Chickabo Pty Ltd v Zphere Pty Ltd (No 3)

[2020] VSC 464

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT

S ECI 2018 00084

CHICKABO PTY LTD (ACN 074 576 186) & ORS	Plaintiffs
v
ZPHERE PTY LTD (ACN 114 716 773) & ORS	Defendants

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JUDGE:	Sifris JA
WHERE HELD:	Melbourne
DATE OF HEARING:	24 June 2020
DATE OF JUDGMENT:	31 July 2020
CASE MAY BE CITED AS:	Chickabo Pty Ltd v Zphere Pty Ltd (No 3)
MEDIUM NEUTRAL CITATION:	[2020] VSC 464

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REMEDIES – Account of profits for breach of fiduciary duty – Alter ego companies acting in concert to secure mutual benefit jointly and severally liable: Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 applied.

REMEDIES -  Constructive trust – Not necessary to decide whether institutional or remedial.

REMEDIES - Allowances - Whether defendants entitled to any allowances - Substantial gain from investment made in breach of fiduciary duty– No allowances appropriate or justified.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	J P Moore QC and J McComish	HWL Ebsworth
For the Defendants	A G Uren QC and R Harris	Herbert Smith Freehills

HIS HONOUR:

A        Introduction

1. This is my third judgment in this case.

1. The first judgment was delivered on 22 February 2019, following the trial of the first stage or liability phase of the proceeding (The Principal Proceeding).[1]

   [1]Chickabo Pty Ltd v Zphere Pty Ltd [2019] VSC 73 (the First Judgment or the Reasons). I will assume familiarity with the First Judgment and defined terms bear the same meaning.

1. The First Judgment includes various findings of breach of fiduciary duty and of the Partnership Act 1958 (Vic) (Partnership Act) by the fourth defendant, Gary Graco (Graco) and a company controlled by him, the first defendant, Zphere Pty Ltd (Zphere). Two of Graco’s associated companies, the second and third defendants, GFBR Nominees Pty Ltd (GFBR) and Glenaldon Pty Ltd (Glenaldon) respectively, were found to be liable as accessories to the various breaches. Despite publication of the First Judgment, I did not make any substantive orders in favour of the plaintiffs. That is to say, I did not order any account of profits, compensation, or declare constructive trusts over assets (or proceeds) the subject of or directly traceable to the various breaches.[2]

   [2]The First Judgment did not deal with or make any findings as to the identity or whereabouts of such proceeds.

1. At a directions hearing on 1 March 2019, Queen’s Counsel for the plaintiffs indicated that in addition to pressing appropriate relief against the defendants, the plaintiffs would, having undertaken the necessary tracing, seek relief against other non-parties, all volunteers, comprising various family members, individuals and corporate entities associated with Graco.

1. The additional parties were joined partly on the basis of evidence given by Graco in the course of the hearing of the Principal Proceeding to the effect that some of the traceable proceeds of the Investment and Additional Payment had been received by them. Findings that they had received proceeds were not made in the Reasons. The proceeds were not identified.  It was foreshadowed that the plaintiffs would be seeking to assert a proprietary interest in the property held by the added defendants.

1. Following their joinder, the added parties made application to set aside the First Judgment and sought orders for a new trial before a different judge on the very issues that were the subject of the Principal Proceeding and the First Judgment, and on the additional issues against them.  In the second judgment, I dismissed the application and held that the added defendants, not having a direct interest in the critical issues were bound by the findings made in the First Judgment[3].  The decision, on this aspect, was reversed on appeal, the Court of Appeal holding that although the existing defendants were bound, the added defendants were not bound by any findings in the First Judgment.[4]

   [3]Chickabo Pty Ltd & Ors v Zphere Pty Ltd & Ors (No 2) [2019] VSC 580 (the Second Judgment).

   [4]FBR Fund Administration Pty Ltd v Chickabo Pty Ltd [2019] VSCA 314.

1. In the curious result, two judges are engaged in the case with potentially different results.  Justice Almond is to hear the case against the added defendants on all issues including the core and foundational issues decided by me.  This Third Judgment deals with the appropriate remedies against the existing defendants following my findings in the First Judgment.

1. For the reasons set out below, and on the application of orthodox principles which are, for the most part, not in dispute, the plaintiffs are entitled to much of the relief they seek.  The defendants’ contention that the claim should be dismissed, notwithstanding the clear findings of the court in the First Judgment, is rejected.[5]

   [5]Reference to the defendants is a reference to the first to fourth defendants.

B        Relevant Factual Background

1. The plaintiffs are Partners in an accounting firm, the Moore Stephens (Vic) Partnership (Partnership).[6]  Graco and Zphere were each also Partners of the Partnership.[7]

   [6]An issue in the Principal Proceeding was whether Graco and the natural person plaintiffs (the Principals) were Partners of the Partnership in their own right. I found that they were. See Reasons [83]-[121]. 

   [7]The fifth and sixth defendants were also formerly Partners in the Partnership. They contended that they are entitled to a proportion of the benefits derived by Graco and recovered by the plaintiffs. This matter has been resolved. 

1. With the knowledge and consent of the Partnership, Graco was appointed a non-executive director of one its clients, Swisse Wellness Group Pty Ltd (Swisse). While on the board of Swisse, he was offered the Opportunity to subscribe for shares in the company (the Investment). Through GFBR, he took up that offer and invested $203,780. The majority of Swisse’s shares were later purchased by Biostime International Holdings Limited (Biostime) a Hong Kong company. In September 2015, Graco caused GFBR to sell its Swisse shares, and GFBR realised a profit in the amount of $11,593,544.71.

1. Soon after the takeover of Swisse, on 4 November 2015, a payment of $4,861,000 was made by entities formerly associated with Swisse to the account of Glenaldon (Additional Payment). The Additional Payment was gratuitous in nature, but represented the difference between the value of the Investment, and the value of a 1 per cent shareholding in Swisse. Put another way, it was a ‘top-up’ payment that had arisen only by virtue of the Investment that arose out of Graco’s fiduciary position.[8]

   [8]Reasons [153]-[154]. 

1. Graco and Zphere did not disclose to the Partnership their shareholding in Swisse, or the Investment or Additional Payment that GFBR or Glenaldon received. The plaintiffs alleged, that as a result of their failure to disclose the Opportunity, and to seek approval and then to account for the benefits derived from the Investment and the Additional Payment, each of Zphere and Graco breached various contractual, statutory and fiduciary duties owed under the terms of the Partnership Deed, Partnership Act, and the general law.

1. A further claim of accessorial liability was made against Graco in relation to the breach of fiduciary duty on the part of Zphere. Finally, the plaintiffs claimed that each of GFBR and Glenaldon were accountable to the Partnership for their knowing receipt of property obtained in breach of fiduciary duty, knowingly inducing or procuring the breaches of fiduciary duty by Zphere or Graco, and the fact that they were each the alter ego or corporate creature of Graco.

1. The plaintiffs were successful on almost all claims they pressed. They were not successful in establishing that Zphere breached the ‘no profit’ rule or s 33 of the Partnership Act. Likewise, I declined to find that Graco engaged in a dishonest and fraudulent design, and consequently, GFBR and Glenaldon were not liable on the ‘knowing participation’ limb of Barnes v Addy[9].  In summary, I found the following:

   [9](1874) LR 9 Ch App 244.

(a)        Graco is liable as a fiduciary in breach of each of the ‘no profit’ and ‘no conflict’ obligations.

(b) Graco is liable as a Partner in breach of ss 32 and 33 of the Partnership Act.[10]

[10]Section 32 of the Partnership Act requires Partners to render true accounts to the Partnership and to give the Partnership full information of all things affecting the Partnership. Section 33 requires Partners to account for a benefit derived without consent from a transaction concerning the Partnership or from the use of a Partnership business connection.

(c)        Zphere is liable as a fiduciary in breach of the ‘no conflict’ obligation.

(d) Zphere is liable as a Partner in breach of s 32 of the Partnership Act.

(e)        Graco is liable, as an accessory, for knowingly inducing or procuring Zphere’s breach of fiduciary duty.

(f)        GFBR is liable, as an accessory, for knowingly receiving property (the Investment) obtained in breach of Graco’s fiduciary duty.

(g)       GFBR is liable, as an accessory, for knowingly inducing or procuring Graco’s breaches of fiduciary duty.

(h)       Glenaldon is liable, as an accessory, for knowingly receiving property (the Additional Payment) obtained in breach of Graco’s fiduciary duty.

(i)         Glenaldon is liable, as an accessory, for knowingly inducing or procuring Graco’s breaches of fiduciary duty.

