Jaeger v Bowden (No 2)

[2016] NSWSC 897

Supreme Court

New South Wales

Medium Neutral Citation:

Jaeger v Bowden (No 2) [2016] NSWSC 897

Hearing dates:

2 – 12 November 2015

Decision date:

29 June 2016

Jurisdiction:

Equity

Before:

Robb J

Decision:

(1) Direct parties to bring in short minutes of order to give effect to matters decided in these reasons.

 

(2) Direct parties to confer and propose directions for the future conduct of the proceedings for the determination of matters not decided in these reasons.

 (3) The court will fix a time for a directions hearing to make directions for the future conduct of the proceedings.

Catchwords:

PROCEDURE – miscellaneous procedural matters – orders for determination of separate questions – orders made that all questions of liability be determined before questions relating to relief – evolution of proceedings during the hearing whereby plaintiff sought an order for a partnership accounting by the first defendant – parties withheld from tendering expert accounting evidence originally intended to be tendered – parties made limited submissions on primary issue concerning the construction of relevant deeds – some matters not determined by these reasons – need for reconsideration of orders for determination of separate questions – directions required for future conduct of proceedings

 

PARTNERSHIP – rights and duties of partners inter se – transfer of, and dealings with, shares – plaintiff executor of the estate of deceased mother – first defendant son of deceased – deceased and first defendant in equal partnership in the ownership of hotel assets and business – family arrangement whereby first defendant would immediately purchase half of deceased’s half share in goodwill of hotel business, but no part of deceased’s half share in hotel freehold – mutual intention to avoid incurring capital gains tax liability and to minimise stamp duty – deceased covenants to leave remaining interest in hotel assets and business to first defendant in her will – various instruments, deeds and agreements entered into to give effect to family arrangement – identification of instruments giving rise to binding agreements

 

PARTNERSHIP – rights and duties of partners inter se – transfer of, and dealings with, shares – deeds and agreement gave first defendant unilateral right to manage the hotel assets and business, to sell the hotel, and to invest the proceeds of sale in a replacement investment – deeds and agreement to apply to replacement investment mutatis mutandis – hotel sold and proceeds of sale applied by first defendant for his own purposes and not for the benefit of the deceased – whether application of the proceeds of sale authorised – whether first defendant breached his fiduciary duty as a partner of the deceased – question not decided

 

DEEDS – form and execution – parties execute and exchange different and inconsistent versions of deeds – whether deeds invalid – held contract created in the terms of the deeds executed by parties other than the first defendant – alternatively, held first defendant induced other parties to deeds to act on the basis that the deeds executed by those other parties contained the terms binding the parties – first defendant estopped from denying deeds containing the terms in the instruments executed by the other parties are binding on him – further, first defendant estopped from denying a composite deed of assignment created by his solicitor combining pages from different deeds executed by various parties binding on him

 

CONTRACTS – general contractual principles – construction and interpretation of contracts – general principles considered – whether operative deeds and agreement had the effect when properly construed that deceased held her remaining interest in hotel assets and business on trust for first defendant; alternatively, whether deceased had agreed to relinquish her entitlement to receive any of the benefits of her continuing beneficial ownership of her remaining interest in the hotel assets and business – held deceased had not agreed to hold her remaining interest on trust for first defendant or to relinquish her entitlement to receive any benefits from her continuing beneficial ownership

 

CONTRACTS – general contractual principles – construction and interpretation of contracts – meaning and effect of terms “investment” and “mutatis mutandis” considered

 

CONTRACTS – general contractual principles – construction and interpretation of contracts – implication of terms – principles applicable to the implication of terms in contracts considered – held contracts did not include alleged implied term – term not necessary to give business efficacy to the contracts, term not so obvious that it goes without saying, and term likely to be inconsistent with the express terms of the contracts

 

ESTOPPEL – by deed or convention – estoppel by convention – principles considered where a party asserts that another party to a set of deeds and agreements is bound by a conventional estoppel based upon an alleged common understanding as to the legal effect of the deeds and agreements allegedly formed during the course of the negotiations before the deeds and agreements were made – question of principle whether a conventional estoppel can be based on pre-contractual negotiations not decided – in any event, absence of clear and convincing proof of alleged common understanding – held claim of conventional estoppel rejected

 

ESTOPPEL – by deed or convention – estoppel by deed – final deeds executed estopped parties from claiming that agreement between the parties contained terms in earlier alleged agreements that were inconsistent with the recitals and terms contained in the deeds

 

PARTNERSHIP – partnership property – dealings with partnership property – whether relevant deeds and agreements authorised first defendant to dispose of the proceeds of sale of the hotel assets and business in the way that he did – deceased authorised first defendant’s conduct in a way that gave rise to the defence of settled accounts – principles applicable to defence of settled accounts considered – held on facts that deceased was not bound by accounts signed by her

 

EQUITY – general principles – fiduciary obligations – receipt of partnership property with notice that property transferred in breach of fiduciary duty – claim by plaintiff that second defendant, former wife of first defendant, received part of proceeds from the sale of partnership interest in hotel assets and business as a result of breach of fiduciary duty by first defendant – insufficient evidence of nature of and circumstances in which second defendant received part of proceeds of sale to make final findings concerning the state of her knowledge

 

EQUITY – equitable remedies – accounts and enquiries – plaintiff seeks an order for an accounting by first defendant as accounting party in a partnership – also seeks correction of past annual financial statements of partnership on the basis that errors made in calculation of partners’ funds – held plaintiff entitled to an order for an account – appropriate basis for the conduct of the accounting not yet established

 

SUCCESSION – wills, probate and administration – construction and effect of testamentary dispositions – effect of gift in will of deceased leaving all sums of money owing to her from the sale of the hotel to plaintiff and the first defendant – principles on the proper construction of wills considered – held gift intended to apply to deceased’s entitlement to an account by, or to equitable compensation from, the first defendant if guilty of breach of fiduciary duty as deceased’s partner

  INTEREST – where equitable relief in the form of equitable compensation may be given for breach of fiduciary duty – rate of interest and whether simple or compound interest – principles for awarding simple or compound interest considered – final determination of proper basis for payment of interest not made – insufficient evidence of consequences of breach of fiduciary duty

Legislation Cited:

Civil Procedure Act 2005 (NSW)
Conveyancing Act 1919 (NSW)
Duties Act 1997 (NSW)
Family Law Act 1975 (Cth)
Limitation Act 1969 (NSW)
Partnership Act 1892 (NSW)
Trustees Act 1962 (WA)
Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Allgood v Blake (1873) L R 8 Ex 160
Barnes v Addy (1873) 28 LT (NS) 398
Baulkham Hills Private Hospital Pty Limited v GR Securities Pty Limited (1986) 40 NSWLR 622
Birmingham v Renfrew (1936) 57 CLR 666
Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Hancock v Rinehart [2015] NSWSC 246
Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298
Hasler v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609
Hospital Pty Ltd (1986) 40 NSWLR 631
Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133
Jane v Bob Jane Corporation Pty Ltd [2013] VSC 406
Johnson Matthey Ltd v A C Rochester Overseas Corporation (1990) 23 NSWLR 190
Linjing Fang v Xiaodan Sun (No 2) [2014] NSWSC 1194
Masters v Cameron (1954) 91 CLR 353
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 325 ALR 188
Newey v Westpac Banking Corporation [2014] NSWCA 319
Perpetual Trustee Co Ltd v Cheyne [2011] WASC 225
Perrin v Morgan [1943] AC 399
Re Wragg [1919] 2 Ch 58
Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603
Secured Income Real Estate (Aust) Pty Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405
Southern Cross Commodities Pty Ltd (I liq) v Ewing (1987) 11 ACLR 818
State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170
Thomas v SMP (International) Pty Ltd (No 6) [2010] NSWSC 1311
Whittet v State Bank of New South Wales (1991) 24 NSWLR 146

Texts Cited:

Butterworth’s Australian Legal Dictionary
Jacobs’ Law of Trusts in Australia (7 ed)
Lindley & Banks on Partnership (19 ed)
Macquarie Dictionary
Meagher, Gummow and Lehane’s Equity Doctrines & Remedies (5 ed)

Category:

Principal judgment

Parties:

Kim Jaeger in her capacity as executor of the estate of the late Adelaide Emily Bowden (plaintiff)
Stephen Bowden (first defendant)
Jane Bowden (second defendant)
Butlers Bridge Pty Ltd (third defendant)
Kettleswell Pty Ltd (fourth defendant)
Bowden Hotel Investments Pty Ltd (fifth defendant)
Bowden Property Investments Pty Ltd (sixth defendant)
Ritz Restaurants (Hurstville) Pty Ltd (seventh defendant)
Hurstville Property Investments Pty Ltd (eighth defendant)
Bowden Company Pty Ltd (ninth defendant)
Samook Pty Ltd (tenth defendant)

Representation:

Counsel: Mr R Newlinds SC (plaintiff)
Mr N J Beaumont SC (plaintiff)
Mr C E Bannan (plaintiff)
Mr M Willmott SC (first and third to tenth defendant)
Mr S Philips (first and third to tenth defendant)
Mr S Wheelhouse SC (second defendant)
Mr M Auld (second defendant)

  Solicitors: Paltos Milevski (plaintiff)
Diamond Conway (first and third to tenth defendants)
Delaney Lawyers (second defendant)

File Number(s):

2012/349543

Publication restriction:

None

Judgment

Introduction

1. The plaintiff, Ms Kim Jaeger, and the first defendant, Mr Stephen James Bowden, are the only children of the late Mrs Adelaide Emily Bowden.

2. In conformity with the approach adopted by all parties at the hearing, as the dispute involves members of the Bowden family, I will, without any disrespect, refer to the family members by their forenames, where convenient.

3. Adelaide died on 8 February 2012. Kim is the executor of Adelaide’s estate, under a will executed by Adelaide on 11 December 2008, and sues the defendants in these proceedings in that capacity.

4. As Kim makes the present claim to recover moneys that she claims Adelaide was entitled to at the date of her death, it will be convenient to refer to the claimant as Adelaide. I will refer to Kim personally, where the reference is to her capacity as Adelaide’s executor or to her personally.

5. In essence, Adelaide claims that she was entitled to an accounting by Stephen in relation to a partnership in which they were engaged, concerning what was initially the operation of a hotel business. The hotel was sold by Stephen, and Adelaide claims that Stephen wrongly applied the proceeds of sale in a manner that requires him to account to her. She also claims that the annual accounts for the partnership were prepared in a way that did not correctly record her partnership entitlements; in respect of matters such as drawings, revaluations of assets, entitlement to rent, capital gains and other matters.

6. The second defendant, Ms Jane Louise Bowden, known as Louise, was at the time that most relevant events occurred, the wife of Stephen. Stephen and Louise are now divorced. Louise is sued primarily on the basis that she has been a director, or a director and shareholder, of companies that have received properties that are impressed with trusts, which were acquired in breach of fiduciary duty by Stephen. She is also sued on the basis that she received some of the proceeds of sale of the Hotel.

7. It is convenient to refer next to the seventh defendant, Ritz Restaurants (Hurstville) Pty Ltd, which was at all material times the trustee of a trust called the Bowden Family Trust No 1 (the “Trust”). I will refer to the seventh defendant as the ‘Trustee’.

8. The other defendants, being the third to sixth defendants, and the eighth to tenth defendants, are all companies owned and controlled by members of the Bowden family. Adelaide claims that the corporate defendants received some of the proceeds of the sale of the Hotel. Stephen has at all material times been a director of the corporate defendants.

9. Stephen’s legal representatives in the proceedings also act and appear for the corporate defendants. Generally, it will only be necessary to refer to the position of Stephen and Louise, as the principal defendants. Where necessary, the separate position of the corporate defendants will be addressed.

