Carantinos v Magafas & Ors

[2009] HCATrans 89

[2009] HCATrans 089

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S546 of 2008

B e t w e e n -

FOTINI CARANTINOS

Applicant

and

ANTHONY MAGAFAS

First Respondent

PAC-COM PTY LIMITED

Second Respondent

ARTESIAN PTY LIMITED

Third Respondent

ATHENA TOURIKI

Fourth Respondent

GREGORY GAV

Fifth Respondent

GEOFFREY McDONALD IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF PETER CARANTINOS

Sixth Respondent

Application for special leave to appeal

FRENCH CJ
BELL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 1 MAY 2009, AT 12.24 PM

Copyright in the High Court of Australia

__________________

MR J.C. KELLY, SC:   May it please the Court, I appear for the applicant.  (instructed by PJ Ellis)

MR T.A. ALEXIS, SC:   May it please the Court, I appear with my learned friend, MR S.M. GOLLEDGE, for the first and second respondents.  (instructed by Rockliffs)

FRENCH CJ:   Yes, thank you.  No appearance has been filed for the third respondent, Artesian Pty Limited, and there has been an affidavit of service in that regard and they gave their submitting appearances for the fourth and sixth respondents.

MR KELLY:   That is as we understand the position, yes, your Honour.

FRENCH CJ:   Yes, Mr Kelly.

MR KELLY:   Your Honours, the issues in the forefront of the proposed appeal in this matter concern the interplay between the defence of clean hands in equity and the remedy of account in circumstances in which a party to a fraudulent scheme seeks the assistance of a court of equity to recover his contributions to and his profits from the operation of that scheme from, in effect, his fellow fraudster by way of the taking of a partnership account.

FRENCH CJ:   The utility questions in respect of both the issues here, are there not, the account question and the clean hands defence, having regard to the fact in relation to the latter that Mr Carantinos is a bankrupt, that his trustee is not pursuing the matter?

MR KELLY:   We would respectfully submit not, your Honour.  Indeed, the fact that Mr Carantinos has been made a bankrupt on the application of the first respondent, as it happened on the same day that the special leave application was made, exacerbates the injustice to Mrs Carantinos and renders the utility and the need for a grant of special leave more acute rather than less for a number of basic propositions need to be made to support that.  Firstly, the clean hands defence was a defence which was raised on behalf of both Mrs Carantinos and Mr Carantinos. 

FRENCH CJ:   You referred us to the pleading, I think, in your submissions in that regard.

MR KELLY:   Yes, indeed, your Honour.  It has been there from beginning to end, it is a threshold point, and if it is sound, then it removes the foundation for the invidious position in which Mrs Carantinos has now been left.  I speak of an invidious position and it arises in this way.  Your Honours would be aware that the orders which affect Mrs Carantinos’ interest as the registered proprietor of a one half share in one of the subject properties and, in turn, the proceeds of sale of that share which his Honour Justice Hodgson at paragraph 81, page 175 of the application book values broadly at a figure in the order of $276,000. 

The orders which affect Mrs Carantinos’ position are, firstly, the declaration in paragraph (4) of the orders.  In that regard, if I can take your Honours to page 183 of the application book, your Honours will see that the declaration inserted by the Court of Appeal in lieu of declaration 4 before Justice Einstein was:

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.

The matter at issue is the concept of his share as distinct from his one half share.  Had the court acceded to the submissions made on behalf of Mrs Carantinos that the proper declaration was as to the holding of the one half interest, then, of course, there will be no need for Mrs Carantinos to go any further.  As your Honour sees in the dissenting judgment of Acting Justice Handley, his Honour reasoned to the conclusion in support of Mrs Carantinos’ position that the court should have found and should have declared in terms of a one half interest instead of leaving that matter to be determined in the course of the account.

As it presently stands, Mrs Carantinos is at liberty to participate in the account.  In effect, in paragraph 88 Justice Hodgson indicated that Mrs Carantinos should be a party to the taking of accounts, although not an accounting party, but your Honours can see immediately the invidious position that that puts her in.  That means that instead of her one half interest being declared and protected such that the matter need go no further, she has been subjected to a declaration and a consequential order, being order 9(a), which appears on page 183.  She has been put in a position where she now has to go back and participate in the taking of an account when the case against her in every respect failed. 