1. Having made various findings and having dealt with the issues as pleaded, I did not, as noted, make any orders. I proposed to deal with the nature, scope and extent of relief that flowed from the breaches, any allowances, and any other matters, including the proportionate entitlement of the fifth and sixth defendants, at a separate hearing.

1. The separate hearing, by audio visual link, took place on 24 June 2020.  Justice Almond is yet to hear the separate trial against the added defendants on all issues.

C        Plaintiffs’ Submissions

1. The plaintiffs rely on the expert report of Brittany Idia Lincoln dated 1 October 2019 (Lincoln Report).[11]  The plaintiffs submit that the Lincoln Report provides an analysis of what happened to the Investment, Additional Payment and any proceeds received as a result of the Investment or Additional Payment.[12]  The defendants have not contested any aspect of the Lincoln Report. In fact most of the information was provided by the defendants.

   [11]In order to correct some minor errors, Ms Lincoln affirmed an affidavit on 23 June 2020 exhibiting an addendum to the Lincoln Report dated 23 June 2020.  Reference to the Lincoln Report includes to the addendum report dated 23 June 2020.

   [12]Plaintiffs’ Submissions [10].

1. The Lincoln Report concludes that the defendants received at least $17,418,302 from the Investment and Additional Payment, including any proceeds.[13]  Appendix 1 of the Plaintiffs’ Submissions sets out the benefit received as a result of the Investment.  Appendix 2 of the Plaintiffs’ Submissions sets of the benefit received in relation to the Additional Payment.  

   [13]Ibid.

1. The plaintiffs submit that the following assets were acquired by GFBR with the funds received from the Investment, Additional  Payment including proceeds and therefore, GFBR holds each of the assets on constructive trust for the Partnership:

(a)        All shares in Biostime held by GFBR;

(b)       A 98 per cent interest as tenant in common in the shares in KIPC Middle East Limited held by GFBR;

(c)        A 90 per cent interest as tenant in common in 75,000 of the shares and 100 per cent interest as tenant in common in 23,000 of shares in VGI Partners Global Investments Limited held by GFBR;

(d)       All shares in VGI Partners Limited held by GFBR;

(e)        A 78 per cent interest as tenant in common in the bonds in NextDC held by GFBR;

(f)        All bonds in the Centuria Capital 2 Fund held by GFBR;

(g)       National Australia Bank term deposit account 983734100 held by GFBR;

(h)       A 95 per cent interest in National Australia Bank term deposit account 292167354 held by GFBR;

(i)         The funds standing to the credit of the GFBR in National Australia Bank NAB Cash Manager bank account number 571707114.[14]

[14]Plaintiffs’ proposed orders.

1. The plaintiffs submit that Glenaldon, as a volunteer recipient, holds the Additional Payment and proceeds as a constructive trustee.  The plaintiffs rely on a number of authorities in support of the principle that a volunteer recipient that obtained property subject to a constructive trust, as a result of a breach of fiduciary duty has the equivalent obligations as a primary wrongdoer to account as a constructive trustee.[15]  The plaintiffs further submit that the liability of the volunteer recipient is “independent of fault-based liability of knowing receipt.”[16] The submission was made notwithstanding the fact that Glenaldon had disposed of all of its funds.

   [15]Plaintiffs’ Submissions [19] citing Heperu Pty Ltd v Belle (2009) 76 NSWLR 230 (Heperu) at [154] (Allsop P); Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732 (Fistar) at [47], [64] (Leeming JA); Great Investments Ltd v Warner (2016) 243 FCR 516 (Great Investments) at [55], [60] (Jagot, Edelman and Moshinsky JJ).

   [16]Plaintiffs’ Submissions [19] citing Fistar at [29]–[56] (Leeming JA); Great Investments [55], [60] (Jagot, Edelman and Moshinsky JJ).

1. The plaintiffs did not draw any distinction between the defendants. It was submitted that given the findings of the Court[17] and the authorities,[18] the defendants are jointly and severally liable[19] for the entire gain or profit and judgment is sought against each in the sum of $17,756,733.64 (the Gain), calculated in accordance with the Lincoln Report.   The only declaration sought is that GFBR holds certain identified property on constructive trust for the Partnership.[20]  The property comprises shares, bonds and bank accounts directly traceable to the Investment and the Additional Payment.  A companion type order is sought for the transfer of the identified property to the Partnership.

   [17]First judgment [197]–[200].  Based on the findings it was submitted that none of the defendants are good faith purchasers for value without notice.

   [18]Grimaldi v Chameleon Mining ML (No 2) (2012) 200 FCR 296 (Grimaldi) [556]–[558].

   [19]Subject to the principle against double recovery. 

   [20]It was submitted that the trust came into existence at the time of receipt.

1. The plaintiffs seek a further order that the Gain be secured by an equitable charge over the assets and undertaking of the defendants in favour of the plaintiffs.[21]

   [21]The plaintiffs rely on the decision of Warman International Limited v Dwyer (1995) 182 CLR 544 (Warman) at [570] (Mason CJ, Brennan Deane Dawson and Gaudron JJ).

1. Although the Gain includes additions and accretions to the amounts received pursuant to the Investment and the Additional Payment, the plaintiffs suggest that pre-judgment interest be discussed between the parties and in the event that the parties are unable to agree  on an amount, it be determined by the court on the papers.  Costs are still to be determined in the event that the parties are unable to agree following these reasons.

1. The plaintiffs submit further that they are entitled to the total benefit received from the Investment, Additional Payment and any proceeds less the costs of the Investment being $203,780.[22]  The plaintiffs contend that Graco and the first to third defendants are not entitled to any allowance other than the costs of the Investment because the breaches of fiduciary duty involved an acquisition of a specific asset, namely shares in Swisse, which did not require Graco exerting himself in anyway.  The plaintiffs rely on Regal (Hastings) Ltd v Gulliver[23] where the House of Lords held directors that acquired shares in breach of fiduciary duty were not entitled to any allowance in respect of the shares even though it resulted in a gainful takeover of a business.[24]

   [22]Plaintiffs’ Submissions [38].

   [23][1967] 2 AC 134.

   [24]Plaintiffs’ Submissions [38].

1. The plaintiffs submit that neither the Investment or the Additional Payment involved Graco exerting himself without full compensation.  The Investment and Additional Payment came about from a client relationship in which Graco was the Partner responsible for the client, and Graco acting as a non-executive director of Swisse.  The plaintiffs submit that Graco was remunerated through the Partnership for both positions.[25] The plaintiffs further submit that given that Graco was a non-executive director, he was not required to engage in decision-making and risk taking activities on behalf of Swisse.  Therefore, no allowances should be given to Graco or the first to third defendants and the plaintiffs are entitled to a constructive trust over the full value of the Investment, Additional Payment and any proceeds

   [25]Plaintiffs’ Submissions [39].

D        Defendants’ submissions

1. The defendants’ submitted that the plaintiffs are not entitled to the orders sought essentially for three reasons:

(a)        there is no causal connection between any breach of obligation and the benefit in the case of either the Investment or the Additional Payment;

(b)       in any event, this is not a case where a constructive trust arose upon receipt of either the Investment or the Additional Payment; and

(c)        in the circumstances the claims for relief based on accessorial liability are unsupportable.[26]

No causal connection between breach and benefit or gain

[26]First to Fourth Defendants’ Submissions dated 6 April 2020 (Defendants’ Submissions) [2] .

1. The defendants submit that there is no causal connection between any breach of fiduciary duty and the benefit or gain in the case of both the Investment or the Additional Payment[27]. In other words, a causal connection sufficient for the fiduciary to be liable to the equitable remedy of account will only exist in circumstances where the benefit or gain to the fiduciary was as a result of, or by reason of, the breach.[28]

   [27]Defendants’ Submissions [36] and [38].

   [28]Defendants’ Submissions [38] citing Howard v Commissioner of Taxation (2014) 253 CLR 83, [64] and Foresters  [88]–[90] (Gageler J).

1. Relying upon the principles stated in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited[29] (Foresters) which the defendants submit applies equally to the case of liability of a fiduciary, the defendants contend that the causal test should be stated in ‘but for’ terms.[30]

   [29] (2018) 92 ALJR 918 [9] (Gageler J).

   [30]Defendants’ Submissions [39] citing Foresters [9] and [88] (Gageler J).

1. Applying the ‘but for’ test, the defendants submit that it is not the case that the Investment would not have been made, or the connected Additional Payment received, ‘but for’ the breaches found.[31] According to the defendants, the failure of Graco to disclose the invitation by Swisse via its information memorandum dated 13 October 2014 to subscribe for ordinary shares in Swisse to the Partnership and the failure to offer the Opportunity to the Partnership did not itself cause the benefit or gain in the form of the shares or the proceeds of the shares.[32]

   [31]Defendants’ Submissions [40].

