Carantinos v Magafas - [2008] NSWCA 304

No judgment structure available for this case.

Appeal Outcome: Special leave application dismissed with costs 1 May 2009 (S546/2008)

New South Wales

Court of Appeal

CITATION: Carantinos v Magafas [2008] NSWCA 304

HEARING DATE(S): 12-13 March 2008

JUDGMENT DATE:
14 November 2008

JUDGMENT OF: Hodgson JA at 1; Campbell JA at 117; Handley AJA at 153

DECISION: See par [116].

CATCHWORDS: EQUITY – FIDUCIARY OBLIGATIONS – PARTNERSHIP – PROCEDURE – Clean hands defence – Whether conduct must be directed against defendant – Whether conduct had sufficiently close relationship to the equity sued for – Whether conditional relief appropriate – Remedies – Account – Whether accounting party should account for whole of proceeds of sale of property of which he was not proved to have total beneficial ownership – Whether party whose beneficial interest in the property was not excluded should be a party to the accounting – Whether appropriate to reserve substantive issues for further consideration.

CATEGORY: Principal judgment

CASES CITED: Armstrong v Sheppard & Short Ltd [1959] 2 QB 384
Australian Hardboards Limited v Hudson Investment Group Ltd [2007] NSWCA 104
Baden Delvaux & Lecuit v Societe General pour Favoriser le Developpement [1983] BCLC 325
Barnes v Addy (1874) LR 9 Ch App 244
Black Uhlans Inc v New South Wales Crime Commission [2002] NSWSC 1060
Breen v Williams (1996) 186 CLR 71
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215
Kettles & Gas Appliances Ltd v Anthony Hordern & Sons Ltd (1934) 35 SR(NSW) 108
Lucas v Cutts (Vice Chancellor, 24 February 1853)
McGrory v Alderdale Estate Company Limited [1918] AC 503
Meehan v Glazier Holdings Pty Ltd [2002] NSWCA 22; (2002) 54 NSWLR 146
Meyers v Casey (1913) 17 CLR 90
National Broach and Machine Co v Churchill Gear Machines Ltd [1965] 1 WLR 1199
Nelson v Nelson (1995) 184 CLR 538
Official Trustee in Bankruptcy v Tooheys Ltd (1993) 29 NSWLR 641
Pawsey v Armstrong (1881) 18 Ch D 698
Poulton v Adjustable Cover and Boiler Block Company [1908] 2 Ch 430
Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309
In Re Wrightson [1908] 1 Ch 789

TEXTS CITED: Meagher Gummow and Lehane’s Equity Doctrines and Remedies, 4th ed (2002), Butterworths LexisNexis, par [25-035]
AG Neville & AW Ashe, Equity Proceedings With Precedents (NSW) (1981) Butterworths at 235, 237, 239
Lindley & Banks on Partnership, 18th ed (2002) Sweet & Maxwell, pars 23 124 and 23-125

PARTIES: Peter CARANTINOS (First Appellant)
Fotini CARANTINOS (Second Appellant)
Anthony MAGAFAS (First Respondent)
PAC-COM PTY LTD (Second Respondent)
ARTESIAN PTY LTD (Third Respondent)
Athena TOURIKI (Fourth Respondent)
Gregory GAV (Fifth Respondent)

FILE NUMBER(S): CA 40611/07

COUNSEL: J C KELLY SC/ A J BOWEN (Appellants)
T A ALEXIS SC/ S GOLLEDGE (First and Second Respondents)
------ (Third Respondent)
T Blyth (submitting appearance) (Fourth Respondent)
[submitting appearance] (Fifth Respondent)

SOLICITORS: Munro Lawyers (Appellants)
Rockliffs (First and Second Respondents)
------ (Third Respondent)
Middletons (Fourth Respondent)
Nicholas G Pappas & Company (Fifth Respondent)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 2670/06

LOWER COURT JUDICIAL OFFICER: Einstein J

LOWER COURT DATE OF DECISION: 15 May 2007, 20 June 2007, 21 August 2007, 30 August 2007, 5 September 2007

LOWER COURT MEDIUM NEUTRAL CITATION: [2007] NSWSC 416, .... , [2007] NSWSC 917, [2007] NSWSC 965, ....

CA 40611/07
SC 2670/06

HODGSON JA
CAMPBELL JA
HANDLEY AJA
14 NOVEMBER 2008

Peter CARANTINOS and Anor v Anthony MAGAFAS and Others

Headnote

Facts

Mr Magafas met Mr Carantinos in 1988 and eventually came to repose trust in Carantinos as a friend and business partner. Carantinos operated a graphic design business, ‘Communicado’. Magafas managed a number of companies involved in a substantial printing business.

In April 1995, Magafas and Carantinos agreed to create a foundation of wealth to provide for their families and to be insulated against third party claims. The arrangement was to last ten years and profits were to be split 50-50 when they terminated the arrangement. Most of the cash flow would be provided by the printing business, and Carantinos would locate properties to be developed and sold and would supervise the projects. On the sale of each asset, profits would be rolled over into the next deal.

Magafas suggested that they gradually move funds to build up a cash box for the new partnership. Carantinos requested that Communicado be the recipient of funds and that the funds be paid to Communicado in response to invoices issued to the printing business. This arrangement enabled Carantinos to dishonestly satisfy his lenders on the serviceability of loans by showing the payments to Communicado as income. Additionally, the payments could be dishonestly claimed as tax deductions. These payments began in November 1995, and subsequent payments made up to March 2002 brought the total payments pursuant to this arrangement to $480,000.

In about mid-1996, Magafas and Carantinos began working towards purchasing properties in Riverside Crescent, Dulwich Hill. Magafas and Carantinos incorporated Pac-Com Pty Ltd (Pac-Com) and were the sole shareholders and directors.

Pac-Com purchased numbers 39-41 for $470,000, and Mr and Mrs Carantinos purchased No. 43. Carantinos told Magafas that he purchased in his wife’s name so he could approach the lender providing the mortgage for the property on the basis of a residential loan.

In February 1997, Magafas and Carantinos executed a deed of settlement to establish the Karafas Trust, which identified Magafas and Carantinos as beneficiaries and joint appointor, and Pac-Com as the Trustee, with power to distribute Trust property.

In November 1999, completion of the sale of the Riverside Crescent properties took place. Pac-Com was the vendor for numbers 39-41, and Mr and Mrs Carantinos were the vendors for No. 43. The proceeds went variously into an account set up for Pac-Com, Mr Carantinos’ accounts, and to an account used to finance the purchase.

In 1999, Artesian Pty Ltd (Artesian), a company in which Mr Carantinos eventually became an equal shareholder, purchased 60-78 Princes Highway, St Peters for the price of $2.31 million. With Magafas' agreement, Carantinos had entered into an arrangement with Artesian to put up half of the development and holding costs. The funding of these costs was to come from the sale of the Riverside Crescent properties.

In March 2002, Magafas advanced $500,000 to Pac-Com for ongoing holding and development costs of the St Peters property. Between 2002 and 2005, Carantinos caused substantial payments totalling over $680,000 to be made by Pac-Com to Communicado, Mr and/or Mrs Carantinos, and Artesian.

In October 2002, Pac-Com purchased Felton Woods Manor for $1.08 million. In December 2002, Magafas transferred $600,000 to Pac-Com to assist in this purchase. In January 2005, Felton Woods Manor House Pty Ltd was incorporated to operate a hotel in this property at Katoomba, with Carantinos as sole director and Pac-Com as sole shareholder. Felton Woods Manor was eventually sold for $1.4 million in 2006.

In June 2005, Carantinos claimed he was entitled to management fees of $200,000 per year, totalling about $2 million for ten years. This led to the breakdown of the relationship between them.

Carantinos subsequently claimed he was entitled to the proceeds of sale of the Riverside Crescent properties, that he held shares in Artesian beneficially, that he was entitled to purported distributions from the Karafas Trust, and that he was entitled to all payments made from Pac-Com to him and/or his wife and to Communicado.

In an action brought by Magafas, the primary judge found to the effect that there was a partnership or joint venture between Magafas and Carantinos involving fiduciary duties and that Carantinos had acted in breach of those duties. Carantinos appealed.

Issues

Issues arising on appeal were:

(i) Whether Carantinos had a ‘clean hands’ defence.

(ii) Whether the accounting party, Mr Carantinos, should account for the whole of the proceeds of sale of property of which he was not proved to have total beneficial ownership.

(iii) Whether the profits on each venture should be considered as capital contributions to the next venture.

(iv) The position of the Karafas Trust.

(v) Costs.

(vi) The form of orders and whether provision needs to be made for the distribution of the assets of Artesian, concerning the Felton Woods Manor, and the Karafas Trust.

HELD (partially allowing the appeal):

In relation to (i) – Clean hands:

(Per Hodgson JA, Campbell JA and Handley AJA agreeing)

Kettles & Gas Appliances Ltd v Anthony Hordern & Sons Ltd

Armstrong v Sheppard & Short Ltd

(2) The disentitling conduct did have a sufficiently close relationship to the equity sued for so as to give rise to a discretion to refuse relief or impose conditions on the grant of relief.

(3) Any relief granted in this case should be subject to the condition that Magafas pay any tax, penalties and interest to the tax authorities.

In relation to (ii) – Mrs Carantinos:

(Per Hodgson JA, Campbell JA agreeing, Handley AJA dissenting)

(4) The primary judge should not have made any positive finding that Mrs Carantinos had no beneficial interest in No. 43 without considering whether her contribution to the purchase was such as to give her a beneficial interest. Consideration of this question should be reserved and Mrs Carantinos should be a party to the taking of accounts.

(Per Handley AJA)

(5) The plaintiff’s proper remedy was equitable compensation for the breach by Mr Carantinos of his fiduciary duty of loyalty to the partnership. There should be an inquiry as to the loss suffered by the partnership by reason of Mr Carantinos’ breach of fiduciary duty to acquire the whole of the beneficial interest in No. 43 for the benefit of the partnership.

In relation to (iii) – Rolling profits:

(Per Hodgson JA, Campbell JA and Handley AJA agreeing)

(6) Whether profits from each deal should be notionally distributed and treated as capital contributions for the next deal was not raised below and should not be permitted to be raised now.

(7) In any event, the evidence does not support the proposition.

In relation to (iv) – Karafas Trust:

(Per Hodgson JA, Campbell JA and Handley AJA agreeing)

(8) The form of orders made by the primary judge is neutral as to the question whether the accounting to Pac-Com is as beneficial owner or as trustee for the Karafas Trust. No occasion has been shown to vary the form of orders. The accounting may provide more information and the question should be reserved for further consideration.

In relation to (v) – Costs:

(Per Hodgson JA, Campbell JA and Handley AJA agreeing)

(9) No sufficient ground has been shown for intervening in the orders made by the primary judge.

