not the question I am asked to decide.
79 In Nassar v Innovated Precasters Group Pty Ltd Barrett J [73] referred to Brooker v Friend & Brooker Pty Ltd [2006] NSWCA 385 and a quotation from McColl JA at [142] and [143].
80 In Brooker v Friend & Brooker Pty Ltd [2006] NSWCA 385:
133. The appellant sought to establish a relationship with the respondent pursuant to which, notwithstanding the incorporation of the company to carry on the construction business they embarked upon in 1977, they would be personally and equally liable to meet any profit or loss incurred to pursue the undertaking. The relationship was said to be either a partnership, a joint venture or a quasi-partnership in the Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 sense. Whatever its precise juridical nature, it was said to be a relationship which required accounts to be taken between the parties of their relationship since they commenced business in May 1977 in order to equalise all personal contributions they had respectively made to the undertaking.
…
140. In my view it was open to the primary judge to conclude (at [72]) that the para 8 conversations demonstrated a common intention in 1977 to cease carrying on business in a relationship which exposed the parties to personal liability for trading debts, and to replace it with a corporate structure under which there was no such exposure. His Honour was entitled to conclude it was inherently improbable that two young men embarking on a business and agreeing to use a corporate structure to avoid exposure to personal liability for trading debts, should nevertheless agree that should the company be unable at some indeterminate time to repay all its debts, they would be personally liable to contribute equally to making the business' losses good. There was no suggestion in 1977 that the parties contemplated the personal debts they subsequently incurred to family and friends when the company fell on hard times.
…
142. A partnership is the relationship which exists between persons carrying on a business in common with a view of profit: s 1(1), Partnership Act 1892. Here while the parties joined forces as shareholders in the company, any profit was to be derived through their equal shareholding and, presumably, by the payment of dividends.
81 In the event, McColl JA considered in that case that the evidence established a fiduciary relationship between the parties arising from the mutual trust and confidence they had imposed on each other from the outset of their business relationship. The other judge in the majority (Mason P) did not reason in the same way.
82 Brooker v Friend & Brooker was subject to appeal: Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129. The decision of the Court of Appeal was reversed.
83 Counsel for the appellant, Mr Friend, submitted, among other things:
The decision cannot be sustained on any ground raised by the notice of contention. The asserted fiduciary relationship is unknown to law. The formulation preferred by the Court of Appeal was contrary to the way the case was conducted at trial. The parties owed fiduciary duties to the company. Those duties were all that was required to ensure that they acted honestly and did not put their own interest in front of the others. The judge found that it was a deliberate commercial decision to enter into a company structure.
84 That submission is to be accepted [86].
85 In Crossman v Taylor (No 3) [2011] FCA 734, Besanko J was dealing with a claim for equalisation of contributions on the basis of oppressive conduct:
The parties chose to conduct their venture through a company and discretionary trust and not through another legal structure such as a partnership. Had they conducted the venture through a partnership they would have owed fiduciary duties to each other. In electing to operate through a company they undertook fiduciary duties to the company but not, on the face of it, fiduciary duties to each other.
It is true that the second defendant was a two-person company and that the genesis of the arrangement was very similar to what one would find in the case of a two-person partnership. It is also true that the categories of fiduciary relationships are not closed: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 ('Hospital Products'). However, those matters having been said, there is nothing by way of an express statement or clear conduct to indicate that the parties intended to create legal obligations over and above the obligations which attended the legal structure they adopted after taking accounting advice.
In this respect, this case is similar to Friend v Brooker (2009) 239 CLR 129. In that case the High Court rejected an attempt to use the equitable doctrine of contribution to avoid the consequences of the selection by the parties of the corporate structure. French CJ, Gummow, Hayne and Bell JJ said (at 161 [88]):
That selection brought with it the attendant legal doctrines of corporate personality and limited personal liability. Moreover, at the time of the incorporation of the Company, the Companies Act 1961 (NSW) was in force and this (and the successor legislation) provided for the breakdown of relations between the controllers of closely held companies by such provisions as those for winding up on the just and equitable ground under s 222(1)(h) and for oppression suits under s 186 [301] - [303].
