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[2025] NSWSC 1477
Supreme Court of NSW
2025-12-09
McGrath J
Original judgment source is linked above.
Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Kupang Resources Pty Ltd v Commonwealth of Australia (No 4) [2025] NSWSC 1477
Hearing dates: 2 – 12 December 2024
Date of orders: 9 December 2025
Decision date: 09 December 2025
Jurisdiction: Equity - Commercial List
Before: McGrath J
Decision: Defendant liable to the plaintiff for knowing receipt
Catchwords: EQUITY — Breach of fiduciary duty— Liability to account as a constructive trustee as distinct from the constructive trust as a remedy
EQUITY — Breach of fiduciary duty — Application of Barnes v Addy — Knowing receipt — whether personal liability extends to cases where the claimant has no proprietary interest in subject property — whether liability dependent upon demonstration of some judicially recognised antecedent or current proprietary interest — HELD — claimant’s ability to assert a proprietary interest in the subject property is not determinative of personal liability in knowing receipt in this jurisdiction — personal liability fixes on the conscience of the recipient by reference to their knowledge at the time of receipt
EQUITY — Breach of fiduciary duty — Application of Barnes v Addy — Knowing receipt — application to non-trustee fiduciary relationship — scope of property to which fiduciary obligations attach — whether unauthorised profits obtained in breach of fiduciary duty are within the ambit of “trust property” — where extant judgment holding errant fiduciary liable to account and not mere allegations — HELD — unauthorised profits obtained in breach of fiduciary duty constitute property to which a fiduciary obligation attaches and are within the ambit of “trust property” for the purpose of liability in knowing receipt
EQUITY — Breach of fiduciary duty — Application of Barnes v Addy — Knowing receipt — whether transfer to recipient itself must be in breach of trust or fiduciary duty — HELD — liability in knowing receipt extends to “downstream recipients”
EQUITY — Breach of fiduciary duty — Application of Barnes v Addy — Knowing receipt — Standard of knowledge required — Relationship with the standard for knowing assistance — HELD — Baden categories (i) to (iv) will sustain an action in knowing receipt but Baden category (v) constructive notice is insufficient
EQUITY — Breach of fiduciary duty — Application of Barnes v Addy — Knowing receipt — Beneficial receipt — whether liability in knowing receipt extinguished by intermediary who holds funds temporarily in a ministerial capacity — application of bona fide purchaser for value without notice “defence” in this context — HELD — questions of title and priority in respect of property not determinative of personal liability in knowing receipt
EQUITY — Tracing — Real property — Registered mortgage — Indefeasibility — where in personam exception to indefeasibility does not extend to cases of a constructive trust under the first limb of Barnes v Addy at least in relation to proprietary claims — where mortgage discharged and claimant seeks to trace into payments received to discharge mortgage — HELD — payments received to discharge mortgage are distinct from a claim of title to either the property or the mortgages themselves
Legislation Cited: Bankruptcy Act 1966 (Cth), s 123
Corporations Act 2001 (Cth), ss 180, 181, 182, 1317E, 1317H
Criminal Assets Recovery Act 1990 (NSW), ss 4, 7, 8, 10, 12, 22, 27, 28C, 29, 31, 32
Income Taxation Assessment Act 1936 (Cth), s 264
Interpretation Act 1987 (NSW), s 34
Land Title Act 1994 (Qld)
Partnership Act 1958 (Vic), s 33
Proceeds of Crime Act 2002 (Cth)
Real Property Act 1900 (NSW), ss 42, 43, 93
Taxation Administration Act 1953 (Cth), s 8AAD
Trustee Act 1888 (UK), s 8
Cases Cited: Adler v Australian Securities and Investments Commission (2003) 179 FLR 1; [2003] NSWCA 131
Admiral International Pty Ltd v Insurance Australia Ltd [2022] NSWCA 277
Agip (Africa) Ltd v Jackson [1990] Ch 265
Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43
Attorney-General v Biphosphated Guano Co (1879) 11 Ch D 327
Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302; [2015] VSCA 9
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17
Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509
Barclays Bank Plc v Boulter [1998] 1 WLR 1
Barnes v Addy (1874) LR 9 Ch App 244
Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566; [1998] HCA 59
BCEG International (Australia) Pty Ltd v Xiao (2022) 162 ACSR 601; [2022] NSWSC 972
Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393
Black v S Freedman & Co (1910) 12 CLR 105; [1910] HCA 58
Blue Mirror Pty Ltd v Tan & Tan Australia Pty Ltd (in liq) [2024] NSWCA 253
Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44
Brady v Stapleton (1952) 88 CLR 322; [1952] HCA 62
Break Fast Investments Pty Ltd v Rigby Cooke Lawyers [2022] VSCA 118
Breen v Williams (1996) 186 CLR 71; [1996] HCA 57
Brown v Bennett [1999] BCC 91
Brown v Bennett [1999] 1 BCLC 649
Byers v Saudi National Bank [2023] UKSC 51; [2024] 2 WLR 237
Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; [1969] 2 WLR 427
Caron v Jahani (No 2) (2020) 102 NSWLR 537; [2020] NSWCA 117
Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129
Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36
Chickabo Pty Ltd v Zphere Pty Ltd (2019) 57 VR 406; [2019] VSC 73
Cigna Life Insurance New Zealand Limited v Westpac Securities Limited [1996] 1 NZLR 80
Coleman v Power (2004) 220 CLR 1; [2004] HCA 39
Commissioner of Taxation v Grimaldi (No 9) [2009] FCA 1404
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8
Cook v Deeks [1916] 1 AC 554
Courtwood Holdings SA v Woodley Properties Limited [2018] EWHC 2163 (Ch)
CSR Ltd v Eddy (2005) 226 CLR 1; [2005] HCA 64
Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599; [1999] HCA 15
El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685
ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; [2021] NSWCA 24
Evans v European Bank Ltd (2004) 61 NSWLR 75; [2004] NSWCA 82
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22
Farrow Finance Co Ltd (in liq) v Farrow properties Pty Ltd (in liq) [1999] 1 VR 584
Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81
Flack v Chairperson, National Crime Authority (1997) 80 FCR 137
Foley v Hill (1848) 2 HL Cas 28
Foskett v McKeown [2001] 1 AC 102
Fox v Percy (2003) 214 CLR 118; [2003] HCA 22
Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3
Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10
Goodrich Aerospace Pty Ltd v Arsic (2006) 66 NSWLR 186; [2006] NSWCA 187
Gordon v Leon Plant Hire Pty Ltd (in liq) [2015] NSWSC 397
GP Building Holdings v Voitin (2022) 69 VR 299; [2022] VSCA 210
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6
Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266
Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252
Heperu Pty Ltd v Morgan Brooks Pty Ltd (No 2) [2007] NSWSC 1438
Hoh v Ying Mui Pty Ltd [2019] VSCA 203
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64
Hotel Portfolio II UK Ltd (in liquidation) v Stevens [2025] UKSC 28; [2025] 3 WLR 293
In re Nisbet and Potts’ Contract [1905] 1 Ch 391
In re Nisbet and Potts’ Contract [1906] 1 Ch 386
International Finance Trust Co Ltd v New South Wales Crime Commission (2009) 240 CLR 319; [2009] HCA 49
International Finance Trust Company Ltd v New South Wales Crime Commission (2008) 251 ALR 479; [2008] NSWCA 291
International Finance Trust Company Ltd v New South Wales Crime Commission (No 2) [2010] NSWCA 46
International Sales and Agencies Limited v Marcus [1982] 3 All ER 551
Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61
Jaken Properties Australia Pty Ltd v Naaman [2023] NSWCA 214
John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19
Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8
Jonray (Sydney) Pty Ltd v Partridge Bros Pty Ltd [1969] 1 NSWR 621; (1969) 89 WN (Pt 1) (NSW) 568
K & A Laird (NSW) Pty Ltd (in liq) v Aidzan Pty Ltd (in liq) [2023] NSWSC 603
Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557; [2007] NSWCA 191
Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342; [1958] HCA 33
Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11
Ling v Pang [2023] NSWCA 112
Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580
Manly Council v Byrne [2004] NSWCA 123
McFee v Reilly [2018] NSWCA 322
McNally v Harris [2008] NSWSC 659
Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671; [1976] HCA 30
Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48
Mills v Renwick (1901) 1 SR (NSW) Eq 173; 18 WN (NSW) 213
Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78
Naaman v Jaken Properties Australia Pty Ltd (2025) 99 ALJR 295; [2025] HCA 1
Nadilo v Souris [2019] NSWSC 108
National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251; [1986] HCA 21
Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400
Parbery v QNI Metals Pty Ltd (2018) 131 ACSR 27; [2018] QSC 240
Payne v Parker [1976] 1 NSWLR 191
Pilcher v Rawlins (1872) LR 7 Ch App 259
Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344
Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81; [2007] HCA 53
Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008
Re Hallett's Estate (1880) LR 13 Ch D 696
Re Lands Allotment Co [1894] 1 Ch 616
Re Montagu’s Settlement Trusts (1987) Ch 264
Re Oatway [1903] 2 Ch 356
Re Stableford Colliery Co (Barrow’s Case) (1880) 14 Ch D 432
Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2025] 2 WLR 529
Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71
Rolfe v Gregory (1865) 4 De GJ & S 576; (1865) 46 ER 1042
Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53
Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 30
Scrivener v Cappello [2021] NSWCA 330
Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555
Simmons v NSW Trustee and Guardian (2014) 17 BPR 33,717; [2014] NSWCA 405
Soar v Ashwell [1893] 2 QB 390
Société d’Avances Commerciales (Société Anonyme Egyptienne) v Merchants’ Marine Insurance Co (The Palitana) (1924) 20 Ll L Rep 140; [1924] 11 WLUK 83
SSABR Pty Ltd v AMA Group Limited [2024] NSWCA 175
Super 1000 v Pacific General Securities [2008] NSWSC 1222
Sze Tu v Lowe [2014] NSWCA 462
The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) 92008) 39 WAR 1; [2008] WASC 239
The Serious Fraud Office v Litigation Capital Limited [2021] EWHC 1272
Thomson v Clydesdale Bank Ltd [1893] AC 282
Toksoz v Westpac Banking Corporation [2012] NSWCA 199
Tomlinson v Ramsey Food Processing Pty Limited (2015) 256 CLR 507; [2015] HCA 28
Touma v Highfields Australia Pty Ltd [2024] NSWCA 160
Turner v O’Bryan-Turner (2022) 107 NSWLR 171; [2022] NSWCA 23
Twigg v Twigg [2022] NSWCA 68
United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766
Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18
Watson v Foxman (1995) 49 NSWLR 315
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157
Westpac Banking Corporation v Savin [1985] 2 NZLR 41
White Constructions Pty Ltd v PBS Holdings Pty Ltd [2020] NSWCA 277
Wilkes v Spooner (1911) 2 KB 473
Texts Cited: G E Dal Pont, Equity and Trusts in Australia (8th ed, 2023, Thomson Reuters)
JC Campbell, “When and why a bribe is held on a constructive trust: The method of reasoning towards an equitable remedy” (2015) 39 Australian Bar Review 320
T Bingham, “The Judge as Juror: the Judicial Determination of Factual Issues” (1985) 38 Current Legal Problems 1
W Gummow, “Knowing assistance” (2013) 87(5) Australian Law Journal 311
Category: Principal judgment
Parties: Kupang Resources Pty Ltd (Plaintiff)
Commonwealth of Australia (Defendant)
Representation: Counsel:
C Withers SC, C Mitchell, D Morris and J Hudson (Plaintiff)
J Hogan-Doran SC and E Ball (Defendant)
Solicitors:
Banton Group (Plaintiff)
Australian Government Solicitor (Defendant)
File Number(s): 2020/00106859
Publication restriction: Nil
INTRODUCTION
RELEVANT FACTS
Key parties and transactions
Mr Grimaldi
Chameleon
Murchison
The Winterfall transaction
Receipt of benefits by Mr Grimaldi
Project Wickenby and Operation Starlifter
Witnesses at trial and their credibility
ATO personnel involved in the ATO’s investigation and the Commonwealth’s evidence at trial
Jones v Dunkel inferences
Credibility of Mr O’Neill
Commencement of the Chameleon Proceedings, ATO investigation and Recovery Act Proceedings
November 2007: Commencement of the Chameleon Proceedings
April – May 2008: Commencement of the ATO investigation
May – June 2008: Commencement of the Recovery Act Proceedings
Investigation into Mr Grimaldi and Murchison
25 August 2008: ATO profile of Mr Grimaldi
11 September 2008: Crime Commission letter to the ATO
18 September 2008: ATO profile of Murchison
19 and 22 September 2008: Communications between Martin Woods and the Crime Commission
25 September 2008: Meeting between Mr Grimaldi, the ATO and the Crime Commission
26 September 2008: Meeting between Mr Grimaldi and the ATO
October 2008: Agreement between Mr Grimaldi and the Crime Commission regarding the Recovery Act Proceedings
Restraining Orders in the Recovery Act Proceedings
October 2008: Further Restraining Orders in the Recovery Act Proceedings
November 2008: First Restraining Orders set aside by Court of Appeal
The ATO investigation continues
November 2008: Commencement of ATO audit and compulsory notices to the Crime Commission
24 November 2008: ATO profile of Mr Barnes
12 December 2008: Meeting between ATO and Crime Commission
17 December 2008: ATO Audit Case Plan
19 December 2008: s 264 notice issued to Mr Grimaldi
27 January 2009: Interview with Mr Grimaldi
11 February 2009: Amended Audit Case Plan
4 March 2009: Chameleon meeting with ATO
4 March 2009: s 264 notice issued to Chameleon
24 March 2009: Telephone conversation with Mr Karam
25 March 2009: Telephone conversation with Mr Karam
Conclusions about the ATO’s enquiries
March – April 2009: Further documents provided to the ATO by the Crime Commission
April 2009: ASX announcement by Murchison concerning the Chameleon Proceedings
ATO amended assessments and judgment in the ATO Proceedings
April 2009: The ATO amended assessments to Mr Grimaldi
May – July 2009: The ATO Proceedings
July 2009: The Grimaldi ATO Judgment
July 2009: Forensic report on the July 2005 Trust Deed
July – August 2009: Consent orders made in the Recovery Act Proceedings
July – September 2009: Further ATO investigations
27 July 2009: Report of Audit
24 September 2009: Updated ATO profile of Mr Barnes
September – October 2009: The trial of the Chameleon Proceedings commences
October – November 2009: Judgment against Mr Grimaldi in New Zealand
November 2009: High Court judgment and consequences
November 2009: Judgment against MGG Capital
November – December 2009: Further Recovery Act proceedings
November 2009 and February 2010: Closing submissions in the Chameleon Proceedings
February – March 2010: Developments in the ATO Proceedings
March 2010: Validity of Grimaldi Proceeds Assessment Order
April – June 2010: Mediation and further court orders in the Further Recovery Act Proceedings and the ATO Proceedings
April – June 2010: Mediation between the ATO and Mr Grimaldi
May 2010: Orders in the Further Recovery Act Proceedings
May 2010: Freezing orders in the ATO Proceedings
October 2010: Deeds of Settlement
First Deed of Settlement
Second Deed of Settlement
October 2010: Consent orders in the Recovery Act Proceedings and the ATO Proceedings
October 2010: First payment made to the Crown Finance Entity
Judgment and orders in the Chameleon Proceedings
20 October 2010: Chameleon Judgment delivered
21 October 2010: ATO receives payment from NSW Treasury
21 – 22 October 2010: The ATO’s response to the Chameleon Judgment
20 December 2010: Final orders in the Chameleon Proceedings
Further payments to the Crown Finance Entity and the ATO, and dismissal of Mr Grimaldi’s appeal
February, May, August and November 2011: Further payments by Mr Grimaldi to the Crown Finance Entity and by the Crown Finance Entity to the ATO
21 February 2011: The dismissal of Mr Grimaldi’s appeal in Grimaldi No 2
February and May 2012: Further payments by Mr Grimaldi to the Crown Finance Entity and by the Crown Finance Entity to the ATO
August 2012: Property sale and further payments by Mr Grimaldi to the Crown Finance Entity and by the Crown Finance Entity to the ATO
August 2012: Letter from the solicitors for Chameleon to the ATO
February 2013: Property sale and further payments by Mr Grimaldi to the Crown Finance Entity and by the Crown Finance Entity to the ATO
March 2013 – July 2014: Bankruptcy of Mr Grimaldi and inquiry for account of profits suspended
CHAMELEON’S CLAIM
THE COMMONWEALTH’S DEFENCE
THE ISSUES FOR DETERMINATION
ISSUE 1: THE TRUST PROPERTY ISSUE
Submissions of Chameleon
Submissions of the Commonwealth
Legal principles: Fiduciary duties and the liability to account
Legal principles: Liability for knowing receipt
Personal liability as a matter of conscience
Liability to account “as a constructive trustee”
Claims of knowing receipt against persons dealing with non-trustee fiduciaries
The ambit of “trust property”
Must the transfer of the “trust property” to the recipient be made in breach of fiduciary duty?
Conclusion
Consideration
ISSUE 2: THE KNOWLEDGE ISSUE
Submissions of Chameleon
Submissions of the Commonwealth
Legal principles: Knowledge required in a knowing receipt claim
Consideration
27 January 2009: ATO knowledge
March 2009: ATO knowledge
21 May 2010: ATO knowledge
October 2010: ATO knowledge
The ATO’s conscience
Conclusions on ATO knowledge
ISSUE 3: THE BONA FIDE PURCHASER FOR VALUE WITHOUT NOTICE ISSUE
Submissions of the Commonwealth
Submissions of Chameleon
Legal principles: Bona fide purchaser for value without notice
Consideration
NSW was not a purchaser for value
NSW gave no consideration
The receipts by NSW were ministerial
Failure of the Commonwealth to prove that NSW had no notice
The receipt by NSW was not bona fide
ISSUE 4: TRACING INTO THE MORTGAGE PAYMENTS
Legal principles: Tracing
Relevant facts
Acquisition of Unit 404C/24 Refinery Drive, Pyrmont
Acquisition of Unit 403/24 Refinery Drive, Pyrmont
Subsequent dealings with Unit 403 and Unit 404C
Is Chameleon able to trace the proceeds into the payments received from the sale proceeds?
The operation of ss 42 and 43 of the RPA
Conclusion
CONCLUSIONS
ORDERS
This is the latest chapter in a long saga of litigation spanning almost 20 years.
The genesis of the various proceedings are breaches of fiduciary duty owed by Phillip Grimaldi to the plaintiff, Kupang Resources Pty Limited (which, for consistency, I will refer to as Chameleon in recognition of its former name of Chameleon Mining NL, by which it was known throughout the relevant events). In 2004, as a de facto director, Mr Grimaldi appropriated Chameleon’s funds to enable the completion of a transaction in which Murchison Metals Limited, a company of which Mr Grimaldi was a director and a significant shareholder, acquired an interest in valuable iron ore mining tenements in Western Australia.
Mr Grimaldi obtained significant financial benefits from that transaction in the form of new shares and options in Murchison received as a “spotter’s fee” (Spotter’s Fee Securities) and an increase in the value of his existing Murchison shareholding (Existing Shareholding) via his nominees. He caused both types of securities to be sold from time to time, realising profits of some $36 million. Enjoying the abundant fruits of his breaches of duty, Mr Grimaldi then lived a life of some luxury: he purchased multiple properties in Sydney for his family, paid his rent on a harbourside residence, bought expensive items such as a Bentley and a power boat, and went on opulent trips including a safari in Africa.
On 29 November 2007, Chameleon brought proceedings in the Federal Court of Australia against Mr Grimaldi and Murchison, amongst others, relevantly claiming that Mr Grimaldi was liable to account to it for the profits he and his nominees had obtained as a result of his breaches of fiduciary duty (Chameleon Proceedings).
On 20 October 2010, Chameleon succeeded at first instance in the Chameleon Proceedings before Jacobson J, obtaining relief which included an order for Mr Grimaldi to account for profits made as a consequence of his breaches of fiduciary duty, with the amount of those profits to be determined in an inquiry: Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129 (Chameleon Judgment).
On 21 February 2012, Mr Grimaldi’s appeal to the Full Court of the Federal Court was unsuccessful: Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 (Grimaldi No 2).
Mr Grimaldi’s sudden influx of wealth eventually drew the attention of the Commissioner of Taxation (acting through the Australian Taxation Office (ATO)). The Commissioner pursued Mr Grimaldi from 2008 to 2010 for unpaid tax assessed on the premise that Mr Grimaldi and his superannuation fund were beneficially entitled to keep any profits earned on the Spotter’s Fee Securities and the Existing Shareholding. On 13 July 2009, the Commissioner obtained summary judgment against Mr Grimaldi in the Federal Court for $36,341,461.73 on that basis and ultimately settled the tax dispute with Mr Grimaldi and his nominees for close to $20 million. The majority of that sum was first paid to the New South Wales Treasury () in purported satisfaction of a proceeds assessment order obtained by the New South Wales under the (NSW), before being paid to the ATO from a confiscated proceeds account. The sum was paid in tranches, the first of which was paid to the ATO on 21 October 2010, the day after the was delivered.
According to an ATO Audit Report dated 27 July 2009 (July 2009 Audit Report), Mr Grimaldi was a chartered accountant, an occupation in which he worked for 31 years. He spent 24 of those years providing advice to companies about their financing and structural requirements, advising on the listing on the Australian Stock Exchange (ASX) of around eight companies, including four mining companies. The July 2009 Audit Report also states in respect of Mr Grimaldi that from “1985 until 1989 he was involved in structuring and listing on the ASX a number of public companies including two mining companies [and] … also acted as a director and advisor to those companies” and from “1990 to 1997 he worked as a financial consultant involved in structuring international business ventures mainly between Australia, Malaysia, Philippines, Singapore and China”.
Despite those various business activities, Mr Grimaldi’s financial position was poor. He was made bankrupt in 1989, discharged from bankruptcy in 1998 and had minimal levels of reported income prior to 2004.
On 18 April 1997, Murchison was incorporated. In March 2000, Murchison became a public company. Originally known as Weboz Ltd, Murchison was initially engaged in investment in the information technology and telecommunications industries and, until at least 2003, its principal activities were the operation of a network of proprietary smart card payphones and public internet access units and the design and marketing of prepaid smart cards. In January 2004, its name changed to NiCu Metals Ltd. In October 2004, it changed its name again to Murchison.
Between 18 April 1997 and 12 November 2004, Mr Grimaldi was a director of Murchison. He held about half of its approximately 16 million shares, was in the top 20 shareholders of Murchison and was its controlling mind. The other director of Murchison at the relevant time was Mr Roberts.
One of the central components of Chameleon’s claims in the Chameleon Proceedings — and the transaction forming the factual substratum of these proceedings — was the acquisition by Murchison of interests in certain mining tenements in Western Australia (Iron Jack Tenements). The details of the transaction were the subject of factual findings by Jacobson J in the Chameleon Judgment and were not in dispute between the parties in these proceedings.
From around December 2003, the principal shareholder and director of Winterfall Pty Ltd (subsequently renamed Crosslands Resources Ltd), Nicholas Zuks, began negotiating with several persons and companies to buy the Iron Jack Tenements from them. Those negotiations culminated in Winterfall entering into a Heads of Agreement with the vendors on 19 February 2004 to purchase the tenements for $1 million, with Winterfall to pay the vendors a royalty of 80 cents per tonne of iron ore removed from the Iron Jack Tenements.
The purchase price for the Iron Jack Tenements was payable in instalments: $100,000 on execution, $400,000 within 60 days of execution (i.e. by 19 April 2004), and $500,000 within 24 months of execution.
Mr Zuks paid the first instalment with his own funds, but neither he nor Winterfall had the money to pay the second instalment. He was successful in obtaining several extensions of time for payment of the second instalment.
In about April 2004, Mr Grimaldi and Mr Barnes approached Mr Zuks about the possibility of Murchison acquiring an interest in the Iron Jack Tenements through a reverse takeover of Winterfall. As a result of those discussions, on around 30 May 2004, Murchison and Winterfall signed a Heads of Agreement, under which:
Murchison agreed to pay $350,000 to Winterfall on execution of the Heads of Agreement, which Winterfall was to use to pay the vendors of the Iron Jack Tenements.
Murchison was later to effect a “reverse takeover” of Winterfall by Murchison with Mr Zuks and his partners receiving 40% of the final issued capital of Murchison on completion of the takeover. The reverse takeover was to be effected by an exchange of shares, with the shareholders of Winterfall exchanging their shares in that company for an issue of 40% of the share capital of Murchison.
In about early June 2004, Mr Grimaldi, Mr Barnes and Mr Zuks agreed that Mr Grimaldi and Mr Barnes would be entitled to a “spotter’s fee” in the form of equity in Winterfall to be exchanged for equity in Murchison on completion of the reverse takeover. In early June 2004, an Addendum to the Heads of Agreement was executed which provided that new shares in Winterfall would be issued to nominees of Phillip Grimaldi at no consideration for introducing Murchison to Winterfall. These became known as the Spotter’s Fee Securities.
In October 2004, Mr Grimaldi arranged with an accounting firm in Vanuatu, PKF Accountants, run by an accountant, Robert Agius, for the incorporation of a private company limited by guarantee in Vanuatu. As a result, Iron Ore Sales and Management (HK) Limited was incorporated on 9 November 2004. Its name was changed to IOS Management Ltd on 15 November 2004, and later to Iron Investments Limited on 6 July 2005. International Finance Trust Company Limited (IFTC), another Vanuatu-based entity controlled by PKF, was apparently involved in the incorporation of Iron or at least charged a fee for its incorporation. Iron became the ultimate destination of the Spotter’s Fee Securities.
On 11 November 2004, Mr Barnes on behalf of Pinnacle wrote to Murchison directing how the 10 million shares and 12 million options issued by Murchison were to be allocated. That included the allotment of 4 million Murchison shares and 5 million Murchison options to Iron on Mr Grimaldi’s instructions, and 84,000 Murchison shares and 770,000 Murchison options to MGG Capital Pty Ltd, the entity which acted as the trustee for Mr Grimaldi’s superannuation fund. A number of the options were exercised and converted to shares in 2005. It appears that around this time Mr Grimaldi also directed the transfer of some of the Existing Shareholding, which had substantially increased in value following the completion of the reverse takeover of Winterfall. The result of this was that in March 2005, Mr Grimaldi was the controller of some 6 million Murchison shares and 8.055 million Murchison options registered to Iron.
Mr Grimaldi proceeded to sell or cause his nominees to sell some of these Murchison securities for a substantial profit. Those nominees included Pinnacle, Iron, Yilgarn Infrastructure Limited, MGG Capital, MGG Capital as trustee for Webtel Management Super Fund (Webtel Super Fund), IFTC, CGI Investments Ltd and Ross Lorking. He generated significant profits through those sales amounting to about $36 million. The funds were held in New Zealand, in bank accounts held with the ANZ Banking Group (ANZ Bank) in the name of IFTC. The Murchison securities were held in trading accounts in the name of IFTC Broking Services Limited, which were with Goldman Sachs, BBY and (later on) Commonwealth Securities Ltd (Commsec).
Mr Grimaldi slowly repatriated the funds to Australia and used them for various purposes. He instructed IFTC to pay rent for his residential apartment. He travelled frequently, including to London and on a private safari in Africa, and instructed IFTC to pay various recipients to facilitate those trips. He purchased luxury items, including a Bentley Continental vehicle and a Sunrunner 14800 power boat. He also instructed IFTC to advance funds to his solicitor’s trust account which he used to acquire four properties in Sydney: one property at Miller’s Point and three properties at Pyrmont. Mr Grimaldi also instructed IFTC to buy and sell shares on behalf of Iron.
In February 2006, Project Wickenby commenced as a Commonwealth cross-agency task force set up to combat international tax evasion as an aspect of serious financial crimes, particularly through the use of tax havens.
The Commonwealth agencies involved in Project Wickenby were the ATO, the Australian Federal Police (AFP), the Australian Crime Authority, the office of the Commonwealth Director of Public Prosecutions (DPP), the Australian Securities and Investments Commission (ASIC) and the Australian Transaction Reports and Analysis Centre (AUSTRAC).
Some of the operations involved in Project Wickenby were assisted by state agencies, including the Police and the Crime Commission. These Commonwealth and state agencies were involved in various levels of information sharing under their statutory powers. The assistance and information provided by the Crime Commission to the Commonwealth agencies was given on an ad-hoc basis as a matter of comity between the Commonwealth and the State of New South Wales (NSW) to cooperate and was not provided under any formal agreement or legal obligation.
Project Wickenby ran for nearly 10 years, concluding on 30 June 2015. Project Wickenby was the largest tax evasion investigation that had ever been run in Australia, netting in excess of $2 billion in tax liabilities and recouping nearly $1 billion in outstanding revenue. Project Wickenby also resulted in the conviction of 46 individuals of various state and federal criminal offences.
The work undertaken in Project Wickenby led to both civil proceedings and criminal investigations. The civil proceedings principally involved the pursuit of taxation judgments on notices of assessment against the promoters of tax schemes, their clients and controlled entities. The criminal investigations were undertaken by the AFP, which led to prosecutions by the DPP and proceeds of crime actions by the AFP or the Crime Commission.
In 2006, as part of Project Wickenby, the AFP and the ATO began investigating whether Australian residents were engaged in an offshore tax evasion scheme through PKF, orchestrated by Mr Agius. That joint investigation was known as Operation Starlifter. The scheme under investigation involved the remittance of funds by Australian companies to a New Zealand bank account under the guise of a trading expense, which were ultimately remitted back to the relevant Australian company or a personal bank account of a director of the company. Mr Grimaldi became the subject of these investigations, which are outlined in detail below.
Michael O’Neill was an Assistant Commissioner at the ATO, being one of the Assistant Commissioners responsible for the day-to-day conduct of Project Wickenby. Mr O’Neill oversaw and conducted proceedings brought by the ATO against Mr Grimaldi (T103), which are outlined in detail below. Mr O’Neill was the only ATO witness called by the Commonwealth at the hearing before me. Mr O’Neill was extensively cross-examined at the hearing.
Steven Barns was the ATO’s primary auditor of Mr Grimaldi’s tax affairs. Mr Barns reported indirectly to Mr O’Neill (T104). Mr O’Neill gave evidence that Mr Barns had knowledge of the day-to-day conduct of the audit of Mr Grimaldi (T105). Mr Barns still works at the ATO and swore an affidavit on behalf of the Commonwealth in these proceedings. The Commonwealth did not call Mr Barns as a witness in the hearing before me and did not explain why it did not do so.
Aris Zafiriou was an acting director and later the director of the debt section of the ATO working on Project Wickenby (T105). Mr Zafiriou was the lead tax debt recovery officer for the ATO in the proceedings against Mr Grimaldi. Mr Zafiriou no longer works at the ATO but swore an affidavit on behalf of the Commonwealth in these proceedings. The Commonwealth did not call Mr Zafiriou as a witness in the hearing before me and did not explain why it did not do so.
Edwina McLachlan was and is a tax counsel at the ATO. As set out in detail below, Ms McLachlan was involved in the investigation of Mr Grimaldi and the settlement that was finally reached with him. As also set out in detail below, Ms McLachlan was involved in a late-night call with Mr Zafiriou about the Chameleon Judgment on the day the ATO found out about it. Ms McLachlan still works at the ATO and affirmed an affidavit on behalf of the Commonwealth in these proceedings. The Commonwealth did not call Ms McLachlan as a witness in the hearing before me and did not explain why it did not do so.
The rule in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, being the principle articulated by Kitto J at 308, Menzies J at 312 and Windeyer J at 320–321, has been distilled, summarised, expanded and explained in a number of authorities in the High Court of Australia, the Federal Court and the Court of Appeal of this court, principally including: Payne v Parker [1976] 1 NSWLR 191, Glass JA at 200–201; Flack v Chairperson, National Crime Authority (1997) 80 FCR 137, Hill J at 148–149; Adler v Australian Securities and Investments Commission (2003) 179 FLR 1; [2003] NSWCA 131, Giles JA (with whom Mason P and Beazley JA agreed) at [649]; Manly Council v Byrne [2004] NSWCA 123, Campbell J (with whom Beazley JA and Pearlman AJA agreed) at [44]–[61]; Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11, Heydon, Crennan and Bell JJ at [63]–[64]; Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53, Besanko, Perram and Katzmann JJ at [79]; Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ at [169] and Heydon J at [259] and [263]–[264]; Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61, Bathurst CJ, Bell P, and White JA at [49]; Ling v Pang [2023] NSWCA 112, Kirk JA (with whom Leeming and Mitchelmore JJA agreed) at [20]–[28]; SSABR Pty Ltd v AMA Group Limited [2024] NSWCA 175, Stern JA (with whom Ward P and Price AJA agreed) at [158]–[161]. These authorities support the following legal principles:
The rule in Jones v Dunkel is a principle of judicial reasoning which addresses the drawing of inferences of fact.
The rule in Jones v Dunkel is a principle of plain common sense.
The unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party's case.
The failure to call a witness may also permit the court to draw, with greater confidence, any inference unfavourable to the party that failed to call the witness, if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn.
The drawing of a Jones v Dunkel inference requires the court to be satisfied that, first, it is expected or natural for the party in question to have called the person; second, the person’s evidence would have elucidated a particular matter that requires explanation, contradiction, or an answer; and third, the absence of the person is unexplained.
It is necessary to assess the credibility and reliability of the evidence given by Mr O’Neill in these proceedings.
In doing so, I have endeavoured to evaluate Mr O’Neill’s evidence, not only in the light of his responses during cross-examination, but also in light of the contemporaneous documents, the objectively established facts, the apparent logic of events and probabilities of human behaviour, the existence and nature of corroborative evidence, and the effect and impression given by the evidence as a whole.
This is in line with the appropriate approach to be taken by a trial judge in assessing the reliability of evidence given by witnesses in the course of trial proceedings. Among the salient principles that guide this undertaking are the following:
In circumstances where events have taken place long ago, the orthodox and sensible approach for a trial judge to take in assessing the credibility and reliability of the evidence of a witness about those events is to place primary emphasis on the objective factual surrounding material and the inherent commercial probabilities, together with the documentation tendered in evidence: Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599; [1999] HCA 15, Gleeson CJ, Gaudron, Kirby and Hayne JJ at [15]–[16].
A proper understanding of the chronology of events is critical and contemporaneous documents generally furnish the most reliable source of evidence as to what occurred or, at the very least, provide a generally reliable reference point from which to assess the reliability of witness testimony: ET-China.com International Holdings Ltd v Cheung (2021) 388 ALR 128; [2021] NSWCA 24, Bell P (with whom Bathurst CJ and Leeming JA agreed) at [25].
Judicial notice has been taken of scientific research that casts doubt on the ability of a trial judge to tell truth from falsehood accurately based on the appearance of witnesses such that trial judges should limit their reliance on the appearances of witnesses and develop their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22, Gleeson CJ, Gummow and Kirby JJ at [30]–[31].
There are multiple problems with a trial judge making demeanour findings, ranging from systematic error or bias, memory malfunctions, the possibility that witnesses may be dishonest about only parts of their evidence, that a truthful witness may give accurate or inaccurate testimony and that a dishonest witness may appear to be truthful. A trial judge should keep in mind the guidance provided in Goodrich Aerospace Pty Ltd v (2006) 66 NSWLR 186; [2006] NSWCA 187, by Ipp JA (with whom Mason P and Tobias JA agreed) at [26]:
These problems and doubts about demeanour findings explain why trial judges are expected to weigh their impressions as to demeanour carefully against the probabilities and to examine whether the disputed evidence is consistent with the incontrovertible facts, facts that are not in dispute and other relevant evidence in the case. Of course, demeanour may trump the probabilities, but it should be apparent from the judge’s reasons that the probabilities and consistency with other relevant evidence have properly been taken into account.
… an ounce of intrinsic merit or demerit in the evidence, that is to say, the value of the comparison of evidence with known facts, is worth pounds of demeanour.
This passage was quoted with apparent approval by Gleeson CJ, Gummow and Kirby JJ in Fox v Percy, at [30].
… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.
[27] Whilst the quality and accuracy of oral recollection of actual conversations should be treated with care and caution given the fallibility of human memory (of which there has been a growing appreciation within the judiciary in recent decades), oral testimony may still be of value and importance, as was recognised in the nuanced observations of Leggatt J (as his Lordship then was) in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC (Comm) 3560 at [22] (Gestmin):
the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth. (emphasis added)
[28] Documents and events have to be understood in their context, and evidence of context will often be furnished by witnesses in their oral evidence. Documents, moreover, will not always present a complete picture of events. Indeed it would be rare that they do. Nor do contemporaneous documents necessarily or invariably convey or record the background or context in which events took place. That background or context will be familiar to the actors at the time of those events but may not always emerge from documents.
[29] Context is critical for at least two reasons. Documents and events take their meaning from their context. The context in which events occurred may not necessarily be apparent to a court many years later when hearing a case. A clear understanding of context, both commercial and cultural, is also important where, as in the present case, some or all of the events under consideration occurred overseas and in settings that may differ from those usually dealt with in domestic litigation.
I am particularly conscious that Mr O’Neill gave evidence in 2024 about events which principally took place between 2008 and 2010. In those circumstances, I accept that his memory was likely to be imperfect even if he expressed himself with certainty about his recollections. In assessing Mr O’Neill’s evidence, I also recognise that he did not have a personal financial interest in the outcome of these proceedings.
The Commonwealth submitted that Mr O’Neill’s evidence is not relied upon in any area of controversy given the narrowing of issues. While I accept that the issues narrowed as a result of the concessions made by the Commonwealth, I do not consider that this narrowing resulted in Mr O’Neill’s evidence becoming irrelevant to issues that I am required to determine.
Chameleon submitted that, other than as evidence that the ATO shut its eyes to the obvious, or wilfully and recklessly failed to make inquiries that an honest and reasonable person in the position of the ATO would have made, I should not accept Mr O’Neill’s evidence on any matter unless it is an admission against the Commonwealth’s interests or it is corroborated by a contemporaneous document. Chameleon submits that this conclusion follows for at least the following five reasons, each of which I agree with.
Firstly, I do not know which parts of Mr O’Neill’s affidavit were drafted by him, the lawyers assisting him or some combination of both. In cross-examination, Mr O’Neill initially stated that his affidavit was written in his own words, that he is a solicitor without a practising certificate and where he discussed legal concepts in his affidavit it reflected his understanding of the law (T106). Later in the cross-examination, Mr O’Neill said that in drafting his affidavit he was assisted by lawyers and counsel but he did not know which parts of his affidavit were drafted by him and which parts were drafted by other people because it was “impossible for [him] to say, [that he] drafted that sentence and somebody else drafted this sentence” (T192–193). Mr O’Neill did say that whether he had written parts of the affidavit or someone else had, he had accepted the contents of the affidavit and asserted them to be true (T193), he settled the affidavit with his solicitors and stood by the contents of it (T149) and that he “adopted the affidavit” (T223).
Secondly, Mr O’Neill refused to accept obvious propositions or obvious errors in his affidavit when they were brought to his attention during the cross-examination.
One example of this was [103(i)(iii)] of Mr O’Neill’s affidavit which purports to record that a director of Chameleon met with officers of the ATO and provided information indicating that Chameleon “was not claiming any constructive trust or other proprietary claim against or interest in the shares and options issued to Iron”. In cross-examination, Mr O’Neill said that his knowledge of that assertion was based on a file note of a meeting on 4 June 2009 between officers of the ATO (Mr Papadopoulos and Mr Barns) with a director of Chameleon (Mr Karam) but agreed that the file note did not refer to Mr Karam making any such statement (T207–208). Despite conceding that matter and stating that the only source of his statement was the file note, in further cross-examination Mr O’Neill argumentatively refused to agree that his affidavit was wrong about that matter (T208–212). Mr O’Neill gave the impression that he would not concede an obvious inaccuracy in his affidavit because he thought it was unhelpful to the Commonwealth’s defence of Chameleon’s claim.
It was my belief at the time that whatever be the outcome of the proceedings between Grimaldi and [Chameleon], [Chameleon] was not and would not as a result of such proceedings have any interest in any property of Grimaldi…
Q. Can you remember a single discussion with anybody at all, in which they said to you we needn’t worry because Chameleon is not seeking any form of proprietary relief against Mr Grimaldi?
A. I cannot give a specific recollection of that.
Q. Not any don’t need a specific recollection, any
A. I cannot give a specific recollection.
Q. You don’t have any general recollection of it either, do you?
A. I cannot give any further recollection of that.
Q. The problem here that you’re [encountering] in the witness box today, Mr O’Neill, is that what you had said in paragraph 72 is completely made up and you’re trying to adhere to it but you’re running in all these problems because you cannot tell his Honour of any document or any conversation that enabled you to reach that view that you’ve got in paragraph 72?
A. I disagree with that.
Q. Right. Now, so you say that you received advice on the tax law issues and the ownership issues and, by the latter, do you mean the trust law issues arising out of the Chameleon proceedings?
A. Yes, as they arise the trust law issues as they arise in relation to Mr Grimaldi and Chameleon, yes.
Q. The trust law issues arising out of the nature of the relief that had been sought by Chameleon against Mr Grimaldi in those proceedings, is that what you speak of?
A. Yes, I under I was given some advice in relation to the ATO’s understanding of the Chameleon proceedings and their claim against Mr Grimaldi.
Q. And who gave you that advice?
A. Well, I was receiving advice from ATO lawyers, AGS lawyers, counsel. I’m not exactly sure from whom. And sometimes that would have been advice orally and sometimes I would have been briefed by, for example, reading the audit position paper.
Q. Right. Okay. The mediation position paper, is that what you mean?
A. No, there was an audit position paper.
Q. All right. So your evidence that you’ve given his Honour just now is that, during the course of the Chameleon litigation, you were given advice by somebody from the ATO about the trust law issues that arose out of the Chameleon proceedings?
A. No, I’m saying that, from time to time, I was briefed in relation to the Grimaldi matter. I was briefed in some detail in the Grimaldi matter prior to the settlement discussions. In those briefings it became clear the ATO had an increasing understanding of the Chameleon proceedings and, at some stage, the ATO was able to some officers in the ATO were able to describe to me what was what we understood to be the claim by Chameleon against Grimaldi, which was different to the claim Chameleon had as against Murchison.
Yet there is no reference anywhere in Mr O’Neill’s affidavit to receiving any advice from anyone at the ATO or the AGS about trust law issues in the Chameleon Proceedings (as Mr O’Neill acknowledged (T203)) and a subsequent call by Chameleon for the Commonwealth to produce any records of any such advice did not result in the production of any documents.
In the absence of any written records of that advice to support Mr O’Neill’s evidence of having received advice (sometimes only orally) and in light of the material change from the evidence that he had given the previous day that he had no specific or general recollection of a discussion with anybody about the nature of the relief that was being sought in the Chameleon Proceedings, I consider that I can safely infer that Mr O’Neill did not receive that advice in any written form. I also find that Mr O’Neill gave incorrect evidence in stating that he had received advice (which he said was only sometimes delivered orally) when he did not. This is highly unsatisfactory and damaging to Mr O’Neill’s reliability and credibility as a witness. Although Chameleon urged me to find that Mr O’Neill gave knowingly untrue evidence on this topic, I do not consider that it is necessary for me to do so.
On the second topic of whether he read the Chameleon Judgment, Mr O’Neill in [140] of his affidavit gave the following evidence:
I did not at the time or before these proceedings seek out or read the judgment with a view to understanding Grimaldi’s liability and any connection that might have to proceedings against him by the NSWCC Proceedings or the ATO Proceedings.
In cross-examination, Mr O’Neill said he read the Chameleon Judgment sometime after it was published, at some stage in the context of preparing his affidavit and then stated that he read it at some time around 2010 for the purposes of issues relevant to the ATO’s tax administration or their work on Project Wickenby (T131–133).
When confronted with the apparent inconsistency between [140] of his affidavit and the evidence he gave in cross-examination, Mr O’Neill said he read the Chameleon Judgment but for reasons unrelated to Mr Grimaldi’s liability or any connection that might have with the Crime Commission matter (T135). Both versions of his evidence cannot be true. It is not necessary for me to make a finding about which one is true and which is incorrect.
I again consider that this evidence reflects poorly on Mr O’Neill’s reliability and credibility as a witness.
I observed Mr O’Neill closely in the witness box over two days. I was extremely troubled by the way in which he appeared to become increasingly uncomfortable that the words in his affidavit did not match the evidence he was giving in cross-examination. On several occasions, Mr O’Neill appeared to be unfamiliar with the evidence that was contained in his affidavit. Whether this was caused by parts of his affidavit having been written by someone else or a faulty recollection on his part is not necessary for me to determine.
I also consider that Mr O’Neill’s constant references in his cross-examination to words to the effect of an “increasing awareness” (T101, T143, T144, T156, T158, T162 and T221), “increasing understanding” (T143, T157, T201 and T202), “increasing intelligence” (T202) and “increasing knowledge” (T222) reflected an unnatural stance of a witness endeavouring to give evidence he perceived to assist the Commonwealth’s case. Perhaps this arose from the fact that Mr O’Neill has been employed at the ATO for the past 35 years (the last seven years of which have been on secondment to the Tax Practitioners Board), but I expected that a person who has risen to the seniority of the positions of Assistant Commissioner of the ATO and the ATO’s Chief Risk Officer would refrain from approaching the solemn task of giving evidence in that way.
Taken together, all of these matters adversely impact Mr O’Neill’s reliability and credibility as a witness in these proceedings. As I have indicated above, I have exercised caution in accepting his evidence on any matter unless it is an admission against the Commonwealth’s interests or it is corroborated by a contemporaneous document.
After going in and out of liquidation and administration and conducting an investigation in relation to Mr Grimaldi’s relationship with Chameleon and Murchison, on 29 November 2007, Chameleon commenced the Chameleon Proceedings in the Federal Court against Mr Grimaldi, Murchison, Mr Barnes, Winterfall and Pinnacle by filing a statement of claim.
The thrust of Chameleon’s case in the Chameleon Proceedings was that, through a series of transactions, Mr Grimaldi and Mr Barnes had taken shares and cash from Chameleon for the ultimate purpose of enabling Murchison to acquire a 60% shareholding in Winterfall and thus a controlling stake in the Iron Jack Tenements. Those transactions included the placement of shares in July 2004 and the drawing of the two cheques of $56,250 and $96,500 by Mr Barnes.
In essence, Chameleon alleged that Murchison’s reverse takeover of Winterfall and the acquisition of the Iron Jack Tenements were the result of the breaches of statutory and equitable duties owed by Mr Grimaldi and Mr Barnes to Chameleon.
In the statement of claim in the Chameleon Proceedings, Chameleon sought declarations under s 1317E(1) of the Corporations Act 2001 (Cth) against Mr Grimaldi that he contravened ss 180 to 182 of the Corporations Act, damages resulting from his breaches of statutory duties, an order that an account be taken of all profits made by him as a result of those breaches, and an order that he pay equitable compensation for his breaches of equitable and fiduciary duties owed to Chameleon and for his knowing involvement in breaches of fiduciary duty by Mr Barnes and Mr Roberts.
Chameleon sought more extensive relief against Murchison, Mr Barnes, Winterfall and Pinnacle. As against Murchison, Chameleon sought an order that Murchison held all or a proportion of its shares in Winterfall on constructive trust for Chameleon. It claimed that Pinnacle and Mr Barnes held any beneficial interest in the 10 million shares in Winterfall issued to Pinnacle on constructive trust for Chameleon. Chameleon sought an injunction restraining Pinnacle and Mr Barnes from transferring, mortgaging or otherwise encumbering that beneficial interest in those shares, and sought an order requiring Pinnacle and Mr Barnes to transfer the beneficial interest in those shares to Chameleon.
In respect of all the respondents in the Chameleon Proceedings, the statement of claim stated that Chameleon sought the remedies subject to its reserved right to elect between them.
On 29 November 2007, Chameleon notified the ASX of the claims in the Chameleon Proceedings. In that notification, Chameleon indicated that it had “reserved its rights to make an election between the remedies which are ultimately held to be available to it”. On the same day, Murchison issued an ASX announcement of its own, informing the market of the Chameleon Proceedings, referring to them as an “opportunistic claim” with “no substance”.
On 28 April 2008, Mr Agius was arrested at Perth airport following the investigation as part of Operation Starlifter and charged with conspiracy to defraud the Commonwealth and money laundering.
By May 2008, the AFP had identified a number of New Zealand foreign bank accounts in Australian dollars and an Australian Commsec account held by PKF. The AFP was concerned that these accounts were for the purpose of “assist[ing] Australian clients to reduce or avoid their Australian tax liability through the provision of various illegal schemes and scams”. Some of those accounts were held by IFTC. The AFP was concerned that IFTC was about to start withdrawing funds from the New Zealand accounts.
In around May 2008, the ATO began investigating the financial affairs of Mr Grimaldi.
As mentioned above, the Crime Commission was a state agency involved in Project Wickenby and Operation Starlifter to aid the Commonwealth agencies in the pursuit of the promoters, their entities and clients taking part in offshore tax avoidance schemes. One such scheme was that promoted by PKF through Mr Agius in Vanuatu through IFTC and IFTC Broking.
On 13 May 2008, the Crime Commission commenced proceedings number S12212/2008 in this court (Recovery Act Proceedings) by summons ex parte seeking:
restraining orders under s 10 of the Recovery Act against the beneficial owners of various identified bank accounts and share trading accounts held in the name of numerous entities (including IFTC and IFTC Broking);
an order under s 12 of the Recovery Act that the Public Trustee hold all money and shares in the identified accounts; and
an order under s 22 of the Recovery Act forfeiting to, and vesting in, the Crown the interest in the property of the beneficial owners of the identified accounts.
The Crime Commission relied on the affidavit of Arthur Moerman sworn 13 May 2008 in seeking these orders in the Recovery Act Proceedings.
The Recovery Act Proceedings were brought on the basis that the DPP had commenced proceedings under the Proceeds of Crime Act 2002 (Cth) and restrained some property of Mr Agius, but not the foreign bank accounts or the share trading accounts. Operation Starlifter had not yet identified the beneficial owners of those accounts.
It is clear from these events that the Crime Commission was involved with the AFP and the ATO in the steps to be taken arising from Operation Starlifter.
On 13 May 2008, Hoeben J made orders in the Recovery Act Proceedings, amongst which were the following:
order under s 10 of the Recovery Act restraining any dealing with the interest in property of the beneficial owners of the identified accounts (First Restraining Orders);
order under s 10 of the Recovery Act that the Public Trustee take control of all the interest of the beneficial owners of the identified accounts; and
orders under s 12 of the Recovery Act that the Public Trustee hold all money and shares from the identified accounts.
On 16 May 2008, Hoeben J made orders in the Recovery Act Proceedings under s 12(1)(d)(i) of the Recovery Act that the Public Trustee open domestic and international share trading accounts with Commsec and that the shares held by IFTC Broking in certain identified accounts be transferred into those accounts.
By 25 August 2008, the ATO’s investigation into Mr Grimaldi’s affairs was advanced; it had finalised a detailed profile setting out a “case theory” on his alleged offending (Grimaldi Profile). The ATO’s primary case theory was that Mr Grimaldi was the beneficiary of over $11 million from a New Zealand account controlled by Mr Agius, which was being used as a conduit to transfer funds to and from Australia as part of a “round robin arrangement” to minimise the tax liability of Australian taxpayers. The ATO’s alternative case theory was that Mr Grimaldi had been able to accumulate funds overseas that had not been reported as taxable income in Australia in prior years. On either theory, it was plain that the ATO considered Mr Grimaldi to be evading tax.
In cross-examination, Mr O’Neill said that it was likely that he read the Grimaldi Profile carefully because Mr Grimaldi was a high-risk case and he was asked to be directly involved in discussions with Mr Grimaldi (T122–123).
At [8] of the Grimaldi Profile, the ATO noted that Mr Grimaldi had been the director of 17 companies since the 2003 income year and, as at August 2008, Mr Grimaldi was a director of five companies.
The Grimaldi Profile also noted:
[10] Analysis of ATO systems indicates that Grimaldi and his spouse … have poor compliance histories. Grimaldi has lodged recent returns late and lodgement demands have been made by the ATO…
[11] Grimaldi has declared levels of income far less than what the AUSTRAC transactions suggest his income may be. From the 2000 to 2004 income years, his average income was under $35,000. In the 2005 and 2006 income years he earned $87,200 and $165,919 respectively before his income greatly increased to $770,010 in the 2007 income year.
The table in the Grimaldi Profile at [37] demonstrates that between 2005 and 2009, there were 40 definite or possible transactions relating to Mr Grimaldi and IFTC, with none of those occurring in 2005, $136,269 in value occurring in 2006, $1,449,554 in value occurring in 2007, $9,685,160 in value occurring in 2008 and $7,270 in value occurring in 2009. The spike in the value of the transactions between 2006 and 2008 is significant.
It is plain from these details in the Grimaldi Profile that the ATO was aware that Mr Grimaldi had no other source of wealth prior to 2004 other than the profits that he subsequently earned from selling Murchison shares and trading in those proceeds. Mr O'Neill gave evidence that Mr Barns may have had knowledge of that matter (T126). In light of the fact that Mr Barns was not called as a witness, I infer that, in the absence of any contrary evidence, the ATO knew that Mr Grimaldi had no material source of wealth prior to the placement of the Murchison securities into Iron in November 2004.
The Grimaldi Profile at [24] referred to the Chameleon Proceedings in the following terms:
Legal action is currently being taken against Murchison Metals, a company Grimaldi formerly directed, and claims have been filed against Grimaldi. Further details of this matter have not been reviewed.
Chameleon alleges it helped fund the purchase of the Jack Hills and Weld Range projects by Murchison’s predecessor in 2004 and that the assets were held in a “constructive trust” for Chameleon.
In particular, Chameleon is seeking a 5 per cent stake in the assets, which are among Australia's best untapped iron ore deposits.
Murchison has filed a cross-claim against Chameleon seeking about $75,000.
Both parties have filed claims against former Murchison directors Greg Barnes and Phillip Grimaldi.
It is therefore clear that, as at August 2008, the ATO knew that the Chameleon Proceedings included claims against Mr Grimaldi by both Chameleon and Murchison. Mr O’Neill gave evidence that there were three important pieces of information contained in the Grimaldi Profile: the reference to Murchison being a company whose shares were being sold by Mr Grimaldi or entities associated with him; that Mr Grimaldi was formerly a director of Murchison; and that claims had been brought against Mr Grimaldi (T138–139). Mr O’Neill also accepted that to work out the tax law significance of the connection between the Murchison shares that Mr Grimaldi was selling and the Chameleon Proceedings, the ATO might need to know something about the nature of the claims being made in the Chameleon Proceedings (T138–139). Mr O’Neill also gave evidence that the key circumstances that were relevant were those that went to the heart of Mr Grimaldi trading in shares and making profits on those trades (T158–159). But there is no evidence that the ATO ever conducted an analysis of the claims made in the Chameleon Proceedings.
The Grimaldi Profile concluded (emphasis added):
[83] In regards to Mr Grimaldi it is difficult to establish if he is part of a scheme as there is insufficient information linking him to such activities. However, it is also important to note that this theory should not be ruled out as there may be a possibility he may in fact be operating a scheme (as highlighted above). Further information is required to conclude this theory.
