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[2026] NSWCA 161
respondent. Appeal dismissed with costs. The parties were to file short minutes if they agreed on a revised interest figure for the period from 18 December 2025. If they did not agree, they were to file...
7 cited instruments linked from this judgment.
The Court of Appeal upheld the finding that the Commonwealth was liable for receiving money that came from a company director’s unauthorised profits. The director’s profits were treated in equity as belonging to the company from the time they were obtained, even though the company had not legally owned the securities or received a proprietary order against the director. The ATO’s knowledge of the source of the funds was established by findings that were not successfully challenged. A personal order requiring the director to account did not remove the company’s proprietary interest. The Commonwealth also could not introduce its statutory-duty argument for the first time on appeal because the company might have met it with evidence or cross-examination at trial.
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2,160 words · generated 07/10/2026
The appeal concerned payments made by Phillip Grimaldi to the Commissioner of Taxation and whether the Commonwealth was liable to Kupang Resources Pty Ltd, formerly Chameleon Mining NL, for knowing receipt under the first limb of Barnes v Addy.
The underlying transaction began in 2004. Mr Grimaldi, then a director of Murchison Metals Ltd, participated in the Iron Jack transaction. He and a Chameleon director arranged for Murchison to acquire an interest in the relevant tenements. A “spotter’s fee” was agreed, consisting of shares in Winterfall that would be exchanged for Murchison shares and options. Chameleon’s funds were used in connection with the transaction, and the securities were issued to nominees of Mr Grimaldi and the Chameleon director ([9]). The judgment records it was common ground that Mr Grimaldi obtained the securities in breach of fiduciary duty owed to Chameleon as a de facto director ([5]).
Mr Grimaldi sold the securities at a profit. The primary judge found, and the Commonwealth conceded, that Chameleon could trace the resulting Sale Proceeds into payments received by the ATO ([11]). The payments to the ATO were made under a payment plan relating to tax liabilities compromised by deeds executed on 8 October 2010. They included $12,519,410.61 paid on 19 October 2010, followed by further payments through to $850,000 on 28 February 2013 ([3]-[4]).
The ATO had investigated Mr Grimaldi through Project Wickenby and Operation Starlifter. In parallel, Chameleon pursued proceedings against Mr Grimaldi and others. Jacobson J found in Chameleon’s favour and made final orders requiring Mr Grimaldi to account for the Sale Proceeds and other profits. The orders did not grant a proprietary remedy over those proceeds, and the inquiry into the amount of the account was never completed ([8], [12]).
The primary judge held the Commonwealth liable for knowing receipt and ordered judgment for $15,139,745.67, plus agreed pre-judgment interest to 18 December 2025 ([18]). Bell CJ, with Ward P and Griffiths AJA agreeing, dismissed the Commonwealth’s appeal with costs ([127]-[130]).
The central question was whether the Sale Proceeds were “trust property” for the first limb of Barnes v Addy, and whether the Commonwealth received the payments with the requisite knowledge ([13]). The Court treated the fiduciary duty of loyalty as central. A fiduciary must not prefer personal interest over duty to the principal. The rule is deliberately strict: its purpose is to prevent conflicts and temptation, rather than merely to compensate for loss ([21]-[29]).
Bell CJ relied on the established principle that an unauthorised profit obtained through a fiduciary position belongs in equity to the principal. In Furs Ltd v Tomkies, the High Court stated that an undisclosed profit made by a director in carrying out fiduciary duties “belongs in equity to the company” ([22]). The Court read this with authorities including Keech v Sandford, Keith Henry, Chan v Zacharia and Wicks v Bennett, which it said supported a trust arising by operation of law when the profit is obtained, rather than only after a court order ([55]-[65]).
The principle was not confined to a case where a fiduciary misappropriates property the principal already owned. The Court held that it also applies to “new property” or new proprietary interests obtained because the fiduciary preferred self-interest over loyalty ([66]-[70]). The Spotter’s Fee Securities and their proceeds fell within that reasoning. The proceeds were therefore trust property, and the Commonwealth’s concession that they could be traced into its payments was consistent with Chameleon having an equitable proprietary interest in them ([92], [106]).
The Court also rejected the argument that the Final Orders changed the proceeds’ character. Those orders imposed a personal obligation on Mr Grimaldi to account; they did not decide that Chameleon had no proprietary interest. The Commonwealth did not establish that it was Mr Grimaldi’s privy, as it would need to be to rely on merger in the way it proposed ([97]-[105]). The Court further rejected the related contention that the ATO’s knowledge of the Chameleon Judgment meant it understood the proceeds were not trust property. The primary judge found there was no evidence that the ATO had analysed the judgment in that way, and the orders themselves did not negate Chameleon’s proprietary interest ([108]-[109]).
On knowledge, Bell CJ summarised the accepted categories, including actual knowledge, wilfully shutting one’s eyes to the obvious, wilful and reckless failure to make appropriate inquiries, and knowledge of circumstances that would indicate the relevant facts to an honest and reasonable person ([31]-[33]). The primary judge’s findings that the ATO knew how Mr Grimaldi obtained the profits and that the payments came from those profits were not challenged ([15]-[16], [35]-[39]). “Want of probity” was not an extra element on top of the established knowledge requirements. The Court treated the expression as shorthand for the relevant knowledge, including the applicable constructive knowledge categories ([40]-[47], [126]).
Finally, Ground 4 was not allowed because it raised a statutory-duty argument not pleaded or argued at trial. The argument might have prompted evidence, discovery or cross-examination about what the ATO officers did, what discretion they had, and the basis on which the ATO acted. Chameleon was therefore prejudiced by being faced with the argument for the first time on appeal ([113]-[125]).
The judgment presents its main contribution as an application and clarification of existing equitable principles, not as a departure from them. The Court relied on a long line of Australian and English authorities for the proposition that a fiduciary’s unauthorised profits are held for the principal from the time they are obtained ([52]-[75]). In the Court’s analysis, that principle applies to profits that constitute “new property”, not only to property transferred from the principal to the fiduciary ([66]-[70]).
The decision also distinguishes an institutional trust arising by operation of law from a remedial order made by a court. The Sale Proceeds’ trust character did not depend on Jacobson J having made a proprietary order. The later personal order to account did not determine that the proceeds were not trust property ([61]-[65], [101]-[105]). The Court did not say that every equitable order described as a constructive trust creates a proprietary interest. Rather, it explained that the term “constructive trust” can refer to different situations, including trusts arising by operation of law and remedial trusts ([64], [84]-[85]).
On knowing receipt, the judgment clarifies the status of “want of probity”. It is not a free-standing element in addition to the accepted knowledge categories. The Court described it as a shorthand way of identifying actual or relevant constructive knowledge ([40]-[47]). It also confirmed that an institution such as the ATO does not have special immunity from knowing receipt merely because it performs statutory functions, although the particular statutory-duty argument in Ground 4 was not permitted to be advanced ([45], [112], [125]-[126]).
The decision’s procedural holding is also significant within its facts: even an argument framed as one of law may be refused on appeal where disputed or unexplored facts mean that the respondent could have met it with evidence or cross-examination at trial ([121]-[125]). The judgment does not determine the wider scope of the statutory provisions relied on in Ground 4.
At [22], the Court quotes Furs Ltd v Tomkies: “An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company.” In plain English, a director cannot keep a secret benefit gained through acting in a company role simply because the company did not already own the benefit.
At [60], Bell CJ explains that the trust “springs up upon breach”. In context, that means the equitable character of the profits arises when the relevant profit is obtained through the breach, not only after a judge declares it.
At [66], the Court describes “new property” as property the principal never legally owned but which the fiduciary secured by preferring self-interest over loyalty. That explains why the fact that Chameleon had not previously owned the securities did not, in the Court’s reasoning, prevent the proceeds from being trust property.
At [47], the Court says want of probity is not an “additional, free-standing element” beyond the established knowledge requirements. In plain English, the legal inquiry is whether the recipient had the requisite kind of knowledge, not whether a separate label or extra test is satisfied.
At [105], the Court says Jacobson J did not decide that Chameleon “did not hold” a proprietary interest. The personal account order therefore did not, by itself, remove the possibility of a claim against a knowing recipient of the proceeds.
At [125], the Court concludes that prejudice was established and Ground 4 could not be run. This reflects the procedural concern that a party should not lose the benefit of a trial result on a new argument that could have been answered with evidence or cross-examination.
The judgment’s reasoning is directed to a fact pattern with several connected features. First, a fiduciary obtains a benefit or profit by reason of the fiduciary position or by using an opportunity connected with it. Here, the relevant finding concerned a de facto director and securities obtained through the Iron Jack transaction ([5], [9], [23]-[26]).
Second, the benefit is unauthorised and obtained in breach of the duty of loyalty. The Court stresses that the rule can apply even if the principal never owned the specific property and even if the principal could not itself have made the profit ([22], [27]-[29], [66]-[70]).
Third, the proceeds or substituted property can be identified and traced. Chameleon’s ability to trace the Sale Proceeds into the ATO payments was conceded ([11]). The Court linked tracing to the need for a proprietary base ([92]).
Fourth, a third party receives the property with the requisite actual or constructive knowledge of the relevant breach and provenance ([31]-[39]). The judgment does not hold that a statutory body is automatically liable whenever it receives money connected with a breach. It concerns the primary judge’s specific knowledge findings, which were largely unchallenged.
Finally, where an appeal ground was not raised at trial, the procedural issue turns on whether it could or might have been met with evidence or cross-examination, and whether the respondent would be prejudiced by its late introduction ([120]-[125]).
The supplied judgment contains no later judicial treatment of this NSW Court of Appeal decision. It was decided on 13 August 2026, and the text provides no subsequent judgments applying, distinguishing or questioning it.
The Court does discuss earlier authorities, including the 2025 UK Supreme Court decisions Recovery Partners GP Ltd v Rukhadze and Hotel Portfolio II UK Ltd v Stevens. It treats them as consistent with the view that profits made through breach of fiduciary duty are held for the principal from receipt ([71]-[74], [93]). These are authorities considered by this Court, not later treatment of the NSWCA judgment.
The Court also explains why it did not read Ancient Order of Foresters v Lifeplan as displacing the line of authority concerning a fiduciary’s own interest in unauthorised profits. It characterises Foresters as a knowing-assistance case, not a case about receipt of trust property or the defaulting fiduciary’s equitable entitlement to profits ([86]-[91]). That distinction is part of this judgment’s account of the authorities it applied.
The Court did not decide the merits of Ground 4’s statutory argument because it refused permission to raise that argument for the first time on appeal. In particular, it did not determine whether the statutory duties relied on by the Commonwealth required the ATO to act as it did in these circumstances ([110]-[125]).
The Court noted a possible issue about the scope of Taxation Administration Act 1953 (Cth) sch 1, s 350-10, including whether it applies only for purposes connected with recovery proceedings or taxation laws. It referred to the provision’s context and to Federal Commissioner of Taxation v Futuris Corporation Ltd, but did not decide the point ([117]).
The judgment also did not determine whether Mr Grimaldi could personally have relied on merger after the Final Orders. He was not a party to the appeal and was not seeking to invoke that doctrine, so the question did not arise ([100]). Nor did the Court need to decide a hypothetical case in which a recipient had established privity or where the earlier orders expressly determined that the principal held no proprietary interest.
The outcome depended on the findings about the ATO’s knowledge, which were not relevantly challenged. The judgment therefore does not resolve every possible dispute about what information, circumstances or inquiries will satisfy the knowledge requirement in other factual settings. It sets out the applicable categories and applies them to the findings in this case ([31]-[39], [107]-[109], [126]).
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Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Commonwealth of Australia v Kupang Resources Pty Ltd [2026] NSWCA 161
Hearing dates: 29-30 July 2026
Date of orders: 13 August 2026
Decision date: 13 August 2026
Before: Bell CJ at [1];
Ward P at [129];
Griffiths AJA at [130].
Decision: (1) Appeal dismissed with costs.
(2) If the parties are able to agree to a revised interest figure, the parties are to file short minutes of order in relation to interest payable from 18 December 2025 to date.
(3) If no agreement is reached in relation to interest from 18 December 2025 to date, order that the parties file submissions of no more than two pages on that issue, by 30 August 2026.