86 Despite the concession on behalf of Tony that there was no formal partnership, in view of the declaration sought by John, it is necessary to deal with some specific entities.
(a) J Palermo & Co
87 John is a Fellow of the Institute of Chartered Accountants. He is a registered tax agent. He started his working life in the Commonwealth Bank as a teller and examiner before transferring to the Auditor General's Office of the State Government. He was asked:
Is that sort of eye for detail what got you interested in working as an auditor after that?---No.
What took you into the Auditor-General's Office as an auditor?---Being told by the Commonwealth Bank that I was being transferred to Kalgoorlie (ts 86).
88 John was admitted to the Australian Society of Accountants in February 1979. After admission he was able to commence practice on his own account. He acquired a group of companies from Peter Kotai in 1980 and commenced trading as 'J Palermo & Co' (the accounting practice). The accounting practice has always traded as Palermo & Co with John as principal. The business name 'J Palermo & Co' was registered on 26 March 1983. The business name holder is John Palermo as individual owner. Tony deposes that the business started in about 1978. He worked in the accounting practice but was not a qualified accountant. The accounting practice was operated in John's name as a sole trader and initially operated from his home in Balcatta. Tony deposes that John took the lead in all accounting matters as he was a qualified accountant.
89 Tony says that on 4 March 1980 he paid John $8,000 for a half share in the accounting practice. He said this payment was from his wife's savings.
90 Maria Palermo, Tony's wife, has sworn an affidavit and provided her bank book indicating a withdrawal of $8,000 at around that time. Bank records no longer exist. Apart from Tony's assertion that this money was paid to John and was a half share of the practice there is no other evidence. Tony was assiduous in keeping 'Exhibit A, the scrapbook'. There is no record in the scrapbook of the payment of $8,000. There is no record anywhere else. John denies such a payment and denies that Tony was a partner in the accounting practice. He accepts that Tony was practice manager and deeply involved in the business in that capacity. The payment of $8,000 is inconsistent with Tony's proposition that the two had been in partnership for some years before this in respect of everything. As earlier stated, I do not accept Tony's uncorroborated evidence on matters in dispute.
91 I am not persuaded on the balance of probabilities that Tony paid John $8,000 representing a half share in the partnership.
92 In his evidence Tony indicated that he could not be shown as a partner of the accounting practice as he was not an accountant. It was not allowed:
And you didn't become listed as a partner because the regulatory regime wouldn't allow you to?---That's my understanding.
And you thought that if you became listed as a partner there would be problems with the regulator?---No. That's not correct. If something wasn't possible, and I was only going by what he told me, then it wasn't possible. …
Well, what you did, on your evidence, was act in a way so as to disguise from the regulatory authorities what the true position was?---No. That's not correct.
And what you want now is the court to come and assist you to undo that disguise?---No. I object to your word disguise. There was no disguise on my part.
Well, you didn't list yourself – didn't insist you be listed as a partner, did you?---Because I couldn't.
Because it would have posed problems for the accounting practice?---It was not possible to be a partner of an accounting process if you didn't have the correct qualification (ts 217 - 218).
You don't say that they entered into an agreement with you and John?---I could not say because John was the principal of the practice. I was the silent partner in the practice (272).
93 No evidence was put before me as to any legal impediments to a non-qualified accountant being a member of a firm of accountants. However, the point is that Tony thought this was the position. This severely militates against any presumption that he was a part of the accounting practice in the sense of being a partner of it as opposed to being a practice manager in it. There is no evidence that Tony ever assumed personal liability for the accounting practice debts.