[84] Based on the AUSTRAC transactions identified to date, it is clear that Mr Grimaldi has been in receipt of monies from offshore which have not been declared as assessable income. It is possible that Mr Grimaldi accumulated sizable net wealth and assets offshore and that these funds are now being repatriated for his private use. It is not known whether Mr Grimaldi has used the services of Goldman Sachs JBWere Pty Ltd and Merrill Lynch Equities Australia Ltd to facilitate the transfer of funds offshore.
[85] Analysis of the companies and superannuation fund associated with Mr Grimaldi show a considerable increase in turnover and assets during the 2007 year, including a capital gain of approximately $6M. Further in depth analysis is required to establish whether the entities have involved in any scheme arrangement as highlighted above.
… Significantly, the dealings reveal the majority of trading is undertaken in the shares of a Public listed company “Murchison Metals Limited” (ASX MMX). The companies incorporated in Vanuatu undertaking the share trading are:
- RLB Investments Limited (incorporated 8/10/2004) and
- Iron Investments Ltd (formally IOS Management Ltd, Ion Ore Sales and Management (HK) Ltd) incorporated 9th November 2004.
…
ASX Website shows that MMX was listed on 1/4/2005. Phillip Felice Grimaldi was a Director between 18th April 1997 and 12 November 2004. His shareholding was, we believe through his private company.
The 2005 Annual Report for Murchison Metals Limited show that IOS Management held 4,750,000 fully paid shares (2.76%) and RLB Investments Ltd, 4,000,000 shares (2.32).
…
Internet search on Murchison Metals reveals that there currently are proceedings in the Federal Court involving Chameleon Mining Limited and Murchison. The article states that Murchison has lodged a counter claim against Greg Barnes and Grimaldi in respect the matters that are the subject of the Chameleon claim and Mr Gregory Barnes and Landan Roberts face charges relating to providing false and misleading information to ASX.
It is suspected that Iron Investments Ltd is a company established solely for the benefit of Grimaldi. It is also suspected that RLB Investments Limited has been established for the sole benefit of Gregory Bennet BARNES Dob [X/XX/XXXX] and possibly Landen ROBERTS, hence the name “RLB”.
It is further suspected that the companies may have been establish to conceal capital gains taxation obligations on the sale of shares and options.
…
[1] This profile was created to analyse additional information provided by [the Crime Commission] and AFP in relation to Murchison Metals Ltd, a company associated with Phillip Grimaldi. Please read this profile in conjunction with the “Phillip Grimaldi” profile.
[2] Information obtained by the [Crime Commission] indicates that some shares in Murchison Metals Ltd (MMX) have been held by various offshore entities which appeared to be located in Vanuatu. Some of the shareholdings have been disposed of, and proceeds from disposal of shares have been deposited to accounts controlled by IFTCO. It may be possible that Phillip Grimaldi is the ultimate beneficiary of one or more of these offshore entities.
The belief stated in this final sentence of [2] was repeated later in the Murchison Profile at [13]. At this time, the ATO knew that Mr Grimaldi might be the ultimate beneficiary of shares in Murchison held by Vanuatu located entities.
It was also made plain that the Grimaldi Profile and the Murchison Profile were to be read together.
As stated in the Murchison Profile at [12], the impetus for the creation of the Murchison Profile was clearly Mr Grimaldi’s association with Murchison by his status as a former director of Murchison. The ATO was therefore aware of the connection between Mr Grimaldi and Murchison. It was this connection that caused the ATO to include Murchison as part of its investigation.
The Murchison Profile at [8] noted that as at February 2004, Murchison had issued 12.5 million shares to ATL Exploration Pty Ltd and Weboz. The Murchison Profile continued (all grammatical errors left in place):
[9] The 12 5 million allotment to ATL Exploration Pty Ltd become significant on 11 November 2004 when the directors of MMX (being Phillip Grimaldi), approved the issue of 12.5 million new shares and 4 million options to the shareholders of ATL Exploration Pty Ltd to takeover this company so as to become 100% owned by MMX. Consequently, ISO Management Ltd was allocated 2.25 million shares, and 2.25 million options. ATL Exploration Ptd Ltd's shareholder, Pinnacle Nominees Ply Ltd (whom Gregory Barnett Barnes was the sole director of), provided discretion to MMX to allocate 4 million ordinary shares and 5 million options also to ISO Management Ltd, and 4 million ordinary shares to RLB Investments Ltd.
[10] On 11 November 2004, MMX issued a further 80 million ordinary shares art $0.10 / share, and 30 million $0.20 options maturing on 30 November 2009 to shareholders of Iron Jack Ltd (previously Winterfall Ltd) to acquire all the issued capital of Iron Jack Ltd.
[11] Effectively, on 11 November 2004:
a. Iron Investments Ltd (formerly ISO Management Ltd) was allocated 6.25 million MMX ordinary shares and 7.25 million options…
By these paragraphs of the Murchison Profile, the manner in which Iron (the nominee for Mr Grimaldi) came to hold Murchison shares and options which comprised the Existing Shareholding (being those issued by Murchison) and the Spotter’s Fee Securities (being those directed by Pinnacle to be issued by Murchison) was known to the ATO.
A table recording the “main details” of Murchison in the Murchison Profile at [14] included information on the Chameleon Proceedings. Under the sub-heading “Other” it stated:
…Chameleon Mining Ltd commenced proceedings against MMX, former director Phillip Grimaldi, Greg Barnes, Pinnacle Nominees Pty Ltd and Crosslands Resources Ltd in the Federal Court of Australia.
The claims relates to [Winterfall], which holds the Jack Hills and Weld Range iron ore deposits situated in Midwest of WA…
Claim alleges that:
- MMX is holding shares in [Winterfall] on a constructive trust for Chameleon;
- [Winterfall] is holding Jack Hills and Weld Range on constructive trust for Chameleon;
- Former Chameleon director Barnes and de facto director Grimaldi cause[d] Chameleon to issue securities sold to raise funds that were then used by MMX to acquire Jack Hills and Weld Range.
The ATO therefore had actual knowledge that it was alleged in the Chameleon Proceedings that Mr Grimaldi was a de facto director of Chameleon and that, together with Mr Barnes, he had caused Chameleon to issue securities to raise funds to acquire the Iron Jack Tenements. In other words, the ATO was aware that there was an allegation that Mr Grimaldi had misused Chameleon’s funds to allow Murchison to acquire an asset, which obviously would have involved a breach of fiduciary duties by Mr Grimaldi.
The evidence of Mr O’Neill was that the circumstances of the claim in the Chameleon Proceedings were also facts relevant to the tax audit (T158–159). This was obvious. Despite this, it was a matter that the ATO did not investigate in any detail. There is no evidence that the ATO ever obtained the originating process, the pleadings, the evidence or the submissions in the Chameleon Proceedings.
Iron (then referred to as IOS Management) was also included in the Murchison Profile at [46]–[71] due to its significant shareholding in Murchison. The table in the Murchison Profile at [50] described the numbers of Murchison shares held and disposed of by Iron, and details of the ANZ Bank account in New Zealand into which the proceeds were deposited and said at [50]:
In summary, during the period 25 April 2005 and 22 April 2008, information provided by Merril Lynch, Goldman Sachs and Berndale Securities shows that IOS Management Ltd disposed 9.705 million MMX shares, with total proceeds (before any deduction for brokerage fees and TT) have been calculated to be $36,997,716.96. Information provided by Registries Ltd indicates that, from 11 November 2004 - 24 April 2008, IOS Management Ltd held and disposed of 10.305 million shares. Should the MMX shares be acquired by IOS Management Ltd and / or Phillip Grimaldi for no or negligible consideration, the capital gain from the sale of MMX shares may be $36.85 million.
The ATO knew that there had been a substantial sale of Murchison shares by Iron that raised proceeds of nearly $37 million, and it was fixing upon a capital gain made by Iron and/or Mr Grimaldi of the same amount.
By virtue of information said to have been provided by the Crime Commission and the AFP, it was stated under the heading “Assets” that 9.705 million shares in Murchison had been disposed of and under the heading “Bank account” that the proceeds of the disposal of Murchison shares had been deposited into an identified bank account with ANZ Bank in the name of IFTC. It was this bank account that was later used to pay the first $12.5 million of the settlement Mr Grimaldi reached with the ATO, the details of which are set out below.
The Murchison Profile also set out information regarding the trading and transfer of the Murchison shares. In particular, the Murchison Profile at [62] noted that on 25 April 2005 Iron had transferred 250,000 shares to Pinnacle at below market value (for consideration of $1), recorded that Pinnacle was affiliated with Mr Barnes, and Chameleon had commenced proceedings against both Mr Barnes and Pinnacle. After referring to a company of which Mr Barnes and Mr Grimaldi were both directors, the Murchison Profile stated at [62]:
… it is inferred that Gregory Barnes is an associate of Phillip Grimaldi.
The detail in the Murchison Profile at [61]–[71] set out all of the disposals of the Murchison shares by Iron, including the identification of the ANZ Bank account of IFTC into which proceeds of those disposals were paid (at [66] and [70]).
The Murchison Profile concluded at (all grammatical errors left in place):
[80] The ATO understands that previous Australian clients of Agius have been involved in tax avoidance / evasion schemes, often involving:
a. round robin arrangements which included loan agreements, consultancy agreements or insurance agreements; and / or
b. setting up an offshore company to hold rights to various assets8 on behalf of the beneficiaries (with the aim of hiding the identities of the true beneficial owners of these assets)
[81] Phillip Grimaldi and his Australian associated entities may have entered into a scheme or arrangement, whereby the ownership of shares and option which they have been allotted to have been assigned or transferred to offshore entities established in Vanuatu (in this case, RLB Investments Ltd, IOS Management Ltd [later, known as Iron], and PGM Investments Ltd, and which Phillip Grimaldi and his Australian associated entities have the ultimate control. Any proceeds from the subsequent disposal of these shares may not have been reported in the income tax returns of Phillip Grimaldi and his Australian associated entities as income or capital gains. The proceeds may have been returned to Phillip Grimaldi and his Australian associated entities via M J Woods & Company.
[82] Alternatively, it is possible that Phillip Grimaldi and his Australian associated entities has entered into an arrangement some years earlier which involved the accumulation of assets offshore and that these funds may not be required to yet be repatriated (if ever).
…
[83] It is recommended that compliance action by way of an audit be taken on Phillip Grimaldi to determine his association with the Vanuatu entities identified above, and the nature of the scheme(s) / arrangement(s) in relation to the holding of MMX shares and options by him and his associates.
As a result, it is clear that at 18 September 2008, when the Murchison Profile was finalised, the ATO knew:
the precise number of Murchison securities that Iron had received and sold;
that there was a profit in the order of $36 million from the sale of those Murchison securities; and
the details of the bank account into which the sale proceeds had been deposited.
I consider that the proper inference to be drawn is that it would have been obvious to the ATO officers who prepared the Grimaldi Profile and the Murchison Profile, Mr O’Neill and the other officers of the ATO who read the profiles, that as a step in the ATO’s investigation, they should obtain the originating process, pleadings, evidence and submissions in the Chameleon Proceedings so that they could understand the claims that had been made, the basis for those claims and how Iron came to acquire millions of Murchison securities for no consideration.
On or about 19 September 2008, there was a telephone conversation between Martin Woods (the solicitor acting for Mr Grimaldi and Iron) and Jonathan Spark (the Assistant Director of the Financial Investigations Division of the Crime Commission). During the call, Mr Wood said that Mr Grimaldi asserted a beneficial interest in the shares and funds in the IFTC accounts that were the subject of the First Restraining Orders.
On 22 September 2008, Mr Woods sent a letter to the Crime Commission requesting that the assets in accounts in the name of IFTC and IFTC Broking be excluded from the First Restraining Orders made by this court on 13 May 2008. According to the letter, that was because Iron was the “immediate” and Webtel Super Fund (with MGG Capital as trustee and Mr Grimaldi as sole beneficiary) the “ultimate” beneficial owners of the assets held in the accounts. The letter stated that (emphasis added):
[Iron] was formed to carry on investment activities as nominee/trustee for [Webtel]. In early 2005 shares and options in [Murchison] which at the time had a nominal value only, were transferred to Iron Investments. The shares and options were subject to a twenty four month escrow condition and could not be sold before 1st April 2007. Copies of the Murchison Metals Statement of Holdings are enclosed (Enclosure 3). Also enclosed is a copy of the Trust Deed dated 7****th July 20****05 relating to that holding (Enclosure 4). [Iron] conducted some of its share trading activities utilizing IFTC's share broking services provided via IFTC Broking Service Pty Ltd and Commonwealth Securities Ltd. The Comsec Account records (which we assume you have access to) will confirm a regular and significant volume of trading was conducted via that account.
As put in emphasis above, Mr Woods attached to the letter a copy of the “Trust Deed dated 7th July 2005” (July 2005 Trust Deed). The July 2005 Trust Deed would later be revealed to be “not a genuine document” to the knowledge of the ATO, the details of which are set out below.
The letter from Mr Woods was sent by the Crime Commission to the ATO on the same day, being 22 September 2008.
On 25 September 2008, Mr Grimaldi, Mr Woods and Holgen Sorenson (as counsel for Mr Grimaldi) met with representatives of the ATO (Antoine Tannous and Ivan Barba) and the Crime Commission (Tim O’Connor, Mr Spark, Lou Novakovic, Lesleigh Strohfeldt and Noel Stewart). Given that Mr Grimaldi was under active investigation by the ATO at this time, and in the absence of evidence from the ATO on this matter, I infer that Mr Tannous and Mr Barba were senior officers within the ATO. In the absence of Mr Barns as a witness in these proceedings giving evidence to the contrary, I also infer that what was said in this meeting was reported to him.
According to a short file note of the meeting, Mr Grimaldi said that he had no assets when he came back from overseas in 1998, all his wealth offshore came from Murchison and was invested in superannuation funds. This confirmed the position known by the ATO as recorded in the Grimaldi Profile dated 25 August 2008, which is that Mr Grimaldi had no other source of wealth than the proceeds from the disposal of Murchison shares.
The file note of the meeting on 25 September 2008 also records:
Being a Director of Murchison and a suspicion with Chameleon was a reason Grimaldi place[d] funds in Nominee company in Vanuatu.
… he had $13,000,000 in shares, $10 mil in property and $14 mil in cash.
The first reason given by Mr Grimaldi for placing the funds in a nominee company in Vanuatu was that he was a director of Murchison. The ATO knew by this time that Mr Grimaldi ceased being a director of Murchison by 12 November 2004 (having resigned on 11 November 2004) so he must have been speaking of his state of mind on the receipt of shares by Iron on 11 November 2004. In doing so, it appears that Mr Grimaldi revealed his state of mind in around early November 2004, when he set up Iron and then directed Mr Barnes to cause Pinnacle to give four million Murchison shares and five million Murchison options to Iron and 84,000 Murchison shares and 770,000 Murchison options to MGG Capital from the 10 million shares and 12 million options issued by Murchison which were to be allocated.
The second reason given by Mr Grimaldi at the meeting for placing the funds offshore in November 2004 was a “suspicion with Chameleon”. Here it is plain that Mr Grimaldi was giving his state of mind in November 2004 and was not referring to any subsequent suspicion, such as when the Chameleon Proceedings commenced in November 2007. On its face, it appears that Mr Grimaldi is explaining that he put the Murchison shares overseas in November 2004 to put them out of reach from a claim to them by Chameleon based on some improper conduct by him. Mr Grimaldi’s reference to the “suspicion with Chameleon”, combined with the ATO’s then knowledge as recorded in the Grimaldi Profile and the Murchison Profile that the claims made against Mr Grimaldi in the Chameleon Proceedings involved the misappropriation of Chameleon’s funds, would have made it obvious to the ATO that it should investigate the Chameleon Proceedings to determine what Chameleon alleged Mr Grimaldi had done so that it could understand exactly what was the “suspicion with Chameleon”. As already stated, there is no evidence that any such investigation of the Chameleon Proceedings ever took place within the ATO.
A more detailed account of the meeting with Mr Grimaldi was recorded within the “Status Report: Beneficial Owners Investigation” dated 25 October 2008 (Beneficial Owners Report) prepared by Mr Novakovic and Mr Stewart, each of whom were forensic accountants at the Crime Commission. Under the heading “Phillip Felice Grimaldi”, the Beneficial Owners Report recorded the following matters as having been told to the Crime Commission by Mr Grimaldi during the meeting:
…
(g) In late 2004, Greg Barnes (“Barnes”) held rights to a mining tenement in Western Australia called Jacks Hill and Barnes approached him to list the tenement through Nicu which had been reinstated as a listed Australian company;
(h) He and Barnes agreed to the “back-door” listing of the Jack Hills tenement through Nicu (a “back-door” listing refers to the use of an existing listed company to take over a proposed project).
(i) Nicu later changed its name to Murchison Metals Ltd and through a capital restructure in November 2004, he became beneficially entitled to receive:
(i) six million two hundred and fifty thousand (6,250,000) fully paid ordinary shares in Murchison Metals Ltd (“the Grimaldi MMX shares”);
(ii) seven million two hundred and fifty thousand (7,250,000) 20 cent Murchison Metals Ltd options expiring November 2009 (“the Grimaldi MMX options”).
…
(n) On 11 November 2004 the Grimaldi MMX shares and the Grimaldi MMX options were issued to Iron. …
(o) On 24 November 2004 a further one million (1,000,000) 20 cent Murchison Metal Limited options expiring November 2009 were issued to Iron.
…
(s) He asserts that all the Grimaldi MMX shares and Grimaldi MMX options issued to Iron were, at all material times, held by Iron on behalf of MGG as trustee for the Webtel Super Fund. At his request, Iron executed a Trust Deed on 7 July 2005 declaring that certain Grimaldi MMX shares and Grimaldi MMX options were held on behalf of MGG. …
(t) As at 7 July 2005 Iron was the registered owner of six million (6,000,000) of the Grimaldi MMX shares and eight million and fifty five thousand (8,055,000) of the Grimaldi MMX options. The Grimaldi MMX shares were escrowed until 1 April 2007. The Grimaldi MMX options were unlisted and also escrowed until 1 April 2007 (escrowed shares refers to shares which are prevented from being traded until the release date).
(u) In 2005 Chameleon claimed to have an interest in the Jack Hills tenement (which was now known to be a viable high grade iron ore resource) and threatened to take action against Murchison Metals Limited.
…
(x) On occasions he directed IFTC to exercise some of the Grimaldi MMX options and sell some of the Grimaldi MMX shares and the shares arising from conversion of the Grimaldi MMX options. …
(y) Over time, he directed IFTC to use the proceeds of the sales of the Grimaldi MMX shares to buy other shares. The buying and selling of the shares was initially done through Goldman Sachs JB Were, then BBY Limited, and thereafter through a Comsec account in the name of IFTC Broking. …
(z) Part of the proceeds of sale of the Grimaldi MMX shares was, and is, held in accounts with ANZ National Bank of New Zealand and periodically IFTC issued client statements to him. …
(aa) From time to time IFTC issued invoices to him in respect of fees for services provided to Iron and he authorised IFTC to deduct … those fees from the amounts held. …
(bb) On numerous occasions, he directed IFTC to make payments from the proceeds from the sale of the Grimaldi MMX shares and share trading thereafter, including:
(i) payment of his personal expenses including rent, dental fees and travelling expenses;
(ii) purchase of a Bentley motor car;
(iii) international funds transfers to Woods (some of which were on loaned to his estranged wife);
(iv) purchase of furniture;
(v) payments to a friend and daughter; and
(vi) payments to ANZ bank in respect of an international debit card arranged for him by IFTC.
(cc) In November 2007 Chameleon commenced proceedings in the Federal Court of Australia against Murchison Metals Limited, Barnes, Grimaldi and others claiming an interest in the Jack Hills iron ore tenement. Atanaskovic Hartnell Lawyers represent Chameleon in those proceedings.
As is apparent from these excerpts of the Beneficial Owners Report, Mr Grimaldi was placing importance on the July 2005 Trust Deed to explain that the Murchison shares and options were held by Iron on behalf of MGG as trustee for the Webtel Super Fund. But Mr Grimaldi apparently had ready access to the proceeds of the sale of the Murchison shares and options to enable him to spend them for his own benefit. The existence of the Chameleon Proceedings was also raised at the meeting on 25 September 2008, once again demonstrating the obvious need for the ATO to understand the claims that had been made in it by investigating them, which was not done.
As outlined in more detail below, I infer that the Crime Commission later provided the Beneficial Owners Report to Mr Barns of the ATO in November 2008, that Mr Barns read it, and that it was also given to and read by Mr Zafiriou of the ATO in March 2009.
The summary in the Beneficial Owners Report in relation to Mr Grimaldi was then repeatedly used in other documents that were prepared in the course of the ATO’s investigation of him.
Meeting was held at Mr Woods premises to discuss tax issues and release of funds and shares from NSW CC injunction and placement of security acceptable to the ATO.
Ivan Barba outlined the ATO view as to the taxing points. That is, on one hand if it is determined that the liability is on the superannuation fund – we need to consider is the sale of MMX shares income under ordinary concept or is it statutory income.
We raised concerns of the transfer of shares (off market) to associates that were below market price. Also whether the actions of the trustee have contravened the SIS Act.
At the extreme end the ATO may view that the proceed of the sale of shares are that of Grimaldi and will be taxed as ordinary income or statutory income.
Ivan Barba advised that the ATO will issue a notice under section 162 of the Income Tax Assessment Act 1936 for lodgement of income tax returns for the year ended 30 June 2008 to Mr Grimaldi, MGG Capital Pty Ltd as trustee for the Webtel Management Superannuation Fund, YRC Nominees Pty Ltd and MGG Capital Pty Ltd in its own right.
Mr Woods and Mr Grimaldi agreed to the following:
- Money to be brought back onshore;
- $3m to be paid to the ATO as advance payment. The balance to be deposited into Westpac Bank of MGG Capital as trustee for Webtel Management superannuation fund;
- All shares under control of IFTC Brokers in Comsec Accounts controlled by IFTC Brokers for the benefit of IOS Management Ltd, Iron Investment Ltd as referred to in IFTC’s letter to Martin Woods dated 22 August 2008 will be transferred to MGG Capital as trustee for Webtel Management Superannuation fund;
- The funds deposited into the MGG Capital account as trustee for Webtel Superannuation Fund will be used in accordance with the investment strategy of the superannuation fund.
…
Attached to the file note was a document headed “Chronology of events GRIMALDI”, which does not include any reference to the commencement of the Chameleon Proceedings in November 2007.
The file note indicates that the ATO was focused entirely on the tax assessable on the proceeds of the sale of the Murchison shares and options and the profits earned from them. There was no mention of the transactions using the funds of Chameleon pursuant to which the Murchison shares and options had come into existence; the claims made in the Chameleon Proceedings; or any questions having been asked by the ATO officers about them. This is despite the Chameleon Proceedings having been specifically mentioned by Mr Grimaldi in the meeting with the ATO and the Crime Commission on the previous day and particularly Mr Grimaldi saying that a “suspicion with Chameleon” was a reason why the Murchison shares and options were placed offshore.
In the absence of Mr Barns as a witness in these proceedings giving evidence to the contrary, I infer that what was said in this meeting was reported to him.
Following the meeting on 26 September 2008, Mr Grimaldi and the Crime Commission came to an agreement to release the First Restraining Orders so far as they related to assets to which Mr Grimaldi claimed he was beneficially entitled.
On 10 October 2008, Mr Grimaldi, the Crime Commission and MGG Capital as trustee for the Webtel Super Fund executed a deed in which Mr Grimaldi asserted that he was the “ultimate beneficial owner of the property specified in the Schedule” to the deed. The “property specified in the Schedule” to the deed included 978,945 shares in Murchison, as well as the amounts of US$32,142.56 and A$14,263,136.36 held in ANZ Bank accounts in the name of IFTC.
In the deed, Mr Grimaldi stated that it was his intention to file a notice of motion in the Recovery Act Proceedings seeking “a declaration that he is the ultimate beneficial owner of the property specified in the Schedule”, and the Crime Commission and Mr Grimaldi and stated their intention to execute consent orders in the Recovery Act Proceedings which included their consent to that declaration. Consent orders to that effect were drafted, but IFTC and IFTC Broking (who, at the time, were represented by Atanaskovic Hartnell, the same lawyers acting for Chameleon in the Chameleon Proceedings) refused to execute them.
On 10 October 2008, Mr Grimaldi filed the notice of motion referred to in the deed. In his supporting affidavit sworn 10 October 2008, he deposed that in late 2004 he became beneficially entitled to 6.25 million Murchison shares and 7.25 million Murchison options expiring November 2009. He referred to the July 2005 Trust Deed in which Iron declared that it held Murchison shares and options on trust for the Webtel Super Fund, which he annexed to the affidavit. He described what had occurred with those shares and said that part of the proceeds of sale of the shares was held in three ANZ Bank accounts in New Zealand in the name of IFTC. He said he had agreed to pay $3 million to the ATO from those accounts in advance of tax assessments for him and his superannuation fund.
A copy of Mr Grimaldi’s affidavit sworn 10 October 2008 was provided by the Crime Commission to the ATO.
When the notice of motion came before the court on 17 October 2008, IFTC appeared and questioned the authenticity of the July 2005 Trust Deed that Mr Grimaldi had produced to show that the Murchison shares and options were held on trust for his superannuation fund. As indicated above, the July 2005 Trust Deed had been produced to the Crime Commission as an attachment to the letter dated 22 September 2008 from Mr Woods on behalf of Mr Grimaldi and it was mentioned at the meeting on 25 September 2008 with the ATO and the Crime Commission as recorded in the Beneficial Owners Report. After this hearing, the Crime Commission changed its position and was no longer willing to release assets from the First Restraining Orders.
On 25 October 2008, the Crime Commission sought and obtained ex parte further orders made by Hoeben J in the Recovery Act Proceedings in respect of assets held in IFTC accounts, including:
orders joining Iron, Iron International Ltd, Ore Investments (Pte) Ltd and Mr Grimaldi as defendants to the Recovery Act Proceedings;
orders under s 10 of the Recovery Act restraining any dealing with the interests in property of Iron, Iron International, Ore Investments and Mr Grimaldi in identified accounts and shares (Further Restraining Orders);
orders under s 12 of the Recovery Act allowing the Public Trustee on the instructions of IFTC Broking to dispose of any interest of Mr Grimaldi, Iron, Iron International or Ore Investments in identified shares and the proceeds of any such disposals to be held by the Public Trustee until further order;
orders requiring Mr Grimaldi and his wife, Janine Grimaldi, to be examined on oath before a registrar;
an order under s 10 of the Recovery Act for the Public Trustee to take control of the interest of Mr Grimaldi in the identified shares; and
granting leave to the Crime Commission to amend the summons to include prayers:
(a) seeking declarations under s 7(3) of the Recovery Act that the interests in property of Iron, Iron International and Mr Grimaldi in identified accounts and shares were subject to the effective control of Mr Grimaldi; (b) for orders under s 22 of the Recovery Act to forfeit or vest in the Crown the interests in property of Iron, Iron International, Ore Investments and Mr Grimaldi in identified accounts and shares; and (c) for a proceeds assessment order against Mr Grimaldi under s 27 of the Recovery Act.
Mr Spark swore an affidavit on 25 October 2008 in support of the application by the Crime Commission for the Further Restraining Orders. One of the exhibits to Mr Spark’s affidavit was the Beneficial Owners Report, which is summarised above.
At least part of the reason for the Crime Commission seeking the Further Restraining Orders was the existence of the appeal by IFTC and IFTC Broking in relation to the First Restraining Orders, and to ensure that, if the Court of Appeal set aside the First Restraining Orders, the assets subject to the First Restraining Orders would still be restrained.
On 3 November 2008, Mr Barns was allocated responsibility within the ATO to conduct an audit of Mr Grimaldi’s affairs under an Authority to Audit. The Authority to Audit was authorised by John Papadopoulos, a Team Leader at the ATO who Mr O’Neill described as a Senior Investigator on Project Wickenby.
The reasons expressed in the Authority to Audit were (all grammatical errors left in place):
PKF Vanuatu and one of its principles Robert Agius have been implicated in the promotion of tax avoidance schemes in Australia.
Information available provides that:
- Phillip Grimaldi set up a Vanuatu entity in the 2005 income year called Iron Investments Ltd through PKF Vanuatu
- Sold shares and options in an Australian public company called Murchison Metal Ltd worth over AUD$37million through Iron Investments Ltd
- Used IFTC a PKF Vanuatu trust company to receive and distribute funds to and from Vanuatu
Issues arise as to whether the correct amount of tax has been paid on the above funds.
This indicated that the focus of the ATO’s audit was on the Murchison securities and their proceeds.
During November 2008, Mr Barns issued a number of compulsory notices pursuant to s 264 of the Income Taxation Assessment Act 1936 (Cth) (s 264 notice**(s)**) to obtain documents and information from other sources. Three s 264 notices respectively dated 11, 19 and 27 November 2008 were issued to the Crime Commission, seeking the production of:
the Beneficial Owners Report;
documents supplied to the Crime Commission by Mr Grimaldi and his representatives;
documents obtained by the Crime Commission during its investigation of Mr Grimaldi; and
all evidence in relation to the Crime Commission’s investigations of Mr Grimaldi.
On 19 November 2008, Mr Barns made a submission to Mr Papadopoulos in respect of the s 264 notice dated 19 November 2008. The submission set out a “brief description of subject matter of enquiries” and stated that “[c]oncerns arise as to”:
- Why Mr Grimaldi set up Iron Investments Ltd in Vanuatu through PKF Vanuatu and IFTC
- Whether Mr Grimaldi has declared the correct amount of income when he became entitled to the MMX shares
- Whether Mr Grimaldi declared the correct amount of income/capital gain from the transfer of shares in MMX shares to Iron Investments Ltd
- Whether the arrangement of setting Iron Investments Ltd is a sham
- Whether the SMSF is and has been a complying superannuation fund during the 2005 to 2008 income year
- Whether the payments from Iron Investments Ltd to Mr Grimaldi and his associates is an early access payment from Mr Grimaldi’s SMSF
This submission indicated that Mr Barns was concentrating on the whether Mr Grimaldi was entitled to the income or capital gain on the transfer of the Murchison shares and options and should have declared it for the purposes of the assessment of his income tax.
In light of the compulsory s 264 notices being addressed to the Crime Commission and in the absence of Mr Barns as a witness for the Commonwealth at the hearing of these proceedings giving evidence to the contrary, I infer that the Crime Commission produced all of the documents sought in them to the ATO.
As a consequence, and in the absence of Mr Barns giving evidence to the contrary, I infer that he received and read the Beneficial Owners Report produced to the ATO in November 2008. That inference also means that by November 2008, Mr Barns was aware that the authenticity of the July 2005 Trust Deed had been questioned by IFTC and that Mr Grimaldi had sought to obtain the release of the assets, which had been the subject of the First Restraining Orders, using a document that was potentially fraudulent.
On 24 November 2008, the ATO finalised a profile on Mr Barnes (Barnes Profile), who was at the time still a director of Chameleon, for the purposes of Project Wickenby and Operation Starlifter. The Barnes Profile at [8] notes that Murchison was then currently involved in the Chameleon Proceedings, that Chameleon was listed on the ASX in April 2004 with Mr Grimaldi as a top 20 shareholder, Mr Barnes as managing director and Mr Grimaldi a director of Murchison at that time.
The Barnes Profile at [8] also recorded that Chameleon and Murchison were both involved in mining activities in Western Australia and a dispute had arisen between them over the ownership and right to profits from a number of iron ore tenements. The Barnes Profile continued at [8] recording that Chameleon had brought claims against Mr Grimaldi, Pinnacle, Mr Barnes and Winterfall (then known as Crossland Resources Ltd). The Barnes Profile copied a segment from the RM Wise Research website, which provided as follows:
Chameleon Mining ... alleges that Murchison is holding shares in Crosslands on a constructive trust for Chameleon. The writ also alleges that Crosslands is holding Jack Hills and Weld Range on constructive trust for Chameleon. Further, the writ alleges that former Chameleon director Barnes and de facto director Grimaldi caused Chameleon to issue securities sold to raise funds that were then used by Murchison to acquire Jack Hills and Weld Range. Chameleon is therefore looking for an account of profits from its ownership of Crosslands, an account of profits from Murchison’s sale of 50% of the project to Mitsubishi and interest in the tenements or alternatively equitable compensation or damages.
A link to the RM Wise Research website is contained in the profile.
While this extract from the RM Wise Research website summarised the nature of the relief that was being sought in the Chameleon Proceedings, it did not obviate the need for the ATO to take the obvious step of seeking to analyse the claims made in the Chameleon Proceedings. There is no evidence that the ATO ever did so.
…
- Phillip Grimaldi has provided information which implies that a large % of the restrained funds are his.
- Don’t want to bring Iron into the jurisdiction. It is a company limited by guarantee, that is there is no shareholding and operates by way of a deed of wishes. Don’t want to admit to tax liability in the consent orders nor to the beneficial ownership of Iron.
- NSWCC does not have all the evidence necessary to prove the tax case
…
NSW CC understanding of IFTC and IFTC Broking Services and Murchison Metals Ltd/Grimaldi/[redacted]/Gregory Barnes and others
…
- MMX floated in April 2005
- Pinnacle Nominees Pty Ltd (Gregory Barnes private Australian entity) received substantial shareholdings in MMX on the float
- Grimaldi received around 6million shares and 8million options in MMX on float
…
- Grimaldi set up IOS Management Ltd (later called Iron Investments Ltd) in November 2004. NSWCC thinks they are holding shares in trust for Grimaldi
…
- Grimaldi transfers his shares to Iron and sells down his shares to MMX through IFTC and IFTC Broking Services Ltd using share broking services of JB Were and BBY Securities originally. Later through CommSec, Grimaldi’s shares and options had a 2 year escrow on them (he does however transfer and sell 1.6 million of the shares prior to the escrow being lifted)
NSW CC Running of Case
…
- Grimaldi moved his share trading account from Goldman Sachs to IFTC because the Goldman Sachs Anti-Money Laundering team wanted to know who the beneficial owner of the shares was. Iron claims to be an exempt foreign resident not liable to tax or GST and not subject to withholding tax on dividends
…
- Grimaldi has received and used substantial funds held through Iron, IFTC and IFTC Broking Services. Grimaldi has purchased boats, cars, holidays for himself, wife, girlfriend and daughter (who resides in America)
- NSWCC say they cannot settle just with Grimaldi in relation to the CommSec and ANZ accounts as there are other stakeholders - it could be seen that their money is being paid to the ATO
…
Who can be taxed on the profits
NSW CC wants to understand the tax office position as to whether IFTC Broking Services can be assessed on the share trading activities that were undertaken through the CommSec account. Can IFTC be treated as trustee to Grimaldi, [redacted] etc, or as beneficial owners in their own right?
Say that without consent orders ATO will not get any money.
It appears from the minutes that Mr Grimaldi was no longer asserting his beneficial ownership of Iron. It also must have been a warning sign to all present at the meeting that Mr Grimaldi had moved his share trading account away from Goldman Sachs because he did not want to disclose the beneficial owner of the Murchison shares.
The minutes also record that the Crime Commission held the view that it could not just settle with Mr Grimaldi because of the interests of other parties and “it could be seen that their money is being paid to the ATO”. The Crime Commission is recorded as seeking to understand the tax position. It appears that the Crime Commission was assisting the ATO in its task of attempting to determine who might be liable for a tax debt and recovering it.
The minutes set out the ATO’s position as follows:
- The ATO had issued guidelines / Rulings on the Commissioners interpretation on the taxation of foreign companies limited by guarantee. Further advice would be sent through to the relevant parties.
- To determine whether IFTC Broking Service could be assessed in Australia as a business would need to be determined on the facts.
- It could be argued that IFTC Broking Service was conducting a business in Australia and therefore could be assessed on the share trades.
- The ATO could issue assessments to a number of people and entities for the same income/profits. This can be done where it is unclear whose income/profits the funds are
As stated by Mr O’Neill in his evidence, the ATO had a practice of issuing alternative assessments when it was seeking to recover disputed tax debts, such as in the case of complex corporate and trust structures or where there was a dispute between claiming beneficiaries.
I agree with Chameleon’s submission that it would have been an obvious and appropriate course of action for the ATO to assess each of Mr Grimaldi, the Webtel Super Fund and Chameleon as if each of them was the true owner of the funds and the assets in the bank accounts that were the subject of the Further Restraining Orders. It appeared from the minutes that the ATO was determined to proceed with issuing an assessment and receiving the tax without giving any consideration as to whether Chameleon was one of the possible taxpayers.
On 17 December 2008, the ATO prepared an A****udit C****ase P****lan describing the audit to be conducted of Mr Grimaldi. It appears to have been prepared by Mr Barns and his supervisor, Mr Papadopoulos, both of whom are described as being in the Serious Non-Compliance Audit section of the ATO. In the section of the Audit Case Plan headed “KEY RISKS” under the subheading of “Identified Risks”, four issues were identified, three of which were:
Issue 1: Has Mr Grimaldi declared the correct amount of assessable income from the allotment of options and shares in Murchison to him in November 2004?
Issue 2: Who is assessable on the income earned by Iron during the 2005 to 2008 income years?
Issue 3: Has Mr Grimaldi and/or the Webtel Super Fund declared the correct amount of assessable income in the 2005 to 2008 income year from the transactions undertaken by Iron?
Within each of these issues, the Audit Case Plan set out the various transactions in which Mr Grimaldi and Iron were involved in relation to the Murchison securities and their proceeds.
Under the heading “Proposed Actions”, the Audit Case Plan simply stated:
Audit to be undertaken on Phillip Grimaldi and his associated entities focusing on Iron’s activities.
The Audit Case Plan also stated that further information was required and that the following s 264 notices will be issued to:
the Crime Commission requesting the “substantial documents relating to Grimaldi and his related entities” which it had obtained;
Mr Grimaldi and his related entities for “working papers, journals, ledgers, and financials for the income years ended 30 June 2005 to 30 June 2008”; and
Mr Grimaldi to attend and give evidence.
The Audit Case Plan concluded by stating that assistance from the Crime Commission would be needed.
- During the joint investigation it was found that Phillip Grimaldi:
- in November 2004:
- Became the beneficial owner of 6,000,000 fully paid ordinary shares in an Australian listed public company called Murchison Metals Ltd (MMX) and 8,055,000 20 cent MMX options expiring November 2009 which were subsequently sold and/or transferred for approximately AUD$37million over the 2005 to 2008 income years
- Established Vanuatu company limited by guarantee through PKF Vanuatu called Iron Investments Ltd (previously called Iron Ore Sales and management (HK) Ltd and IOS Management Ltd) which held the majority of the MMX shares and options for his ultimate benefit
- Has directed PKF Vanuatu its related entities including IFTC and IFTC broking services since November 2004 concerning the proceeds from the sale of the MMX shares and options too:
- Buy and sell Australian shares through Australian stock broking services including Goldman Sachs JB Were, BBY Limited and Commsec accounts in the name is IFTC broking Services Ltd or IFTC or Iron
- Pay personal expenses including rent, dental fees and travelling expenses
- Purchase a Bentley motor car
- Transfer funds to Martin Woods (Grimaldi’s Australian lawyer) some of which
- was on-loaned to his estranged wife
- used by another of his private companies (Tivation Pty Ltd) to purchase a property and boat
- Transfer funds to friends and his daughters
- Set up and pay an international debit card for him under Iron
- In Late 2007 commenced to set up through PKF Vanuatu another company in Vanuatu and incorporated in Singapore
- The majority of the sales of MMX shares and options (approximately $32 million of the total $39 million) occurred in the 2008 income year
- Mr Grimaldi contends that the shares and funds held through the PKF Vanuatu entities are assets of MGG Capital Pty Ltd as trustee of the Webtel Management Super Fund (Super Fund)
- The Super Fund is an Australian self managed superannuation fund of which he is the sole member.
- MGG Capital Pty Ltd is an Australian private company of which Grimaldi is the sole director and shareholder of.
- On 13 May 2008 the NSW Crime Commission froze the assets held in the New Zealand Bank accounts and Commsec accounts under the name of IFTC and IFTC Broking Services in an attempt to determine who the beneficial owners of the funds and assets where. It is understood that the funds were involved in the charges relating to Robert Agius.
- Grimaldi has advised that he is the beneficial owner of approximately $14.3million of the frozen [funds] in the New Zealand bank accounts and substantial shares in Commsec held in the name of IFTC and IFTC Broking Services
- Obtain an understanding of how Grimaldi became entitled to the Murchison Metal Ltd shares and options in the 2004 income year
- Obtain information to determine the involvement of Grimaldi and his related entities involvement in offshore schemes through PKF Vanuatu
- It is necessary to obtain the taxpayer’s contentions concerning his involvement
- It is necessary to have an opportunity to closely examine some of the transactions and obtain explanations from Grimaldi on taxation consequences of those transactions
- Given the seriousness and complexity of the case, a formal, tapped interview is the most appropriate course of action to obtain information required
On 19 December 2008, the Submission for Authorisation of Grimaldi Notice was approved by Edward Van Der Pol of the ATO.
The s 264 notice issued to Mr Grimaldi required Mr Grimaldi to explain:
the events surrounding the corporate restructure of NiCu leading up to the public float of Murchison;
the events surrounding Mr Grimaldi’s introduction and subsequent involvement with PKF; and
for the period 1 July 2003 to 30 June 2008, how apparent personal payments from Iron through IFTC to Mr Grimaldi and his related entities had been treated in the accounts of Iron, including rent, purchase of motor vehicles, the purchase of a boat and payments for overseas travel.
The issuance of the s 264 notice to Mr Grimaldi led to the ATO conducting an interview with Mr Grimaldi on 27 January 2009. That interview was recorded and transcribed. Present at the interview for the ATO were Mr Barns, Mr Van Der Pol, Don Gibson and Ian Young. Mr Grimaldi was also accompanied by his lawyer, Mr Woods and Mr Sorenson of counsel. The vast bulk of the questioning was conducted by Mr Barns.
As I have stated above, I infer that by this time the ATO had received the Beneficial Owners Report from the Crime Commission. In the absence of Mr Barns giving evidence, I also infer that Mr Barns had read the Beneficial Owners Report. Having read the Beneficial Owners Report, Mr Barns must be taken to have seen that it was suspected that Mr Grimaldi had engaged in an international tax evasion scheme, Mr Grimaldi had sought to seek the release of funds from the First Restraining Orders using a potentially fraudulent document and that Chameleon had brought the Chameleon Proceedings against Mr Grimaldi and others. In other words, Mr Barns had significant reason to treat Mr Grimaldi’s answers in the interview with considerable caution.
Mr Barns asked Mr Grimaldi about his background and his involvement in establishing mining ventures, to which Mr Grimaldi responded (emphasis added):
... As I said, being a - accounting background, financial background, my responsibility usually is to - or has been to put together, you know, the prospectus, to help with fundraising and to bring together the management team to run the venture and this is what I did with Weboz. It - it emanated from a - from a simple proprietary company in 1997 and we - we secured the distribution rights from a multinational company called Schlumberger to distribute pay phones and internet kiosks throughout Australia so that was in '98, '99 and we then expanded the business and went public in 2001. So I originally received shares in - in this company by setting it up from the beginning and the - at the time of listing, there's two holdings. There's one in my name there of 3.3 million and then there was another company that was mine at that time, it was called Webtel Management Pty Limited. This company was - was my consulting company and also the trustee of my super fund. So all of those shares really came from the original shares that I subscribed for in 1997 which were split into - to denomination. There was no transfer of shares. It was just split into so many number of shares and I contributed so many of them to Webtel Management and the balance was in my name. Those in my name were later contributed to my new company or - not new, it was five years ago, MGG Capital and the others were – went into the - or stayed in the super fund and continued on in the super fund. So you know, that's how the interest derived. Now, Weboz didn't do very well so, you know, by the end of – by 2004 virtually the company's shares were worth very, very little because it – the payphone business was just overtaken by mobile phones and I just went out - so – but, I continued on with the shareholding and I continued on with my superannuation structure in the hope, you know, that who knows? Well, I didn't have much else. Let's put it that way. That was the only business I had, was this company, all right? I didn't have any other means of – other than going out and working as an accountant which I didn't do so.
By this answer, Mr Grimaldi explained the background to Weboz, which went on to become known as NiCu and then Murchison, how it was that he had the Existing Shareholding in his name and in the name of Webtel Management Pty Ltd, all of which he admitted were worth “very, very little” by the end of 2004 and that he did not “have much else”.
Mr Grimaldi then further explained the transition of Weboz to a mining company as NiCu and then as Murchison, as well as the creation of MGG Capital as the new trustee of his superannuation fund to which part of the Existing Shareholding was transferred, saying:
When I was converting Weboz into Murchison Metals, you know, there was no - there was no shining light saying this is all going to be worth millions of dollars, just do this, this and this. No, there was just my continuous normal business strategy to follow through, get the right people, get the right story, at the right time, and things will happen. So, you know, when it came to 1 January 2004, I decided to - that Weboz was going nowhere and we decided to convert it into a mining company - - -
…
and it became Nicu Metals. At the same time, Webtel Management, the company, was saving costs, so Webtel Management was deregistered and the new entity, MGG Capital was – I took that over from the company for – you know, I bought it for $10 or whatever the cost or $1000 or whatever the cost and that became – I set that up as the new trustee of the super fund and I transferred the shares from Webtel Management to that company and at the same time, I transferred the 3.3 million shares in my name to MGG Capital in its own right.
Mr Grimaldi continued by saying that Weboz owed him a lot of money, that he did not get paid, or was paid a fraction of what he should have been paid, and his tax returns showed that. This was in keeping with what the ATO already knew — there was no other source of wealth for Mr Grimaldi prior to 2004 other than the profits that he subsequently earned from selling Murchison shares and trading in those proceeds.
Mr Grimaldi explained his connection to Mr Barnes, having met him in February 2002, with whom he “struck up a friendship” and who introduced him to “various people”.
According to Mr Grimaldi, at the time of the reverse takeover of Winterfall, Murchison was delisted, the Murchison shares were of “minimal” value, Murchison share prices would “never have gone up” and the value would have been “very little” except for the “Chinese explosion” in the growth of the demand for iron ore, which caused the prices to go up.
I agree with Chameleon’s submission that, based on Mr Grimaldi’s answers, shares in Murchison were worthless at the time Mr Grimaldi breached his fiduciary duties. Mr Grimaldi’s breach caused the acquisition of the Jack Hills Tenements and the whole of the increase in the value of the Jack Hills Tenements was therefore the profit that resulted from that breach.
During the interview, Mr Grimaldi then explained why he was given shares in Murchison, saying that:
Mr Barnes was “just helping [him] out”;
he was just trying to get Murchison revived; and
Mr Barnes said “all right, who wants the shares, you know” and “let’s sort of split it this way”.
Mr Grimaldi provided the following explanation for putting his Murchison shares into another entity through PKF in Vanuatu, first citing the escrow restrictions that applied for 24 months given his position as a director of Murchison and then “asset protection”, which he expressed in the following terms:
And no one thought it was going to be worth millions and millions of dollars. I mean, like, we all hoped that, you know, at the time, it was just control and the other thing too, it was just about that time, there was another party that had done some business with who was making, you know, some accusation and you know, litigation threats and things and I thought well, you know, that’s another reason. If I put these shares in another company where they’re not seen to be related to me then if there’s any litigation, I’m protected. So it was asset protection and trying to get around the escrows that prompted me to set that up…
Having already stated to the ATO and the Crime Commission in the joint interview on 25 September 2008 that there was “a suspicion with Chameleon” which caused Mr Grimaldi to place the Murchison shares and options offshore, Mr Grimaldi was now identifying “accusation[s] and … litigation threats” from “another party” for his state of mind in November 2004 as a reason for doing so, to ensure that he had “asset protection”. In November 2004, no proceedings had been commenced against Mr Grimaldi, yet he was cognisant of the threat of them and the need to protect his assets from any claims. In the absence of evidence from Mr Barns, I infer that Mr Barns was aware that this other party was Chameleon. As a result, this answer gave even further cause for the ATO to make inquiries to determine the nature and extent of the claims made in the Chameleon Proceedings, which had been commenced in November 2007 and were brought to the ATO’s attention by at least 25 August 2008 when the audit profile of Mr Grimaldi was finalised.
These answers should have given Mr Barns an alert that Mr Grimaldi was conscious that he had done something wrong. Yet Mr Barns asked no follow up questions in the interview to ascertain what the accusations and litigation threats were, who made them, and why Mr Grimaldi felt the need to protect assets from those persons. These were obvious questions for Mr Barns to ask but they were not asked. In the absence of Mr Barns as a witness, there is no explanation why he did not ask these questions.
During the interview, Mr Barns asked Mr Grimaldi about the letter of 11 November 2004 in which Mr Barnes (on behalf of Pinnacle) wrote to Murchison directing how the 10 million shares and 12 million options issued by Murchison were to be allocated, which included the allotment of four million Murchison shares and five million Murchison options to Iron on Mr Grimaldi’s instructions, and 84,000 Murchison shares and 770,000 Murchison options to MGG Capital. Mr Barns started to ask a question commencing with “[w]hat was the reason…” at which point Mr Grimaldi interjected and volunteered the following information as a lengthy and difficult to understand explanation about the transfer of shares after the reverse takeover of Winterfall (all grammatical errors left in place):
Well, what happened – again, it’s a similar thing. The iron ore properties that were called Jack Hills which – which is what were the properties that had the iron ore, were owned by a company called Winterfall which later become Iron Jack Limited but it was Winterfall. This company was wholly owned by Mr Nick Zooks who is a prospector and he's been around forever and he found these leases. At the time they were just applications for exploration licence. They weren't a mining licence so it wasn't – they weren't worth very much. I explained to you before that the deposit was not economic but what happened was that Nick Zooks, he controlled Winterfall. He acquired Winterfall – acquired the iron ore leases under a contractual arrangement and then he split all the shares and he gave shares to various parties and he gave 10 million shares to Pinnacle Nominees and then Greg Barns agreed to split those with all these parties, right? Now, what happened then is that Murchison Metal made a takeover of Winterfall and all the shareholders who had received shares including these ones which were done first to Pinnacle and then he directed them to be – to be made to these people based on, in my case – or my instruction I said yes, put some in that name, put some in this name, and that’s how – so that's the same sort of arrangement. It was a takeover and it was a swap of shares. It wasn’t a actual sale – it wasn’t a cash sale and because he had – Greg Barns had an ongoing relationship with Nick Zooks. He worked with him. He introduced Nick Zooks to me and as a result of that, Nick Zooks was able to sell the properties to Murchison and as a result of that, my efforts which were – which really added the value to the whole equation was that I introduced a number of Chinese still mills who looked at this whole thing and said - they signed, you know – they looked at it and said, yeah we want to buy the iron ore when you get it to a mine. You know, if you guys can get this to a mine then you know we'll buy the iron ore in the future and they did do that but that was – they're – now, so all of those factors, Nick Zooks, he didn't care. He didn't – he didn't put much value on the deposit either. I mean, he was of the same view of Greg Barns because he thought this is only gunna be worth anything if iron ore prices go up but there was no guarantee that that was gunna happen, you know. It's just something you can't predict but if it didn't then it would've just been a flop, you know, and worthless, which it was at that point in time. It was all worthless. So he was pretty happy to split the shares with whoever was agreed and so was Greg Barns and they got – they got a lot of shares too. They were happy and - - -
In this answer, Mr Grimaldi’s explanation as to why he received the Murchison securities hinged on Mr Zuks being introduced to Mr Grimaldi and Mr Grimaldi being able to sell the Jack Hills Tenements to Murchison because of Mr Grimaldi’s ability to add value by introducing the Chinese steel mills to buy the iron ore produced. Mr Grimaldi was also admitting to having given instructions to Mr Barnes on where the Murchison securities were to be placed.
When asked why he was “one of the chosen few” to receive the shares in Murchison, Mr Grimaldi said (emphasis added):
Well, I wasn't one of the chosen few. There was a heap of other people but of course, because I was also the one who helped them, you know, get it done. I was there. I mean, I was – I was the person that – I introduced them to Weboz and Nicu Metals. I had to convince all the large other share holders of Nicu Metals to agree to the takeover and also to the directors of that company.
In this answer, Mr Grimaldi emphasised that he received the Murchison securities because he helped Mr Zuks to “get it done” by convincing the shareholders and directors of Murchison to agree to buy the Jack Hills Tenements.
Mr Grimaldi’s answers were false. The real reason he received the Murchison securities was because he used Chameleon’s funds to complete the transaction. As detailed below, the ATO knew that those answers were false within a few weeks of the interview when it received information directly from Chameleon on 4 March 2009 outlining exactly how Mr Grimaldi had managed to “get it done”.
Mr Barns appeared not to have been completely satisfied with the answers he had received from Mr Grimaldi because he then sought a further explanation from Mr Grimaldi as to why he had received the Murchison securities in the following exchange:
BARNS: So was there a set formula why you got nearly 40 per cent of the total issued shares?
GRIMALDI: No, there wasn't any set formula - - -
BARNS: It just seems like you got a huge chunk - - -
GRIMALDI: Yeah, but Greg was happy 'cause he had other shares – he got the other shares on ATL and then he got more than me on ATL and he got 3 million over there.
BARNS: Was it something you negotiated in advanced or - - -
GRIMALDI: Not really. Well, in general we just talked about what - but it all came down to how many other shares had to go to all these other people. That was it. It was just a question – now, there was a couple of other people that I had to actually transfer shares post this and there was transfers of market that were done because they said, oh no, we wanted more shares. I said fine. So I did do that and there was quite a few adjustments post these numbers that happened and that was just, just negotiated as I said. At this point in time, you know, the value of these things was not something that you'd be spending a lot of time on, you know?
BARNS: Was there a set formula – like you said that you got issued too many shares so you had to give or transfer some to other people. Like, was there a set formula that was agreed before? Like, it just seems strange that suddenly you just give away - - -
GRIMALDI: Well, I didn't – no one was paying. Those shares were issued all to Nick Zooks. You know, they were all his shares. He split them and then he was giving them away. So that's the way it went.
BARNS: So just to friends and acquaintances.
GRIMALDI: Yeah, well, people that he thought were important and in this case, to Greg Barns who then gave them on to me and to other – all those other people which he thought were important.
These series of answers made no sense, particularly as they were inconsistent with answers given by Mr Grimaldi only moments before. Mr Grimaldi had only just said that he instructed Mr Barnes on where the Murchison securities were to go and now he was saying that Mr Barnes gave the shares to those who he felt were important.
In the absence of Mr Barns giving evidence, I readily infer that Mr Barns did not accept Mr Grimaldi’s explanation given Mr Barns’ statement that “it just seems strange” that the shares were being given away. I have no doubt that Mr Barns had every reason to believe that Mr Grimaldi had engaged in an offshore tax avoidance scheme involving dishonesty and that Mr Grimaldi was not being completely candid in the answers he gave. Mr Grimaldi’s answers on their face were not logical, lacked credibility and did not seem rational. The ATO was clearly in a position where it needed to gather information from other sources to test the answers which Mr Grimaldi had given during this interview.