Catchwords: APPEALS — Procedural fairness — argument raised on appeal not pleaded or argued below — prejudice to respondent — where steps may have been taken at first instance had argument been raised below — new argument not permitted to be raised on appeal
EQUITY — Breach of fiduciary duty — application of first limb of Barnes v Addy — knowing receipt of “trust property”— knowledge requirement — degree of requisite knowledge — relevance of a “want of probity” — where ATO received “trust property” in satisfaction of defaulting fiduciary’s tax liabilities — where there were unchallenged findings that the ATO had actual and constructive knowledge that the funds were obtained in breach of fiduciary duty and were traceable — whether Commonwealth could rely on its statutory obligations — no special protection —knowledge requirement made out
EQUITY — Breach of fiduciary duty — application of first limb of Barnes v Addy — knowing receipt of “trust property”— meaning of “trust property” — where defaulting fiduciary obtained unauthorised profits in breach of fiduciary duty — whether unauthorised profits comprised “trust property” — where unauthorised profits comprised “new property” never legally owned by the principal — discussion of principle in Keech v Sandford (1726) 25 ER 223, Furs Ltd v Tomkies (1936) 54 CLR 583, Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 and other cases — unauthorised profits obtained in breach of fiduciary are held on trust for principal — trust arises at moment of breach — trust arises independently of curial intervention — discussion of remedial and institutional constructive trusts
EQUITY — Breach of fiduciary duty — application of first limb of Barnes v Addy — knowing receipt of “trust property”— meaning of “trust property” — whether personal remedy on defaulting fiduciary to account altered the nature of trust property — effect, if any, of such a remedy on the character of the “trust property” — prior judicial determination did not alter character of “trust property” — errant fiduciary not entitled to treat funds as if they were his property — third party knowing recipient remained liable to account
EQUITY — Fiduciary duties — duty of loyalty — rationale behind duty of loyalty — deliberately onerous, stringent, and uncompromising duty — where de facto director misappropriated corporate funds — where de facto director used fiduciary position to obtain unauthorised profits
JUDGMENTS AND ORDERS — Effect of — merger — whether the third-party knowing recipient’s interests merged with the errant fiduciary’s — where there was no finding of privity
Commonwealth of Australia
Kupang Resources Pty Ltd
Legislation Cited: Income Tax Assessment Act 1936 (Cth) s 177
Land Tax Assessment Act 1910-1937 (SA)
Taxation Administration Act 1953 (Cth) sch 1, s 350-10(1), item 2
Cases Cited: Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43
Anglo American Investments Pty Ltd v Deputy Commissioner of Taxation (2017) 105 ATR 35; [2017] NSWCA 17
Attorney General for Hong Kong v Reid [1994] 1 AC 324
Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161; [1993] 1 WLR 509
Banque Commerciale v Akhil Holdings (1990) 169 CLR 279; [1990] HCA 11
Barnes v Addy (1874) LR 9 Ch App 244
Birtchnell v Equity Trustees Executors and Agency Co. Ltd. (1929) 42 CLR 384; [1929] HCA 24
Black v Freedman & Company (1910) 12 CLR 105; [1910] HCA 58
Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424; [2001] FCA 1833
Bray v Ford [1896] AC 44
Break Fast Investments Pty Ltd v Rigby Cooke Lawyers (A Firm) [2022] VSCA 118
Breen v Williams (1996) 186 CLR 71; [1996] HCA 57; (1996) 70 ALJR 772
Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; [1969] 2 WLR 427
Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129
Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8
Cook v Deeks [1916] 1 AC 554
Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168; [1995] HCA 23
Docker v Somes (1834) 39 ER 1095; (1834) 2 My. & K. 655
Evda Nominees Pty Ltd v Victoria (1984) 154 CLR 311; [1984] HCA 18
Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxes (SA) (1939) 62 CLR 545; [1939] HCA 35
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22
Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146; [2008] HCA 32
Federal Commissioner of Taxation v Grimaldi (No 9) [2009] 181 FCR 275; [2009] FCA 1404
Federal Commissioner of Taxation v Thomas (2018) 264 CLR 382; [2018] HCA 31
Foskett v McKeown [2001] 1 AC 102
Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3
Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10
Golden Rain Development Pty Ltd (ACN 166 672 537) v The Owners – Strata Plan No 97938 [2026] NSWCA 135
GP Building Holdings Pty Ltd v Voitin (2022) 69 VR 299; [2022] VSCA 210
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6
Harris v Digital Pulse (2003) 56 NSWLR 298; [2003] NSWCA 10
Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64
Hotel Portfolio II UK Ltd (in Liquidation) v Stevens [2025] UKSC 28; [2026] AC 801
Jones (as Trustee of the property of Heather MacNeil-Brown, A Bankrupt) v Southall & Bourke Pty Ltd [2004] FCA 539
Kalls Enterprises Pty Ltd (in liq) & Ors v Baloglow & Anor (2007) 63 ACSR 557; [2007] NSWCA 191
Keech v Sandford (1726) 25 ER 223; (1726) Sel. Cas. Ch. 61
Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342; [1958] HCA 33
Lee v Sankey (1873) LR 15 Eq 204
Lewis Securities Ltd (in liq) v Carter (2018) 355 ALR 703; [2018] NSWCA 118
Liftronic Pty Ltd v Unver (2001) 75 ALJR 867; [2001] HCA 24
Mayne v Public Trustee (1945) 70 CLR 395; [1945] HCA 38
Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78
New South Wales v Commonwealth (No 3) (1932) 46 CLR 246; [1932] HCA 12
NIML Limited v MAN Financial Australia Limited [2004] VSC 449
O'Brien v Komesaroff (1982) 150 CLR 310; [1982] HCA 33
Partridge v McIntosh & Sons Ltd (1933) 49 CLR 453; [1933] HCA 38
Queensland Mines Ltd v Hudson & Ors (1978) 18 ALR 1; (1978) 52 ALJR 399
Queensland Mines Ltd v Hudson (1975-6) CLC 40-266
Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209
Robb Evans of Robb Evans & Associates v European Bank Limited (2004) 61 NSWLR 75; [2004] NSWCA 82
Simmons v New South Wales Trustee and Guardian (2014) 17 BPR 33; [2014] NSWCA 405
Soar v Ashwell (1893) 2 QB 390
Thomson v Clydesdale Bank Limited [1893] AC 282
Timber Engineering Co Pty Ltd & Ors v Anderson [1980] 2 NSWLR 488
Tupicoff v Federal Commissioner of Taxation (1984) 56 ALR 151; (1984) 4 FCR 505
Turner v O’Bryan-Turner (2022) 107 NSWLR 171; [2022] NSWCA 23
University of Wollongong v Metwally (No 2) [1985] HCA 28; (1985) 59 ALJR 481
Vanderstock v Victoria (2023) 279 CLR 333; [2023] HCA 30
Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12
Whisprun Pty Ltd v Dixon [2003] HCA 48; (2003) 77 ALJR 1598
White & Libut v Thompson & Ors [2011] NSWCA 161
Wicks v Bennett (1921) 30 CLR 80; [1921] HCA 57
Texts Cited: G Virgo, The Principles of Equity and Trusts (5th ed, 2023, Oxford University Press)
J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (8th ed, 2016, LexisNexis)
L D Smith, The Law of Tracing (1997, Clarendon Press Oxford)
L Tucker, N Poidevin and J Brightwell, Lewin on Trusts (20th ed, 2020, Thomson Reuters)
M Hafeez-Baig and J English, The Law of Tracing (2021, Federation Press)
P Millett, ‘Bribes and Commissions Again’ (2012) 71(3) Cambridge Law Journal 583
Category: Principal judgment
Parties: Kupang Resources Pty Ltd (Appellant)
Commonwealth of Australia (Respondent)
Representation: Counsel:
L Livingston SC, J Hogan-Doran SC with E Ball, H Cooper and F Empeigne (Appellant)
C Withers SC with C Mitchell, D Morris and J Hudson (Respondent)
Solicitors:
Australian Government Solicitor (Appellant)
Banton Group (Respondent)
File Number(s): 2025/500507
Publication restriction: Nil
[This headnote is not to be read as part of the judgment]
This case involved an appeal from the primary judge’s finding that the Commonwealth of Australia (the Commonwealth) was liable to Kupang Resources Pty Ltd (formerly Chameleon Mining NL) (Chameleon) for knowing receipt of “trust property” under the first limb of Barnes v Addy (1874) LR Ch App 244 (Barnes v Addy). The primary judge ordered judgment for Chameleon in the sum of $15,139,745.67 together with pre-judgment interest up to 18 December 2025 in the agreed sum of $20,000,000.
The primary judge found the Commonwealth’s liability arose from the payment of over $15 million by Mr Phillip Grimaldi (Mr Grimaldi) to the Commissioner of Taxation (the Commissioner) pursuant to a payment plan in satisfaction of his tax liabilities which had been compromised by two Deeds of Settlement executed on 8 October 2010. That payment was made using the traceable proceeds of sale (the Sale Proceeds) of certain shares (the Spotter’s Fee Securities) which Mr Grimaldi obtained in breach of fiduciary duty he owed, as a de facto director, to Chameleon. The primary judge found the Commonwealth had actual and constructive knowledge of that fact prior to its receipt of the Sale Proceeds.
The Commonwealth’s knowledge of the provenance of the Sale Proceeds arose from the ATO’s “Project Wickenby”, and, more specifically, its “Operation Starlifter” investigations. Those investigations led to the issuing of amended income tax assessments for Mr Grimaldi for the income years 2006-2008, resulting in additional tax and penalties of $35,761,637 which were compromised in the Deeds of Settlement. In broad parallel with the ATO’s investigation of Mr Grimaldi, Chameleon brought proceedings against Mr Grimaldi and others which resulted in a judgment of Justice Jacobson in favour of Chameleon on 20 October 2010 (Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129 (the Chameleon Judgment)). An appeal from Jacobson J’s orders was dismissed in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6.
Final Orders were made by Jacobson J on 20 December 2010 (the Final Orders). No “proprietary remedy” was ordered in respect of the Sale Proceeds, it being common ground that the Orders imposed a personal liability on Mr Grimaldi as the defaulting fiduciary. Jacobson J did, however, order that Mr Grimaldi account to Chameleon in specie in respect of any of the Spotter’s Fee Securities that he still held. An inquiry was ordered to determine the extent of Mr Grimaldi’s liability to account. That inquiry was never completed.
The critical question on appeal was whether the Sale Proceeds were “trust property” of Chameleon and, if so, whether the ATO received the payments with the requisite knowledge of that fact for the purposes of the first limb of Barnes v Addy. The Commonwealth also sought to advance, by Ground 4, an argument that the primary judge, in finding that the ATO conducted itself with a “want of probity”, failed to have proper regard to the Commissioner’s statutory duties and functions with respect to the enforcement of taxation obligations.
The Court (Bell CJ, Ward P and Griffiths AJA agreeing) held, dismissing the appeal:
Bray v Ford [1896] AC 44; Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3; Breen v Williams (1996) 186 CLR 71; [1996] HCA 57; (1996) 70 ALJR 772; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64; Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43; Harris v Digital Pulse (2003) 56 NSWLR 298; [2003] NSWCA 10; Birtchnell v Equity Trustees Executors and Agency Co. Ltd. (1929) 42 CLR 384; [1929] HCA 24, cited.
Barnes v Addy (1874) LR 9 Ch App 244; Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3; Docker v Somes (1834) 39 ER 1095; (1834) 2 My. & K. 655; New South Wales v Commonwealth (No 3) (1932) 46 CLR 246; [1932] HCA 12; Thomson v Clydesdale Bank Limited [1893] AC 282; Black v S Freedman & Company (1910) 12 CLR 105; [1910] HCA 58; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6; Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342; [1958] HCA 33; Keech v Sandford (1726) 25 ER 223; (1726) Sel. Cas. Ch. 61; Wicks v Bennett (1921) 30 CLR 80; [1921] HCA 57; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64; Golden Rain Development Pty Ltd (ACN 166 672 537) v The Owners – Strata Plan No 97938 [2026] NSWCA 135; Attorney General for Hong Kong v Reid [1994] 1 AC 324; Timber Engineering Co Pty Ltd & Ors v Anderson [1980] 2 NSWLR 488; Mayne v Public Trustee (1945) 70 CLR 395; [1945] HCA 38; Soar v Ashwell (1893) 2 QB 390; Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36; Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78; Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252; Jones (as Trustee of the property of Heather MacNeil-Brown, A Bankrupt) v Southall & Bourke Pty Ltd [2004] FCA 539; Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44; Turner v O’Bryan-Turner (2022) 107 NSWLR 171; [2022] NSWCA 23; Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3; Queensland Mines Ltd v Hudson (1975-6) CLC 40-266; Cook v Deeks [1916] 1 AC 554; Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209; Hotel Portfolio II UK Ltd (in Liquidation) v Stevens [2025] UKSC 28; [2026] AC 801; Attorney General for Hong Kong v Reid [1994] 1 AC 324, cited.
Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43, considered.
White & Libut v Thompson [2011] NSWCA 161; Partridge v McIntosh & Sons Ltd (1933) 49 CLR 453; [1933] HCA 38, cited.
Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxes (SA) (1939) 62 CLR 545; [1939] HCA 35; Federal Commissioner of Taxation v Thomas (2018) 264 CLR 382; [2018] HCA 31, considered.
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22; Barnes v Addy (1874) LR 9 Ch App 244; Robb Evans of Robb Evans & Associates v European Bank Limited (2004) 61 NSWLR 75; [2004] NSWCA 82; Baden v Société Générale pour Favouriser le Développment du Commerce et de l’Industrie en France SA [1992] 4 All ER 161; [1993] 1 WLR 509; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6; Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557; [2007] NSWCA 191; Lewis Securities Ltd (in liq) v Carter (2018) 355 ALR 703; [2018] NSWCA 118; GP Building Holdings Pty Ltd v Voitlin (2022) 69 VR 299; [2022] VSCA 210; Break Fast Investments Pty Ltd v Rigby Cooke Lawyers (A Firm) [2022] VSCA 118; Simmons v New South Wales Trustee and Guardian (2014) 17 BPR 33, 717; [2014] NSWCA 405; Thomson v Clydesdale Bank Limited [1893] AC 282; NIML Limited v MAN Financial Australia Limited [2004] VSC 449, cited.
Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; [1969] 2 WLR 427; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8; Turner v O’Bryan-Turner (2022) 107 NSWLR 171; [2022] NSWCA 23, considered.
BELL CJ: This is an appeal from a decision of McGrath J (the primary judge) finding the Commonwealth of Australia (the Commonwealth) liable to Kupang Resources Pty Ltd (formerly Chameleon Mining NL) (Chameleon) for knowing receipt of “trust property” under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 (Barnes v Addy): Kupang Resources Pty Ltd v Commonwealth of Australia (No 4) [2025] NSWSC 1477 (PJ or primary judgment).
Both limbs of Barnes v Addy liability were considered in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 (Farah). As the High Court observed in that case, “in this field equity devised protections for the holders of equitable interests and those to whom fiduciary duties are owed which the common law had not”: at [153].
The Commonwealth’s first limb recipient liability was found to have arisen from the payment of over $15 million by Mr Phillip Grimaldi (Mr Grimaldi) to the Commissioner of Taxation (the Commissioner) pursuant to a payment plan in satisfaction of his tax liabilities which had been compromised by two Deeds of Settlement executed on 8 October 2010.
The payments, referred to compendiously by the primary judge as the Admitted Receipts, were made in the following amounts on the following dates:
$12,519,410.61 on 19 October 2010.
$250,000 on each of 21 February 2011, 25 May 2011, 25 August 2011, 28 November 2011, 24 February 2012, and 25 May 2012.
$855,000 on 17 August 2012.
$850,000 on 28 February 2013.
Those payments were found to have been made using the traceable proceeds of sale of certain shares which it was common ground Mr Grimaldi obtained in breach of fiduciary duty he owed to Chameleon in his capacity as a de facto director. This was a matter known to the Commonwealth prior to receipt of the payments.
It was also common ground that the proceeds of these sales were initially paid into offshore (New Zealand) bank accounts of various companies which were controlled by Mr Grimaldi including International Finance Trust Company Limited (IFTC). This, and the fact that Mr Grimaldi had no other sources of funds other than those derived from his breach of fiduciary duty, was also known to the Commonwealth prior to receipt of the payments.
It was those offshore bank accounts which originally attracted the ATO’s attention as part of its “Project Wickenby”, and, more specifically, its “Operation Starlifter” investigations, and which led to the issuing of amended income tax assessments for Mr Grimaldi for the years 2006-2008, resulting in additional tax and penalties of $35,761,637 which were compromised in the Deeds of Settlement.
In broad parallel with the ATO’s investigation of Mr Grimaldi under Project Wickenby, Chameleon brought proceedings against Mr Grimaldi and others which resulted in a judgment of Justice Jacobson in favour of Chameleon on 20 October 2010 (Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129 (the Chameleon Judgment)) with final orders being made on 20 December 2010 (the Final Orders). An appeal from Jacobson J’s orders was dismissed in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 (Grimaldi No 2).
The circumstances of Mr Grimaldi’s breach of fiduciary duty to Chameleon were accurately summarised by Chameleon in this Court as follows:
(i) In February 2004, a company called Winterfall Pty Ltd, controlled by Nicholas Zuks, agreed to purchase the “Iron Jack” mining tenements. However, it was unable to pay all of the purchase price out of its own funds: PJ [21]-[23].
(ii) In April 2004, Mr Grimaldi (a director of Murchison Metals Ltd) and Gregory Barnes (a director of Chameleon) approached Mr Zuks and offered for Murchison to acquire an interest in the Iron Jack Tenements: PJ [24].
(iii) In May 2004, Winterfall and Murchison agreed that Murchison would: (i) pay the balance of the purchase price; and (ii) carry out a “reverse takeover” by which Winterfall shareholders would be issued shares and options in Murchison in exchange for their shares in Winterfall: PJ [24].
(iv) In June 2004, Mr Zuks agreed that Mr Grimaldi and Mr Barnes would receive a “spotter’s fee” in the form of shares in Winterfall which would be exchanged for Murchison shares and options (the Spotter’s Fee Securities): PJ [25].
(v) When Murchison was also unable to pay the balance of the purchase price, Mr Grimaldi arranged for Chameleon to raise capital through a share placement. Mr Barnes then drew cheques on Chameleon’s bank account in the total amount of $152,750 to pay the vendors of the Iron Jack Tenements from the capital raised: PJ [26]-[27].
(vi) In November 2004, the transaction completed and the Spotter’s Fee Securities were then issued to a nominee of Mr Grimaldi and Mr Barnes: PJ [28].
“[344] It is at the heart of Chameleon’s case that its funds, including in particular the two cheques totalling $152,750 paid to the Iron Jack Vendors … were used by Murchison to acquire its interest in Winterfall, and through it, the Iron Jack Project.
[345] The effect of Chameleon’s claim is that the two payments … totalling $152,750 to the Iron Jack Vendors were made for the purpose of entitling Mr Grimaldi and Mr Barnes, through Pinnacle, to obtain a ‘spotter’s fee’ of 10 million shares in Winterfall for introducing Murchison … into the transaction.”
The Spotter’s Fee Securities were sold by Mr Grimaldi at a great profit. Those proceeds of sale were described as the Sale Proceeds. In the proceedings before the primary judge in this Court, the Commonwealth conceded that Chameleon was able to trace the Sale Proceeds into the payments which were ultimately made to the ATO under the Deeds of Settlement.
Broadly speaking, having found that he had breached his fiduciary obligations to Chameleon in his capacity as a de facto director, Jacobson J ordered Mr Grimaldi to account to Chameleon for the Sale Proceeds and also made orders for an account of any further profits derived from those Sale Proceeds. No “proprietary remedy” was ordered in respect of the Sale Proceeds, it being common ground that the Orders imposed a personal liability on Mr Grimaldi as the defaulting fiduciary. Jacobson J did however order that Mr Grimaldi account to Chameleon in specie in respect of any of the Spotter’s Fee Securities that he still held. It was not known at the time the Final Orders were made whether any such Securities were still held nor did Chameleon know the amount of the Sale Proceeds, any profit derived from them and to what extent they had been dissipated. It was for this reason that one of Jacobson J’s orders was for an inquiry as to those matters by a referee. As matters transpired, that inquiry never took place.
The principal and critical question before both the primary judge and this Court on appeal was whether the Sale Proceeds were “trust property” of Chameleon and, if so, whether the ATO received the payments with the requisite knowledge for the purposes of the first limb of Barnes v Addy.
The primary judge held that the Sale Proceeds were trust property, “belonging in equity to Chameleon”, in the language of Rich, Dixon and Evatt JJ in Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; [1936] HCA 3 (Furs): PJ [620]. That central finding was challenged by the Commonwealth which contended in this Court that the Sale Proceeds were never trust property and that, even if they were, they lost that character as a result of the Final Orders. The primary judge held that whether or not a remedial constructive trust over those profits was ultimately ordered as part of the Final Orders was “entirely beside the point”: PJ [622]; see also PJ [618].
Under the heading “[c]onclusions on ATO knowledge”, his Honour held, following a painstaking analysis of the facts, that the knowledge requirement for the purposes of the first limb of Barnes v Addy was satisfied. His Honour held, at PJ [686]-[687] that:
“Once all of the findings I have made above in relation to the ATO’s knowledge and the Commonwealth’s acceptance of the ATO’s knowledge of all the findings in the Chameleon Judgment are put together, it is abundantly clear that the ATO had actual knowledge of the following crucial components at the time when it received each payment from Mr Grimaldi under the Second Deed of Settlement:
- the ATO had actual knowledge that Mr Grimaldi had engaged in conduct in breach of the fiduciary duty he owed to Chameleon; and
- the ATO knew that the payments which the ATO received from Mr Grimaldi were made from the proceeds of sale of the Spotter’s Fee Securities obtained by Mr Grimaldi and Iron as his nominee as the profit from his breach of fiduciary duty.
In particular, the ATO knew that the proceeds of sale of the Spotter’s Fee Securities were held in the bank accounts from which the ATO received payments from Mr Grimaldi.”
“(i) how Mr Grimaldi had obtained the $36 million in unauthorised profits in breach of the fiduciary duty he owed to Chameleon;
(ii) where those profits resided in the IFTC account of Iron [a nominee of Mr Grimaldi]; and
(iii) how he had used those unauthorised profits to fund the payments he made to the ATO.”
Subject to one argument dealt with at [107]-[109] below, those findings in relation to the Commonwealth’s knowledge were relevantly unchallenged. It should be noted, however, that Ground 4 of the Amended Notice of Appeal sought to attack the primary judge’s acceptance at PJ [684] of Chameleon’s submission that “the ATO conducted itself with a want of probity sufficient to fix its conscience with liability for knowing receipt” (emphasis added). The significance of a “want of probity” to a recipient’s liability under the first limb of Barnes v Addy is considered at [40]-[47] below. Whether the Commonwealth should be given leave to raise Ground 4 (which was controversial as the matters it sought to raise had not been pleaded and there was a dispute as to whether they had been argued) is dealt with at [113]-[125] below.
The primary judge ordered judgment for Chameleon in the sum of $15,139,745.67 together with pre-judgment interest up to 18 December 2025 in the agreed sum of $20,000,000. His Honour also ordered the Commonwealth to pay Chameleon’s costs.
For the reasons given below, the primary judge was correct in reaching the conclusion he did, and the appeal must be dismissed. Before turning to the grounds of appeal, it is important to understand in a little more detail the nature of Mr Grimaldi’s fiduciary duty which was breached.
It was not in contention at first instance or on appeal that Mr Grimaldi owed fiduciary obligations to Chameleon as a de facto director.
In Bray v Ford [1896] AC 44 (Bray), Lord Herschell observed at 51-2:
“It is an inflexible rule of a Court of Equity that a person in a fiduciary position, … is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.”
“no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability.” (Emphasis added).
See also Latham CJ at 592, Starke J at 600, McTiernan J at 604-5.
“A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position.”
“Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see Keith Henry & Co. Pty. Ltd. v. Stuart Walker & Co. Pty. Ltd. (1958) 100 CLR 342 at 350. That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. In some, perhaps most, cases, the constructive trust will be consequent upon an actual breach of fiduciary duty: e.g., an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. In other cases, however, there may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: e.g., the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty.”
In Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 (Foresters) at [68], Gageler J observed with reference to this passage that “[t]he unconscionability which attracts equitable remedies in circumstances where the conflict rule alone is invoked lies not so much in receipt by the fiduciary of the benefit or gain (over which the fiduciary need not have control) as in retention by the fiduciary of the benefit or gain which in conscience ought to be disgorged to the principal”.
Some breaches of fiduciary duty will involve an unauthorised transfer of a principal’s property to the fiduciary or to a third party at the fiduciary’s direction. Others will involve the fiduciary acting in a way that involves the preference of the fiduciary’s own interest over the duty of loyalty to the principal and which results in a benefit being derived by the defaulting fiduciary. That is the present case.
Chameleon emphasised the precautionary, prophylactic, and cautionary rationale behind that fiduciary duty of loyalty, and in that regard placed particular emphasis on Heydon JA’s observations in Harris v Digital Pulse (2003) 56 NSWLR 298; [2003] NSWCA 10 at [406] and [413] (Harris), where his Honour observed:
“The height and strictness of the standards protect the principals of fiduciaries by nullifying temptation. In that sense they deter fiduciaries from drifting into a position of conflict, or worse.