It is in that way that she is now exposed more than she would otherwise have been exposed for the accounting party prior to the bankruptcy of her husband was to be Mr Carantinos.  So she has now effectively been placed in a position where relief having been denied her in terms which protected her interest, she is forced back into participation in an account in which she is permitted to be a party but otherwise is exposed to the risk and expense of that inquiry.

So it is in that way that, so far from the bankruptcy of Mr Carantinos having rendered inutile the proposed appeal on behalf of Mrs Carantinos, it makes that appeal of greater weight and importance to Mrs Carantinos.

FRENCH CJ:   That is as to the account aspect.

MR KELLY:   It goes to both aspects because, if the threshold question of clean hands is determined in favour of Mrs Carantinos, then the substratum which gives rise to the account is negatived.  In our respectful submission, what one has in this case is quite a unique but important set of circumstances which distinguish themselves in a very important way from the decision of the Court in Nelson v Nelson.  As your Honours see from the written submissions of Mrs Carantinos, this is a case in which the Court of Appeal upheld the clean hands defence, but exercised its discretion to grant relief to Mr Magafas, notwithstanding that he was a party to, indeed, the driving party of the fraudulent scheme, and the court did that upon the basis that it viewed the decision of the Court in Nelson v Nelson as endorsing what was described as a more flexible approach.

As a matter of principle, we contend that the effect of Nelson v Nelson is not to relevantly endorse a more flexible approach.  The effect of the decision of the Court in Nelson v Nelson is to require a principled approach and the proposition in the forefront of the matter of principle is that a party is not to be permitted to enjoy any of the fruits of their unlawful conduct.  If I may take your Honours to our little folder of authorities and materials, your Honours will ‑ ‑ ‑

FRENCH CJ:   You are saying it was not just the Tax Office that was involved in this illegality.  There were lenders and so forth.

MR KELLY:   Undoubtedly, and, in addition, focusing on the matter of principle, if I can take your Honours to pages 572 and 573 in the judgment of Justices Gummow and Deane, the critical element in the conclusion.  Firstly, at page 572 at about point 6 in that joint judgment their Honours say:

What is required is the formulation of, and acceptance by Mrs Nelson of, a term upon the relief to which she is otherwise entitled which denies to her the benefit she obtained by her unlawful conduct and provides for the payment to the Commonwealth of the Benefit Sum.

Then again at page 573, towards the foot of the paragraph saying, “There should be a further declaration”, your Honours see the reference to a trust in relation to the benefit sum, which is the amount of money which Mrs Nelson, in effect, enjoyed as a benefit as a result of her unlawful conduct.  What the Court is here doing is very carefully composing conditions which have the effect of ensuring that Mrs Nelson did not get, indeed, was denied the benefit that she obtained by her unlawful conduct.  At that page 573 their Honours say:

Such a trust of the Benefit Sum would do no more than reflect the unavailability of equity to obtain for the first appellant the actual fruits of her unlawful conduct.

That is the matter of principle which we respectfully contend has been effectively departed from by the Court of Appeal by adopting what it describes as a flexible approach but what in its result means is an abandonment of that specific requirement that any terms and conditions imposed have the effect of denying a participant in a scheme such as this of any of the actual fruits of their fraud.

In paragraph 63 of the judgment of Justice Hodgson, your Honours will have seen, of course, that Justice Hodgson says:

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. 

But instead of actually carefully formulating a condition in the manner that this Court in Nelson v Nelson very carefully formulated a condition so as to ensure that no benefit would be received, his Honour did not proceed to articulate or impose any conditions in those terms.  What the Court rather did, if I can take your Honours to page 184 of the application book, is to make order (8) which is an:

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.

So, in effect, one does not have a set of conditions.  One has an open‑ended discretion ‑ ‑ ‑

BELL J:   But was that not in the context that his Honour was framing orders reserving for consideration, among other things, the position of your client in relation to the premises in the deletion of order 9 from the primary judge’s reasons and the substitution of the orders that were proposed.  His Honour clearly contemplated that there may be further proceedings required.