   [32]Defendants’ Submissions [41].

1. Ultimately the defendants contend that any benefit or gain to Zphere or Graco from the Investment was not obtained ‘but for’ any failure to disclose the Opportunity and that these two events are unconnected in the relevant sense.[33]  

Constructive trust did not arise upon receipt of the Investment or Additional Payment

[33]Defendants’ Submissions [41].

1. The defendants submit that assuming causation is found, the facts of this case would point toward the existence of a remedial constructive trust, not the existence of an institutional constructive trust as argued by the plaintiffs.[34]  

   [34]Defendants’ Submissions [45].

1. Citing McNab v Graham,[35] amongst others, the defendants summarised the distinction:

47. Thus, McNab v Graham was an appeal concerned with whether, on the basis of proprietary estoppel, Mr Turner had held real property on constructive trust for the Grahams. The issue arose of when the constructive trust came into existence: was it at the time that the court below declared the trust, or was it at the time when the detrimental reliance by the Grahams rendered it unconscionable for Mr Turner to depart from his representation? The Court of Appeal distinguished between a constructive trust arising on the basis of proprietary estoppel, where an interest in the property is created as a result of detrimental reliance by the promisee on a promise or an assurance by the legal owner of the property, and a remedial trust where the court is concerned to ensure that a person who engages in fraudulent conduct is liable to account in equity as a “constructive trustee”. By contrast, the present case does not involve proprietary estoppel or “true trusts” that are concerned with property and property [sic] interests.

48. Nor is this a case of stolen property (i.e., where the plaintiff had an existing propriety interest in property) where an institutional constructive trust may arise immediately on receipt by a defendant of a plaintiff’s stolen property as in the case of a Black v Freedman trust…[36]

[35](2017) 53 VR 311.

[36]Defendants’ Submissions [47]–[48] citing Black v S Freedman & Co (1910) 12 CLR 105; Heperu, Sze Tu v Lowe (2014) 89 NSWLR 317, Agip (Africa) Ltd v Jackson (1990) Ch 265 and Fistar as theft cases and Evans v European Bank Ltd (2004) 61 NSWLR 75.  

1. In contrast to the cases upon which the plaintiffs rely, the defendants submit that the Investment and the Additional Payment were property, only when received, but not trust property in the strict sense, ie not property in which the Partnership had a beneficial interest.[37]  If the Investment and Additional Payment were, or are held to be, held under a constructive trust and the situation is only that the holder has trust-like obligations in respect of them, not that they are trust property in the strict sense, then the defendants submit that it is a matter of judicial discretion whether a constructive trust ought to be awarded, in accordance with remedial considerations.[38]

   [37]Defendants’ Submissions [53].

   [38]Ibid citing Giumelli v Giumelli (1999) 196 CLR 101; Bathurst City Council v PWC Properties Pty Ltd (1988) 195 CLR 566 [40]–[42] and Grimaldi (2012) 200 FCR 296, 418–423 [569]–[583].

1. Citing a passage in Snell,[39] the defendants submit that the obligation is to account for profits which have been made in breach of fiduciary duty, not simply to account for profits in the abstract and that the profit may be due to multiple sources, other than breach, which they assert is the case here[40]. According to the defendants, the non-offering to the plaintiffs of an invitation which had to be taken up urgently, was not open to the plaintiffs in any event and this non-offering was not the source of the share issue to GFBR such that it could not be property in which the Partnership had a beneficial interest.[41]

   [39]Principles of Equity (34th ed) at 7-05525.

   [40]Defendants’ Submissions [58].

   [41]Defendants’ Submissions [58].

1. In summary, the defendants contend that the plaintiffs’ assertion that the Opportunity should have been made available to the Partnership and therefore belonged in equity to the Partnership, appears premised on the existence of an institutional constructive trust, which is misconceived.[42]

Unsupportable claims of accessorial liability

[42]Defendants’ Submissions [60].

1. In summary, as it concerns the accessorial liability of:

(a)        Graco, the defendants submit that it was not pleaded and as a result there are no remedies that may flow;

(b)       GFBR, the defendants submit that it was not a ‘puppet’ of Graco so as to have knowingly received property and that the plaintiffs’ claim it induced the breach of Graco cannot be maintained as it was not pleaded;

(c)        Glenaldon, the defendants submit as they did with GFBR, that Glenaldon was not a ‘puppet’ of Graco so as to have knowingly received property and that the plaintiffs’ claim it induced the breach of Graco cannot be maintained as it was not pleaded.

E         Applicable Legal Principles

Fiduciary and accessory

1. The following basic principles are derived from the authorities.

1. The cardinal principle of equity is that the remedy must be fashioned to fit the particular facts and circumstances of the case.  The liability of a fiduciary or primary wrongdoer and an accessory may be different and several, or such liability may be co-extensive and joint and several, depending on the circumstances.  Where a party holds the proceeds (or traceable proceeds) of a breach of fiduciary duty, proprietary relief in the form of a constructive trust may be available.[43]

   [43]          Chan v Zacharia (1984) 154 CLR 178 at 199.

1. In cases where the primary wrongdoer has directed the gain or benefit obtained in breach of fiduciary duty to another party and no longer (or never) obtained any proceeds or benefit, the appropriate remedy may simply be monetary or equitable compensation, which may well be the full extent of the profit or gain made.  So much is uncontroversial.

1. The liability and remedy against the accessory may depend on whether the accessory is the alter ego or nominee of the primary wrongdoer or whether the recipient acted in concert with the primary wrongdoer.  In such a case liability may be joint and several.  Further, to the extent that the accessory in such a case holds the proceeds, or traceable proceeds of the gain, proprietary relief may be available.[44]  Such proceeds will be subject to a constructive trust.[45]

   [44]Fistar [29]; Grimaldi [556]–[558]. In such a case the use of the word accessory may not be strictly accurate.

   [45]McNab v Graham (2017) 53 VR 311 [102]-[110].

1. Where the knowing recipient is not the alter ego of the fiduciary or did not act in concert, the knowing recipient may be severally liable to account for any profit received or the traceable proceeds and the remedy of constructive trust will also be available.   

1. Where the recipient only obtains the requisite knowledge after receipt, the same remedies may be available not for the knowing receipt of the benefit or gain but for the subsequent dealing with the property.  Although the remedy may be the same the basis of liability is conceptually distinct.[46] 

   [46]Forester [45].

1. An innocent volunteer is liable to restore the remaining gain or benefit to the plaintiff, including any traceable proceeds.  The obligation arises from the time the true position or breach is discovered.  Although the remedy may be the same the basis of liability is also conceptually distinct.[47]

   [47]Heperu [92], [143], [155]; Sze Tu v Lowe (2014) 89 NSWLR 317 [142]–[145]; Fistar [47] and [64].

1. In the leading case of Hospital Products Ltd v United States Surgical Corp,[48] Mason J said:

   [48](1984) 156 CLR 41 at 107-8. This statement was referred to and accepted in Grimaldi [575] (Finn, Stone and Perram JJ).

Relief for Breach of Fiduciary Duty.

(a) General principle governing liability to account.

The principle, accepted by the courts below, is that the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by reason of his breach of fiduciary duty: Consul Development; Queensland Mines. A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position.

(b) Constructive trust.

Any profit or benefit obtained by a fiduciary [in breach of the proscriptions on conflict of duty and interest or on misuse of position] is held by him as a constructive trustee… . Neither principle nor authority provide any support for the proposition that relief by way of constructive trust is available only in the case where a profit or benefit obtained by the fiduciary was one which it was an incident of his duty to obtain for the person to whom he owed the fiduciary duty. Once it is established that the fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit. It can make no difference that it was not his duty to obtain the profit or benefit for the person to whom the duty was owed. What is important is that the advantage has accrued to him in breach of his fiduciary duty or by his misuse of his fiduciary position. The consequence is that he must account for it and in equity the appropriate remedy is by means of a constructive trust.

1. Most of the relevant principles are derived from the leading case of Grimaldi.[49] It is as well to set out the relevant passages that have application in this case[50] -  

   [49](2012) 200 FCR 296.

   [50]Ibid [555]–[559]; [612]–[613].

First, it is uncontroversial that the liability of a third party under either limb of Barnes v Addy is a personal, fault-based, one. The available remedies are not limited to an account of profits made or to pay compensation to restore the trust or for the loss occasioned by his or her wrongdoing. They can extend, as earlier noted, to the award of proprietary relief where this is appropriate: see generally Warman.