…
The rules that a plaintiff need not show damage and need not show that the fiduciary has taken a profit which the plaintiff could have gained are prophylactic in the sense that they tend to prevent the disease of temptation in the fiduciary - they preserve or protect the fiduciary from that disease. The temptation might be assisted if the fiduciary had in contemplation the possibility of escaping liability by arguing that the principal was caused no loss, or that the profit made was never available to the principal.”
Much earlier statements as to the powerful and prophylactic policy underpinning this aspect of equitable principle may be found in the judgments of Isaacs J and Dixon J in Birtchnell v Equity Trustees Executors and Agency Co. Ltd. (1929) 42 CLR 384; [1929] HCA 24.
The purpose of the rule is not to compensate the principal for loss (indeed, loss itself is not necessary) or restore to the principal property which belonged to it or ought to have been obtained for it: Foresters at [70]. Professor Virgo concisely explained the rationale behind the duties of loyalty in his book, The Principles of Equity and Trusts (5th ed, 2023, Oxford University Press) at 479, as follows:
“[the no conflict and no profit rules] operate to insulate the fiduciary from distracting influences and ensure that the fiduciary resists the temptation to serve themself rather than the principal.”
See also P Millett, ‘Bribes and Secret Commissions Again’ (2012) 71(3) Cambridge Law Journal 583.
“... a person who receives into his hands trust moneys, and who deals with them in a manner inconsistent with the performance of trusts of which he is cogni[s]ant, is personally liable for the consequences which may ensue upon his so dealing.”
In Farah, the High Court appeared to accept that “actual knowledge” may also include “wilfully shutting one’s eyes to the obvious” and “wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make”, these being categories (ii) and (iii) derived from Peter Gibson J’s famous judgment in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161; [1993] 1 WLR 509 at 575-6 (Baden): see Farah at [174]. “Constructive knowledge” for the purposes of first limb liability has conventionally been restricted in Australia to Peter Gibson J’s fourth category, namely “knowledge of circumstances which would indicate the facts to an honest and reasonable man”: see Grimaldi (No 2) at [263]-[269]; Kalls Enterprises Pty Ltd (in liq) & Ors v Baloglow & Anor (2007) 63 ACSR 557; [2007] NSWCA 191 at [176]; Lewis Securities Ltd (in liq) v Carter (2018) 355 ALR 703; [2018] NSWCA 118 at [183]-[184]; GP Building Holdings Pty Ltd v Voitin (2022) 69 VR 299; [2022] VSCA 210 at [16]-[18]; Break Fast Investments Pty Ltd v Rigby Cooke Lawyers (A Firm) [2022] VSCA 118 at [112]-[119].
In Simmons v New South Wales Trustee and Guardian (2014) 17 BPR 33, 717; [2014] NSWCA 405 at [90], Gleeson JA, with whom Beazley P and Barrett JA agreed, put the matter with customary clarity:
“Although Farah did not consider the categories of knowledge sufficient to attract liability under element (4) of the first limb of Barnes v Addy, it may be accepted that the knowledge required is:
(1) actual knowledge of the trust, or the existence of the fiduciary duty, and of the misapplication of trust property or transfer pursuant of to a breach of fiduciary duty (sic); or
(2) willfully shutting one's eyes to those things; or
(3) abstaining in a calculated way from making such inquiries, as an honest and reasonable person would make, about the trust and the application of the trust property; or
(4) knowledge of facts which to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication.”
“No doubt if the person receiving the money has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is handing over in discharge of his debt money which he has no right to hand over, then the person taking such payment would not be entitled to retain the money, upon ordinary principles which I need not dwell upon.”
This passage was cited with approval by Harper J in NIML Limited v MAN Financial Australia Limited [2004] VSC 449 at [56]. In Grimaldi (No 2), the Full Court of the Federal Court held that “liability arises as a matter of conscience not of property”: at [267].
The primary judge’s central finding as to the Commonwealth’s actual knowledge of Mr Grimaldi’s breach of fiduciary duty, as stated at PJ [686]-[688], has been set out at [15]-[16] above. It is also relevant, however, to note a number of other related and more specific findings as to the Commonwealth’s knowledge.
Thus, the primary judge noted that the ATO accepted it “knew all of the findings” in the Chameleon Judgment when it was delivered on 20 October 2010: PJ [643]; see also PJ [246], [441(2)], [686], [690]. This knowledge included that Mr Grimaldi had breached his fiduciary duty owed to Chameleon, that he acted dishonestly and “that the consequence of an order that Mr Grimaldi had to disgorge the profits meant there was no profit to tax, but the ATO took the money anyway knowing that it would be unavailable to Chameleon despite Chameleon’s corresponding entitlement to the profits”: PJ [684(2)].
In this context, the following evidence given by Mr Michael O’Neill, an Assistant Commissioner of Taxation at the time of the events in question and the only witness called by the Commonwealth, was telling:
“Q. If a fiduciary made a profit from a breach of fiduciary duty, could the - is your understanding in the period 2008 to 2010, could the fiduciary use those profits to go and buy a motor vehicle?
A. My understanding is that they could use those profits. They should not use those profits because they may have held them on trust for the principal.
Q. So is the answer to that, my question, no, they couldn’t?
A. They could in fact do that, but legally they should not, because the funds were held on trust as a - as a cause - as a result of the breach of fiduciary relationship.” (Emphasis added).
The primary judge also held at PJ [678] that, even if the Commonwealth did not have actual knowledge, the ATO had “more than ample knowledge of the facts under each of the categories of notice (2), (3) and (4) described in Baden*”,* namely that:
the ATO wilfully shut their eyes to the obvious;
the ATO wilfully and recklessly failed to make such inquiries as an honest and reasonable person in the position of the ATO would make; and
the ATO had knowledge of circumstances which would indicate the facts to an honest and reasonable person.
These findings were not challenged on appeal.
Before leaving this topic, it is necessary to deal with the concept of “want of probity” in this area of discourse, noting the primary judge’s acceptance of Chameleon’s submission that “the ATO conducted itself with a want of probity sufficient to fix its conscience with liability for knowing receipt”: see [17] above.
To the extent the primary judge may be taken at PJ [684]-[685] to have treated a “want of probity” as an element required to be established for first limb Barnes v Addy liability in addition to the accepted knowledge requirements, there is no such requirement. In fairness to the primary judge, his Honour in those two paragraphs was responding to a particular submission put by Chameleon at first instance rather than purporting to describe what was required to establish liability.
In the course of the hearing of the appeal, Mr Livingston SC, who appeared for the Commonwealth, submitted that:
“in the context of first limb liability under Barnes v Addy, there is an additional step beyond a mere finding of knowledge which is a consideration of whether there was a want of probity such that the recipient’s conscience was affected. That’s the way it is described.”
The Commonwealth’s submission that a “want of probity” is required as “an additional step beyond a mere finding of knowledge” should be rejected although, even if it be correct, the primary judge found the ATO conducted itself with a “want of probity”: PJ [684] extracted immediately below.
What was said by the primary judge at PJ [684]-[685], under the heading “[t]he ATO’s conscience”, was as follows:
“[684] I accept Chameleon’s submissions that the ATO conducted itself with a want of probity sufficient to fix its conscience with liability for knowing receipt, particularly in the following respects:
- The ATO took no steps to inform itself about the full effect of the Chameleon Judgment.
- The ATO knew that the consequence of an order that Mr Grimaldi had to disgorge the profits meant there was no profit to tax, but the ATO took the money anyway knowing that it would be unavailable to Chameleon despite Chameleon’s corresponding entitlement to the profits.
- The ATO structured the Deeds of Settlement with Mr Grimaldi so that he would be contractually barred from challenging his assessments and amended assessments even if the facts materially changed (cl 2.8).
- The ATO reserved its right to overturn the Deeds of Settlement but did not exercise it even after it received the Chameleon Judgment (cl 5).
- The ATO did not ever notify Chameleon of its settlement with Mr Grimaldi or that the settlement required the profits from the sale of the Spotter’s Fee Securities sitting in IFTC’s bank account on behalf of Iron to be used to discharge Mr Grimaldi’s personal tax debts.
- The ATO knew that Mr Grimaldi’s total profit from the sale of the Spotter’s Fee Securities, through his nominee Iron, was $36 million and knew that this was the whole of Mr Grimaldi’s wealth.
- The ATO knew that the IFTC accounts in the name of Iron held the specific funds which Mr Grimaldi would need to use to discharge his fiduciary obligation to account to Chameleon and they represented the profits Mr Grimaldi had obtained and was liable to disgorge to Chameleon.
- The ATO required Mr Grimaldi to discharge his personal tax debts using the assets of Iron that constituted the unauthorised benefit from his breach of duty.
[685] The Commonwealth places emphasis on the fact that at all times the ATO exercised its statutory functions and should not be expected to have to await the outcome of the Chameleon Proceedings before acting to tax Mr Grimaldi. The problem with this submission is that it is detached from the facts of this case. The ATO does not have some special status which makes it immune from possessing the requisite knowledge to make it liable as a knowing recipient or immune from conducting the sorts of inquiries which should be conducted by an honest and reasonable person. In particular circumstances such as in this case, the ATO did possess knowledge which required it to make further investigations and await the outcome of the Chameleon Proceedings. The ATO had sufficient knowledge from the investigations it did conduct to require it to investigate further. It also knew that the Chameleon Proceedings would determine the very issue which was central to the statutory functions it was carrying out — determining who was beneficially entitled to the profits which had been made by Mr Grimaldi through his nominee Iron.”
None of the findings in sub-paragraphs 1-8 of PJ [684] or the statements as to the ATO’s knowledge in PJ [685] was challenged directly on appeal. Further, the Commonwealth accepted the correctness of the statement that “[t]he ATO does not have some special status which makes it immune from possessing the requisite knowledge to make it liable as a knowing recipient or immune from conducting the sorts of inquiries which should be conducted by an honest and reasonable person”.
The expression “want of probity” can be traced to Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; [1969] 2 WLR 427 at 444 (Carl Zeiss) in which Edmund Davies LJ, in a passage referred to by the primary judge at PJ [647], said that the concept of a “want of probity” “recurs through and seems to connect all those cases drawn to the court’s attention where a constructive trust has been held to exist…” and “appears to provide a useful touchstone in considering circumstances said to give rise to constructive trusts”. This passage was referred to by Stephen J in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 410; [1975] HCA 8 (Consul Development) and White JA in Turner v O’Bryan-Turner (2022) 107 NSWLR 171; [2022] NSWCA 23 at [142] (Turner).
It is clear from each of those decisions that the expression “want of probity” is a short hand description of a recipient of trust property who either actually knows that it has been obtained in breach of fiduciary duty or who would have had that knowledge but for shutting his, her or its eyes to the obvious, or wilfully and recklessly failing to make such inquiries as a reasonable and honest person would make as to the existence of the breach of fiduciary duty. At least as a matter of Australian law, it is not an additional, free-standing element to be satisfied on top of the established knowledge requirements and it is clear from PJ [684]-[685] that, to the extent that the primary judge deployed the phrase, it was a shorthand way of him describing and confirming that, if the ATO did not have actual knowledge, it had constructive knowledge of the requisite kind.
The primary judge identified the first of the primary issues for determination before him as being whether the ATO received “trust property” in the form of the Admitted Receipts for the purposes of the application of the first limb of Barnes v Addy. The importance of the receipt of trust property for first limb Barnes v Addy liability lay at the heart of Farah.
This first issue was dealt with by the primary judge at considerable length: PJ [444]-[625]. Because the matter is largely one of principle which must be dealt with in the course of addressing appeal Grounds 1-3, it is not necessary to rehearse the full detail of his Honour’s lengthy, closely and carefully developed reasons which adopted the following structure:
the fiduciary’s duty of loyalty to the principal and liability to account for unauthorised profits obtained by reason or use of its position: PJ [454]-[462].
The concept of “liability to account as constructive trustee” and the different meanings, significance and derivations of that phrase: PJ [463]-[524].
The “substantial body of first instance and intermediate appellate authority” favouring the extension of the first limb of Barnes v Addy to non-trustee fiduciaries: PJ [525]-[546].
The ambit of the concept of “trust property”: PJ [547]-[584].
The question of whether the transfer of the “trust property” to the recipient must itself be made in breach of fiduciary duty, which the primary judge answered in the negative, a conclusion which was not challenged on appeal: PJ [585]-[615].