In relation to (vi) – Form of orders:

(Per Hodgson JA, Campbell JA agreeing)

CA 40611/07
SC 2670/06

HODGSON JA
CAMPBELL JA
HANDLEY AJA

14 NOVEMBER 2008

Peter CARANTINOS and Anor v Anthony MAGAFAS and Others

Judgment

1 HODGSON JA: This appeal concerns proceedings in which the first respondent (Mr Magafas) and the second respondent (Pac-Com) sued the first appellant (Mr Carantinos) and the second appellant (Mrs Carantinos) seeking declarations and orders concerning a partnership alleged to have existed between Mr Magafas and Mr Carantinos and/or an alleged fiduciary relationship between them, and concerning the conduct of Mr Carantinos in relation to Pac-Com, including orders for the taking of accounts. In those proceedings, Mr Carantinos put on a cross-claim against Pac-Com, claiming about $2 million alleged to be due to him under an agreement. At some stage before judgment in the proceedings, the third respondent (Artesian) was added as a defendant.

2 The main decision determining these proceedings was given by Einstein J on 15 May 2007. Prior to the making of orders, and following the decision of the High Court in Farah Constructions Pty Ltd v Say-dee Pty Ltd [2007] HCA 22, there were further judgments given on 20 June 2007 and 21 August 2007. Certain contentions concerning the form of orders were resolved by a judgment given on 30 August 2007, and on that day Einstein J made orders including the following (in which Mr Magafas is referred to as the first plaintiff, Pac-Com as the second plaintiff, Mr Carantinos as the first defendant and Mrs Carantinos as the second defendant):

THE COURT DECLARES:

1. That the partnership or joint venture between the first plaintiff and the first defendant was formed in April 1995 and terminated on 1 May 2006 ("the partnership").

2. That upon the termination of the partnership, the first plaintiff is entitled to be repaid his financial contributions to the partnership with interest from the date of contribution to the date of repayment at 8% per annum capitalised and that the remaining assets of the partnership are to be divided equally between the first plaintiff and the first defendant.

(a) payments made to the first defendant from November 1995 to March 2002 totalling the sum of $480,000;

(b) a payment made to the second plaintiff on 14 March, 2002 in the sum of $500,000; and

4. That the first defendant held the property known as 43 Riverside Crescent, Dulwich Hill and holds the proceeds of sale and all profits arising from the sale thereof on trust for the partnership.

5. That the first defendant holds the two ordinary shares in the third defendant upon trust for the second plaintiff.

(a) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as 39 and 41 E Riverside Crescent, Dulwich Hill;

(b) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale by Artesian Pty Limited of the property known as the Hoechst site at 60-82 Princes Highway, St Peters, and the second plaintiff's beneficial interest as a shareholder in Artesian Pty Limited;

(c) is liable to account to the first plaintiff in relation to the financial contributions made to the partnership referred to in the declaration made in paragraph 3 hereof; and

Felton Woods

Manor

7. That the first defendant is liable to account to the first plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as 43 Riverside Crescent, Dulwich Hill.

THE COURT ORDERS :

(a) specification in chronological order of each payment and receipt, the date and amount thereof, to whom the amount was paid, from whom the amount was received and the purpose for which the amount was paid or received as the case may be;

(b) the assets and liabilities of the partnership as at 1 May 2006;

(c) the assets and liabilities of the second plaintiff as at 30 August 2007; and

(a) to the first plaintiff all sums found to be due to him upon the taking of accounts;

10. That the Cross Claim be dismissed.

……

18. That the first defendant pay the plaintiff’s costs of the proceedings including the costs of the cross defendant on the cross claim and including reserved costs, as agreed or assessed and the plaintiffs' claim for indemnity costs on and from 13 February 2007 be reserved pending the taking of the accounts.

19. That the assessment of the plaintiffs' costs proceed forthwith and be expedited.

20. That the first defendant pay the plaintiff interest on costs and disbursements as agreed or assessed, pursuant to Section 101(4) of the Uniform Civil Procedure Act , from the date of any payment of those costs and disbursements to the date of reimbursement by the first defendant, at the rates prescribed by Schedule 5 of the Uniform Civil H Procedure Rules .

(b) That the first defendant pay to the plaintiffs all costs which the plaintiffs pay to the second defendant.

3 The orders as set out above are as amended by a small amendment under the slip rule on 6 September 2007.

4 On 5 September 2007, Einstein J gave a further judgment in circumstances where there was evidence before him suggesting that certain funds should be frozen, giving rise to an order against the fifth respondent (Mr Gav) and undertaking to the court by the fourth respondent (Ms Touriki).

5 Mr and Mrs Carantinos have appealed from the decision of Einstein J, in respects on which I will elaborate later.

Accepted Facts

6 The case has some complexity, but there is little if any challenge to the basic factual findings made by the primary judge; and it is convenient here to set out a chronological account of facts which have been clearly established or decided, and which are not challenged on appeal.

7 Mr Magafas met Mr Carantinos in about 1988 or 1989. At about that time, Mr Magafas was made a bankrupt following a failed hotel development, and he was not discharged from bankruptcy until March 1991. Mr Carantinos, unlike Mr Magafas, had tertiary qualifications, and he was operating a business trading as “Communicado”, involving graphic design and translation for the printing industry.

8 Mr Magafas and Mr Carantinos came to have a firm friendship, which lasted until about 2005. Mr Magafas grew to repose absolute trust in Mr Carantinos as a friend and as a business partner.

9 During the 1990’s Mr Magafas re-established himself financially, and with his brothers managed a number of companies involved in a substantial printing business. By the mid-1990’s, this business was amassing surplus cash available for investment.

10 From about April 1995, Mr Magafas and Mr Carantinos had a number of discussions regarding the formation of a partnership in which Mr Magafas would represent the Magafas family and Mr Carantinos would represent the Carantinos family. Mr Magafas suggested that they create a foundation of wealth to provide for their families, to last at least ten years, and to be insulated against third party claims, with profits to be split 50-50 when they terminated the arrangements. Mr Magafas proposed that most of the cash flow for the venture would be provided by him from the printing business and that Mr Carantinos would locate suitable properties to be developed and sold and would supervise the projects. On the sale of each asset, profits would be rolled over into the next deal. Interest of 8 per cent would be applied to the funding. These proposals were accepted by Mr Carantinos.

11 In one of the discussions, Mr Magafas suggested that they gradually move funds to build up a cash box for the new partnership. Mr Carantinos requested that Communicado be the recipient of funds and that the funds be paid to Communicado in response to invoices issued to the printing business. This was accepted by Mr Magafas.

12 It was found by the primary judge that this arrangement had two dishonest objectives:

(2) The payments could be and were dishonestly claimed as tax deductions against the income of the successful printing business of the Magafas family.

13 These payments began in November 1995, when two payments totalling $25,300 were made. Further payments totalling $76,000 were made in December 1995.

14 In about mid-1996, Mr Magafas and Mr Carantinos had a number of conversations concerning properties 39-43 Riverside Crescent, Dulwich Hill. Mr Carantinos told Mr Magafas that he had secured 39 and 41 by taking out an option for $20,000, that he would begin negotiating with the owner of No. 43, and that the third property was needed for a development application for the site.

15 In late 1996, Mr Carantinos told Mr Magafas that he had been advised by their architect that the Council was not in favour of allowing development on 39 to 41 on their own, but gave a favourable reaction to the possibility of a development which incorporated No. 43 as well. Mr Carantinos told Mr Magafas that 39 and 41 were costing about $500,000, that they would get $370,000 on mortgage, and that they would need to put in $130,000; and that for 43 “we might get a higher gearing”.

16 Mr Magafas caused additional funds to be paid to Communicado totalling $33,000 in December 1996, $33,800 in January 1997, $25,000 in February 1997 and $15,000 in March 1997.

17 However, without Mr Magafas’ knowledge, on 3 December 1996 Mr and Mrs Carantinos entered into a contract to purchase No. 43 for $245,000, with a deposit of $24,500 payable on exchange. It seems that the source of this deposit was not identified in the evidence.

18 In December 1996 and January 1997, Mr Carantinos negotiated with Balmain NV for finance in relation to Riverside Crescent. On 20 December 1996, Balmain NV wrote to Mr Carantinos offering finance of $640,000 to assist with the acquisition of 39, 41 and 43 Riverside Crescent. Later, Balmain NV wrote on 20 January 1997 to Gray and Perkins, Solicitors, confirming that “Our clients” Mr Carantinos and Mr Magafas were seeking a mortgage of $370,000 to purchase 39 and 41 Riverside Crescent, with the mortgage proposal reporting that “the applicants have also purchased the adjoining cottage 43 Riverside Crescent, this being funded through private sources” and that “in one line the three properties have been the subject of protracted negotiations with Marrickville Council to obtain DA approval for 18 units”.

19 On 13 January 1997, Mr Magafas and Mr Carantinos met with Mr Kevin Munro, solicitor, concerning a suitable structure for their capital acquisitions; and Mr Munro advised that the property be purchased by a hybrid trust that was eventually set up as the Karafas Trust.

20 On 15 January 1997 Pac-Com was incorporated, and Mr Magafas and Mr Carantinos came to be the sole shareholders and directors. Mr Magafas came to understand that Mr Carantinos had arranged for funds to be transferred from Communicado’s bank account to the Pac-Com bank account.

21 On 17 January 1997, Pac-Com exchanged contracts for the purchase of 39-41 Riverside Crescent for a price of $470,000.

22 On 24 January 1997, Mr and Mrs Carantinos completed the purchase of 43 Riverside Crescent. For the balance of the purchase price of $220,500, $190,000 was advanced by NAB giving rise to a debit of about that amount in a joint account of Mr and Mrs Carantinos. The balance of about $30,000 appears to have come from an account of Mr Carantinos with Westpac, increasing the debit balance of that account from about $78,000 to about $109,000 (Blue 1366). In February 1997, Mr Carantinos told Mr Magafas that he had secured No. 43, and that he had decided to buy in Mrs Carantinos’ name so that he could approach the lender on the basis of a residential loan.

23 On 11 February 1997 Mr Magafas and Mr Carantinos attended the office of Mr Kotowicz, solicitor, to execute documents in relation to Pac-Com and the Karafas Trust. It appears that they executed the Deed of Settlement to establish this Trust, which named Mr Carantinos and Mr Magafas and others as beneficiaries, identified Mr Carantinos and Mr Magafas “jointly” as appointor (with power to replace the Trustee), and Pac-Com as the Trustee, with power to distribute Trust property. This deed was dated (that is, apparently back-dated) 16 January 1997.

24 Also on 11 February 1997, Mr Magafas and Mr Carantinos signed minutes of meeting of directors of Pac-Com, which recorded both of them as being present and identified Mr Carantinos as chairman:

The Chairman tabled the following documents:-

1. Documentation in respect of a Mortgage to be granted by the Company to H.P. CUSTODIANS PTY LIMITED (ACN 076 372 284) ("the Mortgagee") over the Property known as 39 and 41 Riverside Crescent, Marrickville to secure a Loan to be made to the Company of three hundred and seventy thousand dollars ($370,000.00).

