Jaeger v Bowden (No 3) - [2017] NSWSC 324

Supreme Court

New South Wales

Summary available

Medium Neutral Citation: Jaeger v Bowden (No 3) [2017] NSWSC 324
Hearing dates: 21 – 23 November 2016
Decision date: 31 March 2017
Jurisdiction: Equity
Before: Robb J
Decision:
The court directs the parties to bring in short minutes of order to give effect to these reasons for judgment, and by consent of the interested parties, the court makes the orders set out in paragraph 481.

Catchwords:
EQUITY – Partnership – Breach of fiduciary duty – Sale of hotel owned by partnership – Whether distribution of proceeds by first defendant was a breach of fiduciary duty – Consideration of partnership agreement and subsequent modifications – Whether distribution of proceeds was ratified – Whether first defendant entitled to set off – Whether first defendant withdrew more than his share of capital from the partnership’s account – Whether plaintiff entitled to an accounting – Whether accounting should be conducted on a wilful default basis – Assessment of interest.

SUCCESSION – Wills, probate and administration – Construction and effect of testamentary disposition.
PRACTICE – Effect of first judgment – Whether proceedings as against the second defendant should be dismissed.
Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27
Garcia v Delphino [2003] NSWSC 1001
Jaeger v Bowden (No 2) [2016] NSWSC 897
Maguire v Makaronis (1996) 188 CLR 449
Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146; [2002] NSWCA 22
MLW Investments Pty Ltd v Tacsum [2006] NSWSC 1256
Union Bank of Australia Ltd v Rudder (1911) 13 CLR 152
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

On 29 June 2016, I published my reasons for judgment in Jaeger v Bowden (No 2) [2016] NSWSC 897, which was the first substantive judgment that I have given in this matter (first judgment). I will refer to the paragraphs of that judgment using the prefix “J”.
In the first judgment, I decided many, but not all, of the issues raised by the parties, which were tried at the hearing that took place between 2 and 12 November 2015.
Since the first judgment was published, directions have been made to enable the remaining issues to be determined. The parties have taken various steps to facilitate that process. A further hearing occurred between 21 and 23 November 2016. These reasons for judgment deal with the matters that were dealt with at that hearing.
On 16 September 2015, before the first hearing, I made orders at the request of the parties under Uniform Civil Procedure Rules 2005 (NSW) rule 28.2: see J [184]. In essence, I ordered that the issues raised by the plaintiff’s statement of claim and the pleadings in response be dealt with at the forthcoming hearing, and if it was determined at that hearing that the plaintiff was entitled to an account of profits or equitable compensation, the quantification of such entitlement would be determined separately and after that hearing. I made equivalent orders in respect of the defendants’ cross claims. The orders appeared to require issues of liability to be dealt with before relief, but the orders were not expressed in those terms.
For reasons set out at J [180] to [202], I explained why the course that the first hearing took caused me concern as to whether I could properly decide all of the issues raised by the pleadings other than the quantification of any relief to which any parties were entitled.
In brief, the point was reached during the first hearing when the plaintiff, Kim, and the Stephen defendants, agreed that the court should first determine whether Stephen was an accounting party, who should be ordered to go through a process of the preparation of accounts for the benefit of Kim, as Adelaide’s executor. That had the consequence that neither Kim nor the Stephen defendants read the evidence of their expert accounting witnesses. The court was asked to have regard to that evidence only as statements, in the nature of particulars, of the cases that the relevant parties intended to make out.
The court had, however, in the expectation that expert accounting evidence would be led to explain the accounting evidence, admitted a substantial body of information of that type into evidence. In particular, the court had received annual financial statements of the Partnership and the Trust, and certain of the corporate defendants and other trusts, as well as a substantial body of ledgers and journals.
The consequence was that there was in evidence a substantial body of complex and somewhat arcane financial information, without the significance of that information having been explained by qualified experts, and without the parties having made thorough submissions concerning the significance of the evidence.
Provisionally, it appeared to me that much, if not all, of the financial information was capable of being material to a number of significant issues that arose on the question of the liability of the parties. At J [233] to [318], I made a number of provisional findings based upon my analysis of the financial statements, concerning the relevant affairs of the Partnership, the Trust, the application of the balance of the proceeds of sale of the Hotel, and payments that had been made to Adelaide.
I declined to make any findings on the basis of my own analysis of the underlying financial documents, such as the ledgers and journals, because of the quantity and obscurity of those documents, and the inappropriateness of the court making findings without having had the benefit of the submissions of the parties.
As I explained at J [499] to [543], I formed the view that it was premature for the court to make a final determination on the questions of construction of the Deeds and the Management Agreement, particularly in-so-far as the objective of the construction exercise was to determine whether Stephen was authorised by his position as managing partner of the Partnership, and by the Deeds and Management Agreement, to apply the proceeds of the sale of the Hotel in the manner in which he had applied those proceeds. In coming to that view, I was partly influenced by a concern that the issues arising out of the financial documents that had not been addressed might be material to the issues of construction and authorisation; and also by my concern that the parties did not appear to have fully addressed all of the construction issues that may have arisen out of the wording of the relevant Deeds and the Management Agreement.
Further, notwithstanding the extensive analysis that I undertook of the pleadings between J [78] and [179], I formed a concern that I am may not have fully dealt with all of the issues raised that were capable of final determination. I formed that view because of the complexity of the pleadings, which had been amended formally and informally on a number of occasions, as well as the extensiveness of the oral and written submissions. Additionally, I was somewhat unsure about the consequences of what I have described as the evolution in the approach to the proceedings, particularly as between Kim and the Stephen defendants, in relation to which issues should be decided at the initial stage of the proceedings. Accordingly, I stated at J [734] that I would be open to the suggestion that there may have been issues that the parties considered had been raised for decision, which had not been dealt with in the reasons for judgment, and which remained outstanding.
I will assume in these supplementary reasons for judgment that the reader has a detailed knowledge of the first judgment.
Naming conventions are generally the same in these reasons as in the first judgment.
For clarity of explanation, I may repeat in abbreviated form some of the explanations set out in more detail in my first judgment. Unless I indicate otherwise, I do not intend to express any different conclusion in these reasons to conclusions that I have already stated in my first judgment.
It appears that Louise has been less involved in the preparation of the explanations of the financial information to which I will refer below, than Kim and the Stephen defendants. For that reason, and also because the issues raised by Louise at the second hearing are in many respects different to those contested by Kim and the Stephen defendants, I will deal with the issues as between Kim and the Stephen defendants first, and then separately consider the issues raised between Louise and Kim.

Remaining issues for determination

In order to reduce the possibility of a misunderstanding concerning the issues that remain to be decided, I made orders on 4 November 2016 that required the parties to serve statements of their cases on those issues. I also directed the parties to serve written submissions in support of their cases.
My purpose in doing this was to reduce the risk of confusion generally, and to ensure that any issues that fell within J [734] of the first judgment were identified.
Kim and the Stephen defendants complied with these directions.
At the end of the recent hearing, for more abundant precaution, I directed the parties to confer, and to deliver to my chambers a list of matters for determination. My expectation was that this process would permit the parties to take into account what occurred at the hearing and be able to deliver an agreed, final list of the matters for determination.
Kim and the Stephen defendants complied with the direction, but I am perplexed to see that there is substantial disagreement concerning the matters for determination at this stage of the proceedings. The Stephen defendants disputed that some matters listed by Kim were to be determined at all, and submitted that others should be formulated differently to the way in which Kim formulated them.
The court is therefore faced with the need to adjudicate a dispute between Kim and the Stephen defendants, concerning what matters are to be determined, before it adjudicates the dispute as to those matters.

Reinvestment issues

I will, to the extent possible, use the descriptions adopted by Kim and the Stephen defendants in their respective lists of matters for determination, in describing those matters.
The first matter is called “reinvestment”, and concerns the question whether Stephen was authorised to deal with the proceeds of sale of the Hotel in the manner that he did.
In par 2 of her statement of matters for determination, Kim describes this matter in two ways. The first (par 2(a)), and primary way, is that Stephen was not authorised to cause the sale proceeds of the Hotel to be paid to the Trust on terms that were ultimately documented as an interest-free loan.
The second was to look at the way that the Trust had applied the proceeds, on the basis, as I understand it, that even if the court finds that Stephen was entitled to cause the Partnership to pay the proceeds of sale of the Hotel to the Trust, certain subsequent dealings that Stephen caused the Trust to undertake with those monies would separately constitute breaches of Stephen’s fiduciary duty to Adelaide.
The first of these alternative cases (par 2(b)(i)) is a claim that it was a breach of fiduciary duty for Stephen to cause the Trust to pay $7,720,478 to the ninth defendant for the acquisition of the Cabramatta Inn Hotel, and also to pay $8,196,417 to the eighth defendant in relation to the re-acquisition of the Hotel.
Secondly (par 2(b)(i)), Kim listed a significant number of payments out of the Trust’s account, other than the payments made to the eighth and ninth defendants for the purchase of the two hotels, as being separate breaches of fiduciary duty by Stephen, even if the initial payment by the Partnership to the Trust was not.
The Stephen defendants’ response, in broad terms, was to accept that Kim’s primary case remained a matter for determination, but they only accepted that Kim’s alternative case in par 2(b)(i) was to be determined now. It is the Stephen defendants’ position that the question whether the substantial number of payments out of the Trust’s account listed by Kim in par 2(b)(ii) involved breaches of fiduciary duty by Stephen is not a question that is to be determined now.
As I understood the oral submissions made by leading senior counsel for Kim, and notwithstanding what was ultimately said in par 2 of Kim’s statement of matters for determination, he strongly submitted that the court should only decide at this stage the primary case put forward by Kim, being that the initial payment of the proceeds of sale of the Hotel by the Partnership to the Trust was unauthorised, and constituted a breach of fiduciary duty by Stephen. Senior counsel went so far as to positively request the court not to look at the evidence of the disbursements of the money in the Trust’s account, and to decide the issue of breach at a “high level”, based upon the terms of the partnership agreement, and the proper construction of the Deeds and the Management Agreement. That was in the context of suggestions made by the court during argument that the evidence concerning how the money in the Trust’s account was disbursed may be material to the primary question of whether the initial transaction was authorised or not. I will refer to these exchanges in more detail when I come to consider the reinvestment issue.
I was accordingly surprised when I learned that Kim now suggests, as matters for determination, the two alternative bases of potential liability of the Stephen defendants in respect of Stephen’s breach of fiduciary duty in pars 2(b)(i) and (ii).
As Kim and the Stephen defendants now accept that the first of the alternative cases (in par 2(b)(i)) should be determined now, I will consider below whether the court is in a position to do so. For the present I will simply note that it is not clear to me that Kim and the Stephen defendants have made submissions as to why those transactions should, or should not, be found to be separate breaches of fiduciary duty by Stephen.
As the Stephen defendants submit that the second of the alternative cases, that Stephen committed numerous breaches of fiduciary duty (par 2(b)(ii)), is not a matter that should be determined now, I will not do so. It is clear in my view, given the position taken by Kim in oral submissions, to the effect that the court should not deal now with the significance of the disbursements of the amount loaned by the Partnership to the Trust, and the Stephen defendants have made no submissions in relation to the issue, it would be procedurally unfair for the court to determine this alternative case. Furthermore, there are many forensic issues that appear to be relevant to this alternative case, which in my view were not seriously addressed by the parties during either hearing, and in particular by the Stephen defendants.
The remaining matters for determination concerning the reinvestment issue were agreed between Kim and the Stephen defendants. As I understand their positions, they have agreed that a number of payments that were made by Stephen to Adelaide during her lifetime should be taken into account in the determination of any amount that Stephen may be found to owe to Kim, as a result of his breach of fiduciary duty based on an unauthorised use of the sale proceeds of the Hotel.
There is a disagreement in respect of whether two matters should be taken into account for that purpose. Those matters are: (1) whether amounts paid to Adelaide prior to the sale of the Hotel on 29 October 2007 should be taken into account; and (2) whether amounts paid to certain Hotel companies and to Bowden Property Investments Pty Ltd, and retained by those companies and not distributed to Adelaide, should also be taken into account.

Capital Account Issue

The second matter for determination has been described by the parties as the “capital account” issue.
I am not sure whether the difference between Kim and the Stephen defendants in respect of this issue is substantial or technical. Doing the best I can, it appears that Kim and the Stephen defendants are agreed concerning the identity of three issues of substance. They appear to disagree as to how the issues should be formulated.
I will preface my consideration of this aspect of the dispute with a brief explanation of how the capital account issue arises. A fuller discussion of this issue will be given below, when I address the relevant questions.
It appears that, when the parties’ expert accountants considered the annual financial statements of the Partnership, and perhaps also the Trust, they found that Mr Morrison had made a small number of significant mistakes in the preparation of the accounts. Those mistakes were not connected with the issue of whether the manner in which Stephen dealt with the proceeds of sale of the Hotel was unauthorised and involved a breach of fiduciary duty.
The effect of clause 3.1 and clause 2.2 of the Principal Deed was to require Adelaide to leave to Stephen in her will the whole of her remaining interest in the Partnership assets, and any replacement investment, after the sale of the Hotel. Accordingly, Adelaide was not entitled to withdraw any of her capital from the Partnership during her lifetime.
Notwithstanding that restriction on Adelaide’s right to withdraw her capital from the Partnership, she had a right to have her capital maintained, and an obligation to leave it intact to Stephen under her will.
As I will explain in more detail below, this case was conducted by Kim and the Stephen defendants on the basis that there was no restriction upon Stephen in withdrawing his share of the capital of the Partnership. While it appears to be true that Stephen caused the Trust to pay out of its account all of the monies listed by Kim in the statement of her second alternative case (par 2(b)(ii)), those payments were accounted for in the annual financial statements of the Partnership and the Trust, at least up to 30 June 2010, by recording repayments of the debt owed by the Trust to the Partnership in order to fund withdrawals by Stephen of the funds in his Partners Funds.
Consequently, an issue that must be addressed is whether all or part of these payments, which otherwise may arguably have involved breaches of fiduciary duty on Stephen’s part, should not be found to have that quality, because they were formally accounted for as repayments to the Partnership and withdrawals of Stephen’s capital.
While the parties have not yet done the arithmetic, it is likely that many of these payments should be treated as legitimate withdrawals by Stephen from his Partners Funds.
That is a separate reason why the court should not determine at this stage whether these individual transactions involved a breach of fiduciary duty by Stephen, as that finding would be divorced from the wider context in which the transactions had been accounted for in the accounts of the Trust and the Partnership.

The significance of the mistakes made by Mr Morrison in the preparation of the annual financial statements for the Partnership is that he may have substantially overstated Stephen’s Partners Funds, and correspondingly understated those of Adelaide: see J [538] and [733].
It is possible that, as a result, when the payments out of the Trust’s account were accounted for as withdrawals by Stephen of the capital in his Partners Funds, Stephen withdrew more than he was entitled to, and part of his withdrawals involved unauthorised withdrawals of Adelaide’s capital. If that occurred, Adelaide would have been entitled to remedies for breach of fiduciary duty against Stephen.
The capital account issues involve disagreements between the parties as to a discrete number of adjustments that should be made in the accounts of the Partnership in relation to Adelaide’s Partners Funds.
I propose to proceed upon the basis that the parties appear to agree upon the substantive issues, and I will determine them. As the parties accept, it will then be a matter for them to carry out the accounting exercise necessary to correct the accounts. That exercise will allow the arithmetical determination of the amount, if any, of any unauthorised withdrawals by Stephen from the capital in Adelaide’s Partners Funds.
I will explain the issues in more detail when I come to deal with them, but at this stage it may be noted that they involve: (1) the proper allocation in the Partnership accounts as at 30 June 2004 of the revaluation of the Hotel conducted as at 11 September 2003; (2) the appropriate allocation as between Stephen and Adelaide of interest on the amount of $5,325,000 borrowed by the Partnership; and (3) whether Adelaide’s capital account should be debited in relation to the acquisition of the Cabramatta Inn Hotel and the re-acquisition of the Hotel.
I will also make brief observations on a number of other issues said by Kim to arise concerning the capital account.
Kim notes that the annual financial statements for the Partnership were only prepared up to 30 June 2010, and suggests that it may be appropriate for the court to order Stephen to provide an accounting in respect of the Partnership’s affairs after that date. I will return to this issue below, in connection with a submission made by leading senior counsel for Kim during submissions. In short, it appears that the parties now know all of the relevant transactions that occurred after 30 June 2010, and it is probable that Kim’s claim for that period could be dealt with as part of her general breach of fiduciary duty claim, rather than to attempt artificially to create accounts for the Partnership.
Finally, in relation to the capital account issue, Kim formulated the issue as a question of whether the three issues listed above had the effect that Stephen made an unauthorised withdrawal from Adelaide’s Partners Funds up to 29 October 2007 (if the court finds in favour of Kim on the issue of whether Stephen dealt with the proceeds of the sale of the Hotel in an unauthorised manner) and thereafter up to 8 February 2012 (if the court finds in favour of the Stephen defendants on the primary authorisation issue).
With respect, I find it difficult to follow this formulation of the capital account issue. What is required is that all relevant corrections be made to the Partnership accounts in respect of Adelaide’s Partners Funds, and then a determination be undertaken as to whether the total of all valid withdrawals by Stephen from the Partners Funds involved Stephen withdrawing part of Adelaide’s Partners Funds.
The fact of the sale of the Hotel on 29 October 2007 is immaterial to that issue.
The Stephen defendants formulated the capital account issue as if it would only arise if the court found against the Stephen defendants on the issue of whether Stephen’s dealing with the proceeds of sale of the Hotel was unauthorised and a breach of fiduciary duty by him. That is also not the case.
I do not understand what the connection could be between the question of whether Stephen applied the proceeds of sale of the Hotel in an unauthorised way on the one hand, and the determination of whether, following unrelated but necessary corrections to the Partnership’s accounts, Stephen withdrew some of Adelaide’s Partners Funds without her authority.
In particular, at least from the time when the accounts for the year ended 30 June 2008 were prepared, the payment by the Partnership to the Trust of the proceeds of sale of the Hotel was treated as a loan by the Partnership to the Trust. The amount of that loan varied in subsequent years, largely to fund the withdrawals of capital by Stephen. Adelaide’s Partners Funds were represented in the accounts of the Partnership after the sale of the Hotel by her share of the amount of the loan owed by the Trust to the Partnership.
Even if Stephen was authorised to cause the Partnership to make an unsecured, interest-free loan of the proceeds of sale of the Hotel to the Trust, and even if the subsequent disbursement of that money by the Trust did not involve a breach of fiduciary duty by Stephen, nothing authorised Stephen to withdraw for his own benefit any part of Adelaide’s Partners Funds in the books of the Partnership.

Other matters for determination

The third matter for determination identified by Kim and the Stephen defendants is “entitlement to account or equitable compensation” and the fourth is “relief in relation to wills”. The parties are agreed that those matters should be determined, although there is some disagreement as to the proper formulation of the fourth matter.
It will be convenient to defer any further reference to the third and the fourth matters until I come to deal with them below.
Kim and the Stephen defendants are at odds about the fifth matter for determination, described as “simple or compound interest” and the sixth, described as “wilful default”.
In par 1.2 of the Stephen defendants’ list of matters for determination, they say that pars 8 and 10 of Kim’s list, concerning simple or compound interest, were not the subject of any evidence or submissions, and therefore should not be determined by the court at this stage. Logically, the Stephen defendants should also have said that par 9 of Kim’s list, which involves how compound interest should be calculated, if compound interest is to be applied, also does not arise. Having taken the stance they did in par 1.1, it appears to me that the Stephen defendants then inadvertently left pars 8 to 10 in their own list, when they intended to delete them.
For the sake of clarity of explanation, it will be convenient for me to defer resolving this aspect of the dispute as to the matters now available for determination until I come to deal with them.

Disbursement of proceeds of sale of Hotel

Perhaps as a result of fading enthusiasm for the prospect that the dispute between them concerning financial and transactional issues would be resolved by the contest between their respective expert witnesses, Kim and the Stephen defendants proffered directions by the court, to which they would submit, with the intent that they would cooperate in analysing the relevant financial information for the purpose of agreeing on the facts relevant to those disputes.
Kim and the Stephen defendants cooperated in preparing a number of schedules to be put before the court. Those schedules were explained in a document delivered to the court called “Documents produced by the plaintiff and the Stephen defendants pursuant to orders made on 22 July 2016”. That document described the contents of a number of schedules, explained the significance of the information in the schedules, and the extent the information was agreed by the participating parties, and made observations as to the use that the court could make of the schedules.
One of those schedules justifies separate consideration at this stage, as it sets out in detail the disbursement of the proceeds of sale of the Hotel.
The schedule to the document, described as “Attachment 1A” sets out, step-by-step, how the net sale proceeds of the Hotel were in fact applied by Stephen, and the steps taken by Stephen in the disbursement of the proceeds of sale (whether by drawings from the Partnership, an interest-free loan to the Trustee, or otherwise).
Evidently, as a result of my passing observation in the first judgment that the evidence of the expert accountants appeared to focus on the financial accounts and adjustments to those accounts, rather than identifying the actual money trail by which the proceeds of sale of the Hotel were expended, Attachment 1 A was shortly described by the parties as the ‘money trail’.
The money trail sets out a chronological list of transactions, by reference to 93 items, over the period 20 March 2007 to 30 June 2012. The first of those dates is the date when the Partnership received the $1,500,000 deposit under the contract for the sale of the Hotel. As at 30 June 2012, the amount remaining of the proceeds was $44,670.
The money trail has separate columns for receipts and disbursements for the Trust, the Partnership, Adelaide, Stephen, Louise, Stephens’ and Louise’s two children, the Bowden Superannuation Investment Fund (of Stephen and Louise), four Bowden Group companies, Kim and Peter Jaeger, the purchase of the Cabramatta Inn Hotel, the repurchase of the Hotel, the Trust’s Newtown property, and the net running balance.
As I understand it, the money trail was prepared in the first instance on behalf of Stephen, and is propounded by him as correctly identifying all transactions relevant to the disbursement of the proceeds of sale of the Hotel. The schedule contains columns for comments by Kim and the Stephen defendants.
The comments set out in the document appear to suggest that there remain many areas of disagreement between Kim and the Stephen defendants.
In pars 4 to 10 of the document explaining the schedules, seven areas of disagreement between Kim and the Stephen defendants are identified.
Of these areas of disagreement, the fifth is that Kim says that item 13, involving in part, payment of $1,100,000 to Kim and Peter Jaeger on 27 June 2008 was a payment to those persons, whereas the Stephen defendants contended that it was paid to those persons at the request of and on the instruction of Adelaide. In par 28 of the document, it is said that, for the purpose of narrowing the argument, Kim accepts that her claim should be reduced in order to take account of this payment, notwithstanding that it was not paid to Adelaide. Consequently, even though Kim and the Stephen defendants disagree as to the proper description of the payment, in practical terms the dispute will be resolved by Kim accepting that the whole of the $1,200,000, of which the $1,100,000 formed part, which is dealt with in item 13, will be treated as if the payment had been made to Adelaide, for the purpose of determining Adelaide’s entitlement to an account or equitable compensation.
As I understand the purpose of describing the other six areas of disagreement in the document that explains the schedules, it is simply to record those disagreements for the purpose of their later resolution. The document contains a statement that the money trail is largely agreed, and that Kim and the Stephen defendants anticipate that it will not be necessary to produce any expert evidence in relation to the money trail. I understand this to express the mutual expectation of Kim and the Stephen defendants that, once the relevant issues are decided in principle by the court, they will be able finally to resolve the factual disputes by further cooperation. If that expectation is disappointed, then arrangements may be made by the court to resolve outstanding disputes.
It may be observed that the contents of the money trail are substantially consistent with the analysis that I carried out at J [233] to [318], based upon the annual financial statements of the relevant entities. Those financial statements, however, expressed the financial circumstances of the entities on an accounting basis, as at annual balance dates, after judgments had been made by Mr Morrison, the accountant, and Stephen, as to how transactions should be treated for accounting purposes. The money trail, on the other hand, sets out the actual dates and amounts of each transaction.
As I understand the money trail, Kim and the Stephen defendants are agreed that, in so far as it may be material to the determination of relevant issues, the court can act upon the information in the document in a general way in relation to how it indicates the proceeds of sale of the Hotel were disbursed. The court is to leave all final calculations to the parties, in the expectation that those calculations may be agreed.

Need for an accounting by Stephen

As I have explained in the first judgment, and briefly summarised above, the issues that I considered were able to be disposed of by the first judgment were influenced by the evolution of the hearing, which led Kim and the Stephen defendants to put to the court that it should decide whether Stephen was an accounting party, who should be ordered to go through a process of accounting in favour of Kim.
It appears to me that a number of developments may obviate the need for Kim and the Stephen defendants to continue with that approach.
It now appears probable that Kim and the Stephen defendants will be able to agree as to how the money trail that I have considered above should be completed. It is at least probable that they will be able to agree to the amounts and times of all transactions concerning dealings with the proceeds of sale of the Hotel, even if some disagreements remain as to the legal effect or nature of the transactions.
The purpose for which the court orders an accounting party to undertake an accounting arises where the accounting party, in this case a fiduciary, deals with the assets the subject of the fiduciary obligation over a period, and the party with the benefit of the accounting obligation is entitled to know how the assets have been dealt with, for the purpose of being able to verify that the accounting party has performed his or her duty properly. The accounting party may not have prepared and delivered accounts at all, or the accounts may be questionable. The object of the accounting is for the accounting party to prepare formal accounts, in a manner consistent with court procedures, following which procedures are employed to enable the party with the benefit of the accounting obligation to challenge and verify the adequacy of the accounts. Ultimately, the purpose of the exercise is that the party with the benefit of the accounting obligation receive the benefit of a formal accounting that accurately records all transactions with the assets the subject of the fiduciary duty.
The course taken by Kim and the Stephen defendants at the first hearing appears to assume that the formal taking of accounts prepared by Stephen will be necessary and useful in these proceedings.
However, if as I suspected at the time I prepared the first judgment, and which now appears to be likely to be correct, Kim and the Stephen defendants will be able to agree concerning the date and amount of all relevant transactions, then such a formal accounting process should become unnecessary.
The overall significance of these considerations is that, if the perceived need for an order by the court that Stephen engage in an accounting process disappears, the court should then be able to make findings which, together with the completion of the cooperative exercise between Kim and the Stephen defendants discussed above, will enable the court to determine the issues of liability that arise under the separate questions. The possible need for the court to revise the separate questions would therefore disappear.

Was the disposition of the proceeds of sale of the Hotel authorised?

As I observed at J [499], the primary issue in these proceedings is whether Stephen was authorised by the partnership agreement, as varied by the Deeds and the Management Agreement, to cause the net proceeds of sale of the Hotel to be disbursed in the manner in which they were disbursed.
The following sets out my answer to that question, having regard to all relevant parts of the first judgment, and the further written and oral submissions received by the court. It should in substance be treated as a continuation of the matters discussed, particularly at J [499] to [543] of the first judgment.

Kim’s submission

Notwithstanding that I raised the question of whether the precise manner in which Stephen caused the proceeds of sale of the Hotel to be dealt with over time may be relevant to the issue of whether Stephen’s conduct involved a breach of the fiduciary duty that he owed to Adelaide, both Kim and the Stephen defendants adopted the stance at the recent hearing that the court should decide the issue as a matter of principle, or construction, and that it was not necessary or appropriate for the court to have regard to any of the dealings with the proceeds of sale, after the time when they were first paid from the bank account of the Partnership to the account of the Trust.
As leading senior counsel for Kim put the matter at T 3.30:

… For my part I am going to urge your Honour that each of the issues, which at least between my client and the Stephen defendants have been agreed, can all be determined at a level of principle without looking at any particular figures. And as between my client and the Stephen defendants, whatever the result of those questions of principle may be, we know how the numbers then fall out. And that may not be satisfactory to your Honour, but for the purpose of my submissions, apart from what we call the money trail, which I will explain what it shows, and that goes to the mutatis mutandis issue, I think and I am going to submit to your Honour, that it can all be decided at a high level.

Perhaps the high watermark of Kim’s argument is found at T6.45, where senior counsel submitted:

That, of course, makes sense commercially, because we know that Adelaide knew all about that lease, and had effectively consented to it, and so consistent with your Honour’s findings at paragraph 473, this all dealt with how things stood as the status quo, but once the status quo was undone – that is, the Ritz Hotel was sold – there is no warranty in any of these agreements to suggest any intention by the parties that an arrangement for any – let’s call them re-investments – could be done on the basis that Stephen was entitled to arrange the affairs of the partnership and the trust so as to cause all the profits to be owed (corrected “earned”) by the trust.