Two paragraphs of his Honour’s reasons were identified by Mr Livingston as being the key passages which the Commonwealth attacked in Grounds 1, 2(a), and 3 of its Amended Notice of Appeal. These were at PJ [575] and [616] as follows:
“As to whether ‘trust property’ in this extended sense is capable of capturing an unauthorised profit or diverted commercial opportunity obtained in breach of fiduciary duty, I am of the view that it is property which is subject to a fiduciary obligation or to which a fiduciary obligation attaches because it is property which ‘belongs in equity’ to the principal and in respect of which the errant fiduciary is obliged, and will be liable, to account ‘as a constructive trustee’ to their principal. I consider property of this kind is within the ambit of ‘trust property’ in the context of a claim in knowing receipt based on breach of fiduciary duty, as are the traceable proceeds of that property. I have reached this conclusion by reference to the above listed cases generally and from the following cases specifically.
…
Drawing all of these threads from the various legal principles together, I conclude that a third party will be personally liable for knowing receipt under the first limb of Barnes v Addy if it receives unauthorised profits (or their traceable proceeds) obtained in breach of fiduciary duty with the requisite knowledge. This is because the errant fiduciary is subject to a fiduciary obligation to account to the principal for those profits as a constructive trustee and liability will attach to a knowing recipient (in both the ‘immediate’ and ‘downstream’ sense) as a matter of conscience.”
The language of property “to which a fiduciary obligation attaches” in the first of these passages derives from the language of the High Court in Farah at [116]. The language of “property which ‘belongs in equity’ to the principal” derives directly from Furs at 592, in the passage set out at [22] above.
In my view, the primary judge did not err in his identification of the appropriate principles nor his application of them. Indeed, a long line of both English and Australian authority dictated the central conclusion that is now challenged, namely that the Sale Proceeds constituted trust property for the purposes of the first limb of Barnes v Addy.
“Wherever a trustee, or one standing in the relation of a trustee, violates his duty, and deals with the trust estate for his own behoof, the rule is that he shall account to the cestui que trust for all the gain which he has made. Thus, if trust money is laid out in buying and selling land, and a profit made by the transaction, that shall go not to the trustee who has so applied the money, but to the cestui que trust whose money has been thus applied. In like manner (and cases of this kind are more numerous), where a trustee or executor has used the fund committed to his care in stock speculations, though the loss, if any, must fall upon himself, yet for every farthing of profit he may make he shall be accountable to the trust estate. So, if he lay out the trust money in a commercial adventure, as in buying or fitting out a vessel for a voyage, or put it in the trade of another person, from which he is to derive a certain stipulated profit, although I will not say that this has been decided, I hold it to be quite clear that he must account for the profits received by the adventure or from the concern. In all these cases it is easy to tell what the gains are; the fund is kept distinct from the trustee’s other monies, and whatever he gets he must account for and pay over. It is so much fruit, so much increase on the estate or chattel of another, and must follow the ownership of the property and go to the proprietor. So it is also where one not expressly a trustee has bought or trafficked with another’s money. The law raises a trust by implication, clothing him, though a stranger, with the fiduciary character, for the purpose of making him accountable. If a person has purchased land in his own name with my money, there is a resulting trust for me; if he has invested my money in any other speculation without my consent, he is held a trustee for my benefit; and so an attorney, guardian, or other person standing in a like situation to another gains not for himself, but for the client, or infant, or other party whose confidence has been abused.” (Emphasis added).
In New South Wales v Commonwealth (No 3) (1932) 46 CLR 246 at 265; [1932] HCA 12, Starke J, responding to the submission that “moneys standing to the credit of the State with its bankers may be, and are in fact in this case, impressed with trusts or interests in favour of persons or bodies other than the State and its agencies”, after citing Thomson v Clydesdale (see [34] above), held that “[l]iability for repayment of funds which can be traced or followed into a banker’s hands arises only where it can be shown that there was knowledge on the banker’s part, not merely that the fund was received from the customer, but knowledge that the payment was a misapplication of the fund made in violation of the customer's duty and obligation”. This observation and the proposition about tracing proceeded on the assumption that, in such circumstances, the customer lacked any beneficial entitlement to the funds on account of its violation of duty and obligation.
In Furs, Rich, Dixon and Evatt JJ put the matter in succinct terms in the context of considering a conflict of duty and interest: “[a]n undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company”: at 592 (emphasis added). The authors of Jacobs’ Law of Trusts in Australia (8th ed, 2016, LexisNexis) at 241 [13-11] (Jacobs) identify Furs as an instance in Australian law of “what appear to be institutional constructive trusts, creating new proprietary interests at the moment of breach” (emphasis added). This is entirely consistent with Lord Brougham’s description in Docker of the law raising “a trust by implication” in the same way that a trust arises by operation of law in the case of stolen funds: Black v S Freedman & Company (1910) 12 CLR 105; [1910] HCA 58 (Black). In Black, O’Connor J said that “[w]here money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person’s hands”: at 110. The same analysis, namely that new proprietary interests are created at the time of the breach in profits that are liable to be disgorged, is also powerfully supported by the Full Court of the Federal Court’s statement in Grimaldi (No 2) that “liability arises as a matter of conscience not of property”: at [267].
In Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342; [1958] HCA 33 (Keith Henry), Dixon CJ, McTiernan and Fullagar JJ, making reference to doctrine first explained by Lord Chancellor King in Keech v Sandford (1726) 25 ER 223; (1726) Sel. Cas. Ch. 61 (Keech v Sandford), made the following relevant observations at 350:
“What the plaintiff has set out to do in this suit seems to be to bring his case somehow within the equitable principle laid down in Keech v. Sandford. The substantial relief claimed is by way of declarations that the defendant holds in trust for the plaintiff the rights given by the quarterly licences granted to it, and all profits made by it by the use of those licences. The doctrine of Keech v. Sandford is shortly stated by saying that a trustee must not use his position as trustee to make a gain for himself: any property acquired, or profit made, by him in breach of this rule is held by him in trust for his cestui que trust. The rule is not confined to cases of express trusts. It applies to all cases in which one person stands in a fiduciary relation to another: it has been applied as between partners, as between principal and agent, and as between master and servant: see, e.g., Re Biss; Biss v. Biss (1903) 2 Ch. 40; Prebble v. Reeves (1910) VLR 88 and Wicks v. Bennett (1921) 30 CLR 80. The case of Birtchnell v. Equity Trustees Executors and Agency Co. Ltd. (1929) 42 CLR 384 may be regarded as an instance of the application of the same rule.” (Emphasis added).
Again it is clear that the trust described is institutional in character in that its existence does not depend upon a curial declaration.
“Whenever a person clothed with a fiduciary position gains some personal advantage by availing himself of the position, a constructive trust is raised, and the advantage must be held for the benefit of the cestui que trust.” (Emphasis added).
The other two judges, Knox CJ and Rich J, did not consider that the question to which Higgins J was directing himself arose, given that the particular point had not been run at first instance. Higgins J’s statement of principle nonetheless anticipated and was entirely consistent with Keith Henry.
In Hospital Products at 107, Mason J referred to Keith Henry for the proposition that “[a]ny profit or benefit obtained by a fiduciary [in breach of the proscriptions on conflict of duty and interest or on misuse of position] is held by him as a constructive trustee” (emphasis added). Neither authority nor principle dictates that the defaulting fiduciary’s holding of the profit as a constructive trustee will only arise upon a court order being made which may be months or even years after the default. Sir Anthony’s use of the present tense in the above passage is instructive and entirely consistent with Keith Henry. The Full Court of the Federal Court expressed its agreement with this passage in Grimaldi (No 2) at [575].
Were the profit derived in breach of fiduciary duty not immediately impressed with a trust, a defaulting fiduciary would be at liberty to treat with the trust property and to dissipate it in a manner that would undermine the rationale of the initial fiduciary obligation as identified in cases such as Bray, Furs, Hospital Products, Chan, Foresters and Harris (see [20]-[30] above). The interest of the company or person(s) to whom the fiduciary duty was owed in gains or profits derived in breach of fiduciary duty would be left unprotected by equity, and, contrary to a submission by the Commonwealth, the possibility of the principal seeking freezing orders does not relevantly mitigate that risk, that being an exceptional remedy which is not granted lightly, which usually will require an undertaking as to damages and the purpose of which is not to provide security for the plaintiff: see Golden Rain Development Pty Ltd (ACN 166 672 537) v The Owners – Strata Plan No 97938 [2026] NSWCA 135 at [36]-[37].
The fact that the trust which arises or is implied springs up upon breach fixing the conscience of the defaulting fiduciary preserves the possibility of the victim of the breach of fiduciary duty tracing the fruits of that breach, those fruits “belonging to [it] in equity”, to revisit the language of Furs. This is sometimes described as an example of equity considering as done that which ought to be done: see Tucker, Poidevin and Brightwell, Lewin on Trusts (20th ed, 2020, Thomson Reuters) at 941 (Lewin on Trusts); see also Attorney General for Hong Kong v Reid [1994] 1 AC 324 at 331 (Reid). As the late Professor Paul Finn put the matter in his groundbreaking monograph Fiduciary Obligations: 40**th Anniversary Republication with Additional Essays (The Federation Press, 2016) (Fiduciary Obligations) at 122, after quoting from Docker, “[t]he fiduciary’s liability for gains is a liability as a trustee and as for trust property” (emphasis in original). This passage was endorsed by Kearney J who also quoted extensively from Docker in Timber Engineering Co Pty Ltd & Ors v Anderson [1980] 2 NSWLR 488 at 494-5 (Timber).
In Lewin on Trusts, the authors observe at 943-4:
“The constructive trust that is imposed on profits is an ‘institutional trust’ that arises where an unauthorised profit is made by the trustee. It is a ‘true trust’ in that the trustee holds the legal title to the asset constituting the profit as trustee for the beneficiary. Accordingly, the beneficiary takes the equitable interest in the profit and the trustee is accountable to the beneficiary because he holds the profit on trust and as a trustee. The constructive trust is imposed to ensure compliance with, and in consequence of, the rules concerning profits and possible conflicts of interest and duty. But the constructive trust is not itself a remedy, save that the court may grant a declaration that the profit is held in trust. Rather the imposition of the constructive trust is a means to the grant of remedies against the trustee (or third parties) whether of a personal or a proprietary character. The imposition of the constructive trust does not involve the exercise of discretion by the court but that does not mean that the remedies that ensue from the imposition of the constructive trust cannot involve the exercise of discretion by the court to the extent that the character of the remedies concerned admit of the exercise of discretion, for instance as to the mode by which accounts and inquiries are to be carried out by the court.”
“his Lordship said that ‘a person occupying a fiduciary relation, who has property deposited with him on the strength of such relation, is to be dealt with as an express, and not merely a constructive, trustee of such property. His possession of such property is never in virtue of any right of his own, but is coloured from the first by the trust and confidence in virtue of which he received it. He never can discharge himself except by restoring the property, which he never has held otherwise than upon this confidence… and this confidence or trust imposes on him the liability of an express or direct trustee’.” (Emphasis added).
“That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed.” (Emphasis added).
It is plain from the citation of Keith Henry and the use of the language “arises from” that the trust was institutional rather than remedial in character in the sense that it did not depend for its creation upon a court order.
There is no necessary or rigid dichotomy between the two types of trust in any event, and “there does not need to have been a curial declaration or order before equity will recogni[s]e the prior existence of a constructive trust”: Muschinski v Dodds (1985) 160 CLR 583 at 614; [1985] HCA 78 (Muschinski). A constructive trust may rest on the existence of property rights and in that sense is not purely remedial: Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [155]. Confusion may, however, arise (and has arisen in the present case) by reason of the fact that “the term ‘constructive trust’ is not confined to circumstances where a beneficiary can obtain a proprietary remedy based on tracing in equity” and “the term ‘constructive trust’ covers both trusts arising by operation of law and remedial trusts”: Jones (as Trustee of the property of Heather MacNeil-Brown, A Bankrupt) v Southall & Bourke Pty Ltd [2004] FCA 539 at [59] and [62] per Crennan J (Jones v Southall), cited with approval in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44 at [48] (Bofinger): see [84] below.
In Turner at [70], White JA, with whom Meagher and McCallum JJA agreed, explained:
“As a defaulting fiduciary who herself received a share of the Trundle Properties, Wendy became bound by a constructive trust arising by operation of law from the time she received title by registration (Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350; Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; Attorney-General for Hong Kong v Reid [1994] 1 AC 324 at 331; Black v Freedman (1910) 12 CLR 105 at 110). The trust binding her interest does not arise merely as a remedy on the making of the order, as might be the case of an accessory to her breach.” (Emphasis added).