10. At the hearing, Mr Newlinds SC appeared with Mr Beaumont SC and Mr Bannan for Kim, as executor of Adelaide’s estate. Mr Willmott SC appeared with Mr Philips for Stephen and the corporate defendants. Mr Wheelhouse SC appeared with Mr Auld for Louise.

Contents

11. The complexity of these reasons for judgment makes it convenient for me to list the contents as follows:

Preliminary observations

Par 12

The Primary Facts

Par 18

The issues raised by the pleadings

Par 78

Statement of claim

Par 79

Defence of first defendant

Par 102

Defence of second defendant

Par 127

Defences of remaining defendants

Par 147

Reply to first defendant’s defence

Par 148

Reply to second defendant’s defence

Par 155

Cross claim by first defendant

Par 158

Defence to cross claim by second defendant

Par 161

Cross claim by second defendant

Par 164

Defence to cross claim by second defendant

Par 175

Order for separate determination

Par 180

Expert forensic accountants’ reports

Par 203

Financial statements

Par 233

The AE & SJ Bowden partnership financial statements

Par 237

The Bowden Family Trust No 1 financial statements

Par 286

Application of balance of proceeds of sale of Hotel

Par 300

Payments made to Adelaide under cl 6.2 of the Principal Deed

Par 302

The Trust Deed

Par 319

The terms of the Partnership

Par 323

The alleged July agreement

Par 334

The alleged November 2003 constructive trust

Par 382

Validity of the Principal Deed and the Deed of Assignment

Par 392

The correspondence

Par 396

Effect of documents

Par 424

Effect of Deeds and Management Agreement

Par 433

The Principal Deed

Par 437

The Deed of Assignment

Par 481

The Family Deed

Par 486

The Divorce Deed

Par 488

The Management Agreement

Par 490

Was the application of the proceeds of sale of the Hotel

authorised?

Par 499

Implied term

Par 544

Conventional estoppel

Par 553

Alleged collateral agreement

Par 603

Inconsistency between July Agreement and Deeds

Par 605

Alleged authorisation by Adelaide of Stephen’s conduct

Par 609

Utility of partnership accounting

Par 630

Notice by Louise of breach of fiduciary duty

Par 648

Issues arising out of Adelaide’s will covenant and will

Par 676

Breach of covenant to leave interest in replacement

investment to Stephen

Par 686

Shares in Bowden Property Investments Pty Ltd

Par 690

Entitlement to proceeds of present proceedings

Par 696

Construction of cl 3(a) of will admitted to probate

Par 695

Simple or compound interest

Par 710

Conclusion

Par 731

Preliminary observations

12. The pleadings in this matter have raised a significant number of complex and difficult questions. There have been many amendments to the pleadings, both formal and informal, and a number of concessions were made during the hearing and final addresses. It has not been an easy matter to identify all of the questions that remain in issue.

13. As I will explain in more detail below, the court was persuaded to make orders for the determination of some issues separately and before others. The form of the orders made would suggest that all questions of liability were to be determined in the present hearing, and the quantification of any claims for damages, equitable compensation, or an account of profits, would occur in a later hearing, if any parties were found to be entitled to those remedies.

14. As I will also explain, by reason of what may have been a misunderstanding, or a shift in the course of the proceedings, I am not satisfied that the course of the present hearing has allowed me to decide all issues concerning the liability of all of the parties. That outcome appears principally to have arisen out of the fact that the hearing evolved, in part, into a claim that Adelaide is entitled to an accounting from Stephen, as the accounting party in a partnership, before further steps are taken in the hearing of the proceedings (where a partnership account may be distinguished from a claim for an account of profits against a defaulting fiduciary). A consequence of this evolution was that Adelaide and Stephen put their expert accounting evidence before the court as evidence of their claims, but not as proof of the facts and opinions contained in the expert reports. An effect of this development was that facts that I have considered are essential to the determination of questions; such as: (a) the true effect of the crucial terms of the relevant deeds; (b) whether Stephen breached fiduciary duties that he owed to Adelaide; and (c) a number of subsidiary, but important questions, such as whether at relevant times Louise had notice of any breaches of fiduciary duty by Stephen, are questions that cannot be properly dealt with on the existing evidence.

15. Furthermore, in my view, the parties pleaded the terms of the relevant deeds that are crucial to the determination of the primary dispute between the parties, but made little or no submissions as to how the court should construe the terms relating to the underlying material facts, which, as I have said, were not in any event considered in depth, in part because the matters considered by the accounting experts were not explored in the evidence.

16. In these reasons for judgment, I have dealt with all of the questions that I believe can properly be determined, on the basis of the evidence and submissions as they stood at the end of the hearing. I have made provisional findings of fact, and partially considered questions of construction of the relevant deeds, up to the point where I have become concerned that I should stop, and propose to give the parties an opportunity, in response to these reasons for judgment, to make further submissions as to the future conduct of these proceedings. That is plainly an unusual course, but I have taken the view that it might be very damaging to the interests of the parties, if I proceeded to make a final determination of all issues, in circumstances where it has become apparent to me that the description of the separate issues to be determined in the present hearing may have become blurred; where, possibly as a result of that blurring, the parties have not addressed all relevant factual issues; and the parties have not in any detailed or comprehensive way addressed what I consider to be the crucial construction issues. Shortly put, if I go further in this judgment than the parties expect me to go, and decide questions that they consider are still the subject of debate, I may jeopardise my capacity to determine the remaining questions, in a way that is fair to all parties.

12. As will be seen below, I propose to direct the parties to confer and to bring in short minutes to deal with: (a) the orders that should now be made as a result of the issues decided in this judgment; (b) the orders that should be made concerning the determination of issues considered provisionally in this judgment, but not determined (including whether those issues should be decided on the basis of the evidence and submissions presently before the court, or whether that determination should be deferred until a later stage, following further evidence and submissions); and (c) the orders that should be made for the determination of the remaining issues in the proceedings.

The primary facts

18. The primary facts were not contentious, and it will be convenient to set them out, in order to provide a proper foundation for a consideration of the issues raised by the pleadings.

19. In 1979 Adelaide and her late husband, Thomas, together with Stephen and Kim and her husband, Peter, acquired from Tooth & Co Ltd the goodwill (the “Goodwill”) and hoteliers licence (the “Licence”) of the Hurstville Ritz Hotel at 350 Forest Road, Hurstville (the “Hotel”). Adelaide and Thomas jointly acquired a one-third interest; Kim and Peter acquired a one-third interest; and Stephen acquired the final one-third interest.

20. The Hotel business was run by Adelaide, Thomas, Stephen, Kim and Peter in partnership (the “Partnership”). The Partnership was informal, and its terms were not set out in any document.

21. In about February 1982, Kim and Peter withdrew from the Partnership, and at that time Stephen became entitled to a 50% interest, and Adelaide and Thomas jointly held the remaining 50%.

22. Adelaide ceased playing an active role in the management of the Partnership or the Hotel from about 1985.

23. From 1987, Stephen held a power of attorney granted by Adelaide, and following the death of Thomas, Stephen made all decisions with respect to the management and administration of the Partnership and the Hotel business, including where necessary signing documents on Adelaide’s behalf in exercise of the power of attorney.

24. In 1990, the partners bought from Tooth & Co Ltd the freehold interest in the land upon which the hotel stood, that is, 350 Forest Road, Hurstville (the “Freehold”), subject to the lease that had earlier been acquired. I will call the Goodwill, the Licence and the Freehold, all being assets necessary for conducting the Hotel business, the “Hotel Assets”. At about the same time, they acquired neighbouring properties at 346 and 348 Forest Road in the names of Butlers Bridge Pty Ltd and Kettleswell Pty Ltd respectively (being the third and fourth defendants). Stephen and Thomas each held one share in both companies, and they and Adelaide were their directors.

25. In 1992, Stephen, Thomas and Adelaide bought the property at 1A Barrett Street, Hurstville, in the names of Stephen, as to one half, and Thomas and Adelaide, as to the other half.

26. In 1994, Thomas died, and his interest in the Goodwill and License of the Hotel, the Freehold, and the Partnership vested in Adelaide as his sole beneficiary.

27. From that time, the Hotel business was operated in partnership by Adelaide and Stephen in equal shares.

28. In about 1994 or 1995, Adelaide told Stephen that she did not want to be involved in the Hotel business anymore, and that he could take care of all matters relating to the business, using the power of attorney where necessary.

29. In 1994 and 1995, there was a downturn in the trading of the Hotel, and Stephen found it difficult to make payments of principal and interest to the bank which had loaned the money for the purchase of the Hotel. Stephen and Adelaide both had to sell assets in conjunction with a refinancing of the debt, and a change of banker to the National Australia Bank (the “NAB”). Following the sale of their residential properties, Stephen and Louise lived with their children in a rented apartment, and Adelaide lived in a garage at her sister’s home.

30. Stephen was required to work such long hours that in early 1995 he suffered a physical breakdown, and was admitted to hospital for a week; but on discharge he was required to resume his usual duties at the Hotel, working 18 hours a day, seven days a week.

31. From 1 July 1998, the accounts for the Partnership, the Trust, the Trustee, and all related entities were prepared by Mr John Morrison, an accountant, who was a nephew of Adelaide.

32. On 29 June 1998, Adelaide and Stephen entered into a lease of the Freehold in favour of the Trustee, as trustee of the Trust, on a monthly tenancy, at a monthly rental of $41,666.67 (i.e. an annual rent of $500,000) (the “Lease”). Under the terms of the Lease, Adelaide and Stephen licensed to the Trustee the use of the business name, the Goodwill (including the Licence) and the conduct of the Hotel business.

33. Also on 29 June 1998, the Trustee appointed Stephen as manager of the Hotel business, with full and unfettered control of the conduct of the business, and agreed that Stephen would hold the licence for the Hotel on its behalf.

34. The Trustee was formally appointed as trustee of the Trust on 1 July 1998.

35. From 1 July 1998 (up until 30 September 2007), all of the income received from the operation of the Hotel by the Trustee was paid into the accounts of the Trust, and any profits were distributed by the Trustee in accordance with its discretion under the relevant trust deed.

36. Between 1 July 1998 and 31 August 2007, the Partnership did not operate its own bank account, and instead the bank account operated by the Trustee with the NAB was used for the Partnership’s transactions.

37. It was Mr Morrison’s practice, when preparing the annual accounts, not to record interest charges on any loans between the Partnership and the Trust.

38. In October 1998, Stephen assisted Adelaide to acquire a home unit at Broadbeach on the Gold Coast for $750,000. The deposit of $75,000 was paid by the Trust. A sum of $600,000 was borrowed from the NAB. Due to her age, the bank would not lend the money to Adelaide as the only borrower. The NAB would only make the loan if the home unit was purchased in the joint names of Adelaide and Stephen, and both were jointly liable for the borrowing. Adelaide was unhappy that Stephen’s name would be on the title, but that could not be avoided. Stephen wrote a letter to Adelaide, dated 15 October 2008, in which he stated, among other things, that he held his 50% share in the home unit on trust for Adelaide.

39. In about 1998, the New South Wales Government increased the number of poker machines that the Hotel could operate from 15 to 30. The number of poker machines operated by the Hotel was increased to 30.

40. According to Stephen, from about 1984 to 1998, Stephen gave Adelaide weekly payments of between $500 and $750 from her share of the profits of the Partnership, and after 1 July 1998, by distributions from the Trust (where funds were available to do so). Following the increase in the number of poker machines to 30, the revenue of the Hotel increased, and the Trust began to distribute $1,000 per week to Adelaide.