94 The sale of the practice, or part of it at various times, is also decisive against there being any partnership between John and Tony as to the accounting practice. There was a sale of 50% of the practice to Mr Melbin. New service entities were incorporated, JBT Capital Pty Ltd which acquired from Tomar all the plant and equipment necessary to support the practice, and JDP Admin Pty Ltd which handled the administration of the accounting practice in place of Empal Pty Ltd.
95 This partnership did not last more than three months. When it dissolved Mr Melbin retained a list of clients and Tomar purchased the plant and equipment back from JBT Capital. JDP Admin continued to handle the administration of the accounting practice as its service entity. In 2006 the practice was sold to John Jnr and Ms Davina Ruland who had been an employee of the practice for many years. They continue to run the accounting practice.
96 In her observations as an employed accountant there was no doubt in Ms Ruland's mind that John was the principal and Tony the practice manager. This was based on her observations in relation to staffing, decisions to write off fees from a bill and questions that required professional judgment. Tony was responsible for the day-to-day management of staff but John made the material decisions. John directed or instructed Tony to deal with material decisions in the manner John decided. I accept her evidence.
97 The Heads of Agreement which constitutes the only formal document of sale nominates John as the vendor although, according to Ms Ruland, Tony did much of the negotiations and was very forceful. Ms Ruland understood that Tony was only acting as John's agent.98 Clearly after the Heads of Agreement was signed and money (at least from Ms Ruland) was paid, the accounting business was owned by John Jnr and Ms Ruland.
99 If, there had been a partnership between John and Tony in respect of the accounting practice it was in any event dissolved on sale in 2006.
100 Tony obviously accepts this position because he commenced a District Court proceeding against John Jnr and Ms Ruland for monies allegedly owed to him.
101 The District Court (CIV 3233/12) proceedings are between JDP Admin Pty Ltd as plaintiff (the company associated with Tony) and Palermo Group Pty Ltd as first defendant, John Joseph Palermo as second defendant, and Davina Renata Ruland as third defendant.
102 Tony read the statement of claim and it was filed on his instructions.
4. Mr Anthony Palermo:
(a) about 1980 and 2 August 2006 provided accounting and taxation services ('Services'), or caused the Services to be provided, to an accountancy business carried on by Mr John Palermo under the names 'J Palermo & Co' and 'Palermo Chartered Accountants' ('the Business').
Particulars
The Services were provided by Anthony Palermo in his personal capacity by various service entities of which Anthony Palermo is a director, including the plaintiff.
As remuneration for the Services the plaintiff, Anthony Palermo, and the various other service entities of which Anthony Palermo is a director, directly or indirectly received by way of distribution or adjustment half of the profits received by the Business.
A portion of the Business was that goodwill asset value derived by the custom enjoyed by certain regular clients of the business ('a portion of the Business')
…
Particulars
- The agreement was recorded in a document entitled 'Heads of Agreement' and dated 1 July 2006 ('Heads of Agreement').
7. It was an express term of the Heads of the Agreement, on its proper construction, that:
(a) the second and third defendants agreed to purchase a portion of the Business for the purchase price of $600,000, with an adjustment provision; and
(b) Anthony Palermo was required to continue to provide the Services, or cause the Services to be provided, to the second and third defendants consequent upon the purchase, on terms to be agreed upon.
The defendants deny each and every allegation in paragraphs 5, 6, 7, 8 and 9 of the Statement of Claim and say as follows:
(a) on or about 30 June 2006, the second and third defendants negotiated with Mr John Palermo to purchase a substantial part of the existing client base of the practice of Palermo Chartered Accountants carried on by Mr John Palermo at that point in time.
104 The reply filed on 7 December 2012 reads:
2. The plaintiff admits paragraph 7(a) of the first, second and third defendants' defence filed 23 November 2012 ('Defence'), and says further that Mr Anthony Palermo assisted Mr John Palermo with the negotiations that occurred in respect of the purchase of a portion of the business.