The principles derived from the foregoing cases are not confined to cases where the property over which a trust has been held to arise by implication or operation of law has comprised profits derived directly from the property of the company or person to whom the fiduciary duty was owed. They extend to what was referred to in the course of argument as “new property” or “new proprietary interests”, represented by what the principal never legally owned but which the defaulting fiduciary has secured by reason of preferring self-interest over loyalty. Furs was such a case. A director who negotiated the sale of one part of the plaintiff company’s business agreed to take up employment with the purchaser (which his fellow directors knew and consented to), but also obtained an undisclosed signing on fee of £5000 which the High Court found he held on trust for the company. It was a benefit which “belonged in equity” to the plaintiff company.
Another such case to which the Court was taken in oral argument by Dr Hudson who, together with Mr Mitchell and Mr Morris appeared with Mr Withers SC for Chameleon, was the decision of Wootten J in Queensland Mines Ltd v Hudson (1975-6) CLC 40-266 (Queensland Mines), which was affirmed, albeit on different grounds, by the Privy Council in Queensland Mines Ltd v Hudson & Ors (1978) 18 ALR 1; (1978) 52 ALJR 399. In that case, Mr Hudson leveraged his position as managing director of the plaintiff company, as well as the company’s “name, prestige and credit”, and its funds, to acquire two mining exploration licences from the Tasmanian Government which he held in his own company and which were ultimately transferred in consideration for a valuable agreement for royalties. At 28-695, Wootten J held that:
“Mr Hudson came into the position of holding the exploration licences by the use of his office of managing director of the company and of its resources, albeit unauthorised use. In these circumstances equity will not allow him to make a personal profit, whether by the acquisition of specific property or otherwise. At the time that he obtained the exploration licences he held a bare legal title, being a trustee, either for Mr. Korman or for Stanhill or for the company yet to be formed, if that be a possible cestui que trust (Re Leeds & Hanley Theatres of Varieties Ltd. (1902) 2 Ch. 809 at 819; Ford, ‘Principles of Company Law’ (1974), p. 113).”
Although the basis of Mr Hudson’s liability was strictly not necessary to decide, Wootten J confirmed that Mr Hudson was liable to the plaintiff company as a trustee (rather than a debtor), and in reaching that conclusion, his Honour applied the “modern law as to the fiduciary obligation not to make a secret profit…based squarely on the rule in Keech v Sandford”: at 28-707. Relevantly, Wootten J also found that the mining licences and their traceable proceeds of sale, including a valuable agreement for royalties, were held on constructive trust by Mr Hudson’s companies, they being affected by his knowledge of his original breach of fiduciary duty: at 28-709. This trust arose from the time he obtained the exploration licences.
Two other examples of “new property” cases were referred to by Dr Hudson, namely Keech v Sandford at 62 and Cook v Deeks [1916] 1 AC 554 (Cook v Deeks).
In Cook v Deeks, the defendants, who were three of the four directors of a railway construction company, obtained a construction contract by leveraging the reputation of the company in misuse of their position. The contract was subsequently taken over by the defendants’ company, by whom the work was carried out and the profits made. Lord Buckmaster LC, delivering the judgment of the Court, found at 563 that:
“Their Lordships think that, in the circumstances, the defendants…were guilty of a distinct breach of duty in the course they took to secure the contract, and that they cannot retain the benefit of such contract for themselves, but must be regarded as holding it on behalf of the company.” (Emphasis added).
“Profits made from the fiduciary relationship are treated by equity as held upon constructive trust for the principal from the moment of their receipt by the fiduciary. In everyday language, the profits belong in equity to the principal and must be treated as such. Therefore the fiduciary must account for them, which means not merely revealing their existence, but paying them to the principal, or otherwise treating them as the principal’s property. They are sometimes called secret profits but the fact that the principal knows that they are being made by the fiduciary is irrelevant to the duty to account, in the absence of the principal’s fully informed consent that the fiduciary should keep them for his own account.” (Emphasis added).
“Numerous authorities show that the fiduciary duty to account is not just a remedy. The duty arises at the moment when the profit is received and, in terms of timing, marches hand in hand with the constructive trust which obliges the fiduciary to treat the profit as belonging to his principal.” (Emphasis added).
“The present case is not of course about bribes, but it is an example of a profit made by a fiduciary ‘as a result of his fiduciary position’, squarely within the settled equitable principle which Lord Neuberger derived from Keech v Sandford and recently examined by this court in Aquila Advisory Ltd v Faichney [2021] UKSC 49; [2021] 1 WLR 5666 and Rukhadze. Applied to this case, it means that Mr Ruhan is to be taken as having made the profit constituted by the dividend on behalf of HPII, so that from the moment of its receipt it was beneficially owned by HPII. Furthermore, to the extent that there is any discernible distinction between Keech v Sandford and this appeal, it is that this is a plain case of fraud, whereas the older case was not. But the principle that a trustee or fiduciary holds such profits upon an immediate institutional constructive trust for the beneficiary does not depend at all upon the fiduciary having acted dishonestly.” (Emphasis added).
“The authorities show that property acquired by a trustee innocently but in breach of trust and the property from time to time representing the same belong in equity to the cestui que trust and not to the trustee personally whether he is solvent or insolvent. Property acquired by a trustee as a result of a criminal breach of trust and the property from time to time representing the same must also belong in equity to his cestui que trust and not to the trustee whether he is solvent or insolvent.” (Emphasis added).
“As to the liability of an errant fiduciary being to ‘account as a constructive trustee’ (J[493]-[524] Red 276-288), whilst the primary judge was of course correct that a ‘fiduciary who has made an unauthorised profit to be subject to a fiduciary obligation to hold those profits for the benefit of their principal and to account for those profits to their principal’ and this was ‘the positive expression of that well established proscriptive duty [not to obtain an unauthorised profit]’ (J[461]-[462] Red 268-269), in a first limb Barnes v Addy claim the question necessarily arises whether the fiduciary duty ‘attaches’ to property so as to impugn any dealing in it.”
The Commonwealth’s acceptance that a fiduciary who has made an unauthorised profit was subject to a fiduciary obligation to hold those profits “for the benefit of their principal” came remarkably close to accepting Chameleon’s case: a person who holds profits “for the benefit of their principal” ex hypothesi does not have a beneficial or equitable entitlement to them. Beneficial title resides in the principal and the defaulting fiduciary is under an equitable obligation to hold such profits for its principal. The Commonwealth’s submission in this regard was wholly consistent with Furs and Keith Henry.
Notwithstanding that apparent concession, the Commonwealth was driven to make a number of bold submissions. These included in relation to Keith Henry that:
“MR LIVINGSTON: Well, the way we put it is what Dixon CJ and other members of the court said in Keith Henry cannot be taken as literally true, that is, to say any property acquired or property ‑ profit made by the trustee in breach of the rule is held by him in trust.”
Mr Livingston submitted that the effect of this line of authority was that the errant fiduciary is “liable to account as a constructive trustee” for the profits gained in breach of fiduciary duty, but that those profits are not “trust property”. But that is entirely to overlook the reason why such a defaulting fiduciary will be held liable to account, namely because the defaulting fiduciary had no entitlement to retain or deal with the ill-gotten profits. Were it otherwise, the powerful policy rationale underpinning the fiduciary duty would be emasculated or eroded and the ability to trace profits arising from the breach of duty would be lost, as Mr Livingston was constrained to accept in argument.
Another way in which Mr Livingston put this argument was that Chameleon only had an “inchoate interest” in the Spotter’s Fee Securities and the Sale Proceeds until the Final Orders were made. Again, no authority was cited for this submission which was inconsistent with the long line of High Court and other intermediate appellate authority which has been referred to above. As Mr Withers submitted, the effect of this argument was that “there are no legal consequences from a breach of fiduciary duty until a court says that there are and what the consequences are”. This consequence would be distinctly at odds with and undermine the onerous and stringent nature of the duty of loyalty imposed on a fiduciary.
There is no warrant for the Commonwealth’s submission that Dixon CJ, McTiernan and Fullagar JJ did not mean what they said in Keith Henry, which was entirely consistent with what Dixon J had said, together with Rich and Evatt JJ, in Furs twenty-two years earlier and was also consistent with both earlier authority in Australia (Wicks) and England (Docker and Keech v Sandford) and more recent authority: see [53]-[75] above.
Secondly, the Commonwealth submitted that the statements by the various courts in Keith Henry, Timber, Furs, Chan, and Hospital Products must be taken to have been overruled or, alternatively, overtaken by more recent Australian authority. In this regard, Mr Livingston said that “under Australian law, unlike English law, the constructive trust is a remedy; it is a remedial institution”.
Apart from the unhelpful coining of the phrase “remedial institution”, which was more apt to conflate than elucidate, that submission cannot be reconciled with the recognition by Deane J in Muschinski that while a constructive trust is sometimes applied for remedial purposes as a pure remedy, that is not to the exclusion of a constructive trust arising by operation of law: at 613-14, 617. As has been seen, his Honour’s own decision one year earlier in Chan involved a favourable citation of Keith Henry and a reference to a trust as “arising” upon the generation of profit from a breach of fiduciary duty (as opposed to being imposed as a remedy): see [24] above.
The submission was also inconsistent with the observations of Crennan J in Jones v Southall at [62], where her Honour, in a passage cited with approval by the High Court in Bofinger at [48], said:
“…the term ‘constructive trust’ covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account.”
The fact that a constructive trust may sometimes be imposed as a remedy over property that was not previously held on trust, or that liability to account as a “constructive trustee” may sometimes be ordered in second limb Barnes v Addy cases concerned with knowing assistance (as opposed to knowing receipt), or that a discretion exists as to whether to fashion such a remedy, is not to deny the existence of a trust (whether referred to as constructive or not) arising by operation of law. The fact that “some constructive trusts create or recognise no proprietary interest” and may be imposed only if no other remedy is considered appropriate or suitable (Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10 at [4], [10]) does not deny that a trust may arise by implication or operation of law.
At another point in his submissions, Mr Livingston placed particular emphasis on the following passage from the judgment of Gageler J in Foresters at [74], going so far as to submit that his Honour was, in this paragraph “in effect” overruling Justices Deane, Brennan and Dawson in Chan and Chief Justice Dixon, McTiernan and Fullagar JJ in Keith Henry. What Gageler J said in Foresters at [74] was as follows:
“Those circumstances were sufficient to render Foresters, no less than Mr Woff, Mr Corby and FPA, liable as a ‘constructive trustee’. Traditionally, that label has been ascribed both to a fiduciary in breach of a proscriptive obligation (Chan v Zacharia at 199) and to a knowing participant in a dishonest and fraudulent breach of a proscriptive obligation imposed on a fiduciary (Barnes v Addy at 251-2). The label was long ago explained to serve no purpose other than to indicate amenability to the range of remedies traditionally available in equity against a trustee who is in breach of a similar proscriptive obligation: Rolfe v Gregory [1865] EngR 136; (1865) 4 De G J & S 576 at 579 [46 ER 1042 at 1044]. See also Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at 290 [47]-[48]; [2009] HCA 44; Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at 404 [141]. The remedies available against each, at the option of the person to whom the proscriptive obligation is owed by the fiduciary, centrally include an order for equitable compensation and an order to account. Ordinarily, declaration of a constructive trust is warranted only if other equitable orders are not capable of doing complete justice in the circumstances of the case. (Footnotes partly omitted).”
A number of points should be made in rejecting the Commonwealth’s submission about the effect of this passage.
First, Foresters was a knowing assistance or second limb Barnes v Addy case. It was not concerned with questions of receipt of trust property or any anterior question concerning a defaulting fiduciary’s equitable entitlement to profits secured in breach of fiduciary duty.
Second*,* his Honour did not purport to overrule or distinguish the Keith Henry line of authorities, and indeed did not refer to those authorities in this paragraph of his reasons, save for a generic reference to Chan.
Third, had Gageler J intended that paragraph of his judgment to carry the far-reaching consequences contended for by the Commonwealth, one would have expected his Honour to have referred to those cases explicitly and to have explained why they no longer represented the current state of the law. Leave would have also needed to have been sought for their overruling (Evda Nominees Pty Ltd v Victoria (1984) 154 CLR 311 at 316; [1984] HCA 18; Vanderstock v Victoria (2023) 279 CLR 333; [2023] HCA 30 at [8], [206], [425], [606], [609], [782], [810]), and it was not.