The evidence of Mr O’Neill was that, given it appeared that Mr Grimaldi had engaged in a dishonest tax evasion scheme as stated in the Grimaldi Profile, the ATO had every reason to be very sceptical of Mr Grimaldi’s answers and obtain information from other sources to test and verify his assertions (T127–128). Mr O’Neill expressed himself in explaining these propositions as follows:
Q. And if this, what is said here in these paragraphs I’ve just shown you is correct, then it looks like Mr Grimaldi was dishonestly seeking to avoid his tax obligations. Do you see that? Do you agree with that?
A. Yes, Mr Grimaldi was involved in either a tax avoidance or evasion scheme.
Q. And a dishonest one at that?
A. An evasion scheme would have involved dishonesty.
Q. And if that was the case and that was the scheme that he was involved in, then you had – the Tax Office had good reason to be very sceptical about anything Mr Grimaldi ever told the Tax Office. Do you agree with that?
A. Yes, in relation to taxpayers who had been involved in tax avoidance or evasion, there was an element of scepticism in accepting what they did or did not say.
Q. Right. And the worst the unlawful conduct, the greater the scepticism; is that fair to say?
A. Yes, scepticism and, therefore, reliance on other sources of information.
Q. Right. So if one has taken shares and transferred them offshore in order to avoid all together paying income in the sale of those shares then that would be a high level of dishonesty, would you agree with that?
A. Yes, it was our view that this was an arrangement of tax avoidance or evasion.
Q. Right. And quite a serious breach of the law?
A. Yes.
Q. Was that your view at the time?
A. Yes, of the tax law certainly. I couldn’t give a view on the criminal law. That was a matter for others.
Q. So that meant that you – the tax officers – yourself and the tax officers who were investigating Mr Grimaldi, really couldn’t accept that anything that Mr Grimaldi said to them without properly investigating the truth of what they were being told. Do you agree with that?
A. Well, I think we would consider what Mr Grimaldi said in the context of other things, rather than not accept it entirely.
Q. Right?
A. And - -
Q. All right. If you – I’m sorry?
A. So, for example, we would have sought information from other sources to test and verify any assertions from Mr Grimaldi or others.
Q Well, that was an important thing to do, wasn’t it, to look at information from other sources and test and verify the information that Mr Grimaldi was giving you?
A. The ATO makes reasonable enquiries to confirm its assessment, yes.
Q. Right. Reasonable enquiries to test and verify the truth of representations that are being made by the taxpayer. Is that a fair summary?
A. Reasonable enquiries on which to ground an assessment, part of that is testing any assertion of Mr Grimaldi or assertions of other parties.
Q. Right?
A. For example, Mr Agius.
Q. Yes. And you would have that means, I take it, plenty of experience of taxpayers not being truthful in their dealings with the Tax Office?
A. That does occur, yes.
Q. And you had the view, did you not that, Mr Grimaldi may indeed be one such person?
A. Yes.
Q. And is it the case that the reasonable enquiries that you just described would include enquiries to test assertions that are made by third parties about the taxable affairs of the taxpayer?
A We would make reasonable enquiries. What exact enquiries were made in the context of this audit, I couldn’t be sure. As you said before, there was a production notice issued under section 264. Some people were examined in the context of this audit. There was information obtained from other agencies. So there were reasonable enquiries in this audit and other audits. The specific enquiries I don’t know.
In further cross-examination, Mr O’Neill said that Mr Grimaldi’s explanation for why he received the shares and options in Murchison lacked credibility (T197).
In my view, it was incumbent on the ATO to do more than merely accept the explanations of a suspectedly dishonest Mr Grimaldi as the basis for treating him as the taxpayer in relation to the various transactions under investigation. The ATO had credible reasons to ask Mr Grimaldi more questions in this interview, particularly about the Chameleon Proceedings, and continue its investigations to determine the basis on which Mr Grimaldi had come to receive the Murchison shares and options. If Mr Barns had asked some questions about the Chameleon Proceedings, he would likely have come to learn that Chameleon alleged that Mr Grimaldi and Mr Barnes dishonestly took Chameleon’s money to enable Murchison to buy the Jack Hills Tenements. That opportunity was not, however, taken.
As it happens, on 4 March 2009 (less than six weeks after the interview of Mr Grimaldi), the ATO would be provided with information directly from Chameleon which would demonstrate that Mr Grimaldi gave false answers in his explanations as to why he received the allocation of the Murchison shares and options. I have dealt with the events of 4 March 2009 below.
On 11 February 2009, Mr Barns prepared an A****mended A****udit C****ase P****lan in respect of the audit of Mr Grimaldi, which was approved by Mr Papadopoulos.
Under the heading “KEY RISKS” and subheading “NEWLY IDENTIFIED RISKS AND PROPOSED ACTIONS” the following matters appear in the Amended Audit Case Plan (all grammatical errors left in place):
Newly identified risks
- The NSW Crime Commission has frozen a number of New Zealand Bank accounts and also, Commsec accounts controlled by Vanuatu entity called the International Finance Trust Company IFTC).
- Under an audit and investigation undertaken on a Mr Robert Agius by the Australian Federal Police, NSW Crime Commission and the ATO, it appears the above-mentioned accounts have been used by Robert Agius and his entities of which IFTC is one of them for criminal activities (mainly money laundering).
- It appears that some of the funds held by IFTC are those which relate to Iron Investments Ltd, being Phillip Grimaldi’s Vanuatu entity.
- Grimaldi contends that over AUD$14 million of the funds held in IFTC is Iron Investments Ltd.
- Issues arise as to whose funds they are, whether they are Grimaldi’s/Iron, IFTC or someone elses.
Proposed Actions
- It is proposed that due to the uncertainty as to whose funds held by IFTC in the New Zealand Bank accounts and the Commsec accounts are:
6.1 no position paper will be issued
6.2 the interview of Grimaldi will be brought forward
6.3 the reason for decision will be completed
6.4 manual assessments will be issued.
It is clear from these statements that Mr Barns did not accept the explanation from Mr Grimaldi during the interview on 27 January 2009 as to the true ownership of the funds that were held in the IFTC bank accounts and was canvassing the possibility that beyond Mr Grimaldi, Iron and IFTC, the funds might belong to “someone else”. I am able to draw this inference with more confidence in the absence of Mr Barns giving evidence to the contrary.
The Amended Audit Case Plan mentioned that the ATO would continually liaise with the Crime Commission concerning information it may obtain to assist in the audit.
Also on 11 February 2009, the ATO prepared a s 264 notice addressed to Registries Ltd to provide a schedule containing a detailed list of transactions, including all transfers, sales, purchases and conversions, of all shares and options in Murchison for the period from 1 July 2002 and 31 December 2008.
On 3 March 2009, Norm Edwards of the ATO received a telephone call from Anthony Karam, a director of Chameleon, who said that he had information about “people who may be of interest” to the ATO and requested a face-to-face meeting with an ATO officer to see if the information was of interest to the ATO before he handed it over. Mr Edwards surmised that the “payment from [IFTC] must have something to do with Chamellion Mining [sic] (or perhaps others such as Bonacorso, Grimaldi or Greg Barnes)”. Mr Edwards then contacted Mr Tannous to see if someone could organise a meeting with Mr Karam. Mr Tannous told Mr Edwards that “Chamellion Mining [sic] is or has been in some legal dispute involving Murchison Metals”. Mr Edwards and Mr Tannous suggested that Mr Edwards contact Mr Barns “given his involvement with Grimaldi”.
Mr Barns then arranged to meet Mr Karam on 4 March 2009.
On 4 March 2009, Mr Barns and Mr Papadopoulos held a meeting with Mr Karam and Geoffrey Brazig, a consultant for Chameleon. The minutes of the meeting were prepared by Mr Barns.
The minutes of the meeting record that:
Chameleon was taking legal action against Mr Grimaldi and Mr Barnes, with a hearing date set down in March 2009;
Chameleon considered that Mr Grimaldi was “a shadow director or an officer of [Chameleon] from at least January 2004 to 12 November 2004”; and
Mr Barnes, who was a director of Chameleon, was taking instructions from Mr Grimaldi and “this is all part of the court action”.
This was consistent with the answers given by Mr Grimaldi during the interview on 27 January 2009 that he also gave instructions to Mr Barnes on the allocation of the Murchison securities received by Pinnacle.
Under the heading “Gregory Barnes (GB) and Phillip Grimaldi litigation”, the minutes record the following (all grammatical errors left in place):
- [Chameleon] consider that [Mr Barnes] and [Mr Grimaldi] contrived to finance the purchase of a company called Crosslands Resources Ltd (previously called Winterfall Ltd and Iron Jack Ltd) in around 2004 by [Mr Grimaldi’s] company Nicu Metals Ltd (now called Murchison Metals Ltd) through [Chameleon’s] cash reserves.
- An Australian company called Crosslands Resources Ltd held mining tenements in WA with a number of other parties. Murchison Metals Ltd (MMX) did not have the funds to purchase the mining tenements so [Mr Barnes] provided funds from [Chameleon] to finance the purchase by [Murchison] for no consideration.
- [Murchison] as part of the purchase consideration for the mining tenements was required to purchase all the shares in Crosslands Resources Ltd in a reverse takeover. The share capital of Crosslands was changed before the final purchase by [Murchison] and eventually there were 80,000,000 shares held by a number of parties. 10,000,000 shares were held by Pinnacle Nominees Pty Ltd. A company controlled by [Mr Barnes]. [Chameleon] consider that [Mr Barnes] received this because of him helping [Murchison] and therefore [Mr Grimaldi] purchase the mining tenements.
- The reverse takeover required [Murchison] to issue 80,000,000 shares and 30,000,000 options of their stock in return in 100% ownership in Crosslands. Pinnacle Nominees Pty Ltd received there entitlement and received 10,000,000 shares and 12,000,000 options on 11 November 2004.
- Pinnacle Nominees Pty Ltd then distributed the shares and options to a number of parties including [Mr Grimaldi’s] Vanuatu company IOS Management Ltd which received 4,000,000 shares and 5,000,000 options.
- Gregory Barnes has provided to the courts that:
- although his company received the 10,000,000 shares in [Murchison] from the takeover by [Murchison] of Crosslands, he was directed to give the shares to others by [Mr Grimaldi]
- [Chameleon] provided that [Mr Grimaldi] possible used the Vanuatu entity as:
- He wanted to hide the related party issues. Trying to distance himself from everything
- He was looking at getting a divorce
- He had been bankrupt twice before and would probably want to reduce his exposure
- And possible tax purposes.
- [Mr Brazig] provided that if the ATO issued a notice to them they would provide all relevant documents
- They provided federal court documents relating to [Chameleon’s] claim against [Murchison], [Mr Grimaldi], Gregory Barnes, Crosslands Resources and Pinnacle Nominees Pty Ltd
- We informed them we would issue a formal notice and collect the documents tomorrow.
- They said that would be fine.
- We also asked once we went through the relevant documents could we come back and ask further questions.
- [Chameleon] provided that it would be fine, but they were going to be very busy over the next couple of weeks as they were preparing for the hearing date of 30 March 2009.
The information provided to the ATO during this meeting gave Mr Barns the answer to the question he had repeatedly asked Mr Grimaldi during the interview on 27 January 2009 to which he received inconsistent answers from Mr Grimaldi which, as I have found above, he had every reason to disbelieve — why was Mr Grimaldi receiving such a significant amount of Murchison securities? The answer given by the Chameleon representatives was that Mr Grimaldi and Mr Barnes had used Chameleon’s cash reserves to finance Murchison’s purchase of the Jack Hills Tenements for no consideration. As explained during the meeting, this was what Mr Grimaldi had arranged to “help them … get it done”.
The information provided by Chameleon gave the context for why Mr Grimaldi had said during the meeting on 25 September 2008 with the ATO and the Crime Commission that there was “suspicion with Chameleon” as a reason for placing the funds offshore in November 2004. The information also gave context to the “accusation[s] and … litigation threats” from “another party” as the reason Mr Grimaldi gave for the offshore “asset protection” during the interview on 27 January 2009. The ATO now knew precisely what the accusations and litigation threats were from Chameleon and why Mr Grimaldi was seeking to protect assets from them.
It was clear from the record of this meeting that Mr Karam and Mr Brazig provided documents to the ATO during the meeting to support their position, and indicated a willingness to provide further documents in answer to a s 264 notice and further information as requested by the ATO. The only qualification given for the willing provision of such further information was the need for Chameleon to prepare for the hearing of the Chameleon Proceedings at the end of March 2009. In effect, the ATO had been provided with an “open door” to seek any further explanation, information or clarification from Chameleon on any topic it wished.
During the meeting, Mr Barns and Mr Papadopoulos said that they would “issue a formal notice and collect the documents tomorrow”.
In the absence of Mr Barns giving evidence to the contrary, there is no evidence to indicate that anything said by Mr Karam and Mr Brazig during the meeting was or should have been disbelieved by Mr Barns. Mr Karam was a director of Chameleon giving credible and coherent information to the ATO about how the funds of Chameleon had been misused by two directors of Chameleon — Mr Grimaldi and Mr Barnes. This is to be contrasted with the answers given by Mr Grimaldi during his interview on 27 January 2009 which, as I found above, Mr Barns had every reason not to accept.
In my assessment, Mr Barns had a firm basis on which to conclude that Mr Grimaldi gave false answers during the interview on 27 January 2009 about why he had received the Murchison securities and that he should accept the information given to him during the meeting on 4 March 2009 as the most likely explanation, being Mr Grimaldi’s misuse of Chameleon’s funds involving a breach of Mr Grimaldi’s fiduciary duties.
On 4 March 2009, the ATO issued a s 264 notice to Chameleon seeking:
“all documents with reference to” Mr Grimaldi, Pinnacle, IOS Management, IFTC, MGG Capital, Webtel Management and Murchison;
“all documents relating to [Winterfall]”; and
“any documents explaining the movements of funds between the above entities and Chameleon”.
The issuing of this s 264 notice had been a step which was outlined during the meeting on 4 March 2009 with Mr Karam and Mr Brazig.
Part of the explanation for seeking approval to issue the notice as set out in the Submission for Authorisation to Issue Notice Under Section 264 dated 4 March 2009 (Submission for Authorisation of Chameleon Notice) under the heading “Brief description of subject matter of enquiries” was that:
Chameleon Mining NL (Chameleon) contend that:
- Phillip Grimaldi and Gregory Barnes inappropriately obtained the shares in Iron Jack Ltd from Chameleon,
- Phillip Grimaldi was a shadow director of Chameleon Mining NL and directed Gregory Barnes to allocate him the 4,000,000 shares and 5,000,000 options to IOS Management for Phillip Grimaldi’s benefit.
Chameleon subsequently produced approximately 60 pages of documents in response to that notice. Those documents included a diagram summarising the reverse takeover of Winterfall by Murchison. In particular, it recorded a placement of shares for “no consideration”, referred to “cheques [from Chameleon] to vendors of tenements for no return” and four million shares and five million options going to Iron (then known as IOS Management), which was Mr Grimaldi’s nominee.
The documents provided by Chameleon supported the matters which the ATO had been told in the meeting with Mr Karam and Mr Brazig on 4 March 2009. I infer that Mr Barns had no reason to doubt the information, which is an inference I am able to draw with greater confidence in light of the absence of Mr Barns giving evidence to the contrary.
In an effort to avoid a Jones v Dunkel inference arising from the absence of Mr Barns, the Commonwealth says that his absence is of no significance as the knowledge of the ATO before the Chameleon Judgment was only of allegations of wrongdoing, not facts. To support this submission, the Commonwealth seeks to make something of the facts that:
Mr Karam was not a director of Chameleon at the time of Mr Grimaldi's breaches of fiduciary duty (having been appointed on 6 June 2007);
Mr Karam only said what he “considers” to be the position of Chameleon and therefore he did not claim to have personal knowledge of those events; and
the documents produced by Chameleon under the s 264 notice did not evidence misappropriate of funds, only share transactions.
I reject this submission because it fails to recognise that what was presented by Mr Karam was not lessened in its significance just because he was not personally involved in the events concerning Mr Grimaldi's conduct. The ATO had before it a senior representative of Chameleon giving factual information about Mr Grimaldi’s conduct, supported by the documents presented to it. The information and material provided by Mr Karam demanded further investigation by the ATO, but none was ever conducted.
I agree with Chameleon’s submissions that by March 2009, the ATO did not have only “mere allegations” about Mr Grimaldi’s conduct. I consider that the ATO had factual information provided by Mr Karam in his capacity as a director of Chameleon, which was substantiated by the documents that Chameleon produced to the ATO in response to the s 264 notice. In my assessment, the ATO knew at this time that Mr Grimaldi had breached his fiduciary duties to Chameleon and profited from it. This was acknowledged by Mr O’Neill in some respects during cross-examination when he said (T157):
Q. And it would have been obvious to you, knowing that, that there was a possibility that the profits that Mr Grimaldi had obtained from the sale of those Murchison shares, were the product of breaches by Mr Grimaldi of his fiduciary duties to Chameleon?
A. I’m not sure I ever came to that conclusion. Clearly, we had increasing understanding of the Chameleon circumstances, and a breach of fiduciary duty and that there were profits associated with that.
[Mr Karam] advised that they have additional information concerning share transfers for Grimaldi and Greg Barnes. Also advise that RBL Investments Ltd was selling down shares in Chameleon mining. Advised that it would be best if we came in and looked at documents and then issued a notice requesting the documents.
The record of this conversation then contains the detail of Mr Karam’s telephone number.
There is no evidence that the ATO ever looked at the documents volunteered by Mr Karam or ever issued a further notice under s 264 requesting them. In the absence of evidence from Mr Barns to the contrary, I infer that the ATO did neither of these things.
- [Mr Barns] advised that we would like to meet him sometime next week say Wednesday to go through the documents
- Anthony said 1st April 2009 at 10.00 would be fine
- Agreed
As I have stated above, I do not regard the information provided by Chameleon on 4 March 2009 as “mere allegations” given the credible source of that information and the documents provided to support it. Mr Barns did not give evidence to say that he treated the information as only amounting to allegations. In my view, I should infer that at this stage the ATO had the basis on which to treat the information and documents provided by Chameleon as material facts for the purposes of the ATO’s investigation.
In any event, by the end of the trial, the Commonwealth conceded that the ATO knew everything contained in the Chameleon Judgment when it was delivered, which substantially lessens the relevance of these matters only being allegations at this stage.
Mr O’Neill gave the following evidence on this topic (T157):
Q. The reasonable enquiries of which you speak, with Mr Barns having been told by Mr Karam about the allegations that Chameleon was making against Mr Grimaldi, you knew that they were allegations, serious ones, that he breached his fiduciary duty?
A. Yes.
Q. And that he had obtained profits as a result?
A. Yes.
Q. And it would have been obvious to you, knowing that, that there was a possibility that the profits that Mr Grimaldi had obtained from the sale of those Murchison shares, were the product of breaches by Mr Grimaldi of his fiduciary duties to Chameleon?
A. I’m not sure I ever came to that conclusion. Clearly, we had increasing understanding of the Chameleon circumstances, and a breach of fiduciary duty and that there were profits associated with that.
I consider that if the ATO had any reason to believe that it could not yet conclude that Mr Grimaldi had breached his fiduciary duties in the manner explained by Chameleon, then the ATO had the power to issue s 264 notices to obtain the documents which went to those issues (including documents from Chameleon evidencing the payments made from Chameleon’s bank account and documents from the vendors of the Iron Jack Tenements evidencing their receipt of funds from Chameleon’s bank account). The ATO could also have conducted interviews with Mr Grimaldi, Mr Zuks and Mr Barnes so that each of them could explain the use of Chameleon’s funds.
There is no evidence that the ATO did any of those things. The ATO ignored all of the obvious warning signs that demanded further investigative action by it.
Mr O’Neill gave evidence that Mr Barns would be the person who would have the detail of the reasonable enquiries and specific enquiries conducted by the ATO during the course of the audit (T129). Mr O’Neill was not aware of what reasonable enquiries had been made and said “[y]ou have to ask Mr Barns that” (T146). In the absence of evidence from Mr Barns, I am more readily able to infer that no further enquiries of Chameleon or others in relation Mr Grimaldi’s breach of fiduciary duties were undertaken by the ATO.
In addition, there is no evidence that the ATO sought legal advice about the legal consequences of Mr Grimaldi’s conduct in using Chameleon’s funds in the reverse takeover of Winterfall. In the absence of evidence from Mr Barns and Ms McLachlan on the question of whether such legal advice was sought or any documents in support of its existence, I am also more readily able to infer that no such legal advice was sought or given.
On 27 March 2009, Mr Novakovic from the Crime Commission sent a facsimile to Mr Zafiriou of the ATO enclosing copies of the affidavits filed by the Crime Commission on 13 May 2008 (Mr Moerman) and 25 October 2008 (Mr Spark) in the Recovery Act Proceedings, along with a copy of the Beneficial Owners Report which was an exhibit to Mr Spark’s affidavit of 25 October 2008.
As extracted above, the Beneficial Owners Report provided detail about the claim made by Chameleon over the Jack Hills Tenements in respect of which the Chameleon Proceedings had been brought by stating:
…
(u) In 2005 Chameleon claimed to have an interest in the Jack Hills tenement (which was now known to be a viable high grade iron ore resource) and threatened to take action against Murchison Metals Limited.
…
(cc) In November 2007 Chameleon commence proceedings in the Federal Court of Australia against Murchison Metals Limited, Barnes, Grimaldi and others claiming an interest in the Jack Hills iron ore tenement. Atanaskovic Hartnell Lawyers represent Chameleon in those proceedings.
In the unexplained absence of Mr Zafiriou giving evidence to the contrary, I infer that Mr Zafiriou received and read the Beneficial Owners Report. I also infer that having read the Beneficial Owners Report, Mr Zafiriou must be taken to have seen that it was suspected that:
Mr Grimaldi had engaged in an international tax evasion scheme;
Mr Grimaldi had sought to seek the release of funds from the First Restraining Orders using a document likely to be fraudulent in the form of the July 2005 Trust Deed; and
Chameleon had brought the Chameleon Proceedings against Mr Grimaldi and others.
On 24 April 2009, Mr Spark of the Crime Commission sent a letter to Mr Tannous of the ATO providing a copy of the deed dated 10 October 2008 between Mr Grimaldi, the Crime Commission and MGG Capital as trustee for the Webtel Super Fund in which Mr Grimaldi asserted that he was the “ultimate beneficial owner of the property specified in the Schedule”, being the Murchison shares and options and the amounts held in ANZ Bank accounts in the name of IFTC. Those were the assets which were the subject of the Further Restraining Orders obtained by the Crime Commission on 25 October 2008.
Chameleon Litigation
On 29 November 2007, Chameleon Mining NL (“Chameleon”) commenced legal proceedings in the Federal Court against Murchison, Crosslands and several other parties. Chameleon is claiming an interest in the Jack Hills and Weld Range projects and/or Murchison’s shares in Crosslands, arising out of a series of transactions that occurred in 2004 before the current Board and management of Murchison were appointed.
The hearing that was scheduled to commence on 30 March 2009 was deferred. An application to vacate the trial date was brought by one of the respondents by reason of Chameleon’s late filing of evidence which could prejudice the respondents.
At a directions hearing in the Federal Court on 2 April 2009, the Court, in addition to making a number of programming orders, listed the matter for a further directions hearing on 25 June 2009 stating that it would do everything possible to ensure that the matter would be allocated a hearing date on that day.
On 23 April 2009, Mr Zafiriou prepared an ATO office minute to Debra Unsworth (the ATO’s Assistant Commissioner, Debt), concerning a proposed Mareva injunction to prevent various taxpayers (including Mr Grimaldi, Webtel Super Fund and IFTC Broking) from dissipating their assets. There was no mention of any claims made by Chameleon with respect to these assets.
On 22 April 2009, the ATO issued amended assessments to Mr Grimaldi for the tax years ended 30 June 2006 (amended taxable income of $1,585,624 and net amount payable of $866,655.77) and 30 June 2007 (amended taxable income of $9,335,136 and net amount payable of $5,252,219.14) and a notice of assessment for the tax year ended 30 June 2008 (taxable income of $32,001,831 and net amount payable of $20,112,670.55), each of which were payable on 13 May 2009.
On 27 April 2009, Paul Cheetham (the ATO’s Assistant Commissioner of Project Wickenby) prepared an ATO office minute addressed to Michael Cranston (Deputy Commissioner of the ATO) on the subject of the “Assets Restrained By NSWCC”, which stated that:
Assessments in relation to Mr Grimaldi were issued the 24th April 2009, and Mr Grimaldi notified of the reasons for decision, by letter, at the same time. Most of the adjustments relate to the sale of shares and options. A taxable income variation of $41,986,662 arose for the 2006–2008 financial years, resulting in additional tax and penalties of $35,761,637
[114] Based on the following facts and evidence, the Commissioner is of the view that you held an equitable interest in the MMX shares and options initially transferred to Iron. The intention behind transferring the shares and options to Iron was for it to hold the legal title for trading purposes, and that you would retain the equitable interest as the beneficial owner of those shares and options and the subsequent proceeds from their disposal:
…
c. Your entitlement to the MMX shares and options arose from your personal relationship with Gregory Barnes. Gregory Barnes was the director of both Pinnacle Nominees Pty Ltd and ATL Exploration Pty Ltd at the time your entitlement to the MMX shares and options arose. In your affidavit you stated that:
“In late 2004 I became entitled to beneficially receive:
(a) six million two hundred and fifty thousand (6,250,000) fully paid ordinary shares in Murchison Metals Limited; and
(b) seven million two hundred and fifty thousand (7,250,000) 20 cent Murchison Metals Limited options expiring November 2009.”
You paid $2 consideration for the entitlement to beneficially receive 6 million shares and 7.25 million options. In the interview conducted pursuant to section 2647, you stated that Gregory Barnes agreed to sell you the MMX shares and options for a nominal sum because you “helped him over the years on different things…”. The Commissioner considers that your comments indicate that you had a beneficial entitlement to the MMX shares and options as a consequence of your personal affiliation with Gregory Barnes, rather than any commercial relationship. The existence of this beneficial interest arising from personal affiliation rather than commercial factors is also supported by the fact the amount paid for the shares was a token amount that did not represent the value of the shares and was paid by you. Accordingly, when the legal interest in those shares and options were transferred directly from ATL Exploration Pty Ltd and Pinnacle Nominees Pty Ltd to Iron, they were transferred on the basis that the equitable interest in those shares and options was held by you. This would have been the understanding under which Gregory Barnes in his capacity as Director of either ATL Exploration Pty Ltd or Pinnacle Nominees Pty Ltd would have transferred the shares, and the understanding under which Iron would have received the shares.
I agree with the submissions made by Chameleon that there were the following flaws with this reasoning in the ATO Reasons:
There was no basis on which it could have been concluded that the intention behind transferring the Murchison “shares and options to Iron was for it to hold the legal title for trading purposes”. Neither Mr Grimaldi nor Mr Karam ever gave such an explanation.
The ATO was uncritically relying on Mr Grimaldi’s assertion in the deed of 10 October 2008 with the Crime Commission that:
(a) he was the “ultimate beneficial owner” of the Murchison shares and options despite the ATO knowing that Mr Grimaldi was involved in a dishonest offshore tax avoidance scheme; (b) he had given answers in the interview on 27 January 2009 which could not be believed; (c) the Amended Audit Case Plan had identified that “[i]ssues arise as to whose funds they are, whether they are Grimaldi’s/Iron, IFTC or someone elses”; and (d) Chameleon had provided information to the ATO on 4 March 2009 which supported its claims in the Chameleon Proceedings.
Mr Grimaldi had never said in the interview on 27 January 2009 that Mr Barnes gave him the Murchison shares and options because Mr Grimaldi had “helped him over the years on different things”. Mr Grimaldi used that expression during the interview to refer to shares he received in ATL. The explanation given by Mr Grimaldi during the interview on 27 January 2009 for receiving the Murchison shares and options through Mr Barnes and Pinnacle as a result of the reverse takeover of Winterfall was that Mr Grimaldi had “helped them … get it done”.
The ATO Reasons refer to what “would have been the understanding under which Gregory Barnes … would have transferred the shares”, yet Mr Karam had told the ATO on 4 March 2009 that Mr Barnes was involved in the breaches of fiduciary duties with Mr Grimaldi and Mr Grimaldi said during the interview on 27 January 2009 that he gave instructions to Mr Barnes on the allocation of the Murchison shares and options. There is no evidence that the ATO ever interviewed Mr Barnes to determine his understanding as stated in the ATO Reasons.
I agree with Chameleon’s submission that in making the assessments the ATO relied on the inconsistent and implausible answers given by Mr Grimaldi (who it knew to be involved in a dishonest scheme) and an unsupported view of Mr Barnes’ state of mind in preference to the credible and coherent information it had received from Mr Karam which it failed to take into account. No reference to any of the information provided by Mr Karam appears anywhere in the ATO Reasons.
Mr O’Neill gave evidence that if Mr Karam had provided information or documents “relevant to the circumstances of Mr Grimaldi’s assessment, then it would have been taken into account” (T147). Mr O’Neill also said that it was a relevant factor in the ATO’s investigations why Mr Grimaldi had received the Murchison securities (T146–147), which was also relevant to assessing the tax liability of Mr Grimaldi (T154–155). Mr Karam had provided information on the reason why the Murchison securities had been received by Iron, yet the ATO paid no regard to that information in making the assessments.
I consider that it was wrong for the ATO to proceed on the basis that Mr Grimaldi was liable to pay tax on the Murchison shares and options and proceeds held by Iron, and the ATO had knowledge of facts which demonstrated that it was wrong. As submitted by Chameleon, I agree that the more important question the ATO failed to address was “can we take this money?” (T342).
On 11 May 2009, the ATO (by the Commissioner of Taxation) commenced proceedings in the Federal Court against Mr Grimaldi, Garry Bonaccorso, IFTC Broking and MGG Capital as trustee for the Webtel Super Fund seeking declarations and judgments against them for tax liabilities, interest and penalties (ATO Proceedings). The ATO claimed Mr Grimaldi was liable to pay a total of $20,112,670.51 in income tax and shortfall interest charges, and $15,246,261.45 in administrative penalties.
Having issued the assessments on 22 April 2009, the bringing of the ATO Proceedings just over two weeks later demonstrated the considerable speed at which the ATO was working to recover the tax debt from Mr Grimaldi.
The ATO’s application to the Federal Court in the ATO Proceedings also sought interim freezing orders over the assets of Mr Grimaldi and MGG Capital, which were made ex parte by Bennett J on 11 May 2009. The application for the freezing orders was supported by an affidavit sworn 11 May 2009 by Mr Zafiriou and an affidavit sworn 11 May 2009 by Mr Van Der Pol. Neither affidavit makes any reference to the Chameleon Proceedings or the information provided by Chameleon to the ATO on 4 March 2009.
The freezing orders made on 11 May 2009 in the ATO Proceedings applied over the assets of Mr Grimaldi up to the unencumbered value of $35,807,867.41, and the assets of MGG Capital as trustee of the Webtel Super Fund up to the unencumbered value of $6,151,624.64.
On 15 May 2009 at 2pm, a hearing was held before Bennett J of the Federal Court in the ATO Proceedings concerning the continuation of the freezing orders made on 11 May 2009. During the hearing, there was no reference to the Chameleon Proceedings or the information provided by Chameleon to the ATO on 4 March 2009.
On 15 May 2009 at 4:45pm, Mr Zafiriou received an email from Mr Tannous of the ATO, copied to Mr Van Der Pol amongst others, stating:
As discussed – Intelligence came to hand of the following in respect of Grimaldi:
…
Also, in the Federal Court of Australia – NSW Register – Reference NSD 2355 of 2007 – an affidavit by Mr Grimaldi and Mr Barnes in the matter between Chameleon (not sure of the spelling) and MMX.
- We act for the Commissioner of Taxation in the above proceedings.
- We are instructed to seek to inspect the court file in certain other Federal Court proceedings, namely NSD 2355 of 2007, Chameleon Mining NL v Murchison Metals Ltd and ors. In particular, we seek to inspect and copy all affidavits of Mr Phillip Grimaldi in those proceedings together with a copy of the initiating process.
…
On 18 May 2009, the Commissioner also issued a notice to produce to Mr Grimaldi in the ATO Proceedings to produce all affidavits he had filed in the Chameleon Proceedings. There is no evidence that those affidavits were ever produced to the Commissioner.
On 20 May 2009, Richard Chia of the AGS made a file note of a telephone call he received from the Federal Court registry informing him that Jacobson J had granted the Commissioner access to the initiating process in the Chameleon Proceedings but the application to inspect and copy all of the affidavits for Mr Grimaldi was denied on the basis that they had not yet been read in open court.
There is no evidence that the initiating process in the Chameleon Proceedings was ever obtained by the ATO. The evidence of Mr O’Neill is that the AGS did not obtain and/or did not provide to him, or to ATO staff working under him, with a copy of the originating process or pleadings in the Chameleon Proceedings. They were not contained on the audit file and they were not produced in these proceedings.
In the absence of evidence from Mr Barns, Mr Zafiriou and Ms McLachlan to the contrary, I agree with Chameleon that the available inferences I should make are that:
the ATO wilfully failed to take any steps to obtain and review a copy of the initiating process in the Chameleon Proceedings; and
if the ATO had done so, it would have understood the nature of the claims that Chameleon was making in the Chameleon Proceedings and the relief that Chameleon was seeking, including the constructive trust that was being sought over the Spotter’s Fee Securities.
On 20 May 2009, a settlement conference was held between representatives of the ATO and Mr Grimaldi in relation to the ATO Proceedings. According to item 3 in the file note of that conference, Mr Grimaldi consented to the continuation of the freezing orders for 12 months, subject to him being able to access $350,000 from the assets of MGG Capital for legal costs in the Chameleon Proceedings “in which Grimaldi was involved”.
On 21 May 2009, the file note of the settlement conference held on 20 May 2009 was forwarded by the ATO’s principal litigator to internal recipients, including Mr Van Der Pol, Mr Zafiriou and Ms McLachlan, with a comment that “item 3 [ie the allowance for Mr Grimaldi’s costs in the Chameleon Proceedings] will likely require some discussion this afternoon”.
On 22 May 2009, Graham J of the Federal Court made freezing orders in the ATO Proceedings over the assets of Mr Grimaldi up to the unencumbered value of $35,807,867.41 and the assets of MGG Capital as trustee of the Webtel Super Fund up to the unencumbered value of $6,151,624.64 for a period of 12 months by consent. The freezing orders over the assets of MGG Capital contained an exception which provided:
This order does not prohibit [MGG Capital] from:
(a) paying an amount not exceeding $20,000 per month for the ordinary living expenses of [Mr Grimaldi] (including rent for any residential premises);
(b) paying the following legal expenses up to but not exceeding the specified amounts;
(i) $350,000 in respect of Federal Court proceedings NSD 2355 of 2007 between Chameleon Mining NL (Applicant), Murchison Metals Ltd (First Respondent) Phillip Felice Grimaldi (Second Respondent) and others.;
…
On 22 May 2009, Graham J also made freezing orders against IFTC and IFTC Broking in the ATO Proceedings with effect up to and including 1 June 2009.
On 26 May 2009, Barbara Zakos (the ATO’s principal litigator) sent an email to internal recipients, including Mr Van der Pol, Mr Zafiriou and Mr O’Neill, attaching an article published that day in the Australian Financial Review. The article described the ATO’s claims against Mr Grimaldi and his interview with the ATO, and said:
In the [interview] transcripts, Mr Grimaldi says the purpose of the scheme, which was ultimately unsuccessful, was to avoid a 24-month escrow on his Murchison stake that applied to directors of the company, and to protect them from litigation by parking them in a Vanuatu company that appeared unrelated to him.
“So it was asset protection and trying to get around the escrows that prompted me to set that up”, the transcript says.
Mr Grimaldi is to be a key witness in a simmering dispute between Murchison and Chameleon Mining, which claims the right to iron ore assets in Western Australia.
In cross-examination, Mr O’Neill said that after he read the article, he did not ask to see the transcript of the interview with Mr Grimaldi on 27 January 2009 (T215). I consider it would have been the obvious thing for him to do but evidently, he chose not to do so.
On 1 June 2009, Graham J of the Federal Court continued the freezing orders against IFTC and IFTC Broking in the ATO Proceedings with effect up to and including 5 June 2009.
On 5, 9 and 23 June 2009, Graham J of the Federal Court continued the freezing orders against IFTC and IFTC Broking in the ATO Proceedings, the latter orders with effect up to and including 2 July 2009.
On 24 June 2009, the Commissioner filed a notice of motion for summary judgment in the ATO Proceedings against Mr Grimaldi, Mr Bonaccorso, IFTC Broking and MGG Capital. The application was supported by the affidavit sworn 23 June 2009 by Mr Zafiriou, which stated that as of 16 June 2009, Mr Grimaldi’s outstanding tax liabilities totalled $36,119,836.12, and Mr Zafiriou believed Mr Grimaldi had “no defence to [the] claim”. In that affidavit, there was no mention of Chameleon or its claim against Mr Grimaldi in the Chameleon Proceedings despite:
Mr Zafiriou’s knowledge of them;
that the Commissioner had sought access to the initiating process in the Chameleon Proceedings; and
that the AFR had published an article which referred to Mr Grimaldi having been interviewed by the ATO and stated that the Murchison securities had been placed in a Vanuatu company for “to protect them from litigation”.
On 9 July 2009, Mr Zafiriou swore a further affidavit in the ATO Proceedings in which he stated that as of 8 July 2009, Mr Grimaldi’s outstanding tax liabilities totalled $36,341,461.73 and he again deposed that he believed that Mr Grimaldi had “no defence to [the] claim”. As was the case with his previous affidavit of 23 June 2009 in support of the summary judgment application, Mr Zafiriou made no mention of the Chameleon Proceedings in this further affidavit.
On 9 and 10 July 2009, Mr Grimaldi, MGG Capital and representatives of the Commissioner (including Mr O’Neill) participated in a mediation before the now late Roger Gyles AO QC in an attempt to settle the ATO Proceedings.
The ATO’s position paper dated 7 July 2009 for that mediation referred to Chameleon, Chameleon’s claims in the Chameleon Proceedings and Mr Grimaldi’s statement during the interview of 27 January 2009 as to why he moved the Murchison shares and options to Iron respectively in the following terms:
…
99.5.17. In 2005 Chameleon claimed to have an interest in the Jack Hills tenement (which was now known to be a viable high grade iron ore reserve) and threatened to take action against Murchison Metals Limited.
…
99.5.25. In November 2007 Chameleon commenced proceedings in the Federal Court of Australia against Murchison Metals Limited, Barnes, Grimaldi and others claiming an interest in the Jack Hills iron ore tenement. Atanaskovic Hartnell Lawyers represent Chameleon in those proceedings.
…
Grimaldi attended a Tax Office interview on 27 January 2009
- Grimaldi provided the following position/contentions in a section 264 interview on oath with the tax office on the 27 January 2009: …
…
105.4. In response to a question concerning why he transferred the shares and options he received in Murchison Metals Ltd to IOS Management/Iron Investments Ltd in November 2004 he provided:
105.4.1. Grimaldi understood of the shares where held in a Vanuatu company then the shares would not be put in escrow and he could trade them without restriction. This however did not eventuate.
105.4.2. For asset protection purposes.
…
Chameleon Mining NL litigation against Grimaldi
- On 29 November 2007 Chameleon Mining NL (Chameleon) commenced legal proceedings in the Federal Court of Australia against Murchison Metals Limited, Crosslands Resources Ltd, Phillip Grimaldi, Gregory Barnes and Pinnacle Nominees Pty Ltd. Chameleon alleges that former Chameleon director Gregory Barnes and de facto director Grimaldi caused Chameleon to issue securities sold to raise funds that were then used by Murchison to acquire Jack Hills and Weld Range. This case is still before the courts.
There is no reference in the position paper to the information which had been provided by Chameleon in the interview with Mr Karam on 4 March 2009 and the documents which had been provided by Chameleon in response to the s 264 notice. As I have found above, there were no further enquiries by the ATO regarding the information that Chameleon had provided despite Chameleon having indicated that it was prepared to provide further information and respond to any further s 264 notices which the ATO might issue.
The mediation was unsuccessful.
On 15 July 2009, John Giorgiutti of the Crime Commission sent various documents to Mr Tannous of the ATO, amongst which was a Forensic Document Service Report by Michelle Novotny, a handwriting and questioned document examiner. The focus of that report was the significant degree of coincidence between the signature panels (including the signatures themselves, their placement relative to one another and to other features) on the July 2005 Trust Deed when compared with another document. Ms Novotny considered the degree of coincidence between those two documents was “highly unlikely” to have occurred naturally or by chance. Ms Novotny considered it “highly probable” that the signature panels had either between copied and pasted from one document to the other, or that both had been copied and pasted from a third document. The report concluded that there was “prima facie support for a proposition” that the July 2005 Trust Deed between Iron and MGG Capital was “not a genuine document”.
This report confirmed to the ATO that in October 2008 Mr Grimaldi had tried to secure the release of assets from the First Restraining Orders using a document likely to be fraudulent.
If there was any doubt within the ATO regarding the credibility of Mr Grimaldi by this time, it would have been swept away by the observations within this report. As mentioned immediately below, the Crime Commission certainly approached the 2025 Trust Deed in this manner. By this time, it must have been obvious to the ATO that Mr Grimaldi should be considered a dishonest person.
On 21 July 2009, Deputy Registrar Lee of this court made orders by consent under the Recovery Act in the Recovery Act Proceedings. Those orders contained notations which included:
Notation 1: the Further Restraining Orders made on 25 October 2008 under s 10 of the Recovery Act in respect of the interests in property of Mr Grimaldi.
Notation 3: the Grimaldi ATO Judgment against Mr Grimaldi in the amount of $36,119,836.12.
Notation 4: Mr Grimaldi’s primary tax debt payable to the ATO was $19,531,791.93.
Notation 5: the Crime Commission contended, and Mr Grimaldi made no admissions, that he had engaged in serious crime related activities within the meaning of the Recovery Act, including by swearing an affidavit on 10 October 2008 to which he had annexed a document “purporting to be a Trust Deed dated 7 July 2005 between Iron Investments Ltd … and MGG Capital Pty Ltd … and in doing so intended to pervert the course of justice”.
The orders made by Deputy Registrar Lee on 21 July 2009 included:
Order 9: a proceeds assessment order pursuant to s 27 of the Recovery Act that Mr Grimaldi pay the New South Wales Treasurer the sum of $19,531,791.93 (Grimaldi Proceeds Assessment Order).
Order 10: an order pursuant to s 27(12) of the Recovery Act that the Treasurer pay to the ATO from the Confiscated Proceeds Account (a term which is not defined in the orders) any such amounts paid in satisfaction or partial satisfaction of the Grimaldi Proceeds Assessment Order in accordance with s 32(3)(b) of the Recovery Act (ATO Payment Order).
The orders made by Deputy Registrar Lee on 21 July 2009 further noted:
Notation 15: by virtue of s 31 of the Recovery Act all interests in property of Mr Grimaldi are, while the Grimaldi Proceeds Assessment Order remains unpaid, charged in favour of the Crown to the extent necessary to secure payment of the Grimaldi Proceeds Assessment Order.
Notation 16: the charge created by s 31 of the Recovery Act is fully satisfied by the charge over the identified property.
Notation 17(a)–(h): the Crime Commission intended to seek declarations that the property specified in the schedules to the orders (being the assets in the IFTC bank accounts and shares held by IFTC Broking) were subject to the effective control of Mr Grimaldi within the meaning of the Recovery Act.
Notation 17(i): the Crime Commission intended to apply for an order under s 29 of the that the interests specified in the schedules to the orders were “available to satisfy” the Grimaldi Proceeds Assessment Order.
The making of the proceeds assessment order is made without admissions by Grimaldi and without prejudice to his rights under Part IVC of the Taxation Administration Act 1953 (Cth) or otherwise to negotiate amounts due by Grimaldi to the ATO for the financial years ended 30 June 2006, 30 June 2007 and 30 June 2008 (“the negotiated tax debt”) and whole or partial satisfaction of the tax debt (or, if applicable, the negotiated tax debt) is to be pro rata whole or partial satisfaction of the proceeds assessment order and whole or partial satisfaction of the proceeds assessment order is to be pro rata whole or partial satisfaction of the primary tax debt (or, if applicable, the negotiated tax debt).
On 23 July 2009, the Crime Commission filed a notice of motion seeking the effective control orders against Mr Grimaldi, which was supported by an affidavit sworn 22 July 2009 by Mr Grimaldi that stated in late 2004 he became “beneficially entitled” to 6.25 million shares and 7.25 million options in Murchison.
On 23 July 2009, Mr Giorgiutti of the Crime Commission sent a letter to Mr Tannous of the ATO providing copies of the notice of motion and the affidavit of Mr Grimaldi.
On 13 August 2009, IFTC and IFTC Broking filed a notice of appeal challenging the orders made on 21 July 2009 by Deputy Registrar Lee, including the Grimaldi Proceeds Assessment Order.
On 27 July 2009, Mr Barns produced a R****eport of A****udit on Mr Grimaldi, which concluded that the total amount payable by Mr Grimaldi to the ATO was $35,762,956, comprising $19,531,792 in tax shortfall, $15,246,263 in penalties and $984,901 in interest.
Much of the Report of Audit repeated material which was set out in previous documents prepared by the ATO in relation to Mr Grimaldi, particularly the ATO Reasons.
The Report of Audit at [12.2] identified as a potential risk the concern as to whether the restraining orders obtained by the Crime Commission may not be maintained and noted:
… Should they be removed before the debts are raised against Grimaldi / the WMSF, it is unclear if any funds will be able to be recovered.
The Report of Audit at [40] noted that concurrent assessments had been issued to Mr Grimaldi, MGG Capital as trustee for the Webtel Super Fund and IFTC Broking.
The Report of Audit at [115] referred to the affidavit sworn 10 October 2008 by Mr Grimaldi in which he stated that “in late 2004 [he] became entitled to beneficially receive” 6,250,000 fully paid ordinary shares in Murchison and 7,250,000 options in Murchison.
The Report of Audit also referred without qualification at [126] and [164.5.15] to the July 2005 Trust Deed between Iron and MGG Capital as trustee for the Webtel Super Fund, despite the fact that the ATO had already received the Forensic Document Service Report on 15 July 2009, which concluded that it was highly unlikely to be a “genuine document”. Concerns raised by third parties as to the authenticity of the July 2005 Trust Deed are noted at [164.8]–[164.9] but again no reference is made to the Forensic Document Service Report. This is inexplicable.
The Report of Audit at [145] noted that four properties located at Pyrmont appeared to have been purchased by Mrs Grimaldi, using funds from Iron being: 404C/24 Refinery Drive (Unit 404C); 403/24 Refinery Drive (Unit 403); 306/32 Refinery Drive (Unit 306); and 5D/2 Bowman Street.
The Report of Audit at [176] referred to the Chameleon Proceedings in the following terms:
On 29 November 20047 Chameleon Mining NL (Chameleon) commenced legal proceedings in the Federal Court of Australia against Murchison Metals Ltd, Crosslands Resources Ltd, Phillip Grimaldi, Gregory Barnes and Pinnacle Nominees Pty Ltd. Chameleon alleges in part that former Chameleon director Gregory Barnes and de facto director Grimaldi caused Chameleon to issue securities to raise funds that were then used by Murchison Metals Ltd to acquire Jack Hills and Weld Range mining tenements in Western Australia. This case is still before the courts.
… that Grimaldi held an equitable interest in the MMX shares and options initially transferred to Iron. The intention behind transferring the shares and options to Iron was for it to hold the legal title for trading purposes, and that he would retain the equitable interest in the beneficial owner of those shares and options and the subsequent proceeds from their disposal.
Grimaldi’s entitlement to the MMX shares and options arose from his personal relationship with Gregory Barnes. Gregory Barnes was the director of both Pinnacle Nominees Pty Ltd and ATL Exploration Pty Ltd at the time Grimaldi’s entitlements to the MMX shares and options arose. In his affidavit to the Supreme Court Grimaldi stated that:
“In late 2004 I became entitled to beneficially receive:
(a) six million two hundred and fifty thousand (6,250,000) fully paid ordinary shares in Murchison Metals Limited; and
(b) *seven million two hundred and fifty thousand (*7,250,000) 20 cent Murchison Metals Limited options expiring November 2009.”
Grimaldi paid $2 consideration for the entitlement to beneficially receive 6.25 million shares and 7.25 million options. In the interview conducted pursuant to section 264 on the 27 January 2009, Grimaldi stated that Gregory Barnes agreed to sell him the MMX shares and options for a nominal sum because he “helped him over the years on different things…” The Commissioner considers that Grimaldi’s comments indicate that he had a beneficial entitlement to the MMX shares and options as a consequence of his personal affiliation with Gregory Barnes, rather than any commercial relationship. The existence of this beneficial interest arising from personal affiliation rather than commercial factors is also supported by the fact the amount paid for the shares was a token amount that did not represent the value of the shares and was paid by him. Accordingly, when the legal interests in those shares and options were transferred directly from ATL Exploration Pty Ltd and Pinnacle Nominees Pty Ltd to Iron, they were transferred on the basis that the equitable interest in the shares and options was held by Grimaldi. This would have been the understanding under which Gregory Barnes, in his capacity as director of either ATL Exploration Pty Ltd or Pinnacle Nominees Pty Ltd, would have transferred the shares, and the understanding under which Iron would have received the shares.
This is the same flawed reasoning that was contained in the ATO Reasons, as I have outlined above.
The Report of Audit at [253.4] stated that Mr Grimaldi had authorised the transfer of funds held by Iron as if they were his own, including for the purchase of a motor vehicle, numerous overseas trips for himself and his relatives, loans to enable his private company to purchase a property in Sydney at which he resided, loans to Mrs Grimaldi to purchase the four properties in Pyrmont and the payment of school fees for his daughter living in the United States.
Appendix A to the Report of Audit listed payments made by IFTC on behalf of Iron for what appeared to be personal expenses of Mr Grimaldi in 2005–2008, including transfers to a debit card, rent on Mr Grimaldi’s residence, purchase of a Bentley motor car, school fees and expenses for Mr Grimaldi’s daughter in the United States, property purchases by Mrs Grimaldi, dental expenses, travel expenses, purchase of furniture for Mr Grimaldi’s house and purchase of a boat.
There was no reference in the Report of Audit to the information which had been provided to the ATO by Chameleon on 4 March 2009, either through the interview of Mr Karam or the documents produced in response to the s 264 notice. Patently, this information had been disregarded by the ATO.
An Internet ‘Google’ search for Gregory Barnes identified numerous reports of legal action being taken by Chameleon Mining NL in November 2007 against Murchison Metals, Philip Grimaldi, Pinnacle Nominees Pty Ltd, Gregory Barnes and Crosslands Resources Ltd (Crosslands)
Chameleon Mining NL was initially listed on the ASX in April 2004. By this time Phillip Grimaldi appeared as a top 20 shareholder, and Gregory Barnes as managing director. Also at this time Philip Grimaldi was a Director of Murchison Metals. Both entities are involved in mining activities in Western Australia and a dispute has arisen over the ownership and rights to profits from a number of iron ore tenements.
A report on the website www.rmwiseresearch.com/ states that Chameleon Mining’s claim ‘alleges that Murchison is holding shares in Crosslands on a constructive trust for Chameleon. The writ also alleges that Crosslands is holding Jack Hills and Weld Range on constructive trust for Chameleon. Furthermore, the writ alleges that former Chameleon director Barnes and de facto director Grimaldi caused Chameleon to issue securities sold to raise funds that were then used by Murchison to acquire Jack Hills and Weld Range. Chameleon is therefore looking for an account of profits from its ownership of Crosslands, an account of profits from Murchison’s sale of 50% of the project to Mitsubishi and interest in the tenements or alternatively equitable compensation or damages;
An announcement to the market made by Chameleon Mining on 29 November 2007 also states that Barnes’ company Pinnacle Nominees was ‘issued with 10 million shares in Crosslands in 2004, prior to Murchison’s successful bid for Crosslands in 2004, under which one Murchison share was issued for each Crosslands share, on a constructive trust for the company.’
Mr Woods and Mr Grimaldi agreed to the following:
- Money to be bought back onshore;
- $3m to be paid to the ATO as advance payment. The balance to be deposited into Westpac Bank of MGG Capital as trustee for Webtel Management superannuation fund;
- All shares under control of IFTC Brokers in Comsec Accounts controlled by IFTC Brokers for the benefit of IOS Management Ltd, Iron Investment Ltd as referred to in IFTC’s letter to Martin Woods dated 22 August 2008 will be transferred to MGG Capital as trustee for Webtel Management Superannuation fund;
- The funds deposited into the MGG Capital account as trustee for Webtel Superannuation Fund will be used in accordance with the investment strategy of the superannuation fund.
On 29 September 2009, the trial of the Chameleon Proceedings commenced before Jacobson J of the Federal Court.
The trial then continued before Jacobson J across 29–30 September 2009 and 1, 2, 6–9, 12–15, 19–23 October 2009, with final closing submissions being made on 3–5 February 2010.
As mentioned above, on 6 November 2008, the Court of Appeal set aside the First Restraining Order orders made on 13 May 2008. As part of that judgment, the Court of Appeal unanimously rejected a constitutional challenge to the validity of s 10 of the Recovery Act, a question on which IFTC and IFTC Broking obtained special leave to appeal to the High Court.
On 12 November 2009, the High Court determined that s 10 of the Recovery Act was constitutionally invalid and ordered that the proceedings brought by the Crime Commission be dismissed: International Finance Trust Co Ltd v New South Wales Crime Commission (2009) 240 CLR 319; [2009] HCA 49.
On 12 November 2009, the AGS wrote to Atanaskovic Hartnell (as the solicitors for IFTC and IFTC Broking) referring to the High Court’s judgment and asking IFTC and IFTC Broking to confirm that they continued to be bound by the undertakings given to the Federal Court in the ATO Proceedings.
On 13 November 2009, Atanaskovic Hartnell sent a letter to the AGS stating that they considered that IFTC and IFTC Broking remained bound by the undertakings they had given in the ATO Proceedings but providing notice in accordance with those undertakings that their clients would seek to deal with the restrained assets.
On 26 November 2009, the Crime Commission sent a letter to Mr Woods noting that while s 10 of the Recovery Act had been found by the High Court to be invalid, the Grimaldi Proceeds Assessment Order made on 21 July 2009 itself remained valid, and the Crime Commission reserved the right to commence new proceedings seeking declarations that various property (including certain shares as well as funds held by IFTC) were under the effective control of Mr Grimaldi.
On 26 November 2009, the letter from the Crime Commission that day was forwarded by email from Noel Stewart of the Crime Commission to Mr Tannous and Ms McLachlan of the ATO, amongst others.
On 30 November 2009, IFTC and IFTC Broking filed a notice of motion in the Court of Appeal seeking orders that all orders and directions in the Recovery Act Proceedings be discharged.
On 2 December 2009, the Crime Commission sent a letter to Mr Zafiriou which enclosed the notice of motion that had been filed by IFTC and IFTC Broking.