Consideration was given as to whether the granting of the Mortgage is for the benefit of the … KARAFAS… Trust ("the Trust”) and is part of the due administration of the Trust. After appropriate deliberation it was concluded that the granting of the Mortgage is for the benefit of the Trust for reasons which include (but are not limited to) the following

...THE MORTGAGE ENABLES THE TRUST TO ACQUIRE THE PROPERTIES AT 39 AND 41 RIVERSIDE CRESCENT MARRICKVILLE AS AN INVESTMENT AND TO BEGIN ITS INVESTMENT PORTFOLIO…

25 In March 1997 Pac-Com settled the contract to purchase 39 and 41 Riverside Crescent, using $370,000 advanced under this mortgage.

26 Between March 1997 and February 1998, Pac-Com paid council and water rates for No. 43 as well as 39 to 41, and paid architect’s fees in relation to the pursuit of a development application for all three properties.

27 Also between April 1997 and the end of 1998, further payments were made by the Magafas companies to Communicado, totalling it would seem $152,680. Subsequent payments up to March 2002 brought the total of such payments made pursuant to the dishonest arrangement to $480,000.

28 In July 1998, Mr Carantinos informed Mr Magafas that Marrickville Council had approved a development application for 39 to 43 Riverside Crescent.

29 On 28 April 1999, contracts were exchanged for the purchase of the property 60-78 Princes Highway, St Peters by Artesian for the price of $2.31 million, with a deposit of $115,000 paid on exchange and a further $115,000 payable within one month. Previously, Mr Carantinos had told Mr Magafas that he was negotiating for the purchase of this site, and that he had done a deal with Mr Gav to purchase the site as a joint venture, with Mr Gav to put up the money to purchase and 50 per cent of the holding and development costs, and Mr Magafas and Mr Carantinos (or Pac-Com) to fund the other 50 per cent; and Mr Carantinos had given estimates of $500,000 for architects, engineers and town-planners, $200,000 purchase costs and $500,000-$600,000 holding costs; and had said that funding of these costs would come from the settlement of the sale of Riverside Crescent properties.

30 At the time of this purchase, Mr Gav was the sole shareholder of Artesian, but later Mr Carantinos became an equal shareholder with him.

31 On 3 May 1999 Crystal Real Estate wrote to Konstan Lawyers concerning the sale of 39-43 Riverside Crescent, Dulwich Hill, giving details which identified Pac-Com as the vendor, Dimension Line Pty Limited as the purchaser, the sale price as $1.48 million, and a 20 per cent deposit and six months settlement.

32 On 6 May 1999, contracts for the sale of 39-43 Riverside Crescent were exchanged. There were two contracts. Pac-Com was the vendor for 39-41 Riverside Crescent, for a price of $1.08 million; and Mr and Mrs Carantinos were the vendors for the sale of 43 Riverside Crescent, for a price of $400,000. There was one deposit cheque of $296,000 drawn in favour of Pac-Com. This was paid into the account of Mr and Mrs Carantinos. $150,000 was then paid into Mr Carantinos’ account, and $115,000 was paid from that account as the second instalment of the deposit on the Artesian purchase.

33 On 2 November 1999, the purchaser of Nos. 39-43 Riverside Crescent defaulted and the deposit was forfeited. However, on 16 November 1999, this purchaser went ahead and completed the purchase, paying the full price of $1.48 million. The net proceeds of the sale of Nos. 39-41, namely $699,635.35, was paid into an ADC account that had been set up for Pac-Com, but which was accessed only by Mr Carantinos. The net proceeds of sale of No. 43 were used to pay $223,528.85 into the joint account which had been used to finance the purchase, and were otherwise disbursed in favour of Mr Carantinos (Blue 1373).

34 On 25 November 1999, the purchase by Artesian of 60-78 Princes Highway was settled. Funds to enable this purchase were advanced by NAB.

35 On the same day, according to a cheque butt bearing the handwriting of Mr Carantinos, Communicado paid $60,000 to the Commissioner of Stamp Duties towards stamp duty on the purchase of 60-78 Princes Highway, identified in Mr Carantinos’ handwriting as being “from Pac-Com as contribution for share in future profits”.

36 On 14 March 2002, Mr Magafas caused Benward Pty Limited (one of the Magafas companies) to advance $500,000 to Pac-Com to enable it to meet its share of ongoing holding and development costs of the St Peters property.

37 Between April 2002 and March 2005, Mr Carantinos caused substantial payments to be made by Pac-Com. These payments included payments totalling $410,000 to Communicado, $24,000 to Mr and/or Mrs Carantinos, and over $254,000 to Artesian.

38 In October 2002, Mr Carantinos became keen to acquire Felton Woods Manor, Katoomba as an asset of Pac-Com; and this property was purchased at about this time for $1.08 million. According to the primary judge’s judgment, this acquisition was not the subject of any claim in these proceedings; but for my part I find it difficult to see that accounts between the parties can be finalised without taking it into account. The 10 per cent deposit on the purchase of Felton Woods Manor, namely $108,000, was paid by Pac-Com on 29 October 2002.

39 On 11 December 2002, Mr Magafas transferred $600,000 to Pac-Com as additional financing to assist in the purchase of Felton Woods Manor.

40 In January 2005, Felton Woods Manor House Pty Limited was incorporated to operate a hotel in this property at Katoomba, with Mr Carantinos as sole director and Pac-Com as sole shareholder. Mr Magafas did not want to be involved in running the hotel, hence the setting up of a separate vehicle. The hotel opened in March 2005.

41 In about June 2005, Mr Carantinos for the first time advised Mr Magafas that he was claiming entitlement to management fees of about $200,000 per year, totalling about $2 million for ten years. This led to the breakdown of the relationship between them.

42 Mr Carantinos subsequently claimed that he was entitled to the proceeds of sale of the Riverside Crescent properties, that he held shares in Artesian beneficially, that he was entitled to purported distributions from the Karafas Trust (which were found by the primary judge to be fictitious), and that he was entitled to all payments made from Pac-Com to him and/or his wife and to Communicado.

43 In November 2005, joint administrators of Pac-Com were appointed; and in February 2006, a deed of company arrangement was entered into in relation to Pac-Com.

44 On 17 March 2006, Pac-Com entered into a contract to sell Felton Woods Manor for $1.4 million; and this was completed on 28 April 2006.

45 On 1 May 2006, Mr Magafas and Pac-Com addressed a formal notice to Mr Carantinos to dissolve the partnership from that date. These proceedings were commenced shortly afterwards.

46 In November 2006, various Magafas entities wrote to the Deputy Commissioner of Taxation advising that it had come to their attention that tax returns for certain years were “subject to an amendment”, and enclosing amended tax returns showing increased income for these years, presumably to the extent of $480,000. However, it was not disclosed to the Deputy Commissioner of Taxation that the understatement of income in those years was due to a deliberate fraudulent scheme.

47 In about September 2007, Artesian completed the sale of the St Peters property; and it was the net proceeds of that sale, amounting to about $4.9 million, that were affected by the orders and undertakings referred to in para [4] above.

Issues

48 The primary judge resolved the factual disputes in the case generally in favour of Mr Magafas and Pac-Com, and gave them substantially the relief that they sought against Mr Carantinos, though not against Mrs Carantinos. In substance, he found to the effect that there was a partnership or joint venture between Mr Magafas and Mr Carantinos involving fiduciary duties; and that Mr Carantinos had acted in breach of fiduciary duties in various ways, including causing No. 43 Riverside Crescent to be purchased in the name of himself and his wife, dealing with the proceeds of the sale of 39-43 Riverside Crescent without accounting to Mr Magafas, putting shares in Artesian in his own name and claiming to be beneficially entitled to them, and dealing with Mr Magafas’ contributions made to Pac-Com inconsistently with his fiduciary duties and without accounting to Mr Magafas.

49 The issues that are relevant on appeal are the following:

(2) Remedies granted by the primary judge concerning proceeds attributable to Mrs Carantinos’ half interest in 43 Riverside Crescent.

(3) The question whether profits on each venture should be considered as capital contributions to the next venture.

(4) The position of the Karafas Trust.

(5) Costs.

(6) The form of orders, and inter alia whether any provision needs to be made in relation to questions concerning distribution of the assets of Artesian, concerning Felton Woods Manor, and concerning the Karafas Trust.
Clean Hands Defence

50 Before the primary judge, it was submitted for Mr Carantinos that the claims against him should be dismissed, because they arose out of a fraudulent scheme whereby false invoices would be brought into existence purporting to record non-existent services provided by Mr Carantinos trading as Communicado to various Magafas companies, so as to enable Mr Carantinos to deceive his credit providers by showing a non-existent stream of income to Communicado, and to enable the Magafas companies to defraud the public revenue.

51 The primary judge dealt with this defence as follows:

Black Uhlans Inc v New South Wales Crime Commission & Ors

[Those two tests are a necessary condition for the application of the unclean hands maxim but not a sufficient condition. This is because equitable relief is always discretionary and other factors can influence the exercise of the discretion [at [181]];

ii. the so-called disentitling conduct must have been done to/directed at the defendant [at [162]];

[190] It is immediately apparent that the unclean hands defence must fail in the present proceedings. Not a single one of the above requirements is made out by Mr Carantinos' case. All that has been made out is that the two men determined to participate in a long-standing fraud upon the Deputy Commissioner of Taxation. Certainly this conduct does not meet the requirement that it had an immediate and necessary relation to the Equity sued upon. There was no lack of clean hands in the relationship between the two participants to the scheme.

[191] It is equally clear that in so far as Mr Magafas was one of the parties to the agreement to engage in the so-called disentitling conduct, that conduct was not directed at the defendant.

[192] The equity which entitles the respective plaintiffs to success is that which obliges the person who is under a fiduciary obligation to account to the person to whom the obligation is [owed] for any benefit or gain which has been obtained or received in circumstances where a conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it: the law requiring that any such benefit or gain is held by the fiduciary as constructive [trustee]: cf Mason P in Blythe v Northwood supra, [in turn citing Deane J in Chan v Zacharia at 198–199 ].

Black Uhlans

52 Before this Court, Mr Kelly SC for the appellants submitted that these reasons disclosed three errors:

(2) The primary judge’s assertion that the disentitling conduct in this case did not have an immediate and necessary relation to the equity sued for.

(3) It was not to the point that there may appear to be injustice in permitting Mr Carantinos to avoid an obligation to account.

53 Mr Kelly submitted that the first proposition was not supported by the decision of Campbell J in Black Uhlans Inc v New South Wales Crime Commission [2002] NSWSC 1060. This proposition was mentioned at paragraphs [161] to [162] only as a matter of legal history; and it was rejected by Campbell J at para [177], referring to Kettles & Gas Appliances Ltd v Anthony Hordern & Sons Ltd (1934) 35 SR(NSW) 108 and Armstrong v Sheppard & Short Ltd [1959] 2 QB 384 at 397.

54 As regards the second proposition, Mr Kelly submitted that Mr Magafas set up his own fraud as the basis for the relief he was claiming from the court. It was an integral part of the arrangement that there be false invoices and fraud on credit providers and the tax authorities, and it was necessary for Mr Magafas to establish these matters as part of his proof of the partnership or joint venture and his provision of monies to it.