Secondly, where the advantage of a fiduciary’s/trustee’s wrongdoing accrues to a third party (whether as a knowing recipient or an assistant) and the third party is the alter ego/“nominee” (usually corporate) of the fiduciary, its liabilities will be joint and several with the fiduciary’s: Green v Bestobell at 40; see Gencor ACP Ltd v Dalby (where the action was against the fiduciary for commission payments “diverted into his own creature company” and for which both the company and the fiduciary were held accountable). This principle, we note in passing, would explain why both Mr Grimaldi and Pinnacle could be held accountable for the 10 million Winterfall shares and the options.

Thirdly, where the third party is not the fiduciary’s alter ego, the fiduciary and the third party will ordinarily be only severally liable for the profits each makes in consequence of the breach of fiduciary duty or breach of trust in which it participated/was a recipient: see generally Warman at 569. Each is not responsible for the other’s profits as we earlier indicated — hence the burden of the observation of the plurality in Michael Wilson & Partners Ltd v Nicholls (2011) 282 ALR 685; 86 ALJR 14 at [106] (Michael Wilson & Partners Ltd):

“… this Court has held that liability to account as a constructive trustee is imposed directly upon a person who knowingly assists in a breach of fiduciary duty. The reference to the liability of a knowing assistant as an “accessorial” liability does no more than recognise that the assistant’s liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another. It follows … that the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ.”

………

Fourthly, beyond the corporate alter ego cases we referred to earlier, there
may well be a further exception to the above general principle. It is that, if the
fiduciary and the third party assistant or recipient act in concert to secure a
mutual benefit, be this to misappropriate trust property for a particular mutually beneficial purpose or to participate in a breach of fiduciary duty to secure a mutual advantage (eg a business opportunity), they are jointly and severally liable to the wronged beneficiary/principal to restore the trust or to account for the profits made. In CMS Dolphin, directors were held equally liable with the corporate vehicle they formed to take unlawful advantage of business opportunities they provided to it: “[T]he reason is that they have jointly participated in the breach of trust” (emphasis added): at [103]; Green v Bestobell; see also the facts in Macdonald v Hauer, above; but cf the criticism in Ultraframe (UK) at [1561]-[1576]. One can readily understand why, when wrongdoers so entangle their affairs, that the law as a matter of legal policy
might wish to make it their responsibility — and not a claimant’s — to untangle them for accountability purposes. We need not explore this matter further, as this issue does not arise directly in the present matter. However, to anticipate matters we have applied a principle of joint and several liability to Mr Grimaldi in respect of his liability to Chameleon for the 10 million Winterfall shares and options where he and his co-director and fellow fiduciary, Mr Barnes, both acted in breach of fiduciary duty to Chameleon in misappropriating its moneys to advance the Winterfall/Iron Jack Vendors transaction from which ultimately they derived their commission. They acted in concert as directors and fiduciaries for their mutual benefit.

Fifthly, in the case of knowing receipt, where some or all of the trust property
received no longer exists (or is not traceable) and so cannot be returned, the
knowing recipient is obliged (no less than the wrongdoing trustee) to restore the trust fund by way of monetary compensation for the assets which have been lost: on this form of equitable compensation see Re Dawson (decd); Union
Fidelity Trustee Company Ltd v Perpetual Trustee Company Ltd [1966] 2 NSWR 211; and see generally Mitchell and Waterson, 132 ff. In this matter, Mr Grimaldi, Winterfall and Murchison are all exposed to such a claim in respect of the cheque advances at Chameleon’s. We have not been asked to determine whether this liability is joint or several or several only. We incline to the latter view. What we wish to emphasise, though, is that Chameleon cannot obtain double recovery for its loss and the trial judge’s orders are sensitive to this.

…

The point to be emphasised is that merely because Mr Grimaldi did not obtain all of the shares and options “in his own right” did not mean he was thereby relieved of his liability to account for the benefit of the remaining shares and options: see Coleman at 208. What it did mean, as his Honour recognised, was that it was only the shares he (or his corporate vehicles) received that he held in specie as a constructive trustee. His liability to account for the other shares was a personal, not a proprietary, one.

The above is in substance what his Honour found. It involves no more than the application of orthodox equitable principles to a delinquent fiduciary and is consistent with the general burden of his reasons. Those principles do not necessarily require the invocation of “accessorial liability” to justify the liability to account for profits in a case such as the present. If his Honour considered that Mr Grimaldi’s liability to account for the shares which he did not hold, so depended on his being an “accessory”, then we consider he erred but it was an immaterial error. He had already, and correctly, identified not only the proper basis upon which Mr Grimaldi was liable to account, but also for what in the circumstances he was liable to account, ie the benefit of the shares and options. Whether that benefit could be claimed by way of a constructive trust, or only through an account of profits did not affect in any way the fact that Mr Grimaldi, as a joint participant in the breaches of fiduciary duty and the derivation of the shares: Coleman; see also CMS Dolphin, at [103]; was liable to account for all of the benefit of the shares and options he and Barnes derived from their breach of fiduciary duty.

Causation

1. In Foresters causation and quantification were critical issues in the case.

1. Mr Woff and Mr Corby were employed by Lifeplan Australia Friendly Society Ltd (Lifeplan) but worked in senior positions in its wholly owned subsidiary, Funeral Plan Management Pty Ltd (FPM), a company profitably engaged in the business of providing funeral products.  Foresters was engaged in the same business but on a much smaller scale. While still employed by Lifeplan, Woff and Corby surreptitiously proffered to Foresters a proposal to develop Foresters funeral products business in a way that would capture for Foresters much if not all of the existing business of FPM.  Foresters would employ Woff and Corby and a new company, including Wo and Corby, would be formed.  Funeral Planning Australia Pty Ltd (FPA) was formed and, using confidential information of FPM, embarked on a ‘systematic course of action to’ secure business for FPA.  The Full Court held that the preparation of a business plan by Woff and Corby for FPA involved the ‘wholesale plundering of confidential information and business records of Lifeplan’.  The primary judge and the Full Court also held that the ‘use of Lifeplan’s confidential information … must have been apparent to honest and reasonable persons in the position of the Board of Foresters’.[51]

   [51]Foresters [27]-[46]. 

1. The primary judge ordered an account of profits in equity against Woff and Corby.  Each was ordered to account for the sum of his drawings and distributions from a trust of which FPA was trustee.  No account of profits was ordered against Foresters, because the primary judge held that the confidential information was not itself used to generate profits.  The primary judge held that whilst ‘the breaches in which Foresters participated might have led to FPA and Foresters being able to establish the proposed business earlier than might have been the case had there been no breaches’.  Those breaches did not for this reason ‘lead to the profits earned and to be earned in relation to the Foresters Funeral Fund’.[52]

   [52]Referred to by Gageler J in Foresters [53].

1. The Full Court held that although the approach taken by the primary judge was unduly narrow, it would be too extreme if the account of profits was to extend to the entire value of the Foresters business.  Having regard to equity’s remedial objectives and giving recognition to the fact that the breaches did not result in the

   
   

   ‘direct generation of profits’, the Full Court considered that a proportionate response was to order that Foresters account to Lifeplan for the net present value of the profits made and predicted to be made on contracts entered into by Foresters within a period of five years.

1. Neither party was satisfied with the result in the Full Court.  Foresters was granted special leave to appeal and Lifeplan and FPM cross-appealed.  Foresters submitted that the Full Court should not have extended the remedy determined by the primary judge.  Lifeplan and FPM submitted that the remedy should go much further than that found by the Full Court and that it should extend to the total capital value of the business of FPA, which it must be recalled was a knowing participant. They succeeded.  Causation, quantification and the full extent of the remedy were critical matters.  The case was relied on by both parties and it is as well to set out in full the critical passages that deal with the relevant principles.   

1. In relation to causation the plurality[53] said:

   [53]Kiefel CJ, Keane and Edelman JJ.

4.Foresters submitted that its liability to account and disgorge should be confined to those profits that are the direct result of each of the particular acts by which it committed the equitable wrong of knowingly assisting Woff and Corby in a dishonest and fraudulent design to breach their fiduciary obligations to Lifeplan and FPM. By focusing on each act of knowing assistance and its direct consequences, rather than the overall effect of Foresters’ wrongful conduct, the submission ignores the obvious reality that Foresters' particular interactions with Woff and Corby resulted, as they were always apt to do, in the wholesale acquisition by Foresters of the business connections that Lifeplan and FPM had with funeral directors, these connections being, as Foresters well knew, essential to Lifeplan and FPM’s funeral fund business.

5.Another way of putting this point is to say that Foresters could not limit its liability to disgorge profits by claiming that only limited profits were caused by particular acts of knowing assistance when the consequences of those acts were inseparable from the consequences of Woff and Corby’s general scheme of breach of fiduciary duty. This point is further reinforced by the cross-appeal, which relied upon other acts by Woff and Corby for which Foresters was said to be vicariously liable. Although it is unnecessary to decide this issue of vicarious liability, it should be noted that there is no novelty in equity attributing to one person the wrongful acts of another. As Lord Millett observed in Dubai Aluminium Co Ltd v Salaam, the Court of Chancery recognised vicarious liability of partners in this manner at least as early as 1842.

6.In Consul Development Pty Ltd v DPC Estates Pty Ltd, in a passage accepted as authoritative by both sides in the present case, Gibbs J said that:

“a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.”

7.So described, the liability to account and to disgorge benefits encompasses “any benefit” received by the knowing participant in a breach of fiduciary duty “as a result of” that participation. The benefit of a business connection is such a benefit. Foresters’ submission fails to come to grips at all with the fact that the benefit that Foresters stood to gain, and in fact acquired, from its participation in the various acts of disloyalty by Woff and Corby was not sporadic deposits from retail customers; it was the business connections of Lifeplan and FPM.

8.In addition, Foresters’ submission, by framing the issue as involving an enquiry as to whether there was a causal connection between each of the particular acts of Foresters, whereby it participated in the strategy formulated by Woff and Corby, and particular deposits associated with its new business, diverts attention away from the significance of the circumstance that Foresters’ acts of participation in the disloyalty of Woff and Corby were not only informed by, but were also an integral part of, the strategy for despoiling the business of Lifeplan and FPM.

9.Whether a benefit can be said to be obtained “as a result of” knowing participation in a breach of fiduciary duty by another contrary to the principles of equity is a question of causation or contribution that depends on “a precise examination of the particular facts” of the case, rather than upon attempts to refine the expression “as a result of”, as if that phrase has some determinate operation of its own that may be discerned and applied independently of the equitable principle of which it is part. The equitable disgorgement principle with which we are concerned is a “prophylactic rather than a restitutionary principle”. It is sufficient to show that the profit would not have been made but for dishonest wrongdoing. Further, whatever may be the position for wrongdoing that is not marked by dishonesty, a defendant cannot avoid liability to disgorge profits dishonestly made by showing that those profits might have been made honestly.  This is not an approach to causation that is unique to dishonesty in equity. A defendant who is liable to compensate for deceit cannot avoid that liability by showing that the loss would have been suffered even without the deceit; and it is sufficient that the deceit was an inducement to engage in the conduct that occasioned the loss even if there were other inducements. And in taking an account of profits for dishonest infringement of intellectual property rights, courts do not reduce the profit by reference to opportunity cost, that is, the revenue that would have been received by a lawful alternative. As Lord Radcliffe said in the context of disgorgement of profits for a breach of fiduciary duty involving non-disclosure, “it is neither here nor there to speculate whether, if he had done his duty, he would not have been left in possession of the same amount of profit”. For these reasons, the deterrent effect of an order for disgorgement of profits should not be diminished by acceding to Foresters’ attempt to confine the scope of the causal enquiry implicit in the expression “as a result of”.

10.Foresters’ submission also ignores the obvious reality that Foresters’ participation was not merely that of a passive recipient of the benefits of the success of the Woff and Corby strategy. Foresters provided the commercial vehicle which would acquire and exploit the business connections to be appropriated from Lifeplan and FPM. That vehicle was necessary to enable Woff and Corby to implement the strategy of despoliation that they had devised. There was no suggestion in the evidence that the strategy could have been implemented by Woff and Corby acting alone or, indeed, with any other competitor in the market.

11.That Foresters’ role was crucial to the implementation by Woff and Corby of the strategy devised by them is confirmed by the urgency and diligence with which Woff and Corby pursued Foresters’ participation, and the absence of any suggestion in the evidence that they ever had it in mind to pursue their strategy either by themselves or with some other participant. Given the knowledge and experience of Woff and Corby of this particular market, there is no reason to suppose that their appreciation of the central importance of the participation of Foresters to the success of their strategy was not soundly based. And there is no reason apparent from the evidence to decline to attribute the same level of understanding to Foresters.

12.As a matter of fact, the strategy proposed by Woff and Corby to acquire the valuable business connections of Lifeplan and FPM with funeral directors succeeded, and could only have succeeded, by reason of the knowing participation of Foresters. Accordingly, the quantification of the benefit to be disgorged by Foresters requires an assessment of the attributable value of the business connections acquired by Foresters as a result of its participation in the disloyalty of Woff and Corby.

1. In relation to quantification the plurality said:

13.Once it has been determined that a benefit or advantage has been caused by the acts of knowing assistance, there remains the question of quantification of the benefit to be disgorged. While it is true that equity will not require an errant fiduciary or a participant in a breach of fiduciary duty to account for an advantage which the breach of fiduciary duty has not caused or to which it has not sufficiently contributed, where causation is sufficiently established the onus is upon the errant fiduciary or participant to show that he or she should not account for the full value of the advantage. That onus is not discharged by mere conjecture or supposition giving the benefit of the doubt to a proven wrongdoer. The requirement of proof conforms with the obligation of a party charged with a breach of fiduciary duty to show why the full value of an advantage obtained in a situation of conflict of duty should not be disgorged.

14.There are two ways in which the wrongdoer might discharge that onus and reduce the extent of the liability to disgorge profits. The first way, which can involve notorious difficulties in attribution of costs, is by proving his or her entitlement to an allowance for costs incurred, and labour and skill employed. No issue of an allowance arises, or was relied upon, in this appeal because it was accepted that the expenses included in the discounted cash flow included an amount for the work and effort of Woff and Corby.

15.The second way, which was the focus of this appeal, is by demonstrating that the benefit or advantage is beyond the scope of the liability for which the wrongdoer should account for profits. A wrongdoer might prove that some profit or benefit is beyond the scope of liability for which he or she should account if the profit or benefit has no reasonable connection with the wrongdoing.  For example, in Frank Music Corp v Metro-Goldwyn-Mayer Inc, the Ninth Circuit Court of Appeals accepted that a copyright infringement by MGM Grand Hotel Inc in a performance at the MGM Grand Hotel entitled the plaintiffs to the profits directly from the performance. It also entitled the plaintiffs to a proportion of indirect profits, including from the consequential increase in hotel room bookings which were held to have a “sufficient nexus” with the performance. But the direct profit from the performance to be disgorged was limited to nine per cent because the copyright infringement comprised only the substantial part of Act IV in a ten-act performance. Nor did it entitle the plaintiffs to any profits made by the liable parent company, Metro-Goldwyn-Mayer Inc, as a result of “the advertising value” of the hotel.

1. In dealing with equitable principles, Gageler J said:

73.The breaches of fiduciary duty on the part of Mr Woff and Mr Corby consisted of conduct in breach of the profit rule which formed an integral element of a concerted course of conduct to gain part of their existing employer’s business for FPA (a company they controlled) and for Foresters (a competitor of their employer). Foresters knowingly participated in those breaches of fiduciary duty by Mr Woff and Mr Corby by choosing to take up and to implement the business plan proposed to Foresters by Mr Woff and Mr Corby in the form of the BCP with knowledge of the conduct which constituted those breaches of fiduciary duty in circumstances which would have indicated the dishonest and fraudulent nature of that conduct to an honest and reasonable person.

74.Those circumstances were sufficient to render Foresters, no less than Mr Woff, Mr Corby and FPA, liable as a “constructive trustee”.  Traditionally, that label has been ascribed both to a fiduciary in breach of a proscriptive obligation and to a knowing participant in a dishonest and fraudulent breach of a proscriptive obligation imposed on a fiduciary. The label was long ago explained to serve no purpose other than to indicate amenability to the range of remedies traditionally available in equity against a trustee who is in breach of a similar proscriptive obligation. The remedies available against each, at the option of the person to whom the proscriptive obligation is owed by the fiduciary, centrally include an order for equitable compensation and an order to account. Ordinarily, declaration of a constructive trust is warranted only if other equitable orders are not capable of doing complete justice in the circumstances of the case.

75.The equitable remedy of account is a personal order. The order operates to require that a defendant pay to a plaintiff the monetary value of a benefit or gain to the defendant. Although commonly referred to as an “account of profits”, there is no reason why a benefit or gain to be made the subject of an account must answer the description of a “profit” in conventional accounting terms.  Nor is there any reason why that benefit or gain must answer the description of “property” or must have sufficient certainty as to be capable of forming the subject matter of a trust. The benefit or gain can be expectant or contingent. Indeed, it is commonplace that a benefit or gain the subject of an account might encompass an ongoing business. And it is commonplace that the benefit or gain to be made the subject of an order to account might extend to the whole of the ongoing business or be limited to a part of the business identified by reference to both a specified scope of commercial activities and a specified period of commercial activities which need not be confined to a past period but may be a period which extends into the future.

…

78.The principles by which a fiduciary is assessed as liable to account for the monetary value of a benefit or gain obtained in circumstances of breach of a fiduciary obligation “express the policy of the law in holding fiduciaries to their duty”. Holding the fiduciary to account in circumstances of breach of a fiduciary obligation has been explained to serve two purposes.  One is preventing the unjust enrichment of the fiduciary. The other, more general, purpose is removing the incentive for the fiduciary to act other than in the sole interests of the principal.

…

83.The “cardinal principle of equity” is “that the remedy must be fashioned to fit the nature of the case and the particular facts”. Contrary to approaches which have emerged in some English cases since Warman, identification of a benefit or gain for which a defendant fiduciary or knowing participant is to be ordered to account is the outcome neither of judicial discretion nor of the determination of a mere factual issue of causation. Identification of the benefit or gain is a matter of judgment informed by equitable principle. However contestable the judgment to be made might be on the facts of a particular case, the judgment to be made is one which admits only of a unique outcome which, once made, falls to be appraised on appeal according to a standard of correctness.

84.Equity is not ignorant of questions of causation. What it stresses is that questions of causal nexus in a remedial context must be addressed by reference to the equitable obligation breach of which is to be vindicated by the remedy that is sought.

85.The benefit or gain for which a fiduciary or knowing participant is liable to be ordered to account must, as a baseline requirement, have a causal connection to the fiduciary’s breach of equitable obligation. The requisite causal connection was explained in Warman to exist if the benefit or gain has been obtained “by reason of” the fiduciary position, where the relevant breach is of the conflict rule, or if the benefit or gain has been obtained “by reason of” the fiduciary taking advantage of an opportunity or knowledge derived from the fiduciary position, where the relevant breach is of the profit rule.

…

87.Foresters’ first ground of appeal therefore proceeds on too narrow an understanding of equitable principle in assuming that a knowing participant cannot be liable to account unless there is a causal connection between the benefit or gain and the conduct which constitutes knowing participation. Foresters’ first ground of appeal is equally mistaken insofar as it asserts a requirement for a court to determine the “real or effective cause of any profit derived”.

88.A causal connection between a fiduciary’s breach of fiduciary obligation and a benefit or gain sufficient for the fiduciary or knowing participant to be liable to the equitable remedy of account will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained “but for” the breach, in the same way as a causal connection sufficient for the fiduciary to be liable to the equitable remedy of compensation will exist if a loss to the person to whom the fiduciary obligation is owed would not have been sustained but for the breach. Because the concern of equity is to vindicate the equitable obligation that has been breached, the “but for” connection will be sufficient even though other contributing causes might be in play. That the fiduciary’s breach of fiduciary obligation is dishonest and fraudulent is also good reason for treating a sufficient causal connection as existing if the dishonest and fraudulent breach can be concluded to have played a material part in contributing to the benefit or gain of the fiduciary or knowing participant even in circumstances where it cannot be concluded that the benefit or gain would not have been obtained but for the breach.

89.Obviously enough, as with any other question of causation in equity, the causal connection between a fiduciary's breach of fiduciary obligation and a benefit or gain must be judged using common sense and “with the full benefit of hindsight”.  And as with other questions of causation in equity, the inquiry into causation is not to be constrained by normative limitations imported from the common law. To introduce those limitations would risk confusing distinct legal policies underlying distinct bases of legal liability and limiting equity’s capacity to mould equitable relief to the circumstances of the individual case.

…

91.The reasoning in Warman makes explicit that where there is shown to exist a causal connection between a fiduciary’s breach of fiduciary obligation and a benefit or gain to the fiduciary or knowing participant, the onus shifts to the defendant to establish that it is inequitable to order that the defendant account for the value of the whole of the identified benefit or gain. The shifting of onus is explicable in part, but only in part, as putting the burden of proof of contested questions of fact on a party who is a proven wrongdoer. The burden on the defendant is not just evidentiary; more fundamentally, it is persuasive. The obligation of the defendant, imposed as an incident of “the fiduciary relation itself”, is to “justify” the “private advantage” that has been obtained.

…

96.Where the benefit or gain which has in fact been obtained by the errant fiduciary or knowing participant is the establishment of an ongoing business, the outcome might accordingly be that the fiduciary or knowing participant is liable to account “for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that [the fiduciary or knowing participant] has expended or made”. Depending on the circumstances, the outcome in the alternative might be that some lesser measure, more favourable to the fiduciary or knowing participant, is judged better to reflect the equities of the case.

…

119.To sum up, what Foresters obtained by reason of the breaches of fiduciary duty by Mr Woff and Mr Corby in which Foresters knowingly participated was a business. Foresters obtained that business to the cost of the business which Lifeplan operated through FPM. Foresters’ business can be, and has been, appropriately valued in a manner which duly allows for all of Foresters’ expenses and for all of Foresters’ ongoing business risks. Foresters has failed to establish any reason for considering that an order that it account for the entirety of the business as so valued is inequitable.

F         Graco and Zphere – The Fiduciaries or Primary Wrongdoers

1. As a fiduciary and primary wrongdoer in breach of the ‘no profit’ and ‘no conflict’ obligations, as found, Graco is subject to both personal and (if applicable) proprietary remedies.

1. As a fiduciary and primary wrongdoer in breach of the ‘no conflict’ obligations, as found, Zphere is also subject to both personal and (if applicable) proprietary remedies.

1. Accordingly, there is no question that each of Graco and Zphere, as primary wrongdoers, are liable to account for the full value of the Gain obtained in breach of fiduciary duty, notwithstanding the fact that they directed that the benefit be received by related corporate vehicles.

1. The position of the related corporate vehicles, GFBR and Glenaldon, is discussed in the next section. 

1. However, the extent to which proprietary relief is available against Graco and Zphere is another matter.  In my opinion there is no basis for proprietary relief against Graco and Zphere.[54]  There is nothing in specie to hold on trust.  GFBR and Glenaldon may, despite a weak argument to the contrary, properly be considered (as indeed found) the alter ego of Graco and in effect ‘his companies’ and  proprietary relief is available exclusively against those parties that hold the traceable proceeds of the breach of fiduciary duty.  There is something in specie to hold on trust.  There is nothing that Graco or Zphere hold or held on trust.[55]

   [54]Although the Plaintiffs’ Submissions sought proprietary relief against all defendants, the draft proposed orders sought declarations and related orders only in relation to the property held by GFBR.

   [55]It is unnecessary in this case, in light of the authorities and the other basis of liability (acting in concert), to identify the precise jurisprudential basis of the liability of the alter ego companies (see Cornerstone Property & Development Pty Ltd v Suellen Properties Pty Ltd [2014] QSC 265 [96] and following.

1. The final issue as to the liability of the primary wrongdoers is the issue of causation.  In short, the defendants contend that the breach of fiduciary duty comprised the failure to make the Opportunity available to the Partnership, that is the failure to extend the invitation to subscribe for shares to the Partnership.  The Investment, however, that produced the Gain was, it was contended, a separate, subsequent and different act that was, if unauthorised, not made ‘as a result of’ the breach of fiduciary duty. The position is the same, it was submitted, in relational to the Additional Payment.  The submissions, raised for the first time, cannot be sustained. They take far too narrow a view of the fiduciary duty and causation.

1. The suggested distinction – if indeed there is one – is both artificial and inaccurate.  In reality there was an unbroken continuous act comprising the taking up of the Opportunity by making the Investment, through a nominated entity, without involving the Partnership or obtaining prior approval, and consequently in breach of fiduciary duty as found.  The Gain was clearly – unlike some other difficult cases – by reason of the unauthorised making of the Investment or exploitation of the Opportunity, in breach of fiduciary duty.  Graco took up the Opportunity and made the Gain, through a nominated entity, when he should not have done so. Indeed, it is the Gain that gives rise to the breach. The Investment was the implementation of the Opportunity and an integral and consequential part of it.   The Additional Payment was also part of the Gain.  In short, the Gain was clearly because of or by reason of the breach of fiduciary duty.  Both Graco and Zphere must account for the full amount of the Gain.

1. By the application of ‘common sense and the full benefit of hindsight’[56] it is tolerably clear that the Gain would not have been made but for the breach of fiduciary duty.  In Foresters the real benefit was not the ‘sporadic deposits from retail customers’ but rather the ‘business connections’.  In this case the real benefit is the Gain.  The Gain was a direct result and consequence of the ‘general scheme of breach of fiduciary duty’.[57]  As was the case in Foresters, the deterrent effect of an order for disgorgement of the Gain should not be diminished by confining the causal enquiry.[58]  The facts and circumstances of the case as found, clearly tell against any attempt to either confine the scope of the fiduciary duty or confine the causal enquiry. The position of the accessories in relation to causation is the same in this case and reference is made to the next section.

   [56]Foresters [89] (per Gaegler J).

   [57]Ibid [5] (per Kiefel CJ and Keane and Edelmen JJ).

   [58]Ibid [9].

G        GFBR and Glenaldon

1. For the reasons set out in the previous section, causation, so far as it relates to and is applicable in this context, is made out. There is clearly a causal connection between the breach of fiduciary duty (as found and not the narrow suggested breach) and the Gain.

1. The liability of the accessories is also to account for ‘any benefit’.  The enquiry is to examine and evaluate the real benefit.  In Foresters, it was not the limited profits caused by particular acts of knowing assistance by Foresters, as they sought to argue, but the entire business connection of Lifeplan and FPM. According to the plurality the equitable disgorgement principle is a prophylactic rather than a restitutionary principle and it is ‘sufficient to show that the profit would not have been made but for dishonest wrongdoing’.  They went further and said that ‘the deterrent effect of an order for disgorgement of profits should not be diminished by acceding to Foresters attempt to confine the scope of the causal enquiry implicit in the expression ‘as a result of’.

1. According to Gageler J, a causal connection will exist ‘if the benefit or gain to the fiduciary or knowing participant would not have been obtained ‘but for’ the breach … Because the concern of equity is to vindicate the equitable obligation that has been breached, the ‘but for’ connection will be sufficient even though other contributing causes may be in play.’   Further, Gageler J said that causation must be judged using common sense and the full benefit of hindsight.

1. The onus is on the wrongdoer, whether fiduciary or accessory, to show that he or she should not account for the full value of the profit, gain or advantage.  There must be cogent evidence and not speculation to demonstrate why the full value of the benefit should not be disgorged.  According to the plurality this may be done in two ways.  First, to prove that the benefit was derived through the labour and skill (and cost) of the wrongdoer and that a just allowance should be made.  This does not arise in the case before me.  Secondly, by demonstrating that the benefit derived is ‘beyond the scope of the liability for which he or she should account for profits’.  This may be done by showing that there is no reasonable connection between the profit and the wrongdoing.  According to the plurality, there is no precise test and all of the circumstances must be considered.

1. Consequently, for the reasons discussed, the argument based on a lack of causal connection between the breach and the Gain must fail.

1. Despite my findings to the contrary, GFBR and Glenaldon contended that any relief should take into account the fact that neither GFBR nor Glenaldon was the alter ego nominee or corporate creature of Graco.  They were separate entities.  In relation to GFBR, it was contended that Graco was not the directing mind and will of the company and that even if he was this did not necessarily make GFBR the alter ego or corporate creature of Graco for all purposes. The position was only faintly argued in relation to Glenaldon, where Graco was the sole shareholder and director.

1. The effect of the submission is that any liability of GFBR and Glenaldon is to be assessed separately and in accordance with the knowing receipt principles.  In relation to GFBR, the argument then proceeded on the basis that nothing, or no property was received by GFBR.  It made the Investment from its own funds after proper consideration by its directors and received a substantial gain.  Consequently no property was received that needed to be accounted for.[59]  Finally, it was argued that if there was any liability to account as a knowing recipient, and to the extent that any proprietary relief was available, it could only be remedial and therefore necessarily involve a range of discretionary matters identified in the Defendants’ Submissions.  There was far less focus on the position of Glenaldon. 

   [59]To the best of my recollection the matter not argued at trial. 

1. In framing and directing the submissions to the appropriate form of relief, the defendants have sought to re-argue various matters or indeed argue them for the first time.  I do not propose to change my findings, although I do wish to add some further observations. 

1. I do not accept that relief against GFBR and Glenaldon should not be based on the corporate alter ego or nominee principles articulated in Grimaldi and other cases.  I have made findings to such effect and, as noted, do not propose to change them.  Accordingly, relief (discussed below) will be based on such findings.  The findings were entirely compelling, appropriate and based on the evidence.[60] 

   [60]Paragraphs [197]-[201] of the First Judgment. 

1. As a matter of broad principle, the law will attribute or impute to a corporation the mind and will of the natural person or persons who manage and control its actions.  The main authorities were referred to by Garde AJA in Australasian Annuities v Rowley[61] as follows:

   [61][2015] VSCA 9 [262]-[266] (Rowley).

262.      In an often quoted passage, Lord Reid in Tesco Supermarkets Ltd v Nattrass said as to the mind of a company:

“I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.”

263.      In Krakowski v Eurolynx Properties Ltd the High Court referred with approval to the words of Bright J in Brambles Holdings Ltd v Carey:

“Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company. …In an often quoted passage, Lord Reid in Tesco Supermarkets Ltd v Nattrass said as to the mind of a company…”

…

265.     In Beach Petroleum NL v Johnson, von Doussa J said:

“These authorities indicate that if a company is to be imputed with the conduct and knowledge of a director, the director must be acting within the scope of his or her authority, that is, within the scope of his or her actual or apparent authority. The scope of the authority of a director may vary widely from company to company and according to the circumstances of the case. In many instances a director might not be formally appointed by resolution of the board to act on the company’s behalf for a particular purpose, but may assume that role without dissent from those who customarily run the company, perhaps even assume the role of managing director.”

266.  In El Ajou v Dollar Holdings plc, the Court of Appeal said:

Directing mind and will

This doctrine, sometimes known as the alter ego doctrine, has been developed, with no divergence of approach, in both criminal and civil jurisdictions, the authorities in each being cited indifferently in the other. A company y having no mind or will of its own, the need for it arises because the criminal law often requires mens rea as a constituent of the crime, and the civil law intention or knowledge as an ingredient of the cause of action or defence. In the oft-quoted words of Viscount Haldane LC in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd:

“My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”

The doctrine attributes to the company the mind and will of the natural person or persons who manage and control its actions. At that point, in the words of Millett J: ‘Their minds are its mind, their intention its intention; their knowledge its knowledge.’ It is important to emphasise that management and control is not something to be considered generally or in the round. It is necessary to identify the natural person or persons having management and control in relation to the act or omission in point.

1. In referring to the phrase ‘closely and relevantly connected’ (Brambles Holdings at 279) Dowsett J in Lee v Westpac Banking Corporation[62] said:

“Closeness” is presumably to be measured by reference to the relevant decision-making process and/or functional unit of the company.  “Relevance” is presumably to be measured by reference to the transaction or conduct in issue in the proceedings.  No doubt the two concepts will frequently overlap.

[62][2015] FCA 467 [23].

1. In certain cases it may not be easy to establish who has management and control in relation to the particular act in point or under consideration.  Indeed, this is what occurred in Rowley.

1. Both the trial judge (Almond J) and the Chief Justice (Warren CJ) in dissent held that, in the particular facts and circumstances, the knowledge of Steven Rowley could not be imputed to Rowley Superannuation Fund Pty Ltd.  However, on their analysis of the facts, Neave JA and Garde AJA held that such knowledge was to be attributed or imputed. 

1. In reaching her conclusion, Neave JA said:

137.In determining whether the mind and will of the director of a company or of some other person should be regarded as the mind and will of the company:

“management or control is not something to be considered generally…It is necessary to identify the natural person or persons having management or control in relation to the act or omission in point.”

138.     Moreover:

“the formal position as regulated by the company’s articles of association, service contacts and so forth, though highly relevant, may not be decisive.”

139. In considering whether a director has management and control in relation to a particular act, it is appropriate for the Court to take a pragmatic view.

140. I consider there was ample evidence that Steven Rowley was acting as the directing mind and will of RSF, in relation to the amounts transferred to RSF when it was established and thereafter. Steven Rowley was both a company director and the secretary of RSF. It was Steven Rowley who negotiated with Mr Melville of Macquarie Bank and who emailed him in May 2007 advising him that the proceeds of the loan should be paid into the Rowley Super Fund, which was initially held on trust by himself, his wife and their two sons, who later became directors of RSF. In Mr Rowley’s evidence he said that he regarded his business and his company as a family business and saw them ‘as one’. He said that he had made all the decisions relating to payments for superannuation and that he did not consult with his wife or sons.

141.Similarly Barbara Rowley said that ‘Steven was the one who looked after our finances’ and that he had looked after superannuation issues. Although this evidence concerned her involvement in decision-making about the loan prior to RSF becoming trustee of the superannuation fund, there is no evidence suggesting that she assumed a greater role in RSF’s management of the superannuation funds, or that she or the sons Adrian and Adam Rowley played a part in managing the receipt of the relevant funds by RSF when it became trustee.

1. In reaching his conclusion, Garde AJA said:

269.I am satisfied that the trial judge erred when he did not find on the evidence that Steven Rowley was the directing mind and will of the Super Fund and of RSF. A number of the transactions including the largest transactions involved payments by AA directly into Steven and Barbara Rowley’s personal bank account. Other transactions were, when reconstructed, payments by AA on the credit of Steven Rowley’s unsecured loan account with AA or were made by AA to third persons for the benefit of entities personally controlled by Steven Rowley. The evidence of Steven Rowley’s involvement with the Super Fund and RSF was uncontested and uncontradicted:

(a) Steven Rowley was the only active or knowledgeable director of RSF. He was instrumental in all of the transactions. He directed and oversaw each of the payments made into the Super Fund in 2007 and 2008. He was the directing mind and will behind all of the transactions and all of the payments into the Super Fund. The Super Fund was a self-managed superannuation fund;

(b)the undisputed evidence was that none of Barbara, Adrian or Adam were active as directors of RSF or even cognisant of the payments into the Super Fund arranged by Steven Rowley;

(c) while Murdoch Partners gave accounting advice and prepared financial statements and tax returns, every transaction before the Court involving the Super Fund or RSF was engineered and undertaken by Steven Rowley; and

(d) there was no evidence suggesting that anyone other than Steven Rowley was the directing mind and will of the Super Fund and RSF.

…

278. By contrast, as the trial judge found, Barbara Rowley had an awareness in only in the most general terms and derived from her husband, Steven Rowley. There is nothing to suggest that she was active in any way in the affairs of the Super Fund or RSF. Likewise, the evidence of Adrian and Adam Rowley shows no hint that they were informed of, or involved in the affairs of the Super Fund or RSF.

279.In my view, the evidence clearly demonstrates that Steven Rowley was the directing mind and will of RSF and the Super Fund just as he was of the other Rowley entities involved in the scheme to borrow significant funds from Macquarie in the name of AA and pass these funds to the Super Fund and RSF. As a result, Steven Rowley’s knowledge must be imputed to RSF. Ground 2 of the notice of appeal is upheld, as the trial judge was in error in not imputing Steven Rowley’s knowledge to RSF.

1. As I have already found , I am satisfied,  to the requisite degree that in relation to the relevant acts, Graco was the natural person who managed and controlled the actions of GFBR and Glenaldon.

1. Mrs Graco was the sole shareholder of GFBR and with her husband comprised two of the three directors of GFBR and two out of three of its members.  Graco brought the idea to GFBR and was involved in the implementation.  On her own admission Mrs Graco left the financial affairs to her husband.  It was his opportunity that he directed to GFBR.  His act and knowledge was clearly that of GFBR. 

1. Accordingly, the alter ego, nominee or corporate creature principle is established.   

1. In any event, the other basis of joint and several liability, arising out of the same facts and circumstances, namely, acting in concert to secure a mutual benefit as found by me, was not specifically addressed.

1. Accordingly, on either principle the liability is joint and several with the primary wrongdoer. 

1. In these circumstances and on each principle or basis, like Foresters, the involvement of GFBR and Glenaldon was inseparable from and indeed a part of the general scheme and breach of fiduciary duty and an integral part of the strategy for giving effect to the breach of fiduciary duty.  Just like Foresters provided the commercial vehicle which would acquire and exploit the business connections, so did Graco provide the commercial vehicles to exploit the commercial opportunity which led directly to the Gain.  Further, as referred to in Foresters, ‘there is no novelty in equity attributing to one person the wrongful acts of another’.[63]

   [63]Foresters [5] (per Kiefel CJ and Keane and Edelmen JJ).

1. However, the liability of each of GFBR and Glenaldon is different. One relates to the Investment (GFBR). The other relates to the Additional Payment (Glenaldon).  Although the matter was not argued (and indeed the contrary was argued), there is no reason why Glenaldon, coming into the picture at a much later point in time and for the purpose of the Additional Payment, should be jointly and severally liable for the Investment which took place and was realised before its involvement.  Accordingly, Glenaldon will remain jointly and severally liable to account for no more than the Additional Payment.

1. Accordingly, it is not necessary to deal with the lesser or alternative form of relief based on the usual knowing receipt principles.  The issues raised are more complex, namely whether there was any receipt (GFBR) and if so the nature of the constructive trust and consequent discretionary considerations, presumably in the event that such trust is remedial. However, I propose to state my conclusions briefly. 

1. In my opinion, GFBR did (knowingly), as I have found, receive property notwithstanding its initial subscription for shares and subsequent receipt of the  Gain.

1. Although I consider that the better view is that the constructive trust arose at the outset, that is from the date of the Investment, it is not necessary to resolve this issue in this case for two reasons.  First, in this case it does not make any difference.  Secondly, even if remedial and consequently discretionary and a remedy of last resort, I do not consider that in the circumstances my discretion should be exercised in the manner submitted by the defendants. As the plaintiffs have forcefully submitted,[64] this is not a case and the defendants have not demonstrated any proper basis for any allowances notwithstanding the substantial windfall Gain.  I accept the plaintiffs’ submissions in this regard.

   [64]See paragraphs 24 and 25 above.

1. The position in relation to Glenaldon is of course different.  It did receive property, that is the Additional Payment and held such receipt on trust from the time of receipt.  Further, unlike GFBR, and as a volunteer it is liable to account in the same way as the primary wrongdoer. 

H        Declarations and Orders

1. Orders will be made against Graco and Zphere jointly and severally for an account of profits in the sum of $17,756,733.64, being the full amount of the Gain less the initial investment.

1. The benefit received by GFBR as a result of the Investment is set out in paragraph 1, Appendix 1 of the Plaintiffs’ Submissions, as amended by the addendum to the Lincoln Report.  It is liable, jointly and severally, to account for such benefit and there will be judgment for such amount less the amount of the initial investment in the sum of $203,780.  The parties should calculate this amount in accordance with these reasons. I refer in particular to paragraph [83] above. The amount will be less than the amount set out in the previous paragraph. It will include amounts transferred from Glenaldon to GFBR as set out in paragraphs 2(a), 3 and presumably 4 of Appendix 2 to the Plaintiffs Submissions. The amount in paragraph 2(b) should be excluded.

1. Paragraph 2 of Appendix 1 as amended by the addendum to the Lincoln Report sets out assets that GFBR continues to hold.  Paragraph 3 as amended by the addendum to the Lincoln Report, sets out the interest earned by GFBR from such holdings.  These assets are held subject to a constructive trust in favour of the plaintiffs.  Declarations and orders will be made accordingly.

1. The benefit received by Glenaldon as a result of the Payment is set out in paragraph 1 of Appendix 2 of the plaintiffs’ submissions.  It is liable to account for such benefit, as adjusted, and there will be judgment against Glenaldon in the sum of $4,868,400. Glenaldon does not continue to hold any assets.

1. The parties did not address the issue as to the relief available for the breaches of the Partnership Act, as found. In view of the decision I have reached, it is unnecessary to do so. It is also unnecessary to deal with any relief against Graco as an accessory to the breach by Zphere.

1. I do not propose to order that the amounts owing, as set out herein, be secured by an equitable charge over the assets of the particular defendant, as submitted. In my opinion, it is not only most unusual but inappropriate to do so in this case which differs significantly to the position in Warman. In Warman the amount found due following the taking of accounts was secured by an equitable charge over the assets of the very company that had received and benefitted from the impermissible (and in breach of fiduciary duty) diversion of part of a business. There was therefore some correlation between the assets charged and the benefit received. The benefit was to some extent represented by the assets. The charge was not simply a form of security, or anticipatory execution, for the amount ultimately established, which seems to be the position before me. It is sufficient that specific assets have been traced and are, to the fullest extent possible in this case against those defendants, subject to proprietary relief in the usual form as submitted.

1. The parties should endeavour to agree on final figures, the appropriate form of declarations and orders pursuant to these reasons, any pre judgment interest and costs. If they are unable to do so by 21 August 2020, I will make further directions for written submissions and determine all outstanding matters on the papers. Once the orders are finalised I propose to include a stay of the orders for 28 days to enable the parties to have discussions and to enable the defendants to consider their position.