On 3 December 2009, the Crime Commission commenced further proceedings number S15399/2009 in this court (Further Recovery Act Proceedings) by filing a summons against Mr Grimaldi, Iron, MGG Capital and others seeking a declaration that the Grimaldi Proceeds Assessment Order made on 21 July 2009 was valid and, in the alternative, a new proceeds assessment order and declarations that Mr Grimaldi had effective control over all of the interests in property of Iron and MGG Capital, amongst other companies.
The application was supported by an I****nvestigation R****eport dated 2 December 2009 prepared by Mr Novakovic and Mr Stewart of the Crime Commission, which set out the history of Mr Grimaldi’s dealings with the Murchison securities.
The Investigation Report noted:
[177] On 22 April 2009 the ATO issued notices of amended assessment for income tax to Grimaldi for the years ended 30 June 2006 and 2007 and an assessment for income tax for the year ended 30 June 2008. The assessment and amended assessments (which include profits on the sale of [Murchison] shares by Iron) result in a total payable by Grimaldi of $36,341,461.73 of which $19,531,791.93 was primary tax.
…
[179] In July 2009 the Commission referred the Deed of Trust dated 7 July 2005 to an expert document examiner for forensic examination and comparison to a number of other documents. On 14 July 2009 the Commission received a report from the document examiner which concluded that the Deed of Trust dated 7 July 2005 “is not a genuine document” and is likely to have been created using a copy and paste of another examined document (“the forensic report”).
[180] Grimaldi and Woods were shown the forensic report on 17 July 2009 and Grimaldi agreed to enter into Consent Orders for a proceeds assessment order under the Act in the sum of $19,531,791.93 (“the Grimaldi Consent Orders”). The Grimaldi Consent Orders were executed on 17 July 2009.
[181] On 21 July 2009 the Grimaldi Consent Orders were entered by the Court.
The Investigation Report at [195] (second occurring) noted uncertainty as to whether Iron held the shares registered in its name on constructive trust but said that even if there was no constructive trust they believed that “the interests in property of Iron are under the effective control (within the meaning of “effective control” in the [Recovery Act]) of Grimaldi”.
The Investigation Report continued:
[197] All of the funds and shares held on behalf of Iron, International Iron and Ore Investments (Pte) Limited are ultimately attributable to the sale of MMX shares in Australia.
…
[199] We believe however that ICs Iron, International Iron and Ore Investments (Pte) Limited are, in fact, either trustees for Grimaldi or that the interests in property of ICs Iron, International Iron and Ore Investments (Pte) Limited are under the effective control of Grimaldi within the meaning of “effective control” in the [Recovery Act] and accordingly their interests in property are, in fact, the interests in property of Grimaldi.
Facts and circumstances
- The facts and circumstances upon which the Commission will rely in seeking the said declaration or proceeds assessment order and the said declarations of effective control are set out in the attached copy of the Investigation Report dated 2 December 2009 prepared by Lou Novakovic, Forensic Accountant, and Noel Stewart, Forensic Accountant (“the Investigation Report”).
Serious crime related activity (section 6 CAR Act)
- On the basis of the contents of the Investigation Report it is contended that Philip Felice Grimaldi:
(a) dishonestly obtained a financial advantage by deception contrary to section 178BA of the Crimes Act 1900 in that for the years ended 30 June 2006 and 30 June 2007 Philip Felice Grimaldi dishonestly engaged in activities to avoid the payment of tax with the intend of obtaining for himself a financial advantage; and
(b) attempted to pervert the course of justice contrary to section 319 of the Crimes Act 1900 in that on 10 October 2008 Philip Felice Grimaldi swore an affidavit in Supreme Court proceedings number S12212 of 2008 to which he annexed at annexure “D” to that affidavit a document purporting to be a Trust Deed dated 7 July 2005 between Iron Investments Limited (formerly IOS Management Limited) (the Trustee) of the one part and MGG Capital Pty Ltd as trustee for the Webtel Management Super Fund (the beneficiary) of the other part and in doing so intended to pervert the course of justice.
On 23 November 2009, Chameleon filed its lengthy written closing submissions in the Chameleon Proceedings.
Chameleon’s closing submissions at [247] refer to tracing schedules showing that Murchison had used $152,750 of Chameleon’s funds in the form of two cheques to pay the vendors of the Iron Jack Tenements in July 2004. As outlined above, this was information that Mr Karam had provided to the ATO on 4 March 2009.
Chameleon’s closing submissions at [251]–[252] set out the factual matters on which Chameleon relied to establish its causation argument that, without the payments of Chameleon’s funds, Murchison’s reverse takeover of Winterfall would have collapsed.
Chameleon’s closing submissions at [298] summarised the causation conclusion sought by Chameleon in the following terms:
For the reasons set out above, the court should find that:
(a) were it not for the use of funds obtained from Chameleon through the various breaches of duty described above, [Murchison] would not have made the payments to Winterfall;
(b) Winterfall’s acquisition of Iron Jack would have failed;
(c) the reverse takeover of Winterfall by [Murchison] would not have been completed;
(d) [Murchison] would not have obtained ownership of the Iron Jack tenements; and
(e) Barnes and Grimaldi would not have received the valuable shares they received in the reverse takeover.
[423] By reason of the matters referred to in the Sections above dealing with each of the relevant transactions, Chameleon has established that Grimaldi knowingly assisted and induced the breaches of fiduciary duty:
…
(d) The July Cheques and breached his own fiduciary duties to Chameleon in that regard…
[424] Grimaldi’s conduct in relation to the March Placement, the Cadetta Deal, the July Cheques, and the August Placement was a continuing course of conduct designed to achieve completion of Murchison’s arrangements with Winterfall such that Grimaldi would personally benefit through his shareholding in Murchison.
[425] Grimaldi must account to Chameleon for the profits he made by reason of his knowing assistance in these breaches of duty. Plainly Grimaldi's profit:
(a) Includes profits he made by sale of Murchison shares by himself or entities that he controlled such as MGG Capital Pty Ltd, 10S Pty Limited, and Webtel … ;
(b) Includes the 10 million ‘free shares’ and 12 million options allotted to Pinnacle as part of his and Barnes’ arrangements with Zuks.
[426] Further, Grimaldi must account to Chameleon for his profits arising from his own breaches of fiduciary duty to Chameleon with respect to the March Placement, the Cadetta Deal, the July Cheques and the August Placement.
From 3 to 5 February 2010, the parties in the Chameleon Proceedings made their oral closing submissions.
On 5 February 2010, Jacobson J reserved judgment in the Chameleon Proceedings.
Beyond May 2009, there is no evidence that anyone from the ATO made any attempt to obtain any further information about the Chameleon Proceedings, observe the trial of the Chameleon Proceedings, request copies of the written submissions or took any step to understand the detail of Chameleon’s case against Mr Grimaldi in the Chameleon Proceedings. In the absence of any evidence from Mr Barns and Ms McLachlan, I am more readily able to draw the inference that none of these steps were taken by anyone at the ATO.
In cross-examination, Mr O’Neill gave evidence that he was not aware of anyone from the ATO making any inquiry of Jacobson J’s chambers to find out when judgment might be given in the Chameleon Proceedings (T234). There is no evidence that any further attempts were made by the ATO or the AGS to obtain access to the originating process or any attempts made by the ATO or the AGS to obtain the pleadings, the evidence or the submissions in the Chameleon Proceedings.
On 26 February 2010, the Commissioner was granted leave in the ATO Proceedings to file an amended application seeking a declaration that Mr Grimaldi was the beneficial owner of “those shares and funds held by” IFTC Broking and funds held by IFTC as identified in the freezing orders made on 22 May 2009 by Graham J of the Federal Court, and for an order that the Commissioner be granted an “equitable charge over [those] shares and funds”. It was supported by an affidavit sworn 22 February 2010 by Mr Barns which included reference to the ATO’s interview of Mr Grimaldi on 27 January 2009 and exhibited the transcript of that interview.
On 25 March 2010, the amended application was filed at the Federal Court.
On 19 March 2010, the Court of Appeal determined that the Grimaldi Proceeds Assessment Order made in the Recovery Act Proceedings was valid and still in effect: International Finance Trust Company Ltd v New South Wales Crime Commission (No 2) [2010] NSWCA 46.
The essence of the reasoning of Basten JA (with whom Allsop P and McLellan CJ at CL agreed) at [67]–[73] gives rise to the following central propositions concerning the operation of 29 of the Recovery Act by reference to the facts of that case:
Section 29 of the Recovery Act sets out the steps which need to be taken before the interests of a party are adversely affected (at [69]).
The effect of s 29(4) of the Recovery Act is the definitions of “interest in property” (s 7) and “effective control” (s 8) will not permit property to be disposed of in order to satisfy a proceeds assessment order, absent a declaration by the court (at [69]).
Under both s 29(3) of the Recovery Act and general law principles, where property is in the name of a party it is generally expected that they will obtain notice of an application by the Crime Commission under s 29 of the Recovery Act (at [69]).
Section 29 of the Recovery Act is the statutory mechanism for resolving disputes as to the availability of property to satisfy the interests of one party rather than another (at [69]).
If Mr Grimaldi had effective control for the purposes of the Recovery Act, it would be open to the court to make an order under s 27 of the Recovery Act for the purposes of a payment to the Treasurer, in order to allow a payment by the Treasurer to the ATO, even though, under the general law, another party had interests in the property which might otherwise have allowed them to dispose of the property (at [71]).
The making of the Grimaldi Proceeds Assessment Order by consent did not deprive the appellants of their interests in the property, nor did it deprive them of an opportunity to argue that those interests were not the subject of effective control by Mr Grimaldi (at [72]).
In the summons filed 3 December 2009 in the Further Recovery Act Proceedings, the Crime Commission did not seek a declaration under s 29 of the Recovery Act. No such declaration was ever obtained by the Crime Commission in the Further Recovery Act Proceedings.
On 29 April 2010, a preliminary mediation conference was held between representatives of the ATO (including Mr O’Neill, Ms McLachlan and Mr Stokes of the AGS), Mr Grimaldi, Mr Woods and the mediator, the Honourable Michael McHugh AC QC, in advance of a mediation scheduled to occur on 18–20 May 2010.
On 18–20, 27 and 28 May and 1 and 9 June 2010, the mediation subsequently took place in circumstances where not all meetings involved the mediator, and not all meetings involved all parties. The Crime Commission declined to attend the mediation.
- This order does not prohibit [MGG Capital] from:
(a) paying an amount not exceeding $20,000 per month for the ordinary living expenses of [Mr Grimaldi] (including rent for any residential premises);
(b) paying the following legal expenses (only to the extent that they have not already been paid as provided for by the freezing orders made on 22 May 2010 by Graham J) up to but not exceeding the specified amounts;
(i) $350,000 in respect of Federal Court proceedings NSD 2355 of 2007 between Chameleon Mining NL (Applicant), Murchison Metals Ltd (First Respondent) Phillip Felice Grimaldi (Second Respondent) and others;
…
The first Deed of Settlement was made between the Commissioner, IFTC, IFTC Broking, Mr Grimaldi, MGG Capital (on its own behalf and as trustee for the Webtel Super Fund), YRC Nominees Pty Ltd, Iron and International Iron Holdings Ltd (First Deed of Settlement). The First Deed of Settlement concerned transfers of property and releases involving IFTC and IFTC Broking.
The effect of the material provisions of the First Deed of Settlement was as follows:
There were conditions precedent involving the variation or discharge of the freezing orders in the ATO Proceedings in the Federal Court, the Further Restraining Orders in the Recovery Act Proceedings in this court and orders made or registered in New Zealand and the making of an ancillary order in the Recovery Act Proceedings in this court (cl 1.1, definition of “Conditions Precedent”).
The control of Iron has “been transferred to” Mr Grimaldi (cl 3).
Iron directed and authorised IFTC and IFTC Broking to immediately instruct (cl 4):
(a) the ANZ Bank to transfer $810,000 to IFTC’s Vanuatu bank account and $12,519,410.61 to the Crown Finance Entity to be paid by the Treasurer to the Commissioner; and (b) the NSW Trustee and Guardian, acting as nominee for Iron, to transfer various shares and options (including shares in Murchison) to MGG Capital and the Grimaldi SuperFund (a superannuation fund registered in that name).
There were mutual releases and indemnities between the parties (cll 8 and 9).
These steps in the First Deed of Settlement were designed to remove the obstacles of various court orders made in the Federal Court and this court so that payment could be made to the Commissioner towards satisfaction of the Grimaldi ATO Judgment.
The second Deed of Settlement was made between Mr Grimaldi, MGG Capital (on its own behalf and as trustee for the Webtel Super Fund), Ross Lorking, Gina Grimaldi, Mia Grimaldi, Tivation Pty Ltd, YRC Nominees and the Commissioner (Second Deed of Settlement).
The Second Deed of Settlement contains a number of matters under the heading “Context”, including:
The Further Restraining Orders had been made in the Recovery Act Proceedings in this court on 25 October 2008.
The Commissioner issued amended assessments and an assessment for the income years ended 30 June 2006, 30 June 2007 and 30 June 2008 respectively to Mr Grimaldi on 22 April 2009 and 30 April 2009.
The Commissioner commenced the ATO Proceedings in the Federal Court on 11 May 2009.
The Commissioner issued assessments and amended assessments for the income years ended 30 June 2006, 30 June 2007 and 30 June 2008 to MGG Capital (as trustee for the Webtel Super Fund) on 6 May 2009, 7 May 2009, 19 May 2009, 27 May 2009, 20 August 2009, 28 August 2009 and 1 September 2009.
Mr Grimaldi and MGG Capital consented to freezing orders in the ATO Proceedings on 22 May 2009.
The Commissioner obtained the Grimaldi ATO Judgment against Mr Grimaldi on 13 July 2009 in respect of his liabilities under the assessments.
The Commissioner obtained the MGG ATO Judgment against MGG Capital on 27 November 2009 in respect of its liabilities under the assessments.
A final section that stated:
Without admission that they are the beneficial owner, Grimaldi and/or MGG Capital assert that they are entitled to direct the application of certain of the assets which were the subject of the Federal Court and High Court New Zealand freezing orders, being funds in certain bank accounts in New Zealand in the name of IFTC, and the shares and money in the name of IFTC Broking now held by the NSW Trustee and Guardian pursuant to the orders of the NSW Supreme Court referred to in recital A above. Details of the assets are listed at Schedule 8 to this Deed. The Commissioner claims that those assets should be applied to the taxation liabilities of those parties under the judgments and assessments referred to above.
The assets listed in Schedule 8 were funds held in bank accounts in the name of IFTC and funds and shares (including shares in Murchison) held by the NSW Trustee and Guardian.
The effect of the material provisions of the Second Deed of Settlement was as follows:
The Settlement Sum was defined as $20 million (cl 1.1).
The Settlement GIC was defined as the general interest charge as calculated under s 8AAD(2) of the Taxation Administration Act 1953 (Cth) continuing from the date of the Second Deed of Settlement until payment in full of the Settlement Sum and the Settlement GIC (cl 1.1).
Mr Grimaldi and MGG Capital agreed to pay the Settlement Sum and the Settlement GIC to the Commissioner in accordance with the Payment Plan set out in Schedule 2 to the Second Deed of Settlement and the Commissioner was entitled to allocate the Settlement Sum to the tax related liabilities of Mr Grimaldi and MGG Capital and to the Commissioner’s costs in his absolute discretion (cl 2.1).
The Payment Plan in Schedule 2 of the Second Deed of Settlement provided:
1 The Taxpayers will make the following payments in reduction of the Settlement Sum:
1.1 Subject to clause 4 of this Deed, the payment of $12,519,410.61 (AUD) being the payment of funds from the New Zealand Bank accounts;
1.2 $250,000.00 on 28 February 2011, 31 May 2011, 31 August 2011, 30 November 2011, 28 February 2012, 31 May 2012, 31 August 2012 and 30 November 2012;
1.3 $2,250,000.00 on 28 February 2013;
1.4 $250,000.00 on 31 May 2013 and 31 August 2013; and
1.5 a final payment on or before 31 August 2013 of the amount which is notified to the Taxpayers by the Commissioner under this Deed as being the amount which the Commissioner calculates is sufficient to fully discharge the Settlement Sum and the Settlement GIC.
Payments made by Mr Grimaldi and MGG Capital in accordance with the Payment Plan, being payments made either to the NSW Treasury or the Commissioner, would be credited by the Commissioner to the Grimaldi Running Balance Account as being payments made of the Settlement Sum and the Settlement GIC (cl 2.2).
Mr Grimaldi and MGG Capital would firstly pay the sum of $19,531,791.93 to the NSW Treasury and the balance under the Payment Plan to the Commissioner (cl 2.3).
Payments to the NSW Treasury up to an amount of $19,531,791.93 could be made by bank cheque to the NSW Treasury and delivered to the Crime Commission or by way of direct credit to a bank account with Westpac Banking Corporation in the name of the Crown Finance Facility (cl 2.4).
Payments of amounts in excess of $19,531,791.93 could be made by bank cheque payable to the Commissioner and paid to the ATO or by direct credit to a bank account with the Reserve Bank of Australia in the name of the ATO (cl 2.5).
Mr Grimaldi and MGG Capital would not object or request an amendment or review of any assessments or amended assessments (cl 2.8).
Gina Grimaldi and Mia Grimaldi (Mr Grimaldi’s daughters) as Mortgagors agreed to provide mortgages in favour of the Commonwealth over the Secured Properties, which were Unit 306, Unit 403, and Unit 404C (cl 3.4.1).
The Commissioner, Mr Grimaldi and MGG Capital would take the necessary steps to enable the freezing orders made in the Federal Court and the High Court of New Zealand to be varied to allow the transfer of particular shares and funds to occur (cll 4.1 and 4.2).
Mr Grimaldi and MGG Capital warranted to the best of their knowledge and belief that they had made a full and true disclosure of all relevant facts to the Commissioner prior to entering into the Second Deed of Settlement, and if there had not been such disclosure then the Commissioner may in his absolute discretion take whatever further action he considers appropriate, including electing to terminate the Second Deed of Settlement or “rescinding, reversing or amending any of the things referred to in clause 6” (cll 5.1 and 5.2).
If Mr Grimaldi and MGG Capital paid the Settlement Sum and the Settlement GIC in accordance with the provisions of the Second Deed of Settlement then, subject to cl 5.2, the Commissioner would accept that payment in full and final satisfaction of their tax liabilities in respect of the relevant years, not impose any further tax, not issue any further assessments or amended assessments and forever forbear from recovering the Grimaldi ATO Judgment and the MGG ATO Judgment (cll 6.4, 6.5 and 6.6).
Subject to cl 5.2 and provided that the Settlement Sum and the Settlement GIC were paid in accordance with the Second Deed of Settlement, the parties agreed that the Second Deed of Settlement constituted a complete release and extinguishment of Mr Grimaldi’s tax liabilities and MGG Capital’s tax liabilities in respect of the relevant years (cl 12.1).
- Pursuant to sections 28C(11) and 32(2) of the [Recovery Act], the [Grimaldi Proceeds Assessment Order] is to be paid into the bank account described in schedule A to these orders (“the Proceeds Account”) in the following instalments:
(a) first, the amount of $12,519,410.61 within 14 days after the last of the following events has occurred:
(i) these orders being made and entered;
(ii) registration of the [Further Restraining Orders] in the High Court of New Zealand to discharge the orders by which the [Further Restraining Orders] were registered in New Zealand;
(iii) orders being made and entered in the [ATO Proceedings] … to vary the freezing orders in those proceedings so as to permit this payment;
(b) second, the payment of $250,000 on or before 28 February 2011;
(c) third, the payment of $250,000 on or before 31 May 2011;
(d) fourth, the payment of $250,000 on or before 31 August 2011;
(e) fifth, the payment $250,000 on or before 30 November 2011;
(f) sixth, the payment of $250,000 on or before 28 February 2012;
(g) seventh, the payment of $250,000 on or before 31 May 2012;
(h) eighth, the payment of $250,000 on or before 31 August 2012;
(i) ninth, the payment of $250,000 on or before 30 November 2012;
(j) tenth, the payment of $2,250,000 on or before 28 February 2013;
(k) eleventh, the payment of $250,000 on 31 May 2013;
(l) twelfth, the payment of $250,000 on 31 August 2013;
(m) thirteenth, the payment of $2,262,381.32 on or before 31 August 2013.
- Pursuant to sections 28C(11) and 32(3)(b) of the [Recovery Act], upon each of the amounts referred to in Order 8 above being paid into the Proceeds Account, the Treasurer shall forthwith pay each such amount from the Proceeds Account into the bank account described in Schedule B is to these orders (“the ATO Direct Credit account”).
- The [Further Restraining Orders] are discharged.
The 8 October 2010 Orders enabled the payments to be made by Mr Grimaldi and MGG Capital into the bank account in the name of the Crown Finance Entity and then to be on-paid to the ATO “forthwith”.
On 11 October 2010, Emmett J made orders by consent in the ATO Proceedings, as contemplated in the Deeds of Settlement, to amend the freezing orders to enable the funds and shares to be dealt with.
On 19 October 2010, the first payment of $12,519,410.61 by Mr Grimaldi was received by the Crown Finance Entity.
On 20 October 2010, Charles Cheung of the NSW Treasury sent an email to Marilyn McMullen of the Crime Commission advising of the receipt of the funds and indicating that it intended to pay the money to the ATO the next day, on 21 October 2010.
On 20 October 2010, Jacobson J of the Federal Court delivered the Chameleon Judgment in the Chameleon Proceedings.
Although the Chameleon Proceedings concerned a number of transactions and allegations against Murchison, Mr Grimaldi, Mr Barnes, Winterfall, Pinnacle and Jack Hills Holdings Pty Ltd, the central transaction relevant to these proceedings was described by Jacobson J as the “July 2004 Placement”. Jacobson J made the following factual findings about the July 2004 Placement and the events surrounding it in the Chameleon Judgment at [50]–[60] (the reference to NiCu being the previous name of Murchison):
[50] The July 2004 Placement and the provision by Chameleon to the Iron Jack Vendors of two cheques totalling approximately $152,000 are the most critical transactions in the proceeding.
[51] These transactions are to be viewed against the background of certain Heads of Agreement dated 30 May 2004 between NiCu, Winterfall and Mr Zuks under which NiCu agreed to pay $350,000 to Winterfall. Those funds were, in turn, required by Winterfall to meet its obligations to the Iron Jack Vendors to secure Winterfall’s investment in the Iron Jack Project. The Heads of Agreement also provided for NiCu to take over Winterfall in return for an issue of shares in NiCu to the shareholders of Winterfall.
[52] I will set out later in Ch 1 an overview of the contractual arrangements under which Winterfall acquired its interest in the Iron Jack Project and the arrangements which provided for NiCu to acquire its majority interest in Winterfall. These arrangements demonstrate the parlous financial position of NiCu and its desperate need for funds to enable it to meet its commitments to Winterfall.
[53] The arrangements also show Winterfall’s urgent need for funds to meet its obligations to the Iron Jack Vendors and the pressure that was applied by Mr Zuks to Mr Grimaldi for NiCu to meet its commitment to Winterfall.
[54] These matters are critical to an appreciation of the significance of the July 2004 Placement and the provision of the cheques to the Iron Jack Vendors, as well as to the claims of breach of duty in relation to those transactions.
[55] The July 2004 Placement was suggested by Mr Grimaldi in late June 2004 and announced to the ASX on 12 July 2004. It was for a capital raising of $360,000 by the issue of eight million shares in Chameleon at 4.5 cents per share. The stated purpose was exploration activity at the Palm Springs Gold Mine.
[56] On 9 July 2004, Mr Barnes signed a cheque for $56,250 on Chameleon’s account payable to one of the Iron Jack Vendors. The cheque was drawn before amounts thus far raised from investors in the July 2004 Placement had been cleared and, on 12 July 2004 the cheque was dishonoured.
[57] The cheque for $56,250 was re-presented later in July, together with a further Chameleon cheque for $96,500 signed by Mr Barnes in favour of another of the Iron Jack Vendors. The two cheques, totalling $152,750 were debited to Chameleon’s bank account on 29 July 2004.
[58] Mr Zuks was concerned that Chameleon and NiCu may be related parties and he asked Mr Grimaldi and/or Mr Barnes for evidence that NiCu was permitted to use Chameleon’s funds for NiCu’s corporate purposes.
[59] Consideration of certain documents which were prepared by Mr Grimaldi and/or perhaps others on behalf of Chameleon, purporting to authorise the drawing of the cheques as a loan by Chameleon to NiCu, bear upon the question of knowledge of breach of the directors’ fiduciary duties in relation to this transaction.
[60] The amount of $152,750 paid out of Chameleon’s bank account to the Iron Jack Vendors represented a substantial part of Chameleon’s available cash.
[344] It is at the heart of Chameleon’s case that its funds, including in particular the two cheques totalling $152,750 paid to the Iron Jack Vendors … were used by Murchison to acquire its interest in Winterfall, and through it, the Iron Jack Project.
[345] The effect of Chameleon’s claim is that the two payments … totalling $152,750 to the Iron Jack Vendors were made for the purpose of entitling Mr Grimaldi and Mr Barnes, through Pinnacle, to obtain a “spotter’s fee” of 10 million shares in Winterfall for introducing Murchison … into the transaction.
…
[348] The drawing of the cheques is said to have been a contravention of the statutory and fiduciary duties of Mr Grimaldi and Mr Barnes to Chameleon. [Murchison] is said to have had knowledge of the breaches of duty, through the knowledge of Mr Grimaldi.
[667] The factual findings make it plain that Mr Grimaldi as a de facto director of Chameleon, and Mr Barnes as a director, breached their statutory duties to the company under each of the provisions of the Corporations Act relied upon by Chameleon.
[668] The circumstances attending the drawing of the cheques make it plain that each of Mr Grimaldi and Mr Barnes arranged for Chameleon’s funds to be paid to the Iron Jack Vendors for the express purpose of assisting NiCu to complete the acquisition of Winterfall and thereby to acquire an interest in the Iron Jack Project.
[669] Mr Barnes drew the cheques. Mr Grimaldi requested him to do so. It was Mr Grimaldi who procured the drawing of the cheques which were drawn for the benefit of NiCu, that company being without funds to honour its contractual commitments to Winterfall.
[670] But what is most telling is the personal interest of Mr Grimaldi and Mr Barnes. Each had a direct personal interest in the completion by NiCu of the acquisition of Winterfall because of their entitlement to the “introduction fee” for introducing NiCu to Winterfall.
[671] The personal interest of Mr Grimaldi and Mr Barnes in the successful completion of the transaction by NiCu gave rise to a real and substantial possibility of conflict between their personal interests and their duty to Chameleon in permitting Chameleon’s funds to be used to assist NiCu to complete the transaction.
[672] In substance what was done was that Mr Grimaldi and Mr Barnes diverted more than $152,000 of funds raised by Chameleon for its own corporate purposes, to NiCu, for NiCu’s benefit and, in particular, for the personal benefit of Mr Grimaldi and Mr Barnes through the introduction fee.
[673] The funds that were diverted consisted of nearly half of the funds raised by Chameleon. Those funds were raised to enable Chameleon to develop the Palm Springs project, or perhaps for the acquisition of Chalceus. Nearly half of those moneys were diverted to NiCu for its corporate purposes in a transaction in which Mr Grimaldi and Mr Barnes was personally interested.
[674] In procuring Chameleon to draw the cheques and in actually drawing them, each of Mr Grimaldi and Mr Barnes failed to act in good faith and failed to act in the best interests of Chameleon in breach of the duty of good faith stated in s 181(1)(a) of the Corporations Act. …
[675] Neither Mr Grimaldi nor Mr Barnes went into the witness box to assert that he was acting honestly. In my opinion, both acted dishonestly.
[676] Similarly, the actions of Mr Grimaldi and Mr Barnes breached the duty to act for a proper purpose stated in s 181(1)(b). They authorised the funds of Chameleon to be used for a purpose other than the purposes of the company. In particular, they authorised the use of the funds for a collateral purpose of assisting NiCu to complete a transaction in which each of Mr Grimaldi and Mr Barnes had a personal interest …
[677] Even if it were a proper corporate purpose of Chameleon to permit its funds to be advanced to NiCu, the advancing of those funds to NiCu to assist in completing a transaction in which Mr Grimaldi and Mr Barnes were personally interested could not be within the range of permissible corporate purposes of Chameleon.
[678] The only relevant exception to that proposition may be that the advance might have been within the range of permissible purposes for which the power was exercised if there were full disclosure to the Board of Chameleon of the personal interests of Mr Grimaldi and Mr Barnes through their entitlement to the introduction fee.
[679] I do not need to decide whether such a use of the funds was authorised because in my opinion the evidence is clear that Mr Grimaldi and Mr Barnes made no disclosure to the other directors of their personal interest in the “introduction” or “success” fee.
[680] So too, the findings I have made show that Mr Grimaldi and Mr Barnes acted improperly to use their position to gain an advantage for themselves in breach of s 182(1). …
Jacobson J had earlier addressed the fiduciary duties owed by Mr Grimaldi to Chameleon, finding that Mr Grimaldi was acting on behalf of Chameleon in relation to the capital raising in the July 2004 Placement by collecting the proceeds of the capital raising and depositing them in Chameleon’s bank account (at [634]) and undertaking to act in Chameleon’s interests and not his own interests, which was sufficient to give rise to a fiduciary relationship even if Mr Grimaldi was not a de facto director (at [689]). His Honour also found that Mr Grimaldi and Mr Barnes failed to disclose their personal interest in the advance of Chameleon’s money to Murchison to enable it to acquire an interest in the Iron Jack Tenements through the acquisition of Winterfall and they were advances which were procured by Mr Grimaldi and Mr Barnes in circumstances in which they had a direct conflict of interest and duty by reason of their entitlement to a fee for the successful consummation of the acquisition of Winterfall (at [688]).
Jacobson J then concluded that Mr Grimaldi had breached the fiduciary duties he owed to Chameleon, saying at [691]:
In procuring funds which he raised for Chameleon’s purposes to be used for his benefit in a transaction in which he was personally interested, Mr Grimaldi breached his fiduciary duties to Chameleon.
Mr Grimaldi and Mr Barnes are liable to account to Chameleon for the personal benefits or gains obtained by them by the misuse of their fiduciary capacities. …
Chameleon submits that when these findings concerning the breach of fiduciary duties are taken together it is plain that the conduct involved dishonesty by Mr Grimaldi and it was akin to a “theft of funds” (T316–317). Whatever pejorative is used to describe the conduct of Mr Grimaldi, it is very clear to me that Jacobson J found in terms that the conduct was dishonest (at [675]).
His Honour addressed the issue of the relief to which Chameleon was entitled across multiple sections of the Chameleon Judgment.
The first part of the analysis of the relief turned on the following factual findings made by Jacobson J regarding the benefits or gains obtained by Mr Grimaldi:
Pinnacle, as nominee for Mr Grimaldi and Mr Barnes was issued with 10 million shares in Winterfall as the introduction fee or the spotter’s fee (at [800] and [1072]).
Pinnacle exchanged its 10 million shares in Winterfall for 10 million shares in Murchison, which were issued to Pinnacle on completion of the reverse takeover, and the 10 million shares in Murchison represented the shares in Winterfall for which Mr Grimaldi and Mr Barnes were liable to account to Chameleon (at [801] and [1073]).
The options in Murchison issued to Pinnacle as part of the consideration for the reverse takeover lapsed and were irrelevant to the claims in the Chameleon Proceedings (at [801]).
Pinnacle no longer holds the 10 million shares in Murchison, with some allotted or transferred to Mr Grimaldi or his nominees and others to Mr Barnes or his nominees (at [1074]).
Without the cheques obtained by Murchison from Chameleon, its attempts to acquire Winterfall and with it an interest in the Iron Jack Tenements would have collapsed and Murchison would not have obtained ownership through Winterfall of the Iron Jack Tenements (at [807] and [809]).
After reaching these factual findings, his Honour concluded at [810]:
The liability of Mr Barnes and Mr Grimaldi as fiduciaries, and of Murchison as a knowing participant, to account for the profits obtained by them in breach of fiduciary duty is well established. I will deal with the remedy to be ordered in a separate chapter because:
[i]t is necessary to keep steadily in mind the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts: Warman International Ltd v Dwyer [1995] HCA 18; (1994) 182 CLR 544 … at 559.
The “separate chapter” in which Jacobson J dealt with the relief is Chapter 12 of the Chameleon Judgment, which runs from [918] to [1112].
Turning to the question of relief, his Honour said at [918]–[929]:
[918] Chameleon has succeeded in its claim against Mr Grimaldi and Murchison in respect of the Cadetta Transaction, as well as against Mr Grimaldi, Murchison and Winterfall, in respect of the misapplication of the cheques for $152,750. The question which then arises is what relief ought to be ordered.
[919] Chameleon claims, at its election, a constructive trust, or an account of profits. Alternatively, it claims equitable compensation. Its claims for a constructive trust or an account of profits from Murchison is made over Murchison’s 100% shareholding in Winterfall, or alternatively over a percentage interest of Murchison’s shareholding in Winterfall. Chameleon also claims a constructive trust or an account of profits in respect of the 10 million shares issued to Pinnacle as a “spotter’s fee”.
[920] The percentage interest is claimed by reference to the amount of Chameleon’s “trust property” which was knowingly received, or in which Murchison knowingly assisted the breaches of duty of Mr Grimaldi and Mr Barnes. On the findings I have made, that sum is $277,840 which is comprised of $125,090 from the proceeds of sale of the shares received by NiCu in the Cadetta Transaction, and the cheques for $152,750. Chameleon seeks a percentage interest calculated by reference to the proportion which that sum bears to the consideration paid by Winterfall to the Iron Jack Vendors and the Weld Range vendors.
[921] The cash component of the consideration provided by Winterfall to those vendors was $1,160,000. It follows that Chameleon’s claim for a constructive trust or an account of profits over a proportionate share of Murchison’s holding in Winterfall, or the iron ore ventures, would be approximately 24%.
[922] As Murchison pointed out on several occasions, Chameleon’s claim is a very large one. The market capitalisation of Murchison on 25 September 2009 was approximately $660 million, most if not all of which seems to be attributable to Murchison’s interest in the Iron Jack and Weld Range projects. Chameleon’s claim for a constructive trust over the whole of Murchison’s shareholding in Winterfall would therefore amount to many hundreds of millions of dollars. Even a claim for a proportionate interest would, on the market capitalisation to which I have referred, amount to about $160 million.
[923] Murchison described Chameleon’s claim, which is based upon the misapplication of its funds in the amount of less than $280,000, as an egregious attempt at “gold digging”. Hyperbole aside, it is clear enough that the question of relief is to be informed by the cardinal principle of equity to which I referred earlier, namely that the remedy must be fashioned to fit the nature of the case and the particular facts: Warman at 559.
[924] As the High Court observed in Warman at 560, the outcome in cases of this kind depends upon a number of factors. These include the nature of the property, and the relationship between the profit made and the duties of the fiduciary.
[925] The first issue which therefore arises is what was the nature of the property (if any) acquired by Mr Grimaldi, and received by Murchison.
[926] This issue is relatively clear in the case of Mr Grimaldi. He and Mr Barnes obtained, through Pinnacle, 10 million shares in Winterfall as a “spotter’s fee”. They exchanged those shares for shares in Murchison under the takeover.
[927] The position is less clear in the case of Murchison. Chameleon’s funds were mixed with other funds of NiCu and were applied in partial satisfaction of NiCu’s contractual obligations to Winterfall. On one view, NiCu did not acquire a specific item of property but it obtained benefits in the form of its ability to complete its contractual obligations to Winterfall. This ultimately resulted in Murchison’s acquisition of Winterfall and, through it, the interest in the Iron Jack and Weld Range tenements.
[928] The second issue which arises is, what was the profit? Is it to be calculated by reference to the proportion that the sum of $277,840 bears to the consideration provided by Winterfall to the Iron Jack and Weld Range vendors, or is it to be determined by reference to a wider range of matters? Other matters which may be relevant include the funds expended by Murchison on the development of the tenements as well as capital raised for the purpose of the venture.
[929] The third issue is delay. It is well established that a claim for an account of profits may be defeated by laches, acquiescence and delay: see Warman at 559. Murchison and Winterfall rely upon this defence. It involves a consideration of events which occurred between 28 July 2004 and the commencement of these proceedings in November 2007.
[930] The three remedies which are relevant to the present case were discussed in Warman at 556ff, although the “primary focus” in that case was the remedy of account.
[931] It is well established that an errant fiduciary may be held accountable as a constructive trustee for a profit or benefit obtained by reason of his or her breach of duty: Hospital Products at 108.
[932] So too, it is clear that a third party who receives trust property with the requisite degree of knowledge may be bound by a constructive trust over the property: Commissioner of Taxation v Macquarie Health Corp Limited (1998) 88 FCR 451 at 497 per Emmett J.
[933] But as the High Court observed in Farah at [200], ordinarily relief by way of a constructive trust is imposed only if another remedy is not suitable. Thus, before a constructive trust is imposed, the Court should first decide whether, having regard to the circumstances, there is an appropriate equitable remedy, falling short of the imposition of a trust: Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 (“Giumelli”) at [10], [49].
[934] Even if a constructive trust is an appropriate remedy, it may be appropriately moulded having regard to the flexible nature of equitable relief. In Hospital Products at 108, Mason J cited with approval the words of Cardozo J in Beatty v Guggenheim Exploration Co (1919) 225 NY 380 at 389:
A court of equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief.
[935] A factor which is of considerable importance in determining whether to impose a constructive trust is the nature of the property over which a trust is claimed. The authorities point to a distinction between cases in which a specific asset is acquired, and cases in which a business is acquired and operated: Warman at 560–561.
[936] Also, where the benefit which is obtained by a fiduciary as a consequence of its breach of duty is a loan of money, it may be “contrary to principle” to impose a constructive trust over the money so as to transform the creditor’s personal claim into a proprietary remedy: Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 (Daly) at 379 per Gibbs CJ.
[937] In Daly, Gibbs CJ at 379–380 considered that the imposition of a trust was not only unnecessary to protect the legitimate rights of the lender, but could also lead to unjust consequences for the borrower/fiduciary (including the liability to account for profits made with the use of the money) and to third parties; see also Katingal Pty Ltd v Amor (1999) 30 ACSR 545 at 548.
[938] The distinction between the acquisition of a specific asset and the acquisition and conduct of a business is also relevant to the question of whether, and if so, on what terms, an account of profits will be ordered. It may be inappropriate to compel an errant fiduciary to account for the whole of the profit from the conduct of the business over an indefinite period of time: Warman at 561.
[939] Also, the profits in respect of which an account is ordered are usually of an income nature but in some circumstances they may be profits of a capital nature. But the question of what form of account is appropriate, or indeed whether it is appropriate to grant such a remedy must await a consideration of all the circumstances and the identification of the gain…
[940] The assessment of a profit will often be very difficult. Mathematical exactness is not required but it is necessary to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of duty: Warman at 558.
[941] It may be that the profits or gain are not the product or consequence of the misapplication of the principal’s property but are the product of the fiduciary’s skill, efforts and resources: Warman at 561. Whether it is appropriate to make an allowance in favour of the errant fiduciary for its efforts and investments will depend upon the facts of the case: Warman at 561 - 562.
[978] The essential reason why no constructive trust arises is that, whether one approaches the matter by reference to the “profit” rule or the tracing rules, the shares which Murchison acquired in Winterfall were not the profit or the property which Murchison obtained from the breach: Hospital Products at 110; Maguire v Makaronis (1997) 188 CLR 449 at 468.
The profit principle
[979] The profit principle has been stated in a very large number of cases including landmark authorities such as Phipps v Boardman [1966] UKHL 2; [1967] 2 AC 46. As Mason J said in Hospital Products at 108, the decided cases provide many illustrations of the fiduciary who has been held to be accountable as a constructive trustee of a profit or benefit which it obtained for itself in breach of its fiduciary duty.
[980] It is no answer to the application of the profit rule that the profit is of a kind that the principal could not have obtained or that no loss is caused to the principal... The object of the rule is to prevent the fiduciary from being swayed by considerations of personal interest and from misusing the fiduciary position for its personal advantage....
[981] If I were to pause at that point, it might be thought that the application of the profit principle would lead, at least prima facie, to the imposition of a constructive trust. I held in Chapter 8 that Mr Grimaldi and Mr Barnes were in a position of conflict between their fiduciary duties to Chameleon and their personal interests when they drew, or authorised the drawing of, the cheques for $152,750. So too, Mr Grimaldi received his commission of 5 million shares from the Cadetta Transaction by the misuse of his fiduciary position.
[982] It would seem to follow that the fundamental rule of equity ought to apply, namely that Messrs Grimaldi and Barnes as fiduciaries and Murchison as an accessory, ought to account as a constructive trustee for what they acquired in breach of their fiduciary obligations...
[983] But the statement of the profit principle and the finding of breach in relation to the Cadetta Transaction and the misapplication of the cheques do not answer the question which arises in relation to Chameleon’s claim for a constructive trust over Murchison’s shares in Winterfall.
[984] As Mason J observed in Hospital Products at 110, the propriety of granting relief by way of a constructive trust is ordinarily to be answered by considering two questions. The first is what is the breach of the fiduciary duty? The second is what is the profit or benefit the fiduciary has made in consequence of the breach?
Jacobson J held that Mr Grimaldi was liable to account to Chameleon for the 10 million shares in Murchison obtained by Pinnacle on completion of the reverse takeover, even though he did not receive all those shares, either as constructive trustee or by way of an account of profits (at [1076]–[1077]), and to account for the remaining shares as an accessory or to pay equitable compensation in respect of those shares (at [1078]).
The basis on which Mr Grimaldi was held liable to account to Chameleon for the profits he made on all of the 10 million shares in Murchison was expressed by Jacobson J at [1094]–[1096] as follows:
[1094] It is true that I have concluded that Mr Grimaldi is liable to account as an accessory for the profit made on the 10 million shares obtained by Pinnacle. But that is because he shared in the profits. He may not have shared in all of the profits but his failure to give evidence entitles me to presume against him that he shared in all of them.
[1095] In my view, this follows from the fact that the introduction fee arose from the discussions between Mr Grimaldi and Mr Barnes and Mr Zuks which culminated in the NiCu/Winterfall Heads of Agreement and the Addendum thereto. The Addendum provided for the issue of the shares to Mr Grimaldi or his nominees.
[1096] The evidence establishes that those shares were ultimately crystallised as the 10 million Winterfall shares allotted to Pinnacle but it is clear that Pinnacle was merely the vehicle through which those shares were to be distributed to Mr Grimaldi and Mr Barnes. In the absence of any evidence from either of them, I am entitled to assume against Mr Grimaldi as a wrongdoer, in assessing the benefit he received, or the quantum of compensation, that he shared in the benefits flowing from the issue of the 10 million shares.
Jacobson J considered that the quantum of those profits was to be fixed on the value of the 10 million shares as at the date of judgment (at [1080]–[1084]), unless it could be shown that Pinnacle, Mr Grimaldi or his nominees disposed of the shares at an earlier date in which case the profits were to be determined by reference to the sale price of those shares (at [1111]).
Jacobson J held that for the purposes of the compensation order to be made for Mr Grimaldi’s breaches of ss 181 and 182 of the Corporations Act and Murchison being knowingly concerned in those breaches, the damage suffered by Chameleon includes the profit made by Mr Grimaldi or Murchison resulting from the contraventions (at [1105]).
The conclusions on relief were expressed by Jacobson J in the following way (at [1106]–[1112]):
[1106] For reasons set out above, Murchison and Winterfall are liable to account to Chameleon for the profits obtained by them through the breaches of duty to which I have referred in relation to the Cadetta Transaction and the misapplication of the cheques.
[1107] The effect of this is that there will be an order for Murchison and Winterfall to account for the income received by them as a consequence of the investment of Chameleon’s funds of $277,840 in the Iron Jack Project from 28 July 2004 to date.
[1108] I have power under s 54A the Federal Court of Australia Act 1976 (Cth) to appoint a referee to carry out the taking of accounts and my strong preliminary view is that I would so order.
[1109] Mr Grimaldi, as the perpetrator of the breaches, is liable to account for the profits obtained by him through the investment of those funds.
[1110] Mr Grimaldi is also liable to account to Chameleon for the 10 million shares in Murchison obtained by Pinnacle on completion of the reverse takeover of Winterfall by Murchison.
[1111] The profits in respect of those shares are to be assessed at the prices quoted for Murchison shares on the ASX at the date of judgment unless it be shown that Pinnacle or Mr Grimaldi or his nominees disposed of the shares at an earlier date. In that event, the profits are to be determined by reference to the sale price of those shares.
[1112] At Chameleon’s election, Murchison, Mr Grimaldi and Winterfall are liable for equitable compensation in respect of the sum of $152,750 from 28 July 2004 to date at mercantile rates of interest, compounded on monthly rests.
At the conclusion of the Chameleon Judgment, Jacobson J ordered the parties to bring in short minutes of order to reflect his Honour’s reasons (at [1132]).
To summarise the Chameleon Judgment, Jacobson J found that Mr Grimaldi had breached the fiduciary duties he owed to Chameleon and was liable to account to Chameleon as a constructive trustee for the profits he made on the 10 million Murchison shares he obtained in breach of his duties, with a referee to be appointed to take that account.
In the Commonwealth’s closing submissions in these proceedings before me, it accepted that it knew the outcome of the Chameleon Proceedings as recorded in the Chameleon Judgment when it was delivered, being the liability of Mr Grimaldi to account as a constructive trustee and the relief ordered upon that finding of liability.
I agree with Chameleon’s submissions that the following four material consequences arose for the ATO on the delivery of the Chameleon Judgment:
The Chameleon Judgment confirmed that the premise underlying the assessment of Mr Grimaldi’s tax liability and the Deeds of Settlement with the Commissioner, being his entitlement to keep all the frozen assets, was wrong because at least some of the profits made by Mr Grimaldi were now known to be held on trust for Chameleon and Mr Grimaldi was required to account for them as an errant fiduciary.
The Chameleon Judgment cast material doubt on the quantum of the tax debt that had been assessed against Mr Grimaldi because if Mr Grimaldi was liable to account for all the profits made through his breach of fiduciary duties, then none of those profits could have represented income for Mr Grimaldi on which he was liable for tax.
The ATO knew Mr Grimaldi was an errant fiduciary who was liable to account to Chameleon for the profits made on the Murchison shares and options in breach of his fiduciary duties.
At least some of the funds the ATO intended to receive from Mr Grimaldi under the Deeds of Settlement were (at the very least) likely to be profits for which Mr Grimaldi was liable to account to Chameleon.
On 21 October 2010, the day after the Chameleon Judgment was delivered, the ATO received $12,519,410.61 from the NSW Treasury. Those funds had been received by the NSW Treasury on 19 October 2010, the day before the Chameleon Judgment was delivered.
On 25 October 2010, Mr Zafiriou sent an email to Mr Stokes of the AGS, Ms McLachlan, Mr O’Neill and Mr Tannous of the ATO, amongst others, confirming that the amount of $12,519,410.61 had been allocated to Mr Grimaldi’s account.
Chameleon wins damages as judge orders Murchison to pay up
A FEDERAL COURT referee will calculate how much Chameleon Mining should reap from its partial win against Murchison Metals over the billion-dollar Jack Hills iron ore project in Western Australia.
Justice Peter Jacobson yesterday upheld two of Chameleon’s five claims and said he would appoint an independent accountant for the complex task of assessing damages.
He found that Murchison improperly used $277,840 of Chameleon’s money when it paid $1.16 million for the iron ore tenements in 2004.
…
Justice Jacobson also ruled that a former Murchison director, Phillip Grimaldi, owed a fiduciary duty to Chameleon which he breached by sharing in a spotter’s fee for Jack Hills of 10 million Murchison shares.
Chameleon is entitled to Mr Grimaldi’s profit on the shares.
…
Hi Edwina
I was thinking about the Chamelon Judgment after our call last night.
The payment will be made to NSWCC in accordance with an order under Division 2 of Criminal Assets Recovery Act 1990 (NSW) prior to the Commissioner being paid the money in accordance with that ACT.
Even if Chameleon were able to make him a bankrupt that is by 19 April 2011 being the time required to enliven the relation date back under 122 of the bankruptcy Act, the payment made to NSWCC is exempt by virtue of S123(4) of the bankruptcy Act. Thus there is no voidable payment and consequently, nothing that the Trustee can claw back.
So any payment made to the DCT in my opinion is not a payment made by the bankrupt and thus not the subject of any claw back
There is no file note or other record of this conversation. It is the one and only documented conversation involving anyone within the ATO speaking about the Chameleon Judgment. It would appear that the Chameleon Judgment had raised a concern within the ATO of sufficient level for these two officers of the ATO to speak about it outside of normal working hours. Neither Ms McLachlan or Mr Zafiriou gave evidence about the conversation. In their absence, I infer that the conversation in the evening of 21 October 2010 did not raise any topic beyond that which is dealt with in the email of 22 October 2010.
I agree with Chameleon’s submissions that the expressed reliance on s 123(4) of the Bankruptcy Act 1966 (Cth) within that email was misplaced: that section provides that nothing in the Bankruptcy Act invalidates “a penalty or fine” imposed on a bankrupt in respect of an “offence against a law”, but Mr Grimaldi had not been found liable of an offence nor had a penalty or fine been “imposed” on him by a court. Rather, on 8 October 2010, this court had given effect to a settlement between the parties by making consent orders which were expressly noted to be “without admission”.
There is no other evidence of anyone within the ATO at this time giving any consideration to the fact that the finding in the Chameleon Judgment — that Mr Grimaldi was liable to account to Chameleon for the profits he had made on the Murchison shares to Chameleon, and therefore those profits did not belong to him — called into question the basis on which Mr Grimaldi had been assessed for tax on them.
Other than this conversation on 21 October 2009 between Mr Zafiriou and Ms McLachlan and the email the following day, there is no evidence that anyone within the ATO analysed the Chameleon Judgment to consider its impact on the course of action to which the ATO was committed in the Deeds of Settlement. I consider that I am able to infer that the telephone call and the email are the complete account of the ATO’s consideration of the effect of the Chameleon Judgment on the ATO’s settlement with Mr Grimaldi.
In my opinion, it was incumbent on the ATO to review the Chameleon Judgment closely and carefully, seek legal advice on it and consider whether the Deeds of Settlement should be set aside on the basis that they had been entered into on the false or misleading premise that Mr Grimaldi was beneficially entitled to the profits he had made for the sale of the Murchison shares and options. Instead, the ATO seems to have disregarded the Chameleon Judgment and continued receiving payments under the Deeds of Settlement as if it had not been delivered.
It reflects poorly on Mr O’Neill’s credit that in cross-examination he considered that after the Mr Grimaldi could have sought a review or raised an objection to his tax assessments (T159 and T161–162), when Mr Grimaldi had contractually bound himself not to do so in the Second Deed of Settlement (cl 2.8 and the assessments listed in Schedule 1 to the Second Deed of Settlement). It will be recalled that Mr O’Neill signed the Second Deed of Settlement as delegate of the Commissioner. I agree with Chameleon’s submission that I can comfortably infer that the ATO would have resisted any attempt by Mr Grimaldi to seek a review of or object to any of the assessments in breach of cl 2.8 of the Second Deed of Settlement (T349).
On 20 December 2010, Jacobson J made final orders in the Chameleon Proceedings (Chameleon Final Orders), after hearing oral submissions from the parties on 10 December 2010.
A mixture of proprietary and personal relief was ordered against Mr Grimaldi in the Chameleon Final Orders. Stripped of their complexity and detail, the orders made against Mr Grimaldi in the Chameleon Final Orders were to the following effect:
Mr Grimaldi was ordered to transfer and/or cause his nominees to transfer to Chameleon the 10 million shares and 12 million options in Murchison obtained by Pinnacle or its nominees, or so many of those shares and options as Mr Grimaldi and/or his nominees presently held, including any shares in Murchison arising from the exercise of some or all of the 12 million options in Murchison (orders 9–11).
For so many of the 10 million shares in Murchison, the shares resulting from the exercise of the some or all of the 12 million options in Murchison and the 12 million options in Murchison which had been sold, Mr Grimaldi was required to pay to Chameleon the sale price of those shares (less the exercise price in the case of the options) plus compound interest (orders 12–14).
In addition to the payment of profits provided for by orders 9–14, Mr Grimaldi was ordered to account to Chameleon for any and all other profits obtained by him or his nominees from his breaches of fiduciary duties with respect to the misapplication of the cheques totalling $152,750 together with his knowing assistance in the breaches of fiduciary duty by Mr Barnes, including any profit arising from the sale, disposition or dealing with the shares and options in Murchison over and above the monies payable under orders 9–14, together with compound interest (order 15(b)).
Pursuant to s 1317H of the Corporations Act, Mr Grimaldi was ordered to pay compensation to Chameleon in an amount equal in the amount of profits obtained by Mr Grimaldi resulting from his contraventions of the Corporations Act, with the amount of such profits obtained by Mr Grimaldi to be determined pursuant to the process provided for by orders 15–25, such amount not to amount to permit double recovery of any profits paid under orders 9–15 (order 16).
Mr Grimaldi was ordered to file and serve an affidavit disclosing all matters within his knowledge, after making reasonable inquiries, relating to:
(a) the past and present legal and beneficial ownership of the shares in Murchison, the options in Murchison and any shares in Murchison resulting from the exercise of the options in Murchison, including whether he or any of his nominees holds or has at any time held any interest in the shares or the options and the identity of those nominees; (b) any disposition of, or dealings with, the shares or options in Murchison; (c) all profits or benefits obtained by him or his nominees from any dealing with the shares in Murchison, the options in Murchison or the shares resulting from the exercise of the options in Murchison; and (d) whether he or his nominees exercised the 12 million options in Murchison and, if so, the date and circumstances in which the options were exercised (order 19).
Orders were made for the conducting of an inquiry by a referee to determine the amount of profits payable pursuant to orders 12–15 (orders 19–25).
Mr Grimaldi was ordered to pay Chameleon’s costs of the Chameleon Proceedings (order 27).
The Chameleon Final Orders against Mr Grimaldi were qualified in two respects.
First, Mr Grimaldi was entitled to set off, in reduction of the amounts he was to pay Chameleon, any fees he had paid in relation to the exercise of the options and interest on those fees.
Secondly, order 17 provided a qualification to orders 12, 14 and 15 in relation to payment of share sale proceeds and the general order to account. That was because, in December 2009, Chameleon reached a settlement with Mr Barnes under which it received $6 million. Because the 10 million shares in Murchison and the 12 million options in Murchison were issued to Pinnacle, a nominee of both Mr Barnes and Mr Grimaldi, concerns were raised by Mr Thomson, the legal representative for Mr Grimaldi at the hearing on 10 December 2010, in relation to the final orders about Chameleon being paid twice in relation to the same assets, which was made more difficult because of the uncertainty as to whether Mr Grimaldi still held the shares in Murchison.
These issues were captured in the following exchange between Jacobson J and Mr Thomson at the hearing on 10 December 2010 in relation to the form of the final orders in the Chameleon Proceedings:
MR THOMSON: Now, what these orders do is, in effect, try and do both without giving credit for the other and fail to give effect to that expression that you can have one or the other. Now, taking first of all the remedy appropriate for a constructive trustee, it appropriate that there be an order for the handing back of such shares as Mr Grimaldi still has and controls. It's - - -
HIS HONOUR: Yes. Do you know whether he has still got them or not? We might be able to sort of shortcut it all.