55 Mr Kelly referred to Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215; and he submitted that it was not the position in this case, as it was in Fitzgerald, that the plaintiff did not have to rely on any illegal act to establish the cause of action. Mr Kelly relied on the statement at page 220 in that case to the effect that persons who deliberately set out to break the law cannot expect to be aided by a court.

56 Mr Kelly referred to Official Trustee in Bankruptcy v Tooheys Ltd (1993) 29 NSWLR 641 at 649-50, where Gleeson CJ said that in cases where a clean hands defence applies, the law frequently regards as just that the cards be left to lie where they have fallen. He submitted that, although in some cases such as Nelson v Nelson (1995) 184 CLR 538, the court could tailor an order to ensure that no benefit was retained from unlawful conduct, that would not be possible in this case because the fraudulent scheme had a number of different aspects to it, not just defrauding the revenue. Further, he submitted, this was not a case where, as in Nelson, the consequence and intention of the statute that gave rise to the illegality were consistent with relief being granted. He submitted that to grant relief in this case would be to aid a litigant to derive an advantage from its own wrong, in the sense discussed in Meyers v Casey (1913) 17 CLR 90 at 123-24.

57 In my opinion, the primary judge was in error in holding that the disentitling conduct must have been done to or directed at the defendant. In this regard, it is sufficient to refer to Kettles and Armstrong.

58 As to whether the disentitling conduct had a sufficiently close relationship to the equity sued for, in my opinion it did have a relationship sufficient to give rise to a discretion to refuse relief or to impose conditions on the grant of relief. The equity sued for arose out of the provision of money pursuant to a scheme designed to defraud tax authorities and financiers; and because of the documentation of the provision of this money, it was as a practical matter necessary for Mr Magafas to prove this illegal and fraudulent scheme in order to prove his case.

59 It is true that the equity claimed arose from the actual provision of money, and not directly from the fraudulent scheme; and to give effect to the equity claimed would not actually further advance the illegal purpose or the fraudulent scheme. What this means, in my opinion, is that a defence of illegality, of the type available both at common law and in equity, would not apply; but it does not distance the plaintiff’s improper conduct from the equity claimed sufficiently to make a “clean hands” defence unavailable.

60 If the result of applying the clean hands defence were to deny relief altogether to Mr Magafas, it would be very doubtful that this could apply in relation to the sums of $500,000 and $600,000 which were not paid in the way proposed by the fraudulent scheme, but were paid honestly as advances to Pac-Com. To refuse relief in relation to $480,000 but to grant it in relation to $1.1 million would introduce additional difficulty and complexity into the taking of accounts which will already be complex and difficult.

61 The High Court in Nelson endorsed a flexible approach to the granting or withholding of relief in a case such as the present; and in moulding appropriate relief in cases where relief is not withheld. In that case, the plaintiff had paid for a house which was put into the names of her children, with the intention that she could, if she wished, purchase another house with the benefit of a subsidy under the Defence Service Homes Act 1918 (Cth) for which she would not be eligible if she already owned a house. She did later purchase another house and received a subsidised loan under the Act, having falsely declared that she did not own or have a financial interest in any other house. The first property was sold; and the plaintiff was successful in obtaining a declaration that she was entitled to the net proceeds of sale. However, the majority held that relief should be conditional on her paying to the Commonwealth an amount representing the benefit she received from the subsided interest rate.

62 If Mr Magafas had frankly disclosed his fraudulent and illegal conduct to the tax authorities, and made appropriate arrangements to pay any additional tax, penalties and interest that might be imposed, this would in my opinion have been a case where unconditional relief could appropriately have been granted. There are strong policy reasons why the courts should not assist anyone to benefit from illegal conduct; and where parties are equally at fault, the loss is generally left to lie where it falls. However, there is also a strong public interest in encouraging disclosure of past illegal conduct, and submission to appropriate penalties. Having regard to this, and to the unfairness of leaving Mr Carantinos with the full benefit of the money provided by Mr Magafas, I would have given effect to this latter consideration, and granted unconditional relief.

63 However, Mr Magafas did not establish (and the onus lies on him) that he has frankly disclosed his fraudulent and illegal conduct to the tax authorities, and that appropriate arrangements have been made to pay any tax, penalties and interest that might be imposed. These matters are not sufficient in my opinion to deny relief; but any relief should be subject to conditions that ensure that there is no distribution to Mr Magafas or at his direction until the Court is satisfied that these things have occurred.

64 This condition should apply to the whole of the relief granted, not just to relief in respect of the payments totalling $480,000. Just as it would have introduced additional difficulty and complexity into the accounting to deny relief in relation to $480,000 but grant it in relation to $1.1 million, it would do likewise if the Court made relief concerning $480,000 conditional and that relating to $1.1 million unconditional. It does seem that some proceeds of the $480,000 found their way into Pac-Com, and it seems that a significant amount of them was used for the Artesian purchase; and it seems therefore that these proceeds have become thoroughly mixed with the proceeds of the $1.1 million. In my opinion Mr Magafas, seeking the assistance of equity in relation to the whole amount, is appropriately subjected to conditions in relation to the whole amount. As well, it is appropriate to direct the Registrar to send a copy of this judgment to the Commissioner of Taxation.

Mrs Carantinos

65 Before the primary judge, Mr Magafas claimed that No. 43 was purchased by Mr Carantinos in the name of himself and his wife in breach of his fiduciary duty to the partnership or joint venture; and that Mrs Carantinos was liable to account to Mr Magafas for the proceeds of sale on the basis that she was a knowing recipient of trust property under the first limb of Barnes v Addy (1874) LR 9 Ch App 244. The primary judge upheld that claim, applying the decision of the Court of Appeal in Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309.

66 After delivery of the primary judge’s main judgment, but before orders were made, the Court of Appeal decision in Say-Dee was reversed by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89. The primary judge gave the parties an opportunity to be heard in relation to the effect of this High Court decision; and on 21 August 2007 he gave a further judgment in which he held that Mrs Carantinos was not liable to account and that Mr Magafas’ case against her failed. However, the primary judge made a declaration that Mr Carantinos was liable to account to Mr Magafas in relation to all proceeds of sale and all profits arising from the sale of No. 43.

67 It appears to have been accepted by Mr Magafas for the purposes of this second decision that, in receiving a one-half share of No. 43 into her name, Mrs Carantinos was not a recipient of trust property for the purposes of the first limb of Barnes v Addy; and in my opinion this was correct, because the mere circumstance that as a fiduciary Mr Carantinos was precluded from acquiring No. 43 or any part of it for his own benefit would not make Mrs Carantinos’ half share trust property. It also seems to have been accepted by Mr Magafas that Mrs Carantinos did not, at the time of acquisition of No. 43, have knowledge of any breach of fiduciary duty by Mr Carantinos within any of the first four categories in Baden Delvaux & Lecuit v Societe General pour Favoriser le Developpement [1983] BCLC 325, so that she could not be liable as an accessory within the second limb of Barnes v Addy. Again, in my opinion this was correct.

68 Accordingly, the claim then made against Mrs Carantinos focussed on what happened to the $296,000 deposit on the sale of 39-43 Riverside Crescent. In relation to that matter, the primary judge found it was not shown that Mrs Carantinos had knowledge of any breach of duty within any of the first four categories in Baden. Indeed, he found there was no evidence that she knew this amount was received into the joint account of her husband and herself, or of how her husband chose to apply the proceeds; so even if in relation to this deposit Mrs Carantinos was treated as a recipient of trust property, so that category 5 knowledge would have been sufficient, in my opinion there was no basis for finding category 5 knowledge either.

69 It was submitted by Mr Kelly for Mrs Carantinos that accordingly Mr Carantinos should be liable to account only for the proceeds of sale or profits on sale of his one-half share in No. 43.

70 However, Mr Alexis SC for Mr Magafas referred to paras [4] to [7] in the primary judge’s judgment of 30 August 2007, in which the primary judge rejected contentions by Mr Carantinos that declaration 4 (set out in para [2] above) should be varied. The judge’s reasons for rejecting those contentions were:

[4] Declaration 4 accurately reflects the findings of the Court in the principle judgment at [80] and [90] — that 43 Riverside Cres “was purchased on trust for the partnership or joint venture between Mr Magafas and Mr Carantinos.” This finding has nothing to do with Mrs Carantinos and the account that the first plaintiff unsuccessfully sought against her.

[5] The result of the further judgment of the Court delivered on 21 August 2007 is that Mrs Carantinos had no notice of the existence of the trust when she obtained her legal interest in the property and thus, has no liability to account for the proceeds of sale and the profits arising from the sale that she may have received. It does not follow that the first defendant’s liability to account to the first plaintiff in relation to 43 Riverside Cres is to be limited to the proceeds/profits that may be said to be only attributable to his legal interest to one half of the property as a tenant in common. Such a result would mean that only one half of the property was held in trust for the partnership or joint venture and this was not the finding of the Court.

[6] The Court rejected the first plaintiff’s application for the first defendant to pay equitable compensation with respect to Mrs Carantinos’ legal interest in the property, in the further judgment at [23]. The reasoning at [22] is that any monies that Mrs Carantinos received from the sale of 43 Riverside Cres are to be brought to account by the first Defendant and he is properly accountable to the first plaintiff for them.

71 Mr Alexis also submitted that in any event, the Court should still make an order against Mr Carantinos to account for all monies that would have been received by him on behalf of the partnership or joint venture had he ensured, consistent with his fiduciary duty, that the full beneficial interest in No. 43 was held for the partnership or joint venture; that is, that the Court should in that respect order an account on the basis of wilful default.

72 In my opinion, this last submission should be rejected. Mr Carantinos’ fiduciary duty did require that he not make any unauthorised benefit or be in a position of conflict (Breen v Williams (1996) 186 CLR 71 at 113); but the question of whether there was a conflict between his duty to the beneficiary and any duty he may have had to his wife was not raised or explored, and it was not shown that any benefit to his wife amounted to a benefit to Mr Carantinos. Insofar as there may have been any conflict of interest, it was not alleged or proved what if any loss may have resulted from Mr Carantinos putting himself in a position of conflict.

73 As regards the question whether Mr Carantinos should otherwise be liable to account for the whole of the proceeds of sale and/or profits arising from the sale of No. 43, I note that in the Amended Statement of Claim, para 9, Mr Magafas alleged that No. 43 was held on trust by Mr and Mrs Carantinos for Pac-Com (or the partnership or joint venture), and that to the extent that Mrs Carantinos obtained a legal interest, she was a volunteer and/or took the interest with notice of the interest of Pac-Com. In their Defence, Mr and Mrs Carantinos denied para 9 and alleged (para 1(b)) that they purchased No. 43 “on their own account”.

74 It seems that, despite the allegation that Mrs Carantinos was a volunteer, Mr Magafas did not actually claim before the primary judge that her interest in No. 43 was subject to a resulting trust on the basis that she had provided none of the purchase money; and no such finding was explicitly made. On the other hand, as the primary judge pointed out, there was no finding that Mrs Carantinos had a beneficial interest in the property to the exclusion of the joint venture; and the undisturbed finding that the property was held on trust at least impliedly involved a finding that Mrs Carantinos did not have a beneficial interest in the property to the exclusion of the joint venture.