MR KELLY:   We respectfully submit that why his Honour has not done it is that, for all practical purposes, it is impossible to frame conditions in a case such as the present.  In this case, the fruits of the fraudulent scheme are obviously the profits from the scheme, the contributions made under the false invoices where the benefit sought to be obtained is a recovery of a payment which is otherwise made under conforming commercial paper.  What his Honour has not done is to apply Nelson v Nelson in a case in which one has an overarching fraud not only on the Tax Department – indeed, the parties who actually committed the fraud on the Tax Department were third parties.  They were companies in the Magafas Family Group of companies, including some trustees of some discretionary family trusts.

Unlike Nelson v Nelson where it was Mrs Nelson, a party before the court, who was the subject of a condition and the condition was carefully and exactly articulated so as to ensure that she, Mrs Nelson, did not recover any benefit at all, in this case the departure from principle is to, in our respectful submission, not articulate any condition and to grant relief without there being any order inhibiting in any way the enjoyment by our participant in the fraudulent scheme of the fruits of his fraud. 

Once one appreciates that that is an error, the next step is to determine as a matter of principle whether in this class of case it is ever possible to compose a condition which would prevent a person from enjoying the fruits of the fraud.  For example, if one had two persons who robbed a bank, one man contributed more, bought the gun, hired the car, the other did relatively less, drove the getaway car, would equity ever entertain a suit by the man who got less than his fair share of the proceeds of the unlawful enterprise?  Would it ever as a matter of principle entertain that suit when the very fund itself, the product of the enterprise, the profits from the venture, are in their entirety fruits of fraud?  We would contend not.

FRENCH CJ:   In other words, your contention is the conditions do not nullify the fraud because they only address one aspect of it.

MR KELLY:   Yes, that is precisely our point, and, in addition, we go one step further and say that in a context in which one has a fraudulent scheme which produces a disputed fund which is itself the fruit of the fraud, it is categorically impossible.

FRENCH CJ:   To what extent do we have facts that indicate the implementation of a fraud against any body other than the Tax Office apart from the generic statements about lenders?

MR KELLY:   There is in evidence a body of finance applications for each of the various properties as events went by.  This scheme was perpetrated over a period of some seven years, properties were bought and sold and it is in the evidence.

FRENCH CJ:   But I am just looking for findings.

MR KELLY:   I do not think there is a finding, but what happened in the Court of Appeal’s reasoning process was that the court focused on the taxation element of it and took the matter no further.

BELL J:   That was at the heart of Mr Magafas’ advantage in this scheme, was it not?

MR KELLY:   It was at the heart of the advantage – part of the advantage serving the interests of companies in his family group, but the borrowings for the properties are the borrowings for the properties which are invested in by the fund.  So he had an interest equally in Mr Carantinos being able to deceive lenders and to lend money into the scheme.  He himself, Mr Magafas, was a recently discharged bankrupt and had no credit worthiness to support the application.  So his interest was by no means limited only to the fact that companies in his family group secured a tax advantage dishonestly, it was also to his advantage that Mr Carantinos was out there borrowing money and spending it on the acquisition of the properties which yielded the disputed property.

FRENCH CJ:   I am just looking to paragraph 12, I think, in the Court of Appeal, Justice Hodgson, just recording the primary judge’s finding about objectives.  One of the objective was:

Mr Carantinos was reliant on borrowed funds to manage his portfolio –

et cetera.  So that was a purpose of it.

MR KELLY:   Yes, and the borrowed funds are for the purpose – although his Honour does not say so here, there is an abundance of evidence, including some of the material in paragraph 18 – there is a short reference to the borrowing for the funding of the acquisition of 39, 41 and 43 Riverside Crescent.  This is a case in which, firstly as a matter of principle, the Court of Appeal has departed from what this Court held in the clearest possible terms in Nelson v Nelson that as a matter of principle, if there are to be conditions, the conditions are to deny a party the benefit obtained.  Indeed, if there is to be relief, one might interpolate, on the same basis.  It cannot be other than upon terms which ensure that a party to a fraudulent scheme does not benefit and in this case it is not possible to compose such a term because the very fund itself is the product of the scheme.  I should say this, however, your Honour, that in paragraph 60 ‑ ‑ ‑

FRENCH CJ:   I think your time is up, Mr Kelly.