MR THOMSON: I'm sorry, I just don't know. I wish I - I'm not sure - just don’t know, but the logic of your Honour's judgment would support an order that he hand back the shares that he has or controls and, indeed, the options and subject to be reimbursed or allowed the exercise price the shares that arise from the exercise of the options.
HIS HONOUR: Yes.
MR THOMSON: In respect of the exercise price; however, there should be allowance for interest in respect of the period since the moneys were paid to acquire those shares and I suggest - - -
HIS HONOUR: I suppose that's right.
MR THOMSON: Yes, and - --
MR HUTLEY: Well, that can be set off against our entitlement.
HIS HONOUR: Yes.
MR THOMSON: Well, sure, but, in effect, at the same rate as they're claiming interest against us. Now the next part of your Honour's suggested remedy involves, in effect, a restitutional sum which your Honour explained was that to the extent that those shares and now options weren't handed back, Mr Grimaldi was going to be liable to pay the value of those shares at the date of judgment.
HIS HONOUR: Yes.
MR THOMSON: Now those two orders, in effect, represent everything that one would be entitled to on a defaulted trustee obligation and achieve a restoration either in kind or in monetary terms of the shares found to have been inappropriately obtained or, indeed, for which he is liable to account the full 10 million. Now that should be the end of it, but my friend 's orders also seek in addition, in effect, an account of profit. They want to go back and also inquire whether Mr Grimaldi made any profits from his sale of these shares on the way through.
So having already been fully restored through the constructive trust remedy, they're seeking in addition an account of profit remedy; your Honour has indicated that really those are alternative remedies and traditionally they are and they should be. So there may have to be an election between one or the other. If your Honour is against me - - -
HIS HONOUR: But it's not possible because we don't know whether Mr Grimaldi still retains the shares, whether he has told some, exercised what options, etcetera.
MR THOMSON: No, but the point being to the extent he has, the restitution sum reimburses the applicant for that property that has been put out of his control, or sold or whatever - - -
HIS HONOUR: Yes, the primary obligation is to make restitution of the trust property and that - - -
MR THOMSON: - - - however it has been disposed of. It has made restitution and handed back, either in cash or in kind, the trust property.
HIS HONOUR: Yes.
MR THOMSON: Now, having obtained that restitution it's not really appropriate for the applicant to be able to also go back and see if there are any shares that were disposed of – might have been sold at a profit – because he has already been compensated for those lost shares through the restitution sum, especially when it's trying to say it can actually pick and choose; it will just pick up the profits and not recognised any loses. In fairness that regime – if your Honour were minded to give them both remedies that is, in effect, double dipping and what one would need to do is to devise a regime which, presumably would need to be the subject of some reference, under which there's an inquiry as to all dealings with the relevant shares - - -
HIS HONOUR: The shares.
MR THOMSON: - - - shares that are not handed back, including losses as well as profits, and unless that amount exceeds the restitution amount – it's only to the extent that that amount exceeds the restitution amount that there's any occasion to require additional disgorgement by Mr Grimaldi. The restitution amount being the value of the shares that he no longer holds or retains that he – the value of the shares - - -
MR HUTLEY: At 20 October.
MR THOMSON: - - - and options that he can 't get back at the date of judgment. And the date of judgment, we would submit, should be today and no[t] 20 October. That's the submission.
On each of 21 February 2011, 25 May 2011, 25 August 2011 and 28 November 2011, Mr Grimaldi made further payments of $250,000 to the NSW Treasury by depositing that amount into the account in the name of the Crown Finance Entity.
Shortly after each payment was made, on 22 February 2011, 1 June 2011, 30 August 2011 and 30 November 2011 respectively, the Crime Commission sent a letter by email to ask the Crown Finance Entity (copying Mr Zafiriou and Mr Tannous amongst others, with the exception in the case of the 1 June 2011 email) to make the necessary arrangements to ensure that each payment was “immediately transferred” to the ATO.
On each of 24 February 2011, 6 June 2011, 1 September 2011 and 5 December 2011, a payment of $250,000 was made by the Crown Finance Entity to the ATO in respect of Mr Grimaldi.
On each of 24 February 2012 and 25 May 2012, Mr Grimaldi made further payments of $250,000 to the NSW Treasury by depositing that amount into the account in the name of the Crown Finance Entity.
Shortly after each payment was made, on 28 February 2012 and 30 May 2012 respectively, the Crime Commission sent a letter by an email to the Crown Finance Entity to make the necessary arrangements to ensure that each payment was “immediately transferred” to the ATO.
On each of 6 March 2012 and 31 May 2012, a payment of $250,000 was made by the Crown Finance Entity to the ATO in respect of Mr Grimaldi.
On 8 August 2012, Robert Ravanello of the ATO sent a letter to Van Cooney (the solicitor acting for Mr Grimaldi’s daughters, Mia Grimaldi and Gina Grimaldi) advising that upon settlement of the property sale of Unit 403 by them, a bank cheque in the amount of $855,000 payable to the NSW Treasury was to be provided to a representative of the Crime Commission.
On 16 August 2012, Mr Spark of the Crime Commission wrote to the Crown Finance Entity enclosing three cheques totalling $855,000 stated to be partial satisfaction of the Grimaldi Proceeds Assessment Order and asking for them to be deposited “URGENTLY” and that “GRIMALDI” be noted as the description.
On 17 August 2012, $855,000 was credited to the Proceeds Account of the NSW Treasury.
On 23 August 2012, Mr Cooney wrote to Mia Grimaldi and Gina Grimaldi confirming that of the sale proceeds of $867,160.87 from the sale of Unit 403, $855,000 had been paid to the NSW Treasury to be forwarded to the ATO. He described the process as follows:
On settlement the balance of the sale money, $867,160.87 was received and distributed as set out above.
The process in this matter was unusual as the direction from the Australian Taxation Office was that the amount agreed to be paid by way of reduction of the "tax debt" was to be paid to the NSW Treasury who in turn forwarded that money onto the Australian Taxation Office. I enclose copy of letter received from the Deputy Commissioner of Taxation which confirms that the $855,000.00 was to be applied to the August 2012, November 2012 and the February 2013 payments.
I also enclose letter dated 16 August 2012 received from the NSW Crime Commission confirming the receipt of the $855,000.00. Please do not lose copies of these correspondences as they may be useful in the future.
Mr Cooney also stated that on settlement he provided to the purchaser’s representative a discharge of mortgage to be registered along with the transfer.
On 27 August 2012, $855,000 was paid by the Crown Finance Entity to the ATO.
Kupang Resources Ltd (formerly Chameleon Mining NL)
Inquiry proceedings before the Hon John Von Doussa AO QC FAAL
Federal Court of Australia NSD 2355 of 2007
I refer to the above proceedings (Inquiry). I act for Kupang Resources Ltd (a publicly listed company), formerly Chameleon mining NL (Chameleon).
By way of background, Chameleon commenced proceedings in the Sydney Federal Court in NSD 2355 of 2007 against (amongst others) Phillip Felice Grimaldi, Gregory Barnes, Crosslands Resources Ltd (ACN 061 262 397) and Pinnacle Nominees Pty Ltd (ACN 008 928 443) for serious breaches by Chameleon's directors and de facto directors of fiduciary duties owed by them to the company.
Relevantly, Chameleon was successful in its claims against Mr Grimaldi (see enclosed copy of the order of Jacobson J dated 20 December 2010) (20 December Orders). Those orders require Mr Grimaldi to account to Chameleon for profits he has derived from the sale of 10 million shares and 12 million options in Murchison Metals Limited (see in particular order 12 and 15).
Mr Grimaldi's appeal from that decision (NSD 28 of 2011) was heard by the Full Court of the Federal Court (Finn, Stone and Perram JJ) in August 2011 and dismissed with costs (see Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6. A copy of the order dismissing the appeal is enclosed.
Mr Grimaldi has applied to the High Court for special leave to appeal from the Full Court's decision. His special leave application is listed for hearing in Sydney this Friday, 17 August 2012. The list commences at 9.30am EST.
The practical effect of the Full Court's decision is that 20 December Orders, in so far as they relate to Mr Grimaldi, remain on foot and will be enforced by my client. In particular, the account set out in orders 12 and 15 of the 20 December Orders has been referred to the Honourable John Von Doussa AO QC FAAL for determination as part of the Inquiry.
We have conducted detailed investigations to support the Inquiry. On evidence presently available to us, we can establish transactions totalling approximately $88M which we consider will be caught by the 20 December Orders. Our contention in those proceedings will be that Mr Grimaldi is to account to Chameleon for the full value of those transactions.
Mr Grimaldi has recently contacted directors and associates of my client claiming, amongst other things, that:
- he cannot pay any money to Chameleon in respect of the Inquiry (due to “current commitments to the NSW Crime Commission”);
- the ATO has a fixed charge over all his property and assets which will be sold to pay agreed tax payments; and
- he has entered into a payment plan with the ATO, the next instalment of $6,091,000 falling due in August 2013.
In respect of (1) above, Mr Grimaldi claims to have ‘settled’ his debt with the ATO for the sum of approximately $17M (not having been required to pay any penalties in respect of the debt).
I am aware of proceedings taken by the Deputy Commissioner of Taxation against Mr Grimaldi (in NSD 407 of 2009) as part of investigations into his tax affairs (Project Whickenby). In particular I have had regard to the evidence of Mr Edward Van Der Pol filed in those proceedings. That material discloses dealings by Grimaldi (and others) in entities directly relevant to the Inquiry (notably MGG Capital, IFTC and Iron Investments) and to our ongoing investigations to support that inquiry.
Mr Grimaldi's ability to meet any judgment resulting from the Inquiry is obviously relevant to my client's progress of those proceedings. I would be grateful if you would contact me or Martina Sedic to discuss matters referred to in paragraphs 1, 2 and 3 above. I appreciate that these matters may be confidential in nature, however I anticipate that some of these touch upon issues which may be relevant in the Inquiry proceedings.
…
On 7 February 2013, Robert Ravanello of the ATO sent a letter to Mr Cooney, (the solicitor acting for Mia Grimaldi and Gina Grimaldi) advising that upon settlement of a property sale of Unit 404C by them, a bank cheque in the amount of $850,000 payable to the NSW Treasury was to be provided to a representative of the Crime Commission.
On 7 February 2013, Arlene Cupay of the ATO sent an email to Mr Spark of the Crime Commission concerning the settlement of the sale of Unit 404C, the proceeds of which were said to be “held with the ATO as security” under the Deeds of Settlement. Ms Cupay said that a cheque for $850,000 made payable to the NSW Treasury was to be provided to a representative from the Crime Commission attending the settlement.
On 27 February 2013, Mr Spark of the Crime Commission wrote to the Crown Finance Entity enclosing two cheques totalling $850,000 asking for them to be deposited “URGENTLY” and that “GRIMALDI” be noted as the description.
On 28 February 2013, $850,000 was credited to the Proceeds Account of the NSW Treasury.
On 28 February 2013, Mr Cooney wrote to Mia Grimaldi and Gina Grimaldi confirming that from the sale proceeds of Unit 404C, $850,000 had been paid to the NSW Treasury to be forwarded to the ATO. He stated that (all grammatical errors left in place):
On settlement the amount received was $678,943.80, the balance of sale money, namely $171,156.20 was provided by Gina Grimaldi by way of a loan to the Purchaser, thus the amount of $850,000.00 was receive and paid to the Australian Taxation Office via the NSW Crime Commission.
He also stated that on settlement he provided to the purchaser's mortgagee a discharge of mortgage to be registered.
On 8 March 2013, $850,000 was paid by the Crown Finance Entity to the ATO.
On 14 March 2013, Chameleon filed a bankruptcy notice against Mr Grimaldi for a debt in the amount of $31,560.44.
Mr Grimaldi succeeded in setting aside the bankruptcy notice.
On 2 July 2014, Mr Grimaldi voluntarily entered bankruptcy by filing a debtor’s petition.
As a result of the bankruptcy of Mr Grimaldi, the inquiry before the Honourable JW von Doussa AO FAAL KC to take an account of profits in accordance with the Chameleon Final Orders was adjourned and has remained in abeyance ever since.
An errant fiduciary, Phillip Grimaldi, misappropriated the plaintiff’s property in breach of the fiduciary duties he owed the plaintiff and he received financial benefits (shares and options in a company called Murchison Metals Ltd) as a result of those breaches. Grimaldi subsequently applied the proceeds of the sale of some of those shares and options to discharge his liabilities to the defendant. The plaintiff (formerly known as Chameleon Mining NL) alleges that the defendant received from Grimaldi trust property that had been obtained by Grimaldi's through his breaches of the statutory and equitable duties he owed the plaintiff and did so with sufficient knowledge of Grimaldi's breaches of his duties to the plaintiff to establish the defendant's liability to the plaintiff for knowing receipt under the “first limb” of Barnes v Addy (1874) LR 9 Ch App 244. The plaintiff through these proceedings seeks to recover trust property or equitable compensation from the defendant.
Chameleon’s claim, as stated in section C of the FACLS headed “Plaintiff’s Contentions”, can be distilled into the following main elements:
Mr Grimaldi breached the statutory and equitable duties he owed to Chameleon in the circumstances in which the funds of Chameleon from the capital raising arranged by Mr Grimaldi were used to pay the vendors of the Iron Jack Tenements acquired by Murchison. Mr Grimaldi (through Iron and MGG Capital) received an allocation of shares and options in Murchison in the form of the Spotter’s Fee Securities following the reverse takeover of Winterfall by Murchison (FACLS at [3]–[19]).
Mr Grimaldi sold or caused his nominees to sell the Spotter’s Fee Securities and the Existing Shareholding at a substantial profit, which profits and benefits were obtained by Mr Grimaldi or his nominees by reason of Mr Grimaldi’s breaches (FACLS at [20]–[24]).
At the time the ATO entered into the Deeds of Settlement on 8 October 2010 and received each of the payments made by Mr Grimaldi under them after the delivery of the Chameleon Judgment between 21 October 2010 and 8 March 2013 (Admitted Receipts), the ATO knew (FACLS at [29]–[52]):
(a) of the circumstances constituting Mr Grimaldi’s breaches of his statutory and equitable duties to Chameleon; (b) that Mr Grimaldi obtained profits as a result of those breaches in the form of the Spotter’s Fee Securities, profits from the sale of the Spotter’s Fee Securities and profits from trading the Existing Shareholding; (c) the Grimaldi ATO Judgment of $36,119,836.12 was obtained by the Commissioner on the basis of Mr Grimaldi’s beneficial ownership and control of funds in bank accounts, which were the profits from the sale of the Spotter’s Fee Securities and profits from trading the Existing Shareholding; and (d) the Admitted Receipts were derived or substantially derived from those profits.
(a) made enquiries of Chameleon to determine whether the funds that the ATO was to receive pursuant to the Deeds of Settlement or in fact received in the form of the Admitted Receipts were obtained by Mr Grimaldi through breaches of his statutory and equitable duties and/or represented trust property belonging to Chameleon; (b) sought to ascertain the outcome of the Chameleon Proceedings, including on the issue of whether the Spotter’s Fee Securities were obtained by Mr Grimaldi or his nominees through breaches of his statutory and equitable duties or represented trust property belonging to Chameleon; or (c) alternatively, decided to await the outcome of the Chameleon Proceedings in order to establish whether or not Mr Grimaldi would be found to have breached his duties and obtained financial benefits as a result.
The failure of the ATO to do the things stated in (4) above constituted a wilful shutting of their eyes to those matters, the wilful and reckless failure to make inquiries that an honest and reasonable person in the position of the ATO would have made, and the possession of such knowledge of circumstances which would indicate those facts to an honest and reasonable person in the position of the ATO (FACLS at [54]).
The ATO’s liability for knowing receipt is made out by the receipt of the Admitted Receipts in the circumstances of the ATO’s actual knowledge, wilful blindness and wilful and reckless failure to make inquiries (FACLS at [56]).
The Admitted Receipts constitute the traceable proceeds of trust property or profits obtained by Mr Grimaldi through the breaches of his statutory and equitable duties he owed to Chameleon, which are held by the ATO on constructive trust for Chameleon and the ATO is liable to pay equitable compensation to Chameleon in the amount equalling the amount received by the ATO, plus interest (FACLS at [57] and [92]).
Chameleon says that a third party will “become chargeable” with trust property if “they received it with notice of the trust”: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ at [112].
Chameleon says that liability for knowing receipt also extends to a third party who “received property that was trust property, or was transferred in breach of fiduciary duty, or was traceable to property so transferred” where the third party had requisite knowledge (not merely constructive notice) of the breach of trust or breach of fiduciary duty so as to warrant the imposition of personal liability arising from the receipt”: Turner v O’Bryan-Turner (2022) 107 NSWLR 171; [2022] NSWCA 23, White JA (with whom Meagher and McCallum JJA agreed) at [92].
Chameleon relies on the elements of a claim under the first limb of Barnes v Addy which were set out in Simmons v NSW Trustee and Guardian (2014) 17 BPR 33,717; [2014] NSWCA 405 by Gleeson JA (with whom Beazley P and Barrett JA agreed) at [88] as follows:
(1) the existence of a trust, or a fiduciary duty, with respect to property (trust property);
(2) the misapplication of trust property by the trustee or fiduciary;
(3) the receipt of trust property by the third party;
(4) knowledge by the third party, at the time he or she received the relevant property, that it was trust property and that it was being misapplied or, in the case of breach by a fiduciary, that the trust property was transferred pursuant to a breach of fiduciary duty.
Chameleon submits that their claim may be summarised in four points, each of which is contested (at least in part) by the Commonwealth:
As a result of Mr Grimaldi’s breaches of statutory and fiduciary duties he owed to Chameleon as a de facto director, he received profits in the form of the proceeds of sale of the Spotter’s Fee Securities and the Existing Shareholding.
Those profits were “trust property” within the meaning of the first limb of Barnes v Addy because they were either held on trust for Chameleon or they were held and controlled by Mr Grimaldi subject to his fiduciary obligation to account and Mr Grimaldi was not beneficially entitled to keep or use them for his own personal interest or advantage.
The amounts received by the ATO represented all or part of the proceeds of sale of the Spotter’s Fee Securities and/or the Existing Shareholding which had increased in value by reason of Mr Grimaldi’s breaches of duty he owed to Chameleon.
At the time the ATO entered into the Deeds of Settlement with Mr Grimaldi and received the amounts under it, the ATO had the requisite knowledge of Mr Grimaldi’s breach of fiduciary duty and consequent liability to account so as to warrant the imposition of personal liability arising from the receipt of those amounts.
In its closing submissions, the Commonwealth substantially narrowed the issues which it raised in defence of Chameleon’s claim. In doing so, the Commonwealth conceded three important matters:
The Commonwealth conceded that, subject to the defence of the NSW Treasury being a bona fide purchaser for value without notice and excluding payments made in discharge of mortgages granted in favour of the Commonwealth, Chameleon is able to trace the proceeds of sale of the Spotter’s Fee Securities into the payments which were made to the ATO under the Deeds of Settlement (T429).
The Commonwealth accepted that the ATO had actual knowledge of everything contained in the Chameleon Judgment when it was delivered on 20 October 2010 (T441–442).
The Commonwealth no longer relied on the defence of laches.
In light of the above, the Commonwealth expressed the principal issues to be resolved with respect to Chameleon’s claim in the following way:
Did the Chameleon Judgment and the Chameleon Final Orders (properly interpreted) impose on Mr Grimaldi a fiduciary duty (the Duty) with respect to the proceeds of sale of both the Spotter’s Fee Securities and any profit made in respect of the Existing Shareholding or merely order him to pay Chameleon an amount of money to be determined after inquiry?
If the Duty was imposed with respect to the property, did the Commonwealth have “knowledge” after it became aware of the Chameleon Judgment, and with or before receipt of any funds, that Mr Grimaldi owed the Duty and breached it in paying the NSW Treasury?
As to the receipt of funds by the NSW Treasury, was NSW a bona fide purchaser for value without notice of the $12.5 million received on 19 October 2010 (before the Chameleon Judgment) and of the subsequent payments (after the Chameleon Judgment)?
Were the payments of $855,000 and $850,000 to clear the Commonwealth’s indefeasible mortgages on the Grimaldi-family properties traceable proceeds of Murchison securities?
The primary issues for determination are as follows:
Did the ATO receive “trust property” in the form of the Admitted Receipts for the purposes of the application of the first limb of “knowing receipt” under Barnes v Addy?
If so, did the ATO have the requisite knowledge when it received the “trust property” so that it is personally liable as knowing recipients under the first limb of Barnes v Addy?
Was NSW a bona fide purchaser for value without notice of each of the Admitted Receipts?
Is Chameleon able to trace the proceeds of the Spotter’s Fee Securities into the payments of $855,000 and $850,000 as part of the Admitted Receipts to discharge mortgages held by the Commonwealth over properties owned by members of Mr Grimaldi’s family?
Chameleon’s submissions on what I will refer to as the “trust property” issue are detailed and complex, running to many hundreds of paragraphs. Those submissions seek to establish the applicable principles for a knowing receipt claim under the first limb of Barnes v Addy as they have developed under Australian law and provide Chameleon’s reply to the submissions made by the Commonwealth as to why Chameleon’s claim fails on that issue. I have set out Chameleon’s summary of its principal submissions below and then dealt with the detail of those submissions in my consideration of the relevant legal principles and my determination on the respective arguments of Chameleon and the Commonwealth.
Chameleon’s overall position is that the Spotter’s Fee Securities, and the profits from the sale of both the Spotter’s Fee Securities and the Existing Shareholding, were “trust property” in the hands of Mr Grimaldi or his nominees within the meaning of the first limb of Barnes v Addy. Chameleon says that the following three well established principles support this conclusion:
A fiduciary must account for any unauthorised profit earned by reason or use of the fiduciary’s position. To the extent any such profit is specifically identifiable property, the fiduciary is accountable for that property and any traceable proceeds and subject to an obligation to hold that property or its traceable proceeds for the benefit of the principal and ultimately give it up to the principal.
The duty to account for profits when referable to identifiable property is a fiduciary obligation with respect to property akin to a trust relationship or other custodial fiduciary relationship falling within the meaning of “trust property” for the purposes of the first limb of Barnes v Addy.
The fiduciary’s duty or obligation to account extends to any company that is the nominee or alter ego of the fiduciary so that the nominee company owes the same custodial fiduciary duty or obligation to account to and hold the property for the benefit of the principal.
Chameleon says that the profit gained or earned by a defaulting fiduciary or its nominee by reason or use of their position is “trust property” for the purposes of a claim under the first limb of Barnes v Addy against a knowing recipient, which is supported by the application of basic equitable principles as well as the decisions of the Court of Appeal in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 and the Full Court of the Federal Court in Grimaldi No 2*.*
According to Chameleon, despite the differing ways in which the courts have applied “labels” to describe the fiduciary’s duty to account for profits as a personal remedy (such as requiring the fiduciary to pay a sum of money to the principal representing the value of that profit), a proprietary remedy (such as requiring the fiduciary to transfer an item of property to the principal representing the profit or its traceable proceeds or declaring that property to be held on constructive trust), or a combination of both, the same core principle has been applied: the defaulting fiduciary who obtains an unauthorised profit in the form of identifiable property has a duty to hold that property or its traceable proceeds for the benefit of the principal, which may be enforced by personal or proprietary remedies, or a combination of both.
The Commonwealth submits that the Chameleon Final Orders, properly interpreted, did not impose on Mr Grimaldi a fiduciary duty with respect to any property, including the proceeds of sale of both the Spotter’s Fee Securities and the Existing Shareholding. I have summarised the basis for this submission and then dealt with the detail of those submissions in my consideration of the relevant legal principles and my determination on the respective arguments of Chameleon and the Commonwealth.
The principal submissions made by the Commonwealth in support of this argument are summarised as follows:
The court must have regard to the Chameleon Judgment and the Chameleon Final Orders to determine what liability Mr Grimaldi had as a “constructive trustee”. By doing so, the following propositions emerge:
(a) The liability of a constructive trustee in a case such as Mr Grimaldi’s is that he is amenable to equitable relief for an equitable wrong and the relief imposed by way of remedial constructive trust aligns the remedy with the liability of the wrongdoer who is amenable to such relief. (b) Consistent with (a), and with Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10, Gleeson CJ, McHugh, Gummow and Callinan JJ at [2]–[5] and [10], Jacobson J in the Chameleon Judgment identified the necessary relief, found Mr Grimaldi liable to account as a constructive trustee and fashioned orders to remedy the wrong giving rise to the liability (especially at [930]–[934], [982] and [1109]–[1111]). This aligned the remedy and the liability. The finding in Grimaldi No 2 as to the liability of Mr Grimaldi (especially at [618]) confirms that liability and relief mirror. (c) As the Commonwealth’s knowledge of Mr Grimaldi’s liability is based on the outcome of the proceedings (the Chameleon Judgment and the Chameleon Final Orders (FACLS at [4] and [51]–[53])) any receipt by the Commonwealth must be determined by reference to an objective understanding of the liability as found in the Chameleon Judgment and the consequential relief giving effect to it. (d) The merger of the rights and liabilities of the parties into the Chameleon Final Orders left Chameleon with nothing more than a personal right to the payment of a sum, there being no other rights in respect of property of Mr Grimaldi or his property to sue on, applying Tomlinson v Ramsey Food Processing Pty Limited (2015) 256 CLR 507; [2015] HCA 28, French CJ, Bell, Gageler and Keane JJ at [20]. The real issue remains the legal consequences of an order to account, including the legal character of the profits the subject of the account, and whether they (as a matter of law) were “trust property” within the meaning of Barnes v Addy, either as conventional trust property or because they were held or controlled by Mr Grimaldi subject to a fiduciary obligation to Chameleon. (e) If Chameleon strays beyond the question of interpretation of the effect of the Chameleon Judgment on the liability of Mr Grimaldi (which it does not seem to be doing), it may well be pursuing a remedy against the Commonwealth in abuse of process.
(a) seeks to establish a jurisprudential milieu largely detached from the actual reasons and findings on both liability and relief by Jacobson J in the Chameleon Judgment; (b) fails to identify a single authority in support of the critical position that a duty to account for property (even in an “identifiable” form) means that such a duty is a fiduciary duty with respect to property in the first limb of Barnes v Addy sense — let alone that a duty to account for the proceeds of such property, in the form of an account of profits, meets that description; (c) invents a test that property in respect of which a duty to account arises is “trust property” if there is a “sufficient connection between that property and misuse of position”, based upon an out-of-context selection of words from a single sentence in the judgment of the Court of Appeal in United States Surgical Corporation — and without at all seeking to engage with the analysis of the authorities undertaken by the Commonwealth; (d) concedes that it does not have (or does not seek to rely upon) an equitable proprietary interest in any property and instead invites the court to modify the first limb of Barnes v Addy in the same way that the High Court rejected as a “radical change” in the law in Farah Constructions; and (e) in many instances, Chameleon either ignores or misstates what is said in the authorities or by the Commonwealth in its submissions.
(a) Mr Grimaldi was amenable to being called to account “as a constructive trustee”, which is merely a formula for equitable relief. (b) Orders 12 and 15 of the Chameleon Final Orders required Mr Grimaldi to account for profits. Such liability is personal, not proprietary. (c) “Trust property” within the first limb of Barnes v Addy requires either a trust in favour of Chameleon or property of Chameleon controlled and managed by a person who has become by agreement or conduct a fiduciary. (d) Chameleon unwittingly proposes a radical change to the law. It is running a preference action under the guise of a knowing receipt claim.
To give context to the point of principle contended for by Chameleon in these proceedings, it is necessary to briefly examine the duties imposed on fiduciaries, the fiduciary’s liability to account for unauthorised profits and the nature of that remedy.
The modern expression in Australian law of the duty of loyalty owed by a fiduciary to the principal involving two overlapping proscriptive obligations and the equitable remedies which flow from their breach are helpfully encapsulated in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 by Gageler J at [67]–[69] as follows (footnotes omitted):
[67] The fiduciary duty that an employee has to an employer within the scope of the relationship of employment, no less than the fiduciary duty that any other person in a fiduciary position has to any other person to whom the fiduciary duty is owed within the scope of the venture or undertaking in respect of which the person in the fiduciary position has undertaken or assumed a responsibility to act in the exclusive interests of that other person, is a duty of “absolute and disinterested loyalty”. That duty of loyalty is imposed in equity by means of two overlapping “proscriptive obligations”. Each proscriptive obligation, or “theme”, is “descriptive of circumstances in which equity will regard conduct of a particular kind as unconscionable and consequently attracting equitable remedies”.
[68] “The first”, often referred to as the “conflict rule”, “is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest”. The unconscionability which attracts equitable remedies in circumstances where the conflict rule alone is invoked lies not so much in receipt by the fiduciary of the benefit or gain (over which the fiduciary need not have control) as in retention by the fiduciary of the benefit or gain which in conscience ought to be disgorged to the principal.
[69] “The second”, often referred to as the “profit rule”, “is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of [the] fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing [the fiduciary’s] position for [the fiduciary’s] personal advantage.” The unconscionability which attracts equitable remedies in such circumstances lies in pursuit by the fiduciary of self-interest, or, more precisely, in pursuit of an interest other than the exclusive interest of the principal.
[74] Those circumstances were sufficient to render Foresters, no less than Mr Woff, Mr Corby and FPA, liable as a “constructive trustee”. Traditionally, that label has been ascribed both to a fiduciary in breach of a proscriptive obligation and to a knowing participant in a dishonest and fraudulent breach of a proscriptive obligation imposed on a fiduciary. The label was long ago explained to serve no purpose other than to indicate amenability to the range of remedies traditionally available in equity against a trustee who is in breach of a similar proscriptive obligation. The remedies available against each, at the option of the person to whom the proscriptive obligation is owed by the fiduciary, centrally include an order for equitable compensation and an order to account. Ordinarily, declaration of a constructive trust is warranted only if other equitable orders are not capable of doing complete justice in the circumstances of the case.
[75] The equitable remedy of account is a personal order. The order operates to require that a defendant pay to a plaintiff the monetary value of a benefit or gain to the defendant. Although commonly referred to as an “account of profits”, there is no reason why a benefit or gain to be made the subject of an account must answer the description of a “profit” in conventional accounting terms. Nor is there any reason why that benefit or gain must answer the description of “property” or must have sufficient certainty as to be capable of forming the subject matter of a trust. The benefit or gain can be expectant or contingent. Indeed, it is commonplace that a benefit or gain the subject of an account might encompass an ongoing business. And it is commonplace that the benefit or gain to be made the subject of an order to account might extend to the whole of the ongoing business or be limited to a part of the business identified by reference to both a specified scope of commercial activities and a specified period of commercial activities which need not be confined to a past period but may be a period which extends into the future.
Chameleon submitted that it is important to trace in a detailed way the historical derivations of these principles regarding fiduciary duties and the remedies which flow from their breach. As I have mentioned, the Commonwealth submitted that this historical excursion is unwarranted.
In light of the fact that it is agreed by Chameleon and the Commonwealth that the profits which were obtained by Mr Grimaldi were in breach of the fiduciary duty he owed to Chameleon and this was decided to be so in both the Chameleon Judgment and Grimaldi No 2, I consider that it is only necessary for me summarise these principles.
Since the early 20th century, the High Court has repeatedly held (for example, Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3, Rich, Dixon and Evatt JJ at 592; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8, Gibbs J at 394; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64, Mason J at 107; Chan v Zacharia, Deane J at 198–199; Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18, Mason CJ, Brennan, Deane, Dawson and Gaudron JJ at 557; Breen v Williams (1996) 186 CLR 71; [1996] HCA 57, Gaudron and McHugh JJ at 108; Ancient Order of Foresters, Gageler J at [67]–[69]) that a fiduciary will be liable to account for a profit, gain or benefit if it was obtained:
in circumstances where there was a conflict or possible conflict between the fiduciary duty and a personal interest; or
by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which the fiduciary derived in consequence of the occupation of the fiduciary position.
The profit, benefit or gain so held by the defaulting fiduciary has been variously described as:
“belonging in equity” to the principal (Furs v Tomkies, Rich, Dixon and Evatt JJ at 592);
“held by him in trust for his cestui que trust” (Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342; [1958] HCA 33, Dixon CJ, McTiernan and Fullagar JJ at 350);
“held by the fiduciary as constructive trustee” (Chan v Zacharia, Deane at 198);
In this country, fiduciary obligations arise because a person has come under an obligation to act in another’s interests. As a result, equity imposes on the fiduciary proscriptive obligations — not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the Fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed. …
To resolve the conflicting positions between the parties on the issue of “trust property” it is necessary for me to analyse the legal principles in relation to knowing receipt as they have been developed in the authorities since Barnes v Addy.
In addressing the issue of “trust property”, I will first consider the nature of the liability of a knowing recipient, the meaning of the liability to account “as a constructive trustee” and the state of the authorities on bringing a claim of knowing receipt against a non-trustee fiduciary.
Once I have done so, I will then address the ambit of “trust property” and the purported requirement that the transfer of “trust property” to the knowing recipient itself must be in breach of trust or fiduciary duty.
Now in this case we have to deal with certain persons who are trustees, and with certain other persons who are not trustees. That is a distinction to be borne in mind throughout the case. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
The emphasised sentence is that which gave rise to the so-called two “limbs” of “Barnes v Addy liability” with the first being “knowing receipt”, where third parties “receive and become chargeable with some part of the trust property”, and the second being “knowing assistance”, where third parties “assist with knowledge in a dishonest and fraudulent design on the part of the trustees”: Farah Constructions, at [111]–[112].
The introductory sentences speak of the conferral upon a trustee of “legal power and control over the trust property” which impose in equity corresponding personal responsibilities. It is the extension of those personal responsibilities to third parties in their dealings with trustees with which Lord Selborne LC was concerned.
The issue in Barnes v Addy was whether two solicitors who acted in the appointment of a new trustee of conventional trust funds could be liable for that trustee's misappropriation of those trust funds. The solicitors had no knowledge of, or reason to suspect, a dishonest purpose in the transaction and no funds passed through their hands. The claim against them failed and the appeal was quickly dispensed with.
Under each limb, Barnes v Addy provides a means by which a third party who never assumed and never intended to be a trustee may be “treated as accountable in equity as a constructive trustee”: Hasler, Leeming JA (with whom Barrett and Gleeson JJA agreed) at [72]. The central concept of being “accountable in equity as a constructive trustee” is dealt with in more detail below.
The origin and utility of the labels “knowing receipt” and “knowing assistance” were explored by the High Court in Farah Constructions, at [112] as follows (footnotes omitted):
It has become common to describe the first limb as involving “knowing receipt” and the second limb as involving “knowing assistance”. Lord Selborne LC did not use the expression “knowing receipt”. It seems to have been employed first in 1966 by the editors of Snell's Principles of Equity. Even then, it was only introduced by inserting under the pre-existing heading “Receipt of Trust Property by Stranger to Trust” a new sub-heading “Knowing Receipt or Dealing”. However, in 1972 Brightman J adopted the expression in Karak Rubber Co Ltd v Burden (No 2). He said that the labels “knowing receipt or dealing” and “knowing assistance” employed by Snell were “an admirable shorthand description of their different natures”. Those labels have been commonly used since then. In contrast, Lord Selborne LC's expression was “receive and become chargeable”. Persons who receive trust property become chargeable if it is established that they received it with notice of the trust.
Lord Selborne LC’s ex tempore expression of this form of liability, delivered some 150 years ago and without reference to authority, has since become a canonical statement of equitable principle, with Barnes v Addy repeatedly considered and applied in Australia on countless notable occasions since: see, for example, Consul Development; Farah Constructions; Ancient Order of Foresters; Kalls Enterprises Pty Ltd (in liq*) v* Baloglow (2007) 63 ACSR 557; [2007] NSWCA 191; Simmons; Scrivener v Cappello [2021] NSWCA 330; Blue Mirror Pty Ltd v Tan & Tan Australia Pty Ltd (in liq*)* [2024] NSWCA 253.
The dictum of Lord Selborne LC has also frequently been described as either a “rule of law” or “the rule in Barnes v Addy”. In this regard, one should remain cognisant of the following remarks made in Hasler by Leeming JA at [66]–[68]:
[66] The reason for my reluctance in commencing with Lord Selborne’s language is that difficulty often arises when a court’s decision is used to describe a rule of law. Only rarely is the judgment the origin of the rule, and the content of the rule tends not to be circumscribed by the precise words used by the judge. (One example is the “rule” in Saunders v Vautier (1841) Cr & Ph 240; 41 ER 482, which predated the decisions, and as traditionally formulated failed sufficiently to appreciate the trustee’s right of recoupment or exoneration: see Beck v Henley [2014] NSWCA 201 at [32] and [36].)
[67] The words of a judgment should not be construed as if they were a statute. One aspect (as will be seen, it is not the only aspect) of that familiar warning is that the expression of the rule in the court’s reasons turns on the particular facts before the court in light of the legal landscape at the time. There is a particular danger in the case of what is known as “first limb” and “second limb” Barnes v Addy liability. For, as one academic has recently observed, it is “clear that accessorial liability for breach of trust and fiduciary duty should not be viewed solely through the prism of Barnes v Addy; indeed, to do so is inconsistent with long-standing authority”: P Ridge, “Equitable accessorial liability: Moving beyond Barnes v Addy” (2014) 8(1) Journal of Equity 28 at 33. Lord Nicholls said in Royal Brunei at 386 that this tendency was particularly pronounced in the case of the accessory limb of Barnes v Addy.
[68] In Farah, the High Court emphasised that the formulation by Lord Selborne was not an exhaustive statement of the circumstances in which a person who was not a recipient of trust property and had not acted as a trustee de son tort might be liable: at [161]. It is helpful to bear in mind at the outset other ways in which third parties may become liable following a breach of fiduciary duty, not merely so as to assess the reasoning in Bell, but also so as to understand the limits of the statement of principle by Lord Selborne and the subsequent divergence of Australian and English law.
The latter of Leeming JA’s remarks at [67] were directed to liability beyond that of knowing receipt, but in my review of the authorities and the submissions before me in this matter, I find those remarks to be equally apposite in this context.
From the plethora of formulations to which my attention has been drawn, it is obvious that the expression of any such “rule” within a court's reasons — and of the “rule” of knowing receipt specifically — has and will frequently turn upon the “particular facts before the court in light of the legal landscape at the time”: Hasler, Leeming JA at [67]; see also Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344, Leeming JA (with whom Bell P and Brereton JA agreed) at [156].
Plainly, what is said of liability in knowing receipt in one case may not necessarily translate to the facts of another. For that reason, to select several cases and pick up (or pick apart) statements made by judicial officers divorced from their context in an effort to construct or defeat a claim in knowing receipt may invite error. Additionally, to do so is to further engage in what a former judge of the High Court, William Gummow, writing extra-judicially, has referred to as “an over refinement of verbal analysis” present in much of the contemporary case law concerning the two limbs of Barnes v Addy liability: W Gummow, “Knowing assistance” (2013) 87(5) Australian Law Journal 311.
In Grimaldi No 2, Finn, Stone and Perram JJ said the following at [249] about the “contemporary burden” of the principles enunciated by Lord Selborne LC in Barnes v Addy:
The extent of discord both within and between common law jurisdictions as to what should be taken to be the contemporary burden of the principles enumerated by Lord Selbourne is marked to the point of being Babel-like: for a survey see Ananian-Cooper, “The Liability of Third Parties for Breaches of Trust or Fiduciary Duty: A Comparative Look at Five Themes Across Four Jurisdictions”, in Weaver and Cragie, Banker and Customer, vol 5, 25-1701; and cf Underhill and Hayton, Law of Trusts and Trustees, Ch 24, 18th ed (2010), Waters' Law of Trusts in Canada, 492-500, 3rd ed (2005), Butler (ed), Equity and Trusts in New Zealand, Ch 18, 2nd ed (2009) and Jacobs' Law of Trusts in Australia, [1333] ff, 7th ed (2006). It stands in stark contrast to the apparent simplicity of what was said in Barnes v Addy (at 251-252):
“… strangers are not to be made constructive trustees … unless [they] receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”
Considering these matters, within this judgment I have consciously refrained from contributing to that discord by way of a further context-specific restatement of the constituent “elements” of Barnes v Addy liability. The elements are as stated and as applied in Australian law since. My task sitting at first instance is to apply the law to the facts, not to recast the law in light of them.
Conversely, it is worth noting that to simply recount verbatim the statement of the “rule” as it was before Lord Selborne LC in 1874 dealing with a simple breach of trust case is to ignore the context in which the statement was made, the principled development of the law in the 150 years which have followed and, in some respects, overlooks significant instances where the law in this jurisdiction has subsequently diverged from the law as it stands in England.
There are two notable instances of the divergence of Australian law from English law on a claim for knowing receipt which are of consequence in this case.
First, the position now taken in England is that a personal claim in knowing receipt cannot succeed absent maintenance by the claimant of a proprietary interest in the subject property. There, it is said that “the extinction or overriding of a proprietary equitable interest by the time when the recipient receives the property defeats a proprietary claim” and “given the close link between the proprietary claim and the personal claim in knowing receipt, it would be logically inconsistent for the law to allow the personal claim in knowing receipt to survive where the proprietary claim has been defeated by the lack of a continuing proprietary equitable interest”: Byers v Saudi National Bank [2023] UKSC 51; [2024] AC 1191, Lord Hodge DP (with whom Lord Leggatt and Lord Stephens agreed) at [6].
That is not reflective of the position in Australian law. Here, the fact that there is no continuing proprietary claim or interest does not preclude a knowing recipient from being personally liable to account: Blue Mirror, Leeming JA (with whom Ward P and Michelmore JA agreed) at [30], citing McFee v Reilly [2018] NSWCA 322, Leeming JA (with whom McColl JA and Payne JJA agreed) at [108]; Turner*,* White JA (with whom Meagher and McCallum JJA agreed) at [103]; cf Byers.
As I have stated, Australian law recognises the constructive trust arising in this context as being remedial (not institutional) in character. In the case of an unauthorised profit or commercial opportunity obtained in breach of fiduciary duty for which the fiduciary is personally liable to account “as a constructive trustee”, liability in knowing receipt against a third party who received that benefit or opportunity at the direction of the errant fiduciary is not dependent upon some judicially recognised antecedent proprietary interest.
A third party’s personal liability under the first limb of Barnes v Addy should not depend upon the mechanism by which the property was transferred, but rather upon whether the third party received property that was trust property, or was transferred in breach of fiduciary duty, or was traceable to property so transferred, and, if so, whether the third party had the requisite knowledge (not merely constructive notice) of the breach of trust or breach of fiduciary duty so as to warrant the imposition of personal liability arising from the receipt.
It is for this very reason that so many cases brought in knowing receipt — and, to an even greater extent, knowing assistance — focus and turn upon the various form of knowledge on which liability arises, being those summarised in Blue Mirror by Leeming JA at [30]. Under Issue 2 described as “the knowledge” issue below, I have dealt in detail with the legal principles concerning the requisite knowledge for a knowing receipt claim.
To summarise, in my view, considering the application of the principles for a claim in knowing receipt under Australian law, the emphasis on the liability being fault-based and attaching to conscience is absolutely critical. It explains why a third party can be held personally liable as a knowing recipient and reduces the focus on the proprietary remedies to which that personal liability might give rise. It also serves to distinguish a claim in knowing receipt (where knowledge to the requisite degree is established at the time of receipt) from claims based upon the victim’s title to the property (as distinct from claims fixed upon the recipient’s conscience) such as the liability of an innocent volunteer to account for trust property or its traceable proceeds insofar as they remain in their hands: see, for example, Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252, Allsop P (with whom Campbell JA and Handley AJA agreed) at [108] and [154]; Fistar, Leeming JA at [40]–[48]. While they may overlap, these claims are distinct in significant respects and operate independently. As will become evident, both Chameleon and the Commonwealth have made various submissions and arguments which appear to be the product of the erroneous conflation of these distinct claims. Additionally, the Commonwealth’s position on some of the points at issue in these proceedings appears to better reflect the law of England more so than the position under Australian law.
Before descending into my consideration of the authorities concerning the extent of liability for knowing receipt, in light of the arguments raised by the Commonwealth concerning the importance of there being no constructive trust ordered over the profits made by Mr Grimaldi from his breach of fiduciary duty in the Chameleon Final Orders, it is necessary to set out the nature of the “constructive trust” which may arise in this context.
It is important to understand the various senses in which “constructive trust” has been used in the decided cases. This is because I am of the view that it partly informs the answer to a central question posed by the submissions in this case, being the ambit of “trust property” in the context of liability for knowing receipt and, specifically, whether it extends to an unauthorised profit over which a constructive trust (as a proprietary remedy) was never declared. In a similar vein, I consider the many uses of “constructive trust” among the authorities, particularly its use as an inconvenient shorthand for the phrase “liability to account as a constructive trustee”, partly explains the uncertainty surrounding this very issue.
It is clear from the legal principles I have outlined above that a fiduciary who derives a profit in breach of their duty will be liable to account “as a constructive trustee”, but that does not mean that the fiduciary necessarily is or will be declared to be a constructive trustee in the proprietary sense. That is because, since even before Barnes v Addy was decided, that label was understood to describe the amenability to a range of personal and proprietary remedies that might be available against an express trustee: Rolfe v Gregory (1865) 4 De GJ & S 576; (1865) 46 ER 1042, Lord Westbury LC at 579.
But what exactly does it mean for there to be a constructive trust under Australian law? Numerous judges in Australia and England have grappled with this question, seeking to resolve the ambiguity which seemingly arises on the use of the term “constructive trust”, including of the notion of a constructive trust in circumstances of a breach of fiduciary duty and claims under either or both limbs of Barnes v Addy.
As a former judge of the Court of Appeal, JC Campbell, pointed out, writing extra-judicially in “When and why a bribe is held on a constructive trust: The method of reasoning towards an equitable remedy” (2015) 39 Australian Bar Review 320, at 332:
… An obligation to account for a profit or benefit can mean several things — it might refer to being obliged to hand it over in specie, it might refer to being obliged to pay its value, or it might refer to being obliged to include it as an item in an overall taking of accounts. Further, even when a court holds that a person is a constructive trustee, sometimes that means that he or she holds property on trust for another, and sometimes it means nothing more than that he or she has a personal obligation to account that is analogous to the personal obligation of a trustee.
In a broad sense, the constructive trust is both an institution and a remedy of the law of equity. As a remedy, it can only properly be understood in the context of the history and the persisting distinctness of the principles of equity that enlighten and control the common law. The use or trust of equity, like equity itself, was essentially remedial in its origins. In its basic form it was imposed, as a personal obligation attaching to property, to enforce the equitable principle that a legal owner should not be permitted to use his common law rights as owner to abuse or subvert the intention which underlay his acquisition and possession of those rights. This was consistent with the traditional concern of equity with substance rather than form. In time, the relationships in which the trust was recognized and enforced to protect actual or presumed intention became standardized and were accepted into conveyancing practice (particularly in relation to settlements) and property law as the equitable institutions of the express and implied (including resulting) trust. Like express and implied trusts, the constructive trust developed as a remedial relationship superimposed upon common law rights by order of the Chancery Court. It differs from those other forms of trust, however, in that it arises regardless of intention. For that reason, it was not as well suited to development as a conveyancing device or as an instrument of property law. Indeed, whereas the rationale of the institutions of express and implied trust is now usually identified by reference to intention, the rationale of the constructive trust must still be found essentially in its remedial function which it has predominantly retained: cf. Waters, op. cit., pp. 37-39. The constructive trust shares, however, some of the institutionalized features of express and implied trust. It demands the staple ingredients of those trusts: subject-matter, trustee, beneficiary (or, conceivably, purpose), and personal obligation attaching to the property: cf. Sir Frederick Jordan, Chapters on Equity in New South Wales, 6th ed. (1947: Stephen ed.), pp. 17-18. When established or imposed, it is a relationship governed by a coherent body of traditional and statute law. Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.
There is, however, a more limited sense in which there is some superficial plausibility in the notions of “institution” and “remedy” as competing characterizations of the constructive trust. If “institution” is understood as connoting a relationship which arises and exists under the law independently of any order of a court and “remedy” is defined as referring to the actual establishment of a relationship by such an order, the catchwords of “institution” and “remedy” do serve the function of highlighting a conceptual problem that persists about the true nature of a constructive trust. Even in this more limited sense, however, any perceived dichotomy between the two notions tends to prove ephemeral upon closer examination. Equity acts consistently and in accordance with principle. The old maxim that equity regards as done that which ought to be done is as applicable to enforce equitable obligations as it is to create them and, notwithstanding that the constructive trust is remedial in both origin and nature, there does not need to have been a curial declaration or order before equity will recognize the prior existence of a constructive trust: cf. Scott, Law of Trusts, 3rd ed. (1967), vol. V, par. 462.4. Where an equity court would retrospectively impose a constructive trust by way of equitable remedy, its availability as such a remedy provides the basis for, and governs the content of, its existence inter partes independently of any formal order declaring or enforcing it. In this more limited sense, the constructive trust is also properly seen as both “remedy” and “institution”. Indeed, for the student of equity, there can be no true dichotomy between the two notions.
Deane J concluded at 616–617 that “[o]nce its predominantly remedial character is accepted, there is no reason to deny the availability of the constructive trust in any case where some principle of the law of equity calls for the imposition upon the legal owner of property, regardless of actual or presumed agreement or intention, of the obligation to hold or apply the property for the benefit of another”.
To similar effect are the observations in Giumelli by Gleeson CJ, McHugh, Gummow and Callinan JJ at [3]–[4]:
[3] A constructive trust of this nature is a remedial response to the claim to equitable intervention made out by the plaintiff. It obliges the holder of the legal title to surrender the property in question, thereby bringing about a determination of the rights and titles of the parties.
[4] The term “constructive trust” is used in various senses when identifying a remedy provided by a court of equity. The trust institution usually involves both the holding of property by the trustee and a personal liability to account in a suit for breach of trust for the discharge of the trustee's duties. However, some constructive trusts create or recognise no proprietary interest. Rather there is the imposition of a personal liability to account in the same manner as that of an express trustee. An example of a constructive trust in this sense is the imposition of personal liability upon one “who dishonestly procures or assists in a breach of trust or fiduciary obligation” by a trustee or other fiduciary.
In any event, before the court imposes a constructive trust as a remedy, it should first decide whether, having regard to the issues in the litigation, there are other means available to quell the controversy. An equitable remedy which falls short of the imposition of a trust may assist in avoiding a result whereby the plaintiff gains a beneficial proprietary interest which gives an unfair priority over other equally deserving creditors of the defendant. …
[47] In this situation assistance is afforded by a point emphasised by four members of the Court in the joint reasons in Giumelli v Giumelli when considering the constructive trust as a remedial response to a claim to equitable intervention. The point is that the term “constructive trust” may be used not with respect to the creation or recognition of a proprietary interest but to identify the imposition of a personal liability to account upon a defaulting fiduciary.
[48] In Jones v Southall & Bourke Pty Ltd, after reviewing the authorities, Crennan J said that they:
“make plain [that] the term ‘constructive trust’ covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account.”
Earlier in her reasons her Honour had noted that the term “constructive trust” had been applied to include the enforcement of the obligation of a defaulting fiduciary to make restitution by a personal rather than a proprietary remedy.
One point made in the Giumelli v Giumelli line of cases is that care must be taken to avoid granting equitable relief which goes beyond the necessities of the case. Another point in those cases is that third party interests must be borne in mind in deciding whether a constructive trust should be granted. That line of cases does not permit a constructive trust to be declared in a manner injurious to third parties merely because the plaintiff has no other useful remedy against a defendant.
[251] The starting point is the proposition that a third party who acquires legal title to trust property as a purchaser in good faith for value and without notice of any breach of trust or prior equitable interest has a defence in equity to any claim for specific restitution of the property or for compensation for its value to restore the trust property: see generally Ford and Lee, Principles of the Law of Trusts [22.10320]-[22.10340]. Importantly notice here extends beyond actual notice and includes constructive notice in its traditional equitable sense. Such constructive notice will attribute notice of a fact to a person who, while lacking knowledge of it, had knowledge of facts which would put a reasonable person on inquiry. This species of notice is considered below. What requires present note is that a third party who has only this form of notice when receiving trust property in breach of trust cannot avail of the bona fide purchaser defence. In consequence that person will be liable in proprietary, in rem, proceedings to make specific restitution to the “true owner” of such trust property (or its traceable proceeds) as remains in his or her hands. While this type of claim is, potentially, available to be made in Barnes v Addy “knowing receipt” cases, it is a separate and distinct liability. It is, in essence, a claim to priority.
[252] The need to distinguish it from Barnes v Addy liabilities was rightly emphasised by Megarry VC in Re Montagu's Settlement Trusts [1987] 1 Ch 264 at 272-273:
“… the doctrines of purchaser without notice and constructive trusts are concerned with matters which differ in important respects. The former is concerned with the question whether a person takes property subject to or free from some equity. The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a man. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a man's conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.”
[253] This exposes what has long been recognised as the essential characteristic of the Barnes v Addy liabilities: they expose the persons to whom they apply to personal, to in personam, liabilities: see eg Lewin, Law of Trusts, 1026-1029 (9th ed, 1891); Ashburner, Principles of Equity, 187-200 (1901) where the difference between the proprietary and the personal remedy is emphasised; Snell, Principles of Equity, 141-142 (15th ed, 1908); for contemporary views, see eg Ford and Lee, Principles of the Law of Trusts, [22.10440) ff; Jacobs' Law of Trusts in Australia, [1333]-[1334] (7th ed, 2006); and see generally Dietrich and Ridge The Receipt of What?: Questions Concerning Third Party Recipient Liability in Equity and Unjust Enrichment, (2007) 31 Melb UL Rev 47 at 51-55; Harpum, “The Stranger as Constructive Trustee” (1986) 102 LQR 114 at 118 ff. In knowing receipt cases, the recipient can be required to pay compensation for loss arising from the misapplication of the trust property, or to account for gains made from it. These liabilities do not depend upon the third party retaining any part of the property received (or its traceable proceeds) in his or her hands although, if such property is retained, it must be accounted for specifically: see Mitchell and Watterson, “Remedies for Knowing Receipt” in Mitchell (ed), Constructive and Resulting Trusts, 132 ff (2010); see also Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (1999) 96 FCR 217 at [75]-[76]. But in the usual case, as Lewison J observed in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) (Ultraframe (UK)), the personal remedy “is needed precisely where the recipient has not retained the property.”
There is a latent ambiguity in the terminology “constructive trustee”. In its strictest sense it refers to a person who, as a constructive trustee, holds specific property on trust for another. In its more general sense it can refer to a person who, whether or not he or she holds or has received, trust property, has so acted as to be exposed potentially to the same remedial consequences for his or her actions as would be a trustee who had acted similarly, ie that person as “a constructive trustee” may in appropriate circumstances be decreed, for example, to hold specific property as a constructive trustee, to be subject to an account of profits, or to be liable to pay compensation etc: see eg Consul Development, at 396-397. This latter usage is particularly prevalent both in claims against fiduciaries for breach of fiduciary duty or for misuse of fiduciary position and in Barnes v Addy claims where, having been described as being liable as a constructive trustee, personal relief only is awarded.