75 Mr Kelly submitted that no such finding could or should have been made: despite the pleading, no claim of the resulting trust was pursued before the primary judge, and it was clear, he submitted, that Mrs Carantinos did contribute to the purchase of No. 43 at least one-half of the amount borrowed on the joint account from NAB.

76 In my opinion, the primary judge should not have made any positive finding that Mrs Carantinos had no beneficial interest in No. 43 without at least considering whether her contribution to the purchase through her half share of the NAB loan was such as to give her beneficial interest at least to this extent, one which would be defeated only pursuant to Barnes v Addy principles. Accordingly, although in my opinion the primary judge was justified in not making a positive finding that Mrs Carantinos had a beneficial interest, the reasons he gave did not justify a finding that she did not have a beneficial interest; and to the extent that such a finding is implied in his finding that No. 43 was held on trust for the partnership or joint venture, such an implicit finding cannot stand.

77 The contributions to the $245,000 purchase price of No. 43, in addition to the NAB loan, appear to have been the $24,500 deposit and a balance of about $30,000. As mentioned earlier, it appears there was no evidence as to the source of the $24,500 deposit; although the accounting that has been ordered may disclose that this was in fact derived directly or indirectly from payments made by Mr Magafas in November and December 1995 and in December 1996. As mentioned earlier, it appears that the balance of about $30,000 was provided by Mr Carantinos.

78 When No. 43 was sold, it appears that $80,000 of the $296,000 deposit for 39-43 was attributable to No. 43; and a further $400,000 was paid for No. 43 upon settlement. The total price of $480,000 was $235,000 more than the purchase price. It is clear that some of this profit was due to the obtaining of a development application for the whole of the properties 39-43; and it is clear that substantial expenses towards the obtaining of this development application (paid for architects, town planners, etc) as well as rates and other outgoings for No. 43 were paid by Pac-Com. Further, to the extent that any money put into this property by Mr Carantinos was either derived from Mr Magafas or subject to his fiduciary duty, it seems clear that no presumption of advancement would apply.

79 In all these circumstances it is in my opinion more probable than not that Mrs Carantinos’ beneficial interest in the proceeds of sale of No. 43 was less than 50 per cent, and it is an open question whether she had any beneficial interest at all. Her half share of the NAB debt would not give rise to a beneficial interest, in my opinion, if Mr Carantinos had indemnified her against liability to NAB; and the circumstances as the Court knows them are such that this may have happened, either expressly or impliedly. It does not appear that Mrs Carantinos made any payment in reduction of her share of this debt, and the whole of the debt was repaid out of sale proceeds.

80 In addition, it is relevant that the primary judge found that Mr Carantinos told Mr Magafas that No. 43 was purchased for the partnership or joint venture, which would support an inference against Mr Carantinos that Mrs Carantinos had no beneficial interest in it; and this inference would also have some support by the circumstance that Mr Carantinos did in fact deal with all the proceeds. One of the matters relied on by the primary judge in his post-Farah judgment was that there was no evidence that Mrs Carantinos even knew about the $296,000 going into the joint account.

81 If Mrs Carantinos had had a beneficial half interest, her entitlement would relevantly have been to one-half of the $80,000 included in the $296,000 deposit, and one-half of the sum of about $176,000 left over after repayment of NAB. The whole of these two amounts were dealt with by Mr Carantinos, and in my opinion he should account for the whole of these amounts that he dealt with.

82 It would be open to him to claim that he had no liability for any part of such amounts that he says he applied in discharge of some legal or equitable interest of Mrs Carantinos; but whether or not that would be sufficient to absolve him would depend on the evidence led and the findings made. If it did become relevant to determine the extent of Mrs Carantinos’ beneficial interest in No. 43, in order to decide whether Mr Carantinos was absolved by some payment he made for her benefit, then consideration could be given at that stage as to where the onus of proof lies in the circumstances, whether the issue is resolved by the primary judge’s finding that it was not established that she had any beneficial interest, or whether it would be appropriate that there be further consideration of this question. I propose to reserve further consideration in the orders that I suggest, as well as reserving liberty to apply.

83 For those reasons, while I think declaration 4 should be amended to assert that Mr Carantinos held his interest in No. 43 and holds his interest in the proceeds of sale and all profits arising from the sale on trust, I nevertheless am of the view that he should be required to account for all of the proceeds, with the question of any interest claimed for Mrs Carantinos being dealt with in the way I have specified.

84 Since writing the above, I have read Handley AJA’s judgment, and I should further explain my reasons for reaching a different conclusion from him on this aspect of the case.

85 I agree with Handley AJA that Mr Magafas did not show there was a resulting trust of Mrs Carantinos’ half interest in No 43; but in my opinion he did make out a case that her beneficial interest in No 43 was significantly less than 50%, by reason of the provision by Mr Carantinos of $30,000 and the partnership’s payment of holding and development costs. In my opinion also, for reasons given earlier, it is open on the pleadings and the way the case was conducted to grant relief on that basis. Thus, although the main case against Mrs Carantinos failed and she was not liable to account, the case that the partnership was entitled to something from her share of No 43 succeeded to that extent.

86 I agree with Handley AJA that a plaintiff’s cause of action and the scope of any account or enquiry must be established at the trial, and that there should not be directed that there be a “roving inquiry”. However, in my opinion, in a case as complex as this one, where breaches of fiduciary duty by Mr Carantinos, extending over some years, have been proved, it is appropriate to reserve some matters for further consideration. Until the accounting makes it clear how money was dealt with and where it went, I do not think the total scope of the relief granted should be narrowly circumscribed.

87 As regards Handley AJA’s view that the proper remedy for Mr Magafas was equitable compensation for breach by Mr Carantinos of his fiduciary duty of loyalty to the partnership, I do not understand Mr Magafas to have made a claim for equitable compensation; and further, to have such an inquiry as to compensation in addition to an account would, in my opinion, add enormous and unnecessary complexity to resolution of this matter. In addition, since it seems clear that most if not all the proceeds of No 43 went into other projects, to delete half of these proceeds from the accounting process would on its own add complexity and difficulties to the accounting.

88 For these reasons, and particularly in circumstances where Mrs Carantinos has no interest adverse to Mr Carantinos and is not separately represented, in my opinion Mrs Carantinos should be a party to the taking of accounts, although not an accounting party; and the orders that I propose are the appropriate ones.

Rolling Profits

89 Although this point was apparently not taken before the primary judge it was submitted on appeal for Mr Carantinos that, in the taking of accounts, profits from each deal should be notionally distributed and treated as capital contributions for the next deal. This could make a difference in the result, if the amount to be distributed ultimately turns out to be insufficient to provide for the return of capital plus interest, and also of the full amount of profits on earlier deals. (In fact, there appears to be only one “deal” that could be relevant, namely that concerning the Riverside Crescent properties.) In that event, on the assumption that Mr Magafas’ contribution of capital was greater, the greater the abatement of capital and interest to be returned, the less would be the excess of the amount returned to Mr Magafas over that returned to Mr Carantinos.

90 It was submitted for Mr Magafas that, since the point was not raised below, it should not be permitted now. It was submitted that the matter could have been the subject of further evidence and cross-examination.

91 In my opinion, it was a matter that, if raised below, could have been the subject of further evidence and cross-examination; and it should not be permitted to be raised now. In any event, in my opinion, so far as the evidence goes it does not support it. The expression “roll the profits into the next deal” seems to me to be neutral as between simply leaving money in the venture (on the one hand) and (on the other hand) taking accounts after each deal and treating the profits as capital contributions. Furthermore, other words in the relevant conversation accepted by the primary judge point towards the former; in particular, the statements “when we terminate the arrangement profits will split 50-50” and “when we terminate the process it is a simple process of accounting to establish who put in what amount of funds and then we can be repaid”.

92 Accordingly, I would reject this submission.

Karafas Trust

93 The primary judge found that 43 Riverside Crescent was held on trust for the partnership or joint venture of Mr Magafas and Mr Carantinos; and that 39-41 Riverside Crescent were held by Pac-Com otherwise than as Trustee for the Karafas Trust. The accounting awarded in favour of Pac-Com made no mention of the Karafas Trust.

94 It was submitted by Mr Kelly for Mr Carantinos that it had been the intention of Mr Magafas and Mr Carantinos that Pac-Com, as Trustee for the Karafas Trust, should be the vehicle for all investments; so that if there is to be any accounting, it should be in favour of Pac-Com in that capacity.

95 Mr Alexis for Mr Magafas submitted that the primary judge had found that the relevant assets and interests were held by Pac-Com beneficially; that the primary judge had ordered the accounts on that basis; and that he was correct to do so.

96 The significance of this question may have more to do with taxation considerations than with the ultimate respective beneficial entitlements of Mr Magafas and Mr Carantinos. Since (1) it is Pac-Com as trustee of the Karafas Trust that can distribute Trust property, (2) Pac-Com is a company of which Mr Magafas and Mr Carantinos are sole directors and shareholders, and (3) the power to appoint a new trustee of the Karafas Trust is vested in Mr Magafas and Mr Carantinos jointly, it would appear inevitable that the net assets of the Karafas Trust will ultimately have to be divided equally between Mr Magafas and Mr Carantinos.

97 However, Mr Alexis told the Court that in the 2003 financial year, the accountant Mr Egan, on instructions from Mr Carantinos, lodged with the Commissioner of Taxation a document called a Family Trust Election, nominating the Carantinos family as beneficiaries of the Trust; and that the law says that this election is irrevocable and has the effect that any distribution otherwise than to the Carantinos family would attract tax of 48.5 per cent. I should say that it is difficult to see how such a document, prepared on the instructions of only one of the two directors, could be efficacious; but this matter has not been explored.

98 The form of orders made by the primary judge is in fact neutral as to the question whether the accounting to Pac-Com is as beneficial owner or as trustee for the Karafas Trust. However, the orders suggest that all accounting to Pac-Com is to Pac-Com in the same capacity; and in my opinion, the minutes of the meeting of directors of Pac-Com dated 11 February 1997 strongly suggest that Pac-Com completed the purchase of 39-41 Riverside Crescent as Trustee for the Karafas Trust.

99 However, in my opinion no occasion has been shown to vary the form of orders so as to state explicitly in what capacity Pac-Com is to have the benefit of the accounting. At present, I think the better view is that it should be to Pac-Com as Trustee for the Karafas Trust; but the accounting may provide more information as to the treatment of assets by Pac-Com that bears on this question.

100 I would propose to reserve further consideration of this matter and to leave it as something that can be dealt with under liberty to apply, if necessary.

Costs

101 The primary judge ordered that Mr Magafas and Pac-Com pay the costs of Mrs Carantinos; but also ordered that Mr Carantinos reimburse Mr Magafas and Pac-Com for the costs they pay Mrs Carantinos.

102 Mr Kelly submitted that the cost order in favour of Mrs Carantinos should have been against Mr Magafas only; and that Mr Carantinos should not have been ordered to reimburse those costs.