Fourth, his Honour was discussing the utility of the label “as a constructive trustee” as part of a description of a personal remedy as in the expression “liable to account as a constructive trustee”. The utility or otherwise of that label is not directed to the nature of the defaulting trustee’s interest in the profit illegitimately derived from a breach of trust. The expression “as a constructive trustee” operates to provide an explanation as to why a defendant is liable to account, namely because the relevant profits derived from the breach are not the fiduciary’s to keep; the defaulting fiduciary has no equitable proprietary interest in the profits, whether they be in the form of property or funds derived from the sale of property. In this context, it would be passing strange if, having derived profits in breach of a fiduciary duty routinely described as deliberately stringent and or uncompromising, a fiduciary obligation did not immediately attach to such profits.
Consistent with this last point, the reason why a party may be entitled to trace in equity is because that party has an equitable interest in the underlying property or what is referred to as a “proprietary base”. As the Full Court of the Federal Court said in Grimaldi (No 2) at [560], citing the work of Professor Smith in The Law of Tracing (1997, Clarendon Press Oxford):
“If you wish to trace from asset A into asset B (as its traceable proceeds), you must first establish you have proprietary rights in asset A. You must establish your ‘proprietary base’”.
See also M Hafeez-Baig and J English, The Law of Tracing (2021, Federation Press) at Chapter 5. The Commonwealth’s concession that Chameleon could trace the Sale Proceeds into the payments made to the ATO (see [11] above) necessarily involved acceptance of the fact that those proceeds were property in which Chameleon had an equitable proprietary right. In this context, the Commonwealth, in its written submissions in reply, adopted the observation of Lord Millett in Foskett v McKeown [2001] 1 AC 102 at 128, approved in Robb Evans at [133], that tracing is “the process by which a claimant demonstrates what has happened to his property, identifies its proceeds … and justifies his claim that the proceeds can properly be regarded as representing his property”.
Next, the Commonwealth submitted that the English approach in this area was different in some material respects from the Australian approach. Whatever differences may exist between English and Australian law in this regard, the analysis in Keith Henry and the cases that have followed it is consistent with recent statements of principle in the United Kingdom Supreme Court in Recovery Partners and Hotel Portfolio which have been set out earlier in these reasons.
Next, the Commonwealth submitted that, even if a constructive trust in favour of the principal may arise as a result of the errant fiduciary’s breach, that is not invariably so. It sought to confine that effect to claims where the breach involved the transfer of pre-existing property belonging to the principal rather than cases where the property in question was “new” in the sense of arising out of a benefit obtained by the defaulting fiduciary. I have dealt with this argument above at [66]-[70], referring to a series of cases inconsistent with the Commonwealth’s submission.
The Commonwealth also submitted that even if the Spotter’s Fee Securities were held on trust by Mr Grimaldi for Chameleon at the time those Securities were issued and subsequently sold, the character of the trust property as trust property was altered by Jacobson J’s Final Orders which relevantly granted Chameleon only a personal remedy over Mr Grimaldi to account for the Sale Proceeds. This argument was the subject of appeal Ground 3 which was expressed in these terms:
“Further and alternatively, His Honour the primary judge erred in failing to find that:
a. on the making of the Chameleon Final Orders (J[402]-[406]), Grimaldi ceased to owe any fiduciary duty (if he did prior) with respect to the monies as any such duty had merged into those orders; and
b. as a consequence thereof, any of the monies paid by Grimaldi to or received
by the Commonwealth after 20 December 2010 (J [409]-[410] and J[413] [415]; [786]) was not property the subject of any fiduciary duty for the purposes of knowing receipt and was not ‘trust property’ in any relevant sense and was not transferred in breach of any fiduciary duty.” (emphasis added)
One thing to be noted immediately is that the argument contained in this Ground of appeal does not apply to the payment to the Commonwealth of $12,519,410.61 on 19 October 2010 as this pre-dated the making of the Final Orders.
Moreover, to the extent that there was any merger, absent an argument based on abuse of process (and such an argument made at first instance was rejected and is not subject to appeal), it would only be open to the Commonwealth to take advantage of the doctrine of merger if it were a privy of Mr Grimaldi: White & Libut v Thompson & Ors [2011] NSWCA 161 at [34] (White & Libut). Senior counsel for the Commonwealth at trial said “there’s no merger problem”. On appeal, the Commonwealth mistakenly submitted that Chameleon had admitted in its pleading that the Commonwealth was a privy of Mr Grimaldi but it was in fact the Commonwealth that had pleaded this fact for the purposes of the abuse of process argument.
The Commonwealth did not, beyond assertion, establish that it was a privy of Mr Grimaldi, nor did it answer the question raised in argument, namely that, if it was a privy of Mr Grimaldi, why would it not equally be privy to and liable for Mr Grimaldi’s obligation to account for the profits he derived from the Sale Proceeds: see Partridge v McIntosh & Sons Ltd (1933) 49 CLR 453 at 463; [1933] HCA 38 (“[b]ut although the estoppel is only a personal matter between the particular parties, yet to really give the parties the benefit of it, and subject them to the burden of it, it is essential that not they only, but those of whom it can be predicated, that they are their ‘representatives in interest’ should likewise have the benefit of and be subject to the burden of the admission”) (emphasis added).
Mr Livingston modified his merger argument on the morning of the second day of the appeal as follows:
“the more direct answer to your Honour’s questions yesterday about merger is that what is significant is not so much whether the Commonwealth can directly rely on the doctrine of merger, but what is sufficient, in our submission, is that Mr Grimaldi could rely on the doctrine of merger. That is to say, by reason of the orders that were made by Jacobson J, Mr Grimaldi was able to say, correctly, that the cause of action had been extinguished. There was no longer a proprietary cause of action, if there ever was one, by reason of the making of the account of profits order. The legal relevance of that is that means that Kupang cannot make out an essential element of the claim for first limb liability as against the Commonwealth, namely, that at the time of receipt, the property that was received by the Commonwealth was trust property.”
The short answer to this reformulation of the argument is that Mr Grimaldi was not a party to the proceedings and was not seeking to rely upon the doctrine of merger. Whether it would have been open to him to do so in circumstances where he had never accounted to Chameleon for his dishonestly secured gains in breach of fiduciary duty may be open to doubt but the question simply does not arise.
This submission was ultimately another way of the Commonwealth contending that the character of the trust property as trust property was altered by Jacobson J’s Final Orders. Mr Livingston candidly accepted that he could not point to any authority for the proposition that orders of the kind made by Jacobson J could change the underlying character of property in an errant fiduciary’s hands for the purposes of a Barnes v Addy knowing receipt claim such that, if the Sale Proceeds had been “trust property”, they ceased to have that character if no declaration of trust was sought or made. What Mr Livingston described as “perhaps the closest authority” was this Court’s decision in White & Libut but, as has already been pointed out, that case made it plain that the effect of orders made in proceedings would operate only between parties to those proceedings and their privies and, in any event, that was a case where the claiming party had elected to treat a relevant payment in respect of which proprietary relief was subsequently sought as a loan. It was wholly distinguishable. Chameleon, in seeking the orders it did before Jacobson J, never ratified Mr Grimaldi’s breach of duty so as to treat the Spotter’s Fee Securities and their Sale Proceeds as being beneficially held by him.
Ultimately Mr Livingston accepted that “we cannot point the Court to any specific authority that has held that the grant of an order for an account of profits has the consequence that property that was previously trust property for the purpose of the first limb of Barnes v Addy is no longer trust property for that purpose” although he did suggest that this was because of the unusual fact pattern in the present case.
The absence of authority to support the Commonwealth’s contentions is scarcely surprising. A party in Chameleon’s position will frequently not know at the time orders are made what the defaulting fiduciary has done with the profits arising from the breach of fiduciary duty and Mr Withers contended with some force that that was so in the present case at the time when Jacobson J made the Final Orders. The very reason why a defaulting fiduciary is ordered to account as a constructive trustee is because of a lack of entitlement to the profits derived in breach of duty. If those profits have been dissipated to a third party who is not a bona fide purchaser for value without notice and who has knowledge to the requisite degree, it is entirely proper that that party itself be subject to liability pursuant to the first limb in Barnes v Addy.
In supplementary written reply submissions filed after the oral hearing, the Commonwealth referred to the High Court’s decisions in E**xecutor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxes (SA) (1939) 62 CLR 545; [1939] HCA 35 (Executor Trustee) and Federal Commissioner of Taxation v Thomas (2018) 264 CLR 382; [2018] HCA 31 (Thomas). These decisions do not assist the Commonwealth. As Gageler J explained in Thomas at [91], Executor Trustee was a case in which the Commissioner “was obliged in the administration of the taxing statute to take interests in land and in income from land as the Commissioner found them”. Those interests were found in the orders of the Supreme Court of South Australia construing a will. However, those orders did not operate in rem (see Executor Trust**ee at 562-3, 570) but were required to be taken into account by the Commissioner in the administration of the taxing statute, in that case, the Land Tax Assessment Act 1910-1937 (SA). In Thomas itself, the High Court held that Executor Trust**ee did not require that the Commissioner was bound by declarations made in earlier proceedings to which the Commissioner was not a party.
In any event, it was not “inconsistent with” the Final Orders, to pick up the language of Dixon J in Executor Trustee at 570, for Chameleon to retain a proprietary interest in the Sale Proceeds. Jacobson J in those Orders did not decide that Chameleon did not hold a proprietary interest in the Sale Proceeds but only that Mr Grimaldi was liable to account to Chameleon for them. That this was a personal remedy did not mean that Chameleon lost any right of recovery against a third party who received trust property knowing that it was derived from a breach of fiduciary duty and who could not, by reason of its knowledge, in good conscience retain it.
For the reasons outlined above, appeal Grounds 1, 2(a), and (3), which challenged the primary judge’s finding that the Admitted Receipts were Chameleon’s “trust property”, must be rejected.
It also follows for similar reasons that Ground 2(b) must fail. Under that ground, the Commonwealth argued that, having found that the ATO had actual knowledge of the Chameleon Judgment and the findings of fact and liability therein, the primary judge ought to have also found that the ATO knew Mr Grimaldi’s liability was merely personal and therefore that the Sale Proceeds were not “trust property”. That sub-ground was ultimately directed not to impugning the finding that the Sale Proceeds were in fact “trust property” but rather the primary judge’s finding that the Commonwealth had the requisite knowledge of that fact to be fixed with liability under the first limb of Barnes v Addy.
The notion that the ATO sought legal advice on the Chameleon Judgment or analysed it closely so as to form the view that Mr Grimaldi was subject to personal but not proprietary relief was contrary to the primary judge’s unchallenged finding that “[o]ther than [one phone conversation on 21 October 2009 and an email the following day]… there is no evidence that anyone within the ATO analysed the Chameleon Judgment to consider its impact on the course of action to which the ATO was committed in the Deeds of Settlement”: PJ [399]; see also PJ [343].
In any event, as explained at [105] above, there was nothing in the Final Orders, still less the Chameleon Judgment itself, which held that Chameleon did not have a proprietary interest in the Sale Proceeds such that those Proceeds were not “trust property”. The primary judge made unchallenged findings that the ATO knew the Sale Proceeds were obtained in breach of fiduciary duty, and belonged in equity to Chameleon. I reject the proposition that the Commonwealth could escape liability under the first limb of Barnes v Addy by claiming that it had formed the view, erroneously, and by the Commonwealth’s own admission wholly without authority, that, in the absence of a proprietary remedy being ordered with respect to the Sale Proceeds, the Sale Proceeds ceased to be or were no longer trust property. There was, in any event and, as noted above, no evidence to support such a factual conclusion.
“Further and alternatively, the primary judge:
a. erred at J [684)-[685] in finding that the ATO conducted itself with a want of probity sufficient to fix its conscience with liability for knowing receipt by failing to have regard, or to give sufficient weight, to the statutory functions and duties pursuant to which the ATO was acting at all relevant times; and
b. should have concluded that, when proper account is taken of the said statutory functions and duties, the ATO's conscience was not fixed with liability for knowing receipt in circumstances where the ATO had pursued the assessed tax-related liabilities and dealt with, and applied, the payment thereof as the ATO was bound by Commonwealth statute law to do.