As already mentioned, in Ancient Order of Foresters, Gageler J at [74] considered the notion of liability of a defaulting fiduciary as a “constructive trustee” to “serve no purpose other than to indicate amenability to the range of remedies traditionally available in equity against a trustee who is in breach of a similar proscriptive obligation” and that the remedies available “centrally include an order for equitable compensation and an order to account” at the option of the principal but that the “declaration of a constructive trust is warranted only if other equitable orders are not capable of doing complete justice in the circumstances of the case”.
It is clear that liability under either limb of Barnes v Addy is a personal liability which exposes the recipient or assistant to both personal and, where appropriate, proprietary consequences: Turner, White JA at [92].
Typically, proprietary remedies will hold the recipient accountable in rem for such of the property received (or its traceable proceeds) as “remains extant in that person’s hands”: Grimaldi No 2, Finn, Stone and Perram JJ at [254].
While proprietary remedies may be available, personal liability in knowing receipt differs materially from liability in proprietary, in rem, proceedings to make specific restitution to the “true owner” of property received either with notice of the claimant’s beneficial interest or as a volunteer: Grimaldi No 2, Finn Stone and Perram JJ at [251]–[252].
In other words, liability in knowing receipt is a personal liability and is not solely directed to the recovery of property remaining in the hands of a third party to which a defence of being a bona fide purchaser for notice may arise: GP Building Holdings v Voitin (2022) 69 VR 299; [2022] VSCA 210, Niall, Sifris and Walker JJA at [10].
As mentioned above, where a proprietary claim is not available, the recipient may nevertheless be liable personally to account to the person to whom the duty was owed: Grimaldi No 2, Finn, Stone and Perram JJ at [253]; Blue Mirror, Leeming JA at [30]–[33].
In Hasler, Leeming JA at [69]–[70] highlighted the different uses of “constructive trustee”, particularly those used in the English authorities, in the following terms:
[69] A non-trustee may be liable as a trustee de son tort if he, she or it presumes to act as a trustee although not so appointed, and then, say, commits a breach of trust or makes a profit from the position: see Williams v Central Bank of Nigeria [2014] UKSC 10; [2014] 2 All ER 489 at [54] and Parkview Qld Pty Ltd v Commonwealth Bank of Australia [2013] NSWCA 422 at [97]-[105] and [128]-[130]. That is quite different from the liability to account as a constructive trustee which may follow from either limb of Barnes v Addy. This was pointed out very clearly by Millett LJ in Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 at 408-409 and (as Lord Millett) in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at [140]-[143]. Although the same expressions “constructive trust” and “constructive trustee” are used, the two situations are “entirely different”: Dubai at [140]. A person liable pursuant to either limb of Barnes v Addy is:
“not in fact a trustee at all, even though he may be liable to account as if he were. He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property. If he receives the trust property at all he receives it adversely to the claimant and by an unlawful transaction which is impugned by the claimant”: at [141].
[70] Most recently, this entirely different use of the term “constructive trustee” has been echoed by Lord Sumption JSC in Williams v Central Bank of Nigeria [2014] UKSC 10; [2014] 2 All ER 489 at [9]:
“In its second meaning, the phrase 'constructive trustee' refers to something else. It comprises persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by the trustee, or they have received trust assets knowing that the transfer to them was a breach of trust. In either case, they may be required by equity to account as if they were trustees or fiduciaries, although they are not. These can conveniently be called cases of ancillary liability.”
Lord Neuberger PSC made the same point at [64].
[105] A person who is liable under the first limb of Barnes v Addy is liable to account to the person to whom the fiduciary duty was owed for the property transferred in breach of duty. The liability to account is as a constructive trustee. In Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 it was emphasised “what has long been recognised as the essential characteristic of the Barnes v Addy liabilities: they expose the persons to whom they apply to personal, to in personam, liabilities”: at [253]. Finn, Stone and Perram JJ went on to say (at [253]):
In knowing receipt cases, the recipient can be required to pay compensation for loss arising from the misapplication of the trust property, or to account for gains made from it. These liabilities do not depend upon the third party retaining any part of the property received (or its traceable proceeds) in his or her hands although, if such property is retained, it must be accounted for specifically.
[106] In concluding that the same test of knowledge should apply to both “limbs” of Barnes v Addy liability, the Full Court said at [267] that:
We do not consider that a property protection rationale for recipient liability (beyond a proprietary claim to a subsisting equitable interest in property, or its proceeds, in the third party’s hands) of itself provides a sufficient justification for imposing a personal liability to account. That liability arises as a matter of conscience not of property. As with assistance liability, recipient liability should be seen as fault based and as making the same knowledge/notice demands as in assistance cases. (emphasis in original)
[107] Liability to account as a constructive trustee extends also to cases where a third party has assisted in a fraudulent and dishonest breach of trust, even though the third party has received no trust property: see Hasler v Singtel Optus Pty Ltd; Curtis v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266 at [69]–[80] .
[108] The personal liability to account to the person to whom a fiduciary obligation was owed exists even if the property has ceased to exist, or has been transferred to a third party, or (as in the present case) is incapable of being held on constructive trust by dint of statute. Thus, although statute prevents a court ordering that the sisters hold Boronga as constructive trustees, they are still liable to account to the estate for the value of the property. I did not understand their counsel to submit to the contrary.
[76] The amenability of a knowing participant in a dishonest and fraudulent breach of fiduciary duty to a personal order to account for the monetary value of a benefit or gain has sometimes been described as an “accessorial” liability. The description is useful in a case such as the present in highlighting that it is the dishonest and fraudulent breach of fiduciary duty which gives the character of unconscionability to the knowing participation and which exposes the knowing participant to equitable remedies. The description would have the potential to mislead were it to be taken further:
“The reference to the liability of a knowing assistant as an ‘accessorial’ liability does no more than recognise that the assistant's liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another. It follows … that the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ.”
Any suggestion that there must be some coincidence or contingency in the remedy awarded against an errant fiduciary and a knowing recipient cannot be good as a matter of law. Applying common sense, the utility of proprietary remedies against a fiduciary who has passed trust property to a recipient is doubtful. So too is the suggestion that the availability of such a remedy against a recipient is somehow contingent on the same remedy having been awarded against the errant fiduciary.
It is clear from the authorities that the liability of a knowing recipient to account “as a constructive trustee” is simply a formulation of liability and is distinct from the constructive trust as a remedy; it is a label which indicates amenability to the “range of remedies traditionally available in equity against a trustee who is in breach of a similar proscriptive obligation”. That range of remedies may, or may not, include a declaration of a constructive trust in respect of specific property — in either case the label is apt: Ancient Order of Foresters, Gageler J at [74].
In cases of this kind, the “constructive trust” is adopted as a “vehicle to secure personal accountability” and this constructive trusteeship will not always generate a proprietary consequence: G E Dal Pont, Equity and Trusts in Australia (8th ed, 2023, Thomson Reuters) at 1160–1161 [38.100].
In other words, the knowing recipient is not a trustee (unless declared otherwise) but must account “as if they were one”: Hasler, Leeming JA at [69]–[70]; Break Fast Investments, Kyrou, McLeish and Walker JJA at [112].
It is worth noting that the position under English law is quite different, with an institutional constructive trust arising when a fiduciary acts in breach of their fiduciary duty and gains an unauthorised profit: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, Lord Browne-Wilkinson at 714–715; Hotel Portfolio II UK Ltd (in liq*) v Stevens* [2025] UKSC 28; [2025] 3 WLR 293, Lord Burrows at [121]–[123]. In English law, profits made by a fiduciary “from the fiduciary relationship are treated by equity as held upon constructive trust for the principal from the moment of their receipt by the fiduciary”: Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2025] 2 WLR 529, Lord Briggs (with whom Lord Reed, Lord Hodge and Lord Richards agreed) at [2].
Under English law, the fiduciary must account for unauthorised profits, which means “not merely revealing their existence, but paying them to the principal, or otherwise treating them as the principal’s property”: Recovery Partners, at [2]. So understood, the constructive trust arising over a fiduciary’s unauthorised profits is an institutional constructive trust, the recognition of which “involves no exercise of discretion by the court”: , at [23]. The “fiduciary duty to account for profits is a rule governing the conduct of fiduciaries which exists in its own right” which is “imposed by equity on all fiduciaries” and “does not depend upon a demand for an account by the principal, or upon an order of the court”: , at [20]. Importantly, the “fiduciary duty to account is not just a remedy. The duty arises at the moment when the profit is received and, in terms of timing, marches hand in hand with the constructive trust which obliges the fiduciary to treat the profit as belonging to his principal”: , at [22]. The fiduciary’s obligation to account for profits is a self-standing “duty arising on the receipt of the profits, rather than just a remedy for breach of fiduciary duty”: , at [25].
In recent times it has been assumed, but rarely if at all decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary. Since the appellants did not contend that the first limb was incapable of applying on the ground that neither Farah nor Mr Elias was a trustee, the correctness of this assumption need not be examined.
For example, in DPC Estates Pty Ltd v Grey and Consul Development Pty Ltd [1974] 1 NSWLR 443 at 459-460, Jacobs P assumed that if property were received by a stranger from a fiduciary in breach of fiduciary duty, the first limb applied. See also El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 700 per Hoffmann LJ.
Relevantly, the High Court’s remarks in Farah Constructions at [113] were made in the course of allowing the appeal from the decision of the Court of Appeal which found third parties liable on both a knowing recipient and restitutionary basis: Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309.
Broadly speaking, in Farah Constructions it was alleged that third parties had received information in breach of a joint venturer’s fiduciary duty and had derived some benefit from that information. The High Court rejected the Court of Appeal’s conclusion on knowing receipt for two reasons. Firstly, there was no relevant “receipt of property to which a fiduciary obligation attached” (Farah Constructions, at [115]–[117]). Secondly, in any event, neither of the third parties had the requisite knowledge to sustain a claim in knowing receipt against them.
The High Court in Farah Constructions resoundingly rejected the separate restitutionary ground as an independent basis for the decision in circumstances where such a ground was not pleaded. The High Court considered this approach was either the effective abandonment of the knowledge requirement for knowing recipient liability contrary to established authority and the seriously considered dicta of that court in Consul Development, or it was the recognition of a new and additional avenue of relief which tends to render knowing recipient liability under Barnes v Addy otiose and was not an appropriate step for an intermediate appellate court to take (Farah Constructions, at [134]).
This is a convenient point for me to observe that the comments in Farah Constructions concerning a “radical change” in the law (on which the Commonwealth relies to describe Chameleon’s arguments) were made in an entirely different context in circumstances where there was no property, and so no property to which fiduciary obligation attached, and the High Court was invited by the respondent to accept the receipt of a “benefit” in lieu of property as a basis for liability in knowing receipt. The High Court rejected that proposed “radical change” in the law and confirmed that liability in knowing receipt is confined to benefits of a proprietary character: Farah Constructions, at [117]–[118], as discussed in Bell Group No 3, Drummond AJA at [2152]–[2155].
For present purposes, what emerges from the High Court’s consideration of this issue in Farah Constructions is that knowledge is central to liability under knowing receipt. Liability for knowing receipt is fault-based and it is wrong as a matter of principle to consider it as being some “species of unjust enrichment” or “restitution-based” as a means of explaining why the element of dishonesty element found in the second limb is not equally applicable to the first limb (, at [148]). Put simply, it is and always has been the knowledge of the nature or origins of the property received which binds the recipient’s conscience in an action for knowing receipt.
As to third parties, characterising a relationship as “fiduciary” has implications for personal remedies available against those who receive property which was the subject of the fiduciary obligation or who assist in a breach of fiduciary duty. The “rule” stated in Barnes v Addy is that agents who are not trustees or fiduciaries are not personally liable in respect of transactions on which equitable relief would be granted “unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees”. The first part of that sentence (“the first limb”) is commonly referred to as “knowing receipt” and the second part (“the second limb”) as “knowing assistance”. As to the first limb, it has been assumed that “knowing receipt” involves not just trust property, but also property which was subject to a fiduciary obligation*.* In Australia, the second limb involves a defendant being liable for assisting a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary.
While their Honours simply noted the assumption without more, it is difficult to construe the introductory sentence to that paragraph as anything other than apparent approval of the proposition (noting their Honours’ dissenting conclusion appeared also to proceed on that very footing, but the issue was not expressly decided).
In Jaken, the principal issue that divided both the Court of Appeal and the High Court was whether a successor trustee owes a fiduciary duty to the former trustee not to deal with trust assets so as to destroy, diminish or jeopardise the former trustee’s entitlement to be indemnified or exonerated out of those very assets: Jaken Properties Australia Pty Ltd v Naaman [2023] NSWCA 214 (Jaken Court of Appeal decision).
In essence, the majority of the Court of Appeal (Leeming JA with whom Kirk JA agreed, Bell CJ dissenting) in the Jaken Court of Appeal decision held that a successor trustee is subject to a “duty” enforceable in equity by the former trustee of the kind contended, but that duty was not fiduciary in character. Leeming JA considered that a former trustee can prevent their successor in dealing with trust assets in ways which would destroy, diminish or jeopardise the former trustee's entitlement to be indemnified from those assets, and that this is a simple consequence of the nature of the former trustee’s entitlement to indemnity having proprietary aspects which survive their removal (at [37]). In this way, the former trustee’s right may be expressed as casting a correlative “duty” on their successor not to deal with trust assets in that manner (at [37]). However, mere recognition of the equitable proprietary rights enjoyed by the former in property held by the latter does not entail a personal relationship of trust and confidence to which Barnes v Addy liability attaches (at [38]). A majority of the High Court substantially agreed and the appeal to that court was dismissed: Jaken, Gageler CJ, Gleeson, Jagot and Beech-Jones JJ at [6], [12], [49] and [50].
Relevantly for present purposes, the entire premise of the Jaken litigation was that if the contended duty was owed and it was fiduciary in character (being a proscriptive duty not to deal with trust assets in the impugned manner), third parties who knowingly receive or participate in a breach of that duty could be held liable “under either or both limbs of Barnes v Addy” engaging both "personal and proprietary responses": Jaken Court of Appeal decision, Leeming JA at [35], [37] and [127].
This is significant in circumstances where, while it was argued in Jaken that the relationship between a former trustee and their successor itself answered the description of beneficiary and trustee respectively, even the dissenting reasons in both the Court of Appeal and the High Court do not appear to ground the purported fiduciary duty as falling squarely within that status-based paradigm: , Bell CJ at [19]–[24]; , Gordon, Edelman and Steward JJ at [88]–[89] and [92]–[96].
(1) the existence of a trust, or a fiduciary duty, with respect to property (trust property);
(2) the misapplication of trust property by the trustee or fiduciary;
(3) the receipt of trust property by the third party;
(4) knowledge by the third party, at the time he or she received the relevant property, that it was trust property and that it was being misapplied or, in the case of breach by a fiduciary, that the trust property was transferred pursuant to a breach of fiduciary duty.
These decisions also necessarily extend the concept of “trust property” in the strict sense to include, at least, property held or controlled subject to a fiduciary obligation or, to use the phrasing adopted by the High Court in Farah Constructions at [116], “property to which a fiduciary obligation attached”. By way of a non-exhaustive list, these authorities include (in chronological order):
Farrow Finance Co Ltd (in liq*) v Farrow properties Pty Ltd (in* liq*)* [1999] 1 VR 584, Hansen J at [181].
Kalls Enterprises, Giles JA at [159].
Super 1000 v Pacific General Securities [2008] NSWSC 1222, White J at [204].
Grimaldi No 2, Finn, Stone and Perram JJ at [254].
Simmons, Gleeson JA at [87]-[88].
Hasler, Leeming JA at [73].
Australasian Annuities Pty Ltd (in liq*) v Rowley Super Fund Pty Ltd* (2015) 318 ALR 302; [2015] VSCA 9, Warren CJ at [32] (dissenting in the result), Garde AJA (with whom Neave JA relevantly agreed at [136]) at [279]–[281].
Gordon v Leon Plant Hire Pty Ltd (in liq*)* [2015] NSWSC 397, Black J at [61].
McFee, Leeming JA at [105].
Chickabo, Sifris J at [199].
Turner, White JA at [92]–[95].
K & A Laird (NSW) Pty Ltd (in liq*) v* Aidzan Pty Ltd (in liq*)* [2023] NSWSC 603, Black J at [114] and [117].
Blue Mirror, Leeming JA at [155].
I recognise that courts have occasionally noted the absence of submissions to the contrary when proceeding on the basis that knowing receipt liability extends beyond “trust property” in the strict sense and applies to fiduciaries who are not trustees: see, for example, McFee, at [45] where Leeming JA, citing the High Court’s observation in Farah Constructions, noted the absence of any submission that liability in knowing receipt was confined to trustees. See also Simmons, Gleeson JA at [86]–[92].
As I have mentioned, just as liability under either limb of Barnes v Addy extends to non-trustee fiduciaries, it must therefore necessarily extend beyond “trust property” in the strict sense. Unfortunately, just how far it extends, and the precise basis and scope of the extension, is less clear.
Of course, on the facts of Barnes v Addy, it is not surprising that the language used was necessarily directed — or at least appears to have been directed — to “trustees” and so “trust property” in the strict sense of those terms. However, as has been stated by the Court of Appeal, even that is debatable owing to the state of flux in the law and usage of those terms in the 19th century.
In Pittmore, Leeming JA at [157] observed in relation to liability for procuring or inducing a breach of trust that:
There is much to be said for referring simply to “breach of trust” in this context to embrace all breaches of fiduciary duty, not merely by trustees but also by fiduciaries who are not trustees. That would in fact reflect an older usage, before the narrowing of the term “trust” in the 19th century and the pressing into service of the term “fiduciary” to describe relationships, especially principal and agent and company and director, for which “trust” had ceased to be appropriate: see W Gummow, “Knowing assistance” (2013) 87 Australian Law Journal 311 at 312. While there is always the danger in “trusting to verbal formulae” to which Fletcher Moulton LJ famously adverted in In re Coomber; Coomber v Coomber [1911] 1 Ch 723 at 728, I think there is merit in recognising that simpler language can be used to describe a form of ancillary liability — procuring or inducing a breach of trust or fiduciary duty — which is relevantly identical across the spectrum of persons who are subject to fiduciary obligations.
Whatever its intended meaning when deployed by Lord Selborne LC in 1874, the breadth of “trust property” in knowing receipt has undeniably widened in the many years that have followed.
One of the main areas to which the first limb has been held to extend is where the legal property of a party is under the control and management of a fiduciary; a company director exercising control over company property subject to fiduciary obligations is the paradigmatic (but not the only) example. In cases of this kind, the relevant property was the legal property of the company prior to the relevant breach; it was property over which the directors exercised control and in respect of which the directors owed fiduciary obligations. In a tidy case of knowing receipt in this context, that property is then usually transferred in breach of fiduciary duty to the recipient who accepts the property with requisite knowledge of the breach.
The conceptual difficulty presented by this case is whether “trust property” extends in knowing receipt cases to property which was obtained in breach of fiduciary duty, where such property was not the legal property of the company and which perhaps did not even exist prior to the breach, such as where a director of a company makes an unauthorised profit or obtains a proprietary benefit or gain by diverting a commercial opportunity in breach of either proscriptive obligation.
As I have already outlined above, this profit, benefit or gain by the defaulting fiduciary has been variously described as “belonging in equity” to the principal (Furs v Tomkies, at 592), and as being “held by him in trust for his cestui que trust” (Keith Henry & Co, at 350); “held by the fiduciary as constructive trustee” (Chan v Zacharia, at 198); “held by him as a constructive trustee” (Hospital Products, Mason J at 107–108); subject to the “imposition of a constructive trust” (Warman, Mason CJ, Brennan, Deane, Dawson and Gaudron JJ at 563–564); and in respect of which the fiduciary is “liable as a “constructive trustee”” (Ancient Order of Foresters, Gageler J at [74]). As I have also already concluded, I regard these expressions as meaning no more than that the defaulting fiduciary owes a fiduciary obligation to account for such profits, benefits or gains to the principal.
If property so obtained is then transferred into the hands of a third party recipient with requisite knowledge of the circumstances in which it was obtained, are they liable in knowing receipt?
While the extension of “trust property” in the paradigmatic example provided above is not contentious, consideration of the rationale for the extension of “trust property” within those cases may shed light on the answer to this question.
It has been established beyond doubt by authority binding on this Court that a person occupying a fiduciary relation, who has property deposited with him on the strength of such relation, is to be dealt with as an express, and not merely a constructive, trustee of such property. His possession of such property is never in virtue of any right of his own, but is coloured from the first by the trust and confidence in virtue of which he received it.
Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since joint stock companies were invented directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees, and it has always been held that they are not entitled to the benefit of the old Statute of Limitations because they have committed breaches of trust, and are in respect of such moneys to be treated as trustees. Then, when the Legislature passed an Act of Parliament—the Trustee Act, 1888 (51 & 52 Viet. c. 59)—protecting trustees against actions for breaches of trust, how can it be with any reason said that directors are not to have the benefit of this statute? I cannot go that length. I am satisfied that the statute does apply.
Now, case after case has decided that directors of trading companies are not for all purposes trustees or in the position of trustees, or quasi trustees, or to be treated as trustees in every sense; but if they deal with the funds of a company, although those funds are not absolutely vested in them, but funds which are under their control, and deal with those funds in a manner which is beyond their powers, then as to that dealing they are treated as having committed a breach of trust.
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…[D]irectors … are not trustees at all. They are only trustees qua the particular property which is put into their hands or under their control, and which they have applied in a manner which is beyond the powers of the company. I conceive that qua such fund they are constructive trustees, or trustees by implication of law, and they come exactly within the words of this definition in the Act, and therefore the 8th section of the Act, which applies to all persons who come within this definition of trustees, does apply to exonerate these directors from that misapplication of funds for which otherwise, I assume, they would have been liable.
I cannot understand either of these passages as saying any more than company officers who misapply company property in breach of their fiduciary obligations will be liable to account for that property “as a constructive trustee”.
That liability to account depends upon the scope, rather than the mere existence, of a fiduciary relationship; that is to say, it depends on whether fiduciary obligations are owed in relation to the property: Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400, Millett LJ at 415–416; Sze Tu v Lowe [2014] NSWCA 462, Gleeson JA at [359]–[361]; Twigg v Twigg [2022] NSWCA 68, Brereton JA (with whom Bell P and Payne JA agreed) at [173].
The reasoning in Re Lands Allotment Co was later relied upon by the English Court of Appeal in Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 (Belmont No 2) to sustain a knowing receipt claim in relation to a transaction which involved the plaintiff company giving financial assistance for the purpose of purchasing its own shares. In deciding whether the plaintiff company was entitled to a constructive trust over the funds it had advanced, Buckley LJ (with whom Waller LJ relevantly agreed) at 405 said:
I now come to the constructive trust point. If a stranger to a trust (a) receives and becomes chargeable with some part of the trust fund or (b) assists the trustees of a trust with knowledge of the facts in a dishonest design on the part of the trustees to misapply some part of a trust fund, he is liable as a constructive trustee [citing Barnes v Addy].
A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust [citing Re Lands Allotment Co at 638 per Lindley and Kay LJJ]. So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v Wakefield Waterworks Co where he said:
“In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.”
In the present case, the payment of the £500,000 by Belmont to Mr Grosscurth, being an unlawful contravention of s 54, was a misapplication of Belmont's money and was in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied found their way into the hands of City with City's knowledge of the whole circumstances of the transaction. It must follow, in my opinion, that City is accountable to Belmont as a constructive trustee of the £489,000 under the first of Lord Selborne LC’s two heads.
However, the constructive trustee claim was formulated, both in the finally amended statement of claim and in argument before us, in the two alternative ways stated by Lord Selborne LC in Barnes v Addy, namely, receiving trust funds in such a way as to become accountable for them and knowing participation in a dishonest and fraudulent design on the part of the trustees. The second of those ways does depend on fraud or dishonesty, but the first does not …
…
What Belmont has to show is that the payment of the £500,000 was a misfeasance, which for this purpose is equivalent to breach of trust, that City received all or part of this money, and that it did so knowing, or in circumstances in which it ought to know, that it was a breach of trust. In fact City received £489,000 and that is the basic measure of any liability under this head. It is true that City received this through Grosscurth as a payment for the shares in Belmont, but this was intended by all parties and made pursuant to the agreement of 3rd October 1963. In my judgment, therefore, the money received by City was dearly part of the original £500,000 of Belmont's money.
In Belmont No 2, it was held that, owing to a genuine belief on the part of the directors that the transaction was a good commercial decision, City (the recipient) could not be liable in knowing assistance (as there was no dishonest and fraudulent design to assist with) but could be, and was, liable in knowing receipt. This is because City had received funds in breach of fiduciary duty with knowledge of the breach; money had been misapplied by the directors of Belmont about which City (though its directors) had knowledge and so it was said that City had “received trust funds (i.e. funds belonging to Belmont of which Belmont’s directors were trustees) in such a way as to become accountable for them”.
The approach in Belmont No 2 has been followed in Australia to support the conclusion that the first limb applies to the dealings of company directors with respect to company property: Grimaldi No 2, Finn, Stone and Perram JJ at [275]; Bell Group No 9, Owen J at [4748] and [4765]; Super 1000, White J at [208]; Bell Group No 3, Drummond AJA at [2143]–[2144]; Linter Group Ltd (in liq*) v Goldberg* (1992) 7 ACSR 580, Southwell J at 623–624.
In Kalls Enterprises, Giles JA referred at [153] to the observation of the High Court in Farah Constructions at [113] before stating that a “number of cases have applied the first limb to persons receiving property with knowledge of breach of a director’s fiduciary duty”. His Honour proceeded to refer, at [154]–[156], to the reasoning in each of Belmont No 2 and Re Lands Allotment Co that explained the extension of “trust property” in this context, before stating at [157]–[159]:
[157] Cases in which the first limb of Barnes v Addy has been applied to breach of fiduciary duty by a director include Rolled Steel Products Ltd v British Steel Corporation (1986) 1 Ch 246 (see at 298, 307, 309); Linter Group Ltd v Goldberg (see at 623-6); Farrow Finance Co Ltd (in liquidation) v Farrow Properties Ltd (in liquidation) (1997) 26 ACSR 544 (see at 589-90); Bank of Credit and Commerce International (Overseas) Ltd v Akindele (2001) Ch 437 (see especially at 448-50); and Robins v Incentive Dynamics Pty Ltd (in liquidation) (see at [60]-[64]). In each of these cases except Farrow Finance Co Ltd (in liquidation) v Farrow Properties Ltd (in liquidation) and Bank of Credit and Commerce International (Overseas) Ltd v Akindele there was express adoption of the explanation by Buckley LJ that a director is treated as if trustee of the funds of the company under his control. Bank of Credit and Commerce International (Overseas) Ltd v Akindele took for granted a director’s position, and was primarily concerned with the knowledge required of the recipient. In Robins v Incentive Dynamics Pty Ltd (in liquidation) Mason P, with whom Stein JA agreed and I relevantly agreed, said at [64] that the passages cited from [Belmont No 2]
“… show how the Barnes v Addy principle can be applied to money which is not trust money in the strict sense at the time of its misapplication by directors acting in breach of their duties.”
[158] O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 was not concerned with Barnes v Addy liability, but with a director’s liability to the company for breach of fiduciary duty and particularly with causation of loss to the company. It was held that causation in the claim for equitable compensation should be determined as in the case of the trustee of a traditional trust. Spigelman CJ said at 273 that the authorities established that, with respect to equitably fraudulent misappropriation or misapplication of property, the duties of a director were equivalent to those of a trustee, citing what had been said by Kay LJ in Re Lands Allotment Co at 638. His Honour referred to other cases in which a director had been placed in the same position as a trustee in relation to the property of the company. They included Re International Vending Machines Pty Ltd and Companies Act (1962) NSWR 1408 at 1420, Mulkana Corporation NL (in liquidation) v Bank of New South Wales (1983) 8 ACLR 278 at 279 and [Belmont No 2]. Priestley and Meagher JJA agreed with his Honour’s reasons, each with some additional observations.
[159] In the face of this line of authority, which is not exhaustive and to which regrettably Mr Baloglow did not draw attention, the submission in his supplementary written submissions should not be accepted. The line of authority should be followed until the High Court says otherwise.
[4776] In my view first limb Barnes v Addy jurisprudence can extend beyond trust property in the strict sense and may include property to which a fiduciary duty attaches. Fortunately I do not have to examine in any detail what other ramifications this might have.
[4777] It is not easy to explain with complete precision why this is so. It can be looked at in at least two ways. One way is a direct application of the trustee analogy. As Anderson J described it in Hancock Family Memorial Foundation, the directors of a company should be regarded as holding on trust any property or money of the company under their control. A director who misapplies the money or property of a company by causing the assets to be used for purposes which are not the purposes of the company acts in breach of trust.
[4778] A slightly different approach is to adopt what was said by Mason P in Robins [64], by Spigelman CJ in Robb Evans [160] and by Hoffman LJ in El Anjou (700), all of which are set out above. The focus of attention is on the disposal, or act of transfer, of property to which the fiduciary obligation attaches. This does not necessarily involve the characterisation of the asset (before the disposal or transfer) as trust property. So far as directors are concerned company property is property to which a fiduciary duty attaches. If they dispose of, or transfer, that property to a third party in breach of those obligations it may be “trust property” within the extended understanding of that phrase.
[4779] My preference is for the latter analysis but, in the end, I do not think it affects the outcome. The important consideration is the extent to which the principles in Barnes v Addy are pertinent in relation to corporate activity of the type under scrutiny in this case. I will have a little more to say about the trustee analogy shortly.
In expressing his support for the latter view, Owen J cited the decisions in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 and Evans v European Bank Ltd (2004) 61 NSWLR 75; [2004] NSWCA 82. I will return to each of these decisions below.
In Bell Group No 9, Owen J at [4801]–[4804] went on to briefly consider why a constructive trust on the principles of Barnes v Addy arises in respect of property received by a third party which is not itself trust property (emphasis added in underline):
[4801] This is not an easy area of the law and, in many respects, it remains in a state of flux. A case in which, for example, a director steals money from a company and pays it across to a third party, who receives it with the requisite notice, would raise few problems. The money remains property of the company and is trust property in the hands of the director. But if the misfeasance by the director in dealing with company property under her or his control is no more than a breach of fiduciary duty, the conceptual basis under which that property comes to be regarded as trust property is more difficult to discern.
[4802] One way of looking at it is to say that company property with which a director deals in breach of fiduciary duty is property to which a fiduciary obligation attaches (which is the language used in Farah Constructions [166]). If the third party receives it with the requisite knowledge the conscience of the third party is sufficiently affected to justify the intervention of equity. The previous sentence is a paraphrase of In re Montagu's Settlement, at 285. In those circumstances, equity might be disposed to treat property received under those circumstances either as a species analogous to trust property or as property coming within a broadened understanding of the concept referred to by Lord Selborne. The justification for broadening the concept lies in the more recent authorities that have extended the principle to include some classes of non-trustee fiduciaries. Under this view, it is not necessary to rely on the doctrine of the constructive trust in order to characterise the property transferred away in breach of a fiduciary duty as trust property. This is not to say that, in such cases, the constructive trust is irrelevant. The intervention of the court will still be necessary to seal and fashion the remedy.
[4803] On the other hand, it may be that the phrase “trust property”, when applied to an errant company director, is wide enough to cover dealings with trust property (strictly so-called) and also dealings with property subject to a fiduciary obligation and in respect of which it is likely that a court would eventually decree (and does eventually decree) a constructive trust. If it is other than trust property strictly so-called, avoidance of the transaction will be necessary before the court will make such a declaration. In this way, setting aside the impugned transaction becomes a constituent element of a successful cause of action.
[4804] On either approach, assuming that the plaintiffs establish that in causing the Bell group companies to give the securities the directors breached fiduciary duties, the acceptance by the banks of the securities could constitute receipt of trust property. It follows that I do not accept the banks' broad submission that, as a matter of law, the plaintiffs cannot bring a cause of action based on recipient liability because, on any view of it, there was no receipt of “trust property”. Whether the plaintiffs have made out this and the other elements of the cause of action is, of course, another matter.
It bears noting that in Bell Group No 9, Owen J found that liability for knowing receipt can extend to contractual rights granted in breach of fiduciary duty, including in share mortgages, mortgage debentures, guarantees and indemnities. Those contractual rights did not exist and were not “property of the company” prior to the breach; they were created in breach of fiduciary obligation by virtue of the impugned transactions themselves.
On appeal, in Bell Group No 3, Drummond AJA considered the ambit of “trust property” in knowing receipt by reference to the confines of the decision in Farah Constructions “in its application to persons who receive benefits at a company’s expense as a result of the breach by the company's directors of their fiduciary duties” as being limited to benefits of a “proprietary nature” that is subject to some fiduciary obligation and “capable of being held on trust”: Bell Group No 3, Drummond AJA at [2149]–[2163]. Relevantly, in doing so, his Honour at [2158]–[2159] stated that:
[2158] The rights created and conferred on the banks by execution of the various Transaction instruments constitute choses in action. Each of those instruments, including the Torrens and share mortgages, the mortgage debentures, the guarantees and indemnities and the main refinancing agreements and the subordination deeds, created choses in action when they were executed (or, at the latest, when they came into effect upon satisfaction of relevant conditions precedent). Property for the purposes of the first limb of Barnes v Addy then came into existence.
[2159] Further, all the various interests and rights obtained by the banks under the Transaction instruments, as contractual choses in action, constitute property that are capable of being held in trust, ie, are capable of being subject to the fiduciary obligations of the directors. They therefore satisfy the requirement of “trust property” for the purposes of the first limb of Barnes v Addy.
It is well established that the first limb of the rule in Barnes v Addy extends to property protected by fiduciary or statutory fiduciary obligations such as are presently involved.
Robins was a conflict of interest case. The directors in that matter caused “an improper diversion” of the company's money to gain advantage for themselves as major shareholders of the recipient company. Mason P (with whom Stein and Giles JJA agreed) referred to Belmont No 2, and explained at [64] the passages extracted above as being demonstrative of the fact that liability in knowing receipt can be applied to property which is not "trust property" in the strict sense at the time of its misapplication by directors acting in breach of their duties. The relevant misapplication in Robins was the payment of purchase money for real property bought by the recipient company without any material benefit to the first company. Those payments were held to be in clear breach of fiduciary and statutory duties: Robins, Mason P at [48].
The prevailing view in this jurisdiction appears to be that reflected in the words of Mason P in Robins, at [60] and [64] where his Honour characterised the “extension” of liability in knowing receipt to “property protected by fiduciary or statutory fiduciary obligations” which was not “trust property” in the strict sense at the time of its misapplication. Another way of saying the same thing is “property in respect of which a fiduciary obligation attached” (Farah Constructions, at the heading to [116], as noted in Bell Group No 9, Owen J at [4775]).
This remains the prevailing view among the other authorities, although the phrasing differs from case to case, to encompass the receipt of:
“property held or controlled subject to a fiduciary obligation”: Grimaldi No 2, at [254];
property being dealt with or transferred “in breach of fiduciary duty”: Farrow Finance Co Ltd, Hansen J at [181]; Super 1000, White JA at [203]–[204] and [207]–[208]; Kalls Enterprises, Giles JA at [153]; El Ajou, Hoffmann LJ at 700;
property transferred “in breach of fiduciary obligation”: Evans, Spiegelman CJ at [160];
property “in relation to which fiduciary duties existed”: BCEG International (Australia) Pty Ltd v Xiao (2022) 162 ACSR 601; [2022] NSWSC 972, Rees J at [426];
property which “was the proceeds of a breach of trust or fiduciary duty”: Hoh v Ying Mui Pty Ltd [2019] VSCA 203, Beach, Hargrave JJA and Sifris AJA at [325]; and
“assets which are traceable … to a breach of fiduciary duty”: El Ajou, Hoffmann LJ at 700.
As to whether “trust property” in this extended sense is capable of capturing an unauthorised profit or diverted commercial opportunity obtained in breach of fiduciary duty, I am of the view that it is property which is subject to a fiduciary obligation or to which a fiduciary obligation attaches because it is property which “belongs in equity” to the principal and in respect of which the errant fiduciary is obliged, and will be liable, to account “as a constructive trustee” to their principal. I consider property of this kind is within the ambit of “trust property” in the context of a claim in knowing receipt based on breach of fiduciary duty, as are the traceable proceeds of that property. I have reached this conclusion by reference to the above listed cases generally and from the following cases specifically.
[5] It was recognized that this conduct of Anderson and Toy attracted “the fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict,”: per Lord Upjohn in Phipps v Boardman (11a).
[6] The principle was also recognized that a fiduciary making a profit by use of his fiduciary position is accountable therefor. The relevant principles are comprehensively examined in the judgment of Wootten J in Queensland Mines Ltd v Hudson (12). In this judgment his Honour also reviews all the leading cases in that field, together with academic writings not only from England and Australia, but also from Canada and the United States. It is necessary to add for the purposes of this case, as being in the master and servant context, only a reference to Reading v Attorney-General (13). As well as having the benefit of the judgment of Wootten J I have derived great assistance in this case from the analysis of the principles and authorities contained in the work “Fiduciary Obligations” by P D Finn.
[7] The respect in which differing contentions were submitted as to the law, concerned the nature and extent of relief which may be granted in relation to benefits acquired by a fiduciary in breach of his duty. It was submitted on behalf of the defendants that this relief should be confined to an account of profits, and that benefits diverted by the defendants should not be characterized as trust property for which, together with accretions thereto, the defendants could be liable to account as trustees. I consider that this contention presents too narrow a view of the basis of the equitable principle involved. Thus in Docker v Somes (4b) Lord Brougham said: “Wherever a trustee, or one standing in the relation of a trustee, violates his duty, and deals with the trust estate for his own behoof, the rule is, that he shall account to the cestui que trust for all the gain which he has made. … It is so much fruit, so much increase on the estate or chattel of another, and must follow the ownership of the property and go to the proprietor. So it is also where one not expressly a trustee has bought or trafficked with another's money. The law raises a trust by implication, clothing him, though a stranger, with the fiduciary character, for the purpose of making him accountable. If a person has purchased land in his own name with my money, there is a resulting trust for me; if he has invested my money in any other speculation without my consent, he is held a trustee for my benefit; …”
[8] Likewise in Consul Development Pty Ltd v DPC Estates Pty Ltd (3a) Gibbs J said: “The question whether the remedy which the person to whom the duty is owed may obtain against the person who has violated a duty is proprietary or personal may sometimes be one of some difficulty. In some cases the fiduciary has been declared a trustee of the property which he has gained by his breach; in others he has been called upon to account for his profits and sometimes the distinction between the two remedies has not, it appears, been kept clearly in mind.”
[9] Finally, in Queensland Mines Ltd v Hudson (12a) Wootten J concluded that the “straightforward and, it seems to me, salutary position” was as follows: “The trustee in Keech v Sandford (1726) Sel Cas 25 ER 223 T King 61; was not held liable to the cestui que trust for his profits on a debtor/creditor basis. He was treated as holding the lease he had acquired on trust, and ordered to assign the lease to the cestui que trust as well as to account for the profits already made from it. One would expect that the extension of the Keech v Sandford principle to other fiduciaries would expose them to the same remedy, viz. to be treated as constructive trustees of what they had acquired in breach of their fiduciary obligations. This is exactly what happened in Phipps v Boardman (11b) where persons who were not actual trustees, and had acquired property by investing their own money but at the same time making use of their fiduciary position, were declared constructive trustees of the plaintiff's share of so much of the acquired property as they still held, as well as ordered to account for his share of profits they had made. This was the relief claimed and ordered by Wilberforce J. and its appropriateness does not appear to have been called in question in the Court of Appeal or House of Lords. If this be the correct view a fiduciary is open to the same remedies as an actual trustee, including a declaration of trust, an order to transfer property, an account of profits and an order for payment, or a tracing order, whichever may be the appropriate and useful remedy or remedies as the facts stand at the time of trial.”
[10] Hence, I agree with the view expressed by Dr Finn in his work, Fiduciary Relations, at p 111: “The fiduciary's liability for gains is a liability as a trustee and as for trust property. It is, as will be seen, one which can give rise to personal actions against a fiduciary. It can give rise to actions in rem to recover extant trust property.”
Of course, neither of these benefits were received by Graco in his own right. The proceeds of the Investment were received by GFBR while the Additional Payment was received by Glenaldon. This was done at the request and direction of Graco and is within the scope of s 33(1). Any benefit received by these companies, through the efforts and at the direction of Graco, was likewise a benefit received by Graco. Further, it would be contrary to the equitable principles that underpin s 33 to allow an errant partner to escape liability on the basis of where they directed the payment of a benefit in respect of which they ought to account. The focus is not on where or to whom the benefit was diverted, but by what means the partner obtained the benefit.
[184] Under the first limb of Barnes v Addy, a third party who knowingly receives property obtained in breach of trust or fiduciary duty will be rendered liable to account as constructive trustee in respect of such property. Liability under Barnes v Addy is fault-based and turns on conscience rather than property, and should therefore be distinguished from claims based on the vindication of proprietary rights.
…
[187] The plaintiffs allege that GFBR and Glenaldon are accountable to the Partnership for their knowing and active participation or assistance in breaches of fiduciary duty, as well as their knowing receipt of property obtained in breach of fiduciary duty. Each company's liability is said to arise under the first and second limbs of Barnes v Addy. It is well established that the principles under Barnes v Addy extend to property obtained in breach of fiduciary duty, and are not restricted to property obtained in breach of trust…
As a matter of equitable principle, this must be correct. I cannot understand how liability in knowing receipt could operate in this context with any practical effect if the position were otherwise. The prospects of recovery from a fiduciary who had obtained proprietary benefits in breach of their proscriptive obligations would be rendered precarious (noting the fiduciary's personal liability would be unaffected) by a simple transfer of the property, irrespective of the knowledge or conscience of the party receiving it. I have never understood the eye of equity to be so narrow in its enquiries.
In Consul Development, broadly speaking, Mr Grey was a manager and director of several companies pursuant to a service agreement which required him to devote himself exclusively to the business of those companies. His duties included investigating properties for the purpose of investment. In breach of fiduciary duty, Mr Grey entered into an arrangement with Mr Clowes whereby Mr Grey would disclose properties identified as suitable for investment, Mr Clowes would arrange for their purchase, and each would share in their financing and any profits. Particularly relevant are the following observations of Gibbs J at 396–397 (footnotes omitted, emphasis added in underline):
… All these authorities, however, are dealing with trustees and trust property in the strict sense and the question is whether the principle applies to impose liability on strangers who knowingly participate in a breach of fiduciary duty committed by a person who is not a trustee or is at most a constructive trustee. In Selangor United Rubber Estates Ltd. v. Cradock [No. 3], Ungoed-Thomas J. held that directors of a company should be regarded as holding on trust any moneys of the company under their control and that agents of the directors who received moneys of the company in circumstances that showed that they assisted “with knowledge in a dishonest and fraudulent design” on the part of the directors were liable as constructive trustees. He held that what is “dishonest and fraudulent” for this purpose has to be judged according to “the plain principles of a court of equity”. After an exhaustive discussion of the question what knowledge is required to satisfy the test stated in Barnes v. Addy, he expressed his conclusions on that matter as follows:
“The knowledge required to hold a stranger liable as constructive trustee in a dishonest and fraudulent design, is knowledge of circumstances which would indicate to an honest, reasonable man that such a design was being committed or would put him on inquiry, which the stranger failed to make, whether it was being committed. Acts in the circumstances normal in the honest conduct of affairs do not indicate such a misapplication, though compatible with it. And answers to inquiries are prima facie to be presumed to be honest …”
This decision was followed by Brightman J. in Karak Rubber Co. Ltd. v. Burden.
The decision in Selangor United Rubber Estates Ltd. v. Cradock [No. 3] that the rule in Barnes v. Addy applies to agents of company directors who have received money of the company does not go quite far enough to resolve the present case, since Consul did not receive any property of D.P.C. However, in my judgment, the principle under discussion extends to the case where a stranger has knowingly participated in a breach of fiduciary duty committed by a person who is not a trustee even though nothing that might properly be regarded as trust property — even property stamped with a constructive trust — has been received. The strict rule of equity that forbids a person in a fiduciary position to profit from his position appears to be designed to deter persons holding such a position from being swayed by interest rather than by duty (see Bray v. Ford); it is “a rule to protect directors, trustees, and others against the fallibility of human nature”: Costa Rica Railway Co. Ltd. v. Forwood. If the maintenance of a very high standard of conduct on the part of fiduciaries is the purpose of the rule it would seem equally necessary to deter other persons from knowingly assisting those in a fiduciary position to violate their duty. If, on the other hand, the rule is to be explained simply because it would be contrary to equitable principles to allow a person to retain a benefit that he had gained from a breach of his fiduciary duty, it would appear equally inequitable that one who knowingly took part in the breach should retain a benefit that resulted therefrom. I therefore conclude, on principle, that a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.
This conclusion is supported by Selangor United Rubber Estates Ltd. v. Cradock [No. 3], Karak Rubber Co. Ltd. v. Burden, and the earlier similar case of Gray v. Lewis (reversed on other grounds), although it represents a slight extension of those cases, since in all of them the defendants had obtained possession of what was regarded as trust property. A case which in some respects seems to me to be even closer to the present is Cook v. Deeks. In that case directors of the Toronto Company, while ostensibly acting for that company, obtained for themselves a contract which they should have obtained for the company. It was held that the defendant directors could not retain the benefit of the contract for themselves, but must be regarded as holding it on behalf of the company, and they were ordered to account for the profits which they had made out of the transactions. However the directors had formed a second company, the Dominion Construction Company, which had taken over the contract. The Judicial Committee said, that they had in the course of their judgment referred to the claim as one against the directors, and went on: “But it was not, and it could not be, disputed that the Dominion Construction Company acquired the rights of these defendants with full knowledge of all the facts, and the account must be directed in form as an account in favour of the Toronto Company against all the other defendants”. Although their Lordships spoke of the directors holding the contract on behalf of the Toronto Company, this was not a case of the misuse by trustees of trust property, but one in which persons in a fiduciary position obtained for themselves something which they ought to have got for the company, and no order declaring any of the defendants to be constructive trustees was ever made.
In essence, Cook was a case in which directors of a construction company negotiated for and obtained a contract for their own benefit in conflict with, and to the detriment of, the company. Following successful negotiations, but prior to execution of the formal contract, the errant directors formed another company to carry out the work and obtain the benefit of the contract. The conduct of the directors was held to be in breach of fiduciary duty in circumstances where the directors could not retain the benefit of the contract for themselves and must account for that benefit to the company.
The company formed to secure the benefit of the contract was equally liable to account as it had received or “acquired” that benefit “with full knowledge of all the facts”. As Gibbs J observed in Consul Development, no order declaring any of the defendants a constructive trustee was ever made, but both the defendants and the company formed were personally liable to account for any benefits received under the contract. This kind of factual matrix, where the errant fiduciary uses the corporate creature to “secure the profits of, or inflict the losses by, their breach of fiduciary duty”, is fairly commonplace and (despite being somewhat “artificial”) the company formed is usually amenable to a claim under either limb of Barnes v Addy because the knowledge of the principal wrongdoers is imputed to it: Grimaldi No 2, at 243, citing, among others, Cook, at 565.
In summary, I have found that the ambit of “trust property” in a case of knowing receipt has been held to extend to property transferred “in breach of fiduciary obligation”, property “held or controlled subject to a fiduciary obligation”, property “protected by” a fiduciary obligation, “property to which a fiduciary obligation attached”, property “traceable to” a breach of fiduciary duty, property which “was the proceeds” of a breach of fiduciary duty, and property “obtained in breach of fiduciary duty”.
The next issue of principle presented by the arguments in this case is whether the relevant disposition or transfer of the property (or its traceable proceeds) to the alleged knowing recipient must itself be a breach of fiduciary duty in the strict sense or whether liability can extend to those who (adopting similar shorthand to that used in Blue Mirror by Leeming JA at [2]–[4]) I will refer to a “downstream recipient”. As his Honour explained in the circumstances of that case, an “immediate recipient” (who received property or its traceable proceeds) can be distinguished from a “downstream recipient”, being the person to whom the immediate recipient transferred the “trust property” or its traceable proceeds.
It may be the case that the “immediate recipient” of the impugned profits in this case was not Mr Grimaldi, but his corporate alter egos or nominees (being the vehicles used to secure his profit). Through the series of transactions detailed above, Mr Grimaldi then transferred, or otherwise directed for those funds to be transferred, to the NSW Treasury following which those funds were to be “immediately transferred” to the ATO.
To my mind, there are three possible answers to the question available on the authorities before me, none of which assist the Commonwealth:
An overarching first answer to the question raised by the submissions of the Commonwealth on this issue lies in the distinction between the transfer of "trust property" and the receipt of it. I consider it is the transfer, obtaining, diversion or dissipation of "trust property" which must be in breach of fiduciary duty in the strict sense, not the receipt of it.
To my mind, a second answer to the question lies within my findings as to the ambit of “trust property” in this context as including property: “to which a fiduciary obligation attached”; or has been “transferred in breach of fiduciary obligation”; or is “held or controlled subject to a fiduciary obligation”; or “protected by” a fiduciary obligation; or is “traceable to” a breach of fiduciary duty; or which “was the proceeds” of a breach of fiduciary duty; or which was “obtained in breach of fiduciary duty”. Those phrases invite attention to a broader range of circumstances than funds transferred in breach of either of the two proscriptive fiduciary duties recognised in this jurisdiction. An unauthorised profit in the hands of the fiduciary or their corporate alter ego is property obtained in breach of fiduciary duty and so is property to which a fiduciary obligation is attached; specifically, the fiduciary, their alter ego and a knowing recipient would each be obliged to account to the principal for that profit. To the extent it is necessary to do so, a subsequent transfer of the subject property to a “downstream recipient” can be characterised as a breach of that fiduciary obligation.
By way of a third answer, to the extent I may be mistaken in either or both of the two answers above, I would consider that the duty to account for unauthorised profits to be a fiduciary duty and so the transfer or diversion of the subject property to the recipient is itself a breach of fiduciary duty in the strict sense. This conception reflects the law in England. There it is said the “fiduciary duty to account for profits” is “a rule governing the conduct of fiduciaries which exists in its own right”, which is “imposed by equity on all fiduciaries” and “does not depend upon a demand for an account by the principal, or upon an order of the court”. It is said to be “not just a remedy” but “marches hand in hand with the constructive trust which obliges the fiduciary to treat the profit as belonging to their principal”: , at [20] and [22]. While the characterisation of a positive “duty” to account for profits as a standalone and seemingly prescriptive fiduciary duty is, on one view, not reflective of the dual proscriptive duties recognised in this jurisdiction; on another view, it could be said it is simply the positive expression of that well established proscriptive duty, which is reflected within, but distinct from, the classical remedial response to such a breach.
[160] In my opinion, it is an essential aspect of accessorial liability for “knowing receipt” that the act of transfer of the property — relevantly the deposit by Benford with the respondent — must be in breach of a fiduciary obligation. The claim arises in equity’s exclusive jurisdiction and does not give rise to the apparent difference between English and Australian law as to whether tracing in equity requires a pre-existing fiduciary relation. (See, for example, Agip (Africa) Ltd v Jackson [1990] Ch 265 at 290B; Agip (Africa) Ltd v Jackson [1991] Ch 547 at 566H–567A; Boscawen v Bajwa [1996] 1 WLR 328 at 335G; [1995] 4 All ER 769 at 777j and cf Black v S Freedman & Co; R P Meagher and W M C Gummow, Jacobs’ Law of Trusts in Australia, par [2706]; Meagher, Gummow & Lehane’s Equity Doctrines & Remedies, R P Meagher, J D Heydon and M J Leeming, eds, 4th ed (2002) Chatswood, LexisNexis Butterworths, at [5-025], [5-230].)
[161] This proposition has been variously expressed in the authorities:
- “there must … be some misapplication, some breach of trust”: Gray v Johnston (1868) LR 3 HL 1 at 11.
- “the payment is being made in fraud of a third person”: Thomson v Clydesdale Bank Ltd [1893] AC 282 at 287–288.
- “the money is being applied in breach of trust”: Coleman v Bucks & Oxon Union Bank [1897] 2 Ch 243 at 250 and 254.
- “misapplied funds”: [Belmont No 2] at 405.
- “the transfer to him was a breach of trust”: Agip (Africa) Ltd v Jackson (at 291G). See also Lipkin Gorman v Karpnale Ltd [1987] 1 WLR 987 at 1006B.
- “a disposal of his assets in breach of fiduciary duty”: El Ajou v Dollar Land Holdings plc (at 700); Bank of Credit & Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 at 448.
- “trust money was “misapplied”. See El Ajou v Dollar Land Holdings plc (at 739–740); Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769 at 777; Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16 at 105.35.
[162] As a trustee of the funds for the defrauded credit card holders, Benford had an obligation to refund the money to them as soon as they could be ascertained. That was by no means able to be done immediately, even if all the knowledge of Mr Taves and his associated companies was to be fictionally attributed to Benford. Until the beneficiaries could be identified and the precise total of the monthly debits computed in each case, Benford was under a duty to properly invest the trust fund. An interest bearing deposit with a bank in the currency of the fraud would appear to me to be perfectly appropriate. If European Bank is to be credited with constructive knowledge of the fraud, there seems no reason why it should not also have such knowledge of the processes required for repayment.
[163] The deposit with Benford only lasted a few months before the account was frozen in the way described above. In these circumstances, I do not believe that the Benford deposit with European Bank should be seen to involve a misapplication of trust funds on the part of Benford.
In my opinion, it is an essential aspect of accessorial liability for “knowing receipt” that the act of transfer of the property — relevantly the deposit by Benford with the respondent — must be in breach of a fiduciary obligation.
Whether his Honour actually intended to lend support for that narrow proposition, or whether the emphasised text was merely intended to contextualise the broader proposition that for an action in knowing receipt there must be a foundational transfer, diversion or disposition of “trust property” in breach of fiduciary duty, is less clear.
As a matter of equitable principle, in circumstances where liability in knowing receipt is accepted to be personal and fault-based, I can only understand the emphasised text as contextualising his Honour’s statement of broader principle confined to the facts of the case before him. This is the only way in which I have been able to reconcile the many authorities to which I have been referred which extend recipient liability not only to those who were the “immediate recipient” of "trust property" but also to those regarded as "downstream recipients" in the sense described above, some of which include the cases cited by Spigelman CJ at [161] as being “various expressions” of the very proposition his Honour expressed at [160]: see, for example, El Ajou and Belmont No 2.
Perhaps notably, the rejection of liability in knowing receipt in Evans was on two grounds which his Honour considered separately, and in both respects his Honour relied upon statements made by Millett J in Agip (Africa).
In Agip (Africa), Millett J considered the requirement that funds be received beneficially was foundational to liability in knowing receipt and an essential requirement “if receipt-based liability is to be properly confined to those cases where the receipt is relevant to the loss” (at 292). This statement was relied upon by Spigelman CJ in his Honour’s finding that the property the subject of the claim must be “beneficially” received, but it too reflects the suggestion that there must be some causal nexus between the breach and the receipt, or to put it another way, that the transfer to the recipient itself must be in breach of either trust or fiduciary duty.