41. In October 2000, Stephen, at Adelaide’s request, employed Kim and Peter to work at the Hotel, at a salary package of $216,000 per year, which was paid out of the Trust. In about mid-November 2000, Stephen assisted Kim and Peter to acquire a home unit in Rose Bay for a price of $1,160,000. The deposit was paid by the Trust. The loan of $928,000 that was borrowed from the NAB was serviced by distributions made by the Trust. The Trust also paid the monthly lease fee of $2,039.09 on a vehicle leased for Kim.

42. In January 2001, Stephen dismissed Kim and Peter from their employment at the Hotel, because of disagreements with Louise. At Adelaide’s request, Peter caused the Trust to continue to pay Kim and Peter $2,000 per week, together with the mortgage payments on the Rose Bay property of $1,654 per week, as well as the lease payments on the vehicle.

43. Following the dismissal, Stephen became estranged from Kim and Peter.

44. Adelaide decided that she would like to use her equity in the Partnership to make a gift to Kim and Peter, during her lifetime, to enable them to buy a suitable business. Adelaide asked Stephen to assist, and Stephen arranged for Mr Morrison to find a suitable motel business.

45. Starting in about March 2003, discussions took place between Adelaide and Stephen, about Stephen buying out Adelaide’s share in the Partnership. With the assistance of Mr Morrison, Stephen obtained advice from a tax adviser, Mr Stephen Davidson, and a partner at the firm of solicitors then known as Blake Dawson Waldron, Mr Philip Wiseman. Stephen discussed the significance of that advice with Adelaide, and on 1 July 2003, a meeting occurred at the Hotel between Adelaide, Stephen, Kim, Peter and Mr Morrison. At the end of the meeting, the persons present signed minutes of the meeting (the “July Minutes”). Thereafter, as agreed at the meeting, lawyers were instructed, principally Mr Wiseman, to prepare documentation to implement the matters decided at the meeting, in accordance with the advice that had been given. The meaning and effect of the advice, the discussions prior to the meeting, the matters discussed in the meeting, and the July Minutes are controversial. I will defer a more detailed discussion of these matters until after I have considered the issues raised by the parties in their pleadings.

46. In November 2003, drafts of four deeds and a management agreement were prepared. Adelaide, Kim, Peter and Mr Bullen signed a version of these documents. Stephen, however, was unhappy with some of the terms of two of the deeds, and gave instructions to Mr Morrison to prepare revised versions of the documents. Stephen executed and initialled a set of the documents that included the revised documents. The set of documents executed by Stephen was not executed by the other parties. Adelaide and Stephen are agreed as to the identity of the documents that took effect. Louise challenges that position, and indeed argues that the deeds and the management agreement were not valid. This is another contentious issue, which will be addressed below.

47. On 13 November 2003, Adelaide made a will in contemplation of the execution of the documents (the “2003 Will”) by which Adelaide gave all of her interest in the Hotel, including the Hotel companies, the Freehold and the Goodwill to Stephen, and the residue of her estate to Kim.

48. Kim and Peter found a motel at Gosford that they wished to buy before Christmas 2003. They, together with Adelaide and Stephen, agreed on the basis of the family arrangement made in July, that Kim and Peter should enter into a contract to purchase the motel. They did so, and Stephen arranged for the Trust to pay the deposit of $60,000 and stamp duty of $98,794, in the expectation that he would be repaid on completion of the agreement that was then proposed to be implemented in accordance with formal documents that were then in the course of being drafted.

49. Putting aside the issue of the identification of the relevant documents, and the validity of the transaction, the following documents were executed in November or December 2003:

1. Undated deed between Adelaide, Stephen and Kim, which dealt with the management of the Hotel; the possible future sale of the Hotel; the will of Adelaide; covenants by Kim and Stephen that they would not challenge Adelaide’s will; family arrangements concerning the provision of certain entitlements to Adelaide; the relinquishment by Adelaide and Kim of any entitlement to distributions from the Trust; and the responsibility for the liabilities of the Hotel business (the “Principal Deed”).

2. Deed dated 30 December 2003 between Adelaide and Stephen, by which Adelaide assigned to Stephen the half of her interest in the Partnership, the Goodwill and the Licence that she had inherited from Thomas, but not the other half, or her half interest in the Freehold (the “Deed of Assignment”).

3. Undated deed between Adelaide, Mr Bullen (who was Adelaide’s companion), Kim, Peter and Stephen, by which the parties covenanted that they would not challenge the part of Adelaide’s will that gave Adelaide’s remaining interest in the Hotel to Stephen, including under the Family Provision Act, which was then in force (the “Family Deed”).

4. Undated deed between Louise, Stephen and Adelaide, under which Louise covenanted, in the event of her divorce from Stephen, not to seek to obtain part of Stephen’s interest in the Hotel by means of Family Court orders (the “Divorce Deed”).

5. Undated management agreement between Adelaide, Stephen and the Trustee, appointing Stephen as the managing partner of the Partnership, and giving Stephen the exclusive authority to manage the Partnership and the Hotel (the “Management Agreement”).

50. I will refer to the four deeds described in the preceding paragraph collectively as the “Deeds”.

51. It is the meaning and effect of these documents that will primarily govern the determination of the issues between the parties. In outline, the defendants contend that, by reason of an agreement contained in the July Minutes; an agreement made in November 2003 when the family committed to the purchase of the motel by Kim and Peter; or by the Deeds and the Management Agreement; Adelaide assigned the full legal and beneficial interest in half of her Partnership interest to Stephen, and agreed to hold her legal interest in the other half, and her legal interest in the Freehold, on trust for Stephen. Alternatively, if Adelaide did not agree to hold her remaining interest on trust for Stephen, she agreed to relinquish her interest in any of the profits of the Partnership or the Trust. The defendants say that, if there was no agreement as they contend, Adelaide became bound by a conventional estoppel, which prevented her from asserting that she continued to have any beneficial interest in any of the Hotel assets. (This summary ignores a number of differences in the arguments put by Louise, on the one hand, and the other defendants, on the other). Adelaide, on the other hand, contends that she remained entitled beneficially to her half of the interest in the Partnership, the Goodwill and the Licence that she retained, and also her half interest in the Freehold, and accordingly to the profits of the Partnership.

52. It will be necessary to set out the terms of the July Minutes, the Deeds and the Management Agreement below, and to carry out a detailed analysis of the meaning and effect of those documents. For present purposes, it will assist with the understanding of this statement of primary facts, and the analysis of the pleadings that follows, if I refer in broad terms to a number of matters dealt with in the Deeds and the Management Agreement:

1. The Principal Deed appointed Stephen to be the managing partner of the Partnership, with power to manage not only the Partnership, but the Freehold and all assets associated with the Hotel business.

2. Adelaide covenanted to make a will, under which she would leave to Stephen all of her interest in the Partnership, the Goodwill, the Licence, the Freehold, and her shares in the Trustee and three other of the corporate defendants that owned assets connected with the operation of the Hotel (the “Hotel Companies”), that she did not assign to Stephen under the Deed of Assignment.

3. Under the Principal Deed, Adelaide consented to Stephen selling the Hotel business and the Freehold, subject to a particular condition. Stephen was given the authority to invest the proceeds of sale in a replacement investment. In that event “the provisions of clause 1 of [the Principal Deed (concerning Stephen’s control of the Hotel business)] shall apply to the replacement investment mutatis mutandis”.

4. The Principal Deed required Stephen to pay out the mortgage secured on Adelaide’s Gold Coast home unit, and to transfer his interest in the title to her.

5. It also contained an undertaking by Stephen to ensure that Adelaide would, during her lifetime, continue to receive Stephen’s support, in relation to the costs of her ongoing lifestyle, including distributions of profits from the Hotel business or distributions from the Trust.

6. Adelaide and Kim agreed by the Principal Deed that Stephen would be free to distribute any income from the Trust to his immediate family, and they relinquished any entitlement they had to distributions of income or capital from the Trust.

7. As stated above, under the Deed of Assignment, Adelaide assigned to Stephen the one half of her interest in the Hotel assets that she had inherited from Thomas, but not the remainder of her interest, including any of her interest in the Freehold. The price was $3 million (or, as Louise submits, $2,825,000).

8. The Principal Deed contained a recital that Adelaide intended to pay a substantial part of the price she received under the Deed of Assignment to Kim, to enable her to acquire a business. In fact, Adelaide intended to make a gift of $2 million to Kim from the $3 million she was to receive.

9. The Management Agreement contained the specific terms of Adelaide’s appointment of Stephen as the managing partner of the Partnership. Of particular importance, it empowered Stephen to grant or extend the existing lease under which the Partnership leased the Hotel assets to the Trust at a non-commercial rent, which had the effect that the profits of the Hotel business were earned in the Trust and not the Partnership.

53. The price of $3 million provided for in the Deed of Assignment was determined on the basis that the value of the Goodwill, the Licence and the Freehold was $20 million. To that amount the value of various Hotel assets were added, and then the amount of all of the liabilities of the Hotel business, whether owed by the Partnership or the Trust, were deducted, giving a “net share value” of approximately $12 million. A quarter share was rounded down to $3 million. This approach to the determination of the price did not value the Goodwill, the Licence and the Freehold separately. Consequently, Adelaide agreed to sell half of her interest in the Partnership, the Goodwill and the Licence for a price that reflected one quarter of the net value of all of the Hotel Assets.

54. The transactions contemplated by the Deeds were completed on 22 December 2003. Stephen arranged for new borrowings of $12 million to refinance all of the existing secured debts of the Partnership and the Trust, and to make all of the payments required to complete the transactions. Nine million dollars was borrowed from the NAB, secured on the Hotel assets owned by the Partnership, and $3 million was borrowed from the NAB, secured on a home unit at Newtown owned by the Trust. After repayment of the existing loans, various payments totalling $2 million were made on behalf of Kim and Peter, $1 million was retained for Adelaide, and $491,155.24 was used to pay out the mortgage on Adelaide’s Gold Coast home unit. Stephen was repaid the amounts that he had drawn out of the Trust to enable Kim and Peter to enter into the contract to buy their motel. The balance of the funds was used to pay various transaction costs.

55. As Adelaide was not paid the $1 million immediately, the deeds were held in escrow by Mr Wiseman until the payment was made, and the escrow condition was satisfied on about 29 March 2004.

56. Thereafter, until 2007, Stephen managed the Partnership, the Hotel and the Trust in substantially the same way as had happened before the execution of the Deeds and the Management Agreement.

57. Stephen caused the Partnership and the Trust to pay regular amounts of income to Adelaide; to pay the related income tax; and also to pay Adelaide’s sundry living expenses. These payments will be considered in more detail below.

58. In 2007, Stephen caused the Partnership to enter into an option for the purchase of the Hotel for a price of $52 million. Stephen executed the documentation under his power of attorney on behalf of Adelaide.

53. There was a term in the option agreement that the Hotel would be operated by the Partnership at the time of completion of any contract for sale, as the Partnership would be the vendors. Accordingly, at the end of September 2007, the lease granted by the Partnership to the Trust was terminated, and for a period of about a month between the termination and the completion of the contract of sale, the Hotel business was operated by the Partnership.

54. On completion of the contract of sale on 29 October 2007, the net purchase price of $42,327,116 was paid into the Partnership’s bank account.

55. Mr Morrison, with the authority of Stephen, caused that amount to be paid immediately into the Trust’s bank account, for the purpose of ensuring that any interest income was earned by the Trust, rather than the Partnership, as that would facilitate the minimisation of income tax. Following the payment of certain debts of the Partnership, including a debt owed to the Trust, as at 30 June 2008, the Trust was indebted to the Partnership in the sum of $28,394,241.

56. Thereafter, over the period of a number of years, Stephen, with the assistance of Mr Morrison, conducted the affairs of the Partnership and the Trust in the belief that he was the beneficial owner of all of Adelaide’s remaining interest in the Partnership, and could deal with the assets of the Partnership as he saw fit. The financial dealings that were undertaken using the proceeds of sale of the Hotel are complex, and will be considered below in relation to the annual financial statements of the Partnership and the Trust. For the present, it will be sufficient to say that Stephen caused part of the money to be paid out of the Trust to beneficiaries associated with himself and Louise; part to be loaned to the trustee of a trust in which he and Louise were the primary beneficiaries; and part to be drawn down by himself from his partners’ funds in the accounts of the Partnership.

57. Adelaide learned of the completion of the sale of the Hotel assets soon after it occurred on 29 October 2007. Almost immediately, she made demands to Stephen and Mr Morrison for her share of the sale proceeds. Her demands were expressed on the basis that she expected to receive an appropriate share of what was, in practical terms, the windfall that arose out of the sale of the Hotel for $52 million in 2007, when the family understood it was only worth $20 million in 2003. Stephen and Mr Morrison took the stance that Adelaide was not entitled to any additional share of the capital profit, and that her rights were extinguished by the payment of the $3 million in 2003. Adelaide apparently repeated her demands on a number of occasions.

58. On 6 December 2007, Mr Peter Kilmurray, who was Adelaide’s solicitor, wrote a letter to Stephen. He referred to Adelaide having become aware of the sale of the Hotel, and said that Adelaide was the 25% owner of the Partnership, and a 50% owner of the Freehold. He referred to the 2003 transactions, and asked to be provided with a copy of all documents executed by Stephen under the power of sale granted by Adelaide. He then said:

Finally, our client was recently advised by you that the sale of the Hotel had been finalised. Our client requests a full accounting of the sale proceeds and therefore a copy of the settlement statements and any associated statements is also requested.

65. Mr Kilmurray pursued the issue in correspondence, both with Stephen and Clayton Utz, who were then the solicitors for Stephen. In a letter to Clayton Utz dated 11 December 2007, Mr Kilmurray pointed out Stephen’s obligations under cl 6.2 of the Principal Deed, which was the term that required Stephen to support Adelaide’s lifestyle expenses. Mr Kilmurray repeated his request in a letter to Clayton Utz dated 31 March 2008. Clayton Utz sought instructions from Stephen, but apparently received none. Stephen did not make any response to the requests made by or on behalf of Adelaide.

66. Mr Morrison prepared annual financial statements for the Partnership, which reflected the view of Stephen and Mr Morrison, that Stephen was the beneficial owner of all of the assets of the Partnership, and that he was entitled to deal with the proceeds from the sale of the Hotel for his own benefit, to the exclusion of Adelaide, save in respect of his continuing obligation under the Principal Deed to provide for Adelaide’s lifestyle expenses.

67. Unlike the procedure before the Hotel was sold, when Stephen signed the Partnership accounts on behalf of Adelaide, by exercising his power of attorney, for a number of years after the sale, Stephen and Mr Morrison met with Adelaide for the purpose of explaining the Partnership’s accounts, and arranging for Adelaide to sign those accounts personally. Adelaide did so, notwithstanding that she apparently continued to ask for her share of the sale proceeds of the Hotel.

68. Stephen continued to pay, and Adelaide continued to accept, the payments that had been described in the Principal Deed as “lifestyle” payments. As will be seen below, some of these payments were substantial, and it appears that payments were made from time to time on the basis that Stephen was relatively liberal in meeting requests made to him by Adelaide.

69. This state of affairs continued until Adelaide’s death on 8 February 2012.

70. Apparently upset by Stephen’s refusal of her request for a share in the proceeds of sale of the Hotel, Adelaide executed a new will on 17 March 2008, which relevantly, revoked the will that she executed as required by the Principal Deed, and made a gift of her interest in the Hotel, by cl 3(a), in the following terms:

All sums of money owing to me from the sale of the commercial property known as “The Hurstville Ritz Hotel”… and all interest due and to become due in respect thereof and my interest in all securities, if any, for the same to my daughter KIM FRANCES JAEGER and my son STEPHEN JAMES BOWDEN as shall survive me for 30 days, and if more than one then equally as tenants in common.

71. Adelaide made a further will on 11 December 2008, which made the same gift in cl 3(a) as had the 17 March 2008 will.

72. On 5 February 2010, Bowden Company Pty Ltd (the ninth defendant) purchased the Cabramatta Inn Hotel for a price of $22,799,658.

73. Louise commenced proceedings in the Family Court of Australia for a property settlement and maintenance. She filed an amended initiating application on 20 September 2010. Stephen and Adelaide were joined as respondents.

74. On 5 August 2010, the solicitors representing Stephen in the Family Court proceedings wrote a letter to Louise’s solicitors in which they said: “You will note from the information below that our client’s mother, Adelaide Emily Bowden… has a significant interest in the overall asset pool”. The letter contained the following statement, in par 12.6:

In October 2007, the Ritz Hotel was sold for $52 million… Our client held 75% interest in the goodwill of the Ritz Hotel with Mrs Bowden Snr holding the remaining 25%. The Husband and Mrs Bowden Snr held an equal 50% interest in the Freehold. After payment of sale expenses, liabilities and Capital Gains Tax, Mrs Bowden Snr’s net entitlement from the sale proceeds of the freehold and leasehold were approximately $11,943,881.

75. Stephen and Adelaide both filed affidavits in opposition to Louise’s application. Stephen swore an affidavit on 24 September 2010. In par 113, he said:

I do not know how much is owed to my mother from the asset pool however which may be in the vicinity of between $4,000,000 to $12,000,000. I have engaged Walker Wayland Chartered Accountants to independently calculate my mother’s entitlement from the asset pool…

76. In pars 13 to 16 of her 28 September 2010 affidavit, Adelaide noted the statement made in Stephen’s solicitors’ letter that has been extracted above; agreed that she was entitled to 50% of the proceeds of sale of the Freehold, and 25% of the proceeds of sale of the Goodwill; and said that she had not at that stage quantified her entitlement. She claimed to be entitled to a trust over any assets acquired with her share of the proceeds of sale of the Hotel.

77. On 7 February 2011, Hurstville Property Investments Pty Ltd (the eighth defendant), being a company owned and controlled by Stephen and Louise, repurchased the Hotel for $32,627,187.

The issues raised by the pleadings

78. It will now be appropriate to analyse the issues raised by the parties’ pleadings. I will do so in perhaps more detail than might otherwise be thought necessary. That is because the issues are complex, and the structure of the pleadings – in particular the defences – does not assist in making the issues transparent. Further, there have been a significant number of amendments, some formal, and some informal. Some matters alleged by parties have also been abandoned during the hearing or submissions. I have made orders for the separate determination of some questions. As I have said above, it appears to me that the line dividing the separate questions to be determined, from those that have been deferred, has become blurred. It has therefore been necessary for me to pay particular attention to the way in which the parties have pleaded their cases.

Statement of claim

79. Adelaide seeks the following relief in par 1 of the relief claimed:

An order that the Defendants account to the Plaintiff in her capacity as executor of the estate of the late Adelaide Bowden for the profits of the late Adelaide Bowden’s share of the Partnership assets properly payable to her between the date of the execution (sic) Deeds in 2003 and the date of her death on 8 February 2012.

80. At the hearing, Adelaide abandoned her claim for an account for the period between the execution of the Deeds in 2003 and the date of completion of the sale of the Hotel on 29 October 2007, and confined her claim to the period between that date of sale of the Hotel and the date of her death. The reason given for that abandonment was that cl 6.5 of the Principal Deed had the effect that Adelaide relinquished her entitlement to distributions from the Trust.

81. In pars 2 and 3 of her claim for relief, Adelaide seeks orders charging the assets of the defendants with the amount found to be owing to her following the accounting process, or alternatively, declarations that the defendants hold their assets on trust for Adelaide, insofar as those assets were directly or indirectly acquired with assets or profits properly belonging to Adelaide.

82. Adelaide seeks, in par 4, an order for all necessary accounts and enquiries to enable her to trace and recover the assets and profits referred to in the preceding paragraphs.

83. Alternatively, by par 5, Adelaide seeks an order that the defendants pay her equitable compensation.

84. Finally, Adelaide seeks interest and costs.

85. The statement of claim does not at this stage elaborate how the charges or trusts should be applied in relation to individual assets owned by the defendants, and I assume that Adelaide proposes that such an elaboration will be deferred until after she has made her election to seek an account of profits, or alternatively equitable compensation, and after the further accounts and enquiries have been carried out, in order to enable her to plead her claim specifically.

86. Adelaide pleads the duties owed by Stephen to her in par 17 of the statement of claim, in the following terms:

By reason of each and either of:

(a)   the Partnership between [Adelaide] and [Stephen]; and

(b)   the terms of the Deed pleaded in paragraphs 14 and 16 above,

[Stephen] owed a duty to [Adelaide] at all material times between 2003 and the death of [Adelaide] on 8 February 2012:

(i)   to account to [Adelaide] for any profits made by the Partnership, including the profits of the Hotel business until its sale on 29 October 2007, and thereafter the profits of any other subsequently purchased business, as well as the profits from the sale of the Hotel; and

(ii)   not to make an unauthorised profit, from his position of partner in the Partnership, or from his position of managing partner of the Partnership.

87. I should note that the terms of “the Deed” pleaded in pars 14 and 16 are said to be terms of the Deed of Assignment, whereas in fact the terms pleaded in par 16 are terms of the Principal Deed. Nothing turns on this, as the proceedings were conducted on the basis that, assuming their validity, all of the Deeds took effect in accordance with their terms.

88. Paragraph 16(c) pleads the terms of cl 2.1 of the Principal Deed, which I consider to be crucial to the determination of the issues in this case. That provision has the effect that, in the event that the Hotel was sold, and the proceeds of sale invested in a replacement investment, the provisions of cl 1 of the Principal Deed, by which Stephen was appointed managing partner, would apply to the replacement investment mutatis mutandis.

89. As I have noted above, Adelaide now only seeks to enforce a duty that she alleges was owed to her by Stephen for the period from 29 October 2007.

90. Looking at par 17(b)(i), Adelaide alleges that Stephen was obliged to account to her for any profits made by the Partnership after 29 October 2007, and the profits of any subsequently purchased business, as well as the profits from the sale of the Hotel. As will be seen, the Partnership did not make any significant profits after the sale of the Hotel. The Partnership made a substantial capital profit from the sale of the Hotel. The Trust earned significant income from on-lending part of the money loaned by the Partnership to the Trust. However, because the Partnership’s loan to the Trust was interest-free, the Partnership did not make profits “from any subsequently purchased business”.

91. At this stage, I merely flag that it is not clear to me that par 17(b)(i) properly captures the events that followed the sale of the Hotel. The Partnership did not make any profits from its business activity after that date. It is not a matter of accounting for such profits, but whether Stephen had a duty to the Partnership to make profits that it did not make. Further, the reference to “the profits from the sale of the Hotel” appears to be a reference to the capital profit that occurred on the sale. The statement of claim does not appear to deal with the significance of the provision in Adelaide’s 2003 will whereby her interest in the capital of the Hotel was left to Stephen.

92. Adelaide alleges, in pars 18 and 19, that Stephen and Louise knew the matters that gave rise to the duty to account, and that the corporate defendants did also, as Stephen, or alternatively Stephen and Louise, was the directing mind and will of those defendants. The statement of claim does not specify exactly, what it was that Stephen and Louise knew.

93. There is an allegation in par 20 concerning the period up to 29 October 2007. In essence, Adelaide alleges that Stephen caused the Trustee to operate and receive the profits of the Hotel Business rather than the Partnership, and that Stephen and the Trustee have breached their duty to account to Adelaide in respect of her full entitlements to the profits of the Hotel business. As Adelaide abandoned the allegation in sub-par (a), concerning Stephen’s causing the Trustee to receive the profits of the Hotel Business, it is not clear that the remaining sub-paragraphs have any continued operation, as they appear to be dependent upon sub-par (a).

94. Paragraphs 21 to 24 deal with the sale of the Hotel on 29 October 2007. Paragraph 22 contains the allegation of the duty owed by Stephen to Adelaide. Kim advised during the hearing that the paragraph should be read as if the words underlined had been added to the original paragraph.

By reason of the matters pleaded in paragraphs 12 to 17 above, [Stephen] has a duty to account to [Adelaide] for the profits earned on her capital account from 2007 to date of the said sale in proportion to her 25% interest in the Partnership assets including the goodwill of the Hotel business and licence and her 50% of the freehold (that is, in the sum of approximately in the order of $11,943,881 plus interest).

95. By adding the interpolated words, Adelaide appears to be confining her claim to the profits that should have been earned on her share of the capital of the Partnership between 29 October 2007 and the date of her death.

96. Adelaide alleges in par 23 that Stephen has failed to account to Adelaide for her full entitlement to the profits.

97. In par 24, Adelaide alleges that Stephen and Louise caused the eighth defendant, Hurstville Property Investments Pty Ltd, to repurchase the Hotel using funds from the Partnership’s sale of the Hotel that were paid to it by the Trustee.

98. Paragraph 25 pleads the liability of the defendants, either as accounting parties, or parties who were knowingly in receipt of assets and funds that are traceable to a breach of fiduciary duty by Stephen. Adelaide no longer pursues the allegation in par 25(b), which concerns the period between 1 July 2003 and 29 October 2007.

99. Paragraphs 26 to 29 allege, in summary, that on or about 5 February 2010, Stephen and Louise caused the ninth defendant, Bowden Company Pty Ltd, in its capacity as trustee of the Cabramatta Bare Trust, to purchase the Cabramatta Inn Hotel for $22,800,000, using $7,720,000 of funds known by Stephen, Louise and the ninth defendant to have ultimately been borrowed from the Partnership.

100. Finally, in par 29, Adelaide alleges that the defendants are liable to account to her. Her particulars claim that her total entitlements were in the order of $11,002,300 as at 8 February 2012, less partial repayments of $5,255,133, giving an approximate entitlement of $5,747,176 plus interest. These amounts are now overstated, as Adelaide has abandoned her claim for the period between 20 to December 2003 and 28 October 2007.

101. As I understand the statement of claim, Adelaide’s claim that Stephen is obliged to account to her is based upon the fact of the Partnership being in existence after the sale of the Hotel, and Stephen continuing to be the managing partner. That is, Stephen’s obligation to conduct the business of the Partnership in a manner that would have caused additional profits to be distributable to her was an incidence of the existence of the Partnership. It thus arose automatically, and was reinforced by the terms of the Principal Deed, under which Stephen was the sole managing partner. As I have noted above, Adelaide pleaded the effect of cl 2.1 of the Principal Deed, but appears to assert that the only consequence of cl 1 continuing to apply, mutatis mutandis, was that Stephen continued to be managing partner.

Stephen’s second further amended defence

102. During the hearing, the operative defence filed by Stephen was his second further amended defence. In final submissions, a document described as Stephen’s third further amended defence was handed to the court, in order to illustrate aspects of his defence that Stephen had abandoned, by means of amendments to the second further amended defence.

103. First, Stephen responded, in par 3 of his second further amended defence, to the allegation in par 13 of the statement of claim, that the relevant parties entered into the Deeds, by alleging (primarily in par 3(1)(b)(iv)) that, based upon the proper construction of identified provisions in the Deeds and the Management Agreement, Adelaide “agreed to relinquish her beneficial interest in and any rights attaching to the remaining Adelaide Interests in favour of” Stephen, “in lieu of which”, Stephen agreed to transfer his interest in the Gold Coast unit to Adelaide unencumbered, to pay her lifestyle costs, and to indemnify her in relation to all debts of the Hotel business.

104. Thus, Stephen claimed that the combined effect of the relevant provisions of the Deeds and the Management Agreement was that, upon completion of the transaction, Adelaide only retained the legal title to her remaining interest in the Partnership and the Hotel, and that Stephen had the entire beneficial interest.

102. Secondly, Stephen responded, in par 4, to the allegation in par 14 of the statement of claim that Adelaide assigned to him by the Deed of Assignment, for the consideration of $3 million, one half of her interest (namely 25%) in the Partnership, but not her 50% interest in the Freehold, by alleging that Stephen and Adelaide entered into an agreement on 1 July 2003. Stephen gave particulars, being the conversation that occurred at the meeting on 1 July 2003, and the July Minutes. The most significant term of what Stephen described as the “July Agreement” is that, during her lifetime, Adelaide would hold her remaining interest in the Hotel on trust for Stephen: see par 4(d)(i)(D). Stephen alleged that the July Agreement was a final agreement, to which the parties “intended to be bound immediately while agreeing to have the terms restated in writing which was to be fuller or more precise but not different in effect”: see par 4(d)(i)(D)(aa). Alternatively, Stephen said that the parties to the July Agreement “had agreed completely upon all of the terms of their agreement and intended no departure from or addition to those terms, but made performance of those terms conditional upon the execution of formal documents”: see par 4(d)(i)(D)(bb). In either event, Stephen said that the whole of the July Agreement was made on or about 1 July 2003, and “to the extent of any inconsistency between the oral terms and any subsequent written part, the oral terms take precedence”: see par 4(d)(i)(D)(cc).

103. Put in simple terms, Stephen claimed that a final agreement was made on 1 July 2003, a term of which was that Adelaide would hold her remaining interest in the Hotel on trust for Stephen, and the terms of that agreement prevailed over any inconsistent terms contained in the Deeds and the Management Agreement.

104. Stephen also responded to the allegation in par 14 of the statement of claim, by claiming an entitlement to rectification of the Deeds, based upon “the premises” referred to in par 4(d)(i)(D)(ee).

105. The amendments to his defence contained in the document called third further amended defence of the first defendant involve, in essence, Stephen abandoning (a) his claim that either the Deeds or the July Agreement had the effect that Adelaide would hold her remaining legal interest in the Partnership and the Hotel Assets on trust for Stephen; and (b) his claim that, to the extent that the Deeds do not have that effect, they should be rectified.

106. The effect of the various amendments to the second further defence, relating to the manner in which Adelaide would continue to hold her remaining interest in the Partnership and the Hotel Assets, was that, although Adelaide did not agree to hold that interest on trust for Stephen, she did “relinquish” any rights attaching to her remaining interests in favour of Stephen (pars 3(b)(iv) and 4(d)(dd)(1)).

107. This amendment gives rise to a question about the legal effect of Adelaide continuing to have the beneficial ownership of her remaining interest in the Partnership and the Hotel Assets, in circumstances where she has relinquished any rights attaching to that interest. That is a question that will require consideration below.

108. Stephen further responded to the allegation, in par 14 of the statement of claim, by alleging, in par 4(d)(ii)(A) to (F), that Adelaide made representations in the period April to 1 July 2003 (called the “Adelaide Representations”), and by alleging, in par 4(d)(ii)(G) to (I), that the Adelaide Representations led to “a common understanding and, or in the alternative, an agreed assumption” (called the “Common Understanding and Assumption”) on a number of matters.

109. Summarising those matters, Stephen said that there was a Common Understanding and Assumption that Adelaide had relinquished her beneficial interest in her remaining interest in the Hotel, and would hold it on trust for Stephen, and that Stephen would be free to distribute any income from the Trust or the Hotel business, without any obligation to account to Adelaide in respect of that distribution.

110. Stephen then said that the Deeds do not reflect the terms of the Common Understanding and Assumption: see par 4(d)(ii)(I)(aa).

111. This allegation leads to another claim that the Deeds should be rectified. That claim has also now been deleted.

112. A second consequence of the Common Understanding and Assumption alleged was that Adelaide is estopped from asserting, in summary, that any agreement reached is inconsistent with the Common Understanding and Assumption; Adelaide had any entitlement to any profits of the Hotel business or the Trust; or that she had not relinquished any beneficial interest in her remaining interest in the Hotel: see par 4(d)(v).

113. These allegations appear to distil into the proposition that Adelaide is prevented by a conventional estoppel from asserting that the Deeds gave her any continuing rights to receive any benefits from the retained interest in the Hotel.

114. In the document called third further amended defence, Stephen has deleted the allegations that supported his claim that Adelaide is estopped from asserting that she retained the beneficial ownership of her remaining interest after the Deeds were entered into. Stephen maintains, however, his claim that she is estopped from (a) asserting that any agreement was inconsistent with the Common Understanding and Assumption; (b) asserting that she had any entitlement to profits or distributions with respect to any sale of the Hotel, or that Stephen had any duty to account in relation thereto; and (c) denying that she had “relinquished any beneficial interest in and rights attaching to”, her remaining interest in favour of Stephen: see par 4(d)(v)(B). (The court can but wonder what the legal significance could be of Adelaide’s having retained her beneficial ownership of her remaining interest, but having relinquished that beneficial interest in and the rights attaching to it to Stephen).

115. Stephen repeats this theme in response to a number of other subsequent paragraphs of the statement of claim.

116. In par 10(b), Stephen admits that monies from the sale of the Hotel were paid to the Trustee, but says that such payments were made from 23 to 29 October 2007. In final submissions, Stephen accepted that the monies were paid to the Trustee on the same day that they were received by the Partnership.

117. In par 11, Stephen alleges that Adelaide did not at any time demand any account of any profits derived from the sale of the Hotel, and that she thereby waived any entitlement to an account. As has been noted above in the outline of the primary facts, that claim is clearly false, as Adelaide made many claims to be given her share, and her solicitor on at least one occasion appears to have demanded an account on her behalf.

118. Stephen admits, in par 16, that the ninth defendant purchased the Cabramatta Inn Hotel on about 5 February 2010 for the sum of $22,800,000, with funds derived in part from the sale of the Hotel.

119. In par 18, Stephen pleads various terms of the Management Agreement and the Principal Deed whereby he was given authority to manage both the Partnership and the Freehold and other aspects of the Hotel business (and, in particular, cl 2.1 of the Principal Deed, which provided that the provisions of cl 1 of the Principal Deed were to apply mutatis mutandis to any replacement investment, if the Hotel was sold). He says that he carried out his duties as managing partner in accordance with the covenants contained in the Principal Deed and the Management Agreement, both in respect of the Hotel and the Cabramatta Inn Hotel.

120. This aspect of Stephen’s defence involves a claim that, in causing the remaining proceeds of the sale of the Hotel to be lent to the Trust on a non-interest bearing basis, and then causing the Trust and the Partnership to apply that money in the manner that I will set out below, when considering the annual accounts of the Partnership and the Trust, Stephen was acting in accordance with the Deeds and the Management Agreement mutatis mutandis to the way those documents operated before the sale of the Hotel.

121. This allegation suggests that Stephen takes the stance that both the Hotel, after its repurchase, and the Cabramatta Inn Hotel, were replacement investments under cl 2.1 of the Principal Deed.

122. Stephen then says, in par 18(d), that between 1 July 2003 and the death of Adelaide, he complied with his obligations, and in particular distributed to her from the profits of the Hotel business, and distributions from the Trust, between 14 October 2003 and 31 March 2012, amounts totalling $6,714,228.87, together with a superannuation payment of $179,946. Particulars of these amounts are set out in the schedule to the defence.

123. Finally, Stephen pleads, in pars 19 to 20AA, a claim based upon Adelaide’s failure to comply with the covenants in the Principal Deed, concerning her promise to leave to Stephen in her will, her remaining interest in the Hotel, or any replacement investment. It will be convenient to deal with this claim separately below.

Louise’s third further amended defence

127. Louise filed a third further amended defence at the close of the hearing.

128. Louise claims that, from 30 December 2003, Adelaide ceased to act as a director of any of the Hotel Companies and the Trustee, and denies that Adelaide was a director from that time, and says that Adelaide held the issued shares registered in her name in trust for Stephen: see pars 2 to 8.

129. Louise then claims, in par 12(c)(i), that Adelaide held her equitable interest in the Partnership, the Hotel business, the Freehold and the Hotel Companies not conveyed by the Deed of Assignment, on a constructive trust for Stephen. The constructive trust arose “after” Stephen caused the trust to make the payments necessary to purchase the motel for Kim and Peter; Adelaide made her will dated 13 November 2013; Stephen conveyed his interest in the Gold Coast unit to Adelaide, and versions of the executed Deeds and the Management Agreement were exchanged.

130. Alternatively, Louise alleges, in par 12(c)(ii), that Adelaide is estopped from denying that she had transferred to Stephen her equitable interest in the Partnership, the Hotel business, the Freehold and the Hotel Companies following the events referred to in the preceding paragraph.

131. Louise pleads, in par 13, that different versions of the Principal Deed were executed by Adelaide and Kim on the one hand, and by Stephen on the other. Louise also admits that a version of the Deed of Assignment was executed by Stephen. Louise does not admit that each of the Deeds was executed by each of the parties on the dates alleged, and in the form alleged. The effect of this non-admission is not entirely clear, but it is clear that at the hearing Louise alleged that the Principal Deed and the Deed of Assignment were invalid, and of no force or effect. In the case of the Principal Deed Louise alleged that the document executed by Adelaide and Kim contained different terms to the document executed by Stephen. Louise claimed that the Deed of Assignment was a fabrication being part of a document signed by Adelaide, and part of a document signed by Stephen.

132. Louise says, in par 13(a)(c), that the version of the Divorce Deed that she executed is of no legal effect, as it is contrary to the Family Law Act 1975 (Cth). Louise does not appear to have made anything of this allegation in her final submissions.

133. Louise alleges, in par 13(d), that Adelaide, Stephen and Kim entered into an agreement in or about July 2003. The essence of the agreement was that Stephen would acquire the whole of Adelaide’s interest in the Hotel, the Partnership, the Hotel Companies and the Hotel Freehold, as contemplated by the terms of the July Agreement, the primary covenants contained in the Principal Deed and the Management Agreement. Louise says this was done, “[s]o as to avoid excessive stamp duty and the triggering of capital gains tax liability for which [Adelaide] would be liable, [Adelaide] would transfer her interest… in the following way [and then listed the terms]: see par 13(d)(i)(2). Louise continues in par 13(d)(i)(2)(i):

The parties made a final agreement on or about 1 July 2003 that made performance of one or more of the terms conditional on execution of formal documents, and although formal documents were executed, they did not purport to contain the whole of the agreement or replace the earlier agreement.

134. Louise says that the July Agreement was evidenced by writing (listed in par 13(d)(ii)); conversations between Adelaide, Stephen and Kim on about 1 and 3 July 2003 (listed in par 13(d)(iii)); and conduct (listed in par 13(d)(iv)). It is to be noted that Louise includes in the conduct, steps taken by Stephen in relation to the purchase of the motel for Kim and Peter, which included paying for the motel in the period up to 22 December 2003.

135. Alternatively, to the allegation that the parties entered into the July Agreement, Louise alleges, in par 13(e), that Adelaide, Stephen and Kim entered into an agreement on 30 December 2003 containing the same terms as the July Agreement. Louise provides the same particulars as for par 13(d).

136. As a further alternative, Louise alleges, in par 13(f), that on 30 December 2003, Adelaide, Louise (this may have been intended to be a reference to Stephen) and Kim made a collateral agreement to that contained in the Deed of Assignment, whereby Adelaide transferred to Stephen her equitable interest in the Hotel Business, the Partnership, including the Freehold, and the shares in the Hotel Companies. Again the same particulars are provided as for par 13(d).

137. Next, in pars 13(g) and (h), Louise alleges a conventional estoppel case in similar terms to that alleged by Stephen. The crucial representations allegedly made by Adelaide are pleaded in par 13(g)(iv), (v) and (vi) as follows:

[Adelaide] held only a legal interest in the Hotel Business including the goodwill and the licences, the Partnership, the Freehold Land, and shares in the Hotel Companies;

[Adelaide] held the entirety of her interest in the Hotel Business including the goodwill and the licences, the Partnership, the Freehold Land and the shares in the Hotel Companies beneficially on behalf of [Stephen];

[Stephen] was under no obligation to account to [Adelaide] or [Kim] for the profits or the capital derived from the Hotel Business, the Partnership, the Hotel Freehold, or the shares in the Hotel Companies…

138. In substance, Louise alleges, in par 13(h)(x)(2), that Adelaide is estopped from denying that, at all times from 30 December 2003, Adelaide held on behalf of Stephen the whole equitable interest in her remaining share of the Hotel and related assets, or asserting that the agreement reached was inconsistent with the Common Understanding and Assumption.

139. Louise pleads, in par 17, that Stephen’s duty to account to Adelaide was limited to satisfying the obligation contained in cl 6.1 of the Principal Deed, and that the obligation to account was satisfied by Stephen making the payments pleaded by Stephen in par 18 of his defence.

140. Louise admits that the Hotel was repurchased with part of the net proceeds of its sale (par 24), but does not admit that the Cabramatta Inn Hotel was purchased with part of those monies (par 26).

141. In par 30, Louise pleads a number of matters in answer to the whole of Adelaide’s claim, which I will summarise as follows. First, Louise denies that Stephen has failed to account to Adelaide, and says in par 30(b):

that to the extent [Stephen] was required to account to [Adelaide] alleged he did so account.

142. It is not entirely clear, but this appears to be an allegation that there have been settled accounts as between Adelaide and Stephen.

143. Secondly, Louise claims that, by reason of the fact that Adelaide accepted the benefits provided to her by Stephen in purported compliance with his obligations under the Principal Deed, and the fact that, in breach of her covenant to make a will leaving her remaining interest in the Hotel, or any replacement investment to Stephen, she revoked that will and made a new will that was inconsistent with her covenants, she “comes to the Court with unclean hands and should be refused the relief she claimed”: par 30(f).

144. As was the case with Stephen’s defence, I will defer consideration of Louise’s defence in pars 30 to 33 based upon Adelaide’s obligation to leave her remaining interest in the Hotel to Stephen.

145. By her third amendment to her defence, Louise added a further par 34. In that paragraph, she claims that, if any versions of the Deeds are valid and enforceable, the versions executed by Stephen and Louise take effect, and not the different versions executed by the other parties.

146. She also claims that the effect of the Deeds that were valid and the Management Agreement was that Adelaide held her remaining interest “in name only” and on trust for Stephen.

Defences of the remaining defendants

147. The remaining, corporate defendants each put on short form defences in which they admit, do not admit, or deny, relevant paragraphs of the statement of claim alleging claims against them. The corporate defendants do not admit that Stephen and Louise were their directing minds and wills, or that they knew recipients of any relevant monies.

Reply to Stephen’s second further amended defence

148. Adelaide’s reply is a lengthy document that, with respect, contains a number of responses that are counter arguments, rather than necessary allegations of fact in reply. I will restrict this summary to matters raised in the reply that, in my view, were properly included in that pleading, and I will defer consideration of the matters relevant to the dispute concerning Adelaide’s revocation of the 2003 will, and her making of an inconsistent will.

149. First, in par 1, Adelaide says that Stephen is estopped from propounding the construction of the Deeds set out in his defence, or contending that there was any Common Understanding and Assumption, by reason of: (a) recitals included in each of the Deeds; (b) cl 6.5 of the Deed of Assignment, which is what is commonly termed an ‘entire agreement’ clause; and (c) a recital and terms contained in the Management Agreement, that in various ways expressly provide that Adelaide continued to hold a beneficial interest in the Hotel, after the execution of the Deeds and Management Agreement.

150. Secondly, Adelaide says that Stephen is bound by his conduct in accepting the versions of the Deeds executed by Adelaide, Kim and others; so that those versions, rather than alternative versions executed by Stephen, are the Deeds that take effect. Stephen conceded this point during the hearing (but Louise did not).

151. Thirdly, the obligations on Stephen, in cll 6.1 and 6.2 of the Principal Deed, in no way derogated from Adelaide’s rights to receive an accounting in respect of her remaining interest in the Hotel (par 1B).

152. If the July Agreement was binding, it was discharged and was of no further effect upon the execution of the Deeds (par 1DA).

153. If there was any Common Understanding and Assumption, as alleged by Stephen, any convention that arose in consequence was terminated by Adelaide in about 6 November 2007, when she demanded an account of the profits of the sale of the Hotel (par 1E).

154. Adelaide demanded an account following the sale of the Hotel, in letters by her solicitor to Stephen dated 6 November 2007 and 31 March 2008, and by her response filed in the Family Court of Australia proceedings between Stephen and Louise (par 1F).

Amended reply to Louise’s second further amended defence

155. Adelaide replied to Louise’s defence by making the same allegations as she did in her reply to Stephen’s defence, concerning Stephen being estopped from asserting the construction of the Deeds, and the Common Understanding and Assumption (par 1A).

156. In response to Louise’s claim that she was not at the time of receipt of any funds on notice that their receipt was a breach of fiduciary duty, Adelaide pleads that Louise was put on notice by a letter from Stephen’s solicitors to her solicitor dated 5 August 2010; Stephen’s affidavit in the family law proceedings sworn 23 September 2010; and Adelaide’s affidavit in the same proceedings sworn 28 September 2010 (par 1B).

All sums of money owing to me from the sale of the commercial property known as “The Hurstville Ritz Hotel”… and all interest due and to become due in respect thereof and my interest in all securities, if any, for the same to my daughter KIM FRANCES JAEGER and my son STEPHEN JAMES ABOUT as shall survive me for 30 days, and if more than one then equally as tenants in common.

679. The will for which probate was granted did not contain the terms required by the Principal Deed, in that it did not leave the whole of Adelaide’s remaining interest in any replacement investment following the sale of the Hotel to Stephen.

680. Further, the new wills did not contain the provision in the 2003 Will whereby Adelaide left her interest in the shares in the Hotel Companies to Stephen, so that under the later wills those assets fell into residue

681. Initially, Stephen sought a declaration that Kim, as Adelaide’s executor, held Adelaide’s interest in the shares in the Hotel Companies on trust for Stephen, and an order that those shares be transmitted to Stephen.

682. The declaration sought was in respect of the companies listed in the schedule, which included the four Hotel Companies listed in the definition of that term in cl 8.8 of the Principal Deed (set out above at par 473), and also an additional company called Bowden Property Investments Pty Ltd.

683. In Stephen’s third further amended defence, he pleaded in par 20AA, in effect, that by reason of Adelaide’s breach of her will covenants, Kim held Adelaide’s shares in the Hotel Companies, Adelaide’s interest in the Partnership, “including but not limited to all choses in action derived from her interest in the Partnership, and all receivables, including loans to the Bowden Family Trust and the Bowden Superannuation Investment Trust”, and Adelaide’s interest in any replacement investment, on trust for Stephen.

684. Stephen informed the court during final oral submissions that it had been an inadvertent error for a declaration to the effect of par 20AA of the defence to have been omitted from his amended first cross claim, and the case proceeded upon the basis that he had sought that relief in his cross claim.

685. Initially, as I understand it, four primary issues arose between Kim and Stephen concerning the breach by Adelaide of her will covenants. Two of those issues have fallen away.

Breach of covenant to leave interest in replacement investment to Stephen

686. First, Kim has accepted that it will be appropriate for the court to make a declaration that she holds Adelaide’s interests in the Hotel Companies, as well as her interest in the Partners’ Funds of the Partnership (after all necessary and proper adjustments have been made to Adelaide’s Partners’ Funds) on trust for Stephen. Kim’s position is that she will not contest the proper implementation of Adelaide’s will covenants. Her acceptance of that course is conditional, however, on Stephen first complying with his obligations to provide a proper partnership accounting to Adelaide, including the making of all necessary and proper adjustments to Adelaide’s Partners’ Funds, and also that he account to Adelaide’s estate for all profits made in breach of his fiduciary duty to Adelaide, or alternatively that he pay to the estate all equitable compensation for which he may be held liable to Adelaide up until her death, in either case with all appropriate interest to the date of payment.

687. Consequently, the primary issue relating to the breach by Adelaide of her will covenants is no longer contested.

688. In my view, Kim’s acceptance that she holds these assets on trust for Stephen (which I understand was not in issue during the trial) undermines Louise’s argument that Kim has come to court with unclean hands, because of Adelaide’s breach of her will covenant.

689. It is not necessary for me to consider the principles that are applicable to the equitable defence of unclean hands. It is an obvious proposition that Adelaide was obliged, by cl 2.2 of the Principal Deed, to leave her interest in any replacement asset to Stephen, and that the making of her 2008 wills was a breach of that covenant. It seems clear that Adelaide’s decision to revoke her 2003 Will, and make the 2008 wills, was a response to Stephen’s failure to respond to her demands after the sale of the Hotel. It appears that Adelaide’s understanding of her entitlements was misguided. If the defendants’ claims in these proceedings succeed, then Kim’s case will fail. However, if Kim’s case succeeds on any basis, so that Adelaide was entitled to receive money as a result of Stephen’s conduct following the sale of the Hotel, then it will follow that Stephen was also in breach of his obligations to Adelaide. In that situation, Stephen (and thus Louise) could not say that Adelaide’s breach of the will covenant had the result that she had unclean hands, so that she could not enforce Stephen’s obligations to her arising out of the Partnership, and the Deeds and the Management Agreement.

Shares in Bowden Property Investments Pty Ltd

690. Secondly, as I understand it, Stephen now accepts (as was indicated in final oral submissions) that Bowden Property Investments Pty Ltd is not a Hotel Company, as it was not included in the relevant definition in the Principal Deed, and as it was in any event incorporated after the date of the Deeds. Stephen has made no claim that the shares in the company were assets of the Partnership. That part of Stephen’s claim for relief, in which he seeks a declaration that Kim holds Adelaide’s shares in Bowden Property Investments Pty Ltd on trust for Stephen, must therefore be dismissed.

Entitlement to proceeds of present proceedings

691. Two issues remain in contention. The first arises out of that part of the wording in par 20AA of Stephen’s third further amended defence which, in effect, alleges that, if at Adelaide’s death, Adelaide was entitled to a chose in action, being a claim for breach by Stephen of his fiduciary duties as a partner to Adelaide, then the fruits of that claim were an interest that Adelaide had in the Partnership, so that Kim would also hold the benefit of that chose in action on trust for Stephen.

692. I have dealt with the nature of Adelaide’s rights, at the time of her death, to an account of profits, or alternatively equitable compensation, from Stephen as a result of any breach by him of any fiduciary duties that he owed to Adelaide, in the context of my consideration of Stephen’s defence that Adelaide’s estate cannot be entitled to an account from Stephen, because Kim would hold all fruits of that accounting on trust for Stephen, whatever the fruits might be. See pars 630 – 647 above. (This was a different aspect of the defence pleaded in par 20AA of the defence).

693. I held that the defence failed, because any sums that Stephen was obliged to pay to Adelaide, whether by way of an account or equitable compensation, were amounts owed to Adelaide in her personal capacity, and could not be, without her authority, part of Adelaide’s “interest in the Partnership” within the meaning of that expression in cl 3.1 of the Principal Deed.

694. Stephen’s claim that he is entitled to a declaration that Kim holds those monies on trust for him must also fail, for the same reasons.

Construction of cl 3(a) of will admitted to probate

695. The last issue that remains involves the proper construction of cl 3(a) of the will in respect of which probate was granted to Kim. Stephen pleads, in par 20A of his third further amended defence, in effect, that, if he is liable to pay monies to the estate of Adelaide on an account, or as equitable compensation, the effect of cl 3(a) is that Kim will hold those monies as to half for herself, in her personal capacity, and as to the other half for Stephen.

696. Kim responded to this claim in par 11 of her reply. First, Kim says that this claim does not properly arise on the matters pleaded in the statement of claim, and would arise, if at all, only in a properly constituted will construction suit. I do not propose to enter in detail into this aspect of the dispute. It was raised in fact in these proceedings, and has been the subject of argument. It is in the interest of the parties, and will ultimately avoid multiplicity of proceedings, if I deal with the substance of the issue. That is what I propose to do. Kim then says that the determination of the issue should be deferred until the time any accounts are taken. I cannot see any benefit in that approach.

697. In substance, Kim’s response is that any and all fruits of these proceedings will fall wholly within the residuary estate, because the bequest in cl 3(a) extends only to:

the interest of [Adelaide] at the date of her death in the proceeds of sale of the [Hotel] and all interest due and to become due in respect thereof, and does not extend in any respect to any of the fruits of these present proceedings, being a claim for an account or other relief against the various defendants of, or in respect of, profits properly payable to [Adelaide] during her lifetime.

698. I take the relevant principle for the proper construction of wills to be as stated by Lord Romer in Perrin v Morgan [1943] AC 399 at 420 as follows:

My Lords, I take it to be a cardinal rule of construction that a will should be so construed as to give effect to the intention of the testator, such intention being gathered from the language of the will read in the light of the circumstances in which the will was made. To understand the language employed the court is entitled, to use a familiar expression, to sit in the testator’s armchair. When seated there, however, the court is not entitled to make a fresh will for the testator merely because it strongly suspects that the testator did not mean what he has plainly said…

699. The so-called armchair principle was expressed by Blackburn J in Allgood v Blake (1873) L R 8 Ex 160 at 162 as follows:

The general rule is that, in construing a will, the court is entitled to put itself in the position of the testator, and to consider all material facts and circumstances known to the testator with reference to which he is to be taken to have used the words in the will, and then to declare what is the intention evidenced by the words used with reference to those facts and circumstances which were, or ought to have been, in the mind of the testator when he used those words… the meaning of words varies according to the circumstances of and concerning which they are used.

700. The words used by Adelaide in cl 3(a) of her 11 December 2008 will literally refer to her interest in all sums of money owing to her from the proceeds of sale of the Hotel, and all interest due in respect of that entitlement, and any securities for the same.

701. The effect of the Principal Deed and the Management Agreement was that Adelaide was not entitled to demand payment of any part of the proceeds of sale of the Hotel Assets. That result must be implied from her covenant to leave her remaining share in the Hotel Assets to Stephen in her will. It also follows expressly from the provisions that gave Stephen absolute control of the assets during Adelaide’s lifetime.

702. Read in literal terms, Adelaide would not be entitled to receive any sums of money from the sale of the Hotel.

703. However, the question becomes: what effect should be given to these words, so that they have some meaning and effect? Do the words have an operative secondary meaning? As is stated in Principles of Australian Succession Law (2 ed), LexisNexis Butterworths, at [8.8]:

This principle is really part of the so-called ‘armchair principle’… It will be seen, in discussion of the armchair principle, that a court of construction is entitled to take into account all the circumstances surrounding the making of the will and the circumstances actually known to the testator when the will was made. In the light of those circumstances, it may be clear to a court that a testator used the word in a sense other than the usual sense. If so, the secondary meaning will be given to that word…

704. The question becomes whether the words “all sums of money owing to me from the sale of the [Hotel]” can only refer to a share in the sale proceeds, or whether their meaning can extend to all monies owing to Adelaide from the use of her share in the sale proceeds. In my opinion, that question should be answered affirmatively.

705. It is plain that Adelaide believed she was entitled to be paid sums of money from the sale of the Hotel, even though she was not. After Adelaide became aware of the sale of the Hotel, she made a number of requests to Stephen that he pay her share of the proceeds of sale to her, although what she meant by the reference to her share was never made clear.

706. It is clear that Adelaide believed she was owed “sums of money” and that she wished to leave that interest to Stephen and Kim equally.

707. Adelaide was an elderly woman, who was unfamiliar with commercial practice, and was probably unaware at the time she executed her will of what Stephen had done with the net proceeds of sale of the Hotel. Even if she became aware that Stephen had caused the Partnership to lend the whole of the net proceeds of sale to the Trustee, which did not occur until 11 May 2009, when Adelaide signed the partnership accounts for the year ended 30 June 2008. Adelaide’s two 2008 wills were prepared by her solicitor, but the solicitor could not have known any more than Adelaide did about the disbursement of the proceeds of sale, as Adelaide was only shown the 2008 accounts for the Partnership on 11 May 2009.

708. Thus, all Adelaide had to go on, so to speak, was that she knew that the Hotel had been sold; she believed that she was entitled to share in the proceeds of sale; but she was misguided as to the true nature of the rights.

709. In this context the words “All sums of money owing to me” should be construed as being intended to encompass all sums of money to which she was entitled, as a result of the proceeds becoming available from the sale of the Hotel, whatever the basis of that entitlement might be. This construction has the effect that the words “owing to me from the sale” are not restricted to a share of the proceeds of sale. To give the words that narrow meaning would be to give them no effect at all, because Adelaide did not have a right to a share in the proceeds of sale. Giving the words “owing to me from the sale” the wider meaning of all of the money owing to me from the way the proceeds of sale were used, gives those words effect, and in my view accords with the intention that I believe Adelaide had when she made her will.

Simple or compound interest

710. As Kim makes clear in par 12 of the Overview in her final written submissions, she seeks an account of the profits actually made by the defendants, or equitable compensation for profits that ought to have been made by the Partnership. Kim has not yet made an election between these two remedies. She says that, if the court accedes to her application that accounts be taken, three steps will be involved. The first is the reconstruction of the accounts of the Partnership relating to Partners’ Funds, so that they accurately reflect the position of each of the partners. The second step is to identify either the profits in fact generated by the recipients of the Partnership assets, or the profits that ought to have been realised by the Partnership. The third and final step is for interest to be calculated.

711. Kim asks the court – I understand with the acquiescence of the defendants – to determine now whether interest should be assessed on a simple basis, or on the basis of court rates, compounded with yearly rests, notwithstanding that the court will not have carried out steps one and two.

712. Kim submits that interest should be calculated on a compound basis, and the defendants submit that only simple interest should be awarded.

713. I do not feel able at this stage of the proceedings to make a definitive ruling as to the basis upon which interest should be applied, in respect of any breaches that are established against the defendants.

714. Kim has cited a number of authorities to the court, including the relatively recent judgments of Pembroke J in Thomas v SMP (International) Pty Ltd (No 6) [2010] NSWSC 1311, and of Slattery J in Linjing Fang v Xiaodan Sun (No 2) [2014] NSWSC 1194. Both of their Honours cite the following statement of principle by Boehm AM in Southern Cross Commodities Pty Ltd (I liq) v Ewing (1987) 11 ACLR 818 at [843]:

… A trustee may, and normally will, be charged with compound interest with yearly rests not only where he has used the money for his own commercial purposes but also where he has been guilty of fraud or serious misconduct.

715. Kim submitted that the court has a discretion as to whether or not to order that interest be calculated on a compound basis. In Thomas, Pembroke J expressed a preference for the view that, in modern times, the court should always order that interest be calculated on a compound basis, but it was not necessary for him to decide that question. Kim did not submit that compound interest should necessarily be awarded, and this is not an appropriate occasion for me to consider that issue.

716. Southern Cross Commodities suggests that it will be appropriate for the court to award interest on a compound basis in two circumstances, only one of which involves fraud or serious misconduct by the defendant. That is where there is such fraud or serious misconduct, that the court should order that compound interest be paid. However, even where there is no fraud or misconduct, if the defendant has used the money for his or her own commercial purposes, then it may be appropriate to order compound interest.

717. In his final written submissions, Stephen submits, in reliance on the judgment of Heydon JA (as he is Honour then was) in Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 at [299], that Stephen should not be ordered to pay interest on a compound basis, because he had not acted fraudulently, and Equity will not impose a penalty on a defaulting fiduciary, who has not acted fraudulently. In my view, this submission misstates the effect of his Honour’s judgment. It is true that Heydon JA, with the concurrence of Spigelman CJ on this issue, held that Equity would not act to punish a defaulting fiduciary, but that was in the context of a ruling that Equity would not order that a defaulting fiduciary pay compensation on a basis equivalent to the imposition of exemplary damages at common law. His Honour specifically distinguished the situation where Equity might order a defaulting fiduciary to pay interest on the amount of equitable compensation payable, calculated on a compound basis. Heydon JA made the following observations on the subject of when Equity will order a defaulting fiduciary to pay a high rate of interest:

[303] The award of the higher rate of interest in cases of gross misapplication of trust funds thus rests not on ideas of punishment or penalty, but on two other bases. The first was articulated by the Full Federal Court (Burchett, Gummow and O'Loughlin JJ) in Bailey v Namol Pty Ltd (1994) 53 FCR 102 at 112: the award of the higher rate of interest in cases of gross misapplication of trust funds rests "on the footing not that a penalty is imposed but that the defendant is estopped from denying that he received interest at such a rate which he ought to have received". The second is that the award ensures that the fiduciary retains no profit. Thus in Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818 at 848, Acting Master Boehm, sitting in the Supreme Court of South Australia, in awarding compound interest at the higher rate, said: "It is not a punishment. It is not compensation. It is equity's way of ensuring, as far as possible, that no profit should remain in the hands of the trustee from so gross a breach of trust." An appeal was dismissed by the South Australian Full Court: Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 91 FLR 271. That approach was approved by Kearney J in Hagen v Waterhouse (1991) 34 NSWLR 308 at 393, a case which was itself approved by this Court (Gleeson CJ, Handley and Sheller JJA) in Alemite Lubrequip Pty Ltd v Adams (1996) 41 NSWLR 45 at 47. In Wallersteiner v Moir (No 2) [1975] QB 373 at 388 Lord Denning MR combined the two bases when he said, after citing Jones v Foxall, Attorney-General v Alford, Burdick v Garrick and Vyse v Foster:

Those judgments show that in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position - who has misapplied the money and made use of it himself for his own benefit. The Court:

presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in these cases the court directs rests to be made,' ie, compound interest: see Burdick v Garrick, 5 Ch App 233, 242, per Lord Hatherley LC.

The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust: and, if he does, he is liable to account for that profit or interest in lieu thereof.

In addition, in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business. It is plain that the company should be compensated for the loss thereby occasioned to it. Mere replacement of the money - years later - is by no means adequate compensation, especially in days of inflation. The company should be compensated by the award of interest. That was done by Sir William Page Wood V-C (afterwards Lord Hatherley) in one of the leading cases on the subject, Atwool v Merryweather (1867) LR 5 Eq 464n, 468-469. But the question arises: should it be simple interest or compound interest? On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it: cf Armory v Delamirie (1723) 1 Stra 505. It may be that the company would have used it in its own trading operations; or that it would have used it to help its subsidiaries. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, ie compound interest.

At 397 Buckley LJ followed the line of cases under discussion and said:

The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes...

At 398 Buckley LJ said:

In cases of this kind interest is not... given to compensate for loss of profit but in order to ensure as far as possible that the defendant retains no profit for which he ought to account.

At 406 Scarman LJ said, after referring to Burdick v Garrick:

Dr Wallersteiner was at all material times engaged in the business of finance. Through a complex structure of companies he conducted financial operations with a view to profit. The quarter million pounds assistance which he obtained from the two companies in order to finance the acquisition of the shares meant that he was in a position to employ the money or its capital equivalent in those operations. Though the truth is unlikely ever to be fully known, shrouded as it is by the elaborate corporate structure within which Dr Wallersteiner chose to operate, one may safely presume that the use of the money (or the capital it enabled him to acquire) was worth to him the equivalent of compound interest at commercial rates with yearly rests, if not more. I, therefore, agree that he should be ordered to pay compound interest at the rates, and with the rests, proposed by Lord Denning MR and Buckley LJ.

The citation by Lord Denning MR of Jones v Foxall followed by his statement that it was among the judgments which show that in equity "interest is never awarded by way of punishment" negates the reliance by the plaintiff on that case.

[304] All these cases were approved and applied by this Court (Meagher, Sheller and Beazley JJA) in Cureton v Blackshaw Services Pty Ltd [2002] NSWCA 187. In particular, the Court said that compound interest awarded against fiduciaries "is not awarded as a punishment": at [104].

[305] Accordingly the contentions of the plaintiff to the effect that the award of compound interest against fiduciaries reflects a punitive approach which is consistent with the availability of exemplary damages must be rejected. Those contentions rest on a highly selective citation of authority, and cannot survive a reading of all the leading cases.

718. Thus, Equity may order a defaulting fiduciary to pay interest on compensation calculated on a compound basis, but that is not done in order to punish the fiduciary. It is done because of the way the fiduciary has used the money or other assets obtained in breach of duty to earn, or attempt to earn, a profit for himself or herself. The fiduciary may be estopped from denying that he or she has made a profit, or may have made a profit in a compounding manner.

719. The problem in the present case is that the basis upon which particular defendants may be liable to account to Adelaide, or the nature and amount of any equitable compensation that should be paid to her, have not yet been decided.

720. Kim’s case is put on the basis that Stephen, and the other defendants, may be liable to account to Adelaide following a reconstruction of the Partnership’s accounts. She also says that part of the proceeds of sale of the Hotel may have been applied, through the loan made by the Partnership to the Trustee, in making payments to, or for the benefit of the defendants, and for the repurchase of the Hotel and the acquisition of the Cabramatta Inn Hotel.

721. The court is in a position to take a view about the culpability of the conduct of the defendants in relation to errors in the Partnership’s accounts, but even if that leads to the conclusion that, in respect of any breaches in that regard, only simple interest was warranted, that still leaves open the possibility that compound interest should be charged on any misuse of the assets of the Partnership, that involved the defendants using those assets for their own commercial purposes.

722. I have explained above that, on the basis of the present evidence, and the submissions made on behalf of the parties, I have not adequately been able to track the disbursement of the monies loaned by the Partnership to the Trustee. Accordingly, at this stage, I am not in a position to make sufficiently precise findings concerning the application of that part of the Partnership’s assets, which defendants benefited from the receipt or use of those funds, or the culpability of the relevant defendants. Nonetheless, if it be found that some of the defendants have wrongfully used or participated in the use of the Partnership’s funds for their own benefits, the imposition of compound interest may be appropriate.

723. I am in a position, however, to make a number of findings that go some way to determining whether it may only be appropriate to award simple interest on some aspects of Kim’s claim.

724. I am satisfied that all of the defendants have acted honestly. They have not acted fraudulently, and I would not characterise their conduct as involving serious misconduct.

725. The defendants genuinely relied upon the advice given by Mr Morrison. I have explained above that Mr Morrison formed an absolute view that the effect of the 1 July 2003 meeting, the July Minutes, and any subsequent agreements, was that from the date of completion Adelaide only held her remaining interest as to the legal title, and that Stephen was entitled to full beneficial ownership of the Partnership’s assets, and the assets deployed by the Partnership. Mr Morrison acted on that basis; he so advised Stephen and Louise; and he prepared the annual accounts, and the tax returns of all interested parties, on that basis. I am satisfied that Mr Morrison honestly held the view that he formed.

726. I am satisfied that Stephen and Louise, and through them the corporate defendants, genuinely believed that the effect of whatever agreements took effect was that Stephen became beneficially entitled to the whole of Adelaide’s interest in the Partnership and the related assets.

727. Although I have found that that belief was unsound, I am satisfied that the argument to the contrary was genuinely put, and at least reasonably arguable. It required a close analysis of the relevant documents to be satisfied that Adelaide did retain beneficial ownership of the portion of the Partnership and the related assets that she retained.

728. I appreciate that this finding gives little effect to the evidence given by Stephen, at the behest of Mr Morrison, in the Family Court proceedings between himself and Louise. The evidence given by Stephen in those proceedings was to his great discredit, and I regret to have to say that he was so obviously lying when he gave that evidence that I have been able with some confidence – albeit that the result is hardly satisfactory – to satisfy myself that, in the period before the Family Court proceedings, when Stephen and Mr Morrison were dealing with the proceeds of sale of the Hotel, they genuinely believed that they were entitled to do so as if Stephen was the sole beneficial owner.

729. Furthermore, insofar as Adelaide’s case may be based on mistakes made in the preparation of the accounts of the Partnership; including the misallocation of revaluations and capital gains as between Adelaide and Stephen; and the mischarging of expenses against Adelaide’s Partners’ Funds, when those expenses ought to have been charged against Stephen; I am not satisfied that Stephen or any other defendant consciously appreciated the fact of the mistakes, or that it was necessary to revise the annual accounts.

730. I am also able to say that I am satisfied that it would be appropriate in this case to select as the applicable interest rate the rate established by s 100 of the Civil Procedure Act 2005 (NSW), as the appropriate rate to apply. The only open issue is whether that interest rate should be calculated on a simple or compound basis.

Conclusion

731. It will be necessary for the parties to review these reasons for judgment and decide how they wish the court to proceed. For that purpose the parties should confer, and it will be necessary for the court to fix a time for a hearing in which the question of the most appropriate way to proceed to complete this case may be determined.

732. The parties should consider the significance of the observations that I have made above concerning the separate questions and the parties’ decision not to go into evidence on the issues raised by the expert accountants’ reports on the one hand, and the need for submissions concerning the proper construction of the Deeds and the Management Agreement – particularly with regard to the effect of the mutatis mutandis provision in cl 2.1 of the Principal Deed – on the other.

733. Insofar as Kim seeks an order for an account by Stephen as an accounting party in the Partnership, Kim has established a right to that order, but at this stage only in a limited way. Mr Morrison made errors in the preparation of the annual financial statements of the Partnership that require correction. Even though the principal changes that are required to the Partners’ Funds accounts will change Adelaide’s entitlement to capital, and even though the effect of the Deeds and the Management Agreement was to prevent Adelaide from withdrawing her capital from the Partnership, the evidence strongly suggests that Stephen made some unauthorised withdrawals from Adelaide’s Partners’ Funds, in the mistaken belief that he was drawing down from his own Partners’ Funds. However, the failure of the parties to conduct the proceedings in a way that would permit findings on the issue of whether Stephen breached his fiduciary duties to Adelaide, and if he did, the nature and consequences of those breaches, has a significant bearing on the utility of the accounting exercise that could be carried out at this stage. There remains a question as to whether the accounting should be on the basis of a common account or wilful default. It is an open question whether the implementation of a formal accounting process is the most efficient way to resolve the dispute, rather than for the court to determine in the conventional way the outstanding issues concerning the claim that Stephen breached his fiduciary duties to Adelaide, the nature and consequences of those breaches if they occurred, and the corrections that should be made to the annual financial statements based upon the evidence of the accounting experts.

734. I will be open to the suggestion that there may be issues that the parties consider have been raised for decision at this stage of the proceedings, which have not been dealt with in these reasons for judgment, and which remain outstanding.

735. The parties should also consider the short minutes of order that is appropriate for the court to make in relation to the issues that have been resolved by this judgment, and to bring in those short minutes of order.

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Decision last updated: 22 July 2016