MR KELLY:   I am sorry, your Honour.

FRENCH CJ:   Just finish off what you were going to say.

MR KELLY:   In paragraph 60, his Honour Justice Hodgson makes it plain that in relation to the sum of $500,000 and $600,000, they were not paid as part of the fraudulent scheme but were paid honestly as advances to Pac‑Com.  So when the loss lies as it falls as we contend, those sums are left as advances by Mr Magafas to Pac‑Com.

FRENCH CJ:   Thank you.  Yes, Mr Alexis.

MR ALEXIS:  As your Honour the Chief Justice observed, the clean hands point suffers a fundamental lack of utility.  My learned friend has referred to the pleading in the defence but in substance and in reality the clean hands defence was one that was advanced by Mr Carantinos and Mr Carantinos only. 

Your Honours will see that that submission is made plain by Justice Hodgson’s judgment initially at application book 163 where his Honour identifies the issues in paragraph 49.  Your Honours will see at about line 37 that it is Mr Carantinos only who is there recorded as advancing that defence.  Secondly, and if there be any doubt about that, if your Honours turn to page 164 of the application book in paragraph 50, his Honour there records the submission advanced for Mr Carantinos, namely:

that the claims against him should be dismissed, because they arose out of a fraudulent scheme whereby false invoices would be brought into existence—

et cetera.  So it is plain, in our respectful submission, that this is not a point that can with the utility be advanced by Mrs Carantinos.  Her involvement in the case singularly related to a question as to whether or not she had a recipient liability under the first limb of Barnes v Addy with respect to her acquisition of a one half interest in one piece of real estate that form part of a number of property ventures that the partners engaged in.

Now, importantly, we would say Mr Carantinos succeeded in the Court of Appeal in demonstrating error in the primary judge with respect to his Honour’s finding that the disentitling conduct had to be done to or directed at a defendant and he also succeeded in demonstrating that Justice Einstein was in error in finding that on the facts of this particular case there was no immediate and necessary relation to the equity sued upon.

He only failed in the Court of Appeal on the discretionary question of whether the case brought against him ought to be dismissed, the Court of Appeal, of course, unanimously finding that conditional relief should be granted which, of course, obliged Mr Magafas to make a full disclosure to the ATO.  That was a significant and is a significant condition that was imposed because it related not only to the $480,000 worth of contributions that were the subject of the invoices and were the subject of deductions by companies in the Magafas group of companies, which should not, of course, have been the subject of such a claim, but it relates also to another $1.1 million of contributions that, on any view, were not the subject of the impugned transactions. 

So, in our submission, the granting of conditional relief was open to their Honours in the Court of Appeal and that the exercise of the discretion in granting that conditional relief was not informed by the application of any erroneous principle.  The decision of this Court in Nelson v Nelson does not, in our respectful submission, support our learned friend’s proposition that the Court of Appeal was precluded from granting or moulding appropriate relief in the case where disentitling conduct had been found.  Indeed, in our submission, Nelson is to the opposite effect and authorised the approach the Court of Appeal took.

A compelling factor, of course, in the exercise of that discretion, which, with all respect to our learned friend, his submission seemed to overlook, is the fact that if the case against Mr Carantinos was dismissed, he would receive the significant benefit of all of the contributions that were the subject of the claim in the proceedings at first instance and, on the findings of the primary judge, a sum in the order of $1.5 to $2 million with no liability to account.  So, of course, when that compelling factor is brought into the consideration of factors on discretion, your Honours see no doubt why the Court of Appeal approached the matter in the way that they did.

So, in our submission, absent any demonstrable error, any appeal on this point would have insufficient prospects of success to warrant the granting of an order for special leave to appeal.  It relates to the exercise of discretion informed by the particular facts of this case and there is no question of general importance.

Finally and perhaps most significantly, there is no declaration made or order made either by Justice Einstein, the trial judge, or by the Court of Appeal against the applicant that would render any appeal brought by her on the clean hands point a suitable vehicle to determine this discretionary question. 