To the extent the need for such a causal nexus between the breach and the receipt has been suggested, it has not found favour in this jurisdiction, and the statements made by Millett J in Agip (Africa) are frequently confined as reflecting the “property protection” rationale for liability in knowing receipt which, subsequent to the decision in Evans, was the subject of serious doubt by the Full Court in Grimaldi No 2, Finn, Stone and Perram JJ at [267]; see also GP Building, Niall, Sifris and Walker JJA at [21].
As a matter of principle, it is difficult to understand why an action for knowing receipt should not extend to downstream recipients simply because the subsequent transfer (i.e. that from the immediate recipient to the downstream recipient who takes with the requisite knowledge) might not itself be a breach of trust or fiduciary duty in the strict sense. That does not align with intermediate appellate court authority subsequent to on this issue: see, for example, and . It is also difficult to reconcile with the wholesale rejection of “causation questions” in this context by the High Court in , at [199]:
… Since the primary case against the second to sixth appellants rests on their supposed receipt of property, causal questions do not arise. Where a defendant has received trust property, or property in relation to which fiduciary duties existed, with notice, the cause of action is complete without having to examine causation questions.
I will now refer to two of the cases listed by Spigelman CJ in Evans at [161], statements from which were said to support the proposition his Honour expressed at [160]. As I have stated, I do not interpret his Honour as lending support to the narrow proposition contended by the Commonwealth in these proceedings. While I am aware that proposition has found support in England, I could find no positive treatment of it in this jurisdiction, including in Evans: cf Courtwood Holdings SA v Woodley Properties Limited [2018] EWHC 2163 (Ch), Nugee J at [12] and [190]–[202] applying Brown v Bennett [1999] BCC 91; B**rown v Bennett [1999] 1 BCLC 649.
I have discussed Belmont No 2 above. For present purposes, I observe that the impugned receipt there (in the hands of City) was in fact the result of two transactions, with the second being conditional upon completion of the first. The first transaction which was held to be in breach of fiduciary duty involved the purchase by Belmont from Mr Grosscurth of all the share capital in a company known as Maximum for the sum of £500,000. The second transaction involved Mr Grosscurth using £489,000 of that £500,000 to purchase all of the share capital in Belmont from City. Mr Grosscurth was the immediate recipient of funds transferred in breach of fiduciary duty, while City was what one might call a “downstream recipient”.
The decision in Belmont No 2 has been considered or cited at the intermediate appellate court level with apparent approval on several occasions: see, for example, Grimaldi No 2, at [275]; Kalls Enterprises, at [157]–[158]; Robins, at [60]–[65].
The facts in El Ajou are complex. At their core is a “boiler room” share selling scheme run briefly by three Canadian fraudsters through two Dutch companies. For present purposes, the central facts are these: the plaintiff’s investment manager was bribed to subscribe on behalf of the plaintiff in parcels of practically worthless shares sold by the fraudsters (via the Dutch companies) at gross overvalue. Acting in breach of fiduciary duty, the investment manager participated in the scheme and caused some £13,051,221 to be debited from the plaintiff’s account. The relevant transactions took place between February and May 1985. The plaintiff’s funds then quickly moved in a series of complex multi-jurisdictional transfers involving Geneva, Gibraltar, Panama and back through Geneva. Mr Sylvain Ferdman, a Swiss fiduciary agent, acted for the Canadians in their incorporation of various entities and movement of funds.
In July 1985, Mr Ferdman was put on notice that the plaintiff was investigating the share purchases in circumstances where an entity controlled by Mr Ferdman had subscribed for shares in another company at 25 cents a share which were later sold to the plaintiff at $8.25 a share. In October 1985, Mr Ferdman was on notice of express allegations of fraud. Although Mr Ferdman was also a director and the Chairman of Dollar Land Holdings plc (), his appointment was nominal, and the affairs of BLH were conducted by its controlling shareholders and William Stern.
This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.
The decision in El Ajou has been considered or cited with apparent approval in several decisions of the Court of Appeal: see, for example, Kalls Enterprises, Giles JA at [138] and [152]; Turner at [93]; Evans, Spigelman CJ at [160]–[161].
It appears to be clear from these authorities that liability for knowing receipt can arise for a downstream recipient of the traceable proceeds of a breach of trust or fiduciary duty, even where the transfer to that downstream recipient was not itself a breach of trust or fiduciary duty in the strict sense of those terms: Blue Mirror, Leeming JA at [2]–[4], [7], [28] and [156]–[158].
Having dealt with the relevant legal principles at considerable length, I can swiftly deal with my consideration of the parties’ respective competing arguments, which naturally follows from my consideration of the relevant principles.
I wholly reject the Commonwealth’s arguments that this case turns on the proper interpretation of the Chameleon Final Orders, which it says left Chameleon with nothing more than a personal right to payment of a sum of money and so there was no “trust property” which could give rise to a claim of knowing receipt against the Commonwealth.
If the Commonwealth’s submissions were accepted it would follow that, absent the declaration of a constructive trust in the proprietary and remedial sense, a knowing recipient of property obtained in breach of fiduciary duty could escape liability simply by pointing to the lack of “trust property” in the narrow sense of that phrase. For a start, that is not consistent with the authorities in cases where knowing receipt has attached to third parties in their dealings with the directors of a company.
In the Chameleon Judgment, Mr Grimaldi was held to have breached the fiduciary duties he owed to Chameleon (at [691]) and was liable to account to Chameleon for the profits obtained through his breaches as a constructive trustee (at [693] and [982]). Those were entirely orthodox findings arising from Mr Grimaldi’s conduct, in keeping with Furs v Tomkies, Keith Henry & Co, Chan v Zacharia, Hospital Products, Warman and Ancient Order of Foresters. I regard those profits as belonging in equity to Chameleon.
The liability of Mr Grimaldi to account extended to Iron and Webtel Super Fund as his nominees, who also held those profits as a constructive trustee in favour of Chameleon: Grimaldi No 2, at [556].
I regard the profits and their traceable proceeds to be “property to which a fiduciary obligation attached” (Farah Constructions, at [116]) and property “obtained in breach of fiduciary duty” (Chickabo, at [187]) and therefore “trust property” for the purpose of a claim of knowing receipt under the first limb of Barnes v Addy. Whether or not a remedial constructive trust over those profits was ultimately ordered as part of the Chameleon Final Orders is entirely beside the point.
In short, I completely agree with Chameleon’s submission that the fiduciary’s obligation to account for unauthorised profits is the basis on which that property is considered to be “trust property” for the purposes of the first limb of Barnes v Addy. This is either because the existence of that obligation meant that the fiduciary held the profit “as a constructive trustee” for the principal (applying , Deane J at 198) or the existence of the obligation was a “fiduciary duty with respect to property” (applying , Gleeson JA at [88(1)]).
Chameleon says that the ATO as a third party will “become chargeable” with trust property “if they received it with notice of the trust”: Farah Constructions at [112].
Chameleon submits that the ATO had the requisite degree of knowledge that:
the payments to the ATO pursuant to its settlement with Mr Grimaldi represented the traceable proceeds of the profits from the sale of the Spotter’s Fee Securities and the Existing Shareholding;
those profits were obtained by Mr Grimaldi, or his nominees, by reason or use of his fiduciary position; and
this property or its traceable proceeds was transferred to and received by the ATO in breach of Mr Grimaldi’s obligation to hold the property on trust for the benefit of Chameleon.
Chameleon says that there are different levels of knowledge required depending on whether there is a proprietary remedy or a personal remedy sought under the first limb of Barnes v Addy*.* That submission is wrong as a matter of law, and I have dealt with it below.
As to the proprietary claim, Chameleon relies on the following principles:
Any third party who acquires trust property from the defaulting fiduciary will take it subject to the principal’s equitable interest in the property unless the third party can establish that they are a bona fide purchaser for value of the entire legal estate in the property, acting in good faith and without notice of that interest, citing Re Montagu’s Settlement Trusts (1987) Ch 264, Megarry VC at 272–273 and 278.
A third party will be prevented from relying on a bona fide purchaser rule even where they only have constructive notice of the interest, being knowledge of facts which would put a reasonable person on inquiry about the existence of the equitable interest in the property, citing Grimaldi No 2, at [251].
A third party who is taken to have constructive notice of an equitable interest cannot free themselves of notice of that interest by procuring that an innocent third party receive the property as a step in the course of the property being transferred to the third party who has constructive notice, citing Re Stableford Colliery Co (Barrow’s Case) (1880) 14 Ch D 432, Jessel MR at 445, approved in Wilkes v Spooner [1911] 2 KB 473, Vaughan William LJ at 483.
A third party who applies the property to discharge a debt owed to them by the defaulting fiduciary without notice of the equitable interest may have a good defence, but this does not apply where the third party had notice of the interest, citing Thomson v Clydesdale Bank Ltd [1893] AC 282, Lord Herschell LC at 287–288, applied in [1968] 1 WLR 1555, Ungoed-Thomas J at 1588–1589.
The Commonwealth submits that it had no relevant knowledge of any potential or actual breaches by Mr Grimaldi of any fiduciary duty with respect to any proceeds of sale used to pay the NSW Treasury or the Commonwealth. They say that this is because there was no such duty apparent from the Chameleon Judgment or the Chameleon Final Orders, and it is the Chameleon Judgment and knowledge of its contents (with the consequential orders) that is determinative of the Commonwealth’s knowledge.
The Commonwealth argues that any knowledge of wrongdoing was only put by Chameleon as knowledge of allegations, with no claim of a duty on the part of the ATO to determine whether the allegations were well-founded.
The Commonwealth says that the Crime Commission and then the ATO through Project Wickenby carried out a thorough and forcefully litigated investigation into the tax avoidance scheme promoted by Mr Agius and the many clients who appeared to have sought to shelter their gains from trading in Australian listed securities through the use of Vanuatu-based companies holding funds in New Zealand. The Commonwealth points to the work of the Crime Commission and the ATO that included exercising compulsory powers of investigation, freezing orders, discovery, litigation in multiple courts, and the work of forensic accountants and other investigators.
The Commonwealth submits that the plain object of that work included identifying who were the true beneficial owners of the shares and funds held by IFTC as restrained by this court on the application of the Crime Commission so that the guilty party could be punished and properly taxed with appropriate penalties and interest charges. The Commonwealth asserts that the ATO was indifferent whether the party properly taxed was IFTC, Mr Grimaldi, his self-managed superannuation fund or another person (including Chameleon) had they come forward to claim an interest in the funds and shares. The Commonwealth points out that there is no explanation why Chameleon did not do so.
The Commonwealth claims that the investigation included looking into the Chameleon Proceedings. It says the primary record it obtained was the announcement by Chameleon to the ASX on the commencement of the Chameleon Proceedings on 25 November 2007, which stated that Chameleon was claiming personal relief only against Mr Grimaldi but proprietary relief against Murchison. The Commonwealth says that this perfectly accords with the originating application and pleadings that were filed in the Chameleon Proceedings.
The Commonwealth points out that the ATO’s investigation into the financial affairs of Mr Grimaldi included the meeting on 4 March 2009 with Mr Karam (a director of Chameleon) and that Chameleon did not plead any reliance on this meeting. The Commonwealth says that the conclusion I should draw from the meeting with Mr Karam is that he was aware of Mr Grimaldi establishing and controlling Iron and he could provide documents in relation to that issue. It also relies on Mr Karam’s view Iron was used to hide related party issues and, because Mr Grimaldi was looking at getting a divorce, he would probably want to reduce his exposure to bankruptcy and possible tax liabilities. The Commonwealth says that there was no suggestion by Mr Karam that one of the reasons for establishing Iron was to hide property belonging to Chameleon.
The knowledge required to hold a stranger liable as constructive trustee in a dishonest and fraudulent design, is knowledge of circumstances which would indicate to an honest, reasonable man that such a design was being committed or would put him on inquiry, which the stranger failed to make, whether it was being committed. Acts in the circumstances normal in the honest conduct of affairs do not indicate such a misapplication, though compatible with it. And answers to inquiries are prima facie to be presumed to be honest …
It may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger's failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man. However, for reasons that will appear, it is unnecessary for me to express any concluded view on these questions and I assume for the purposes of this case, but without finally deciding, that the formulation of principle on this point in the Selangor Case was correct.
In my view the state of the authorities as they existed before Selangor did not go so far, at least in cases where the defendant had neither received nor dealt in property impressed with any trust, as to apply to them that species of constructive notice which serves to expose a party to liability because of negligence in failing to make inquiry. If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from enquiry for fear lest he learn of fraud. But to go further is, I think, to disregard equity's concern for the state of conscience of the defendant.
As is evident, Stephen J said that it was “equity’s concern for the state of conscience of the defendant” which was relevant to the level of knowledge to be found to support a knowing receipt claim. His Honour also observed at 410 that in Carl Zeiss, Edmund Davies LJ at 300–301 took the view that “want of probity” was “a feature which recurs through and seems to connect all those cases drawn to the court's attention where a constructive trust has been held to exist”.
Stephen J at 410 also expressed the view that it was not clear why there should be any distinction between the level of knowledge required for a knowing receipt case and a knowing assistance case.
The so-called Baden categories of knowledge are the five categories expressed in Baden, by Peter Gibson J at 575–576 and 582 being:
actual knowledge;
wilfully shutting one’s eyes to the obvious;
wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;
knowledge of circumstances which would indicate the facts to an honest and reasonable person; and
knowledge of circumstances which would put an honest and reasonable person on inquiry (which is traditionally referred to as constrictive notice).
In Farah Constructions, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ at [174]–[178] said (footnotes omitted):
[174] Against this background, it has been customary to analyse the requirement of knowledge in the second limb of Barnes v Addy by reference to the five categories agreed between counsel in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA:
(i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.
In Bank of Credit and Commerce International (Overseas) Ltd v Akindele (BCCI), Nourse LJ observed that the first three categories have generally been taken to involve “actual knowledge”, as understood both at common law and in equity, and the last two as instances of “constructive knowledge” as developed in equity, particularly in disputes respecting old system conveyancing. After noting that in Royal Brunei the Privy Council had discounted the utility of the Baden categorisation, Nourse LJ in BCCI went on to express his own view that the categorisation was often helpful in identifying the different states of knowledge for the purposes of a knowing assistance case.
[175] Although Baden post-dated the decision in Consul, the five categories found in Baden assist in an analysis of that for which Consul provides authoritative guidance on the question of knowledge for the second limb of Barnes v Addy.
[176] Thus, support in Consul can be found for categories (i), (ii) and (iii). Further, Consul also indicates that category (iv) suffices. However, in Consul, Stephen J held that knowledge of circumstances which would put an honest and reasonable man on inquiry, later identified as the fifth category in Baden, would not suffice. Gibbs J left open the possibility that constructive notice of this description would suffice. Barwick CJ agreed with Stephen J.
[177] The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.
[178] These conclusions in Consul as to what is involved in “knowledge” for the second limb represent the law in Australia. They should be followed by Australian courts, unless and until departed from by decision of this Court.
Although these statements were made as applying the Baden categories (1) to (4) to second limb claims of knowing assistance, they have subsequently become accepted as also applying to first limb claims for knowing receipt, as outlined below.
In Grimaldi No 2, Finn, Stone and Perram JJ surveyed the existing Australian authorities regarding the knowledge element in a knowing receipt case. Their Honours at [260]–[261] said this of the Baden categories:
[260] The comment that should be made at the outset about this five-fold classification is that it tends to invite the use of formulae to solve problems. Unsurprisingly judges have cautioned against treating each category as an exclusive and rigid one. That caution is justified and is illustrated in his Honour's reasons as will be seen.
[261] The first two categories of “knowledge” require no comment. The third involves such a calculated abstention from inquiry as would disentitle the third party to rely upon lack of actual knowledge of the trustee's or fiduciary's wrongdoing. The fourth reflects what seems to have been accepted provisionally by three judges of the High Court in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 398 and 412-413. It is, in essence, an understandable, objective, default rule designed to prevent a third party setting up his or her own “moral obtuseness” as the reason for not recognising an impropriety that would have been apparent to an ordinary person: Consul, 398. It is the surrogate of actual knowledge. The form of constructive notice used in category (v) derives from the bona fide purchaser for value without notice doctrine.
In addition, as mentioned above, their Honours in Grimaldi No 2 at [267] recognised that under Australian law the liability for knowing receipt “should be seen as fault-based and as making the same knowledge/notice demands as in [knowing] assistance cases”.
The conclusion expressed in the Grimaldi No 2, at [268]–[269], was that the weight of authority for a knowing receipt case involved the application of categories (1) to (4) of the Baden categories, with constructive notice in category (5) excluded. In those paragraphs, Finn, Stone and Perram JJ said:
[268] The High Court in Farah Constructions did not settle the knowledge/notice requirement in relation to recipient liability. Nonetheless, from at least the 1990s and in the wake of the Baden classification, judges had begun in recipient liability cases to generalise from what had been said both by Gibbs J (at 398) and by Stephen J (at 412) with whom Barwick CJ agreed, about the insufficiency of traditional, or category (v), constructive notice — though not of category (iv) notice — as a basis for personal liability. To allow that, as Stephen J commented, would be “to disregard equity's concern for the state of conscience of the defendant”: at 412; see eg Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 103G; Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd at 105; Hancock Family Memorial Foundation at 209; Tara Shire Council v Garner [2003] 1 Qd R 556 at [66]-[72]; Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 54 ATR 241 at [54]-[60]; see also United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 252-254. In Kalls Enterprise Pty Ltd (in liq*) v* Baloglow (2007) 63 ACSR 557 — a decision which post-dates Farah Constructions — the New South Wales Court of Appeal applied *Baden'*s categories (i)-(iv), but not category (v) to a knowing receipt claim. Kalls Enterprise in turn has been applied subsequently: see eg Horsman v MG Kailis Pty Ltd [2009] WASC 166; Fodare Pty Ltd v Shearn (2011) 29 ACLC 11-036.
[269] There is, in other words, an established line of judicial decision and opinion both at first instance and in intermediate courts of appeal spanning at least 20 years adhering to the view taken in the above cited cases. We do not consider that that view is plainly wrong and should be rejected. On the contrary! Finally, for the sake of completeness, we should note we do not consider that what was said by Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404 at [469]-[478] is inconsistent with that view. Commendably, his Honour emphasised the fault based character of recipient liability: “[u]nconscionability cannot be fictionalised, and the grounds on which constructive trust liability is imposed should be real and substantial”: at [471].
[90] Although Farah did not consider the categories of knowledge sufficient to attract liability under element (4) of the first limb of Barnes v Addy [being knowledge by the third party, at the time he or she received the relevant property, that it was trust property and that it was being misapplied or, in the case of breach by a fiduciary, that the trust property was transferred pursuant to a breach of fiduciary duty], it may be accepted that the knowledge required is:
(1) actual knowledge of the trust, or the existence of the fiduciary duty, and of the misapplication of trust property or transfer pursuant of to a breach of fiduciary duty; or
(2) willfully shutting one's eyes to those things; or
(3) abstaining in a calculated way from making such inquiries, as an honest and reasonable person would make, about the trust and the application of the trust property; or
(4) knowledge of facts which to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication.
[91] The authorities which have accepted that the above categories of knowledge are sufficient include: Kalls Enterprises Pty Ltd (in liq*) v* Balaglow [2007] NSWCA 191; 63 ACSR 557 at [176] (Giles JA; Ipp and Basten JJA agreeing); Hancock Family Memorial Foundation Ltd v Porteous at 142; Grimaldi v Chameleon Mining NL (No 2) at [268]-[270]. See also Westpac Banking Corporation v Bell Group Ltd (In Liq) (No 3) [2012] WASCA 157; 44 WAR 1 at [2130], when approving the view to which Owen J came at first instance in Bell Group Ltd (No 9) at [4748].
[92] On the other hand, those authorities also establish that mere knowledge of circumstances which would put an honest and reasonable person on inquiry is not sufficient to establish liability for knowing receipt.
What someone knows is distinct from the degree of certainty with which it is known. The so-called “Baden scale of knowledge” more than any other aspect of ancillary liability in equity is associated with technicality and distinctions which are difficult if not illusory; “it tends to invite the use of formulae to solve problems”: Grimaldi at [260]. However, the formulation helpfully emphasises that the conclusions of mixed fact and law which often comprise the elements of what a defendant “knows” come in shades of grey. In any event it was affirmed in Farah Constructions and Grimaldi as applicable to ‘knowing receipt” and “knowing assistance”.
[142] In Consul Development Stephen J (with whose reasons Barwick CJ agreed) referred with approval to the observations of Edmund Davies LJ in Carl Zeiss Stiftung v Herbert Smith (No 2) [1969] 2 Ch 276 at 300-301 that the feature recurring through all the cases was the need to establish a “want of probity”. An accessory cannot plead his or her own moral obtuseness, hence the need to consider the facts known to an honest and reasonable person. But the honest and reasonable person whose viewpoint is to be considered is someone with the objective characteristics of the accessory alleged to be a constructive trustee.
[143] In Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, Nourse LJ (at 455), with whom Ward and Sedley LJJ agreed, applying the observations of Sir Robert Megarry VC in Re Montagu’s Settlement Trust and Buckley LJ in Belmont Finance Corporation Ltd v Williams Furniture Limited (No 2) [1980] 1 All ER 393 at 405, said that what was necessary was that “…the recipient’s stated knowledge should be such as to make it unconscionable for him to retain the benefit of receipt”. This language echoes the requirement that the recipient’s knowledge be such as to show a want of probity in his receiving and retaining the property transferred in breach of fiduciary duty.
In Blue Mirror, Leeming JA at [30] commented that the Baden category (4) knowledge was treated as sufficient in Kalls Enterprise**s, at [176]–[199], a position which was confirmed in Grimaldi No 2, at [263]–[270] and applied in Turner, at [139].
The Commonwealth relied heavily on Carl Zeiss. In that case, the East German Carl Zeiss foundation brought proceedings against the West German Carl Zeiss foundation for the alleged wrongful use of the name “Carl Zeiss”. The plaintiff later amended its pleading to allege that all the assets and property of the defendant in the United Kingdom belonged to the plaintiff or was held on trust for it. Before the trial, the plaintiff brought further proceedings against Herbert Smith and another law firm, both of which had acted for the defendant at different times, alleging that they received their fees and disbursements from the defendant on notice that the funds belonged to the plaintiff.
At first instance, Pennycuick J held that the proceedings against the law firms obstructed the course of justice and were contrary to public policy. The Court of Appeal unanimously dismissed the appeal, treating the principal issue as whether the solicitors had sufficient knowledge of receiving money from their principal paid in breach of trust. In the appeal, Danckwerts LJ at 290 held that:
In my view, knowledge of a claim being made against the solicitor's client by the other party is not sufficient to amount to notice of a trust or notice of misapplication of the moneys. In the present case, which involves unsolved questions of fact, and difficult questions of German and English law, I have no doubt that knowledge of the plaintiffs' claim is not notice of the trusts alleged by the plaintiffs.
Now let me apply these principles to the circumstances of the present case. In the first place, it is admitted by the plaintiffs that the defendant solicitors have acted honestly and with complete propriety in receiving these sums that were paid to them as solicitors by the West German foundation. Mr. Harman's contention was that the defendant solicitors knew where the moneys that they received came from and knew that the source was trust funds. In my view this contention fails at the outset. What the defendant solicitors knew was that the moneys came from the West German foundation and they knew of the allegations contained in the proceedings brought against that foundation by the plaintiffs in which they were instructed to act as solicitors for the West German foundation. They knew that claims were being made against the West German foundation that all their property and assets belonged to the plaintiffs or were held on trust for them. But claims are not the same thing as facts. Mr. Harman contended that for the purposes of the present issue all the allegations contained in the statements of claim in both the actions must be taken as true. That will not do. What we have to deal with is the state of the defendant solicitors' knowledge (actual or imputed) at the date when they received payments of their costs and disbursements. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. The claims depended upon most complicated facts still to be proved or disproved, and very difficult questions of German and English law. It is not a case where the West German foundation were holding property upon any express trust. They were denying the existence of any trust or any right of property in the assets claimed by the plaintiffs. Why should the solicitors of the West German foundation assume anything against their clients?
Consequently, it seems to me that the plaintiffs' claim against the defendant solicitors must fail on the requisite condition of knowledge or notice.
Sachs LJ at 296 considered that a “doubtful equity” is not enough to ground a case of notice or knowledge and “no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess”. Sachs LJ at 297 also found that a defendant’s solicitor is under no duty to inquire into the accuracy of the facts alleged by the plaintiff in the pleading nor to assess the result of any conflict in the evidence.
Edmund Davies LJ at 300–301 analysed the circumstances in which English law held that a constructive trust exists, determining that a “want of probity” was a concept which could distinguish those cases in which one arose. Edmund Davies LJ said at 301:
The concept of “want of probity” appears to provide a useful touchstone in considering circumstances said to give rise to constructive trusts, and I have not found it misleading when applying it to the many authorities cited to this court. It is because of such a concept that evidence as to “good faith,” “knowledge” and “notice” plays so important a part in the reported decisions. It is true that not every situation where probity is lacking gives rise to a constructive trust. Nevertheless, the authorities appear to show that nothing short of it will do. Not even gross negligence will suffice. Thus in Williams v. Williams, 17 Ch.D. 437 , where a solicitor had acted, as Kay J. found, “with very great negligence towards his client” in dealing with trust property, the judge said, at p. 445:
If it were proved to me upon the evidence that he had wilfully shut his eyes, and was determined not to inquire, then the case would have been very different …. I do not find that anything done by [the solicitor] in the matter was done for his own benefit …. If he had, as I believe he had, a bona fide conviction that there was no settlement whatever … I cannot hold that he is affected with such notice as to make him personally liable for the purchase-moneys which passed through his hands as solicitor.
Do the demands of justice and good conscience bring the present case within any of the foregoing categories? In my judgment, the question is one which demands a negative answer. The law being reluctant to make a mere agent a constructive trustee, as Lord Selborne L.C. put it in Barnes v. Addy, 9 Ch.App. 244 , 251–252, mere notice of a claim asserted by a third party is insufficient to render the agent guilty of a wrongful act in dealing with property derived from his principal in accordance with the latter's instructions unless the agent knows that the third party's claim is well-founded and that the principal accordingly had no authority to give such instructions. The only possible exception to such exemption arises where the agent is under a duty to inquire into the validity of the third party's claim and where, although inquiry would have established that it was well-founded, none is instituted.
The decision in Carl Zeiss has since been taken to stand for the proposition that mere notice of a third party’s claim is not sufficient to render a solicitor acting for a client liable for a first limb claim under Barnes v Addy*,* unless the solicitor knows the claim to be true or had a duty to inquire as to the validity of the claim but did not do so when such an inquiry would have shown the claim to be true. It does not mean that mere allegations can never be sufficient to render a third party liable for a claim of knowing receipt, so I reject the Commonwealth’s submission based on it. Instead, I consider that in every case it is necessary to conduct a fact specific inquiry of the knowledge of the recipient across all of the Baden categories (1) to (4).
Finally, to avoid any doubt, to the extent that either party has submitted to me that Baden category (5) constructive notice is sufficient basis upon which to sustain liability in knowing receipt, that submission is rejected.
The submission advanced by Chameleon, and reflected in submissions advanced by the Commonwealth, that “there are different levels of knowledge required depending on whether there is a proprietary remedy sought or a personal remedy sought under the first limb of Barnes v Addy”, is also rejected.
Both submissions are wrong as a matter of law and appear to be the product of an elision between:
a proprietary claim to priority in equity (to which a defence a bona fide purchaser for value without notice may be available and such defence may be defeated by the demonstration of Baden category (5) constructive notice); and
a personal claim in knowing receipt (being a personal liability in respect of which both personal and proprietary remedies may be available and which, in either case, depends upon the demonstration of Baden categories (1) to (4): Grimaldi No 2, at [251]–[253].
A claim in knowing receipt (where knowledge to the requisite degree is established at the time of receipt and so binds the recipient’s conscience) differs markedly from claims based upon the victim's title to the property such as the liability of an innocent volunteer to account for trust property or its traceable proceeds insofar as they remain in their hands: see, for example, Heperu, Allsop P (with whom Campbell JA and Handley AJA agreed) at [108] and [154]; Fistar, Leeming JA at [40]–[48]. As I mentioned at the outset of my analysis of the relevant legal principles, in these proceedings both parties made submissions and arguments which appear to be the product of the erroneous conflation of these distinct claims.
A recipient of property of another’s proprietary interest in the property is antithetical to a recipient. To that extent, it is true that these two worlds collide, but even a volunteer without notice would not be liable in knowing receipt. In the same breath, I would repeat that a claim in knowing receipt in this country is not contingent upon the demonstration of a continuing proprietary interest (and so priority) in subject property at all.
Chameleon made submissions summarising the extent of the ATO’s knowledge as at:
27 January 2009, following the interview with Mr Grimaldi;
March 2009, following the meeting on 4 March 2009 with Chameleon’s director, Mr Karam, and the production of documents by Chameleon pursuant to a s 264 notice; and
May 2010, following the making of consent orders on 17 May 2010 in the Further Recovery Act Proceedings that Mr Grimaldi had effective control (within the meaning of ss 7 and 8 of the Recovery Act) of Iron, Iron International, Ore Investments and MGG Capital (as trustee for the Webtel Super Fund) and their respective interests in property.
Based on the factual findings I have already made, I accept Chameleon’s submissions about the ATO’s knowledge as at each of those dates, as outlined below.
I accept the following summary of the ATO’s knowledge of factual matters as at 27 January 2009 as submitted by Chameleon:
Mr Grimaldi was a substantial shareholder in Murchison prior to the reverse takeover of Winterfall.
Prior to the reverse takeover of Winterfall, shares in Murchison had no value or only a nominal value.
Mr Grimaldi and his nominees had been allocated additional shares and options in Murchison in November 2004 on completion of the reverse takeover of Winterfall.
The completion of the reverse takeover of Winterfall enabled Murchison to acquire an asset, being the Iron Jack Tenements, which subsequently increased in value rapidly due to the “Chinese explosion” in iron ore purchasing and substantially increased the value of Murchison securities.
Trading by Mr Grimaldi in shares in Murchison was or was likely to be the only or the predominant source of the $36 million that the ATO had identified as belonging to Mr Grimaldi or his nominees.
The precise number of Murchison shares received, disposed of and traded by Mr Grimaldi through Iron, including when the shares were sold, whether the trades were on or off market, whether and what other assets had been purchased with the sale proceeds, and even the specific bank and trading accounts in which the sale proceeds were held.
Mr Grimaldi had admitted that the shares were received by Iron as a spotter’s fee connected with the reverse takeover of Winterfall.
Mr Grimaldi had admitted that Iron had received the shares because Mr Grimaldi had helped the deal get done.
Mr Grimaldi had admitted that he moved the shares offshore, in part, due to a “suspicion with Chameleon” and allegations and a concern about litigation.
Mr Grimaldi had admitted that he put the shares in Iron’s name so that they did not appear related to him and would be protected in the event of litigation.
Mr Grimaldi was dishonest and had lied about his tax affairs.
Mr Grimaldi’s explanation for why he received the shares was nonsensical.
In my view, there is a credible basis on which the ATO would have been suspicious of the explanations given by Mr Grimaldi, particularly in circumstances where the ATO knew that claims had been brought in the Chameleon Proceedings in which Chameleon was asserting that Murchison held the shares in Winterfall on a constructive trust for Chameleon, Winterfall held the Jack Hills Tenements on constructive trust for Chameleon and that Mr Barnes and Mr Grimaldi used the funds raised by Chameleon for Murchison to acquire the Jack Hills Tenements.
I also accept the following summary of the ATO’s knowledge of the Chameleon Proceedings as at 27 January 2009 as submitted by Chameleon (most of the contents of which appeared in the ATO’s Barnes Profile dated 24 November 2008):
I accept the following summary of the ATO’s knowledge of factual matters as at March 2009 following the interview with Mr Grimaldi on 27 January 2009 and the meeting with Mr Karam and Mr Brazig on 4 March 2009 as submitted by Chameleon:
The ATO knew all the underlying facts of Mr Grimaldi’s breach of fiduciary duty, as well as the fact that the funds in the IFTC ANZ Bank accounts in New Zealand were obtained as a result of that breach of fiduciary duty through the receipt of, and trading in, Murchison securities and their proceeds.
These were not mere allegations. They were facts as the ATO had first-hand evidence from Mr Karam together with the supporting documents obtained by the ATO from Chameleon pursuant to the s 264 notice.
The ATO had no reason to disbelieve what Mr Karam told the ATO and, in the absence of evidence from Mr Barns that he did in fact disbelieve or even doubted what Mr Karam told him, I can infer that he did accept Mr Karam’s explanation for why Mr Grimaldi received the Murchison shares.
I also accept the following submissions made by Chameleon that even if I was not satisfied that the ATO had actual knowledge of the facts as at March 2009, the ATO had more than ample knowledge of the facts under each of the categories of notice (2), (3) and (4) described in Baden:
The ATO wilfully shut their eyes to the obvious: Mr Barns was obviously sceptical of the explanation provided by Mr Grimaldi in the 27 January 2009 interview, and he received a much more coherent explanation from Mr Karam on 4 March 2009 as well as from the supporting documents produced by Chameleon in answer to the s 264 notice. In those circumstances, I can readily infer that Mr Barns had actual knowledge of Mr Grimaldi’s wrongdoing and, even if not, that was the result of him wilfully shutting his eyes to the obvious. I can more readily draw that inference given that the Commonwealth failed to call Mr Barns as a witness.
The ATO wilfully and recklessly failed to make such inquiries as an honest and reasonable person in the position of the ATO would make: Following the interviews with Mr Grimaldi on 27 January 2009 and with Mr Karam on 4 March 2009 and the provision of documents by Chameleon pursuant to the s 264 notice, the ATO wilfully and recklessly failed to make such inquiries as an honest and reasonable person in their position would make. This is demonstrated by each of the following:
(a) There was an ongoing failure of the ATO to obtain the originating process, the pleadings, the affidavits and submissions in the Chameleon Proceedings. (b) There was a failure by the ATO to take any steps to follow-up information provided by Mr Karam. Mr Barns did not seek to interview Mr Grimaldi a further time and did not seek to interview Mr Zuks or Mr Barnes, or issue a s 264 notice to either of them to obtain relevant documents.
The ATO had knowledge of circumstances which would indicate the facts to an honest and reasonable person: The ATO is a well-resourced and powerful regulator with compulsory powers that had been able to trace the Murchison share movements in minute detail, interviewed both Mr Grimaldi and Mr Karam and received documents from Chameleon under a s 264 notice, which demonstrated Mr Grimaldi’s use of Chameleon’s funds to facilitate the reverse takeover of Winterfall and Mr Grimaldi’s receipt of the Spotter’s Fee Securities in return.
I also agree with Chameleon that the unexplained absence of Mr Barns from the witness box to give evidence for the Commonwealth gave rise to inferences that either Mr Barns had actual knowledge of the relevant matters or Mr Barns had closed his mind to the obvious. Mr O’Neill identified Mr Barns as the person within the ATO who would hold the relevant knowledge. I am able to infer that the failure of the ATO to obtain any relevant information about the Chameleon Proceedings other than what Mr Karam gave it and the failure of Mr Barns to follow-up any investigative steps following the meeting with Mr Karam gives rise to the further inference that the ATO chose to ignore the information and tax Mr Grimaldi anyway. It appears that the ATO chose to ignore the information it received from Chameleon because that was inconvenient to the approach it had already determined to take, which was to proceed with amended assessments for Mr Grimaldi.
In Mr O’Neill’s evidence, he stated that it was not ATO policy to await the outcome of proceedings to which it is not a party which might lead to the possible bankruptcy of an individual due to debt, damages or the like. Mr O’Neill stated that the ATO would depart from that position only where the taxpayer raised those matters as a reason for deferring enforcement or considering alternative assessments. Mr O’Neill said that nothing in the pleadings and other documents in the Chameleon Proceedings would have motivated him to await the outcome of the Chameleon Proceedings before seeking to issue a notice of assessment and judgment against Mr Grimaldi. To my mind, this highlights the issue of wilful blindness on the part of the ATO in relation to the Chameleon Proceedings. Despite everything the ATO knew about the Chameleon Proceedings, it had adopted a policy of not awaiting the outcome of them but instead following an exclusive focus to recover a tax debt from Mr Grimaldi. There are no further references within the ATO material of any further contact with Mr Karam. In effect, the ATO had instituted a policy of wilful blindness in relation to the claims in the Chameleon Proceedings akin to a “tax now, ask questions later” approach. Although in this case, it did not even bother to ask any questions later.
I also accept the following summary of the ATO’s actual knowledge of factual matters as at 21 May 2010 as submitted by Chameleon:
The ATO knew of Mr Grimaldi's shareholdings in Murchison.
The ATO knew of Mr Grimaldi's dealings with the Murchison securities and the profits derived by Mr Grimaldi from trading in the Murchison securities.
The ATO knew of the existence and nature of the Chameleon Proceedings, including the allegations and relief sought against Mr Grimaldi.
The ATO knew that the funds sitting in various accounts, including those of IFTC in various New Zealand bank accounts, represented or were likely to represent the proceeds from the sale of Murchison securities received by Mr Grimaldi or his nominees.
The ATO knew that the Grimaldi ATO Judgment had been obtained against Mr Grimaldi in the amount of $36,341,461.73 on the basis that he was the beneficial owner of the profits derived from the sale of the Murchison securities.
The ATO knew that whether or not Mr Grimaldi was the beneficial owner of the Spotter's Fee Securities and whether he was liable to account to Chameleon for benefits he obtained by reason of the breaches of his statutory and equitable duties, would be determined in the Chameleon Proceedings.
As already mentioned above, the Commonwealth accepts that the ATO knew all of the findings in the Chameleon Judgment from the time it was delivered on 20 October 2010, the day before the ATO received the first payment from NSW.
But having received the Chameleon Judgment, other than an exchange between Mr Zafiriou and Ms McLachlan immediately after it, the evidence reveals that there was scant consideration within the ATO on the effect of the Chameleon Judgment on the course that the ATO had already agreed with Mr Grimaldi as contained in the Deeds of Settlement. Instead, the ATO knowing accepted payments of more than $15 million directly from the profits made by Iron on the sale of the Spotter’s Fee Securities, which were the “trust property” of Chameleon.
I accept Chameleon’s submissions that the ATO conducted itself with a want of probity sufficient to fix its conscience with liability for knowing receipt, particularly in the following respects:
The ATO took no steps to inform itself about the full effect of the Chameleon Judgment.
The ATO knew that the consequence of an order that Mr Grimaldi had to disgorge the profits meant there was no profit to tax, but the ATO took the money anyway knowing that it would be unavailable to Chameleon despite Chameleon’s corresponding entitlement to the profits.
The ATO structured the Deeds of Settlement with Mr Grimaldi so that he would be contractually barred from challenging his assessments and amended assessments even if the facts materially changed (cl 2.8).
The ATO reserved its right to overturn the Deeds of Settlement but did not exercise it even after it received the Chameleon Judgment (cl 5).
The ATO did not ever notify Chameleon of its settlement with Mr Grimaldi or that the settlement required the profits from the sale of the Spotter’s Fee Securities sitting in IFTC’s bank account on behalf of Iron to be used to discharge Mr Grimaldi’s personal tax debts.
The ATO knew that Mr Grimaldi’s total profit from the sale of the Spotter’s Fee Securities, through his nominee Iron, was $36 million and knew that this was the whole of Mr Grimaldi’s wealth.
The ATO knew that the IFTC accounts in the name of Iron held the specific funds which Mr Grimaldi would need to use to discharge his fiduciary obligation to account to Chameleon and they represented the profits Mr Grimaldi had obtained and was liable to disgorge to Chameleon.
The ATO required Mr Grimaldi to discharge his personal tax debts using the assets of Iron that constituted the unauthorised benefit from his breach of duty.
The Commonwealth places emphasis on the fact that at all times the ATO exercised its statutory functions and should not be expected to have to await the outcome of the Chameleon Proceedings before acting to tax Mr Grimaldi. The problem with this submission is that it is detached from the facts of this case. The ATO does not have some special status which makes it immune from possessing the requisite knowledge to make it liable as a knowing recipient or immune from conducting the sorts of inquiries which should be conducted by an honest and reasonable person. In particular circumstances such as in this case, the ATO did possess knowledge which required it to make further investigations and await the outcome of the Chameleon Proceedings. The ATO had sufficient knowledge from the investigations it did conduct to require it to investigate further. It also knew that the Chameleon Proceedings would determine the very issue which was central to the statutory functions it was carrying out — determining who was beneficially entitled to the profits which had been made by Mr Grimaldi through his nominee Iron.
Once all of the findings I have made above in relation to the ATO’s knowledge and the Commonwealth’s acceptance of the ATO’s knowledge of all the findings in the Chameleon Judgment are put together, it is abundantly clear that the ATO had actual knowledge of the following crucial components at the time when it received each payment from Mr Grimaldi under the Second Deed of Settlement:
the ATO had actual knowledge that Mr Grimaldi had engaged in conduct in breach of the fiduciary duty he owed to Chameleon; and
the ATO knew that the payments which the ATO received from Mr Grimaldi were made from the proceeds of sale of the Spotter’s Fee Securities obtained by Mr Grimaldi and Iron as his nominee as the profit from his breach of fiduciary duty.
In particular, the ATO knew that the proceeds of sale of the Spotter’s Fee Securities were held in the bank accounts from which the ATO received payments from Mr Grimaldi.
To put matters bluntly, the ATO knew exactly:
how Mr Grimaldi had obtained the $36 million in unauthorised profits in breach of the fiduciary duty he owed to Chameleon;
where those profits resided in the IFTC account of Iron; and
how he had used those unauthorised profits to fund the payments he made to the ATO.
Before arriving in this state of actual knowledge within category (1) of the Baden categories, there were many occasions on which the ATO acted with a lack of probity in its investigations, particularly following the interview of Mr Grimaldi in January 2009, after the meeting with Mr Karam in March 2009 and after receipt of the Chameleon Judgment in October 2010. In these instances, I consider that the state of the ATO’s knowledge could be correctly characterised as satisfying each of the following:
the wilful shutting of ATO officers’ eyes to the obvious (category (2) of the Baden categories);
the wilful and reckless failure of ATO officers to make such inquiries as an honest and reasonable person in the position of the ATO would make (category (3) of the Baden categories); and
knowledge of circumstances by key ATO officers which would indicate the facts to an honest and reasonable position person in the position of the ATO (category (4) of the Baden categories).
As I have mentioned above, the ATO’s attitude appears to have been one of “tax now, ask questions later” but in the case of Mr Grimaldi it did not even ask the later questions when it became obvious that it should do so. The investigations undertaken by the ATO demonstrate a “want of probity” in how Mr Grimaldi came to receive the Spotter’s Fee Securities. But once the ATO knew all of the findings in the , actual knowledge of Mr Grimaldi’s conduct replaced anything that might have required for Chameleon to rely on the other categories of knowledge to establish the ATO’s liability.
The Commonwealth raises a defence to Chameleon’s claim on the basis that NSW (acting through NSW Treasury) was a bona fide purchaser for value of each of the Admitted Receipts and therefore any pre-existing interest of Chameleon in those traceable proceeds was extinguished by the payments of each of the Admitted Receipts into the account in the name of the Crown Finance Entity.
The deployment of this defence in this context and on these terms reflects continued reliance by the Commonwealth on English authority in this case — where it is necessary in that jurisdiction to demonstrate a continuing proprietary interest in the subject property in order to bring either a personal or proprietary claim in knowing receipt of it — in the sense that the Commonwealth say any proprietary interest in the proceeds was extinguished by their payment to NSW and cannot be “revived” in the subsequent payment of those funds to the ATO: B**yers, Hodge LJ (with whom Leggatt and Stephens LLJ agreed) at [3].
As mentioned previously, that position does not reflect Australian law and so the utility of this defence in this context — where NSW is not a party to these proceedings, the funds transited through NSW as a mere conduit and no funds were “beneficially received” in the relevant sense by NSW — is dubious at best. It also speaks to the elision of two distinct claims which I discussed above, and which is outlined very clearly in Grimaldi No 2, at [251]:
The starting point is the proposition that a third party who acquires legal title to trust property as a purchaser in good faith for value and without notice of any breach of trust or prior equitable interest has a defence in equity to any claim for specific restitution of the property or for compensation for its value to restore the trust property: see generally Ford and Lee, Principles of the Law of Trusts [22.10320]-[22.10340]. Importantly notice here extends beyond actual notice and includes constructive notice in its traditional equitable sense. Such constructive notice will attribute notice of a fact to a person who, while lacking knowledge of it, had knowledge of facts which would put a reasonable person on inquiry. This species of notice is considered below. What requires present note is that a third party who has only this form of notice when receiving trust property in breach of trust cannot avail of the bona fide purchaser defence. In consequence that person will be liable in proprietary, in rem, proceedings to make specific restitution to the “true owner” of such trust property (or its traceable proceeds) as remains in his or her hands. While this type of claim is, potentially, available to be made in Barnes v Addy “knowing receipt” cases, it is a separate and distinct liability. It is, in essence, a claim to priority.
In my view, the potential application of this defence in this context is primarily confined to the Commonwealth’s submission that, by NSW being a bona fide purchaser for value, it in turn conferred good title to the property onto the ATO (that argument again being one orientated toward disputes over rights of priority in respect of property). In any event, to the extent I am mistaken in this view, I have dealt fully below with the respective arguments advanced by each of Chameleon and the Commonwealth on this issue.
Given that I have found that the Commonwealth bears the onus in making out this defence, I have summarised its submissions on this issue first before I summarise those of Chameleon.
The Commonwealth says that if NSW was a bona fide purchaser for value without notice then any equitable proprietary interest which Chameleon might otherwise have had will have been extinguished without the possibility of revival, even if the Commonwealth had sufficient and relevant knowledge of the breach of fiduciary duty by Mr Grimaldi.
In summary, the Commonwealth made the following submissions in support of its position:
All the funds claimed were paid to the Crown Finance Entity in partial satisfaction of the Grimaldi Proceeds Assessment Order, making NSW a purchaser for value. The source of funds to pay such an order is irrelevant. It is not necessary for an effective control order to be made for Mr Grimaldi to pay money from his own sources.
The payments from IFTC, Mr Grimaldi and under the mortgages were effective to make payment in partial satisfaction of the Grimaldi Proceeds Assessment Order based on the following matters:
(a) It is not necessary for there to be an effective control order under s 29 of the Recovery Act in respect of property the subject of an order to use any source of funds to pay the Grimaldi Proceeds Assessment Order. This is because:
(i) Nothing in the Recovery Act says so. (ii) The absence of any provision as to payment save for the more extreme case of effective control orders and enforcement against assets, indicates an assumption that, like any debt, the debtor can pay from whatever source may be available. It is recoverable as such by operation of s 27(7) of the Recovery Act. (iii) It would be odd if the R**ecovery Act made it necessary to prove “effective control” and obtain an order if there is no apparent issue as to ownership, especially if none is raised by the defendant.
(b) The making of effective control orders by consent on 17 May 2010 in the Further Recovery Act Proceedings in respect of assets of Iron and other nominees does not convert Mr Grimaldi’s property into something less, being only property under his effective control. This is because:
(i) The Recovery Act does not say this. (ii) In any event, the orders were set aside on 11 October 2010 before any payment.
(c) The purposes of s 29 of the Recovery Act is plainly to facilitate enforcement of the Grimaldi Proceeds Assessment Order against property that might, or might not be, property of the miscreant without resolving that question. (d) There can be no real issue that Mr Grimaldi was the beneficial owner of the funds in relation to Iron, IFTC or MGG Capital. This is because:
(i) Chameleon says that Iron, IFTC and MGG Capital were “nominees” of Mr Grimaldi in the FACLS at [18]–[21] and [29]. (ii) The July 2009 Audit Report details how Mr Grimaldi used proceeds to pursue private uses, not consistent with the self-managed superannuation fund authorised uses. (iii) Mr Grimaldi made an affidavit on 23 July 2009 swearing that the assets were his, not the assets of Iron/IFTC. (iv) In the First Deed of Settlement, IFTC agreed to payment of $12.5 million to NSW for the Grimaldi Proceeds Assessment Order and to the rollover of shares to a new superannuation trustee.
(e) There was no failure to notify Chameleon, and even if there was the payment was still effective. This is because:
(i) Section 29(3) of the Recovery Act makes plain that notice only need go to a person who the Crime Commission has reason to believe may also have an interest in the property. (ii) It was not Mr Spark’s evidence that the Crime Commission had reason to believe this.
(f) The proper interpretation of the Recovery Act is not assisted by Mr Spark’s understanding of its effect, or amendments made to the Recovery Act in 2012, in respect of payments made by IFTC (or Mr Grimaldi and purchasers subsequently), applying s 34 of the Interpretation Act 1987 (NSW).
(a) NSW received money pursuant to orders of this court under s 27 of the R**ecovery Act. It was paid into the Proceeds Account. It could not have been received there except as a payment under a proceeds assessment order. Section 32(2) of the R**ecovery Act states that “[t]o the credit of the Proceeds Account there is to be paid the money required by this or any other Act to be paid to the Proceeds Account”. (b) NSW paid the money to the Commonwealth pursuant to orders of this court under s 32(2)(b) of the R**ecovery Act. The payment of money under a Public Act is a payment for the peace, order and good government of NSW. This is especially so when paid to an apparent victim of crime. The actions of NSW in accordance with court orders under an Act cannot be so readily assimilated to the position of a bank or a private party. (c) The issue is not one of “substance” or “intent” over form. This is because:
(i) NSW is not a party to the Deeds of Settlement so there can be no “intent” to some other arrangement. The Deeds of Settlement operate in accordance with their terms to cause payment to NSW, knowing that NSW will pay the Commonwealth. They do not need to operate otherwise than at face value to achieve their plain objective. (ii) Any reduction in the Grimaldi Proceeds Assessment Order liability if tax is paid does not affect payments in fact made under the Grimaldi Proceeds Assessment Order. The effect of payments under the Grimaldi Proceeds Assessment Order on tax liabilities does not affect the character of a payment under the Grimaldi Proceeds Assessment Order.
In summary, Chameleon submits that the Commonwealth’s defence that NSW was a bona fide purchaser for value without notice should be rejected because:
NSW was not a purchaser for value as it gave no consideration.
NSW was not a purchaser for value as it did not receive the money for its use or benefit.
The Commonwealth has failed to discharge its onus of establishing that NSW had no notice of Chameleon’s interest.
If NSW did not have notice, the receipt nevertheless lacked bona fides because the ATO denied Chameleon procedural fairness by failing to take steps to ensure that the interests of third parties were protected adequately, or at all, in the settlement arrangements agreed with Mr Grimaldi.
A purchaser for valuable consideration without notice can give a good title to a purchaser from him with notice. The only exception is that a trustee who has sold property in breach of trust, or a person who has acquired property by fraud, cannot protect himself by purchasing it from a bona fide purchaser for value without notice.
The defence is one which gives the person who claims an interest in property which has been acquired from the bona fide purchaser for value without notice with protection whether that person took their interest with or without notice and whether or not they were purchasers for value provided they did not participate in an original breach of trust: Jonray (Sydney) Pty Ltd v Partridge Bros Pty Ltd [1969] 1 NSWR 621; (1969) 89 WN (Pt 1) (NSW) 568, Herron CJ, Jacobs and Asprey JJA at 577, approved in Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671; [1976] HCA 30, Barwick CJ, Mason and Jacobs JJ at 674–677.
The onus of pleading and proving all elements of a defence of bona fide purchaser for value without notice falls on the person who seeks to rely upon it: Mills v Renwick (1901) 1 SR (NSW) Eq 173; 18 WN (NSW) 213, Simpson CJ in Eq at 213; Parbery v QNI Metals Pty Ltd (2018) 131 ACSR 27; [2018] QSC 240, Jackson J at [220]; see also Barclays Bank Plc v Boulter [1998] 1 WLR 1, Mummery LJ at 8, applying Pilcher v Rawlins (1872) LR 7 Ch App 259, James LJ at 268–269, Attorney-General v Biphosphated Guano Co (1879) 11 Ch D 327, Thesiger LJ at 337, In re Nisbet and Potts’ Contract [1905] 1 Ch 391, Farwell J at 402, In re Nisbet and Potts’ Contract [1906] 1 Ch 386, Collins MR at 404 and Wilkes v Spooner, Farwell LJ at 486.
The operation of the relevant provisions of the Recovery Act on their proper construction do not have the effect for which the Commonwealth contend because they do not make NSW a purchaser for value.
My analysis of the relevant provisions of the Recovery Act, their operation and application as at the relevant dates in 2009 and 2010 mostly accepts the detailed submissions made by Chameleon on this issue. My analysis is as follows:
Section 27 of the Recovery Act relevantly provided in July 2009:
(1) The Commission may apply to the Supreme Court for a proceeds assessment order requiring a person to pay to the Treasurer an amount assessed by the Court as the value of the proceeds derived by the person from an illegal activity, or illegal activities, of the person or another person that took place not more than 6 years before the making of the application for the order, whether or not any such activity is an activity on which the application is based as required by subsection (2) or (2A).
…
(7) The amount a person is required to pay under a proceeds assessment order is a debt payable by the person to the Crown on the making of the order and is recoverable as such.
…
(9) The net amount recovered under a proceeds assessment order is to be paid to the Treasurer and credited to the Proceeds Account.
(10) Notice of an application under this section is to be given to the person against whom the order is sought and any other person required by the regulations to be given notice.
(11) The absence of a person entitled to be given notice of a proceeds assessment order does not prevent the Court from making the order.
(12) The Supreme Court may, when it makes a proceeds assessment order at any later time, make any ancillary orders that the Court considers appropriate.
(1) On the application of the Commission, the Supreme Court must, if of the opinion that an interest in property is subject to the effective control of a person in relation to whom the Court has made a proceeds assessment order, make an order declaring that the interest is available to satisfy the order to the extent that other property is not readily available for that purpose.
(2) If the Supreme Court declares that an interest in property is available to satisfy a proceeds assessment order, the proceeds assessment order may be enforced against the property to the extent specified in the declaration.
(3) If application is made for an order under this section:
(a) the Commission must give notice of the application to the person against whose interest in property the order is sought and to any other person who the Commission has reason to believe may also have an interest in the property to which the application relates, and
(b) each person to whom notice is given, and any other person who claims an interest in the property, may appear, and adduce evidence, at the hearing of the application.
(4) Despite section 7, an interest in property is not available to satisfy a proceeds assessment order made against a person who has effective control of the interest unless the Supreme Court makes a declaration under this section in relation to the interest.
(1) If the Supreme Court makes a proceeds assessment order against a person, all the interests of the person in property are, while the assessed amount remains unpaid, charged in favour of the Crown to the extent necessary to secure payment of the assessed amount.
(2) A charge created by subsection (1) on the making of a proceeds assessment order ceases to have effect:
(a) if the proceeds assessment order is discharged on the hearing of an appeal against the making of the order, or
(b) on payment to the Treasurer of the assessed amount, or
(c) on the bankruptcy of the person subject to the order, or
(d) on the sale or other disposition of the interest charged under the authority of this Act except under section 10 (8) (b) or 14, or
(e) on the sale of the interest charged to a purchaser for sufficient consideration who, at the time of purchase, had no notice of the charge,
whichever first occurs.