105 These pleadings are completely contrary to any notion of a partnership existing between John and Anthony for the period of about 1980 to 2006.
106 In Atwell v Roberts [2013] WASCA 37; (2013) 43 WAR 507:
(a) it is an axiom of partnership law that any change in the membership of a partnership occurring, whether by reason of the retirement, expulsion, death or otherwise of a partner has the consequence of dissolving the partnership: SJ Mackie Pty Ltd v Dalziell Medical Practice Pty Ltd [1989] 2 Qd R 87, 90 - 91;
(b) after dissolution, the next step is to wind up the affairs of the partnership by realising the assets and paying the debts and liabilities of the firm before distributing the surplus, if any, among the partners according to their rights and interests: Partnership Act 1891 (Qld)s 42; Rushton (Qld) Pty Ltd v Rushton (NSW) Pty Ltd [2002] QCA 210; [2003] 1 Qd R 320, 323;
(c) winding up in that way may be avoided if the parties agree on a sale to one or more of the remaining partners of the share of the outgoing partner or if there is a provision in the partnership agreement to that effect. This is sometimes described as a technical or notional dissolution which is something of a misnomer because it is not the dissolution, but rather the winding up, that is notional. In those circumstances, the partnership or firm itself is dissolved as soon as there is a change in membership, but the assets and, as between the partners, responsibility for the liabilities of the partnership are taken over by the remaining partners: Rushton (323); Commissioner of State Taxation of the State of South Australia v Cyril Henschke Pty Ltd [2010] HCA 43; (2010) 242 CLR 508 [12]; Fazio v Fazio [2012] WASCA 72 [65]. [11].
107 I find that Tony was never a partner in the accounting practice.
(b) JP Corporate Pty Ltd
108 John deposes in his affidavit of 10 October 2013:
36. In or about 2000 I caused to be incorporated JP Corporate Pty Ltd ('JP Corporate') to act as entity to undertake my corporate consulting activities as by this time, I was becoming increasingly occupied with corporate matters on a consultancy basis rather than my accounting practice itself as it had a number of qualified accountants dealing with the day to day work. I never discussed this with Anthony.
109 JP Corporate was registered on 4 April 2000. John was the sole director and shareholder until Marisa Palermo, John's daughter, was appointed director in his place on 4 September 2013.
110 Dean Palermo deposed:
JP Corporate
29. I prepared:
29.1 BAS returns to be lodged for JP Corporate;
29.2 the remittance of GST by JP Corporate to the ATO, which was dealt with on the same BAS return;
29.3 the remittance of group tax for John (who was an employee of JP Corporate).
29.4 The BAS returns for July 2011 for JP Corporate included income from the newly opened BankWest account of JP Corporate that had been received in earlier months. I had not been provided with details of the income received by JP Corporate in the BankWest account when I prepared the BAS returns for the earlier months.
30. Accordingly I observed that funds were still being passed to JDP Admin as secretarial fees from JP Corporate until October 2011.
111 Moneys from JP Corporate were distributed by John and Tony to other corporations and trusts. Tony lacked the specific knowledge to earn income on behalf of JP Corporate. It was a business run entirely by John. It was a one director, one shareholder company. There is no basis on the evidence for the existence of a relationship as asserted by Tony.
(c) The farming business
112 One indicia of a partnership is unlimited and joint liability for losses.
113 All the losses from the part of the farming enterprise not undertaken by a company were borne entirely by John. This is decisive against the existence of a partnership. The motive, said by Tony to be reduction of John's income tax burden, is immaterial. In relation to the losses, Tony's evidence was:
There was a reason why I couldn't be listed a partner if it was in his name. He was the one that was in the higher income. He is the one that needed the tax deductions. He is the one that designed all the advanced tax plans.
…
[I] did not need the tax deductions.
…
What was declared to the ATO was the result of running the farm, and the farm had losses that were offset against John's other taxable income (ts 228).
114 Tony was closely involved in the farm operation as deposed by various witnesses. Affidavits were read by consent from a number of persons who deposed in broad terms that they took instructions about the farm from Tony and did not know or had not ever met John. This is unsurprising. The evidence overall suggests that Tony acted as John's manager generally both for the accounting practice and for the farming enterprise.
115 I note that each became a director of Red Lancer Pty Ltd which took over the farm business. There is no evidence of the value of the farm business or whether payment was involved.
Palermo Group entities
116 Annexure A is informative in that it confirms the brothers' intention to trade through companies and trusts. The nominated beneficiaries are the brothers' children, with the exception of Tomar where the beneficiaries are the family trusts of each brother.
Tomar borrowings
117 At trial, following inspection of subpoenaed documents from the National Australia Bank, parties agreed to the following propositions:
(1) Tomar borrowings from at least 1996 were serviced by income from income producing entities or sources of John and/or Tony, including those entities or sources in John Palermo's sole control, such as J Palermo & Co and (from 2000) JP Corporate Pty Ltd.
(2) Security was required from various entities or sources and provided by them, regardless of them being an Anthony Palermo entity or a John Palermo entity or both, but not from JP Corporate Pty Ltd.
(2a) Part of the security provided was a guarantee and indemnity from Seashells Resort Proprietary Limited, in its own capacity and in its capacity as trustee of the Radiantnight Trust.
(3) The security was provided for the overall Tomar borrowings.
(4) There were regular reporting requirements to NAB regarding the entities or sources at (1) above (ts 302).
118 John, John Jnr and Tony had access to the Palermo Group's online business banking facility. An authority dated 27 October 2000 included the Palermo Farm account, JP Corporate and J Palermo and general accounts. These authorities were renewed in 2001, 2005 and 2006. It is clear that the various entities operated as and were regarded as a group so far as the bank is concerned.
119 At the time of refinancing from Westpac to NAB, John and Tony provided guarantees and indemnities for $1.3 million. If a guarantee provides for rights as between the guarantors in the event of a shortfall, this provides a further reason why an overarching contract with fiduciary obligation should not be imposed. The parties are in relationship defined by their offices within trading corporations, corporations as trustees, and guarantors.
120 The various deeds of settlement establishing trusts as evidenced in Volume 18 and 19 of the annexures to Tony's affidavit sworn 11 December 2013 provide further proof of the brothers' intentions to trade exclusively through corporate entities and trusts and not to trade as partners or in a relationship giving rise to fiduciary obligations. The structures they have created precludes the notion that they were carrying on business in common with each other. This is acknowledged by Tony's counsel in closing submissions:
43. The taxable income that was received by the group entities was dealt with largely by distributions through various trusts and allocation of expenses, in a way that ensured that across the group entities and the families of John and Tony the most tax effective result was achieved.
44. That usually meant that income or profits were distributed or otherwise dealt with (usually by the allocation of expenses) in the order that:
44.1. distributions were made to the individuals that were part of the extended families of John and Tony and were on a lower or the same rate of tax as the companies within our group entities;
44.2. distributions were then made to group entities that had available tax losses;
44.3. distributions were then made to the companies within the group entities, which companies would be liable to pay tax at the corporate tax rate.
45. Importantly, none of the cash was actually paid to the ultimate beneficiaries, except for the tax component (which was paid to the ATO, usually from the joint account of the accounting practice coded accounts).
122 The submissions, Tony's affidavit, and Annexure A, confirm what I have said again and again. There is no place for a partnership, contract or relationship which gives rise to fiduciary obligations in circumstances where the parties have quite deliberately chosen to take advantage of tax and corporation laws to effectively manage their incomes by the use of companies and trusts. Most of Tony's evidence I accept but it has the result opposite for which he contends.