Insofar as the second special leave question is concerned on the remedy of account, the application suffers the same problem, in our submission, because no declaration or order was made in the Court of Appeal that renders Mrs Carantinos an accounting party or, indeed, creates any liability in her to account to Mr Magafas or Pac‑Com Pty Limited.  Thus we say there is no basis upon which she can seek a grant of special leave in the absence of any relevant order being made against her.  Properly understood, her application for leave is really a complaint that she wishes to advance to assist her husband to try and reduce or curtail his liability to account in relation to the subject property.

Now, the case against Mrs Carantinos at first instance eventually failed after this Court delivered its decision in Farah Constructions v Say‑Dee.  The declaration that was the subject of submissions in the Court of Appeal granted by the trial judge, however, provided that Mr Carantinos was liable to account to Mr Magafas in relation to all of the proceeds of sale of the jointly held property.  That declaration was corrected by the Court of Appeal to limit its effect to his interest, but the question of what his interest was was left at large and, importantly, there is no contrary finding by either the trial judge or the Court of Appeal which renders the process of accounting going forward to be problematic in any way at all.

Indeed, as Justice Hodgson makes it clear at paragraph 88 of the judgment, application book 176 and 177, Mrs Carantinos should be a party to the accounting, that does not oblige her of course to participate if she does not want to, but she should be a party to the accounting if she wants to but not an accounting party.  To the extent that her beneficial interest in the

subject property is in issue, one would have thought that she would embrace the opportunity to maintain a position that says she owned both the legal interest and the beneficial interest in half of the property.

So the issue with respect to the remedy on account is a very narrow one.  It raises no question of principle.  The reservation provided for in Court of Appeal order 9(a) is not circumscribed by any finding of fact.  The order creating the reservation involved an exercise of discretion that was open to the Court of Appeal.  That discretion again was informed by the particular facts of this case and, in our respectful submission, this point does not raise any question of general importance either and your Honours therefore should dismiss the application for costs.

FRENCH CJ:   Thank you, Mr Alexis.  Mr Kelly.

MR KELLY:   The reference to Mr Carantinos’ clean hands argument in the several places referred to by my learned friend is plainly an error on the part of the Court.  The clean hands point that was being pleaded as long ago as 21 December 2006, that threshold matter was before the Court in the interests of both Mr and Mrs from beginning to end.  That point if successful has the effect of completely saving Mrs Carantinos from the burden of declaration 4 and order 9 and the burden of participating in an account. 

Indeed, as my learned friend has indicated, the claim as pleaded against Mrs Carantinos seeking declarations that her interest in the property was held in trust for this so‑called partnership failed.  In effect, what is now being done or sought to be done and will, in effect, be achieved unless leave is granted is that Mr Magafas will be provided with another opportunity, a second bite at the cherry, as it were, and Mrs Carantinos will have to, in effect, wear the burden of a reversal of the onus.  In paragraph 157 of Justice Handley’s judgment, his Honour says that:

Declaration 4 should therefore be limited to the half interest of Mr Carantinos in No 43 . . . 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, and for that reason alone . . . she was not a volunteer.

It is unjust in the extreme for, in effect, Mrs Carantinos, despite the failure of the case against her, now being put in a position where she has to return to an accounting and bear an onus of demonstrating that she had a beneficial as well as a legal interest when that was the matter upon which the plaintiff

failed.  There is a matter of importance when it comes to principle that if a party is to seek relief, it must prove its case and the avenue of an account is not an alternative for a failed proof.  Those are my submissions.

FRENCH CJ:   The clean hands defence in this case was met by conditions imposed upon the relief granted to Mr Magafas.  The imposition of those conditions was an exercise of discretion which, in our opinion, is not attended by sufficient doubt to warrant the grant of special leave.  The account remedy as framed, in our view, adequately protects Mrs Carantinos’ interests.  Special leave will be refused.

Do you seek costs?

MR ALEXIS:   Yes.

FRENCH CJ:   Can you resist that?

MR KELLY:   No.

FRENCH CJ:   All right, special leave refused with costs.

MR KELLY:   If the Court please.

MR ALEXIS:   If the Court please.

FRENCH CJ:   The Court will adjourn till 2.15.

AT 1.00 PM THE MATTER WAS CONCLUDED