103 During argument, I expressed a view that, having regard to the terms of the primary judge’s judgment, the order in favour of Mrs Carantinos would only extend to incremental costs. That is, in circumstances where Mr Carantinos and Mrs Carantinos had the same representation, where Mr Carantinos was on any view the principal defendant, and where the case substantially succeeded against him, Mrs Carantinos would only be entitled to costs to the extent to which the costs of both of them were increased through the joinder of Mrs Carantinos. No reason to the contrary was put by Mr Kelly. I think the costs order should make this clear.

104 It was suggested by Mr Kelly that the order in favour of Mrs Carantinos could carry the whole of the costs of the hearing concerning the effect of the High Court decision in Farah. I do not think this is so. This hearing did involve a question as to the extent of Mr Carantinos’ obligation to account, on which Mr Magafas was successful before the primary judge and partly successful in this Court.

105 On the question whether Pac-Com should be ordered to pay the costs of Mrs Carantinos, it is my understanding that Pac-Com has in any event an indemnity from Mr Magafas. However, since Mrs Carantinos does not seek an order against Pac-Com, it is appropriate not to make it.

106 On the question whether Mr Carantinos should be ordered to reimburse Mr Magafas for costs payable to Mrs Carantinos, there were obvious reasons for such an order, including Mr Carantinos’ statement to Mr Magafas that he had put property of the venture into Mrs Carantinos’ name. In my opinion there is no sufficient ground for appellate intervention on this matter.

Form of Orders

107 As appears from what I have written, there are a number of unresolved questions that may require consideration beyond that which would ordinarily happen in the taking and settling of accounts. In relation to these matters, in my opinion the best course is to have an express reservation for further consideration, which may be activated under the liberty to apply. In relation to some issues, it could be that further proceedings will be necessary; but whether or not that is so could be considered on an application under the liberty to apply. There are six matters that need to be dealt with in this way.

108 First, questions may arise in relation to claims by Mr Carantinos that he has discharged any obligation in relation to his dealing with proceeds of sale of 43 Riverside Crescent by making payments for the benefit of Mrs Carantinos.

109 Second, it may be necessary to determine whether any property to which Pac-Com is entitled is or is not subject to the Karafas Trust.

110 Third, questions may arise as to the winding up of Pac-Com and/or the Karafas Trust and the distribution of their net assets.

111 Fourth, questions may arise as to the interrelationship of the purchase, ownership and sale of Felton Woods Manor, on the one hand, and the operation of the hotel business by Felton Woods Manor Pty Limited on the other hand. The orders as presently framed appear to treat these as two distinct matters, with only the first of them being the concern of the partnership, Pac-Com and/or the Karafas Trust. However, the process of taking accounts may suggest that there are interrelationships the effect of which need to be considered.

112 Fifth, there may be questions as to the distribution of assets of Artesian. The original proceedings did not raise any issue as between the shareholders of Artesian; but following the sale of the St Peters’ property, the proceeds of that sale were made subject to orders and undertakings given in these proceedings. Questions as to how those proceeds are to be dealt with may raise issues as between Pac-Com (as beneficial owner of half the shares) and Mr Gav (as owner of the other half), concerning the distribution of those proceeds. No order in relation to this matter has yet been sought, and Mr Gav has put on a submitting appearance in the appeal; so in my opinion, these issues are appropriately made the subject of a reservation.

113 Sixth, any order for payment to Mr Magafas will require evidence that the condition referred to earlier in relation to the clean hands defence has been satisfied.

114 It may be that the first five matters can be dealt with by agreement. It is to be hoped that there will be no application to have any of them determined by the Court before the accounting has proceeded as far as possible. The taking of accounts and resolution of these questions have the potential to involve legal costs out of all proportion to what is in dispute, and I commend to the parties and their legal advisers that they keep this in mind.

115 As regards costs, the appeal has in substance failed, although it has resulted in the imposition of a condition of relief in relation to the claim of Mr Magafas, and also a variation in the orders concerning 43 Riverside Crescent. In my opinion, the appropriate order as to costs is that Mr Carantinos pay 80 per cent of the respondents’ costs, and that there be no order as to the costs of Mrs Carantinos.

116 We were informed that the preparation of the accounts had already commenced pursuant to the orders made by the primary judge, so those orders should only be amended to the extent made necessary by this Court’s decision. I would propose the following orders:

(2) Delete declaration 4 and in lieu thereof declare:

4. That the first defendant held his interest in the property known as 43 Riverside Crescent, Dulwich Hill and his share of the proceeds of sale on trust for the partnership.

7. That the first defendant is liable to account to the first plaintiff in relation to the proceeds of sale of the property 43 Riverside Crescent, Dulwich Hill.

(d) the respective interests of the first plaintiff and the first defendant in the partnership.

(b) determination of whether or not any property to which the second plaintiff is entitled is or is not subject to the Karafas Trust.

(c) questions concerning the winding-up of the second plaintiff and/or the Karafas Trust and the distribution of net assets thereof.

(d) questions as to the interrelationship between the purchase, ownership and sale of Felton Woods Manor and the operation of the hotel business by Felton Woods Manor Pty Limited.

(e) questions as to the distribution of the net assets of the fifth defendant (Artesian).

(f) the making of any orders for immediate payment of money to the first plaintiff.

(b) that the first defendant reimburse the first plaintiff for the costs which the first plaintiff pays to the second defendant.

(8) Order that no payment be made to either respondent or at the direction of either respondent of any part of the entitlement of either respondent arising from or in relation to the partnership assets without the leave of the Court.

(9) Direct the Registrar to send a copy of this judgment to the Commissioner of Taxation.

117 CAMPBELL JA: I agree with Hodgson JA concerning all topics in his judgment other than 43 Riverside Crescent.

118 In light of the difference of opinion between Hodgson JA and Handley AJA concerning the orders that are appropriate concerning 43 Riverside Crescent, I should state my own views on that topic. My views largely accord with those of Hodgson JA.

Modification of Einstein J’s Order 4

119 I agree that Einstein J’s order 4 cannot stand. Before Mr Carantinos could hold 43 Riverside Crescent on trust for the partnership, it would be necessary for Mr Carantinos to have either legal or full equitable ownership of that property – for there cannot be a trust without there being trust property that is held by the trustee. For the reasons given by Hodgson JA, there is an open question whether Mrs Carantinos had any beneficial interest in No. 43. It was wrong to declare that Mr Carantinos held No. 43 on trust for the partnership without resolving that question.

120 To the extent to which Mrs Carantinos had any such beneficial interest, the result of the decision of Einstein J, not appealed against, is that she holds it without any obligation to account to the partnership concerning it. It is a further effect of the judgment of Einstein J that she has no obligation to account to the partnership concerning her joint legal ownership of that property. But that does not affect how the beneficial interests in the property lie as between Mr and Mrs Carantinos. If, as between Mr and Mrs Carantinos, Mr Carantinos has a beneficial interest in the property, that beneficial interest is held by him for the benefit of the partnership. Declaration 4 as proposed by Hodgson JA does not say anything about Mrs Carantinos’ interest in the property; it relates only to Mr Carantinos’ interest, whatever it might prove to be.

121 While I accept that a plaintiff’s cause of action and the scope of any account or inquiry must be established at the trial, there are some types of trial that lead to wider enquiries than others. The cases upon which Handley AJA relies to conclude that the inquiry in the present case should not extend to the assets of Mrs Carantinos when no right to any of those assets was established at the trial, seem to me to be distinguishable.

122 McGrory v Alderdale Estate Company Limited [1918] AC 503 concerned a vendor’s suit for specific performance of an open contract for the sale of land. The trial judge made an order for specific performance of the contract, if a good title could be made to the land the subject of the inquiry. The judge also ordered an inquiry as to whether a good title could be made. At that inquiry, the purchaser adduced evidence of three defects in title. The vendor gave evidence, over objection, that the purchaser knew of these defects prior to entering the contract. Upon the matter being returned to the trial judge, he held that the evidence of the vendor should not have been allowed, and that if the vendor relied upon waiver of the obligation to make a good title in any respect that ought to have been brought forward at the hearing and embodied in the decree.

123 The Court of Appeal reversed that decision, but the House of Lords restored it. It was an essential part of the decision in the House of Lords that the terms of the Court’s decree established the terms of the contract that had been ordered to be specifically performed, and that if there were to be a waiver in any respect of the purchaser’s right to receive a good title that would amount to altering the decree itself. Thus, Lord Finlay LC said, at 509:

“The effect of the judgment of the Court of Appeal would be that, having got judgment on a particular contract from the Court, they are to be allowed to adduce evidence before the registrar for the purpose of varying its effect as to title.”

124 Viscount Haldane said, at 511:

“The terms of the decree have, in the eye of the law, superseded and excluded all other evidence, and it is too late, if the decree remains unaltered, to try to import new terms in the course of inquiries which follow merely consequentially on the rights which the purchaser has been given as the result of the trial.”

125 Similarly, Lord Shaw of Dunfermline said, at 511-512:

“In cases of this kind you start with the decree for specific performance. The time for modification or alteration of the subject-matter of that decree has gone past; if such modification or alteration by reason of alleged waiver or otherwise was desired as being in accordance with the true intention of parties to the contract, that issue should have been the subject of contest in the proceedings for specific performance, and the alteration or modification, whether upon subject-matter or upon title, should have appeared on the face of the decree. Otherwise the decree must stand, with all that the law implies therein, namely, that a good title to the entire subject-matter of the contract shall be given.”

126 In the present case, conducting an account in accordance with the orders proposed by Hodgson JA would not involve any variation or qualification of any finding or order of the trial judge.

127 Poulton v Adjustable Cover and Boiler Block Company [1908] 2 Ch 430 was an action brought by a patentee for infringement of the patent. The defendants alleged the patent was invalid, but failed in that defence, in consequence of which the plaintiff obtained an order for an inquiry as to damages. Before that inquiry was heard, the defendant, in reliance upon instances of prior user of the invention of which they had been ignorant at the time of the trial, obtained a revocation of the patent. The substantial question for decision was whether the subsequent revocation of the patent showed that the plaintiffs had sustained no damage. Both Parker J at first instance, and the Court of Appeal, held that substantial damages could be recovered notwithstanding the revocation. The reason by which all judges of the Court of Appeal (Vaughan Williams LJ at 438, Fletcher Moulton LJ at 438-439, Buckley LJ at 440-441) reached that conclusion was that the judgment in the action established the validity of the patent as res judicata between the parties to the action.

128 In the present case, conducting an account in accordance with the orders proposed by Hodgson JA would not involve the calling into question of anything established as a res judicata.

129 In Re Wrightson [1908] 1 Ch 789 was an action brought by some of the beneficiaries of a deceased estate against the trustees seeking a declaration that a particular investment was a breach of trust, an order for administration of the estate by the court, accounts and inquiries concerning the estate, and removal of the trustees. At the trial of the action the trustees admitted the breach of trust. The order of the court was that the trustees pay costs, that the trusts of the will be carried into execution, that “what are usually referred to as the common accounts and inquiries in an administration action should be taken and made” (at 793), that further consideration be adjourned, and any of the parties were to be at liberty to apply. The question arose of whether some of the beneficiaries were entitled, in the taking of accounts, to allege breaches of trust that had not been alleged in the pleadings. Warrington J said, at 799:

“Plainly not. The rules require that in cases of breach of trust particulars shall be alleged in the pleadings, and without amendment it would have been hopeless for the plaintiffs to have sought to charge the trustees with a breach of trust other than that alleged in the pleadings.

Is it the practice of the Court where one breach is proved to direct some roving inquiry with a view of ascertaining whether there are any other breaches of trust? I think plainly not. No instance of the sort has been cited, and if it were the practice the rules requiring particulars to be given would be ridiculous and absurd. It seems to me that, in regard to a breach of trust, that is to say, an active breach of trust, in its active and proper sense, the plaintiffs are not entitled to relief at the trial, except in regard to that which is alleged in the pleadings and proved at the trial.”

130 His Honour went on, at 799, to distinguish the situation where an active breach of trust was alleged from that in which accounts were sought on the basis of wilful default.

131 Meagher Gummow and Lehane’s Equity Doctrines and Remedies, 4th ed (2002), Butterworths LexisNexis, par [25-035] explains that accounting on the basis of wilful default:

“… means that the defendant must account not only for all receipts and payments actually made by him but also for all moneys which he would have received if he had managed the property prudently.”

132 The learned authors go on to say that, other than in the case of a mortgagor seeking an account from a mortgagee in possession,

Sleight v Lawson

Job v Job

Mayer v Murray

Re Symons

Re Youngs

White v City of London Brewery

Re Wrightson

Re Wells

133 The different bases for taking accounts has also been explained by Giles JA (with whom Sheller and Beazley JJA agreed) in Meehan v Glazier Holdings Pty Ltd [2002] NSWCA 22; (2002) 54 NSWLR 146 at [13]-[14]. Giles JA said that under an order for taking accounts in common form:

“… the accounting party accounts only for what has actually been received and disposed of. The other party to the accounting can challenge the accounting party's account by asserting that more was received (in the old terminology, surcharging) or by asserting that less was disposed of (in the old terminology, falsifying).

Partington v Reynolds

134 In Wrightson, an argument was put, that just as a single pleaded and proved example of wilful default in the administration of a trust justified the court in ordering an accounting on the basis of wilful default, in the course of which other examples of wilful default could be alleged, so a single pleaded and proved (or, as in Wrightson, admitted) breach of trust should allow an accounting of the affairs of the trust in the course of which breaches other than those pleaded and proved could be alleged. Warrington J rejected that argument at 799, saying:

“It is well known, of course, that in a case of wilful default, which is quite distinct from active breach of trust, if wilful default is pleaded and if a case is established, then the accounts are directed on that footing. But why is that? It is because there are two perfectly distinct classes of accounts which are directed in cases of this kind - one is the common account, and the other is the account on the footing of wilful default; and if it is shewn that a trustee has been guilty of wilful default, then the second of those forms of account is adopted, and not the first. That is all. If I may put it shortly, what I mean is that there is a kind of character attaching to a trustee which is referred to by the expression "wilful default"; and, if it is proved that he is a trustee coming under that character, then that particular form of account is directed, and not the other. But in the case of a breach of trust there is no general form of account which is substituted for the common account. In cases of breach of trust relief is given in respect of those specific breaches of trust which are proved, and in respect of those only; and it seems to me that is the true distinction between the line of authorities which have been cited with regard to wilful default and those which apply to the present case. As to the former class of cases, there is no question that the rule is that, if wilful default is alleged and if an instance is proved, then the trustees are not in a position to claim to have against them the ordinary account only, but the account must be directed on the footing of wilful default. In my judgment that rule does not apply to cases of breach of trust.”

135 The cases in which Warrington J was denying that there could be a “roving enquiry” were ones where an active breach of trust was alleged, and it was sought in an inquiry to allege other and different breaches of trust. Indeed, the power of the court to order an accounting on the basis of wilful default when only one wilful default has been alleged and proved, and yet for other wilful defaults to be alleged in the course of the inquiry, shows that scope of the inquiry is not in all cases restricted to inquiry into matters that have been proved at the trial.

136 In National Broach and Machine Co v Churchill Gear Machines Ltd [1965] 1 WLR 1199 the English Court of Appeal distinguished In Re Wrightson. National Broach was an action brought by the licensor of intellectual property relating to gear shaving machines against a former licensee, alleging that the former licensee had manufactured and marketed its own gear shaving machines by using confidential information that had been supplied to it by the licensor. At the trial, the licensor pleaded, particularised and established over 100 instances of wrongful user of confidential information. The trial judge, Cross J, granted an injunction restraining the former licensees from using confidential information of any kind the property of the plaintiffs, and from offering for sale any machines or parts made with the assistance of the plaintiffs’ confidential information. He also directed an inquiry as to the damages suffered by the licensor, but limited that inquiry to damages suffered by them by reason of the use of the confidential information contained in the drawings specified in the further and better particulars. The Court of Appeal removed that restriction on the inquiry. Willmer LJ said, at 1202-1203:

In re Wrightson

Aktiebolaget Manus v. R. J. Fullwood & Bland Ltd

.

A. G. Spalding & Brothers v. A. W. Gamage Ltd

,

137 Similarly, Harman LJ, at 1204-1205 said that the course adopted by Cross J:

A. G. Spalding & Brothers v. A. W. Gamage Ltd

"any confidential information … in any drawings relating to the plaintiffs' … machines or any parts thereof supplied by the plaintiffs for the purpose of manufacturing under licence such machines …"

In re Wrightson

138 It is quite common for judgments relating to dissolution of a partnership to include an order in extremely general terms for an inquiry as to the assets and liabilities of the partnership. Seton’s Judgments and Orders, 7th ed (1912) Stevens and Sons Limited at 2093 identifies the order made by Kay J in Pawsey v Armstrong (1881) 18 Ch D 698 as being:

“1. An account of all dealings and transactions between the Plt and Deft as co-partners, including in such account all dealings with the partnership assets and property since the — day &c; 2. An inquiry of what the credits, property and effects now belonging to the said partnership consist ...”

139 Seton also gives example of orders in closely similar terms made in Lucas v Cutts (Vice Chancellor, 24 February 1853) at 2098. See also AG Neville & AW Ashe, Equity Proceedings With Precedents (NSW) (1981) Butterworths at 235, 237, 239.

140 Lindley & Banks on Partnership, 18th ed (2002) Sweet & Maxwell, pars 23-124 and 23-125 say:

“Lord Lindley summarised the method of taking a partnership account under a judgment in the usual form as follows:

“(1) Ascertain how the firm stands as regards non-partners.

West v Skip

(3) Apportion between the partners all profits to be divided or losses to be made good; and ascertain what, if anything, each partner must pay to the others, in order that all cross-claims may be settled.”

This still holds true.”

141 A necessary part of ascertaining “how the firm stands as regards non-partners” is to work out what beneficial interest the firm has in any property, legal title to which is held by a partner jointly or as tenant in common with a non-partner.

Replacing Einstein J’s Order 9

142 The form of orders proposed by Hodgson JA accords with the normal Chancery practice in suits for the dissolution of partnerships whereby the accounts are ordered to be taken and the proceedings are adjourned for further consideration: Meehan v Glazier Holdings at [31]-[32].

143 Hodgson JA has deliberately omitted order 9 made by Einstein J, under which payments were to be made to the plaintiffs of sums found to be due upon the taking of accounts.

144 In my view that course is the appropriate one to take, given the complexity of the further issues that may arise in the accounting. Lindley & Banks, op cit para 23-119 say that an order for accounts and payment of the amount due was the form of judgment for a partnership account “in its simplest form”, and that the consequential order for payment “is commonly omitted”.

145 At first instance in Meehan v Glazier Holdings the trial judge had made an order for the taking of accounts (in common form) of a trustee, and for the trustee to pay the amount found due on the taking of those accounts ([2002] NSWCA 22; (2002) 54 NSWLR 146 at [10]). When later inquiries revealed what was thought to be a basis for the taking of accounts on the basis of wilful default or neglect, the trial judge made an order varying his initial order, so that the account was to be taken on the basis of wilful default and neglect, and the amount so found due be paid (at [20]). The substantial reason why Giles JA held that there was no power to make that variation was that the order for taking accounts in common form and payment of the amount so found due was a final order, that had been entered, and so could not be changed (at [31]-[45]). If the order had been for the taking of accounts on the common basis, with reservation of further consideration, and no order for payment of any amount, the order would have been interlocutory, so far as the basis upon which any payment ought ultimately be made was concerned, and so might have been changed.

146 The orders proposed by Hodgson JA in the present case preserve the freedom of future action that was not available to the plaintiff in Meehan v Glazier Holdings.

147 But, in so far as the rights of the parties have been decided, any such decision cannot be overturned or varied as a consequence of the inquiry or the further consideration of the matter. There is a limitation on what can be decided pursuant to further consideration in that the judge cannot review and reconsider what he or she has decided at an earlier hearing: Australian Hardboards Limited v Hudson Investment Group Ltd [2007] NSWCA 104 at [73] and cases there cited.

Declaration 7

148 There are two separate senses in which one can say that a partner or joint venturer has an obligation to account to a fellow partner or joint venturer. The first is that there is an obligation to provide full information concerning the assets, liabilities, transactions and dealings of the partnership or joint venture. The second is that there is an obligation to pay whatever amounts properly fall due concerning the partnership or joint venture. Read in the context of the orders as a whole, and of his reasons, declaration 7 proposed by Hodgson JA relates to a liability to account in the first of those senses. It is appropriate to declare that Mr Carantinos is liable to account to Mr Magafas in relation to the whole of the proceeds of sale of number 43 because Mr Carantinos has received and dealt with the whole of those proceeds, and without information and explanation concerning the whole of those proceeds, it will not be possible for a full understanding of the assets, liabilities, transactions and dealings of the partnership or joint venture to be arrived at.

Equitable Compensation for Breach of Fiduciary Duty of Loyalty?

149 Fiduciary duties that were pleaded in paragraph 3 of the Amended Statement of Claim to be owed by Mr Carantinos included duties (variously stated) for Mr Carantinos not to make profits or receive or secure benefits at the expense of the partnership or joint venture. The claim made in paragraphs 8-9 of the Amended Statement of Claim was (relevantly) that when Mr and Mrs Carantinos purchased No. 43 in their own names that was a breach of the fiduciary duty owed by Mr Carantinos, in consequence of which No. 43 was held on trust for Pac-Com. The basis on which there could be such a trust, when Mrs Carantinos had obtained a legal interest in No. 43, was pleaded to be that she was a volunteer, and/or that she took with notice of the beneficial interest of Pac-Com.

150 To the extent that Mr Carantinos had acquired a beneficial interest in No. 43, he breached the fiduciary duty that had been pleaded against him when he asserted that he held that interest in his own right. However, that breach of fiduciary duty is fully remedied by requiring him to treat his interest in No. 43 as an asset of the partnership.

151 There would be scope for an allegation of breach of fiduciary duty to give rise to a wider remedy than this, concerning the dealings with No. 43, only to the extent that his permitting his wife to acquire an interest in No. 43 resulted in the interest of his wife not being treated as an asset of the partnership. It would be intelligible to allege that a partner who had management responsibilities for the partnership breached his duty of good faith to his partners and caused loss to the partnership by permitting a commercial opportunity that was available to the partnership to be availed of by some friend or associate. It would also be intelligible to allege that the partner should compensate the partnership for the loss arising, even though the partner had made no personal profit or derived no personal benefit from so doing. It is unnecessary to go into whether or when the law allows such a claim, because the claim that the respondents made in this litigation was not of that type. Thus, I agree with Hodgson JA that it is not appropriate to order an inquiry as to the loss suffered by the partnership as a result of Mr Carantinos’ breach of fiduciary duty.

Orders

152 In my view the orders proposed by Hodgson JA should be made.

153 HANDLEY AJA: In this appeal I have had the considerable advantage of reading the judgment of Hodgson JA in draft. I agree with his reasons, other than those in paras [72]-[83] and the orders consequential thereon, and must give my reasons for doing so.

154 In my opinion declaration 4 made by the primary judge cannot be supported in its present form. It declared that Mr Carantinos held the property known as 43 Riverside Crescent and holds the proceeds of sale and all profits on trust for the partnership. But the judge had held that Mrs Carantinos, the co-owner of the property, was not a recipient of trust property within the first limb of Barnes v Addy and was not liable, under the second limb, as an accessory for her husband’s breach of fiduciary duty.

155 Mr Magafas did not plead a tracing claim in respect of Mrs Carantinos’s half share in No 43, and did not prove such a claim: above paras [17], [22]. There was no finding that she held the whole or any part of her share on a resulting trust for the partnership.

156 The primary judge’s finding reflected in para [4] of his judgment of 30 August 2007 that No 43 “was purchased on trust for the partnership” cannot be reconciled with the findings just referred to. Mr Carantinos had a fiduciary obligation to acquire No 43 for the partnership and in breach of that obligation he caused his wife to acquire her half interest but the judge did not find that she had an obligation to hold her share on trust for the partnership.

157 Declaration 4 should therefore be limited to the half interest of Mr Carantinos in No 43. The fact that (para [7] 30 August 2007) the judge did not find that she held any beneficial interest in the property to the exclusion of the partnership is not to the point. Mrs Carantinos did not have to prove that she had a beneficial as well as a legal interest in the property. Mr Magafas failed to prove that the partnership had any equitable cause of action against Mrs Carantinos or any interest, beneficial or by way of charge, which bound her legal interest. She had entered into a personal covenant to repay the mortgage debt on No. 43 and, for that reason alone, as the High Court held in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89, 166 para [188], she was not a volunteer.

158 However, as the primary judge held, the plaintiff’s failure against Mrs Carantinos did not reduce the liability of Mr Carantinos for his breach of fiduciary duty.

159 The judge held that Mr Carantinos was bound to account to the partnership for the whole of the net profit on the sale of No 43, and he rejected the plaintiff’s claim for equitable compensation based on the same facts.

160 In my opinion the plaintiff’s proper remedy was equitable compensation for the breach by Mr Carantinos of his fiduciary duty of loyalty to the partnership. His fiduciary duty to the partnership obliged Mr Carantinos to acquire the whole of No 43, or at least the whole of the beneficial interest, for its benefit. He put himself in breach of this duty by undertaking a conflicting duty to his wife.

161 Although the result should be much the same, the appropriate remedy was not an account as such, but an inquiry as to the loss suffered by the partnership as a result of this breach of fiduciary duty by Mr Carantinos. The half share of Mrs Carantinos was not an asset of the partnership and the plaintiff did not establish that Mr Carantinos had any right to her share of the net proceeds of sale or any part thereof which would make him accountable to the partnership for any part of her share of those proceeds.

162 Mr Carantinos may have received and dealt with the net proceeds of No 43 in disregard of the rights of his wife but in my opinion this would not make him accountable to the partnership for monies for which he was accountable to her.

163 The representation by Mr Carantinos to Mr Magafas that No 43 was purchased for the partnership was not admissible against Mrs Carantinos. It cannot support an obligation to account which would be inconsistent with the failure of the plaintiff’s case against Mrs Carantinos personally. The representation was prima facie false and fraudulent, but a cause of action in deceit was not pleaded and it would not have been an asset of the partnership.

164 It would not be appropriate in the light of the findings and the failure of the plaintiff’s case against Mrs Carantinos to order Mr Carantinos to account for the whole of the proceeds of the sale of No 43, leaving him to discharge himself, if he can, by proving that his wife had a beneficial interest in the property, and that he had made or was liable to make payments to her in satisfaction of her entitlement.

165 It is well established that the plaintiff’s cause of action and the scope of any account or inquiry must be established at the trial. “The course of the inquiries follow”, as Lord Haldane said in McGrory v Alderdale Estate Co. Ltd [1918] AC 503, 511 “merely consequentially.”

166 It will be sufficient to refer to two other cases on the point. In Poulton v Adjustable Cover Co. [1908] 2 Ch 430 CA, 439 Moulton LJ said:

“… the inquiry as to damages … must … proceed on the basis of the judgment given upon the issues as to the validity of the patent and its infringement by the defendants, a judgment which binds the parties …”

167 In Re Wrightson [1908] 1 Ch 789, 799-800 Warrington J said:

“Is it the practice of the Court where one breach [of trust] is proved to direct some roving inquiry with a view of ascertaining whether there are any other breaches of trust? I think plainly not. No instance of the sort has been cited … It seems to me that, in regard to a breach of trust, that is to say, an active breach of trust, … the plaintiffs are not entitled to relief at the trial, except in regard to that which is alleged in the pleadings and proved at the trial … In cases of breach of trust relief is given in respect of those specific breaches of trust which are proved, and in respect of those only … if that is so then it would be wrong for me to direct further inquiries …”.

168 The account directed against Mr Carantinos should only require him to account for the assets of the partnership. It should not extend to assets of a third party unless the right of the partnership to that asset was established at the trial. The case against Mrs Carantinos having failed the Court should not, as proposed, direct a “roving inquiry” to ascertain whether the partnership has some other case against her.

169 Mrs Carantinos will not be an accounting party, or a party to the taking of the account. She will not be bound by the result, and Mr Carantinos may have to account for the same receipts to two parties. The rules which determine who are the necessary parties to proceedings in equity, and the issues which must be decided at the trial, and not left to an account or inquiry are intended to avoid such a result.

170 These considerations demonstrate, in my opinion, that proof of a cause of action against Mrs Carantinos and a decision that she did not own the whole of her share in No 43 beneficially could not be left to the accounting stage of the proceedings. The account must be limited to the share of the partnership in No 43 which, on the findings, was the half share of Mr Carantinos. Since Mrs Carantinos will not be a party to the taking of the accounts she cannot be ordered to reimburse the partnership or Pac.Com for payments made by them for holding or development costs on No 43, but any unrecouped expenditure would increase the equitable compensation payable by Mr Carantinos.

171 There should be an inquiry as to the loss suffered by the partnership by reason of the breach by Mr Carantinos of his fiduciary duty to acquire the whole of the beneficial interest in No. 43, for the benefit of the partnership.

**********

Citations

Carantinos v Magafas [2008] NSWCA 304

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CITATION:	Carantinos v Magafas [2008] NSWCA 304
HEARING DATE(S):	12-13 March 2008
JUDGMENT DATE:	14 November 2008
JUDGMENT OF:	Hodgson JA at 1; Campbell JA at 117; Handley AJA at 153
DECISION:	See par [116].
CATCHWORDS:	EQUITY – FIDUCIARY OBLIGATIONS – PARTNERSHIP – PROCEDURE – Clean hands defence – Whether conduct must be directed against defendant – Whether conduct had sufficiently close relationship to the equity sued for – Whether conditional relief appropriate – Remedies – Account – Whether accounting party should account for whole of proceeds of sale of property of which he was not proved to have total beneficial ownership – Whether party whose beneficial interest in the property was not excluded should be a party to the accounting – Whether appropriate to reserve substantive issues for further consideration.
CATEGORY:	Principal judgment
CASES CITED:	Armstrong v Sheppard & Short Ltd [1959] 2 QB 384 Australian Hardboards Limited v Hudson Investment Group Ltd [2007] NSWCA 104 Baden Delvaux & Lecuit v Societe General pour Favoriser le Developpement [1983] BCLC 325 Barnes v Addy (1874) LR 9 Ch App 244 Black Uhlans Inc v New South Wales Crime Commission [2002] NSWSC 1060 Breen v Williams (1996) 186 CLR 71 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215 Kettles & Gas Appliances Ltd v Anthony Hordern & Sons Ltd (1934) 35 SR(NSW) 108 Lucas v Cutts (Vice Chancellor, 24 February 1853) McGrory v Alderdale Estate Company Limited [1918] AC 503 Meehan v Glazier Holdings Pty Ltd [2002] NSWCA 22; (2002) 54 NSWLR 146 Meyers v Casey (1913) 17 CLR 90 National Broach and Machine Co v Churchill Gear Machines Ltd [1965] 1 WLR 1199 Nelson v Nelson (1995) 184 CLR 538 Official Trustee in Bankruptcy v Tooheys Ltd (1993) 29 NSWLR 641 Pawsey v Armstrong (1881) 18 Ch D 698 Poulton v Adjustable Cover and Boiler Block Company [1908] 2 Ch 430 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 In Re Wrightson [1908] 1 Ch 789
TEXTS CITED:	Meagher Gummow and Lehane’s Equity Doctrines and Remedies, 4th ed (2002), Butterworths LexisNexis, par [25-035] AG Neville & AW Ashe, Equity Proceedings With Precedents (NSW) (1981) Butterworths at 235, 237, 239 Lindley & Banks on Partnership, 18th ed (2002) Sweet & Maxwell, pars 23 124 and 23-125
PARTIES:	Peter CARANTINOS (First Appellant) Fotini CARANTINOS (Second Appellant) Anthony MAGAFAS (First Respondent) PAC-COM PTY LTD (Second Respondent) ARTESIAN PTY LTD (Third Respondent) Athena TOURIKI (Fourth Respondent) Gregory GAV (Fifth Respondent)
FILE NUMBER(S):	CA 40611/07
COUNSEL:	J C KELLY SC/ A J BOWEN (Appellants) T A ALEXIS SC/ S GOLLEDGE (First and Second Respondents) ------ (Third Respondent) T Blyth (submitting appearance) (Fourth Respondent) [submitting appearance] (Fifth Respondent)
SOLICITORS:	Munro Lawyers (Appellants) Rockliffs (First and Second Respondents) ------ (Third Respondent) Middletons (Fourth Respondent) Nicholas G Pappas & Company (Fifth Respondent)
LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	SC 2670/06
LOWER COURT JUDICIAL OFFICER:	Einstein J
LOWER COURT DATE OF DECISION:	15 May 2007, 20 June 2007, 21 August 2007, 30 August 2007, 5 September 2007
LOWER COURT MEDIUM NEUTRAL CITATION:	[2007] NSWSC 416, .... , [2007] NSWSC 917, [2007] NSWSC 965, ....