(3) A charge that, on the making of a proceeds assessment order, is created by subsection (1) over an interest in property:
(a) is subject to every encumbrance on the property that came into existence before the charge and that would, apart from this paragraph, have priority over the charge, and
(b) has priority over all other encumbrances, and
(c) subject to subsection (2), is not affected by any change of ownership of the interest charged.
(1) The Treasurer is to establish in the Special Deposits Account at the Treasury an account called the Confiscated Proceeds Account.
(2) To the credit of the Proceeds Account there is to be paid the money required by this or any other Act to be paid to the Proceeds Account.
(3) From the Proceeds Account there is to be paid:
(a) to the Treasurer—the amounts from time to time determined by the Treasurer in consultation with the Minister as payable for the purpose of administering this Act, and
(a1) to the NSW Trustee and Guardian—such amounts from time to time as the Treasurer is satisfied the NSW Trustee and Guardian is entitled to be paid under section 19, and
(b) any amount required to be paid in accordance with an order of the Supreme Court under this Act, and
…
(a) “encumbrance” in relation to property, includes any interest, mortgage, charge, right, claim and demand in respect of the property (s 4); and (b) “interest of a person in property” include, amongst other things, an interest the person has in real or personal property, a chose in action enforceable at the suit of the person and money (ss 7(1) and (2)); (c) “interest” in relation to property means a legal or equitable estate or interest in the property or a right, power or privilege in connection with the property (s 7(4)); and (d) “effective control of an interest in property” may occur even if the person does not have a legal or equitable estate or interest in the property or the person has no direct or indirect right, power or privilege in connection with the interest (s 8(1)).
(a) the Grimaldi Proceeds Assessment Order was made pursuant to s 27 of the Recovery Act that Mr Grimaldi pay the Treasurer the sum of $19,531,791.93; and (b) the ATO Payment Order was made pursuant to s 27(12) of the Recovery Act that the Treasurer pay to the ATO from the Confiscated Proceeds Account (a term which is not defined in the orders) any such amounts paid in satisfaction or partial satisfaction of the Grimaldi Proceeds Assessment Order in accordance with s 32(3)(b) of the Recovery Act.
(a) the Grimaldi Proceeds Assessment Order in the sum of $19,531,791.93 became a debt payable by Mr Grimaldi to the Crown and was recoverable as such (s 27(7)); (b) all the interests of Mr Grimaldi in property were charged in favour of the Crown to the extent necessary to secure payment of the Grimaldi Proceeds Assessment Order, subject to every encumbrance on the property that came into existence before the charge (ss 31(1) and (3)(a)); and (c) the Treasurer was to pay from the Confiscated Proceeds Account to the ATO any amounts paid in satisfaction or partial satisfaction of the Grimaldi Proceeds Assessment Order (s 32(3)(b)).
(6) The amount a person is required to pay under a proceeds assessment order or unexplained wealth order is a debt payable by the person to the Crown on the making of the order and is recoverable as such.
…
(8) The net amount recovered under a proceeds assessment order or unexplained wealth order is to be paid to the Treasurer and credited to the Proceeds Account.
(9) Notice of an application for a proceeds assessment order or unexplained wealth order is to be given to the person against whom the order is sought and any other person required by the regulations to be given notice.
(10) The absence of a person entitled to be given notice of a proceeds assessment order or unexplained wealth order does not prevent the Supreme Court from making the order.
(11) The Supreme Court may, when it makes a proceeds assessment order or unexplained wealth order or at any later time, make any ancillary orders that the Court considers appropriate.
(a) The court first determines whether there is property which is not under the effective control of the wrongdoer and is readily available to satisfy a proceeds assessment order (s 29(1)). (b) The court must make a declaration that an interest in available to satisfy the proceeds assessment order to the extent that other property is not readily available for that purpose (s 29(1)). (c) The Crime Commission must give notice of the application to the person against whose interest the order is sought (s 29(3)(a)). (d) The Crime Commission must give notice of the application to any other person who the Crime Commission has reason to believe may also have an interest in the property (s 29(3)(a)). (e) Each person to whom notice is given and any other person who claims an interest in the property may appear and adduce evidence at the hearing of the application (s 29(3)). (f) An interest in property is not available to satisfy a proceeds assessment order made against a person who has effective control of the interest unless this court makes a declaration under s 29 of the Recovery Act in relation to the interest (s 29(4)).
[67] The fourth ground complained that the appellants were denied procedural fairness, as affected parties. If they had a sufficient interest in the orders made with the consent of the Commission and Mr Grimaldi, that ground should be upheld. If they did not, not only should that ground be rejected, but their standing to complain about the consent orders on other bases must be in doubt. It is the last proposition which the Commission sought to raise by way of an objection to the competency of the third appeal.
[68] In the course of the appeal, the logical proposition was put to counsel for the appellants that the proceeds assessment order, and hence the subject matter of the consent orders, was concerned only with the “interests in property of Grimaldi”. If the appellants were interested in the property, their interests would not be affected; if, on the other hand, they had no interests in the property, they had no interest which would be affected by the consent orders. The appellants’ answer was, in substance, that the purpose of the orders was to provide for payment of the tax debt incurred by Mr Grimaldi from the property which was the subject of the restraining order, regardless of another party having relevant interests in the property. Accordingly, unless the appellants were entitled to be heard before the consent orders were made they were at risk of losing their property because they had no opportunity to assert their interest in the property, prior to its disposal in accordance with the orders.
[69] The fact that the “further matters” were noted by the Court may have little bearing on the appellants’ challenge, but they are relevant to an understanding of the legislative scheme and the steps which will need to be taken before the interests of the appellants are adversely affected. Thus, although s 29 is not formulated in terms which require the Commission to make an application, the effect of sub-s 29(4) means that the definitions in ss 7 and 8 will not have any automatic operation, nor will they permit property to be disposed of in order to satisfy a proceeds assessment order, absent a declaration by the Court. If s 29(3) is not determinative of the entitlement of the appellants to have notice of an application under that section, nevertheless, in circumstances where the property is in the name of the appellants, it will generally be expected, under general law principles, that they will obtain notice of the application, as they appear to have done. This, in substance, is the statutory mechanism for resolving disputes as to the availability of property to satisfy the interests of one individual rather than another. At least by inference, the Public Trustee will not be able to dispose of property to satisfy a proceeds assessment order absent a further order from the Court. Again, there may not be an express statutory guarantee to protect the interests of the appellants, but the Public Trustee would presumably be at risk if it sought to give effect to an order by disposing of interests obtained from named individuals in circumstances where no application under s 29 had been made and determined.
[70] The precise effect of these provisions was not discussed in the course of the appeal. Nevertheless, they provide an answer to the appellants’ first four grounds of challenge. Accepting that there was a dispute as to who in fact had effective control of interests in the property the subject of the proceeds assessment order, that dispute could be, and was proposed to be, litigated by the seeking of declarations pursuant to s 29 of the Recovery Act. The statute provides for the disposal of property in accordance with a declaration by the Court identifying whether the party subject to a proceeds assessment order has effective control of the interests in the property.
[71] It is not relevant for present purposes to determine the circumstances in which a person may be deemed to have an interest in property for the purposes of the Recovery Act, to the exclusion of others who may have such an interest under the general law: see Recovery Act, ss 7 and 8. Mr Grimaldi may have had interests in property under the general law, which was under the effective control of the appellants for the purposes of the Recovery Act, or vice versa. If Mr Grimaldi had effective control for the purposes of the Recovery Act, it would be open to the Court to make an order under s 27 for the purposes of a payment to the Treasurer, in order to allow a payment by the Treasurer to the Australian Taxation Office, even though, under the general law, the appellants had interests in the property which might otherwise have allowed them to dispose of the property.
[72] It follows that the making of the consent orders, and in particular orders 9 and 10, did not deprive the appellants of their interests in the property, nor did it deprive them of an opportunity to argue that those interests were not the subject of effective control by Mr Grimaldi. It not being suggested that they were prejudiced in any other way, the claim that they were denied procedural fairness by the making of the consent orders has not been made good.
[73] It does not necessarily follow that they did not have standing to challenge the making of the consent orders in this Court. It is at least arguable that a right of standing to appeal against a decision in proceedings to which one is a party is more extensive than the right to be heard in relation to the making of the orders sought to be challenged. In any event, it is not necessary to resolve this question, as it is appropriate to dispose of the present appeal, which has been fully argued, on the merits.
(a) Section 29 of the Recovery Act sets out the steps which need to be taken before the interests of a party are adversely affected (at [69]). (b) The effect of s 29(4) of the Recovery Act is the definitions of “interest in property” (s 7) and “effective control” (s 8) will not permit property to be disposed of in order to satisfy a proceeds assessment order, absent a declaration by the court (at [69]). (c) Under both s 29(3) of the Recovery Act and general law principles, where property is in the name of a party it is generally expected that they will obtain notice of an application by the Crime Commission under s 29 of the Recovery Act (at [69]). (d) Section 29 of the Recovery Act is the statutory mechanism for resolving disputes as to the availability of property to satisfy the interests of one party rather than another (at [69]). (e) If Mr Grimaldi had effective control for the purposes of the Recovery Act, it would be open to the court to make an order under s 27 of the Recovery Act for the purposes of a payment to the Treasurer, in order to allow a payment by the Treasurer to the ATO, even though, under the general law, a party had interests in the property which might otherwise have allowed them to dispose of the property. (f) The making of the Grimaldi Proceeds Assessment Order by consent did not deprive the appellants of their interests in the property, nor did it deprive them of an opportunity to argue that those interests were not the subject of effective control by Mr Grimaldi (at [72]).
On 17 May 2010, Deputy Registrar Giurastante of this court made declarations by consent in the Further Recovery Act Proceedings that Mr Grimaldi had effective control (within the meaning of ss 7 and 8 of the Recovery Act) of Iron, Iron International, Ore Investments and MGG Capital (as trustee for the Webtel Super Fund) and their respective interests in property. No declarations were sought, or made, under s 29 of the Recovery Act. As a result of the operation of s 29 of the Recovery Act, none of that property could be used to satisfy the Grimaldi Proceeds Assessment Order.
It follows that the use of the property under the effective control of Mr Grimaldi to satisfy the Grimaldi Proceeds Assessment Order without a declaration under s 29 of the Recovery Act did not operate to deprive Chameleon of any interest in, or claim to, any of that property.
For this reason, I consider that NSW was not a bona fide purchaser for value without notice taking the property free of any interests that Chameleon might have in it.
It is unnecessary for me to refer to any of the evidence from Mr Spark (T268–269) as to how the Crime Commission understood the operation of s 29 of the Recovery Act or for me to give any consideration to any amendments made to the Recovery Act in 2012. I agree with the Commonwealth that neither of those matters can be legitimately used in the exercise of properly interpreting the operation of the relevant provisions of the Recovery Act in 2009 and 2010.
It is clear that by operation of s 27(7) of the Recovery Act as at July 2009 and s 28C(6) of the Recovery Act as at September 2010, the amount a person is required to pay under a proceeds assessment order “is a debt payable by the person to the Crown on the making of the order and is recoverable as such”. As a result, the Grimaldi Proceeds Assessment Order on 21 July 2009 created a debt owing by Mr Grimaldi to the Crown.
But, as explained above, the decision in IFTC v Crime Commission meant that the effect of s 29(4) of the Recovery Act is the definitions of “interest in property” (s 7) and “effective control” (s 8) did not permit property to be disposed of in order to satisfy the Grimaldi Proceeds Assessment Order, absent a declaration by the court under s 29(1) of the Recovery Act. In light of there being no declaration under s 29(1) of the Recovery Act by the court in the Recovery Act Proceedings and the Further Recovery Act Proceedings, none of the property which was declared to be under the effective control of Mr Grimaldi was permitted to be used to satisfy the Grimaldi Proceeds Assessment Order. Mr Grimaldi had no other material source of wealth other than the funds in the IFTC accounts held for Iron and as a result of the effective control declarations on 17 May 2010 the assets of Iron were not available to satisfy the Grimaldi Proceeds Assessment Order without there being a declaration under s 29(1) of the Recovery Act. This is because other property was not “readily available” to satisfy the Grimaldi Proceeds Assessment Order.
To make the property of Iron, Iron International, Ore Investments and MGG Capital (as trustee for the Webtel Super Fund) which had been declared to be under the effective control of Mr Grimaldi available to satisfy the Grimaldi Proceeds Assessment Order, it was necessary for the Crime Commission to give notice under s 29(3) of the Recovery Act to any other person who the Crime Commission had reason to believe may also have an interest in the property to which the application related. There is no evidence that the Crime Commission gave any such notice or notified any party whose interests might be affected under the general law. No necessary declaration under s 29(1) of the Recovery Act was ever sought by the Crime Commission. This is despite the fact that notation 17(i) to the orders made on 21 July 2009 stated that the Crime Commission intended to apply for an order under s 29 of the Recovery Act that the interests specified in the schedules to the orders were “available to satisfy” the Grimaldi Proceeds Assessment Order. This was amongst the notations to which Basten JA was referring in [69] of IFTC v Crime Commission that were “relevant to an understanding of the legislative scheme and the steps which will need to be taken before the interests of the appellants are adversely affected”.
A further reason that the defence of bona fide purchaser for value without notice fails in this case is that, as a matter of fact, each of the payments made by Mr Grimaldi to NSW was immediately passed to the ATO at the direction of the Crime Commission. NSW did not receive or keep any of the payments for its own use or benefit. This is classically a case of a ministerial receipt which would defeat any claim in knowing receipt brought against NSW in circumstances where those funds must be “beneficially received”.
Under the Second Deed of Settlement, payments up to the amount of $19,531,791.93 were to be made by Mr Grimaldi to NSW in the form of bank cheque to the “NSW Treasury” or transfers to the Crown Finance Entity (cll 2.3 and 2.4). Under the ATO Payment Order made on 21 July 2009, NSW was obliged to pass on those payments to Treasurer to the ATO.
Chameleon does not allege that NSW received the funds as agent for the ATO but instead asserts that NSW received the funds as the ATO’s nominee under the Deeds of Settlement with an obligation to pass them to the ATO under the orders made on 21 July 2009 (order 10) and 8 October 2010 (order 9).
Chameleon says that the three reasons identified by the Commonwealth as to why NSW was interposed in the payment arrangements are:
NSW had a charge over the assets under Mr Grimaldi’s effective control under s 31 of the Recovery Act and therefore had priority over the debt owed by Mr Grimaldi to the ATO so payment to the ATO through the Crown Finance Entity side stepped the charge.
Payment to NSW, coupled with an obligation for NSW to pass on the payment immediately to the ATO, allowed for the Grimaldi Proceeds Assessment Order and the payment due under the Second Deed of Settlement to be discharged with a single payment.
The Crime Commission could enforce orders against assets under the effective control of Mr Grimaldi, unlike the ATO.
Chameleon argues that none of these reasons indicate that the payments from Mr Grimaldi were received for the use and benefit of NSW but merely explain why NSW was no more than a channel or conduit to pass the funds from Mr Grimaldi to the ATO. I agree.
There are a number of decisions which set out the notion of the ministerial style of “receipt” where the money is not received by a party for its own use and benefit. A key case is that of Evans, which I have considered earlier in this judgment. As mentioned above, one of the issues on appeal was whether European Bank was liable under the first limb of Barnes v Addy for knowing receipt. Spigelman CJ (with whom Handley and Santow JJA agreed) at [163]–[175] surveyed and applied the principles from the authorities which contrasted the position of banks who received money for their own benefit (for example, in the satisfaction of a debt or conscious application to an overdraft) and banks who receive money in the ministerial role as a mere depository or channel and therefore cannot liable for knowing receipt. Spigelman CJ at [166] said that this treatment of banks “may be an application of the maxim that equity looks to the intent not to the form”.
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Commonwealth of Australia
(2003) 179 FLR 1
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The effect of this was that Chameleon’s victory at trial and on appeal in the Chameleon Proceedings proved to be strikingly hollow. By the time the inquiry ordered to determine the amount of profits to be disgorged by Mr Grimaldi was underway, most (if not all) of Mr Grimaldi’s remaining funds had been paid to the Commissioner. Mr Grimaldi entered voluntary bankruptcy on 2 July 2014 and the inquiry was never completed.
In these proceedings, commenced on 8 April 2020, Chameleon brings a claim against the Commonwealth of Australia for “knowing receipt” under the first limb of Barnes v Addy (1874) LR 9 Ch App 244. It contends that as a result of the orders made by Jacobson J following the Chameleon Judgment and by reason of Mr Grimaldi’s liability to account as a defaulting fiduciary, the profits made by Mr Grimaldi in relation to the Spotter’s Fee Securities and the Existing Shareholding (or their traceable proceeds) were “trust property”, such that the Commonwealth holds the funds the Commissioner received from Mr Grimaldi and his nominees on constructive trust for Chameleon or is otherwise liable to pay equitable compensation to it.
The proceedings raised several complex issues, most significantly in the application and ambit of the “trust property” component of Barnes v Addy. I received in excess of 450 pages of closely reasoned written submissions from Chameleon and the Commonwealth covering all issues.
In the orders made following the Chameleon Judgment, Jacobson J did not declare a constructive trust over the Spotter’s Fee Securities and the Existing Shareholding or their proceeds. Despite this, Chameleon contends that its knowing receipt claim should succeed because a fiduciary’s duty to account for unauthorised profits when referable to identifiable property is a fiduciary obligation with respect to property akin to a trust relationship or other custodial fiduciary relationships falling within the meaning of “trust property” for the purposes of the first limb of Barnes v Addy.
The Commonwealth submits that I should reject Chameleon’s case as failing at the first hurdle. The Commonwealth says that Chameleon’s claim is unsupported by authority and is contrary to the presently understood first limb of Barnes v Addy under Australian law as it applies to non-trustee fiduciaries. The Commonwealth goes so far as to say that the acceptance of Chameleon’s claim involves a radical change to the law by misreading binding authority, overlooking warnings provided in an area fraught with terminology that might confuse the unwary and would make categorical mistakes as to the place of a well-established personal remedy that sits outside the authorities and principles which define the boundaries of the first limb in Barnes v Addy.
Despite these various warnings from the Commonwealth, I have determined that on the contemporary understanding of the application of a claim in knowing receipt under the first limb in Barnes v Addy, which fixes on the conscience of the recipient, Chameleon’s case should succeed.
In summary, on the four principal issues that give rise to the acceptance of Chameleon’s knowing receipt claim against the Commonwealth, I have reached the following conclusions:
The Commonwealth received “trust property” in the form of the traceable proceeds of sale of the Spotter’s Fee Securities which had been obtained in breach of fiduciary duty.
The Commonwealth had the requisite knowledge for it to be liable as a knowing recipient.
The receipt of the relevant payments by the NSW Treasury was not as a bona fide purchaser for value without notice and therefore provides the Commonwealth with no defence to Chameleon’s claim.
Portions of the last two payments of $855,000 and $850,000 to discharge the Commonwealth’s mortgages on properties held by members of the Grimaldi family were the traceable proceeds of the profits obtained by Mr Grimaldi in breach of fiduciary duty, are not protected by the indefeasible title under those mortgages and those portions can be recovered by Chameleon.
However, Murchison failed to pay the $350,000 due to Winterfall on execution of the Heads of Agreement. It did not have the funds to do so. The effect of Murchison’s inability to fund the payment to Winterfall meant that Mr Zuks stood to lose Winterfall’s interest in the Iron Jack Tenements, and Mr Grimaldi stood to lose the benefit of the commercial opportunity that he wished for Murchison to take up for his benefit.
Mr Grimaldi took matters into his own hands. In late June 2004, he made arrangements for Chameleon to make a share placement of 8 million ordinary shares at $0.045 cents per share for a capital raising of $360,000. The stated purpose for the share placement was for exploration activity at a gold mine in Palm Springs. Mr Barnes drew two cheques on Chameleon’s bank account for $56,250 and $96,500 respectively, each payable to one of the vendors of the Iron Jack Tenements. The source of the funds for the cheques was the capital raising which Mr Grimaldi had arranged on Chameleon’s behalf. Those payments to the vendors comprised more than 40% of the purchase price.
The reverse takeover of Winterfall was completed on 11 November 2004. It allowed Murchison to obtain ownership, through Winterfall, of the Iron Jack Tenements, which ultimately proved profitable for Murchison and its shareholders. It also resulted in shareholders in Winterfall receiving 80 million shares and some 30 million options in Murchison in exchange for their shares in Winterfall. Of those, 10 million shares and 12 million options were issued to Pinnacle Nominees Pty Limited, a nominee of Mr Grimaldi and Mr Barnes.
On 12 November 2004, Mr Grimaldi resigned from the board of Murchison.
The Commonwealth initially put in issue:
whether the Existing Shareholding formed part of Chameleon’s claim against Mr Grimaldi in the Chameleon Proceedings; and
whether any profits derived from the Existing Shareholding were attributable to any breach of duty.
But at the conclusion of the trial, the Commonwealth conceded that the relevant payments it received could be treated as the proceeds or traceable proceeds of the sale of the Spotter’s Fee Securities (T484). The issues raised by the Commonwealth regarding the Existing Shareholding therefore became otiose.
The rule in Jones v Dunkel only applies once all the evidence in the case is in.
Whether some inference should be drawn, what inference, and with what significance, are all matters of discretion that depend upon the particular case. A particular inference to be drawn will generally only be of material significance where the balance of evidence is equivocal.
In some cases, no inference will be drawn merely because corroborative or cumulative witnesses are not called.
The rule in Jones v Dunkel cannot be used to draw a positive inference if the evidence does not otherwise admit of a rationally drawn inference.
The rule in Jones v Dunkel does not permit a court to infer that the uncalled evidence would have been positively damaging to a party’s case.
The rule in Jones v Dunkel does not supply missing gaps in the evidence, or convert conjecture or suspicion into inference; rather, it enables an already available inference to be drawn more comfortably.
The effect of the rule in Jones v Dunkel is not that any inference favourable to the party that failed to call the witness should not be drawn.
Chameleon submitted that, a week before the hearing before me and without explanation, the Commonwealth decided not to call Mr Barns, Mr Zafiriou and Ms McLachlan as witnesses in circumstances where they were all available and would be expected to have been called as witnesses by the Commonwealth. Relying on Jones v Dunkel, Chameleon submitted that I should draw inferences that their evidence would not have assisted the Commonwealth on the question of the ATO’s knowledge and that I can more readily draw inferences against the Commonwealth and in favour of Chameleon in relation to that issue in their absence.
I accept Chameleon’s submissions that I should make Jones v Dunkel inferences in respect of the specific factual matters that I have identified below.
Although the Commonwealth submitted that the absence of each of Mr Barns, Mr Zafiriou and Ms McLachlan is of no significance in circumstances where the Commonwealth had the Chameleon Judgment and actual knowledge of the liability of Mr Grimaldi, I do not accept that submission in respect of the relevant events in advance of delivery of the Chameleon Judgment. There are matters where it is appropriate for Jones v Dunkel inferences to be drawn about the knowledge of the ATO at particular points in time, which I have outlined in further detail below.
A further example was an issue which arose concerning inconsistency in the statements made in [105] and [107] of Mr O’Neill’s affidavit regarding whether the Australian Government Solicitor (AGS) did or did not obtain a copy of the originating process in the Chameleon Proceedings. Mr O’Neill said in those paragraphs respectively that the AGS did not obtain anything more than the originating process (at [105]) and did not obtain and/or provide ATO staff a copy of the originating process (at [107]). Mr O’Neill stated in cross-examination that the AGS did obtain a copy of the originating process and then said that he stood corrected by his affidavit, and he would rely on it (T140–141). There was an obvious inconsistency in the respective parts of the affidavit which Mr O’Neill initially acknowledged (T142), but then later said that he apologised if they were “ambiguous and inaccurate in relation to that matter” (T149). Mr O’Neill would not, however, simply acknowledge that they were directly inconsistent (T149).
Thirdly, despite Mr O’Neill giving evidence about the Chameleon Proceedings in [71], [72] and [103] of his affidavit, and initially saying in cross-examination that he turned his mind to the specific relief that was sought against Mr Grimaldi (T102), Mr O’Neill then repeatedly portrayed a significant lack of knowledge about the Chameleon Proceedings, examples of which included the following:
He did not know when or how he came to know about the nature of the claim (T101–102).
He did not understand what the relief sought was and repeatedly described it as a personal claim for damages (T102).
He was unaware of the causes of action pleaded against Mr Grimaldi (T223–224).
He said in [71(f)] of his affidavit that there was a personal claim for damages and equitable compensation as a de facto director as against Mr Grimaldi. In cross-examination, he said that these were the only two claims for relief he became aware of between 2008 and 2010 (T224).
He knew that there were orders made after the Chameleon J**udgment but he was unaware of the details of the orders (T225).
He said that his present understanding was that there was an account of profits but he did not recall knowing that at the time between 2008 and 2010 (T225). Given that [72] of his affidavit states that to his knowledge Chameleon was only claiming damages and equitable compensation in the Chameleon Proceedings, he could not have known that it was also claiming an account of profits at that time.
Fourthly, Mr O’Neill gave unreliable evidence concerning his understanding of the requirement of a defaulting fiduciary to account following a breach of fiduciary duty. In cross-examination, Mr O’Neill gave evidence that he understood each of the following (T109–110):
the legal concepts of proprietary interest, beneficial ownership and personal claims;
the liability to account as a constructive trustee;
a fiduciary owes fiduciary duties, such as a company director to their company;
the law prohibits fiduciaries from profiting from their position as fiduciaries without the informed consent of the person to whom they owe the fiduciary obligations; and
the law prohibits fiduciaries from seeking to advance their own interest when there is a real possibility of conflict with the interests of their principal, being the person to whom the fiduciary obligations are owed.
Mr O’Neill then gave evidence that if there was a breach of fiduciary duty, the principal could seek a declaration and one of the remedies would be an account of profits (T111–112).
Having given this evidence, Mr O’Neill was then asked a series of questions to which he professed ignorance regarding the legal position. Mr O’Neill was asked whether in the period from 2008 to 2010 he understood that a fiduciary who made a profit from a breach of fiduciary duty could use those profits to buy a motor vehicle (T112–113). Mr O’Neill’s initial answer was that the fiduciary could do so but legally they should not because the funds were held on trust as a result of the breach of fiduciary relationship (T112–113). Mr O’Neill then said that as a matter of fact the fiduciary could buy a motor vehicle with the profits, but the question was then clarified as to whether Mr O’Neill understood that the fiduciary would be legally entitled to use the profit obtained in breach of fiduciary duty to buy a motor vehicle (T113). Mr O’Neill answered that it was his understanding that the fiduciary would hold the funds in trust and he did not understand whether they were legally entitled to use it to buy a motor vehicle (T114). The questioning then turned to whether Mr O’Neill turned his mind to whether or not Mr Grimaldi could legally use the profit he obtained as a result of his breach of fiduciary duties owed to Chameleon to pay a tax debt. Mr O’Neill responded that he did not know the answer in the period from 2008 to 2010 or at the present time (T114–115). I consider these shifts in the position of Mr O’Neill’s evidence to be unsatisfactory although I do not go so far as to find that Mr O’Neill knowingly gave false evidence, which Chameleon urged me to do.
Finally, Mr O’Neill gave unsatisfactory evidence on which I could not rely regarding two topics: whether he received legal advice on the effect of the Chameleon Proceedings and whether he read the Chameleon Judgment at any time prior to these proceedings.
On the first topic of whether he received legal advice on the effect of the Chameleon Proceedings, Mr O’Neill in [72] of his affidavit gave the following evidence:
On 22 May 2008, the Public Trustee opened an account with Commsec into which the shares were transferred.
On 6 June 2008, IFTC and IFTC Broking appeared in the Recovery Act Proceedings through their solicitors, Atanaskovic Hartnell, and filed notices of intention to appeal the First Restraining Orders.
On 13 June 2008, IFTC and IFTC Broking were joined as defendants to the Recovery Act Proceedings and also filed a notice of appeal against the First Restraining Orders.
As outlined below, on 15 July 2009, the ATO would be provided with an expert report which concluded there was prima facie evidence to support the proposition that the July 2005 Trust Deed was “not a genuine document”.
In cross-examination, Mr O'Neill identified Mr Barns as the person at the ATO who would have the detail of the inquiries "to verify the truth” of what it were told by Mr Karam and Mr Brazig (T129). But Mr Barns was not called to give evidence to provide any such detail. In the absence of that evidence, I infer that there were no inquiries conducted by the ATO and that it accepted the truth of what it was told by Mr Karam and Mr Brazig.
In cross-examination, Mr O’Neill also gave evidence that Mr Grimaldi’s explanation lacked credibility and agreed that Mr Karam’s explanation for why it was that Mr Grimaldi received a substantial volume of shares and options in Murchison was a lot more coherent, rational and understandable than the one given by Mr Grimaldi during the interview on 27 January 2009 (T196–197).
Mr O’Neill also gave evidence that if the information provided by Mr Karam was true, it would be a breach of fiduciary duty by Mr Grimaldi, and the Murchison shares he received through Pinnacle would be a product of that breach of fiduciary duty (T200).
Mr O’Neill’s further evidence was that the information provided by Mr Karam “would be information that went into the audit”, that it “was obviously taken into account” and that he “assumed it was taken into account” (T197–198). But there is no evidence that the information and documents provided by Mr Karam was ever taken into account by the ATO. It was never recorded as providing any basis for the reasons expressed by the ATO for the approach that it took in the investigations, the audit or the tax assessments of Mr Grimaldi. Rather, the evidence reveals that it was ignored by the ATO.
In the absence of evidence to the contrary from Mr Barns and Ms McLachlan and any documents which evidence it, I also infer that the ATO did not obtain legal advice on the consequences of the conduct of Mr Grimaldi in using the funds of Chameleon to obtain profits for himself.
Notation 20 to the orders made by Deputy Registrar Lee on 21 July 2009 provided:
As is apparent from these provisions, the overall purpose of the Second Deed of Settlement was to enable Mr Grimaldi and MGG Capital (as trustee of the Webtel Super Fund) to pay $20 million to the Commissioner under the Payment Plan which would result in the Grimaldi ATO Judgment and the MGG ATO Judgment being satisfied and, subject to cl 5.2, the parties would be forever released from their tax liabilities in respect of the relevant years.
Chameleon submits that the fiduciary’s duty to account for profits, when referable to identifiable property, is the basis on which that property is considered to be “trust property” for the purposes of the first limb of Barnes v Addy either because the existence of that duty meant that the fiduciary held the profit “on trust” for the principal (applying Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36, Deane J at 199) or the existence of the duty was a “fiduciary duty with respect to property” (applying Simmons, Gleeson JA at [88(1)]).
Chameleon says that applying the first limb of Barnes v Addy to this “custodial duty” is not dependent on the principal having a judicially recognised antecedent or current proprietary interest or on whether a given remedy, either personal or proprietary, has been or will be granted.
Chameleon argues that the application of these principles means that any third party who receives this “trust property” will be liable under the first limb of Barnes v Addy if that transfer and receipt amounts to a breach of the fiduciary’s custodial duty to hold the gain on behalf of the principal until it is disgorged and the recipient has the required degree of knowledge that:
the property so received represents an unauthorised gain or profit obtained by the fiduciary in breach of the fiduciary duty or the traceable proceeds of that profit; and
the defaulting fiduciary has transferred the unauthorised profit, or its traceable proceeds, to the third party in breach of their duty to hold that profit for the benefit of the principal until it is disgorged.
On this analysis, Chameleon says that the Spotter’s Fee Securities, and the profits from the sale of the Spotter’s Fee Securities and the Existing Shareholding, were unauthorised profits obtained by Mr Grimaldi, by his nominee company or his alter-ego, Iron, by reason or use of his fiduciary position. The consequence of Chameleon’s case is that Mr Grimaldi and Iron had a duty to hold the Spotter’s Fee Securities and the Existing Shareholding for the benefit of Chameleon because they were held subject to a fiduciary duty with respect to property and thus were “trust property” for the purposes of the first limb of Barnes v Addy. Chameleon contends that it was this “trust property” or its traceable proceeds which were transferred to and received by the ATO in breach of Mr Grimaldi’s obligation to hold the property for the benefit of Chameleon, and the ATO had the required degree of knowledge of each of these facts.
“held by him as a constructive trustee” (Hospital Products, Mason J at 107–108);
as being subject to the “imposition of a constructive trust” (Warman, Mason CJ, Brennan, Deane, Dawson and Gaudron JJ at 563–564); and
for which the fiduciary is “liable as a “constructive trustee”” (Ancient Order of Foresters, Gageler J at [74]).
Under Australian law, fiduciaries duties are proscriptive, not prescriptive. If these obligations are breached, the errant fiduciary “must account for any profits and make good any losses arising from the breach”. So much was stated in Breen v Williams by Gaudron and McHugh JJ at 113 (footnotes omitted):
Secondly, and relatedly, English jurisprudence has conventionally approached the rationale for liability in knowing receipt as being primarily concerned with the protection of “rights of priority in relation to property”: Agip (Africa) Ltd v Jackson [1990] Ch 265, Millett J at 292–293.
While this rationale provides a neat answer to any proprietary claim to property in which the claimant has a subsisting equitable interest and which remains the hands of the recipient, Australian courts have observed that it does not provide “sufficient justification for imposing a personal liability to account” which is fault-based and “arises as a matter of conscience not of property”: Grimaldi No 2, Finn, Stone and Perram JJ at [263]–[267], cited in Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81, Leeming JA (with whom Bathurst CJ and Sackville AJA agreed) at [44]; McFee, Leeming JA at [106]. Personal liability in knowing receipt should therefore be “distinguished from claims based on the vindication of proprietary rights”: Chickabo Pty Ltd v Zphere Pty Ltd (2019) 57 VR 406; [2019] VSC 73, Sifris J at [184], citing Fistar, Leeming JA at [44].
While the judgment in Barnes v Addy is not to be understood as an exhaustive statement of the circumstances in which third parties may become liable following a breach of trust or fiduciary duty (Hasler, at [68]; Grimaldi No 2, at [24] and [248]; Farah Constructions, at [161]), it is the only form of liability pleaded by Chameleon in this case.
As outlined above, the well established position in Australian law that liability in knowing receipt is fault-based, the imposition of which is a matter of conscience, reflects the fact that liability of this kind is responding to conduct of an “unconscionable” character (in a similar sense to that used in Ancient Order of Foresters by Gageler J at [67]–[69]), first by the errant fiduciary and then, by extension, by the party who receives “trust property” with the requisite knowledge of its origins.
It has been emphasised that personal liability in knowing receipt it is not based upon “inflexible formulae”: Grimaldi No 2, Finn, Stone and Perram JJ at [247]. Nor, as mentioned above, is it parasitic upon pre-existing proprietary rights or interests in the subject property: Blue Mirror, Leeming JA (with whom Ward P and Michelmore JA agreed) at [30]; cf Byers.
It follows that it is not the mere receipt of “trust property” which is ultimately determinative of the recipient’s liability; the outcome of that inquiry will ultimately reflect equity’s concern with the conscience of the recipient: Break Fast Investments Pty Ltd v Rigby Cooke Lawyers [2022] VSCA 118, Kyrou, McLeish and Walker JJA at [113], citing Consul Developments, Gibbs J at 398, Stephen J at 412; Grimaldi No 2, Finn, Stone and Perram JJ at [267]; Westpac Banking Corporation v Bell Group Ltd (in liq*) (No 3)* (2012) 44 WAR 1; [2012] WASCA 157 (Bell Group No 3), Drummond AJA at [2129]–[2130].
The equitable jurisdiction imposing personal liability on a knowing recipient is engaged in the manner summarised in Turner by White JA at [92] as follows:
The obvious point of difference is that under Australian law a constructive trust as a remedy may or may not arise for a breach of fiduciary duty where unauthorised profits have been earned, but in England it is imposed institutionally giving rise to an immediate proprietary interest over the fund representing those profits for the principal as beneficial owner of that fund: Hotel Portfolio, Lord Briggs at [23]–[25], [28]–[29] and [100].
A possible further point of distinction is the characterisation of the obligation imposed on an errant fiduciary to account for its unauthorised profits as a “self-standing” (and apparently prescriptive) fiduciary duty as distinct from a remedy for breach of that core proscriptive obligation. This is a matter I will return to below.
It follows that, under English law, the argument raised by the Commonwealth that the Chameleon Final Orders did not impose a constructive trust over the proceeds of Mr Grimaldi’s breach of fiduciary duty and are therefore not “trust property” would never arise because at all times those proceeds would be held on constructive trust and so would readily be regarded as “trust property”.
For the reasons I will shortly explain, I do not consider that the lack of the declaration of a constructive trust over Mr Grimaldi’s profits within the Chameleon Final Orders means that Chameleon cannot maintain a claim for knowing receipt of the traceable proceeds of those profits.
In Farah Constructions, the High Court commenced its analysis of the issue of knowing receipt stating that the reasoning of the Court of Appeal would be examined on the assumption that a fiduciary duty to disclose the subject information was owed and had been breached, contrary to their conclusion otherwise (at [109]). Evidently, the issue as to whether liability in knowing receipt could attach to third parties in their dealings with non-trustee fiduciaries generally — that is, as a matter of principle — was not contested, either in the Court of Appeal or in the High Court, and so the correctness of this assumption in the law was not examined.
It follows that Farah Constructions is “not authoritative for any proposition concerning the liability of third parties pursuant to the first limb of Barnes v Addy for knowing receipt in connection with fiduciaries who are not trustees": Pittmore, Leeming JA at [156]. That is because any proposition which has been assumed to be correct without argument in a superior court is not binding on a lower court even when it forms part of the ratio decidendi: see Coleman v Power (2004) 220 CLR 1; [2004] HCA 39, McHugh J at [79]; CSR Ltd v Eddy (2005) 226 CLR 1; [2005] HCA 64, Gleeson CJ, Gummow and Heydon JJ at [13].
After I reserved my judgment in these proceedings, the High Court delivered judgment in Naaman v Jaken Properties Australia Pty Ltd (2025) 99 ALJR 295; [2025] HCA 1. In Jaken, albeit without the benefit of any argument and so in circumstances where it was not necessary to decide the point, Gordon, Edelman and Steward JJ (dissenting in the result) noted without elaboration the assumption in the law referred to in Farah Constructions at [113], stating at [84] as follows (emphasis added in underline):
Further, I note that in each court through which the Jaken litigation travelled, the threshold question as to whether liability may attach to third parties “under either or both limbs of Barnes v Addy” appears to have been whether the relevant duty was fiduciary in character, not whether the fiduciary duty was owed in the capacity as trustee.
While the proposition has been characterised by the High Court in both Farah Constructions and Jaken as an assumption in the law, there is a substantial body of first instance and intermediate appellate authority, some of which post-date Farah Constructions, suggesting (but not always deciding) that the first limb of Barnes v Addy can and does apply to non-trustee fiduciaries: The Bell Group Ltd (In Liq*) v Westpac Banking Corporation (No 9)* (2008) 39 WAR 1; [2008] WASC 239 (Bell Group No 9), Owen J at [4641]; Kalls Enterprises, Giles JA at [157] and the cases cited there; see also Simmons, where Gleeson JA at [87] characterised the observation of the High Court in Farah Constructions at [113] as an “acceptance” of the proposition “in the absence of any argument to the contrary” and, on that footing, described the elements of a knowing receipt claim at [88] as follows:
The Commonwealth did not submit in this case that Barnes v Addy liability would not apply to Mr Grimaldi as a non-trustee fiduciary. In the absence of argument on the point, my overarching view is that the “assumed” state of the law — being that knowing recipient liability can apply to third parties in their dealings with non-trustee fiduciaries — is correct. In any event, to the extent there is any doubt, a contrary submission was made in Kalls Enterprises and, after reviewing the authorities, Giles JA at [159] decided that the first limb of Barnes v Addy did apply to the breach of fiduciary duty by a director.
As others have said before me, the above-listed authorities should be followed unless or until “the High Court says otherwise”: Kalls Enterprises, Giles JA at [152]–[159]; Bell Group No 3, Drummond AJA at [2135]–[2136], Carr AJA at [2723]–[2733]; Gordon, Black J at [61]; K & A Laird, Black J at [114] and [117].
As a matter of equitable principle, I am of the view that the “extension” of liability for knowing receipt to non-trustee fiduciaries is entirely consistent with extension of the second limb of Barnes v Addy to non-trustee fiduciaries despite Lord Selborne LC’s trustee-focused formulation of the “rule”. The rationale for extending liability in that regard is said to be that “equity intervenes in order to deter conduct which directly undermines the high standards required of fiduciaries, and because it is inequitable for such persons to “retain benefits” deriving from their conduct”: Hasler, Leeming JA at [75]; Consul Development, Gibbs J at 396–397. It is also because there is no reason in principle to distinguish between a party who assists with knowledge in a breach of trust, and a party who assists with knowledge in a breach of fiduciary duty: Pittmore, Leeming JA at [154]–[157]. As I have already observed, in respect of either limb, it reflects the fact that liability is personal, fault-based and attaches as a matter of conscience: Grimaldi No 2, Finn, Stone and Perram at [259] and [267].
In Soar v Ashwell [1893] 2 QB 390, Bowen LJ at 397 stated the following:
In Timber Engineering Co Pty Ltd v Anderson [1980] NSWLR 488, two employees diverted a portion of their employer’s business and profits to themselves and their companies. In concluding that each employee has placed themselves in a position of conflict and had taken advantage of this position to gain profits for which they were accountable, Kearney J at [5]–[10] considered the issue and characterised the benefits obtained as “trust property” for which the fiduciaries and the knowing assistants were liable to account as constructive trustees in the following way (footnotes omitted):
In any case, my conclusion is that where a third party receives “trust property” (or its traceable proceeds) with the requisite knowledge that the property is property to which a fiduciary obligation attaches or which has been obtained in breach of fiduciary duty, their conscience is bound; they are a knowing recipient of that property, and they will be personally liable to account as a constructive trustee in respect of it.
To confine liability in knowing receipt by a technical argument to the effect that the impugned transfer of “trust property” or its traceable proceeds by an immediate recipient to a downstream recipient must itself be a transfer in breach of fiduciary duty in the strict sense appears to be contrary to both authority and principle. It speaks to the echoes of a rationale proffered in respect of liability in knowing receipt which fixes upon rights of priority in relation to property.
As I have outlined above, that rationale is not reflective of the fault-based justification for liability which is favoured in Australian law, being one directed primarily to conscience rather than the vindication of proprietary rights. The authorities I explained above make plain that the proper confines of fault-based liability in knowing receipt is the conscience of the recipient, not the precise mechanism of the receipt: Grimaldi No 2, at [263]–[267]; McFee, Leeming JA at [106]; Chickabo, Sifris J at [184].
As this is a more technical point, it will be necessary to refer in greater detail to the authorities upon which I have reached these alternate conclusions, beginning with the decision of the Court of Appeal in Evans.
In Evans, a fraudster had debited approximately USD$47.5 million from credit card accounts held by residents of the United States. Some USD$7.5 million of the proceeds of that fraud found their way to European Bank, in a deposit account in the name of Benford Ltd, a company under the control of the fraudster. European Bank then placed the funds in an interest-bearing deposit with Citibank in Australia. The receiver of Benford brought proceedings to recover the funds, including on the basis of knowing receipt. European Bank brought a cross claim against Citibank seeking repayment of the amount. Spigelman CJ (with whom Handley and Santow JJA agreed) considered that Benford held the stolen funds as trustee for the defrauded credit card holders under the principles in Black v S Freedman & Co (1910) 12 CLR 105; [1910] HCA 58, an example of an institutional constructive trust which arises “automatically” and “immediately upon acquisition of the property” (at [111]–[116]): see also Sze Tu, at [162].
In Evans, the claim against European Bank in knowing receipt failed on two bases. First, in accordance with longstanding principle established at least since Foley v Hill (1848) 2 HL Cas 28, European Bank did not “beneficially” receive the funds on deposit (at [171]). Second, it could not be said that the deposit with European Bank constituted a misapplication of the trust funds in breach of trust, which his Honour considered to be an “essential aspect” of liability in knowing receipt. His Honour observed the following at [160]–[163] (emphasis added in underline):
The proceedings in El Ajou concerned £1.3 million that the plaintiff sought to trace into DLH. That sum was said to have been invested by the Canadian fraudsters (following their introduction by Mr Ferdman to Mr Stern) via various Panamanian entities as part of a property development joint venture with DLH in Battersea, London. It was paid in early 1986 in two tranches of £270,000 and £1,030,000 to the solicitors acting on the purchase of the Battersea site for Dollar Land Holdings London (a subsidiary of DLH who subsequently assigned their interest in the Battersea project to DLH). In late 1987, when the property market declined and criminal investigations into their fraud ensued, the Canadians sought to divest themselves of their share in the project. Mr Ferdman (who had since signed resigned from DLH) informed Mr Stern, who negotiated a transaction under which DLH agreed to purchase their share at substantial undervalue while simultaneously selling the entire project at a substantial project. That transaction was completed in March 1988.
At first instance, the plaintiff’s case in knowing receipt failed for a lack of knowledge. Specifically, while Millett J found that Mr Ferdman eventually (if not, initially) knew of the fraud and later knew (or assumed) that funds invested into the Battersea project represented its proceeds, his Honour refused to impute that knowledge to DLH in circumstances where Mr Ferdman was never the “directing mind and will” of DLH. On the other hand, Mr Stern was the “moving force” behind DLH and while his Honour considered that Mr Stern’s knowledge could be attributed to DLH, there was insufficient evidence that he knew (or ought to have known) that the funds invested by the Canadians represented the proceeds of their fraud.
On appeal, despite Mr Stern being the “moving force” of DLH, Nourse, Rose and Hoffmann LLJ were content to treat a Mr Ferdman as the directing mind and will of DLH in respect of the impugned transactions so that his knowledge of the fraud could be imputed to DLH who was therefore liable under knowing receipt.
Two aspects of this decision in El Ajou are notable for comment.
First, this case concerned the extension of liability to the recipient of property arising from a breach of by a non-trustee fiduciary (as addressed above). The relevant breach in this case stretched back to the misapplication of funds by the plaintiff’s investment manager. Secondly, DLH was not the direct recipient of funds paid in breach of fiduciary duty. Those funds were paid into the Dutch companies and subsequently traversed the globe; their traceable proceeds landed in the hands of DLH (a downstream recipient) and so the transfer to DLH was not made in breach of any fiduciary duty. It was, however, property (or its traceable proceeds) to which a fiduciary obligation attached.
As I have mentioned previously, El Ajou, was one of two cases cited by the High Court in Farah Constructions at [113] as authority for the statement that “it has been assumed, but rarely if at all decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary”.
That reference to El Ajou appears to be a reference to Hoffmann LJ’s statement at 700 to the effect that “trust property” in this context extends to assets received which are “traceable to a breach of fiduciary duty” (with the decision proceeding on that very basis):
I also find, to the extent that it is necessary, that the transfer of the “trust property” to the ATO in the form of the Admitted Receipts was in breach of the fiduciary obligation which Mr Grimaldi owed to Chameleon to account for the unauthorised profits.
Accordingly, the findings in the Chameleon Judgment are entirely consistent with Chameleon being able to later assert a claim of knowing receipt against any third party (such as the ATO) who received the traceable proceeds of the profits arising from Mr Grimaldi’s breach of fiduciary duty. Contrary to the Commonwealth’s submission, no merger of the rights of Chameleon against Mr Grimaldi into the Chameleon Judgment prevents Chameleon from pursuing its rights against those third parties who received its trust property with the requisite knowledge and are therefore bound as a matter conscience (Grimaldi No 2, at [263]–[267]; McFee, at [106]; Chickabo, at [184]; see also GP Building, where the knowing receipt claim arose only after proceedings against the errant fiduciary had concluded and he had been made bankrupt).
It follows that I also reject the Commonwealth’s submission that these proceedings are an abuse of process.
Chameleon says that the degree of notice required for a personal claim includes at least the first four categories in the scale of knowledge outlined in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, by Peter Gibson J at 575–576, although these categories are artificial and are not to be applied rigidly, citing Grimaldi No 2, Finn, Stone and Perram JJ at [260], Bell Group No 3, Lee AJA at [1122] and Pittmore, Leeming JA at [191]. Chameleon also relies on the notion of there being a “want of probity” in the conduct of the third party who received the property, citing Consul Development, Stephen J at 410 and Turner, White JA at [142].
I will deal with the detail of Chameleon’s submissions in my consideration of them below.
The Commonwealth submits that its true understanding of the Chameleon Proceedings was contained in the ATO’s mediation position paper dated 7 July 2009, which simply referred to the existence of the Chameleon Proceedings, that Chameleon claimed to have an interest in the Jack Hills Tenements and that Chameleon alleged that Mr Barnes and Mr Grimaldi caused Chameleon to issue securities sold to raise funds that were then used by Murchison to acquire the Jack Hills Tenements.
The Commonwealth says that knowledge of allegations is not even constructive notice sufficient to ground liability under the first limb of Barnes v Addy, relying on the decision of Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; [1969] 2 WLR 427 (and the authorities in Australia which have followed it) to establish that even knowledge of an express claim for a declaration of trust or other proprietary relief against property in the hands of a party, along with identified sworn evidence, does not constitute relevant knowledge. The Commonwealth says that it certainly had no duty to determine whether Chameleon’s claims were well-founded, even if it could.
The Commonwealth submits that absent even constructive notice (fifth category of notice in Baden), it could not have any high category of knowledge because it is wrong to say that it should have determined for itself whether any breach was committed or await the outcome of the Chameleon Proceedings. The Commonwealth submits that it would be absurd to require the ATO to await potentially for some years (including appeals) with ongoing cross-border litigation and freezing and restraint orders in place before determining taxation liabilities. The Commonwealth says that Chameleon treats allegations as justifying the rest of the world stopping and waiting, which is not the law and if it wanted that outcome, it should have sought injunctions and freezing orders itself.
The Commonwealth accepts that the ATO knew all of the findings in the Chameleon Judgment from the time it was delivered on 20 October 2010, being the day before the ATO received the first payment from NSW.
This is a matter to which I will return below in dealing with Issue 3, which considers the Commonwealth’s submissions as to the operation of the bona fide purchaser for value without notice defence in these proceedings.
Chameleon was initially listed on the ASX in April 2004. At this time, Mr Grimaldi appeared as a top twenty shareholder and Mr Barnes appeared as managing director. Mr Grimaldi was also a director of Murchison at this time.
In 2005, Chameleon claimed to have an interest in the Jack Hills Tenements (which was by then “known to be a viable high grade iron ore resource”) and had “threatened to take action” against Murchison.
In November 2007, Chameleon commenced proceedings in the Federal Court against Murchison, Mr Barnes, Mr Grimaldi and others claiming “an interest in the Jack Hills iron ore tenement”.
The dispute concerned the ownership and rights to profits from several iron ore tenements.
Chameleon alleged that it helped fund the purchase of the Jack Hills and Weld Range projects by Murchison’s predecessor in 2004 and that the assets were held in a "constructive trust" for Chameleon.
Chameleon’s originating process alleged that Winterfall was holding Jack Hills and Weld Range on constructive trust for Chameleon.
Chameleon’s originating process also alleged that former Chameleon director Mr Barnes and de facto director Mr Grimaldi caused Chameleon to issue securities sold to raise funds that were then used by Murchison to acquire Jack Hills and Weld Range.
Chameleon sought an account of profits from its ownership of Winterfall, an account of profits from Murchison’s sale of 50% of the project to Mitsubishi and interest in the tenements or alternatively equitable compensation or damages.
In essence, I am thoroughly convinced that in all the circumstances the Commonwealth is liable for knowing receipt under the first limb of Barnes v Addy as a matter of conscience.
The result is that the none of the assets of Iron, Iron International, Ore Investments and MGG Capital (as trustee for the Webtel Super Fund) declared to be under the effective control of Mr Grimaldi were available to satisfy the Grimaldi Proceeds Assessment Order. The consequence is that the payments made under the Deeds of Settlement by Mr Grimaldi to NSW did not extinguish the debt owed to the Crown and so no valuable consideration was given by NSW in return for each of the payments.
I reject the Commonwealth’s submission that the absence of a declaration under s 29 of the Recovery Act is immaterial because a proceeds assessment order need not be paid out of assets declared to be under the effective control of the wrongdoer. In the present case, it is abundantly clear that Mr Grimaldi had no other assets from which to satisfy the Grimaldi Proceeds Assessment Order than those which had been declared to be under his effective control and that the latter assets were used to satisfy the Grimaldi Proceeds Assessment Order. The making of a declaration under s 29 of the Recovery Act therefore became critical to the permitted use of those assets under Mr Grimaldi’s effective control.
Accordingly, I consider that, to the extent it is relevant in these proceedings, the defence of bona fide purchaser for value without notice also fails because there was no consideration given by NSW.
Several of the authorities relied upon in Evans at [171]–[173] are instructive.
International Sales and Agencies Limited v Marcus [1982] 3 All ER 551 concerned money that was misappropriated from a company by its directors and paid to third parties. Lawson J at 557–558 drew a distinction between two categories of persons who are recipients of company’s money: “the person who receives moneys held by a constructive trustee and receives those moneys for his own benefit”; and “the constructive trustee who acts as a channel through which funds disposed of in breach of constructive trust reach other quarters”, with the latter category not “receiving” the property for the purpose of knowing receipt.
Westpac Banking Corporation v Savin [1985] 2 NZLR 41 involved a boat dealer who sold boats on behalf of two boat owners, the money received from the purchasers was paid into an overdrawn Westpac bank account, neither seller was paid, and the boat dealer subsequently went into liquidation. In dealing with the claim by the boat owners against Westpac alleging breach of constructive trust, Richmond J at 69 cited Marcus to say that it can be argued that an agent who receives trust funds from a trustee will be liable for knowing receipt only if they are “setting up a title of his own to the funds which he has received and is not acting as a mere depository”.
In Cigna Life Insurance New Zealand Limited v Westpac Securities Limited [1996] 1 NZLR 80, Greig J at 86–87 also drew the distinction between a bank who receives money and applies it to an overdraft for its own benefit and a bank who is “merely a depository or channel through which the moneys are transferred to achieve the fraudulent purpose”.
In the same manner, two single judge decisions of this court have applied the same distinction to individuals who were not banks:
In Heperu Pty Ltd v Morgan Brooks Pty Ltd (No 2) [2007] NSWSC 1438, Palmer J at [127]–[130] applied the reasoning in National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251; [1986] HCA 21 in which Gibbs CJ (with whom Wilson and Dawson JJ agreed) at 268 held that an individual did not “receive” funds if they were unaware of the receipt and did not have the “benefit of the money”.
In McNally v Harris [2008] NSWSC 659, White J at [84] held that for a claim of knowing receipt it was essential that the recipient was aware of the receipt, received a benefit from the receipt or that the moneys remained in the account.
I agree with the submissions of Chameleon that each receipt of the payments made by Mr Grimaldi to NSW was not retained for its own use or benefit, but that NSW was merely a channel through which the funds were immediately passed to the ATO at the direction of the Crime Commission. This is demonstrated by the following matters: