Jaeger v Bowden

Remaining issues for determination

1. In order to reduce the possibility of a misunderstanding concerning the issues that remain to be decided, I made orders on 4 November 2016 that required the parties to serve statements of their cases on those issues. I also directed the parties to serve written submissions in support of their cases.
2. My purpose in doing this was to reduce the risk of confusion generally, and to ensure that any issues that fell within J [734] of the first judgment were identified.
3. Kim and the Stephen defendants complied with these directions.
4. At the end of the recent hearing, for more abundant precaution, I directed the parties to confer, and to deliver to my chambers a list of matters for determination. My expectation was that this process would permit the parties to take into account what occurred at the hearing and be able to deliver an agreed, final list of the matters for determination.
5. Kim and the Stephen defendants complied with the direction, but I am perplexed to see that there is substantial disagreement concerning the matters for determination at this stage of the proceedings. The Stephen defendants disputed that some matters listed by Kim were to be determined at all, and submitted that others should be formulated differently to the way in which Kim formulated them.
6. The court is therefore faced with the need to adjudicate a dispute between Kim and the Stephen defendants, concerning what matters are to be determined, before it adjudicates the dispute as to those matters.

Reinvestment issues

1. I will, to the extent possible, use the descriptions adopted by Kim and the Stephen defendants in their respective lists of matters for determination, in describing those matters.
2. The first matter is called "reinvestment", and concerns the question whether Stephen was authorised to deal with the proceeds of sale of the Hotel in the manner that he did.
3. In par 2 of her statement of matters for determination, Kim describes this matter in two ways. The first (par 2(a)), and primary way, is that Stephen was not authorised to cause the sale proceeds of the Hotel to be paid to the Trust on terms that were ultimately documented as an interest-free loan.
4. The second was to look at the way that the Trust had applied the proceeds, on the basis, as I understand it, that even if the court finds that Stephen was entitled to cause the Partnership to pay the proceeds of sale of the Hotel to the Trust, certain subsequent dealings that Stephen caused the Trust to undertake with those monies would separately constitute breaches of Stephen's fiduciary duty to Adelaide.
5. The first of these alternative cases (par 2(b)(i)) is a claim that it was a breach of fiduciary duty for Stephen to cause the Trust to pay $7,720,478 to the ninth defendant for the acquisition of the Cabramatta Inn Hotel, and also to pay $8,196,417 to the eighth defendant in relation to the re-acquisition of the Hotel.
6. Secondly (par 2(b)(i)), Kim listed a significant number of payments out of the Trust's account, other than the payments made to the eighth and ninth defendants for the purchase of the two hotels, as being separate breaches of fiduciary duty by Stephen, even if the initial payment by the Partnership to the Trust was not.
7. The Stephen defendants' response, in broad terms, was to accept that Kim's primary case remained a matter for determination, but they only accepted that Kim's alternative case in par 2(b)(i) was to be determined now. It is the Stephen defendants' position that the question whether the substantial number of payments out of the Trust's account listed by Kim in par 2(b)(ii) involved breaches of fiduciary duty by Stephen is not a question that is to be determined now.
8. As I understood the oral submissions made by leading senior counsel for Kim, and notwithstanding what was ultimately said in par 2 of Kim's statement of matters for determination, he strongly submitted that the court should only decide at this stage the primary case put forward by Kim, being that the initial payment of the proceeds of sale of the Hotel by the Partnership to the Trust was unauthorised, and constituted a breach of fiduciary duty by Stephen. Senior counsel went so far as to positively request the court not to look at the evidence of the disbursements of the money in the Trust's account, and to decide the issue of breach at a "high level", based upon the terms of the partnership agreement, and the proper construction of the Deeds and the Management Agreement. That was in the context of suggestions made by the court during argument that the evidence concerning how the money in the Trust's account was disbursed may be material to the primary question of whether the initial transaction was authorised or not. I will refer to these exchanges in more detail when I come to consider the reinvestment issue.
9. I was accordingly surprised when I learned that Kim now suggests, as matters for determination, the two alternative bases of potential liability of the Stephen defendants in respect of Stephen's breach of fiduciary duty in pars 2(b)(i) and (ii).
10. As Kim and the Stephen defendants now accept that the first of the alternative cases (in par 2(b)(i)) should be determined now, I will consider below whether the court is in a position to do so. For the present I will simply note that it is not clear to me that Kim and the Stephen defendants have made submissions as to why those transactions should, or should not, be found to be separate breaches of fiduciary duty by Stephen.
11. As the Stephen defendants submit that the second of the alternative cases, that Stephen committed numerous breaches of fiduciary duty (par 2(b)(ii)), is not a matter that should be determined now, I will not do so. It is clear in my view, given the position taken by Kim in oral submissions, to the effect that the court should not deal now with the significance of the disbursements of the amount loaned by the Partnership to the Trust, and the Stephen defendants have made no submissions in relation to the issue, it would be procedurally unfair for the court to determine this alternative case. Furthermore, there are many forensic issues that appear to be relevant to this alternative case, which in my view were not seriously addressed by the parties during either hearing, and in particular by the Stephen defendants.
12. The remaining matters for determination concerning the reinvestment issue were agreed between Kim and the Stephen defendants. As I understand their positions, they have agreed that a number of payments that were made by Stephen to Adelaide during her lifetime should be taken into account in the determination of any amount that Stephen may be found to owe to Kim, as a result of his breach of fiduciary duty based on an unauthorised use of the sale proceeds of the Hotel.
13. There is a disagreement in respect of whether two matters should be taken into account for that purpose. Those matters are: (1) whether amounts paid to Adelaide prior to the sale of the Hotel on 29 October 2007 should be taken into account; and (2) whether amounts paid to certain Hotel companies and to Bowden Property Investments Pty Ltd, and retained by those companies and not distributed to Adelaide, should also be taken into account.

Capital Account Issue

1. The second matter for determination has been described by the parties as the "capital account" issue.
2. I am not sure whether the difference between Kim and the Stephen defendants in respect of this issue is substantial or technical. Doing the best I can, it appears that Kim and the Stephen defendants are agreed concerning the identity of three issues of substance. They appear to disagree as to how the issues should be formulated.
3. I will preface my consideration of this aspect of the dispute with a brief explanation of how the capital account issue arises. A fuller discussion of this issue will be given below, when I address the relevant questions.
4. It appears that, when the parties' expert accountants considered the annual financial statements of the Partnership, and perhaps also the Trust, they found that Mr Morrison had made a small number of significant mistakes in the preparation of the accounts. Those mistakes were not connected with the issue of whether the manner in which Stephen dealt with the proceeds of sale of the Hotel was unauthorised and involved a breach of fiduciary duty.
5. The effect of clause 3.1 and clause 2.2 of the Principal Deed was to require Adelaide to leave to Stephen in her will the whole of her remaining interest in the Partnership assets, and any replacement investment, after the sale of the Hotel. Accordingly, Adelaide was not entitled to withdraw any of her capital from the Partnership during her lifetime.
6. Notwithstanding that restriction on Adelaide's right to withdraw her capital from the Partnership, she had a right to have her capital maintained, and an obligation to leave it intact to Stephen under her will.
7. As I will explain in more detail below, this case was conducted by Kim and the Stephen defendants on the basis that there was no restriction upon Stephen in withdrawing his share of the capital of the Partnership. While it appears to be true that Stephen caused the Trust to pay out of its account all of the monies listed by Kim in the statement of her second alternative case (par 2(b)(ii)), those payments were accounted for in the annual financial statements of the Partnership and the Trust, at least up to 30 June 2010, by recording repayments of the debt owed by the Trust to the Partnership in order to fund withdrawals by Stephen of the funds in his Partners Funds.
8. Consequently, an issue that must be addressed is whether all or part of these payments, which otherwise may arguably have involved breaches of fiduciary duty on Stephen's part, should not be found to have that quality, because they were formally accounted for as repayments to the Partnership and withdrawals of Stephen's capital.
9. While the parties have not yet done the arithmetic, it is likely that many of these payments should be treated as legitimate withdrawals by Stephen from his Partners Funds.
10. That is a separate reason why the court should not determine at this stage whether these individual transactions involved a breach of fiduciary duty by Stephen, as that finding would be divorced from the wider context in which the transactions had been accounted for in the accounts of the Trust and the Partnership.
11. The significance of the mistakes made by Mr Morrison in the preparation of the annual financial statements for the Partnership is that he may have substantially overstated Stephen's Partners Funds, and correspondingly understated those of Adelaide: see J [538] and [733].
12. It is possible that, as a result, when the payments out of the Trust's account were accounted for as withdrawals by Stephen of the capital in his Partners Funds, Stephen withdrew more than he was entitled to, and part of his withdrawals involved unauthorised withdrawals of Adelaide's capital. If that occurred, Adelaide would have been entitled to remedies for breach of fiduciary duty against Stephen.
13. The capital account issues involve disagreements between the parties as to a discrete number of adjustments that should be made in the accounts of the Partnership in relation to Adelaide's Partners Funds.
14. I propose to proceed upon the basis that the parties appear to agree upon the substantive issues, and I will determine them. As the parties accept, it will then be a matter for them to carry out the accounting exercise necessary to correct the accounts. That exercise will allow the arithmetical determination of the amount, if any, of any unauthorised withdrawals by Stephen from the capital in Adelaide's Partners Funds.
15. I will explain the issues in more detail when I come to deal with them, but at this stage it may be noted that they involve: (1) the proper allocation in the Partnership accounts as at 30 June 2004 of the revaluation of the Hotel conducted as at 11 September 2003; (2) the appropriate allocation as between Stephen and Adelaide of interest on the amount of $5,325,000 borrowed by the Partnership; and (3) whether Adelaide's capital account should be debited in relation to the acquisition of the Cabramatta Inn Hotel and the re-acquisition of the Hotel.
16. I will also make brief observations on a number of other issues said by Kim to arise concerning the capital account.
17. Kim notes that the annual financial statements for the Partnership were only prepared up to 30 June 2010, and suggests that it may be appropriate for the court to order Stephen to provide an accounting in respect of the Partnership's affairs after that date. I will return to this issue below, in connection with a submission made by leading senior counsel for Kim during submissions. In short, it appears that the parties now know all of the relevant transactions that occurred after 30 June 2010, and it is probable that Kim's claim for that period could be dealt with as part of her general breach of fiduciary duty claim, rather than to attempt artificially to create accounts for the Partnership.
18. Finally, in relation to the capital account issue, Kim formulated the issue as a question of whether the three issues listed above had the effect that Stephen made an unauthorised withdrawal from Adelaide's Partners Funds up to 29 October 2007 (if the court finds in favour of Kim on the issue of whether Stephen dealt with the proceeds of the sale of the Hotel in an unauthorised manner) and thereafter up to 8 February 2012 (if the court finds in favour of the Stephen defendants on the primary authorisation issue).
19. With respect, I find it difficult to follow this formulation of the capital account issue. What is required is that all relevant corrections be made to the Partnership accounts in respect of Adelaide's Partners Funds, and then a determination be undertaken as to whether the total of all valid withdrawals by Stephen from the Partners Funds involved Stephen withdrawing part of Adelaide's Partners Funds.
20. The fact of the sale of the Hotel on 29 October 2007 is immaterial to that issue.
21. The Stephen defendants formulated the capital account issue as if it would only arise if the court found against the Stephen defendants on the issue of whether Stephen's dealing with the proceeds of sale of the Hotel was unauthorised and a breach of fiduciary duty by him. That is also not the case.
22. I do not understand what the connection could be between the question of whether Stephen applied the proceeds of sale of the Hotel in an unauthorised way on the one hand, and the determination of whether, following unrelated but necessary corrections to the Partnership's accounts, Stephen withdrew some of Adelaide's Partners Funds without her authority.
23. In particular, at least from the time when the accounts for the year ended 30 June 2008 were prepared, the payment by the Partnership to the Trust of the proceeds of sale of the Hotel was treated as a loan by the Partnership to the Trust. The amount of that loan varied in subsequent years, largely to fund the withdrawals of capital by Stephen. Adelaide's Partners Funds were represented in the accounts of the Partnership after the sale of the Hotel by her share of the amount of the loan owed by the Trust to the Partnership.
24. Even if Stephen was authorised to cause the Partnership to make an unsecured, interest-free loan of the proceeds of sale of the Hotel to the Trust, and even if the subsequent disbursement of that money by the Trust did not involve a breach of fiduciary duty by Stephen, nothing authorised Stephen to withdraw for his own benefit any part of Adelaide's Partners Funds in the books of the Partnership.

Other matters for determination

1. The third matter for determination identified by Kim and the Stephen defendants is "entitlement to account or equitable compensation" and the fourth is "relief in relation to wills". The parties are agreed that those matters should be determined, although there is some disagreement as to the proper formulation of the fourth matter.
2. It will be convenient to defer any further reference to the third and the fourth matters until I come to deal with them below.
3. Kim and the Stephen defendants are at odds about the fifth matter for determination, described as "simple or compound interest" and the sixth, described as "wilful default".
4. In par 1.2 of the Stephen defendants' list of matters for determination, they say that pars 8 and 10 of Kim's list, concerning simple or compound interest, were not the subject of any evidence or submissions, and therefore should not be determined by the court at this stage. Logically, the Stephen defendants should also have said that par 9 of Kim's list, which involves how compound interest should be calculated, if compound interest is to be applied, also does not arise. Having taken the stance they did in par 1.1, it appears to me that the Stephen defendants then inadvertently left pars 8 to 10 in their own list, when they intended to delete them.
5. For the sake of clarity of explanation, it will be convenient for me to defer resolving this aspect of the dispute as to the matters now available for determination until I come to deal with them.

Disbursement of proceeds of sale of Hotel

1. Perhaps as a result of fading enthusiasm for the prospect that the dispute between them concerning financial and transactional issues would be resolved by the contest between their respective expert witnesses, Kim and the Stephen defendants proffered directions by the court, to which they would submit, with the intent that they would cooperate in analysing the relevant financial information for the purpose of agreeing on the facts relevant to those disputes.
2. Kim and the Stephen defendants cooperated in preparing a number of schedules to be put before the court. Those schedules were explained in a document delivered to the court called "Documents produced by the plaintiff and the Stephen defendants pursuant to orders made on 22 July 2016". That document described the contents of a number of schedules, explained the significance of the information in the schedules, and the extent the information was agreed by the participating parties, and made observations as to the use that the court could make of the schedules.
3. One of those schedules justifies separate consideration at this stage, as it sets out in detail the disbursement of the proceeds of sale of the Hotel.
4. The schedule to the document, described as "Attachment 1A" sets out, step-by-step, how the net sale proceeds of the Hotel were in fact applied by Stephen, and the steps taken by Stephen in the disbursement of the proceeds of sale (whether by drawings from the Partnership, an interest-free loan to the Trustee, or otherwise).
5. Evidently, as a result of my passing observation in the first judgment that the evidence of the expert accountants appeared to focus on the financial accounts and adjustments to those accounts, rather than identifying the actual money trail by which the proceeds of sale of the Hotel were expended, Attachment 1 A was shortly described by the parties as the 'money trail'.
6. The money trail sets out a chronological list of transactions, by reference to 93 items, over the period 20 March 2007 to 30 June 2012. The first of those dates is the date when the Partnership received the $1,500,000 deposit under the contract for the sale of the Hotel. As at 30 June 2012, the amount remaining of the proceeds was $44,670.
7. The money trail has separate columns for receipts and disbursements for the Trust, the Partnership, Adelaide, Stephen, Louise, Stephens' and Louise's two children, the Bowden Superannuation Investment Fund (of Stephen and Louise), four Bowden Group companies, Kim and Peter Jaeger, the purchase of the Cabramatta Inn Hotel, the repurchase of the Hotel, the Trust's Newtown property, and the net running balance.
8. As I understand it, the money trail was prepared in the first instance on behalf of Stephen, and is propounded by him as correctly identifying all transactions relevant to the disbursement of the proceeds of sale of the Hotel. The schedule contains columns for comments by Kim and the Stephen defendants.
9. The comments set out in the document appear to suggest that there remain many areas of disagreement between Kim and the Stephen defendants.
10. In pars 4 to 10 of the document explaining the schedules, seven areas of disagreement between Kim and the Stephen defendants are identified.
11. Of these areas of disagreement, the fifth is that Kim says that item 13, involving in part, payment of $1,100,000 to Kim and Peter Jaeger on 27 June 2008 was a payment to those persons, whereas the Stephen defendants contended that it was paid to those persons at the request of and on the instruction of Adelaide. In par 28 of the document, it is said that, for the purpose of narrowing the argument, Kim accepts that her claim should be reduced in order to take account of this payment, notwithstanding that it was not paid to Adelaide. Consequently, even though Kim and the Stephen defendants disagree as to the proper description of the payment, in practical terms the dispute will be resolved by Kim accepting that the whole of the $1,200,000, of which the $1,100,000 formed part, which is dealt with in item 13, will be treated as if the payment had been made to Adelaide, for the purpose of determining Adelaide's entitlement to an account or equitable compensation.
12. As I understand the purpose of describing the other six areas of disagreement in the document that explains the schedules, it is simply to record those disagreements for the purpose of their later resolution. The document contains a statement that the money trail is largely agreed, and that Kim and the Stephen defendants anticipate that it will not be necessary to produce any expert evidence in relation to the money trail. I understand this to express the mutual expectation of Kim and the Stephen defendants that, once the relevant issues are decided in principle by the court, they will be able finally to resolve the factual disputes by further cooperation. If that expectation is disappointed, then arrangements may be made by the court to resolve outstanding disputes.
13. It may be observed that the contents of the money trail are substantially consistent with the analysis that I carried out at J [233] to [318], based upon the annual financial statements of the relevant entities. Those financial statements, however, expressed the financial circumstances of the entities on an accounting basis, as at annual balance dates, after judgments had been made by Mr Morrison, the accountant, and Stephen, as to how transactions should be treated for accounting purposes. The money trail, on the other hand, sets out the actual dates and amounts of each transaction.
14. As I understand the money trail, Kim and the Stephen defendants are agreed that, in so far as it may be material to the determination of relevant issues, the court can act upon the information in the document in a general way in relation to how it indicates the proceeds of sale of the Hotel were disbursed. The court is to leave all final calculations to the parties, in the expectation that those calculations may be agreed.

Need for an accounting by Stephen

1. As I have explained in the first judgment, and briefly summarised above, the issues that I considered were able to be disposed of by the first judgment were influenced by the evolution of the hearing, which led Kim and the Stephen defendants to put to the court that it should decide whether Stephen was an accounting party, who should be ordered to go through a process of accounting in favour of Kim.
2. It appears to me that a number of developments may obviate the need for Kim and the Stephen defendants to continue with that approach.
3. It now appears probable that Kim and the Stephen defendants will be able to agree as to how the money trail that I have considered above should be completed. It is at least probable that they will be able to agree to the amounts and times of all transactions concerning dealings with the proceeds of sale of the Hotel, even if some disagreements remain as to the legal effect or nature of the transactions.
4. The purpose for which the court orders an accounting party to undertake an accounting arises where the accounting party, in this case a fiduciary, deals with the assets the subject of the fiduciary obligation over a period, and the party with the benefit of the accounting obligation is entitled to know how the assets have been dealt with, for the purpose of being able to verify that the accounting party has performed his or her duty properly. The accounting party may not have prepared and delivered accounts at all, or the accounts may be questionable. The object of the accounting is for the accounting party to prepare formal accounts, in a manner consistent with court procedures, following which procedures are employed to enable the party with the benefit of the accounting obligation to challenge and verify the adequacy of the accounts. Ultimately, the purpose of the exercise is that the party with the benefit of the accounting obligation receive the benefit of a formal accounting that accurately records all transactions with the assets the subject of the fiduciary duty.
5. The course taken by Kim and the Stephen defendants at the first hearing appears to assume that the formal taking of accounts prepared by Stephen will be necessary and useful in these proceedings.
6. However, if as I suspected at the time I prepared the first judgment, and which now appears to be likely to be correct, Kim and the Stephen defendants will be able to agree concerning the date and amount of all relevant transactions, then such a formal accounting process should become unnecessary.
7. The overall significance of these considerations is that, if the perceived need for an order by the court that Stephen engage in an accounting process disappears, the court should then be able to make findings which, together with the completion of the cooperative exercise between Kim and the Stephen defendants discussed above, will enable the court to determine the issues of liability that arise under the separate questions. The possible need for the court to revise the separate questions would therefore disappear.

Was the disposition of the proceeds of sale of the Hotel authorised?

1. As I observed at J [499], the primary issue in these proceedings is whether Stephen was authorised by the partnership agreement, as varied by the Deeds and the Management Agreement, to cause the net proceeds of sale of the Hotel to be disbursed in the manner in which they were disbursed.
2. The following sets out my answer to that question, having regard to all relevant parts of the first judgment, and the further written and oral submissions received by the court. It should in substance be treated as a continuation of the matters discussed, particularly at J [499] to [543] of the first judgment.

Kim's submission

1. Notwithstanding that I raised the question of whether the precise manner in which Stephen caused the proceeds of sale of the Hotel to be dealt with over time may be relevant to the issue of whether Stephen's conduct involved a breach of the fiduciary duty that he owed to Adelaide, both Kim and the Stephen defendants adopted the stance at the recent hearing that the court should decide the issue as a matter of principle, or construction, and that it was not necessary or appropriate for the court to have regard to any of the dealings with the proceeds of sale, after the time when they were first paid from the bank account of the Partnership to the account of the Trust.
2. As leading senior counsel for Kim put the matter at T 3.30: … For my part I am going to urge your Honour that each of the issues, which at least between my client and the Stephen defendants have been agreed, can all be determined at a level of principle without looking at any particular figures. And as between my client and the Stephen defendants, whatever the result of those questions of principle may be, we know how the numbers then fall out. And that may not be satisfactory to your Honour, but for the purpose of my submissions, apart from what we call the money trail, which I will explain what it shows, and that goes to the mutatis mutandis issue, I think and I am going to submit to your Honour, that it can all be decided at a high level.
3. Perhaps the high watermark of Kim's argument is found at T6.45, where senior counsel submitted: That, of course, makes sense commercially, because we know that Adelaide knew all about that lease, and had effectively consented to it, and so consistent with your Honour's findings at paragraph 473, this all dealt with how things stood as the status quo, but once the status quo was undone - that is, the Ritz Hotel was sold - there is no warranty in any of these agreements to suggest any intention by the parties that an arrangement for any - let's call them re-investments - could be done on the basis that Stephen was entitled to arrange the affairs of the partnership and the trust so as to cause all the profits to be owed (corrected "earned") by the trust.
4. Senior counsel described that as the central question. As I understand the argument, it is that, in the circumstances of the present case, once the Hotel was sold, on the proper construction of the Deeds and the Management Agreement in relation to their effect on the pre-existing partnership agreement between Adelaide and Stephen, Stephen was not entitled to deal with the proceeds of the sale of the Hotel in a way that generated profits anywhere else than the Partnership. In that sense "the status quo" achieved by the Deeds and the Management Agreement was "undone".
5. The submission was made on behalf of Kim that the conclusion I expressed at J [473] decides the issue in favour of Kim.
6. Given its significance, it will be appropriate to repeat J [473] here: I do not accept the defendants' argument that, on the proper construction of the Principal Deed, Adelaide positively agreed that her entitlements were limited to the receipts provided for in cll 6.1 and 6.2 of the Principal Deed. The Principal Deed does not contain any express term whereby Adelaide relinquished her entitlement to receive any income earned by the Partnership. Instead, it contained a term whereby Adelaide relinquished her right to receive any distributions from the Trust, which had the practical effect that there would be no income for Adelaide to receive, so long as the status quo was maintained whereby only the Trust earned any significant income. In my view, that commercial arrangement is to be explained by the drafter's objective to structure the transaction in a manner that created the least risk possible, that the revenue authorities would be entitled to characterise the transaction as involving an immediate transfer of Adelaide's remaining beneficial interest in the Partnership and the Hotel Assets to Stephen.
7. It was submitted on behalf of Kim that, in-so-far as I had raised the issue of whether what I described as the mutatis mutandis provision in the Principal Deed could have the effect of authorising Stephen to deal with the proceeds of the sale of the Hotel in a way that led to any profit being made by the Trust, rather than the Partnership, the suggestion had "gone off on a tangent": see T 4.10.
8. Kim's submission was, as I understand it, that the effect of my conclusion at J [473] was that, as Adelaide had not relinquished her entitlement to receive any income earned by the Partnership, but the Deeds and the Management Agreement had the practical effect that there would be no income for Adelaide to receive (so long as the status quo was maintained whereby only the Trust earned any significant income), then once that status quo came to an end, nothing in the Deeds and the Management Agreement authorised Stephen to reconstruct the arrangements between the Partnership and the Trust in a way that reinstituted the status quo in respect of a replacement asset acquired with the proceeds of sale of the Hotel.
9. It should be recorded that when, during the course of argument, I enquired of senior counsel whether the effect of the Deeds and the Management Agreement may be more subtle than was submitted on behalf of Kim, in the sense that those documents may have contemplated some circumstances in which Stephen would be authorised to apply the proceeds of the sale of the Hotel in a way that led to the profit being earned by the Trust, rather than the Partnership, and the question may be the precise circumstances in which that course would be authorised, senior counsel responded that it was Kim's "fall‑back position" that in this case Stephen went too far, because, having caused the Partnership to loan the proceeds of sale of the Hotel to the Trust on an unsecured and interest-free basis, Stephen then effectively used the money in the Trust as if it was his own, which on any view was not authorised: see T 23.25 and 25.5.
10. Kim's senior counsel was correct in his expectation that the Stephen defendants would put a high level submission that the Deeds and the Management Agreement authorised Stephen to apply the proceeds of sale of the Hotel by making an unsecured interest-free loan to the Trust. The Stephen defendants submitted that that was the end of the matter, and that if they did not succeed in sustaining that argument, they would not put any argument to say that individual transactions involving the use of the funds after they had been loaned to the Trust were authorised: see T 42.5. The Stephen defendants relied upon what they described as the "thicket" of provisions in the Deeds and the Management Agreement, particularly those in clauses 1 and 2 of the Principal Deed concerning the management of the Hotel and the sale of the Hotel, to submit that Stephen's management powers were not confined to the Hotel or to the goodwill, but extended to the Partnership itself, and in those circumstances there were no restrictions put upon him. He was authorised to treat the asset as his own. He did not need Adelaide's consent to sell, and he did not need her consent to choose what, if any, replacement asset would be acquired. She had already given consent to that. The words in clause 2.1 of the Principal Deed "new investment property or other investment (the replacement investment)" were left at large.
11. I do not accept the submissions put by Kim on the one hand, or the Stephen defendants on the other, in the broad terms in which those submissions were put.
12. First, dealing with Kim's submission, I do not accept that, on the proper construction of the Principal Deed, it contemplated that the Hotel might be sold in circumstances which could bring the status quo created by the Deeds and the Management Agreement to an end, with the result that Stephen would be bound to reinvigorate the Partnership in the sense of applying the Partnership's assets to a partnership business for the purpose of causing the Partnership to earn profits in its own right, which would then be distributed between the partners.
13. There is nothing in the wording of the Deeds and the Management Agreement that positively or expressly has that effect. Those documents do not expressly provide for the reinvigoration of the Partnership (in a manner in which it had never operated in any event) upon the sale of the Hotel.
14. Whatever the effect of the words "then the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis" in clause 2.1 of the Principal Deed might be, it is not in my view that Stephen would be required to manage the assets of the Partnership in a way that would cause the Partnership to earn income in the ordinary course.
15. That outcome would have been inconsistent with the modus operandi of the Partnership and the Trust for substantially the whole of their existence, and also would be inconsistent with the terms of the July Minutes.
16. It would also have led to the result that Adelaide would become entitled both to share in the profits earned by the Partnership and the payment by Stephen of her 'lifestyle expenses', which is a result that is inconsistent with the objective intention of the parties to the Principal Deed.
17. I do not accept the submission made on behalf of Kim that the conclusion that I expressed in J [473] of the first judgment compels the ultimate conclusion that the status quo was broken after the sale of the Hotel, so that Stephen became bound to manage the proceeds of sale in a way that earned a profit in the Partnership. J [473] was directed at the problem faced by the drafter of the Deeds and the Management Agreement that arose from the fact that the parties had two purposes. One purpose was that Kim would get her share of Adelaide's estate immediately, and that Stephen would, as far as possible, become entitled to his share at the same time, and be able to enjoy the benefits of that share. The other purpose was that the transaction would be implemented in a way that did not subject Adelaide to the obligation to pay any capital gains tax, and that stamp duty would be minimised. The transaction would not have been commercially viable if the second purpose was not achieved. That was the source of the Deeds and Management Agreement being drafted to have the effect that Adelaide would continue to have full beneficial ownership of her remaining interest in the Partnership until her death.
18. The documents were therefore crafted in a subtle but real way in which Adelaide did not relinquish her entitlement to receive income from the Partnership, but a state of affairs was authorised whereby the Hotel was leased to the Trust on a basis that would not cause the Partnership to earn any profit, and any profit from the operation of the Hotel would be earned by the Trust. Adelaide expressly relinquished her entitlement to receive distributions from the Trust, but not her entitlement to receive a share of profits from the Partnership - there simply would be none.
19. Those considerations do not lead to the result that, if the Hotel was sold, what Kim has described as the status quo would be broken, so that thereafter the Partnership would have to be managed by Stephen as a conventional, income-earning partnership.
20. This is a convenient point to deal with Kim's submission that her primary argument was supported by the fact that, in the month or so before the completion of the contract for the sale of the Hotel, the Partnership actually operated the Hotel using its own bank account, after the lease from the Partnership to the Trust had been terminated. That was in fact done because the purchaser required the Hotel to be operated by the Partnership at the date of completion. As I understand Kim's argument, it was to the effect that what she described as the status quo had been broken in fact by these changed circumstances, so that at the time of completion, the Partnership was actually operating the Hotel for a profit. Consequently, Kim submitted, what I have described as the mutatis mutandis provision in the Principal Deed had to be applied on the basis that the proceeds of sale of the Hotel had to be invested in a manner that was comparable, in the sense required by the use of the term mutatis mutandis, with the situation where the Partnership was operating the Hotel for its own profit.
21. I do not accept that submission, because the Deeds and the Management Agreement must be construed in the circumstances as they existed at the date when the documents were executed, and whatever the effect of the mutatis mutandis provision may be, it speaks of the circumstances as they existed at the time when the documents were executed. The provision was not intended to have the elastic effect that it would require the proceeds of sale of the Hotel to be invested in a manner that mirrored the manner in which the Hotel was being operated immediately before the completion of the sale.
22. Kim's submission effectively ignores those parts of clauses 1 and 2 of the Principal Deed, which on their face are intended to give Stephen the sole discretion concerning the sale of the Hotel and the reinvestment of the proceeds, on a basis that will involve the provisions that govern the management of the Hotel operating mutatis mutandis in relation to the replacement investment. While there are difficulties in ascertaining how these provisions of the Principal Deed were intended to work, they are inconsistent with a conclusion that the Deeds and the Management Agreement contemplated an outcome where the status quo would be broken, and Stephen would become obliged to manage the Partnership in a way that caused the Partnership to earn a profit in its own right.

Stephen defendants' submission

1. I will now turn to the submission put by the Stephen defendants to the effect that the Deeds and the Management Agreement had the effect that, following the sale of the Hotel, Stephen was authorised to invest the proceeds of sale in whatever manner he thought fit, even to the extent of treating the proceeds of sale as if they were his own. Specifically, the Stephen defendants submitted that Stephen was authorised to cause the Partnership to make an unsecured, interest-free loan to the Trust, and so long as that loan continued to exist, it was entirely immaterial how Stephen caused the Trust to apply the money loaned by the Partnership.
2. The essential reason why I reject that submission is that it entirely ignores what I have described above as the second purpose of the parties, as well as the provisions in the Deeds and the Management Agreement that were included in order to ensure that effect was given to the second purpose, in a manner that was sufficiently robust so as to protect the transaction from the imposition of capital gains tax and a greater amount of stamp duty than was acceptable.
3. It is simply not the case that the Deeds and the Management Agreement provided that, if Stephen decided to sell the Hotel, he could treat the proceeds of sale as if they were his own, in a manner that would be inconsistent with Adelaide retaining the real beneficial ownership of her remaining interest in the Partnership.

Proper approach to construction issue

1. Perhaps a convenient way of illustrating the problem of identifying what the Deeds and the Management Agreement did authorise is to propose a practical example that might suggest what the drafter of the documents intended to achieve. This example recognises the validity of the submission made on behalf of the Stephen defendants that, following the sale of the Hotel, it might not be practicable for Stephen to acquire a replacement Hotel or any equivalent investment immediately, and he might have to deposit the proceeds of sale in some bank account until he was able to acquire a replacement investment.
2. Plainly, in that situation Stephen could have deposited the proceeds of sale into a bank account in the name of the Partnership, but that would cause the Partnership to earn a profit represented by the interest payable on the deposit. I accept that it was never intended by the parties to the documents that the Partnership would actually earn a profit.
3. Stephen could have invested the proceeds of sale of the Hotel by causing the Partnership to make a properly documented loan to the Trust on an interest-free basis. The Trust could have deposited the amount of the loan in a secure bank account, or the equivalent. The consequence would have been that the Trust would earn income represented by the interest payable by the bank. The Trust could have secured the loan from the Partnership by granting a charge over the deposit on terms that would prevent the Trust from dissipating the amount of the deposit during the term of the loan. There may be variations to this suggested example that might also be useful.
4. My purpose in giving this hypothetical example is to demonstrate my view that, if the proceeds of sale of the Hotel had been invested in this, or perhaps some similar manner, it would be difficult to argue that the investment was not authorised by the Deeds and the Management Agreement. I use the word difficult advisedly, because I do not intend to decide whether or not this particular replacement investment, or some variation of it, would have been authorised by the documents. The example is only put as one possible way that a real replacement investment could have been made in a way that retained the reality of Adelaide's beneficial interest in the Partnership assets, but also preserved the arrangement whereby the profit was earned by the Trust rather than the Partnership.
5. The court is not, however, required to decide whether this or any other hypothetical example of a replacement investment would have been permitted by the Deeds and the Management Agreement. Nor is it required to decide the metes and bounds of how the relevant provisions of those documents may operate in relation to the range of replacement investments that would be permitted. The court is only required to examine what actually occurred in relation to the investment of the proceeds of sale of the Hotel, for the purpose of determining whether Stephen was authorised to invest those proceeds in the manner in which he did.
6. The court must construe the relevant provisions of the Deeds and the Management Agreement in the light of the fact that those documents varied the effect of the pre-existing partnership agreement between Adelaide and Stephen, albeit that the terms of the partnership agreement were not recorded in writing. I considered the terms of the partnership agreement at J [323] to [333]. Of particular relevance is the aspect of the partnership agreement whereby the Partnership retained ownership of the Hotel, which was leased to the Trust on a basis that was terminable on short notice. Notwithstanding the arrangements agreed to by the partners with the Trust to ensure that the Trust rather than the Partnership earned income from the operation of the Hotel, in a real and immediate sense, the Hotel remained an asset of the Partnership.
7. In so far as it may be proper for the court to have regard to the surrounding circumstances, for the purpose of construing the relevant terms of the Deeds and the Management Agreement, the most material circumstance involves giving proper weight to what I have described above as being the two purposes of the parties in entering into the transaction. A construction of the documents that ignores, or does not give proper weight to, the second purpose, is likely to be erroneous.
8. The drafter of the documents was faced with the task of accommodating the agreement between the parties that Stephen would have unilateral power to sell the Hotel and replace it with some other asset in a way that did not undermine the achievement of the second purpose, being to avoid the attraction of capital gains tax and unnecessary stamp duty. As it was not possible for the drafter to identify and anticipate all possible circumstances in which the Hotel might be sold and replaced, it was necessary for the drafter to devise provisions that would give Stephen the agreed power, while regulating the consequences of his actions in a way that would prevent the transaction being subject to capital gains tax and unnecessary stamp duty. In practical terms, that would require Adelaide to retain beneficial ownership of her remaining interest in the Partnership assets, in a way that was sufficiently robust to survive a claim by the revenue authorities that in reality the effect of the documents was to make an immediate transfer of Adelaide's beneficial interest to Stephen.
9. The drafter has attempted to execute this task by adopting the wording in clause 2.1 of the Principal Deed which, although it must be applied in the context of the whole of the documentation, is the principal relevant provision. It is appropriate to repeat this term as follows: 2.1 In the event that the Hotel is sold and the proceeds of sale invested in a new Hotel, new investment property or other investment (the replacement investment), then the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis.
10. The proper construction of the term requires an analysis of two aspects being, first, the words "and the proceeds of sale invested in a new Hotel, new investment property or other investment (the replacement investment)", and secondly, the requirement that the provisions of clause 1 "shall apply to the replacement investment mutatis mutandis".

Significance of "replacement investment"

1. As to the first of these aspects of clause 2.1, I accept the simple submission made orally on behalf of Kim that the primary meaning of these words comes from the use of the word "replacement". The use of that word in the term "replacement investment" does more than to provide a shorthand term for the words that immediately precede them (as is common in the drafting of legal documents where a complex term is given a shorthand description in parentheses). In my view the use of the expression "replacement investment" is intended to expand upon the meaning of the preceding words "a new Hotel, new investment property or other investment". In short, in a real and substantial sense, clause 2.1 required Stephen to invest the proceeds of sale of the Hotel in some investment that could properly be described as a replacement for the Hotel, which would involve the new investment retaining as many features of the Hotel investment as was reasonably possible in the circumstances.
2. It may be that the use of the term "replacement investment" is an indefinite one, in the sense that it does not extensively prescribe the requirements of the replacement investment, but it does not follow that the court is unable to make a judgment as to which investments are, and which are not, sufficiently a replacement of the Hotel, to make the investment authorised.
3. In my view, one of the characteristics of the replacement investment that is required by clause 2.1 is that the investment be reasonably equivalent to the ownership by the Partnership of the Hotel in circumstances where the asset the subject of the investment is real and valuable and readily recoverable by the Partnership.
4. That conclusion is consistent with the way that the Partnership had always operated, and nothing in the Deeds and the Management agreement expressly suggests that the parties intended to depart from this position.
5. Furthermore, clause 2.1 should be construed having regard to all of the possibilities that could have occurred following the execution of the documents and their delivery in December 2007. As it has happened, the Hotel was sold for an unexpectedly high price, and that has created the outcome that a substantial amount of money became available to Stephen to apply for various purposes, including honouring his obligation in clause 6.2 of the Principal Deed to ensure that Adelaide would continue during her lifetime to receive the support of Stephen in relation to the costs of her ongoing lifestyle.
6. However, events could have turned out differently, and the Hotel might not have been able to be sold for a price greater than the value the parties understood it to have at the time the documents were executed. Whatever future may have eventuated, the only asset of the Partnership was the Hotel, or any replacement investment acquired by the Partnership following the sale of the Hotel. The only security that Adelaide had, using that word in a general sense, for the performance of her entitlements under the Principal Deed, was that the value of the assets of the Partnership would be retained in a genuine and realisable way. This consideration militates against clause 2.1 being construed in a way that would authorise Stephen to reinvest the proceeds of sale of the Hotel in the making of a loan in circumstances where, by reason of the way in which Stephen intended to deal with the monies advanced, the loan could be irrecoverable.
7. It is necessary, in construing clause 2.1, to consider the need to preserve the beneficial ownership by Adelaide of her remaining interest in the Partnership's assets, by means that would survive an argument by the revenue authorities that in reality the transaction was an immediate transfer of that beneficial interest to Stephen.
8. The combined effect of clause 2.3 and clause 2.1 of the Principal Deed was that Stephen could have sold the Hotel immediately after the transaction had been completed, or at any later time. If the provisions permitted Stephen to make an unsecured interest-free loan to the Trust, in circumstances where the Trust was free to dissipate the money for whatever purpose it thought fit, including for the personal benefit of Stephen, then the asset of the Partnership represented by the loan would cease to be real, and the practical effect of the provision would be to give Stephen the benefit immediately of the interest in that part of the Partnership's assets that Adelaide retained. A construction of clause 2.1 that had that effect would be inconsistent with the achievement of what I have called the second purpose of the parties.
9. Importantly, the effect of clause 1 of the Principal Deed, and the various terms of the Management Agreement, was that Stephen was the managing partner of the Partnership, with sole control over its assets. Ordinary equitable principles required Stephen to comply with a fiduciary duty to deal with the assets of the Partnership in the interests of the partners as a whole, and not his separate personal interest. No express term of the Deeds and the Management Agreement released Stephen from that fiduciary obligation. The court would not readily find that Stephen was impliedly released from that obligation, unless the circumstances were clear, which is not the case.
10. In simple terms, there is no reason for the court to adopt a construction of the relevant parts of the Deeds and the Management Agreement which had the effect of releasing Stephen from the obligation to deal with the assets of the Partnership in a way that maintained the commercial reality and enforceability of Adelaide's beneficial ownership of her remaining interest in the Partnership assets, or to construe the documents in a way that authorised Stephen in substance and effect to deal with Adelaide's share in the assets of the Partnership for his own benefit and contrary to hers.
11. Clause 2.2 of the Principal Deed expressly obliged Adelaide, after any sale of the Hotel, to leave to Stephen in her will "her interest in the replacement asset". These express words contemplate that Adelaide would continue to own a real asset and not only a nominal one.

Significance of the mutatis mutandis provision

1. It is then necessary to address the effect of the mutatis mutandis provision. This provision will only become relevant after the court is satisfied that Stephen has invested the proceeds of sale of the Hotel in a way that satisfies the requirement that the investment be a real replacement for the Hotel. If that is determined not to be so in the present case, then the meaning given to the mutatis mutandis provision will not be material.
2. Although the conclusion may be debatable, I have come to the view that the proper construction of clause 2.1 in the present case would permit Stephen to re-invest the proceeds of sale of the Hotel in a true replacement investment in circumstances where the Partnership did not earn an income, but that income was earned by the Trust.
3. That outcome would be consistent with the historical dealings between the Partnership and the Trust, as well as the provisions of the Deeds and the Management Agreement whereby Adelaide authorised the maintenance of the lease between the Partnership and the Trust, and relinquished her right to receive the distributions from the Trust.
4. The existence of such an authority in Stephen to make a replacement investment in a way that did not cause the Partnership to earn income would not, in my view, be inconsistent with the proposition that the replacement investment should be able to withstand a challenge that it involved in substance and in effect an immediate assignment of Adelaide's beneficial interest to Stephen.
5. I acknowledge that this construction of clause 2.1 involves a liberal or expansive interpretation of the relationship between clauses 2.1 and 1.4 of the Principal Deed, as I observed at J [525]. The wording of the relevant provisions of the Principal Deed does not readily connect the mutatis mutandis application of the provisions in clause 1, concerning the management of the Hotel in relation to the replacement asset, to the provision in clause 1.4 of the Management Agreement, which empowered Stephen to grant or extend the existing lease to the Trust. However, in my view, having regard to the provisions of the documents as a whole, and the July Minutes, taken as part of the relevant surrounding circumstances, the mutatis mutandis provision should be construed as having the effect that Stephen could arrange the dealings between the Partnership and the Trust so that the latter rather than the former earned income from the asset, provided always that the investment was a true replacement investment.

Significance of disbursement of Hotel sale proceeds

1. Although Kim and the Stephen defendants submitted that the court should decide the question of whether the re-investment of the proceeds of sale of the Hotel made by Stephen were authorised, without the need to consider the detail of the evidence of the circumstances in which the re-investment was made, or what was done with the money, I have taken the view that at least some of that evidence is material to a proper determination of the issue.
2. Evidence of this nature will be relevant in any event to a consideration of the consequences, if Stephen is found to have made an unauthorised investment, which is a subject relevant to other issues between the parties that the court is required to determine.
3. The evidence justifies the following findings concerning the circumstances in which the proceeds of sale of the Hotel were paid by the Partnership to the Trust, and how the Trust disbursed the amount received by it after the loan was made: 1. The Partnership received a payment of $1,500,000 for the deposit under the contract for the sale of the Hotel on 20 March 2007. 2. The evidence suggests that the Partnership did not have its own bank account until a later time, after the lease of the Hotel to the Trust was terminated to enable the Partnership to conduct the business of the Hotel itself in the month or so before the completion of the contract of sale. The evidence does not establish how the $1,500,000 was banked, other than that it was paid into an account of the Trust on 20 March 2007. 3. The evidence does not specifically deal with the circumstances that caused the deposit to be dealt with in that way, in that neither Stephen nor Mr Morrison dealt with the matter. I infer that either Stephen or Mr Morrison caused the deposit to be banked into the Trust's account to avoid the Partnership earning interest on the money. 4. There is no evidence of any discussion between Stephen and Mr Morrison that could have constituted the making of an oral loan of the amount of the deposit by the Partnership to the Trust. Whatever the arrangement was, it was not documented. There is no direct evidence in the annual financial statements of the Partnership or the Trust that, as at 30 June 2007, the deposit was treated as a loan by the Partnership to the Trust. 5. On the same day as the $1,500,000 was received by the Trust, $1,000,000 was paid out into Bowden Superannuation Investment Fund, which was the superannuation fund of Stephen and Louise. At this stage it is not clear what was done with the remaining $500,000. 6. The balance of the purchase price of $50,595,069 was received by the Partnership on 29 October 2007. On that date the Partnership had its own bank account, into which the balance of the purchase price was paid. On the same day the whole amount was transferred to an account of the Trust. That was done on the advice of Mr Morrison to ensure that the Partnership did not earn interest on the deposit. 7. There is no evidence of any discussion between Stephen and Mr Morrison to the effect that the payment of the money into the Trust's account would create a loan from the Partnership to the Trust. There is no evidence that the basis of the transaction was even considered. The transaction was not documented in any way. 8. As at 30 June 2007, the Partnership was indebted to the Trust in the amount of $8,175,730.60: see J [266]. 9. On the same date, the Partnership had non-current liabilities of $10,673,383.06: see J [266]. The parties did not contest a finding that both of these liabilities of the Partnership were repaid out of the proceeds of sale of the Hotel. 10. The annual financial statements of both the Partnership and the Trust, as at 30 June 2008, record a loan of $28,586,446.66 made by the Partnership to the Trust. 11. Both sets of annual financial statements were signed on 15 May 2009. I find that the accounts were prepared by Mr Morrison, to reflect his opinion as to how the net result of the payment of the purchase price of the Hotel by the Partnership to the Trust should be treated. There is no evidence as to when the draft accounts were prepared. There is no evidence that Stephen and Mr Morrison ever discussed how the payment should be treated, or what the terms of the transaction should be. 12. To the extent that the signing of the annual financial statements created evidence of a loan, the loan was unsecured, undocumented, and not subject to agreed terms. The loan was impliedly payable on demand. There was no agreement for the payment of interest by the Trustee. There was no term of the loan that prevented the Trustee from disbursing the amount loaned in whatever manner the Trustee saw fit. 13. Over the period between 29 October 2007 and 30 June 2012, a total of $4,316,960 was paid out of the Trust's account for purposes treated as being for the benefit of Adelaide. That included a payment of $1,100,000 to Kim and Peter Jaeger on 27 June 2008, which Kim now accepts should be treated as having been paid at the request of and for the benefit of Adelaide, even though not paid to Adelaide. 14. Over the same period, an amount of $8,746,827 was paid out of the Trust's account for the benefit of the Partnership. It is to be inferred that most of that money was applied in repayment of the Partnership's external creditors. 15. Over the same period, a total amount of $9,167,006 was paid out of the Trust's account to a number of companies described as the Bowden Group of companies. The primary payment was a sum of $7,957,257, paid on 2 June 2009. This amount substantially represented debts owed by the Trust to the Bowden Group of companies in relation to prior years' distributions of income of the Trust that had not actually been paid to those beneficiaries. 16. In addition to the initial payment of $1,000,000 to Bowden Superannuation Investment Fund on 20 March 2007, a further $2,330,787 was paid out of the Trust's account to the same payee over the period. The last two of the payments, being $1,100,000 on 8 May 2009, and $100,000 on 29 June 2010, were accounted for in the annual financial statements of the Partnership as being withdrawals by Stephen from his Partners Funds. The accounts for earlier periods do not disclose whether the same category of payments was treated as being withdrawals from Stephen's Partners Funds for the earlier periods. 17. Over the period, substantial amounts were paid out of the Trust's accounts for drawings by Stephen, Louise and their two children. The total net amount of the drawings was $13,573,238. The derivation of this net amount includes the effect of a total payment out of $16,000,000 on 8 August 2008 and 1 December 2008. Although the amounts do not reconcile easily, these payments were treated in the accounts of the Partnership for the year ending 30 June 2009 as having funded the drawings of Stephen listed in J [276] and [278]. 18. A total amount of $16,966,691 was repaid into the Trust's account by payments on 1 June 2009, 2 October 2009, 8 October 2009 and 10 November 2009, by way of reversal of the drawings of Stephen, Louise and their children. 19. Part of the effect of the reversal of the drawings was to enable the Trust to make a payment of $7,720,478 on 3 February 2010, to enable the purchase of the Cabramatta Inn Hotel. 20. No documentation was produced to record the terms of the loan made by the Trust of $7,720,478 to enable the purchase of the Cabramatta Inn Hotel. The loan was recorded as such in the annual financial statements of the Trustee and the borrower companies. The loan was made on an unsecured basis. 21. An amount of $8,196,417 was also paid out of the Trust's bank account to fund the repurchase of the Hotel, and was apparently treated as a loan to Stephen and Louise. 22. The drawings by Stephen, Louise and their children were associated with a reduction in the amount of the loan from the Partnership to the Trust as at 30 June 2008 of $28,394,241, to $7,430,793.83 as of 30 June 2009: see J [274]. Apparently connected to the reversal of the drawings, the loan increased to $16,663,287.45 in the period to 30 June 2010: see J [283]. 23. There is no evidence of any discussion between Stephen and Mr Morrison concerning these decreases and increases in the amount of the loan from the Partnership to the Trust. It is probable that the loan was treated in the accounts of the Partnership and the Trust in the manner in which it was treated as a result of decisions made by Mr Morrison, as to the best way to account for the transactions after they had occurred. 24. At all relevant times from the date when the Partnership entered into the contract of sale of the Hotel, Stephen was the sole person in management control of the Partnership and the Trust. 25. At all relevant times after the Deeds and the Management Agreement were entered into, it was Stephen's belief that, if he caused the Hotel to be sold, he was entitled to deal with the proceeds of sale as if the money was his own. 26. During the same period, Mr Morrison had the same belief as Stephen as to Stephen's entitlement to deal with any proceeds of sale of the Hotel as if they were his own.

Finding on authorisation

1. I find that Stephen was not authorised, as the managing partner of the Partnership, under the terms of the partnership agreement as modified by the Deeds and the Management Agreement, to apply the proceeds of sale of the Hotel by causing that money to be paid into the bank account of the Trust on 20 March and 29 October 2007, on the basis on which those payments were made, as set out above. The breach of Stephen's duty as managing partner was complete as soon as the money was paid on each occasion, being in relation to the deposit and the balance of the sale price.
2. If the circumstances in which the monies were paid are considered holistically, as I believe they must be, there are no significant characteristics of the circumstances of the payments that would qualify the payments as replacement investments for the Hotel.
3. Although Kim has accepted that, from the point in time when the net effect of the payments was recorded in the annual financial statements of the Partnership and the Trust as constituting a loan of $28,394,241 from the Partnership to the Trust, the transaction took effect as a loan, I do not understand Kim to have accepted that there was in reality loans at the time that two payments were actually made. Not only were the transactions not documented, but on the evidence nothing was done objectively to create the relationship of lender and borrower. The payments were made for practical reasons involving the avoidance of the Partnership earning income. The persons who caused the payments to be made, being Stephen and Mr Morrison, believed that the proceeds of sale of the Hotel were Stephen's to be dealt with as he saw fit. There is no basis for the court to infer that either person had a subjective intention at the time the payments were made to treat the money paid as being anything other than Stephen's money. The subsequent decision to treat the net effect of the payments as creating a loan from the Partnership to the Trust was merely a matter of convenience, in order to provide a basis for properly accounting for distributions of income of the Trust on the one hand, and withdrawals of capital on the other, the latter of which could only be done through the accounts of the Partnership.
4. In assessing the nature and quality of the transaction constituted by the making of the two payments by the Partnership to the Trust, it is proper for the court to have regard to Stephen's subjective intention at the time as to what would be done with the money. That is so because the real characteristics of a transaction will be affected in a practical way by the intention of the person who initiated and carried through the transaction. I find that Stephen paid the money into the Trust's account for the purpose of using that money from time to time for his own purposes as he saw fit, though having regard to his obligations to Adelaide under the Principal Deed. Stephen had no intention to preserve the money in the Trust's account to ensure that, at all times for the balance of Adelaide's life, the Trust would be in a position to repay the amount of the loan on demand.
5. That is clear from the fact that, on the very day the first $1,500,000 was paid by the Partnership to the Trust, Stephen caused $1,000,000 to be paid out to the Bowden Superannuation Investment Fund.
6. As the basis upon which the amounts were paid by the Partnership to the Trust were not documented, the transactions could not at the time they were made be regarded as a replacement asset for the Hotel. In the period up to the time when the net effect of the transactions was brought to account as a loan, had Stephen and Mr Morrison died or become incapacitated, Adelaide would have been at a loss as to the basis upon which the Partnership's funds had been paid to the Trust.
7. As the Partnership was not given any security for the Trust's obligation to repay the amounts transferred to the Trust, and as there was nothing to prevent the Trust dissipating the amounts paid, as in fact occurred, the result of the payments could not realistically be described as a replacement asset for the Hotel. Even if the payments are taken to have given rise to loans from the inception, the loans were little more than nominal assets of the Partnership, as from the inception Stephen intended over time to cause the Trust to pay out the monies for his own purposes in a way that would have the result that the loans would be in name only, in the sense that the Trust would not have the capacity to repay them. Even though the actual payments out occurred on numerous occasions over the five-year period to 30 June 2012, I find that the fact of the payments merely evidences the implementation of an intention that Stephen had from the outset. (In this regard it should be noted that the amount retained by the Trust had been reduced to $5,959,128 over the two year period to 30 June 2009, before the amount in the Trust's account was increased to $20,344,048 as a result of the repayment of $16,966,691 referred to in paragraph 141(18) above).
8. As, for these reasons, the transactions that took place on 20 March 2007 and 29 October 2007, were not replacement investments for the purposes of clause 2.1 of the Principal Deed, it is not necessary for the court to decide whether the absence of a term requiring the Trust to pay interest to the Partnership would separately have disqualified the transactions from satisfying the requirements of clause 2.1. For reasons that I have given above, I would allow the possibility in the special circumstances of the arrangements created by the Deeds and the Management Agreement, that a genuine replacement investment for the Hotel could have been made as part of arrangements that caused the profit from the investment to be earned by the Trust rather than the Partnership. The transactions that were implemented in the present case were not within the ambit of what may have been found to be genuine replacement investments.
9. I find that Stephen breached his fiduciary duty to Adelaide when he caused each of the payments to be made by the Partnership to the Trust on 20 March 2007 and 29 October 2007.
10. To avoid any misunderstanding, it should not be taken to follow from my finding that the Deeds and the Management Agreement did not, on their proper construction, require Stephen to invest the proceeds of sale of the Hotel in a replacement investment that led to the Partnership earning a profit, that Adelaide is not entitled, as a remedy for an unauthorised investment by Stephen, to a share of the profits actually made from the unauthorised investment. That is an issue that will arise at the second stage of these proceedings, when the remedy to which Kim is entitled is considered.
11. The money trail shows that the Trust made profits from the investment of the part of the proceeds of sale of the Hotel that was loaned to it of $1,803,603 (30 June 2008), $1,517,955 (30 June 2009), $891,683 (30 June 2010), $942,328 (30 June 2011) and $430,134 (30 June 2012, after Adelaide's death). All but the first of these profits are described in Attachment 1A as being an amount calculated after the deduction of a loss from the Trust's ownership of the Newtown property.

Set off

1. Kim and the Stephen defendants agreed that a sub-issue of the reinvestment issue is whether Kim is obliged to allow the Stephen defendants a set off against any amount payable by the Stephen defendants as a remedy for any breach of fiduciary duty by Stephen of amounts received by Adelaide during her lifetime. Kim accepts the principle that the Stephen defendants are entitled to a set off in relation to such payments, but there are differences about how the amounts to be set off should be calculated.
2. The court has been asked to determine the disputes between the parties as a matter of principle. The parties then expect to be able to calculate the amount of the set off by agreement between them.
3. The parties did not explain to the court what the arithmetical process was that they had in mind concerning the calculation of any set-off that should be allowed, so the calculation will be a matter for agreement between the parties, and the resolution by the court of the matters that are at issue will not involve the court's imprimatur in respect of the arithmetical exercise that is proposed.
4. This is part of an exercise that has involved the preparation of the document described by Kim and the Stephen defendants as Attachment 3. Attachment 3 contains various columns and comments and responses, apparently by Kim's expert accountant. I do not understand many aspects of Attachment 3, but the position of the parties is that it is not necessary for me to do so.

Payment of $1,100,000 to Kim and Peter Jaeger

1. I note the statement in par 49 of Kim's written submissions, in relation to the first issue, that Kim now accepts that her claim should be reduced in order to take account of the payment of $1,100,000 to Kim and Peter Jaeger on 27 June 2008.

Tax paid on behalf of Adelaide

1. The second issue concerns the column in Attachment 3 entitled "Tax paid on AB's behalf by others". Kim's position, as stated in par 50 of her written submissions is: "Subject to the provision of [supporting documentation], the Plaintiff does not accept that her claim should be reduced by the amounts…" When this statement is considered carefully, it appears that Kim intended to say "accepts" rather than "does not accept". Otherwise, the words "subject to the provision of such material" are out of place.
2. As Kim has not made any submissions on the basis that she does not accept the claim, I am not presently in a position to resolve the issue, if my understanding of Kim's true position is wrong. If I am wrong, it will be necessary for me to supplement this judgment on that point.

Profits of Trust paid to Bowden companies

1. The third issue relates to profits of the Trust paid to the Bowden companies in the amount of $4,633,417 referred to in Attachment 3.
2. Stephen and Adelaide held 50% each of the ordinary shares in the companies. Whatever the amounts actually paid by the Trust to the companies were, Kim asserts in par 52 of her written submissions (and the Stephen defendants do not contest) that only $775,000 was ultimately paid to Adelaide by way of dividends by the Bowden companies. Of that amount $275,000 was paid prior to the sale of the Hotel, and $500,000 was paid after the sale.
3. Kim accepts in par 53 of her written submissions that her claim should be reduced to take account of the payment of $500,000, but not the earlier receipt of $275,000.
4. I accept Kim's submission that no dividends received by Adelaide before Stephen breached his fiduciary duty to her by the manner in which he dealt with the proceeds of sale of the Hotel are relevant to the calculation of the amount of the relief to which Kim is entitled.
5. In my view, it is self-evident that amounts properly distributed to Adelaide as dividends of the companies, in the ordinary course of their operations before the breach of duty, are irrelevant to the assessment of the amount of the relief to which Kim is entitled. The decisions of the directors of the companies to pay dividends to shareholders, including Adelaide, conferred benefits on the shareholders in accordance with the constitutions of the companies that preceded and were entirely unconnected with the subsequent breach of duty by Stephen and the consequences of that breach.
6. As I understand it, the Stephen defendants claim that they are entitled to a set off in relation to amounts paid by the Trust to the Bowden companies in which Adelaide had a 50% shareholding, even where the companies retained the money and did not pay any part of it out to Adelaide as dividends. I accept Kim's submission that there should be no reduction in relation to the balance of the amount paid by the Trust to the companies, being the proportion of the $4,633,417 that was not actually paid out by the companies to Adelaide as dividends. That is clearly so in relation to all amounts paid before the sale of the Hotel. As to amounts paid after the sale, the receipts were capital sums in the hands of the companies. They were retained by the companies under the control of Stephen, and except as to the payment of the $500,000 dividends, which has separately been considered above, Adelaide had no knowledge of what was done with the money, and gained nothing from the payments.
7. Moreover, three of the four companies fell with within the definition of Hotel companies in the Principal Deed, and clause 3.1 of that deed required Adelaide to leave her shares in the Hotel companies in her will to Stephen. At least in relation to those companies, whatever benefit may now subsist from the receipt by those companies of money from the Trust will be for the benefit of Stephen.

Profits of Trust paid to Adelaide

1. The final set off issue relates to an entry in Attachment 3 entitled "BFT Profit to AB". The total is $245,000. Of this amount $72,000 was paid after the sale of the Hotel. Kim accepts that her claim should be reduced to take account of the payment of $72,000, but not the balance of $173,000.
2. Distributions of profit by the Trust at times before the sale of the Hotel, out of the profits earned by the Trust, are irrelevant to the assessment of the amount of any remedy to which Kim is entitled.

Capital Account

1. As explained above, this issue relates to a separate basis upon which Kim may be entitled to a remedy for breach by Stephen of his duty to Adelaide, as the managing partner of the Partnership.
2. If, when the annual financial statements of the Partnership are corrected for errors made by Mr Morrison in stating the respective Partners Funds of Adelaide and Stephen, Stephen withdrew more than his share of the capital, then he may have made unauthorised withdrawals from Adelaide's Partners Funds.
3. This basis of an entitlement to a remedy by Kim is not related to the possibility that Stephen has breached his fiduciary duty by the manner in which he dealt with the proceeds of sale of the Hotel. There is, however, a practical connection between the two issues, because Stephen caused some of the payments made out of the Trust's account from the proceeds of sale of the Hotel to be accounted for in the accounts of the Partnership as drawings from his share in the Partnership's capital. For the reasons considered above, it appears that he was entitled to take that course, but he was not entitled to draw down more than his share of the capital.

Revaluation of Hotel

1. The first issue that the court is required to decide is whether the Partnership's accounts for the year ended 30 June 2004 should be adjusted to correct an error in the way the accounts dealt with an increase in the value of the Hotel based upon a valuation of Robertson & Robertson, dated 11 September 2003.
2. It is not clear that this matter remains in issue between Kim and the Stephen defendants, notwithstanding that par 4 (a) of the Stephen defendants' list of matters for determination says that it is.
3. In par 6 of the Stephen defendants' statement of case, it is said that the outstanding differences between the parties are limited to the other two capital account issues, and that the issue concerning the reallocation of the revaluation has been largely resolved. That position is confirmed in par 1.2 of the Stephen defendants written submissions. Although leading senior counsel for Kim made oral submissions on this issue, it does not appear that senior counsel for the Stephen defendants followed suit.
4. I therefore take it to be agreed between the parties that the Partnership's accounts for the year ended 30 June 2004 should be corrected by apportioning the $8 million increase in the valuation of the Hotel that resulted from the Robertson & Robertson valuation in the proportion as between freehold and goodwill as stated in the Advanced Valuations valuation of 24 September 2003 (being 43.5% relating to the freehold and 56.5% relating to the goodwill), rather than by attributing the whole of the increase to goodwill.
5. Lest there be any doubt, I would in any case have accepted the submissions made by Kim in pars 13 to 18 of her written submissions.

Payments to assist in purchase of Hotels

1. The second dispute between Kim and the Stephen defendants concerning the corrections that should be made to the Partners Funds in the accounts of the Partnership relates to the amount of $7,720,478 paid out of the Trust's account on 3 February 2010, to assist in the purchase of the Cabramatta Inn Hotel, and the amount of $8,196,417 paid by the Trust on 7 February 2011, to assist in the re-purchase of the Hotel.
2. The Stephen defendants relied upon the fact that, in par 24 of the statement of claim, Kim pleaded that the eighth defendant repurchased the Hotel using funds made available to it from the proceeds of sale of the Hotel by the Partnership, and that, in par 26, Kim made a similar allegation in relation to the purchase of the Cabramatta Inn Hotel by the ninth defendant, using funds borrowed from the Partnership.
3. The essence of the submission, as I understand it, is that, if Adelaide was entitled to a share in the beneficial ownership of the two hotels by means of tracing her share of the proceeds of sale of the Hotel into the two hotels, then that is a capital sum that must be added to her Partners Funds, before the issue of whether Stephen overdrew his own Partners Funds can be determined.
4. In par 1.5 of their written submissions, the Stephen defendants made the following submission: … Accordingly, the Stephen defendants submit that the reconstructed Partnership Capital Account should show Adelaide's "Partner's Funds" to be reduced in the financial year ending 30 June 2010 by $3,088,191 (that is, the sum representing her interest in the Cabramatta Inn) and in the financial year ending 30 June 2011 by the further sum of $3,278,566 (that is, the sum representing her interest in the Hurstville Ritz Hotel).
5. If that were done, it would have the same result as if Adelaide had authorised her share in the proceeds of sale of the Hotel to be paid to the Trust to assist in the purchase of the two hotels, and she had been given a beneficial share in the ownership of the two hotels that was proportionate to her contribution. For the court to proceed on that basis would not be in accordance with reality. Adelaide did not authorise the transaction, and even if, unbeknownst to her, she became entitled to a proportionate interest in the two hotels, because of an entitlement to trace the payments into the ownership of the hotels, she was not aware of that entitlement, and did not obtain any benefit during her lifetime from that beneficial interest.
6. Furthermore, to accede to the argument of the Stephen defendants would involve a misunderstanding of how the accounts of the Partnership operated.
7. It must be remembered that, as between both the Partnership and the Trust, at all times there was only one asset. Initially it was the Hotel, and upon the sale of the Hotel, it became the proceeds of sale. After the proceeds were paid by Stephen from the Partnership to the Trust, in due course the net amount received by the Trust was accounted for as a debt owed by the Trust to the Partnership.
8. Although the amount of the debt varied from time to time, as a result of notional repayments and re-lendings, in order to fund Stephen's dealings with his Partners Funds, Adelaide's interest in the Partnership assets continued to be represented in its accounts by the amount of the debt (save to any extent by which Stephen's capital drawings drew down from Adelaide's capital).
9. Part of Adelaide's share in the money loaned by the Partnership to the Trust was probably applied by the Trust to make the payments which assisted in the purchase of the two hotels. That may have given Adelaide a partial beneficial interest in the two hotels. The initial value of that interest would be represented by part of the amount of the loan from the Partnership to the Trust. If that beneficial interest came to exist, as an accounting matter, it would not involve a proportionate reduction in Adelaide's share in the capital of the Partnership. It would simply mean that Adelaide could claim a more valuable interest than a part interest in the loan made by the Partnership to the Trust. She could claim instead in respect of part of the debt that she was entitled to a proportionate beneficial interest in the ownership of the two hotels. She could not claim as well an entitlement to an equivalent amount of the debt owed by the Trust to the Partnership, at least where her making the two claims would lead to a double recovery.
10. Ultimately the point is that, in-so-far as Adelaide's Partners Funds were calculated on the basis of her interest in the debt owed by the Trust to the Partnership, as a numerical matter, her Partners Funds were calculated on a proper basis. That calculation should not be disturbed to reflect the fact that part of Adelaide's capital might be represented by a beneficial interest in the two hotels, rather than simply by the debt owed by the Trust. The interest in the hotels represents the application of part of the debt upon the basis of which her share in the capital of the Partnership was calculated correctly. Put another way, Adelaide's capital in the Partnership was represented by part of the debt owed by the Trust to the Partnership. If Adelaide was entitled to trace into the ownership of the hotels, that would improve the quality of the assets that constituted her share of the capital of the Partnership, but would not have increased its amount by adding the value of the interest in the hotels to the value of her interest in the debt.
11. Accordingly, I reject the Stephen defendants' submission on this issue.

Interest on $9,000,000 borrowing

1. The final issue to be decided concerning the capital account arises in relation to a borrowing of $9,000,000 by the Partnership in the financial year ending 30 June 2004. Of that sum, $3,675,000 funded Stephen's obligation to pay for half of Adelaide's interest in the goodwill of the Hotel, being 25% of the total. It is now common ground that the accounts for the year ending 30 June 2004 should be corrected to reflect the fact that Stephen should be liable for the whole of the interest payable on the $3,675,000.
2. The dispute is as to how the interest should be born on the balance of $5,325,000. The Stephen defendants contend that the interest should be split 50% as to Adelaide, and 50% as to Stephen. Kim contends that the appropriate split of interest should reflect the fact that Adelaide only held 25% of the goodwill. If that is so, then Adelaide's overall interest in the Partnership was 35.875% in accordance with the split in the valuation by Advanced Valuations dated 24 September 2003, and she should therefore be liable for 35.875% of the interest payable on the balance of $5,325,000.
3. The essence of Kim's argument, as I understand it, is simply that, if money is borrowed by the Partnership for its general purposes, and the partners have disproportionate shares in the Partnership, which is reflected in equivalent differences in their entitlement to share in the profit, their obligation to bear the interest should be in the same proportion. Any other result would be inconsistent with the partners' ultimate entitlement to share in the profit in proportion to their respective interest in the Partnership.
4. I may be mistaken, but I have not been able to find any submissions, whether written or oral, by the Stephen defendants on this point.
5. It was not explained to me how this aspect of the proposed correction of the Partnership's accounts is intended to work. It would not involve a correction to the partners' capital accounts.
6. The answer should depend upon the terms of the partnership agreement. If I were to infer the terms of the partnership agreement from the way profits were generally treated in the Partnership's accounts, I would conclude that the agreement was that the partners were to share in the profits in proportion to their respective ownership share in the Partnership.
7. However, the profits were calculated by determining the difference between income and outgoings, where interest payments were simply treated as an outgoing. If that approach is applied to the $5,325,000 balance of the amount borrowed, the whole of the interest payments would be deducted from the income before the profit was calculated. The interest obligation would not separately be split between the partners in proportion to their shares in the Partnership assets and their entitlement to share in the profits.
8. The $3,675,000 is in a different position because, under the Deed of Assignment, Stephen was required to pay a purchase price of $3,000,000 for the 25% interest in the goodwill of the Partnership that he acquired from Adelaide, and under clause 6.1 of the Principal Deed, Stephen was required to pay out the mortgage on Adelaide's Gold Coast unit.
9. Strictly, Stephen should have borrowed the $3,675,000 on his own account to fund the performance of these obligations. Instead, part of the $9,000,000 borrowed by the Partnership was used for this purpose. Consequently, as the money was borrowed solely for the purposes of Stephen, he should have borne the whole of the interest on that amount.
10. The position is not the same for the general borrowings of the Partnership, in respect of which interest should be deducted from the income in the course of calculating the amount of the profit, and then the partners should share in the profit in proportion to their shares in the Partnership.

Exoneration of Stephen

1. In Part 5 of their written submissions, the Stephen defendants put an argument that Kim should not be entitled to an account. As I understand it, that argument is put on two bases. First, the court found in the first judgment at J [724] that the defendants, including Stephen, acted honestly in their dealings with the proceeds of sale of the Hotel. Secondly, Adelaide understood as a result of the Deeds and the Management Agreement that she would no longer be entitled to income other than an entitlement to receive 'lifestyle expenses'.
2. The Stephen defendants based this submission on the proposition that the right to an account or equitable compensation are equitable remedies, and equity acts on the conscience of the defendant. If Stephen's conduct was not in any way unconscionable, then no remedy should be granted against the Stephen defendants.
3. It is not clear how the Stephen defendants intend to justify this submission, given the principle stated by the editors of Meagher, Gummow and Lehane's Equity Doctrines & Remedies (5th edition) at [5-125], as follows (footnotes omitted): The authorities are unanimous in holding that whether or not there is actual fraud, dishonesty or bad faith on the part of a fiduciary is irrelevant to liability. Fiduciaries may be liable although their integrity emerges from the proceedings unscathed… On no view was intention required where the conflict is between duty and interest and a profit is made.
4. The Stephen defendants also submitted that there would not be any utility in ordering an account.
5. It is necessary to distinguish between an order that an accounting party undertake an accounting of that party's dealings with assets the subject of a trust or fiduciary duty, and the remedy of an account in respect of profits earned by a defaulting trustee or fiduciary. For reasons that I have given above, I doubt that there will be any need for or utility in an order at this stage of the proceedings that Stephen undergo an accounting process. Kim's entitlement as Adelaide's executor for an account of profits earned by the Stephen defendants is a different matter.
6. My finding at J [724] that the defendants had acted honestly was a step in my consideration of the question posed by the parties as to whether, if Kim was entitled to equitable compensation for any breach of fiduciary duty, and the court rate of interest was appropriate to be used as a proxy for the quantification of the compensation, the compensation should be calculated on the basis of simple or compound interest.
7. I did not make the finding as part of a response to any claim by the Stephen defendants that they should be exonerated from the consequences of any breach of fiduciary duty by reason of the fact that they had all acted honestly.
8. In response to the second basis upon which the Stephen defendants based their submission that Stephen should not be ordered to account to Adelaide for his misuse of the proceeds of sale of the Hotel, being that Adelaide agreed that she would only receive her lifestyle expenses, in principle the making by a fiduciary of an unauthorised investment subjects the fiduciary to the obligation to account to the beneficiary for any profits made, irrespective of any benefits the beneficiary may have received from the authorised investment of the property, because the fiduciary is not permitted to retain the fruits of the breach.
9. In any event, I do not read the defences filed by any of the Stephen defendants as having specifically raised a claim by those defendants that, if the court found that a breach of fiduciary duty had occurred, the defaulting fiduciary, or parties involved in the breach, they should be exonerated for any reason, including the fact that they had acted honestly.
10. I do not consider Kim to have made submissions on this issue, and it may well be that Kim would have conducted her case differently, particularly in regard to the cross examination of Stephen, if she had appreciated that the Stephen defendants would ask the court to exonerate them, even after a finding of breach of fiduciary duty.
11. I do not propose to rule on the Stephen defendants' claim to be exonerated at this stage of the proceedings. I would first hear Kim as to whether this claim should be available to the Stephen defendants.
12. In relation to the Stephen defendants' assertion that Kim should not be entitled to equitable compensation in relation to Adelaide's failure to receive any share of the income from the replacement investment, if Kim were to elect for equitable compensation rather than an account, I accept that there may be a real issue, when the court comes to consider the relief to which Kim is entitled, as to whether Adelaide suffered a loss which should be the subject of equitable compensation, based upon the argument that she actually received everything that she agreed to accept, and she had no expectation of receiving a share of income from the ordinary operation of the Hotel, or any replacement investment.
13. I also acknowledge that, in the special circumstances of the present case, it may have been possible for Stephen to make a genuine replacement investment on terms that led to the Partnership not earning any continuing income, and that this may have a bearing on the issue of whether Kim is entitled to an order for equitable compensation.
14. However, even if the present case is exceptional, and the Stephen defendants can establish that, while the amount loaned by the Partnership to the Trust was retained in the Trust's account, Adelaide did not suffer any loss for which she should be compensated, nonetheless, Stephen and the other defendants received at various times virtually all of Adelaide's share in the proceeds of sale of the Hotel, which they then were able to invest for their own profit. On the face of it, nothing submitted by the Stephen defendants would deny Kim's entitlement to an order that the Stephen defendants account for profits made from their involvement in Stephen's breach of fiduciary duty.
15. I should record that I have not made any findings concerning whether individual payments out of the Trust's accounts would have constituted breaches of fiduciary duty by Stephen, if the circumstances in which the amounts were first paid by the Partnership into the Trust's account did not involve a breach of fiduciary duty by Stephen. That accords with my understanding of the express request made to the court by Kim and the Stephen defendants.

Stephen's entitlement to deal with his Partners Funds

1. I will first deal with a preliminary question that concerns the financial relationship between the Partnership and the Trust.
2. The evidence includes annual financial statements for the Partnership up to 30 June 2010, and for the Trust up to 30 June 2011. Those annual financial statements were prepared by Mr Morrison after the end of each accounting period, and were signed by an appropriate person on behalf of the Partnership or the Trust. In relation to the Partnership, the annual financial statements up to 30 June 2007 were signed by Stephen on his own account, and in the exercise of his power of attorney granted by Adelaide on her behalf. When Adelaide and Stephen fell out over who was entitled to the proceeds of sale of the Hotel, Adelaide apparently revoked the power of attorney. From the financial statements for the period 30 June 2008 onwards, Mr Morrison had to arrange for those accounts to be signed by Adelaide.
3. I considered those financial statements in some detail at J [237] to [299]. Although the parties have not made submissions concerning the validity of the information in the accounts of the Partnership and the Trust, having regard to all of the individual transactions in what has been described as the money trail, it appears to me to be broadly true that the evidence of the actual transactions in the money trail is consistent with how the relevant transactions were treated in the annual financial statements. There is one exception that I have noticed which, for the sake of accuracy, I will mention below.
4. An important feature of the relationship between the annual financial statements for the Partnership and the Trust is that many transactions that were implemented using the Trust's bank account were reflected in the accounts as if the Partnership had made loans to the Trust in the particular year, or the Trust had made repayments to the Partnership. That appears to have been done because the terms of the Trust Deed did not authorise the distribution of the capital of the Trust, but only its income. Accordingly, only the income could be distributed to the beneficiaries of the Trust. Although the capital of the Trust could not be distributed, the capital of the Partnership represented by the Partners Funds could be withdrawn. Consequently, payments out of the Trust's bank account that could be categorised as withdrawals of Partners Funds by Stephen were treated in the accounts as involving repayments of the relevant amounts by the Trust to the Partnership to fund the withdrawal of Partners Funds by Stephen.
5. I will repeat only a number of significant examples that I have dealt with in the first judgment.
6. The 2009 annual financial statements show a reduction in the loan from the Partnership to the Trust over the year from $28,394,241 to $7,430,793.83 (an amount of $20,963,447.17)(J [274]). That appears to have been used to fund drawings by Adelaide of $3,630,669.10 to pay income tax and PAYG instalments of $28,000 (J [275]). The repayment also funded drawings by Stephen of $17,432,357.64 (J [276] and [278]).
7. Perhaps surprisingly, in the subsequent year ended 30 June 2010, Stephen's Partners Funds were increased by the reversal of two of the drawings made in the year ended 30 June 2009, in the total amount of $12,822,526.80 (J [284]). The net amount of the reversal of Stephen's drawings in the 2010 year was $9,100,704.89 (J [301 (3)]).
8. That reversal in Stephen's Partners Funds was reflected in an increase in the amount of the loan by the Partnership to the Trust from $7,430,793.83 to $16,663,287.45 (J [295]).
9. The increase in the loan by the Partnership to the Trust was used to fund the payment of $7,720,479 made by the Trust to fund the purchase of the Cabramatta Inn Hotel. This conclusion appears to be confirmed by items 48 to 51 of the money trail.
10. I have repeated these aspects of the first judgment, as they are relevant to observations made by leading senior counsel for Kim during the hearing, concerning the need to avoid double counting in relation to the provision of a remedy to Kim for any unauthorised investment of the Partnership's funds by Stephen, and the consequences of the revision of the capital accounts of the partners that has been undertaken as a separate exercise: See T65.
11. As I understand senior counsel's proposition, he suggested that, to avoid double counting, if the court found that the Partnership's loan of the proceeds of sale of the Hotel to the Trust was an unauthorised investment, the consequences of that breach of fiduciary duty by Stephen could be dealt with wholly from the perspective of an account of profits or equitable compensation for that breach, and that the reconstruction of the Partnership's accounts to compensate Adelaide for any overdrawing of capital by Stephen would only be need to be done up to the date of the sale of the Hotel.
12. The appropriateness of approaching the issue of remedy on that basis is complicated by a number of factors.
13. First, is the actual treatment of the relevant transactions in the annual authorised financial statements of the Partnership, to which I have referred above. Second, is the fact that Kim has not contested the proposition that Stephen was entitled to withdraw the whole of his Partners Funds from the capital of the Partnership at any time he wished.
14. As to the first of these matters, it may not be legitimate to ignore the actual annual financial statements of the Partnership that were approved by the partners. Those accounts were real, and not arbitrary, in the sense that they reflected the true legal position concerning the distribution of the income of the Trust to its beneficiaries, and the withdrawal of capital by the partners through the Partnership's accounts (save for the consequences of Mr Morrison's mistakes).
15. If the Partnership's annual financial statements are recognised as reflecting real transactions, one result will be that, if the original loan by the Partnership to the Trust was unauthorised, it must be treated as having been repaid in part during the year ended 30 June 2009, in advance of the amount of the loan being increased during the year ended 30 June 2010. The partial repayment of the loan may have taken effect as if it were a replenishment of a trust fund.
16. I do not regard the parties as having made final submissions on this issue. However, as I understand the approach that was originally taken by the parties and their expert accountants, it was to treat the annual financial statements of the Partnership and the Trust as being valid, subject to necessary corrections.
17. The problem raised by senior counsel becomes more acute for the period after 30 June 2010, for which no annual financial statements were prepared for the Partnership. It may be more logical to treat the transactions that occurred after 30 June 2010 as being part of the consequences of the original unauthorised loan. Otherwise, it would be necessary for the parties to reconstruct accounts for the Partnership that had not in fact been prepared.
18. The relevant transactions are those dealt with in items 70 to 93 of the money trail, as a result of which the amount remaining from the proceeds of sale of the Hotel was reduced from $10,507,105 to $44,670, a reduction of $10,462,435. Of this amount, $8,196,417 reflects a payment out of the Trust's bank account on 7 February 2011, to fund the re-acquisition of the Hotel. That suggests that senior counsel's proposition is likely to be correct for the period after the end of the preparation of the annual financial statements for the Partnership up to 30 June 2010, in that the preferred course is likely to be to treat all transactions after 30 June 2010 as being an aspect of the relief for unauthorised use of the proceeds of sale of the Hotel.
19. The second matter referred to above relevant to the appropriateness of the suggestion made by senior counsel concerns Stephen's entitlement to withdraw the whole of his Partners Funds from the Partnership.
20. I observed at J [537], that the parties had not actually addressed the question of whether Stephen was entitled to withdraw his own Partners Funds at will. Senior counsel for the Stephen defendants observed during submissions that Kim had not challenged Stephen's right to do so, and Kim did not contradict that proposition during the balance of the hearing.
21. Consequently, the issue of whether Stephen's dealing with the proceeds of sale of the Hotel was an unauthorised investment of the Partnership's assets must be dealt with having regard to the fact that Stephen was entitled to do what he liked with the part of the assets represented by his share in the Partners Funds.
22. That may justify the conclusion that, even if the making of the unsecured, interest-free loan by the Partnership to the Trust was technically an unauthorised investment, it only involved a breach of fiduciary duty owed to Adelaide in respect of that part of the amount loaned that represented Adelaide's share in the Partners Funds. It may additionally, or alternatively, have the effect that some of the disbursements of the amount of the loan from the Trust's account would involve a replenishment of the assets of the Partnership, because the payment was made for the account of Stephen and treated in the annual financial statements of the Partnership as a proper withdrawal of Stephen's Partners Funds.
23. That this is not merely a technical observation is shown by the fact that, on 20 March 2007, the day when the Partnership received payment of the $1,500,000 deposit under the contract for the sale of the Hotel, $1,000,000 was paid into Stephen's and Louise's Bowden Superannuation Investment Fund. The Partnership's accounts for the year ended 30 June 2007 show that Stephen made drawings of $2,450,389.43 during that year. It is not clear whether the $1,000,000 paid into the superannuation fund was accounted for as being part of those drawings. Items 7, 15, 32 and 59 of the money trail show further payments out of the Trust's account into the Bowden Superannuation Investment Fund on 29 October 2007 ($1,000,000), 27 June 2008 ($130,787), 8 May 2009 ($1,100,000) and 29 June 2010 ($100,000). The annual financial statements for the Partnership up to 30 June 2008 do not dissect Stephen's drawings in a way that would show that the payments up to that time had been treated as drawings from Stephen's Partners Funds. However, the Partnership accounts for the 30 June 2009 and 30 June 2010 years show that the final two payments were treated as being drawings by Stephen.
24. The point of these observations is that some, but not all, of the disbursements of the proceeds of sale of the Hotel, after the making of the initial loan by the Partnership to the Trust, were accounted for in a manner that involved partial repayments of the debt, and the withdrawal of Stephen's Partners Funds.
25. Other payments out of the Trust's account were in repayment of the Trust's debts to beneficiaries in relation to the earlier distributions of income of the Trust declared by the Trustee but not actually paid.
26. Other payments out of the Trust's account were treated as being advances made by the Trust, being the loan of $7,720,478 made for the purchase of the Cabramatta Inn Hotel on 3 February 2010, and the payment of $8,196,417 on 7 February 2011 for the repurchase of the Hotel.
27. It will ultimately be an accounting matter, which Kim and the Stephen defendants must address, as to how they deal with the consequences of the making of the original unauthorised investment by Stephen, as well as the compensation to which Adelaide became entitled by reason of the fact that Stephen withdrew part of Adelaide's Partners Funds, in-so-far as the excessive withdrawal by Stephen was a result of mistakes in the preparation of the accounts of the Partnership that had nothing to do with the making of the unauthorised loan.
28. It might be legitimate to start with the proposition that, even though the making of the loan was an unauthorised investment, it only constituted a breach of fiduciary duty to Adelaide in respect of that part of the loan which was represented by Adelaide's properly adjusted share of the Partners Funds at the time the monies were paid to the Trust's account, which may involve a separate consideration of the payment of the deposit and the balance of the purchase price. It would then be necessary to ensure that all subsequent payments out of the Trust's account, that were validly treated in the Partnership's accounts as being withdrawals from Stephen's Partners Funds, were apportioned to that proportion of the original loan that Stephen made out of his own share of the proceeds of sale of the Hotel. Given the substantial amount of the Partners Funds that Stephen withdrew, that process is likely to lead to the result that Stephen withdrew from the Partners Funds all of the proportion of the original loan from the Partnership to the Trust that may be apportioned to Stephen's share of the Partnership's assets. The result is likely to be that a substantial part of the payments made by the Trust in repayment of the debts that it owed to the beneficiaries of the Trust, and the two loans made for the purchase of the hotels, will need to be apportioned to that part of the original loan from the Partnership to the Trust that represented an unauthorised investment of Adelaide's share of the Partnership's assets in breach of fiduciary duty to Adelaide. That approach may clear the way, so to speak, to an identification of the consequences of the unauthorised dealing by Stephen with Adelaide's share in the Partnership's assets. It could be supplemented by the correction of the Partnership's capital accounts in relation to mistakes made by Mr Morrison, that were unconnected with Stephen's breach of fiduciary duty, and the determination of an appropriate remedy for Stephen's withdrawal of Adelaide's Partners Funds.
29. I will now return to the observation made above that I have now noticed one additional aspect of the Partnership's annual financial statements that may not be correct. Item 1 of the money trail indicates that the Partnership received a deposit of $1,500,000 on 20 March 2007. That amount was paid into the Trust's account. On the same day $1,000,000 was paid into the Bowden Superannuation Investment Fund. It is not yet clear what happened to the remaining $500,000. As I have observed above, the annual financial statements for the Partnership and the Trust do not appear to record a loan of $1,500,000 as having been made by the Partnership to the Trust.
30. However, the Partnership's accounts for the year ended 30 June 2007 record a non-current liability of the Partnership of $1,500,000 as: "Deposit in Advance - ALG Group". It may have been reasonable for the deposit to be treated as a liability, given that its retention by the Partnership may have been contingent on the contract for sale being completed. However, the liability should have been balanced by an equal asset, being the amount of the deposit as deposited in an account of the Partnership (or even a loan to the Trust, if that was the case). I cannot see where that asset is reflected in the accounts. The accounts may therefore have overstated the Partnership's liabilities by $1,500,000, and accordingly wrongly reduced the Partners Funds by that amount.
31. I cannot tell whether this error, if it was made, was corrected in the accounts for the year ended 30 June 2008, in which the $1,500,000 non-current liability is not present, but it is not clear whether the understatement of the Partners Funds has been properly corrected.

Relief in relation to wills

1. Kim submits that I failed in the first judgment to deal with an issue raised by her, and that I should now do so. Kim invokes the invitation that I made at J [734].
2. The issue, which has been described as the 'approbate and reprobate' issue, arises in this way: Kim submits that Stephen is not entitled to obtain relief against Kim based upon Adelaide's contravention of the covenants in the Principal Deed, whereby she promised to leave her remaining interest in the Partnership to Stephen under her will, and at the same time receive a benefit under the will made by Adelaide by which she revoked the will that she had made in compliance with her covenant.
3. Stephen's response is that the court has already dealt with this issue in the first judgment, and Kim is now precluded from raising it. Alternatively, if the issue remains open for determination, Stephen says that Kim's argument is misconceived in principle, and that he is not approbating and reprobating in seeking to enforce Adelaide's covenants against Kim, while at the same time accepting the benefit of Adelaide's later will.
4. I accept Kim's submission that this issue was not dealt with in the first judgment.
5. In that judgment, I noted at J [685] that, as I understood it, four primary issues arose between Kim and Stephen concerning the breach by Adelaide of her will covenants. I then explained why two of those issues had fallen away. At J [691] to [693], I dealt with the issue raised by Stephen where he submitted that, on the proper construction of the relevant provisions of the Principal Deed, any amount that Adelaide was entitled to receive from Stephen for breach of fiduciary duty in relation to the disposition of the proceeds of sale of the Hotel fell within the assets that Adelaide had covenanted to leave to Stephen under her will. I held against Stephen on that argument.
6. What I described at J [695] as "the last issue" was the proper construction of clause 3(a) of the 11 December 2008 will (the 2008 will). That was an obscurely worded provision, which provided that the subject matter of the provision was given by Adelaide to Kim and Stephen in equal shares.
7. I held at J [709] that, on the proper construction of the provision, it had the effect that any proceeds received by Kim in this litigation, on her claim based upon the consequences of Stephen's dealings with the proceeds of sale of the Hotel, were to be divided equally between Kim and Stephen.
8. In simple terms, the result will be that Kim will only be able to retain on her own behalf half of any amount that the Stephen defendants may be ordered to pay her, arising out of any breach of fiduciary duty by Stephen concerning the disposition of the proceeds of sale of the Hotel. Stephen will be entitled to the other half.
9. I did not state the point in the first judgment, as it should be obvious, but clause 3(a) will not apply to any amount that Stephen is ordered to pay to Kim that arises out of his unauthorised use of Adelaide's Partners Funds and may be payable after the correction of the Partnership's accounts, to the extent that the amount arose out of mistakes and adjustments not caused by Stephen's application of the proceeds of sale of the Hotel.
10. In dealing with this supposedly last issue, I omitted to consider the submissions made on behalf of Kim that Stephen could not accept the benefit given to him under clause 3(a), because to do so would involve an impermissible approbation and reprobation.
11. The issue arises in the following way. Clause 3.1 of the Principal Deed provides: AB upon the date hereof has executed a new Will whereby she has left to Steve her interest in the goodwill and licence of the Hurstville Ritz Hotel her interest in the Partnership, her interest in the Freehold upon which the Hotel stands and all her shares in the Hotel companies (the "Steve Clauses").
12. By clause 3.2, Adelaide covenanted that she would not revoke, vary, delete, alter or change the provisions of her will in relation to the Steve Clauses.
13. Before the exchange of counterparts of the Principal Deed, Adelaide, on 13 November 2003, had made a will (the 2003 will), clause 4 of which was consistent with the description of the new will in clause 3.1.
14. Clause 2.2 of the Principal Deed contained a covenant by Adelaide that she would forthwith, after any sale of the Hotel, execute a codicil to her will, or execute a new will, whereby she would leave to Stephen her interest in the replacement asset.
15. Clause 5 of the 2003 will was drafted in a way that, in part, complied with Adelaide's obligation in clause 2.2 in advance, in that in relation to any replacement hotel, the bequest in clause 4 would be deemed to refer to that hotel. Clause 5 did not cover any replacement investment other than a hotel.
16. Clauses 3.2 to 3.4 of the Principal Deed then provided as follows: 3.2. AB has left the rest of her estate in her said Will to parties other than Steve. 3.3. AB covenants that she will not revoke, vary, delete, alter or change the provisions of her Will in relation to the Steve Clauses. 3.4. Nothing in clause 3.3 prevents AB changing by Codicil the rest of her Will from time to time as she thinks fit and leaving the rest of her estate to whomsoever she thinks fit, or executing a new Will providing new provisions in relation to her estate, provided that such new Will contains the Steve clauses in identical terms.
17. Kim was a party to the Principal Deed, although arguably for the purpose of being bound by certain covenants other than those in clauses 1 to 3.
18. As it happened, clause 6 of the 2003 will left the residue of Adelaide's estate to Kim absolutely.
19. The point that is crucial to the determination of this aspect of the dispute is that Adelaide did not covenant not to revoke or alter clause 6 of the 2003 will; and Kim did not have any right to require Adelaide to leave the residue of her estate to Kim. Kim did not have any right to force Stephen to accept from Adelaide's estate no more than he would receive by operation of the Steve Clauses.
20. On the contrary, clause 3.4 expressly entitled Adelaide to change her will from time to time, and to leave the rest of her estate as she thought fit, provided the Steve Clauses were maintained.
21. Consequently, Adelaide remained free to revoke the 2003 will, or to amend it, in any respect whatsoever, provided she left a will in force that implemented the Steve Clauses. In respect of the whole of the residue of her estate, Adelaide was free to continue to leave the residue to Kim, or she could have left it to Stephen, or divided it between the two of them as she thought fit (or indeed made any other disposition of the residue that she wished).
22. As was recorded in the first judgment at J [686], Kim has accepted that, provided Stephen pays to her as Adelaide's executor all sums that the court may order him to pay for breach of duty to Adelaide, Stephen is entitled to enforce Adelaide's will covenants against Kim, either by enforcing in equity a trust over the assets the subject of the Steve Clauses, or by maintaining at law an action for damages equal to the value of those assets.
23. Kim framed her approbation and reprobation case in a number of ways, but did so most clearly in par 93(c) of her submissions, which repeated part of her closing submissions at the first hearing: In any event, it is not open to Stephen to take the benefit of Adelaide's will of 13 November 2003 on the one hand, and a selection of the terms of the impugned 11 December 2008 will on the other… As set out above, the most obvious answer to such a claim is that it is not open to Stephen to select those parts of the 2003 and 2008 wills that he likes, and to suggest that a combination of the two different wills ought to apply. That would be approbating and reprobating.
24. Specifically, Kim put the argument the following way in relation to Stephen's entitlement to claim damages at law from Kim: 94. If Stephen sues for damages (which indeed he does in his cross claim) what should his damages be? They should be the difference between what he received under the 2008 will and what he would have received under the 2003 will if it had not been revoked. 95. What did he receive under the 2008 will? On your Honour's construction, he received 50% of the sale proceeds and 50% of the interest owing to Adelaide on all the sale proceeds. What would he have received under the 2003 will? He would have received 100% of the capital but 0% of the interest owing to Adelaide (i.e. neither the profits nor any personal claim for compensation) (see J [635]). 96. Therefore, the damages would be the difference between the amount Stephen would have received under the 2003 will (an amount equal to 100% of the capital) less the amount he received under the 2008 will (an amount equal to 50% of the sale proceeds plus 50% of the interest owing to Adelaide). His damages have to bring to account what he received under the 2008 will. He cannot ignore the 50% payment of interest he receives under the 2008 will while in the same breath complaining that the 2008 will caused him to lose 50% of the capital. 97. The analysis is no different in respect of an equitable claim that the estate holds Adelaide's capital on trust for him.
25. I am, with respect, unsure what is meant by par 95 of the submission. It may be that the reference to the sale proceeds and the interest takes up the literal wording of clause 3(a) of the 2008 will. Following the first judgment, what Stephen is in fact entitled to under the 2008 will is 50% of the amount of equitable compensation or the account of profits that he is ordered to pay Adelaide arising out of his unauthorised application of the proceeds of sale of the Hotel. Kim's point seems to be that, under the 2003 will, Stephen would only have received 100% of Adelaide's capital interest in the Partnership, and under the 2008 will he will also receive 50% of the compensation that he himself is obliged to pay.
26. The critical proposition lies in the assertion: "His damages have to bring to account what he received under the 2008 will. He cannot ignore the 50% payment [of the compensation] he receives under the 2008 will while in the same breath complaining that the 2008 will caused him to lose 50% of the capital". I do not follow the reference to 50% of the capital. Stephen complains that under the 2008 will he lost 100% of Adelaide's remaining capital in the Partnership.
27. I do not accept Kim's submissions on the approbate and reprobate issue.
28. My principal reason is that I do not accept the logic of Kim's submission in-so-far as it is based on a comparison of what Stephen would receive under the two wills.
29. I accept the submission made on behalf of Stephen, which was not as a matter of principle challenged by Kim, to the effect that the 2008 will was effective in revoking the 2003 will, and was rightly admitted to probate, notwithstanding that it was made in breach of Adelaide's covenants in the Principal Deed.
30. The 2008 will therefore takes effect for all purposes in probate.
31. Notwithstanding the truth of that proposition, Stephen's underlying contractual right to enforce the covenants made by Adelaide in the Principal Deed remain effective.
32. That is the source of Stephen's right to sue Kim, as Adelaide's executor for damages for breach of the covenants, or alternatively to seek an appropriate order that Kim holds Adelaide's remaining capital interest in the Partnership on trust for Stephen.
33. The starting point of any comparison must be what Stephen was entitled to receive under the Principal Deed, and not what he was entitled to receive under the 2003 will. For this purpose it does not matter that he was in fact entitled to receive the same benefit under both.
34. Under clause 3.1 of the Principal Deed, Stephen was entitled to receive the benefit of what was described as the Steve Clauses.
35. However, the Principal Deed did not bind Adelaide in any way as to how she could dispose of any part of her assets, other than those the subject of the Steve Clauses.
36. In particular, the Principal Deed did not give Kim a right to receive the benefits that were in fact the bestowed upon her as the residuary beneficiary under the 2003 will.
37. Kim's approbation and reprobation argument would probably be good, if the effect of the Principal Deed was to give Stephen an entitlement to the benefit of the Steve Clauses, and Kim an entitlement to inherit the residue of Adelaide's assets. In that case, it would be true to say that, if Stephen sued Kim to enforce his entitlement to the benefit of the Steve Clauses, but also sought the benefit of clause 3(a), which in this case would have been made in breach of the Principal Deed, he would be seeking a remedy for breach of one part of that deed, while seeking to accept a benefit that was a breach of another part of the same deed.
38. However, because Adelaide was always free to dispose of the balance of her property as she saw fit, the only part of the 2008 will that was a breach of the Principal Deed was that part of the will that omitted the Steve Clauses. In‑so‑far as Stephen now seeks to receive the benefit of other parts of the 2008 will, he will simply receive something that Adelaide was lawfully entitled to give to him.
39. Put another way, when it is realised that Stephen's claim is to enforce the Principal Deed, and the source of the benefit he wishes to receive is clause 3(a) of the 2008 will, the assertion that Stephen is approbating and reprobating fails as a matter of logic. Stephen is simply enforcing his rights under the Principal Deed, as he is entitled to do. Stephen is not enforcing the 2008 will. Technically, Kim, as the nominated executor propounded the 2008 will, and it is Kim's obligation to implement the terms of that will, whatever those terms might be on their proper construction.
40. Kim's reliance upon the extract from the judgment of the plurality of the High Court in Maguire v Makaronis (1996) 188 CLR 449 at 475 is not apposite. Relevantly, the issue in that case was whether a mortgage granted to mortgagors following a breach of duty by the mortgagee should be set aside, without the mortgagors first having to pay the amount of the loan the subject of the mortgage. The plurality said at 475 (footnotes omitted): Here, given the undisclosed role of the appellants as mortgagee, the breach of duty went to the identity of the parties having the benefit under the Mortgage both of the security and the covenants to pay money. To set aside the Mortgage purely in its operation as a security, without conditioning that upon repayment, would be to reform the transaction in an impermissible fashion. It would be to strike down the security interest without ensuring repayment of that which was paid in return for it. The respondents would be left with the fruits of the transaction of which they complained, whereas their equity was to have the whole transaction rescinded and, so far as possible, the parties returned to their original position.
41. In that case, the mortgage had been granted in return for the loan of the money, and the two obligations were connected in that way. The mortgagors were not permitted to take one course (being the setting aside of the mortgage) while ignoring the other side of the transaction, of which they had received the benefit (being the loan).
42. The present case is quite different, because all that Stephen seeks to do is enforce the covenants made in his favour by Adelaide under the Principal Deed. There was no countervailing or connected restriction that Stephen would be precluded from ignoring, if he wished to enforce the benefit to which he is entitled under the Principal Deed.

Simple or compound interest

1. During the course of the first hearing Kim, with what I understood was the acquiescence of the defendants, asked the court to determine whether interest should be assessed on a simple basis, at Court rates, or on those rates compounded with yearly rests: see J [711].
2. The court was asked to take that course, notwithstanding that it was an issue relevant to the remedy to which Kim may be entitled (and accordingly not before the court under the orders for the separate determination of questions) because, as I understand it, it was thought that the proceedings as a whole may have been shortened if the parties knew how the court would deal with interest.
3. I considered the question of interest at J [710] to [730]. I made a number of observations concerning the relevant legal principles, and also made a number of intermediate findings relevant to the determination of the issue. However, for the reason given at J [722], I said that it was premature for the court finally to determine the issue. That was, in essence, because on the evidence then before the court, I had not adequately been able to track the disbursement of the monies loaned by the Partnership to the Trustee, in order to be in a position to make sufficiently precise findings concerning the application of those monies.
4. As I have explained above, between the first hearing and the most recent hearing, Kim and the Stephen defendants have cooperated in preparing the document that I have described as the money trail. That document has been put before the court on the basis that it is generally reliable to indicate how the Trustee disbursed the monies loaned to it by the Partnership, even though some of the detailed items in the document remained to be agreed.
5. Kim has taken the view that the money trail is adequate to cure the deficiencies in the evidence that I mentioned at J [722], so that the court should now determine the interest issue.
6. As I have also explained above, however, there is a difference between Kim and the Stephen defendants as to whether this issue is to be determined at this stage of the proceedings.
7. Kim stated, at par 33 of her amended statement of plaintiff's case, that this was an issue to be decided at the recent hearing, and she set out her submissions on the subject in pars 110 to 116 of her written submissions. In essence, Kim referred to relevant paragraphs of the first judgment, in particular the comments at J [717] and [718] to the effect that, where a fiduciary has used the money or other assets obtained in breach of duty to earn, or attempt to earn, a profit for him or herself, the fiduciary may be estopped from denying that he or she has made a profit, or may have made a profit, on a compounding basis.
8. Notwithstanding that the Stephen defendants asserted that the interest issue was not to be decided at the recent hearing, they acknowledged in par 10(d) of their statement of case, that the issue was a matter that arose for determination, and they also set out submissions at pars 6.4 to 6.7 of their written submissions.
9. In these circumstances it is my view that the interest issue does arise for consideration at this stage of the proceedings. The main impediment to the court finally dealing with the issue will be whether the money trail contains sufficient information to enable the court to make all intermediate determinations necessary to decide the basis upon which interest should be payable by the defendants.
10. I have found that Stephen acted without authorisation when he caused the proceeds of sale of the Hotel to be paid to the Trust, in the manner and upon the terms that he did. I found in the first judgment that Stephen and the other defendants acted honestly, in the sense that they genuinely believed that they were entitled to do what they did, in relation to their use of the proceeds of sale of the Hotel: see J [725] to [727]. As Stephen was effectively the guiding mind of the corporate defendants, they were imprinted with his knowledge at the time that any of them received any part of the proceeds of sale of the Hotel.
11. The position is different in relation to the case against Louise. At J [648] to [675], I made limited findings concerning Louise's state of mind over the relevant period. As will be seen below, when I come to deal with Kim's case against Louise, I have decided in this judgment that the court should not decide at this stage of the proceedings what parts of the proceeds of sale of the Hotel were received by Louise, or what her state of mind was at the time of any such receipts.
12. In my view, it would be premature for the court to decide at this stage any questions concerning the payment of interest in relation to the case against Louise.
13. I will therefore confine my consideration of the interest issue below to Kim's case against the Stephen defendants.
14. I must first make a number of preliminary observations concerning the way Kim has formulated this aspect of her case.
15. At J [710], I summarised how I understood Kim put her case on the interest issue as follows: As Kim makes clear in par 12 of the Overview in her final written submissions, she seeks an account of the profits actually made by the defendants, or equitable compensation for profits that ought to have been made by the Partnership. Kim has not yet made an election between these two remedies. She says that, if the court accedes to her application that accounts be taken, three steps will be involved. The first is the reconstruction of the accounts of the Partnership relating to the Partners' Funds, so that they accurately reflect the position of each of the partners. The second step is to identify either the profits in fact generated by the recipients of the Partnership assets, or the profits that ought to have been realised by the Partnership. The third and final step is for interest to be calculated.
16. Two observations should be made about this formulation of Kim's case. The first is that it assumed that Kim's entitlement would be determined by the reconstruction of the accounts of the Partnership relating to Partners Funds, so that they accurately reflect the position of each of the partners. This is an issue that leading senior counsel for Kim made observations upon during submissions, and which I have considered above. I will return to this issue shortly.
17. The second observation is that Kim's position was that the second step would identify either the profits in fact generated by the recipients, or the profits that ought to have been realised by the Partnership.
18. The second possibility identified (being equitable compensation for the profits that ought to have been realised by the Partnership) appears to assume that Kim would be successful in her primary argument that, following the sale of the Hotel, Stephen was obliged to reinvest the proceeds of sale in a manner that would cause the Partnership to earn profits from the use of its asset.
19. Even though I have found that Stephen made an unauthorised investment in the way he applied the proceeds of sale of the Hotel, one aspect of Kim's primary case that I have not accepted is her submission that Stephen was obliged to cause the Partnership to earn profits. I have decided that the relevant terms of the Principal Deed did not oblige Stephen to reinvest the proceeds of sale of the Hotel in a manner that caused the Partnership to earn profits.
20. An issue arises as to whether, when a party in Kim's position is entitled to a remedy from a defaulting fiduciary for the making of an unauthorised investment, and the party has a right to elect between equitable compensation and an account of profits, the party must show that it has actually suffered damage (for example, because the party has not shared in profits that ought to have been earned) before an election of equitable compensation will lead the court to make a money award in favour of the party.
21. That is an issue which I regard as being an open question in these proceedings. It is a question for consideration by Kim before she makes her election, and as the orders for the determination of separate questions have been formulated, it is a matter for the second stage of the proceedings.
22. I have raised this issue because of the way in which Kim formulated her entitlement to relief in her amended statement of the plaintiff's case. In par 8 Kim put it this way: "at that point, the plaintiff may make an election that Stephen accounts for any profit made on that amount or alternatively for equitable compensation with interest being applied as a proxy for that sum". Perhaps more clearly at par 9 Kim said: "The remedy will be limited to either Stephen accounting for profits he made on the unauthorised use of the funds, or alternatively equitable compensation by way of interest on those same funds".
23. It is possible that I misunderstand the way Kim seeks to formulate her alternative remedies, but it appears to me from these two formulations of the claim that Kim says she is entitled to elect between: (1) an account of the profits made by Stephen and the other defendants; or (2) equitable compensation determined on the basis of interest as a proxy for the amount of the loss suffered by Adelaide.
24. The issue is whether or not the court only allows interest as a proxy in the calculation of the remedy to which the plaintiff is entitled in the case of equitable compensation, and not as a proxy for the quantification of the profit earned by the defaulting fiduciary. If the answer to that question is yes, then the use of interest as a proxy for the remedy may not be available in cases where the plaintiff cannot establish that the plaintiff has suffered some loss as a result of the breach of fiduciary duty (such as in the case where it cannot be shown that the plaintiff has lost a profit).
25. At this stage, all I need do is to refer back to my analysis of the cases at J [714] to [718]. Those cases would suggest that the adoption of compound interest as a proxy for the calculation of the amount of the relief to which the plaintiff is entitled is appropriate in cases where the defaulting fiduciary has used the money for his or her own commercial purposes. It will be necessary for Kim to resolve this apparent uncertainty in the way she has formulated her claim for relief, and for the defendants to be given an opportunity to make submissions in response, before the court comes to any final view on the interest issue.
26. The second assumption that was expressed in par 12 of the Overview in Kim's final written submissions was that a reconstruction of the accounts of the Partnership relating to Partners Funds would be the basis of the determination of any amount payable to Kim.
27. I have dealt above in this judgment at some length with the observations made by leading senior counsel for Kim, and my response to those observations, in relation to the need for a reconstruction of the Partnership's accounts, and the relationship between that reconstruction and the determination of the relief to which Kim is entitled, as a result of the unauthorised use by Stephen of the proceeds of sale of the Hotel. As I explained, a related consideration is how to allow properly for Stephen's entitlement to withdraw his own share of the Partners Funds at any time he wished.
28. I will not repeat any of those observations, save to give the following summary in so far as it is relevant to the interest issue. The reconstruction of the Partnership's accounts will include the making of corrections for errors by Mr Morrison that had nothing to do with the unauthorised investment of the proceeds of sale of the Hotel. Another aspect of the reconstruction will involve the return of funds from the Trust to the Partnership (by way of notional partial repayment of the loan) in order to fund withdrawals by Stephen of his Partners Funds. That will have the effect that some disbursements by the Trust of the amount received from the Partnership (such as payments into Stephen's and Louise's superannuation fund, and the acquisition of fixed deposits on behalf of Stephen, Louise and their children), which would otherwise appear to have been misapplications by the Trustee of the Partnership's property, will in fact be accounted for as legitimate withdrawals of Stephen's Partners Funds. At the end of that accounting process, it may be determined that Stephen has withdrawn part of Adelaide's Partners Funds.
29. As I have also said above, the parties must confront the issue of deciding upon the most appropriate way to deal with payments made by the Trustee after 30 June 2010, during which period accounts were not prepared for the Partnership. That decision may depend upon whether, by 30 June 2010, Stephen is found to have already exhausted his own Partners Funds.
30. However the exercise is undertaken, the result may involve two possibilities. The first is that it will be found that Stephen has withdrawn some of Adelaide's Partners Funds, because of the mistakes made by Mr Morrison. The second is that, after the amount that Stephen was legitimately entitled to withdraw from his Partners Funds has been matched to disbursements made by the Trustee, it will be possible to allocate the balance of the disbursements made by the Trustee as representing Adelaide's Partners Funds (being her share of the loan of the proceeds of sale of the Hotel).
31. Finally, it will be necessary to make a decision as to whether the inadvertent overdrawing of Stephen's Partners Funds had the result that Adelaide became entitled to trace into some part of the disbursement of funds by the Trustee.
32. The point of these observations is that it is not yet possible to determine with any certainty which aspects of the disbursements by the Trustee have had the ultimate result that payments were made that may be traced back to Adelaide's share in the Partners Funds, represented by the debt from the Partnership to the Trust.
33. The difficulty in making this determination is complicated by the repayment of the $16,966,691 that occurred in the 2009 year, and which involved a reversal of the withdrawal of Stephen's Partners Funds.
34. Consequently, the problem I explained at J [722] has not yet been resolved. In simple terms, the evidence does not yet establish what Stephen did with Adelaide's share of the proceeds of sale of the Hotel, after proper allowance has been made for Stephen's withdrawal of his own share of the Partners Funds, having regard to how he chose to allocate disbursements by the Trust to his own withdrawals.
35. All that can be said at this stage is that, intuitively, there are strong reasons to suspect that a proper accounting exercise will establish that Adelaide's share of the proceeds of sale of the Hotel was disbursed by the Trust in a manner that must be appropriated to the whole or part of the $9,167,006 paid by the Trust to the various Bowden Group companies, the $7,720,478 paid to enable the purchase of the Cabramatta Inn Hotel, and the $8,196,417 paid in respect of the repurchase of the Hotel.
36. There is no evidence as to what the Bowden Group of companies did with the money paid to them by the Trust (although it is possible that some part of that money may be traced into the repurchase of the Hotel).
37. As to the money paid to enable the two hotels to be purchased, the evidence would suggest that the eighth and ninth defendants have been operating those hotels from the time of purchase for the benefit ultimately of Stephen and Louise.
38. I am not willing to make a final determination on the interest issue until the underlying facts can be determined, as the issue relates to the second stage of the proceedings, and I am not satisfied that it would be appropriate to determine the issue on a hypothetical basis.
39. However, I refer back to my observation at J [718] that, where a fiduciary has used money or other assets obtained in breach of duty to earn, or attempt to earn, a profit for him or herself, the fiduciary may be estopped from denying that he or she has made a profit, or may have made a profit in a compound in manner.
40. At least in relation to any part of Adelaide's share in the proceeds of sale of the Hotel that may be traced into the acquisition of the two hotels, there is a strong argument that Adelaide should be entitled to a remedy based upon a calculation of interest on a compound basis, as a proxy for an account of the profits made through the misuse of Adelaide's funds. Were that approach to the determination of Adelaide's remedy not available, Kim might be put to the enormous expense of conducting an examination of the affairs of the two hotels, in circumstances where the manner in which any profits earned by the hotels have been accounted for may not be transparent.
41. However, for the reasons I have given, it would be premature for the court to make any final order at this stage concerning Kim's entitlement to relief based upon court interest rates calculated on a compound basis.
42. For completeness I should note that I have not lost sight of the question of whether, if Kim's remedy is determined on the basis of interest on a compound basis, the interest should be compounded on yearly rests. I will merely observe that at this stage none of the parties have made submissions on this issue, although it may be thought that, if interest is to be compounded, yearly rests would seem reasonable and a relatively conservative way to approach the quantification of Kim's remedy.

Wilful default

1. Kim submitted that the accounting required of Stephen should be undertaken on a wilful default basis, while Stephen submitted that the accounts should only be taken in common form.
2. Although there was disagreement as to the appropriate form in which the account should be taken, the parties agreed as to the legal principles that must be applied to determine whether or not the accounting should be undertaken on the basis of wilful default.
3. In Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146; [2002] NSWCA 22, Giles JA (with whom Sheller and Beazley JJA agreed) said: [13] Although it had earlier been in contest, in the appeal it was accepted that order 4 was an order for taking accounts in common form. Under such an order the accounting party accounts only for what has actually been received and disposed of. The other party to the accounting can challenge the accounting party's account by asserting that more was received (in the old terminology, surcharging) or by asserting that less was disposed of (in the old terminology, falsifying). [14] There is an alternative basis for taking accounts. An order may be made for taking accounts on the basis of wilful default (sometimes the words are wilful neglect and default). Under such an order the accounting party must account not only for what has actually been received, but also for what should have been received: that is, for what would have been received if the relevant duties of the accounting party had been properly discharged. Thus in Partington v Reynolds (1858) 4 Drew 253; 62 ER 98 it was said (at 255; 98) that on this basis an executor or administrator must account "not only for what he has received, but also for what he might, without his wilful neglect or default have received, although he has not received it". [15] For the present what amounts to wilful default, with consequential enlargement of the accounting, need not be further explored. An accounting on the basis of wilful default is more onerous than an accounting in common form, and can result in the accounting party having to pay more to the other party to the accounting. This no doubt explains the application to vary order 4, and the opposition to it.
4. Further, his Honour said, in relation to what must be proved before the court will order the account to take place on the basis of wilful default: [46] Austin J held, referring to Sleight v Lawson (1857) 3 K & J 292 at 298; 69 ER 1119 at 1121-2 and Gava v Grljusich (Kennedy J), that before an order for taking accounts on the basis of wilful default could be made at least one instance of wilful default had to be established. His Honour also accepted that there had to be evidence from which arose a reasonable suspicion that there may have been other defaults (see re Tebbs (1976) 2 All ER 858). Neither requirement was in question in the appeal. The findings of instances of wilful default was in question in the appeal.
5. Finally, Giles JA said, in relation to the types of conduct that may constitute wilful default: [65] It is then necessary to return to what amounts to wilful default, and to ask whether the matters found by Austin J were instances of wilful default. In an accounting by a trustee, the underlying concept is that through breach of trust the trustee has failed to obtain for the trust that which would have been obtained if the trustee's duties had been discharged. There may be simple failure to get in an asset of the trust; sale of a trust asset at an undervalue has been treated as wilful default, presumably because of failure to obtain for the trust the full value of the asset (re Tebbs); failure to obtain rent for a stranger's occupation of a trust property has been treated as wilful default (Bartlett v Barclays Bank Trust Co Ltd (No 2) (1980) 1 Ch 515). The breach of duty need not be conscious wrongdoing (Bartlett v Barclays Bank Trust Co Ltd (No 2) at 546). But wilful default is not coextensive with breach of trust: there may be a breach of trust which is not wilful default (see in re Wrightson: Wrightson v Cooke (1908) 1 Ch 789 at 799-800; Russell v Russell (1891) 17 VLR 729 at 732; In re Wood; Ebert v Union Trustee Co of Australia Ltd (1961) Qd R 375 at 378). [66] It is not necessary to explore in any more detail what may or may not amount to wilful default. It may be accepted that failure to maintain adequate books and records, to prepare monthly management accounts, and to maintain financial records for that purpose, were breaches of trust. It does not follow from the breaches that something was not received by the Trust or otherwise lost to it, on any reasonable amplitude of the concept of wilful default. Although there was a failing in record keeping, all assets of the Trust may have been got in and properly dealt with. I do not think that the matters found by Austin J were instances of wilful default.
6. It must be noted that his Honour in broad terms characterised conduct of a defaulting fiduciary as involving wilful default if it had the effect that "something was not received by the Trust or otherwise lost to it". By either means the breach would have the effect of reducing the assets of the trust held for the benefit of the beneficiary.
7. Kim also relied upon the following observation by Barrett J (as his Honour then was) in Garcia v Delphino [2003] NSWSC 1001 at [33] as to when an account on a wilful default basis is appropriate: "the central concept is one of loss or potential loss through inactivity, inattention or failure to face up to responsibilities".
8. Kim relied on the following description of the process of taking accounts on a wilful default basis given by Campbell J (as his Honour then was) in MLW Investments Pty Ltd v Tacsum [2006] NSWSC 1256, at [33]: [33] As well, the defendant seeks an order that the parties "file accounts on a wilful default basis". Accounting on the basis of wilful default involves taking an account of what would have been received by the partnership if the partner said to be in default had performed his duty to the partnership. Taking accounts on that basis can require complex questions of fact and estimation to be engaged if the breach of the duty established on the part of the party is, for instance, diversion of a business opportunity from the partnership to some other business. In that type of case, it is necessary for the judicial officer hearing the accounting to decide what would have happened if, for instance, the business opportunity had been available to the partnership.
9. Although Campbell J spoke in terms of "what would have been received by the partnership", the formulation made in those terms reflected the issues in the case, and was not intended to exclude from wilful default breaches that result in assets being lost or diminishing in value.
10. Kim's primary case was that, in the circumstances as they existed at the time the Hotel was sold, the partnership agreement required Stephen to reinvest the proceeds of sale in some form of replacement investment that caused the Partnership to earn a profit.
11. The effect of what Stephen did with the proceeds of sale of the Hotel was to lend that money on an interest-free basis to the Trustee, rather than to invest the money in a replacement investment that earned a profit for the Partnership.
12. Kim's case was, therefore, that this is a simple and obvious case in which the accounting should take place on a wilful default basis, because the Partnership suffered a loss because Stephen invested the money on a basis that precluded the Partnership from earning any income at all.
13. I agree with the argument put by Kim that, if the partnership agreement as modified had to be construed in accordance with Kim's submission, then this would be an appropriate case to order that the accounting take place on a wilful default basis.
14. However, for the reasons that I have given above, one aspect of Kim's case that I have not accepted is that the modified partnership agreement required Stephen to reinvest the proceeds of sale of the Hotel on a basis where the replacement investment necessarily caused the Partnership to earn an income.
15. It follows that in this case the argument put by Kim is not effective to require that the accounting be on a wilful default basis.
16. However, even if it be accepted that the modified partnership agreement did not require Stephen to ensure that the replacement investment led to the Partnership making an income, there is an alternative basis upon which it could be argued that the actual replacement investment made by Stephen involved a wilful default on a different ground.
17. Stephen not only caused the Partnership to loan the proceeds of sale of the Hotel to the Trust on an interest-free basis, but he did so without any security, or any effective mechanism to ensure that the amount of the loan was retained as a secure fund that could always be repaid by the Trust forthwith on demand. The loan was made on a basis that permitted the Trustee to pay the money away in circumstances which either defeated or impeded the ability of the Trustee to repay the amount of the loan on demand. Even if proper allowance is made for Stephen's entitlement to withdraw his own Partners Funds, it seems highly likely that parts of the loan that represented Adelaide's Partners Funds were paid out by the Trust in repayment of the Trust's debts, or paid out in loans, which may not have been readily recoverable.
18. That aspect of the replacement investment would, in my view, justify an order that the account be taken on a wilful default basis.
19. However, there are special features of this case which require that the court not simply make an order at this stage for an accounting by Stephen, whether that accounting should be undertaken in common form or on a wilful default basis.
20. First, the court has held that Stephen committed a breach of fiduciary duty to Adelaide once and for all at the time he caused the Partnership to make the interest-free and unsecured loan to the Trust in the manner in which that loan was made. If that is correct, the accounting remedy that Kim needs is not so much an accounting as contemplated by UCPR Part 46, but is appropriate bespoke orders to permit the tracing of the disbursements by the Trustee, and the identification of profits that were made by Stephen or other recipients of money that was traceable to the proceeds of the loan made to the Trust. The appropriate relief may be in some respects tantamount to an order for an accounting on a wilful default basis, but will be tailored to achieve the most efficient identification possible of the amount for which Stephen or other defendants should be ordered to account to Kim. The term account is used in this context more in terms of a remedy than a process aimed at achieving the preparation of an accurate set of accounts that reflect the transactions that have been undertaken with the Partnership's property, and the assets that would have been available, had there been no breach of fiduciary duty.
21. Secondly, at least in relation to identifying the disbursements that were made by the Trustee of the part of the proceeds of sale of the Hotel to which Adelaide was entitled, there are grounds for optimism that the completion of the process of verifying the money trail, and the undertaking of the accounting exercise necessary to separate Stephen's legitimate withdrawals of his own Partners Funds in the Partnership from the misuse of Adelaide's Partners Funds, may lead to a result that obviates the need for a formal accounting process, as opposed to the formulation of tailored orders to facilitate the identification of the relief to which Kim is entitled.
22. Thirdly, the profits actually made by the Trust itself appear to be identified in the money trail (subject perhaps to the adjustment of the profits to add the amounts that have apparently been deducted in order to allow for the losses on the Newtown property, which were losses incurred entirely for the benefit of Stephen).
23. Fourthly, in relation to the identification of the profits that may have been earned by the defendants through the use of funds paid to them by the Trustee, it may be that if Kim elects to have the remedy of an account, the court would accept the submission that interest on the relevant amounts, as a proxy for the determination of the actual profits, should be allowed. This could obviate the need for a detailed investigation of the profits actually made by the defendants.
24. I therefore think that it will not be appropriate for me to formulate the orders that should be made in respect of the general issue of Kim's entitlement to an accounting from the defendants in this judgment. It will, of course, be necessary for the court to make appropriate orders as part of the directions for the preparation of the second stage of the proceedings that are required by the existing orders for the determination of separate questions. The court should make those orders after the parties have had an opportunity to consider these reasons for judgment, and possibly after Kim has made her election as to the remedy that she seeks. However, I regard the question of the appropriate timing for the making of procedural orders for the completion of the proceedings to be an open one, as to which I will hear the parties' submissions.

Claim against Louise

1. Following the delivery of the first judgment, Louise took the position that she is entitled to an order dismissing Kim's claim against her based upon findings in the first judgment, that the court is not entitled to depart from those findings, that Kim failed to prove essential elements of her case against Louise in the first hearing, and that Kim should not now be given an opportunity to correct those deficiencies.
2. On 7 September 2016, Louise filed a notice of motion in which she sought an order that the case against her be dismissed.
3. In the course of the court's dealing with a number of case management issues, Louise's notice of motion was considered by the court, but the claim in the notice of motion was not finally heard and determined, because there was inadequate time for the court to hear the application, and deliver a considered judgment, before the commencement of the recent hearing. Louise's claim for the relief in the notice of motion was heard in conjunction with the continuation of the hearing.
4. In support of her notice of motion, Louise delivered submissions as to why she was entitled to judgment. Those submissions encapsulated the basis of Louise's claim, and were supported by a document that identified portions of the first judgment that Louise claimed gave rise to an entitlement on her part to the claim against her being dismissed.
5. Louise relied heavily on observations made in the first judgment at J [675], which for convenience I will set out again: … The point is that for Kim to establish that Louise personally received money that might be traced to the proceeds of sale of the Hotel with knowledge that she had received the money as a result of breach of fiduciary duty by Stephen, it would be necessary to establish in a precise way the state of knowledge at the time of receipt. Kim did not begin to undertake that exercise, having regard to Louise's apparent role in the affairs of the Trust, and the underlying complexity of the financial transactions.
6. As I understand it, Louise relies upon this paragraph as a substantive finding that Kim did not establish, at the first hearing, that Louise personally received money that could be traced to the proceeds of sale of the Hotel, or her state of knowledge at the time of receipt (and, indeed, that Kim did not begin to undertake that exercise). Hence, according to Louise's submissions, Kim had wholly failed to prove essential issues that she was required to prove in order to establish the claims that she had made that were to be determined at that hearing in conformity with the orders for the determination of separate questions. That, according to Louise, was the end of the matter, and she was entitled to an order dismissing the claims against her.
7. Louise also relied upon submissions that she had made at the end of the first hearing (in relation to Kim's allegation in par 24 of the statement of claim) that Stephen and Louise caused the eighth defendant to repurchase the Hotel using funds available to them from the proceeds of sale of the Hotel that were distributed by the Trust, and that the evidence established that the eighth defendant financed the purchase of the Hotel partly with a formal loan on commercial terms from the Trust, which Louise submitted did not involve a receipt by her of part of the proceeds of sale of the Hotel.
8. This is a convenient place to record that Kim originally claimed relief against Louise on two bases: first, that she received personally part of the proceeds of sale of the Hotel through the Trust in circumstances where her state of knowledge made her liable to account to Kim for those receipts; and second, that Louise was obliged to account to Kim in respect of those receipts because she was a volunteer. It is not necessary to recount the circumstances in detail, but in the course of the determination of case management hearings shortly before the recommencement of the hearing, Kim abandoned her claim based upon Louise having received property as a volunteer.
9. In relation to her remaining claim for relief in relation to the receipt by Louise of part of the proceeds of sale of the Hotel, Kim made a number of responses to Louise's claim that the claim against her should be dismissed because of the manner in which Kim had conducted the first hearing, and certain of the findings made by the court in the first judgment.
10. It is convenient to deal first with Kim's response to Louise's submission that the evidence in the first hearing required a finding that Louise had not personally received any part of the proceeds of sale of the Hotel, and that, in particular, any part of the proceeds of sale that were paid by the Trustee to the eighth defendant to fund the purchase of the Hotel were paid as an interest-bearing loan on commercial terms.
11. Kim's response was that Louise did not plead in her defence that the Trust had made an interest-bearing loan on commercial terms to the eighth defendant, and did not open her case on that basis. Rather, Kim argued, Louise put that claim in her final submissions, in circumstances where Kim had not previously been aware of it, and did not have the opportunity to contest it during the hearing. Kim also responded by demonstrating how the grounds upon which Louise had based her submission were baseless, and not even found in the evidence at the places cited by Louise in her submissions.
12. On the contrary, Kim pointed to evidence that supported a conclusion that the purchase by the Hotel by the eighth defendant was funded in part by two unsecured loans made to the eighth defendant by Stephen and Louise of $4,055,125.10 each. That evidence is found in the statement of non-current borrowings in the eighth defendant's financial statements for the year ended 30 June 2011. Those financial statements do not record any loan made by the Trust to the eighth defendant. Nor do the financial statements of the Trust for the year ended 30 June 2011 record as an asset any loan made to the eighth defendant. In fact, the only loan recorded in the Trust's financial statements for that period is a loan of $6,500,000 (originally $7,720,478.68) made by the Trust to the ninth defendant to assist to fund the purchase of the Cabramatta Inn Hotel.
13. As I understand Louise's response to these submissions, she accepted that Kim's position was correct. The evidence at the first hearing did not establish that the Trust made an interest-bearing loan on commercial terms to the eighth defendant to assist it to fund the purchase of the Hotel.
14. Kim's primary response to Louise's claim that she was entitled to an order dismissing the claim against her was to rely upon the terms of the orders for the determination of separate questions, and to submit that Louise's submissions misunderstood the effect of those orders. Kim's position was that she was not required by the orders to prove at the first hearing all of the receipts by Louise of part of the proceeds of sale of the Hotel. The primary purpose of the first hearing was to determine whether Kim had established that she was entitled to an accounting by Stephen, as when Kim's proceedings were commenced, and continuing to the end of the first hearing, Kim had not been provided with all of the financial records necessary to trace all disbursements of the proceeds of sale of the Hotel. It was logically necessary for Kim first to demonstrate an entitlement to an accounting, and then, depending upon the outcome of the first hearing, and perhaps additional enquiries supported by procedural orders of the court, to elect between the remedy of an account or equitable compensation. Kim could not practically establish what parts of the proceeds of sale of the Hotel had been received by Louise until after the accounting by Stephen had taken place.
15. Accordingly, Kim's position was that she had not been required to prove, at the first hearing, all of the receipts of parts of the proceeds of sale of the Hotel by Louise, and the court was not in a position to make findings on that issue in the first judgment. Kim simply had not contested that issue at the first hearing, and she was not required to. That issue must necessarily be dealt with after Kim has been able to make her election as to her preferred remedy, and if necessary must be determined at the second hearing.
16. Kim submitted, incidentally, that this process could be implemented by the parties and the court in accordance with the existing orders for the separate determination of questions, and that it was not necessary for the court retrospectively to revise those orders.
17. To support her position, Kim relied upon an affidavit of one of her solicitors, Ms Karen Rita Beashel, made on 14 October 2016, in which Ms Beashel, among other things, identified in detail the amounts of money that Kim wished to establish Louise had received, which could be traced to the proceeds of sale of the Hotel. Ms Beashel distinguished between receipts that were referred to in the evidence that was already before the court, and additional receipts that Kim believed could be established by further evidence.
18. Kim submitted that the existing evidence at the first hearing justified a finding that the $4,055,125.10, which Kim apparently loaned to the eighth defendant to assist it to purchase the Hotel, was obtained by Kim through the Trust as part of the proceeds of sale of the Hotel. That finding was justified, according to Kim, because Louise plainly conceded at the hearing that (except for borrowings from third parties) the Hotel was purchased by money originally sourced from the sale of the Hotel.
19. Kim submitted that the evidence established that the eighth defendant had been incorporated by Louise and Stephen, shortly before the repurchase of the Hotel, for the sole purpose of purchasing the Hotel. Accordingly, Kim submitted, even if Louise did not receive the $4,055,125.10 and on-lend it to the eighth defendant, the receipt by the eighth defendant should be treated in law as a receipt by Louise.
20. Kim also identified (by means of Ms Beashel's affidavit) a further seven payments, in the total amount of $1,249,767.45, that were arguably received by Louise, and could be traced to the proceeds of the sale of the Hotel on the basis of the existing evidence before the court.
21. All of these payments were apparently made after the time when I found, in the first judgment, that Louise must have been aware of the possibility that Stephen was liable for a substantial amount to Adelaide, because Adelaide had been entitled to a share of the proceeds of sale of the Hotel: see J [671]. As I have said, Ms Beashel also identified further possible receipts by Louise that might be proved by the tender of additional evidence.
22. Finally, Kim submitted that it was not necessary for her to apply to reopen her case against Louise, but if such an application were necessary, it should be allowed.
23. Louise responded by providing separate written submissions as to why Kim should not be entitled to rely upon Ms Beashel's affidavit, a document called "Notes for further argument", and detailed written submissions in relation to the matters to be dealt with by the court at the further hearing that commenced on 21 November 2016.
24. Louise also provided a copy of Attachment 1A (the money trail) to which had been added a column to provide Louise's comments in outline. Louise provided a number of brief responses to the items in the money trail, in which she indicated how the particular transaction should be categorised. While in a number of cases the response was "no comment", in response to many items the comment was that Louise did not know and could not admit the entries in Attachment 1A in relation to that item.
25. I interpolate briefly that it appears that Kim and the Stephen defendants have cooperated extensively in attempting to complete the money trail. Louise was not involved in that process until, as I understand it, shortly before the recommencement of the hearing, when I made suggestions to the effect that the process that led to the production of the money trail may be of little utility, if Louise had not been involved in the preparation of the document, and did not agree with its contents. Subsequently, Louise was given an opportunity to review the contents of the money trail, but she was not, in the time available, able to form a concluded view as to its accuracy in relation to many of the items.
26. Accordingly, as between Louise on the one hand, and the other parties on the other, the information contained in the money trail is substantially less resolved than as between Kim and the Stephen defendants. The money trail is a work in progress.
27. The court has no information that would justify it in forming any view about the reasons why Louise was not as involved as the other parties in the preparation of the money trail. Accordingly, the court must look neutrally at the result that, as between Louise and the other parties, there remains considerable uncertainty as to the accuracy of the money trail.
28. The most obvious conclusion that emerges from a consideration of all of the submissions made by Kim and Louise is that there is a fundamental disagreement concerning the meaning and effect of the orders for the determination of separate questions, and as to what was required to be determined at the first hearing.
29. I am satisfied that the court should accept the submissions made by Kim, and dismiss Louise's notice of motion in so far as she sought an order dismissing the whole of the claim against her. Although there appears to have been some misunderstanding as to the effect of the orders for the determination of separate questions, the proper course is for the court to facilitate the determination of how all relevant disbursements of the proceeds of sale of the Hotel occurred, whether by some cooperative completion of the money trail, or by the making by the court of orders tailored to enable the completion of that process. The question whether Louise has received parts of the proceeds of sale of the Hotel in circumstances where her state of knowledge required her to account to Kim in respect of those receipts must logically and fairly be dealt with after all relevant receipts have been identified, and at the second stage of the proceedings.
30. The one aspect of Kim's submissions that I do not accept, is her submission that the court should find at this stage that Louise received from the proceeds of sale of the Hotel the amount of $4,055,125.10 that the eighth defendant's financial statements for the year ended 30 June 2011 suggest Louise loaned to that company. I do not accept that submission for the following reasons.
31. First, that finding would be inconsistent with Kim's primary submission that the specific receipts of parts of the proceeds of sale of the Hotel was not an issue required by the orders for the determination of separate questions to be dealt with at the first hearing, and that Louise's liability should be dealt with at the second hearing after all receipts by Louise have finally been identified.
32. Secondly, it appears from submissions made on behalf of Louise that she wishes to challenge the conclusions that may be drawn based upon the eighth defendant's financial statements, and that complicated issues arise in relation to matters such as, among others, whether Louise was entitled to regard her share of the apparent loan as being money received from Stephen as part of the matrimonial settlement, and whether the apparent loan represented a real transaction. In short, Louise has not yet had a proper opportunity to contest the issue.
33. Thirdly, the court did not, after the first hearing, receive the benefit of comprehensive submissions from the parties concerning the effect of the financial evidence that had been tendered. The court itself made a provisional analysis of the annual financial statements of the Partnership and the Trust, for the purposes explained in the first judgment. The court did not analyse the annual financial statements of the eighth defendant. In‑so‑far as the court said at J [675] that Kim did not begin to undertake the exercise of establishing in a precise way Louise's state of knowledge at the time she received parts of the proceeds of sale of the Hotel, that observation reflected an understanding that Kim had not made submissions to the court as to what parts of the proceeds of sale were in fact received by Louise. The court does not understand that, at the first hearing, Kim made the submissions that she has now made to support a finding that Louise must have received at least $4,055,125.10, after she became aware of Adelaide's claim. It could hardly be procedurally fair for the court to expect Louise to have fully contested this issue, if the court itself had no appreciation that the issue arose at the first hearing.

Effect of order for determination of separate questions

1. The dispute between Kim and Louise makes it necessary for the court to consider the meaning and effect of the orders made on 16 September 2015, for the determination of separate questions (see J [184]), the circumstances in which those orders were made, and their significance to the manner in which the first hearing was conducted.
2. The genesis of the problem was an apparent disagreement between Kim and the Stephen defendants as to whether all of the issues that arose in the proceedings were to be determined at the hearing fixed to commence on 2 November 2015.
3. It will be convenient to repeat the first and second of the orders for the determination of separate questions made on 16 September 2015: 1. Subject to order 2, at the hearing commencing on 2 November 2015, the Court will determine the whole of the plaintiff's statement of claim filed 2 May 2013, the defendants' defences thereto and the plaintiff's replies to the defendants' defences. 2. In the event that the Court determines that the plaintiff is entitled to an account of profits or equitable compensation, the quantification of any such entitlement is to be determined separately and after the hearing commencing on 2 November 2015, in a manner to be the subject of further consideration by the parties and, to the extent necessary, further orders by the Court.
4. Those orders appear superficially to require that issues of liability be determined at the first hearing, and issues of remedy be determined at the second, but the truth of that proposition depends upon the validity of the assumption that the statement of claim and the defences called for the determination of all issues of liability.
5. I discussed the relief claimed in the statement of claim at J [79] to [84]. Kim did not claim relief that would involve the court identifying specific receipts by any of the defendants and finding that the defendants were obliged to account to Kim, or to pay her equitable compensation, in relation to those receipts. The claims for relief by Kim were consistent with her having limited knowledge as to how the proceeds of sale of the Hotel had been disbursed. This was reflected in her claims to an entitlement to an accounting or equitable compensation, supported by claims for all necessary accounts and enquiries to enable her to trace and recover the property to which she was entitled. In short, Kim sought by her claims to relief to establish her right to a remedy in principle, and to obtain the assistance of the court that might be necessary to make good her remedy. She did not claim remedies in relation to specific receipts, because in the circumstances it was premature for her to do so. It is proper to have regard to the terms of the relief sought by Kim in her statement of claim, when considering the effect of the relevant allegations of fact in that pleading.
6. So far as Louise is concerned, leaving out some preliminary allegations, Kim pleaded a number of allegations under the heading "Knowledge on the part of Defendants of Partnership, Deeds and duties owed by First Defendant". Relevantly, par 18 contains an allegation that Kim knew each of the matters pleaded in paragraphs 12 to 17 (essentially the primary facts).
7. Paragraph 24 alleges: Further, the First and Second Defendant caused the Eighth Defendant to repurchase the Hotel using funds available to them, including from the proceeds of sale of the Hotel by the Partnership, including Partnership profits and Hotel sale proceeds paid to the Seventh Defendant and purportedly distributed by the Seventh Defendant.
8. The seventh defendant is the trustee of the Trust.
9. Paragraph 25 concerns the "Liability of Defendants," and pleads: By reason of the matters pleaded in paragraphs 12-24 above… (c) that… Second… Defendants were knowing recipients of assets and funds, being the profits of the Partnership, and proceeds of sale of the Hotel, which are traceable to a breach of fiduciary duty by the First Defendant; and (d) in the premises the… Second… Defendants hold on constructive trust for the Plaintiff in her capacity as executor of the estate of the late Adelaide Bowden all such funds in any assets acquired directly or indirectly with such funds, including, without limit, the repurchase of the Hotel, and are liable to account to the Plaintiff for all profits with respect to all such funds and assets up to 8 February 2012.
10. As the Cabramatta Inn Hotel was purchased on 5 February 2010, which is before the time when, in the first judgment, I found Louise to have acquired knowledge that was capable of constituting receipt with knowledge, Kim at this stage does not pursue against Louise a claim for 'knowing receipt" in relation to that transaction. Accordingly, I need not refer to it.
11. Paragraph 29 pleads: By reason of the matters pleaded in paragraphs 12-28, the Defendants are liable to account to the Plaintiff in her capacity as the executor of the estate of the late Adelaide Bowden in respect of the profits of the Partnership between 1 July 2003 and 8 February 2012. Particulars Subject to the due accounting to be given by the said Defendants, so far as the Plaintiff is presently aware, the entitlement as at the date of her death on 8 February 2012 was, or was approximately in the order of $5,747,176 plus interest…
12. The significance of these extracts from the statement of claim becomes apparent from a review of the initial submissions by Louise as to why she is entitled to have Kim's claim against her dismissed.
13. Louise stated (par 6) that the orders for the determination of separate questions provided that the court "will determine the whole of the plaintiff's statement of claim filed on 2 May 2013" as well as the defences, Louise submitted, at par 13: She has failed to adduce, or to put, any propositions in any particularity that Louise received allegedly tainted funds: including as identified in paragraphs [656]-[662]; and [674-[675].
14. That submission was preceded by the identification of paragraphs in the first judgment that Louise said required the court to dismiss the claim against her.
15. I am satisfied that, when the orders for the determination of separate questions are properly analysed, particularly in the light of their provenance, Louise's submissions are based upon a misunderstanding concerning the issues that were to be determined at the first hearing. The orders did not require that all issues concerning the liability of the defendants were to be determined at the first hearing, and only required that the relatively high level facts that were pleaded, without significant particularity, were to be determined. Paragraph 29, which was the final paragraph of the statement of claim, makes it sufficiently clear that Kim was alleging only that the defendants were liable to account to her, and that the amount that they would be liable to pay was "subject to the due accounting to be given by the said Defendants".
16. That approach is consistent with the basis put to the court on 10 September 2015, for the court to make the order for the determination of separate questions, which ought on the material that I have discussed above to have been known by all of the parties.
17. In short, while it is true that Kim failed to establish with any particularity that Louise received allegedly tainted funds, Kim was not required to do so at the first hearing.
18. It is appropriate for the court to set out the following provenance of the orders for the determination of separate questions, as this explains the reason why Kim, and as I understand it, the Stephen defendants, conducted the first hearing on the basis that the substantial purpose of that hearing was to establish whether Stephen was required to undergo an accounting in favour of Kim, in order to identify how the proceeds of sale of the Hotel had been disbursed in-so-far as the disbursements involved a breach of fiduciary duty by Stephen, or were necessary to trace the consequences of such a breach.
19. The problem surfaced at a directions hearing on 26 August 2015, when Kim and the Stephen defendants were represented by junior counsel. Counsel for Kim stated his understanding that a two week hearing on liability had been fixed, while counsel for the Stephen defendants stated that it was his understanding that all matters in issue were to be determined. At this directions hearing, Louise was represented by a solicitor.
20. On 26 August 2015, the directions hearing was stood over to 10 September 2015, to allow the parties to consider what should be dealt with at the forthcoming hearing. Louise was again represented by a solicitor.
21. Junior counsel for Kim advised the court that the parties were still in dispute. He handed up written submissions that he said had been given to the defendants at 8:30 AM that morning.
22. Annexed to the written submissions were proposed orders that were in identical terms to the orders for the determination of separate questions ultimately made on 16 September 2015.
23. In both oral and written submissions, Kim's counsel made it clear that Kim's position was that the court should decide at the first hearing whether Stephen was an accounting party, who ought to be ordered to undertake an accounting process in relation to the proceeds of sale of the Hotel. The submissions were comprehensive in relation to what it was that Kim had to establish, in order to obtain an order for an accounting from Stephen. He submitted that an account cannot be taken until the threshold question of whether the plaintiff is entitled to an account is resolved in favour of the plaintiff. He referred to Part 46 of the UCPR.
24. Paragraph 20 of the submissions acknowledged that, in an appropriate case, it might be possible to bypass some aspects of the taking of an account, where the benefits of doing so would outweigh the costs. He said that, in any event, in circumstances where the plaintiff does not have all of the necessary documents, even if the accounting process could be curtailed in some way, it would be impossible for that to occur before the hearing in November 2015.
25. The fact was that, in the period leading up to the commencement of the first hearing, Kim had access to some annual financial statements of the Partnership and the Trust, but only covering a closed period, and there was a substantial body of records such as ledgers and journals, but the records were incomplete, particularly in relation to what had been done with any money received by the companies that acquired the hotels, the Bowden companies, and Stephen and Louise.
26. Paragraph 21 of the written submissions stated: The plaintiff's proposed orders, which appear at Schedule 2 to the submissions, contemplate that if an accounting is ordered by the Court, then the parties will liaise in relation to the most cost-effective approach to the quantification of the plaintiff's entitlement. This will, of course, have regard to the evidence already filed by the parties in relation to the amount of the plaintiff's entitlement.
27. Paragraph 26 of the written submissions contained a statement that the defendants had been advised by the plaintiff repeatedly, and in the clearest possible terms, that the scope of the November 2015 hearing was necessarily limited. The submissions then set out, by way of extracting relevant documents, earlier statements made by Kim to the defendants, to the effect that, at the initial hearing, she would seek an order for appropriate defendants, primarily Stephen, to provide an accounting.
28. At the end of the oral submissions made on behalf of Kim, junior counsel for the Stephen defendants advised: I think it is fair to say that having now had an opportunity to both hear what Mr Bannan said this morning and particularly to have an opportunity while he has been speaking to digest the submissions that we saw for the first time this morning and in particular for my instructing solicitor to take on board the contents of those submissions, it is fair to say that the position of the defendants is probably on instructions likely to have shifted slightly during the course of this morning in response to those submissions.
29. Counsel ended by saying: I think the position now, your Honour - I don't have instructions to consent to those exactly in those terms but it could be that with a little bit of massaging, if I could speak colloquially, it might be there could be some agreement to enable orders of that nature to be made potentially by consent.
30. When asked, the solicitor for Louise said: "I certainly have no submissions to make against these orders".
31. I thereupon gave a short ex tempore judgment based upon the terms of the submission to the effect that it had always been Kim's primary intention to seek an order for an accounting, that some form of order for separate questions would be appropriate, as it first had to be decided whether Kim was entitled to an accounting, before directions were made for the accounting to occur. It was not practicable to expect the parties to prepare for the accounting actually to take place at the hearing commencing on 2 November 2015, and any effort to that end would be a waste if Kim failed in her application for an order for an accounting. Furthermore, it was doubtful that an accounting could be completed in the time available for the hearing.
32. The orders for separate questions were not made on that date, and the parties were given an opportunity to discuss the appropriate form of the orders.
33. On 16 September 2015, junior counsel appeared for Kim and the Stephen defendants, and senior counsel appeared for Louise.
34. I was advised that the Stephen defendants consented to orders for the determination of separate questions being made in accordance with the draft orders annexed to Kim's 10 September 2015 written submissions.
35. Junior counsel for Kim advised me that he had spoken to senior counsel for Louise, and had been told that it was Louise's position that it was not clear from the orders that the threshold question whether the plaintiff is entitled to an account remained in issue. Counsel for Kim said that, in his submission, there was no doubt that it did remain in issue.
36. Senior counsel for Louise stated that the only issue that he sought to canvas was whether or not the threshold question, namely whether any money at all was owing, was part of a liability case. He said that he wanted to make it clear that the proposed orders dealt with the contest between the two accountants as to whether any money at all was owed. In making those statements senior counsel for Louise may have had in mind that the first hearing would deal with more issues than was understood by counsel for Kim and the Stephen defendants to be the case. If there was a misunderstanding, it was not resolved by further submissions. Louise did not oppose the orders sought by Kim being made.
37. In these circumstances, I made the orders for the determination of separate questions.
38. In retrospect, there may be scope for argument as to whether the terminology of the orders was entirely clear. In the first place, the orders were not framed specifically in terms of the court being required to determine whether any of the defendants should undertake an accounting in favour of Kim, as the first remedy sought by Kim.
39. The orders did not, on the other hand, specifically provide for all issues of liability to be dealt with separately and before all issues of remedy.
40. Whatever else may be said, one thing that is clear from this analysis of the provenance of the orders for the determination of separate questions, is that Louise and her legal representatives knew that Kim proposed to litigate to the point of determining that Stephen, and perhaps other defendants, were accounting parties, who should be ordered to undertake an accounting in favour of Kim, as a preliminary step to Kim electing between equitable compensation and an account of any profits made by any of the defendants, as a result of the receipt of property for which they were obliged to account to Kim. It would not now be procedurally fair for the court to dismiss Kim's case against Louise.

Significance of first judgment

1. It is necessary that I say something about the aspects of the first judgment upon which Louise has relied to support her claim that she is entitled to have the case against her dismissed.
2. The parties, during the first hearing, made submissions in respect of a series of identified issues. One of those issues was described by Kim in her outline opening submission as "the position of Louise", which was primarily concerned with "the extent of Louise's knowledge". In her final submissions, under the same heading, Kim made submissions primarily directed to the issue of Louise's state of knowledge, at the time she apparently received parts of the proceeds of sale of the Hotel.
3. Louise made extensive submissions on the issue of her own liability in chapter 11 of her final submissions. The bulk of those submissions go towards making out the following claim, set out in paragraph 11.8: "There is no evidence that the second defendant had direct knowledge of any breach of fiduciary duty by the first defendant, nor is there any evidence that the second defendant possessed knowledge as would have put a reasonable person on notice of a breach of fiduciary duty by the first defendant".
4. Broadly, in preparing the first judgment, I adopted the policy of determining all of the issues that were in contest between the parties, even where the better view may have been that the particular issue did not arise for determination under the order for the determination of separate questions, because it was a matter going to relief.
5. At J [648] to [675], I canvassed aspects of the extensive submissions made by the parties on the issue of Louise's state of knowledge at the time she received any parts of the proceeds of sale of the Hotel.
6. I did so under the heading "Notice by Louise of breach of fiduciary duty".
7. It is true that I said at J [675], which is so heavily relied upon by Louise: … The point is that for Kim to establish that Louise personally received money that might be traced to the proceeds of sale of the Hotel with knowledge that she had received the money as a result of breach of fiduciary duty by Stephen, it would be necessary to establish in a precise way the state of knowledge at the time of receipt. Kim did not begin to undertake that exercise, having regard to Louise's apparent role in the affairs of the Trust, and the underlying complexity of the financial transactions.
8. Given the terms of the order for the separate determination of questions, this paragraph did not express a positive finding that Kim had failed to prove that Louise had personally received money that might be traced to the proceeds of sale of the Hotel, with knowledge that she had received the money as a result of breach of fiduciary duty by Stephen. That was not the matter to be determined at the hearing. The real point of the paragraph was the observation that "it would be necessary to establish in a precise way the state of knowledge at the time of receipt". My observation that Kim did not begin to undertake that exercise was not intended to convey that she had failed to prove her case against Louise, but to explain why the court could not determine the question that the parties wanted to be determined. The reason was that it is premature for the court to determine the issues going to 'knowing receipt" before the time has arrived where the evidence is capable of establishing the amounts received by Louise, and the context of those receipts, in sufficient detail to enable Louise's mental state to be determined.
9. In-so-far as Louise appears to have relied upon what was said at J [675], and other parts of the first judgment that dealt with the issue of notice by Louise of breach of fiduciary duty, Louise has misunderstood the significance of those observations in relation to the questions required to be separately determined.
10. It is appropriate for the court to clarify one aspect of the first judgment that was the subject of an oral submission made by Kim at the second hearing. At T 29.26-42, Kim submitted that, at J [671], the court made a binding finding that Louise "had the relevant notice from 5 August 2010". The position was put more accurately by Kim at T 31.22, where it was submitted that "once [Louise] then got Stephen's affidavit and Adelaide's claim, she was aware of the possibility that these might be Adelaide's funds". In fact what I said at J [671] was that, once Louise read Stephen's solicitors' letter dated 5 August 2010, or once she read Stephen's affidavit, "Louise must have been aware of the possibility that Stephen was liable for a substantial amount to Adelaide". That is not a finding that, from that time onwards, if Louise received any part of the proceeds of sale of the Hotel, her state of knowledge was such as to make her liable to account to Kim for that receipt. The thrust of my discussion about the notice issue was that I had concluded that the issue could not properly be determined without there being findings of fact in relation to the circumstances in which the funds were received by Louise.

Ratification by Adelaide

1. Louise submitted that the court had failed in the first judgment to deal with an argument put by Louise, that Adelaide had ratified the decision of Stephen to make an unsecured, non-interest-bearing loan of the proceeds of sale of the Hotel to the Trust, because she signed the Partnership's annual financial statement for the year ended 30 June 2008, after it was pointed out to her that the accounts showed that the Trust owed a debt to the Partnership of $28,586,446.66.
2. Louise consistently used variations of the term "ratified" to describe the legal consequences of Adelaide's actions. Ratification is a term that is more apt to describe the situation where a person purports to enter into a contract on behalf of a principal, but without authority to do so, and the contract subsequently becomes binding on the principal by reason of some act of adoption: see Union Bank of Australia Ltd v Rudder (1911) 13 CLR 152. It is more appropriate to speak in terms of the person to whom the fiduciary duty is owed consenting to what would otherwise be a breach of duty by the fiduciary after full disclosure of relevant circumstances.
3. As a preliminary matter, Louise submitted that J [67] contains an error, in-so­-far as it states that Stephen and Mr Morrison met with Adelaide for the purpose of arranging for Adelaide to sign the 30 June 2008 financial statements personally.
4. I accept that it was an error to state that Stephen was present. The annual financial statements for the year ended 30 June 2008 were signed by Adelaide in the presence of Mr Morrison and Kim and Peter Jaeger. The true position is recorded at J [611], which was in that part of the first judgment where I was actually dealing with the significance of these events. The error was made as part of my statement of the primary facts, and it was corrected when I actually dealt with the issue.
5. Louise put this argument with some vehemence. Her written submissions are to be found in pars 165 to 177.
6. The essence of Louise's argument is that Adelaide signed the 30 June 2008 Partnership financial statements after Mr Morrison had pointed out to Adelaide that the accounts recorded that the Partnership had made an interest-free loan to the Trust, and that this was done in the presence of Kim and Peter Jaeger. Mr Morrison was not challenged on the evidence that he gave. Kim and Peter Jaeger were not called to contradict that evidence. Accordingly, Louise submitted, the making of the interest-free loan was understood and consented to by Adelaide. Louise therefore says that Kim is now estopped from asserting that the loan was not made with Adelaide's authority.
7. I dealt with this issue generally at J [609] to [629]. At J [612], I referred to my earlier analysis of the pleadings, and to the particular allegation in Louise's defence that, to the extent that Stephen was required to account to Adelaide as alleged by Kim, he did so account. At J [613], I observed that I did not consider that this allegation properly pleaded a defence by Louise that Adelaide authorised and consented to any breaches of fiduciary duty or failure to account by Stephen. It was probably sufficient to raise a defence of settled accounts against Adelaide.
8. I then explained why, on the evidence, Louise could not maintain a defence that there were settled accounts, that would preclude Louise from asserting that Stephen was not authorised to deal with the proceeds of sale of the Hotel in the manner that he did.
9. However, I considered the matter more generally at J [628], and I said that there was no reason to believe that Adelaide was informed of what the Trust did with the money, so that Adelaide's claim concerning the application of the money could not be regarded as being settled by signing the Partnership's annual financial statement.
10. I would not have come to a different conclusion, had I accepted that Louise had pleaded a defence of ratification or estoppel, or more strictly consent after full disclosure, as a result of Adelaide's having signed the 30 June 2008 Partnership financial statement. I will now give my reasons for this conclusion, to deal with the possibility that the view that I took as to the defences that were available on Louise's pleadings may be found to have been too restrictive.
11. I will deal first with Louise's reliance upon the fact that Kim and Peter Jaeger did not give evidence of what happened at the time Adelaide signed the 30 June 2008 Partnership financial statements.
12. I do not consider this failure to give evidence to have had any significance. The reason is that I do not think that Louise has made out a case of ratification, or estoppel, even if all of the evidence given by Mr Morrison on the issue is accepted. My finding that Adelaide did not consent after full disclosure to the making of the unsecured, interest-free loan does not depend upon any part of Mr Morrison's evidence being contradicted, whether by Kim and Peter Jaeger, or by any other means.
13. A sufficient statement of the principles that govern the giving of consent after full disclosure of a breach of fiduciary duty is found in Meagher, Gummow and Lehane's Equity Doctrines & Remedies (5th ed) at [5-130], where the learned editors say: If a person occupying a fiduciary position wishes to enter into a transaction which would otherwise amount to a breach of duty, a fiduciary must, if liability is to be avoided, make full disclosure to the person to whom the duty is owed of all relevant facts known to the fiduciary, and that person must consent to the fiduciary's proposal… What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given. The circumstances of the case may call for independent and skilled advice from a third party.
14. The requirement for an effective consent to a breach of fiduciary duty is thus usually described in terms of the giving of free and fully informed consent.
15. Louise's case was that Stephen was authorised by the terms of the partnership agreement, as modified by the Deeds and the Management Agreement, to cause the Partnership to make an unsecured, interest free loan of the proceeds of sale of the Hotel to the Trust. Once that loan had been made, and it was maintained in the accounts of the Trust and the Partnership, that was the end of the matter. It was immaterial how the Trust disbursed the money, even if monies were paid out solely for the benefit of Stephen.
16. Louise's informed consent argument mirrored this submission, in the sense that she put that all that was required was for Adelaide to be shown the page in the financial statement that recorded the existence of the loan, so that once she signed the financial statement, she had consented to Stephen's conduct. It did not matter, according to Louise, that Adelaide had not been told anything about what the Trust had done with the money. To give this observation some substance, the 30 June 2008 financial statements were not signed until 15 May 2009, at which time, according to the money trail, only $15,361,780 of the proceeds of sale of the Hotel remained with the Trust.
17. For the reasons that I have given above, certain aspects of how the Trust dealt with the money paid to it by the Partnership are relevant to the whole question of whether Stephen caused the Partnership to acquire a replacement investment. Adelaide could not be found to have effectively consented to the investment unless she had been fully informed of these matters, and she was not.
18. As I observed at J [623], Mr Morrison had an absolute belief that the effect of the July Minutes, and any subsequent agreement between the parties, was that Adelaide only held the legal title to her remaining interest, that she held the beneficial interest on trust for Stephen, and that Stephen was entitled to deal with the property of the Partnership, including the Freehold, as if it was his own.
19. In my view, it is clear from the evidence that Mr Morrison gave as to what he said to Adelaide at the time, that he did not tell her that there was an argument that Stephen's conduct was not authorised by the partnership agreement, or the Deeds and the Management Agreement, and that it may have amounted to a breach of fiduciary duty owed to Adelaide, for which she might be entitled to some remedy against Stephen. When Adelaide signed the 30 June 2008 Partnership financial statement, it was not with any knowledge that her conduct might amount to a retrospective acceptance of Stephen's conduct, notwithstanding the possibility that it may have involved a breach of fiduciary duty.
20. Other, specific aspects of Mr Morrison's evidence militate against a finding that Adelaide gave her free and fully informed consent to Stephen's conduct.
21. Mr Morrison said that he explained to Adelaide in 2008 that the entire proceeds from the sale were put into the Trust, and posted taxation liabilities for both Stephen and Adelaide, which had to be reflected back into the Partnership: "so I indicated that the funds were all sitting in the family trust but the funds had to come back to the Partnership to pay their respective tax bills" (T 186.30). If that statement was made to Adelaide, it would have caused her to understand that the Trust retained the funds, when that was not the case.
22. Mr Morrison also said (T 186.48): A. I can't specifically remember what I spoke to her about but in essence there was a global financial crisis hitting at that time and I had moved or recommended Stephen and Louise and Adelaide reallocate funds to minimise their exposure to term deposits in bank accounts. I didn't go into detail with her every line because they were complex issues and I did not want to - I tried to shield her of any intricate details. Her main concern was where her money was. … Q. What did you say to her? A. I said to her that the money is being dealt with in line with an agreement of the 2003 deeds and the family minutes and that was the way that we were paying for all of her lifestyle expenses, holidays, $1000 a week drawings and motor vehicle expenses, all of the lifestyle expenses that she was accustomed to having paid.
23. First, Mr Morrison specifically suggested to Adelaide that the arrangement accorded with the Deeds and the Management Agreement, when I have found that it did not.
24. Secondly, Adelaide conveyed to Mr Morrison that her main concern was where her money was. What was told to her did not inform her that the money had not been retained in the Trust's account.
25. It may be that the statement made by Mr Morrison, concerning the effect of the global financial crisis, was a summary of what was said. However, the evidence given by Mr Morrison would have conveyed to Adelaide that funds had been reallocated to minimise exposure to term deposits in bank accounts. That was an entirely inadequate description of what was happening to the money in the Trust's account.
26. Finally, when asked a question about whether he had a specific discussion with Adelaide about the non-payment of interest on the loan, Mr Morrison said (T 190.14): A. Not specifically, because, as I said, she wasn't a person of financial nous, and it was too complicated for her. She would say, "I understand I trust you," but they were complex issues for her to understand.
27. It is mystifying how Louise could submit that the mere signature placed by Adelaide on the 30 June 2008 annual financial statement for the Partnership could constitute free and informed consent to any breach of fiduciary duty by Stephen in the face of this evidence.

Louise's amendment application

1. On the last day of the hearing, and indeed within the last hour of submissions, Louise made an application to amend her defence.
2. The application to amend was opposed by Kim, and after hearing argument, I determined that the application to amend should be refused. The circumstances did not permit me to give reasons for my decision, and I informed the parties that I would give my reasons at the same time as my judgment on the substantive issues. The following are those reasons.
3. The amendment sought by Louise would have added the following par 35 to her defence: In answer to the whole of the claims made against the Second Defendant as identified in the Plaintiff's Outline of Submissions dated 14 November 2016 (as set out at page 29), the Second Defendant says that:- a. Clause 6.5 of the Deed between Adelaide Emily Bowden, Stephen James Bowden and Kim Jaeger ("the Principal Deed") provides that the Plaintiff as the Executor of the Estate of the late Adelaide Emily Bowden will not challenge any distributions of income from the Bowden Family Trust made solely for the benefit of members of the First Defendant's immediate family, and not maintain any entitlement to a right of distribution of income or capital or both from the Bowden Family Trust; b. At all material time the Second Defendant was an immediate family member of the First Defendant; c. By reason of the terms of Clause 6.5 of the Principal Deed, the Plaintiff is contractually barred, and further or in the alternative is estopped, from challenging any distributions of income from the Bowden Family Trust made to the Second Defendant as a distribution of income or capital and further is contractually barred, and further or in the alternative is estopped, from maintaining any claim in respect of any distribution of income or capital from the Bowden Family Trust.
4. In essence, Louise wished to argue that she could enforce an estoppel by deed against Adelaide and Kim based upon the terms of clause 6.5 of the Principal Deed. By that term, Adelaide and Kim agreed that Stephen would be free to distribute any income from the Trust to members of his immediate family, and that they would not challenge any such distributions of income from the Trust, and would not maintain any entitlement to a right to distribution of income or capital or both from the Trust.
5. In my view it was not appropriate to permit Louise to amend her defence at such a late stage of the proceedings, based upon the principles established by the High Court in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27. In particular, no explanation was given as to why the defence was not raised in a timely way; and with all due respect, the application to amend appeared to be a late invention by Louise's legal representatives.
6. However, in my view the making of the amendment would also have been futile, as it was based upon a misunderstanding of the principles governing estoppel by deed and the effect of clause 6.5 of the Principal Deed.
7. First, Louise was not a party to the Principal Deed, and in my view she did not have standing to enforce any estoppel based upon that deed. That conclusion is not affected by the fact that Louise was a party to the Divorce Deed, which in a general way was one of the suite of deeds and agreements entered into by the family. The drafter of the deeds took some care to decide which persons were appropriate parties to the various deeds and agreements, and there is no reason to conclude that the parties objectively intended that aspects of the Deeds and the Management Agreement could effectively be enforced by persons who were not named as parties to them. The suite of deeds and agreements was intentionally structured in a way that would have the opposite effect.
8. In any case, the proposed defence misconceived the effect of clause 6.5. It only restricted the entitlement of Adelaide and Kim to the income and capital of the Trust, and to complain about distributions of the income of the Trust to members of Stephen's immediate family. The clause said nothing at all about Adelaide's rights in relation to her remaining capital interest in the Partnership. Kim's rights against Louise, if they arise, will flow out of her involvement in Stephen's conduct in breach of his fiduciary obligation to Adelaide under the Partnership, not the Trust. The fact that the nature of that breach may have involved the loan of the proceeds of sale of the Partnership's Hotel to the Trust, and to some extent, that payments may have been made as distribution of income of the Trust, does not change the character of Louise's potential liability to Kim.
9. In any event, little of the money disbursed by the Trust took the form of payments of income of the Trust. Payments of capital were carried out through the Partnership. The Trust made loans, and not distributions of capital. The Trust also paid its own debts.
10. Consequently, in my view, it would be futile to permit Louise to make the amendment she applied for leave to make.
11. It should be noted for completeness that, even though Louise did not seek to plead a defence based upon the effect of cl 6.5 of the Principal Deed until the last day of the hearing, in par 5.5.11 of her written opening submissions Louise put the argument that Adelaide expressly renounced her entitlement to distributions of capital and income from the Trust, and authorised Stephen to make distributions from the Trust in favour of himself and his family, by means of cl 6.5. The submission that Adelaide covenanted that she would not challenge any of the distributions from the Trust made for the benefit of the family of Stephen was briefly repeated in par 11.17 of Louise's closing written submissions.
12. The submission that cl 6.5 authorised Stephen to make "distributions" from the Trust misstates the effect of the clause, in that the authorisation is only given "to distribute any income" from the Trust, and does not apply to the capital.
13. Although I did not expressly deal with this argument in the first judgment, in my view it fails for the reasons given above. In its terms, it could only apply to distributions of the income earned by the Trust on its own investments. It could not apply to distributions of the Partners Funds from the Partnership. It would not protect any of the defendants from participation in any breach of fiduciary duty by Stephen. Louise does not have standing to enforce cl 6.5, in any event.

Conclusion

1. It will be necessary for the parties to consider these reasons for judgment in order to determine the substantive orders that should now be made, and the procedural orders that should be made for the further conduct of the proceedings.
2. The parties should investigate whether it is possible for them to cooperate to complete the money trail exercise, and for that purpose it will be necessary for Kim and the Stephen defendants to involve Louise.
3. The parties should also attempt to agree upon the procedural orders that will be necessary to complete the money trail exercise, if that cannot be done cooperatively, and for Kim to obtain whatever other evidence is necessary for the purpose of quantifying the relief to which she is entitled.
4. At an appropriate stage, it will be necessary for Kim to make an election as to the remedy that she will seek from the court. The court has found that the partnership agreement, as modified by the Principal Deed and the Management Agreement, did not oblige Stephen to acquire a replacement investment with the proceeds of the Hotel that would cause the Partnership to earn a profit in its own name. While it is a matter for Kim to consider, it may flow from this finding that the remedy of an account by the relevant defendants is the proper remedy for her to elect.
5. The parties should also consider the advisability of their accepting the appropriateness of the court's adopting the court interest rate as a proxy for the amount of profit earned by any defendant (other than profit actually earned from the direct investment of the proceeds of sale of the Hotel), so that all parties will be spared the costs of a judicial determination of the actual profits. The use of the court interest rate as a proxy would still leave open the need to determine whether the amount of the proxy profit should be determined on a simple or compound basis.
6. The parties should arrange with my Associate to fix a further directions hearing at a convenient time for the purpose of the court making the necessary substantive and procedural orders. If there is disagreement, the parties should submit proposed orders at least three days before the directions hearing.
7. During the second hearing, the court was asked to make a number of orders by consent of the interested parties. It is not necessary to explain the reasons for the orders, and I will make them now. 1. The Court declares that the sixth defendant, Bowden Property Investments Pty Limited ("BPI"), is not a "Hotel Company" for the purpose of: 1. clause 8.8 of the Principal Deed (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016); 2. clause 6.8 of the Family Deed (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016); 3. clause 4.9 of the Divorce Deed (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016); 4. clause 3.8 of the Management Agreement (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016). 1. The Court notes that: 1. the late Adelaide Bowden is currently the registered holder of 50 ordinary shares and 1 B Class share in BPI; 2. upon receipt of notice of an election or a completed transfer form pursuant to sub-rule 12.2(a)(i) or (ii) of the Constitution of BPI, the first defendant, as the sole surviving director of BPI, will cause BPI to register the plaintiff (either in her capacity as executor of the estate of the late Adelaide Bowden or alternatively the plaintiff in her personal capacity), as the holder of the 50 ordinary shares and 1 B Class share in BPI currently registered in the name of the late Adelaide Bowden; 3. the plaintiff is not obliged to transfer the said shares, or any of them, to the first defendant pursuant to clause 3.1 of the Principal Deed or otherwise; and 4. the plaintiff and the first and third to tenth defendants have (without admissions) agreed that the plaintiff will commence separate proceedings in respect of the further relief sought by the plaintiff in relation to BPI as a result of the declarations and notations made in paragraphs 1 and 2(a)-(c) above.
8. The list of transcript corrections sent by junior counsel for Kim to my Associate as an attachment to an email dated 16 December 2016 will be added to the transcript at the end of the transcript for 23 November 2016.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 March 2017