Particulars
In support of this ground, the appellant relies on the following particulars of the ATO's statutory duties and functions:
i. The Commissioner is under a duty to make an assessment of a taxpayer's liability and to pursue the recovery of tax-related liabilities: Denlay v Commissioner of Taxation (2011) 193 FCR 412 at [81); Commissioner of Taxation v Daleo (1990) 168 CLR 614 at 618,629; s 166 of the Income Tax Assessment Act 1936 (Cth); Financial Management and Accountability Act 1997 (Cth), s 47 (as in force at the relevant time).
ii. Once the relevant notices of assessment were issued to Mr Grimaldi (J [258)), those notices were relevantly ‘conclusive evidence’ that the assessments were properly made and that the amounts and particulars of the notices were correct: Taxation Administration Act 1953 (Cth), Sch 1, s 350-10(1), item 2; former s 177 of the Income Tax Assessment Act 1936 (Cth).
iii. Once a payment of a tax debt, including the Admitted Receipts, is received by the ATO, the payment must only be dealt with, and applied, in accordance with the Commissioner's mandatory and unqualified obligations in Part IIB of the Taxation Administration Act 1953 (Cth), including in particulars 8AAZL.”
The essence of this Ground was that that the primary judge, in finding that the ATO conducted itself with a “want of probity”, failed to have proper regard to the Commissioner’s statutory duties and functions with respect to the enforcement of taxation obligations. It was put that, in light of the ATO’s statutory duties, the Commissioner’s conscience was not relevantly bound by the receipt and retention of the Admitted Receipts. The nature of those statutory duties need not be outlined in full, but the Commonwealth said they had the cumulative effect of making the ATO duty-bound to issue the notices of assessment and process Mr Grimaldi’s payments in the manner it did.
It may immediately be observed that, even if the ATO was so duty-bound, if it received trust property with the requisite knowledge for the purposes of the first limb of Barnes v Addy, that would not immunise the Commonwealth from liability. In this context, I have earlier in these reasons noted Mr Livingston’s acceptance of the primary judge’s finding at PJ [685] that “[t]he ATO does not have some special status which makes it immune from possessing the requisite knowledge to make it liable as a knowing recipient or immune from conducting the sorts of inquiries which should be conducted by an honest and reasonable person”: see at [45] above.
Chameleon objected to the Commonwealth being able to raise Ground 4 on the basis that it was not pleaded or argued at first instance, and submitted that it should not be permitted to be raised for the first time on appeal. It referred to and relied upon statements made at a directions hearing before the Court of Appeal Registrar in March of this year by Mr Hogan-Doran SC, who ran the trial before the primary judge, and who acknowledged that the arguments comprehended by Ground 4 had not been run below and that the Commonwealth was briefing senior counsel specialising in taxation matters to run those arguments, namely Mr Livingston. Mr Withers pointed to a number of forensic steps that would have been available to Chameleon at trial to meet an argument of the kind now sought to be made for the first time by the Commonwealth.
Mr Livingston acknowledged that the matters sought to be raised in Ground 4 should have been but were not pleaded below in the Commonwealth’s defence. However, notwithstanding Mr Hogan-Doran’s statement to the Registrar, in this Court the Commonwealth submitted that the argument raised by Ground 4 had been made before the primary judge albeit without the “detail” with which it was sought to be propounded on appeal. That is an understatement. Mr Livingston’s submission was that it was nevertheless “sufficiently raised below”. He suggested that it was dealt with by the primary judge in the first sentence of PJ [585] where his Honour said that “[t]he Commonwealth places emphasis on the fact that at all times the ATO exercised its statutory functions and should not be expected to have to await the outcome of the Chameleon Proceedings before acting to tax Mr Grimaldi”. His Honour went on to say in the following sentence that “[t]he problem with this submission is that it is detached from the facts of this case”.
The primary judge was responding to a submission made by the Commonwealth in opening that it had no duty to inquire as to the basis of any claims by Chameleon or as to the provenance of the Sale Proceeds, stating that, as with the New South Wales Crime Commission:
“The Commonwealth also would have no such duty. Nothing in the Taxation Administration Act 1953 (or for that matter in the Income Tax Assessment Act 1997 or other statutes imposing tax) imposes a duty on the Commissioner to determine whether a party suing a taxpayer for a declaration of trust or other interest in profits made has a ‘well founded’ claim.”
This was a very different submission to that sought to be made in Ground 4 which seeks to engage positive statutory duties. The distinction between a lack of a duty to make certain inquiries and a positive duty to assess and recover tax liabilities in a particular way is significant, including because the latter invites a potential factual inquiry into whether the ATO officers in fact acted, and perceived themselves to be acting, in accordance with what the Commonwealth contended were the relevant statutory duties. Neither of those inquiries arose below. Moreover, of the various statutory provisions referred to in the “Particulars” to Ground 4, only one, Taxation Administration Act 1953 (Cth) (TAA), sch 1, s 350-10(1), item 2, was referred to in passing at the trial (in the Commonwealth’s Opening) and in a very different context, namely that in the event that Chameleon sought to impugn a particular notice of assessment, it would have to deal with this provision. Mr Hogan-Doran said that if that eventuality arose, he would return to it in closing address. The eventuality did not arise, and the section was never returned to and did not feature in the Commonwealth’s closing submissions.
Even if that provision of the TAA had been referred to in the context of an argument the Commonwealth now seeks to make, there would be a real issue as to whether it could have assisted the Commonwealth. As Mr Morris, one of Mr Withers’ juniors, succinctly pointed out in oral submissions, it is strongly arguable that this provision only applies for the purposes of either recovery proceedings or in the language of 350-1, “for the purposes of taxation laws”. Mr Morris also pointed to the title to sch 1 of the TAA, “[c]ollection and recovery of income tax and other liabilities”, and the title of ch 4, “[g]eneric assessment, collection, and recovery rules” as important textual considerations in interpreting the scope of s 350-10. Section 350-10 of the TAA replaced s 177 of Income Tax Assessment Act 1936 (Cth) which was considered by the High Court in Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146; [2008] HCA 32 at [64]-[65] (Futuris) where the majority made plain that the evident policy reflected in the terms of that provision is the “facilitation of proceedings for the recovery of tax” (emphasis added). Futuris was applied by Payne JA in Anglo American Investments Pty Ltd v Deputy Commissioner of Taxation (2017) 105 ATR 35; [2017] NSWCA 17 at [40] and [42], and the restricted ambit of s 350-10’s predecessor provision was consistent with earlier decisions including Tupicoff v Federal Commissioner of Taxation (1984) 56 ALR 151; (1984) 4 FCR 505 at 523 and Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 202; [1995] HCA 23, in a passage later picked up in Grimaldi (No 9) [2009] 181 FCR 275; [2009] FCA 1404 at [56].
Mr Hogan-Doran was correct in his observation to the Registrar that Ground 4 had not been run at first instance. No explanation was forthcoming as to why the legal representatives of the Commonwealth had not pleaded nor advanced the argument now sought to be made by reference to Ground 4.
Whether, notwithstanding the detailed findings by the primary judge as to what the Commonwealth knew at various points in time about Mr Grimaldi and the provenance of the Sale Proceeds, the ATO’s statutory tax gathering obligations referred to in the particulars to Ground 4 placed a different complexion on what the Commonwealth could reasonably be expected to have done by way of inquiry for the purposes of consideration of the knowledge requirement for first limb Barnes v Addy purposes, would have involved a detailed examination of those provisions not in a vacuum but in the particular factual context of the case.
And, as Mr Withers submitted by reference to detailed examples, had the matter been pleaded or argued (to the extent that there may have been acquiescence in a departure from the very detailed pleadings: see Banque Commerciale v Akhil Holdings (1990) 169 CLR 279 at 286-7; [1990] HCA 11), Chameleon would have been entitled to explore whether the relevant officers of the ATO had in fact acted in compliance with those suggested statutory obligations. Questions may have legitimately arisen as to what discretion the Commissioner of Taxation or his delegates had with regard to those obligations including as to timing of the issuing of assessments, the possibility of ex gratia payments, whether the ATO had “revenue-setting targets for Project Wickenby” or any other incentives which caused it to pursue Mr Grimaldi’s tax liabilities in the way it did, whether and what ability the ATO had to vary the Deeds of Settlement with Mr Grimaldi and how that related to the statutory obligations on which the Commonwealth sought to place reliance. In a vigorously contested commercial cause, forensic steps would have been available including in terms of discovery and cross-examination which I have no doubt would have been taken or at the very least explored.
That Ground 4 is apt to raise unexplored factual issues may be seen in the heading to one of the Commonwealth’s written submissions in support of this Ground, viz. “[t]he Commissioner acted as he was bound by statute to do”. Even fresh questions of law may not be permitted to be raised for the first time on appeal where the facts are not admitted or are not beyond controversy: O'Brien v Komesaroff (1982) 150 CLR 310 at 319; [1982] HCA 33.
The authorities in this area are clear. It has rightly been said that “[e]xcept in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an[] opportunity to do so”: University of Wollongong v Metwally (No 2) [1985] HCA 28; (1985) 59 ALJR 481 at 483; see also Coulton v Holcombe (1986) 162 CLR 1 at 8-9; [1986] HCA 33; Liftronic Pty Ltd v Unver (2001) 75 ALJR 867; [2001] HCA 24 at [44]; Water Board v Moustakas (1988) 180 CLR 491 at 496-7; [1988] HCA 12.
In Whisprun Pty Ltd v Dixon [2003] HCA 48; (2003) 77 ALJR 1598 at [51] (Whisprun), Gleeson CJ, McHugh and Gummow JJ observed that it:
“… would be inimical to the due administration of justice if, on appeal, a party could raise a point that was not taken at the trial unless it could not possibly have been met by further evidence at the trial. Nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination.” (Emphasis added).
Considerations of assessment of prejudice are made more difficult because of the need for counsel conducting the appeal to look back in time and hypothetically assess how the trial would or may have been different, had a particular point been raised below: Branir Pty Ltd v Owston Nominees (No 2) P**ty Ltd (2001) 117 FCR 424; [2001] FCA 1833 at [38]. In the current case, Mr Withers had also been Chameleon’s counsel at trial and I am comfortably satisfied that, had the arguments raised by Ground 4 been raised at first instance, they “could or might possibly have been met” by the series of matters he advanced in argument on the appeal.
Prejudice is established and the Commonwealth should not be permitted to run Ground 4 of its appeal.
It should also be noted for completeness that a premise of the Commonwealth’s argument under Ground 4 was that a “want of probity” on the part of the ATO is required to be established for first limb Barnes v Addy liability in addition to the accepted knowledge requirements. As I have explained at [40]-[47] above, that is not accurate as a matter of Australian law. The focus is on the knowledge requirements in the Baden categories (i)-(iv), all of which the primary judge found were made out.
The appeal should be dismissed with costs.
If the parties are able to agree to a revised interest figure, noting that the orders at first instance only provided for interest up to 18 December 2025, the parties should bring in short minutes to record that agreement. If no agreement is able to be reached, submissions of no more than two pages should be filed by 30 August 2026.
WARD P: I agree with Bell CJ.
GRIFFITHS AJA: I agree with the Chief Justice.
**********
[1986] HCA 33
[2026] NSWCA 135
[2022] VSCA 210
(1936) 54 CLR 583
(1958) 100 CLR 342
(2018) 265 CLR 1
(1990) 169 CLR 279
(1929) 42 CLR 384
(1910) 12 CLR 105
(2009) 239 CLR 269
(2001) 117 FCR 424
(1996) 186 CLR 71
(1996) 70 ALJR 772
(1984) 154 CLR 178
(1975) 132 CLR 373
(1986) 162 CLR 1
(1995) 183 CLR 168
(1984) 154 CLR 311
(1939) 62 CLR 545
(2007) 230 CLR 89
(2008) 237 CLR 146
(2018) 264 CLR 382
(1999) 196 CLR 101
(2022) 69 VR 299
(2012) 200 FCR 296
(2003) 56 NSWLR 298
(2009) 76 NSWLR 230
(1984) 156 CLR 41
(2018) 355 ALR 703
(2001) 75 ALJR 867
(1945) 70 CLR 395
(1985) 160 CLR 583
(1932) 46 CLR 246
(1982) 150 CLR 310
(1933) 49 CLR 453
(1978) 18 ALR 1
(1978) 52 ALJR 399
(2004) 61 NSWLR 75
(1984) 56 ALR 151
(1984) 4 FCR 505
(2022) 107 NSWLR 171
(1985) 59 ALJR 481
(2023) 279 CLR 333
(1988) 180 CLR 491
(2003) 77 ALJR 1598
(1921) 30 CLR 80
(2011) 193 FCR 412
(1990) 168 CLR 614
Appeal dismissed with costs. The parties were to file short minutes if they agreed on a revised interest figure for the period from 18 December 2025. If they did not agree, they were to file submissions of no more than two pages on that issue by 30 August 2026: [127]-[128].