Conclusion
123 Despite the mass of material, this case hinged on a narrow legal issue with facts that in broad measure were not in contention. I have made findings on the matters which were in contention and which I regard as relevant to the narrow legal question.
124 Having regard to the gravity of John's illness, at the conclusion of the trial on 23 December 2013, I made declarations as sought by the plaintiff John and dismissed the application for a declaration by the defendant Tony. I ordered the defendant to pay the plaintiff's costs to be taxed if not agreed with a certificate for second counsel if necessary.
125 At the time I gave a summary of reasons for my decision. I said I would publish detailed reasons in due course. These are the reasons.
ANNEXURE A
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Director: John (S), Anthony Shareholder: John (100), Anthony (1) |
Appointor: John, Anthony Spec. Ben: Children of John & Lida and Anthony & Maria |
Appointor: John Spec. Ben: Children of John & Lida | |
Director: Anthony Shareholder: Anthony (2) |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria | |
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(Anthony Sole Trader) |
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Director: Anthony (S) Shareholder: Anthony, John |
Appointor: John Spec. Ben: Children of Anthony and John |
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Director: Anthony (S), John Shareholder: Anthony |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
Director: Anthony Shareholder: Anthony |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
Director: John Shareholder: John (1), Anthony (1) *Anthony was removed as a director without agreement on 21 June 2012 |
Appointor: Anthony Spec. Ben: Deanne Palermo Whitevalley Trust Appointor: Anthony Whitelakes Trust Appointor: Anthony Spec. Ben: Mark Palermo Radiant Night Trust Appointor: John Spec. Ben: Michael Palermo Radiant View Trust Appointor; John Spec. Ben: John Jnr |
Appointor: John Spec. Ben: Marisa Palermo | |
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Director: Anthony, John Shareholder: Anthony (1), John (1) |
Appointor: Anthony Spec. Ben: Children of John & Lida and Anthony & Maria |
Appointor: Spec. Ben: (no copy of trust deed) | |
Appointor: Spec. Ben: (no copy of trust deed) | |
Appointor: Spec. Ben: (no copy of trust deed) | |
Appointor: Spec. Ben: | |
Director: Anthony (S) Shareholder: Anthony (1) |
Appointor: Anthony Spec. Ben: children of Anthony & Maria |
Director: Anthony (S), John Shareholder: Gallant (WA) Pty Ltd (1), Lumen Nominees Pty Ltd (1) |
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Director: John (S) Shareholder: John (9). Lida (1) |
Appointor: Lida Spec. Ben: Children of John |
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(John Sole Trader) |
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Director: Anthony (S) Shareholder: Anthony (2) |
Appointor: Anthony Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony (S) Shareholder: Anthony (10) |
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Director: Anthony (S), John Shareholder: Monarch Corporation Pty Ltd (100), Dolphin Technology Pty Ltd (100) |
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Director: Anthony, John (S) Shareholder: Monarch Corporation Pty Ltd (2), Seashells Resort Pty Ltd (2) |
Appointor: PAJ Investments Pty Ltd? Spec. Ben: (no copy of trust deed) |
Appointor: Anthony? Spec. Ben: (no copy of trust deed) | |
Director: Anthony Shareholder: Maria Palermo (6) |
Appointor: Spec. Ben: (no copy of trust deed) |
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(John Sole Trader) |
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Director: John (S) Shareholder: John (1) |
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Director: Anthony Shareholder: Monarch Corporation Pty Ltd (1) *In liquidation |
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Director: Anthony (S) Shareholder Anthony (10) |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
Director: Anthony (S) Shareholder: Anthony (1), John (1) |
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Director: John Hills Shareholder: John Hills (5000), Anthony (5000) |
Unit Holders: |
Director: John (S), Anthony Shareholder: John (1), Anthony (1) |
Appointor: John, Anthony Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony Shareholder: Maria (1), Anthony (9) |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
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Director: Anthony (S) Shareholder; Cityscan Pty Ltd |
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Director: Anthony Shareholder: Anthony (1) |
Appointor: John, Anthony Spec. Ben: Children of John & Lida and Anthony & Maria |
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Director: John (S), Anthony (S) Shareholder: Monarch Corporation Pty Ltd (1), Seashells Resort Pty Ltd (1) |
Appointor: John, Anthony Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: John (S), Anthony Shareholder: John (1), Anthony (1) |
Unit Holders: PAJ Investments Pty Ltd ATF J Palermo Family Trust No. 2 and PAJ Investments Pty Ltd ATF A Palermo Family Trust No. 2 |
Appointor: (no complete copy of trust deed) | |
Appointor: Spec. Ben: (no complete copy of trust deed) | |
Appointor: Spec. Ben: (no complete copy of trust deed) | |
Appointor: Spec. Ben: (no complete copy of trust deed) | |
Appointor: Spec. Ben: (no complete copy of trust deed) | |
Director: Anthony, John (S) Shareholder: John (1), Anthony (1) |
Appointor: Control Centre Pty Ltd Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony (S) Shareholder: Anthony (1) |
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Director: Anthony, John (S) Shareholder: John (1), Anthony (1) |
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Director: Anthony (S) Shareholder: Anthony (1) |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
Director: John, Michael Palermo Shareholder: John (1) Anthony (1) * Anthony was removed as a director without agreement on 18 June 2012 |
Appointor: Control Centre Pty Ltd Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony (S), John Shareholder: Megisti Pty Ltd (25). Monarch Corporation Pty Ltd (37), Dolphin Technology Pty Ltd (38) |
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Director: Anthony, John (S) Shareholder: John (1), Anthony (1) |
Appointor: Control Centre Pty Ltd Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony, John (S) Shareholder: Anthony (1), John (1) |
Appointor: Control Centre Pty Ltd Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony, John (S) Shareholder: Anthony (1), John (1) |
Appointor: Control Centre Pty Ltd Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony (S) Shareholder: Anthony |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
Director: John (S) Shareholder: John (2) |
Appointor: Lida Spec. Ben: Children of John & Lida |
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(Anthony Sole Trader) |
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Director: Anthony (S). John Shareholder: Anthony |
Appointor; Anthony Spec. Ben: Children of John & Lida and Anthony & Maria |
Appointor: Anthony Spec. Ben: Children of John & Lida and Anthony & Maria | |
Director: John (S) Shareholder: John |
Appointor: Spec. Ben: (no copy of trust deed) |
Director: Anthony (S), John, Graham Rolfe Shareholder: CLM Australia Pty Ltd |
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Director: John Jnr (S) Shareholder: John Jnr (1000) |
Appointor: Anthony Spec. Ben: Children of Anthony & Maria |
Appointor; Anthony Spec. Ben: Children of Anthony & Maria | |
Director: John (S), John Jnr Shareholder: Dolphin Technology Pty Ltd (1) |
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Director: John, Marisa Palermo Shareholder: Anthony (1), John (1) *Anthony was removed as a director without agreement on 18 June 2012 |
Appointor: Anthony, John Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony, John (S) Shareholder: Anthony (1), John (2) |
Appointor: Control Centre Pty Ltd Spec. Ben: (no copy of trust deed) |
Director: John, Anthony Shareholder: |
Unit Holders: Tomar Holdings ATF J Palermo Family Trust and Tomar Holdings ATF A Palermo Family Trust |
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Appointor: Spec. Ben: (no copy of trust deed) | |
Appointor: (no copy of trust deed) | |
Director: Anthony (S), John Shareholder: Anthony (1), John (1) |
Appointor: Control Centre Pty Ltd Spec. Ben: Children of John & Lida and Anthony & Maria |
Director: Anthony (S), John Shareholder: Anthony (1), John (1) |
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Director: Anthony (S), John Shareholder: Anthony (1), John (1) |
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5
10
1