Senior counsel described that as the central question. As I understand the argument, it is that, in the circumstances of the present case, once the Hotel was sold, on the proper construction of the Deeds and the Management Agreement in relation to their effect on the pre-existing partnership agreement between Adelaide and Stephen, Stephen was not entitled to deal with the proceeds of the sale of the Hotel in a way that generated profits anywhere else than the Partnership. In that sense “the status quo” achieved by the Deeds and the Management Agreement was “undone”.
The submission was made on behalf of Kim that the conclusion I expressed at J [473] decides the issue in favour of Kim.
Given its significance, it will be appropriate to repeat J [473] here:

I do not accept the defendants’ argument that, on the proper construction of the Principal Deed, Adelaide positively agreed that her entitlements were limited to the receipts provided for in cll 6.1 and 6.2 of the Principal Deed. The Principal Deed does not contain any express term whereby Adelaide relinquished her entitlement to receive any income earned by the Partnership. Instead, it contained a term whereby Adelaide relinquished her right to receive any distributions from the Trust, which had the practical effect that there would be no income for Adelaide to receive, so long as the status quo was maintained whereby only the Trust earned any significant income. In my view, that commercial arrangement is to be explained by the drafter’s objective to structure the transaction in a manner that created the least risk possible, that the revenue authorities would be entitled to characterise the transaction as involving an immediate transfer of Adelaide’s remaining beneficial interest in the Partnership and the Hotel Assets to Stephen.

It was submitted on behalf of Kim that, in-so-far as I had raised the issue of whether what I described as the mutatis mutandis provision in the Principal Deed could have the effect of authorising Stephen to deal with the proceeds of the sale of the Hotel in a way that led to any profit being made by the Trust, rather than the Partnership, the suggestion had “gone off on a tangent”: see T 4.10.
Kim’s submission was, as I understand it, that the effect of my conclusion at J [473] was that, as Adelaide had not relinquished her entitlement to receive any income earned by the Partnership, but the Deeds and the Management Agreement had the practical effect that there would be no income for Adelaide to receive (so long as the status quo was maintained whereby only the Trust earned any significant income), then once that status quo came to an end, nothing in the Deeds and the Management Agreement authorised Stephen to reconstruct the arrangements between the Partnership and the Trust in a way that reinstituted the status quo in respect of a replacement asset acquired with the proceeds of sale of the Hotel.
It should be recorded that when, during the course of argument, I enquired of senior counsel whether the effect of the Deeds and the Management Agreement may be more subtle than was submitted on behalf of Kim, in the sense that those documents may have contemplated some circumstances in which Stephen would be authorised to apply the proceeds of the sale of the Hotel in a way that led to the profit being earned by the Trust, rather than the Partnership, and the question may be the precise circumstances in which that course would be authorised, senior counsel responded that it was Kim’s “fall‑back position” that in this case Stephen went too far, because, having caused the Partnership to loan the proceeds of sale of the Hotel to the Trust on an unsecured and interest-free basis, Stephen then effectively used the money in the Trust as if it was his own, which on any view was not authorised: see T 23.25 and 25.5.
Kim’s senior counsel was correct in his expectation that the Stephen defendants would put a high level submission that the Deeds and the Management Agreement authorised Stephen to apply the proceeds of sale of the Hotel by making an unsecured interest-free loan to the Trust. The Stephen defendants submitted that that was the end of the matter, and that if they did not succeed in sustaining that argument, they would not put any argument to say that individual transactions involving the use of the funds after they had been loaned to the Trust were authorised: see T 42.5. The Stephen defendants relied upon what they described as the “thicket” of provisions in the Deeds and the Management Agreement, particularly those in clauses 1 and 2 of the Principal Deed concerning the management of the Hotel and the sale of the Hotel, to submit that Stephen’s management powers were not confined to the Hotel or to the goodwill, but extended to the Partnership itself, and in those circumstances there were no restrictions put upon him. He was authorised to treat the asset as his own. He did not need Adelaide’s consent to sell, and he did not need her consent to choose what, if any, replacement asset would be acquired. She had already given consent to that. The words in clause 2.1 of the Principal Deed “new investment property or other investment (the replacement investment)” were left at large.
I do not accept the submissions put by Kim on the one hand, or the Stephen defendants on the other, in the broad terms in which those submissions were put.
First, dealing with Kim’s submission, I do not accept that, on the proper construction of the Principal Deed, it contemplated that the Hotel might be sold in circumstances which could bring the status quo created by the Deeds and the Management Agreement to an end, with the result that Stephen would be bound to reinvigorate the Partnership in the sense of applying the Partnership’s assets to a partnership business for the purpose of causing the Partnership to earn profits in its own right, which would then be distributed between the partners.
There is nothing in the wording of the Deeds and the Management Agreement that positively or expressly has that effect. Those documents do not expressly provide for the reinvigoration of the Partnership (in a manner in which it had never operated in any event) upon the sale of the Hotel.
Whatever the effect of the words “then the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis” in clause 2.1 of the Principal Deed might be, it is not in my view that Stephen would be required to manage the assets of the Partnership in a way that would cause the Partnership to earn income in the ordinary course.
That outcome would have been inconsistent with the modus operandi of the Partnership and the Trust for substantially the whole of their existence, and also would be inconsistent with the terms of the July Minutes.
It would also have led to the result that Adelaide would become entitled both to share in the profits earned by the Partnership and the payment by Stephen of her ‘lifestyle expenses’, which is a result that is inconsistent with the objective intention of the parties to the Principal Deed.
I do not accept the submission made on behalf of Kim that the conclusion that I expressed in J [473] of the first judgment compels the ultimate conclusion that the status quo was broken after the sale of the Hotel, so that Stephen became bound to manage the proceeds of sale in a way that earned a profit in the Partnership. J [473] was directed at the problem faced by the drafter of the Deeds and the Management Agreement that arose from the fact that the parties had two purposes. One purpose was that Kim would get her share of Adelaide’s estate immediately, and that Stephen would, as far as possible, become entitled to his share at the same time, and be able to enjoy the benefits of that share. The other purpose was that the transaction would be implemented in a way that did not subject Adelaide to the obligation to pay any capital gains tax, and that stamp duty would be minimised. The transaction would not have been commercially viable if the second purpose was not achieved. That was the source of the Deeds and Management Agreement being drafted to have the effect that Adelaide would continue to have full beneficial ownership of her remaining interest in the Partnership until her death.
The documents were therefore crafted in a subtle but real way in which Adelaide did not relinquish her entitlement to receive income from the Partnership, but a state of affairs was authorised whereby the Hotel was leased to the Trust on a basis that would not cause the Partnership to earn any profit, and any profit from the operation of the Hotel would be earned by the Trust. Adelaide expressly relinquished her entitlement to receive distributions from the Trust, but not her entitlement to receive a share of profits from the Partnership – there simply would be none.
Those considerations do not lead to the result that, if the Hotel was sold, what Kim has described as the status quo would be broken, so that thereafter the Partnership would have to be managed by Stephen as a conventional, income-earning partnership.
This is a convenient point to deal with Kim’s submission that her primary argument was supported by the fact that, in the month or so before the completion of the contract for the sale of the Hotel, the Partnership actually operated the Hotel using its own bank account, after the lease from the Partnership to the Trust had been terminated. That was in fact done because the purchaser required the Hotel to be operated by the Partnership at the date of completion. As I understand Kim’s argument, it was to the effect that what she described as the status quo had been broken in fact by these changed circumstances, so that at the time of completion, the Partnership was actually operating the Hotel for a profit. Consequently, Kim submitted, what I have described as the mutatis mutandis provision in the Principal Deed had to be applied on the basis that the proceeds of sale of the Hotel had to be invested in a manner that was comparable, in the sense required by the use of the term mutatis mutandis, with the situation where the Partnership was operating the Hotel for its own profit.
I do not accept that submission, because the Deeds and the Management Agreement must be construed in the circumstances as they existed at the date when the documents were executed, and whatever the effect of the mutatis mutandis provision may be, it speaks of the circumstances as they existed at the time when the documents were executed. The provision was not intended to have the elastic effect that it would require the proceeds of sale of the Hotel to be invested in a manner that mirrored the manner in which the Hotel was being operated immediately before the completion of the sale.
Kim’s submission effectively ignores those parts of clauses 1 and 2 of the Principal Deed, which on their face are intended to give Stephen the sole discretion concerning the sale of the Hotel and the reinvestment of the proceeds, on a basis that will involve the provisions that govern the management of the Hotel operating mutatis mutandis in relation to the replacement investment. While there are difficulties in ascertaining how these provisions of the Principal Deed were intended to work, they are inconsistent with a conclusion that the Deeds and the Management Agreement contemplated an outcome where the status quo would be broken, and Stephen would become obliged to manage the Partnership in a way that caused the Partnership to earn a profit in its own right.

Stephen defendants’ submission

I will now turn to the submission put by the Stephen defendants to the effect that the Deeds and the Management Agreement had the effect that, following the sale of the Hotel, Stephen was authorised to invest the proceeds of sale in whatever manner he thought fit, even to the extent of treating the proceeds of sale as if they were his own. Specifically, the Stephen defendants submitted that Stephen was authorised to cause the Partnership to make an unsecured, interest-free loan to the Trust, and so long as that loan continued to exist, it was entirely immaterial how Stephen caused the Trust to apply the money loaned by the Partnership.
The essential reason why I reject that submission is that it entirely ignores what I have described above as the second purpose of the parties, as well as the provisions in the Deeds and the Management Agreement that were included in order to ensure that effect was given to the second purpose, in a manner that was sufficiently robust so as to protect the transaction from the imposition of capital gains tax and a greater amount of stamp duty than was acceptable.
It is simply not the case that the Deeds and the Management Agreement provided that, if Stephen decided to sell the Hotel, he could treat the proceeds of sale as if they were his own, in a manner that would be inconsistent with Adelaide retaining the real beneficial ownership of her remaining interest in the Partnership.

Proper approach to construction issue

Perhaps a convenient way of illustrating the problem of identifying what the Deeds and the Management Agreement did authorise is to propose a practical example that might suggest what the drafter of the documents intended to achieve. This example recognises the validity of the submission made on behalf of the Stephen defendants that, following the sale of the Hotel, it might not be practicable for Stephen to acquire a replacement Hotel or any equivalent investment immediately, and he might have to deposit the proceeds of sale in some bank account until he was able to acquire a replacement investment.
Plainly, in that situation Stephen could have deposited the proceeds of sale into a bank account in the name of the Partnership, but that would cause the Partnership to earn a profit represented by the interest payable on the deposit. I accept that it was never intended by the parties to the documents that the Partnership would actually earn a profit.
Stephen could have invested the proceeds of sale of the Hotel by causing the Partnership to make a properly documented loan to the Trust on an interest-free basis. The Trust could have deposited the amount of the loan in a secure bank account, or the equivalent. The consequence would have been that the Trust would earn income represented by the interest payable by the bank. The Trust could have secured the loan from the Partnership by granting a charge over the deposit on terms that would prevent the Trust from dissipating the amount of the deposit during the term of the loan. There may be variations to this suggested example that might also be useful.
My purpose in giving this hypothetical example is to demonstrate my view that, if the proceeds of sale of the Hotel had been invested in this, or perhaps some similar manner, it would be difficult to argue that the investment was not authorised by the Deeds and the Management Agreement. I use the word difficult advisedly, because I do not intend to decide whether or not this particular replacement investment, or some variation of it, would have been authorised by the documents. The example is only put as one possible way that a real replacement investment could have been made in a way that retained the reality of Adelaide’s beneficial interest in the Partnership assets, but also preserved the arrangement whereby the profit was earned by the Trust rather than the Partnership.
The court is not, however, required to decide whether this or any other hypothetical example of a replacement investment would have been permitted by the Deeds and the Management Agreement. Nor is it required to decide the metes and bounds of how the relevant provisions of those documents may operate in relation to the range of replacement investments that would be permitted. The court is only required to examine what actually occurred in relation to the investment of the proceeds of sale of the Hotel, for the purpose of determining whether Stephen was authorised to invest those proceeds in the manner in which he did.
The court must construe the relevant provisions of the Deeds and the Management Agreement in the light of the fact that those documents varied the effect of the pre-existing partnership agreement between Adelaide and Stephen, albeit that the terms of the partnership agreement were not recorded in writing. I considered the terms of the partnership agreement at J [323] to [333]. Of particular relevance is the aspect of the partnership agreement whereby the Partnership retained ownership of the Hotel, which was leased to the Trust on a basis that was terminable on short notice. Notwithstanding the arrangements agreed to by the partners with the Trust to ensure that the Trust rather than the Partnership earned income from the operation of the Hotel, in a real and immediate sense, the Hotel remained an asset of the Partnership.
In so far as it may be proper for the court to have regard to the surrounding circumstances, for the purpose of construing the relevant terms of the Deeds and the Management Agreement, the most material circumstance involves giving proper weight to what I have described above as being the two purposes of the parties in entering into the transaction. A construction of the documents that ignores, or does not give proper weight to, the second purpose, is likely to be erroneous.
The drafter of the documents was faced with the task of accommodating the agreement between the parties that Stephen would have unilateral power to sell the Hotel and replace it with some other asset in a way that did not undermine the achievement of the second purpose, being to avoid the attraction of capital gains tax and unnecessary stamp duty. As it was not possible for the drafter to identify and anticipate all possible circumstances in which the Hotel might be sold and replaced, it was necessary for the drafter to devise provisions that would give Stephen the agreed power, while regulating the consequences of his actions in a way that would prevent the transaction being subject to capital gains tax and unnecessary stamp duty. In practical terms, that would require Adelaide to retain beneficial ownership of her remaining interest in the Partnership assets, in a way that was sufficiently robust to survive a claim by the revenue authorities that in reality the effect of the documents was to make an immediate transfer of Adelaide’s beneficial interest to Stephen.
The drafter has attempted to execute this task by adopting the wording in clause 2.1 of the Principal Deed which, although it must be applied in the context of the whole of the documentation, is the principal relevant provision. It is appropriate to repeat this term as follows:

2.1 In the event that the Hotel is sold and the proceeds of sale invested in a new Hotel, new investment property or other investment (the replacement investment), then the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis.

The proper construction of the term requires an analysis of two aspects being, first, the words “and the proceeds of sale invested in a new Hotel, new investment property or other investment (the replacement investment)”, and secondly, the requirement that the provisions of clause 1 “shall apply to the replacement investment mutatis mutandis”.

Significance of “replacement investment”

As to the first of these aspects of clause 2.1, I accept the simple submission made orally on behalf of Kim that the primary meaning of these words comes from the use of the word “replacement”. The use of that word in the term “replacement investment” does more than to provide a shorthand term for the words that immediately precede them (as is common in the drafting of legal documents where a complex term is given a shorthand description in parentheses). In my view the use of the expression “replacement investment” is intended to expand upon the meaning of the preceding words “a new Hotel, new investment property or other investment”. In short, in a real and substantial sense, clause 2.1 required Stephen to invest the proceeds of sale of the Hotel in some investment that could properly be described as a replacement for the Hotel, which would involve the new investment retaining as many features of the Hotel investment as was reasonably possible in the circumstances.
It may be that the use of the term “replacement investment” is an indefinite one, in the sense that it does not extensively prescribe the requirements of the replacement investment, but it does not follow that the court is unable to make a judgment as to which investments are, and which are not, sufficiently a replacement of the Hotel, to make the investment authorised.
In my view, one of the characteristics of the replacement investment that is required by clause 2.1 is that the investment be reasonably equivalent to the ownership by the Partnership of the Hotel in circumstances where the asset the subject of the investment is real and valuable and readily recoverable by the Partnership.
That conclusion is consistent with the way that the Partnership had always operated, and nothing in the Deeds and the Management agreement expressly suggests that the parties intended to depart from this position.
Furthermore, clause 2.1 should be construed having regard to all of the possibilities that could have occurred following the execution of the documents and their delivery in December 2007. As it has happened, the Hotel was sold for an unexpectedly high price, and that has created the outcome that a substantial amount of money became available to Stephen to apply for various purposes, including honouring his obligation in clause 6.2 of the Principal Deed to ensure that Adelaide would continue during her lifetime to receive the support of Stephen in relation to the costs of her ongoing lifestyle.

However, events could have turned out differently, and the Hotel might not have been able to be sold for a price greater than the value the parties understood it to have at the time the documents were executed. Whatever future may have eventuated, the only asset of the Partnership was the Hotel, or any replacement investment acquired by the Partnership following the sale of the Hotel. The only security that Adelaide had, using that word in a general sense, for the performance of her entitlements under the Principal Deed, was that the value of the assets of the Partnership would be retained in a genuine and realisable way. This consideration militates against clause 2.1 being construed in a way that would authorise Stephen to reinvest the proceeds of sale of the Hotel in the making of a loan in circumstances where, by reason of the way in which Stephen intended to deal with the monies advanced, the loan could be irrecoverable.
It is necessary, in construing clause 2.1, to consider the need to preserve the beneficial ownership by Adelaide of her remaining interest in the Partnership’s assets, by means that would survive an argument by the revenue authorities that in reality the transaction was an immediate transfer of that beneficial interest to Stephen.
The combined effect of clause 2.3 and clause 2.1 of the Principal Deed was that Stephen could have sold the Hotel immediately after the transaction had been completed, or at any later time. If the provisions permitted Stephen to make an unsecured interest-free loan to the Trust, in circumstances where the Trust was free to dissipate the money for whatever purpose it thought fit, including for the personal benefit of Stephen, then the asset of the Partnership represented by the loan would cease to be real, and the practical effect of the provision would be to give Stephen the benefit immediately of the interest in that part of the Partnership’s assets that Adelaide retained. A construction of clause 2.1 that had that effect would be inconsistent with the achievement of what I have called the second purpose of the parties.
Importantly, the effect of clause 1 of the Principal Deed, and the various terms of the Management Agreement, was that Stephen was the managing partner of the Partnership, with sole control over its assets. Ordinary equitable principles required Stephen to comply with a fiduciary duty to deal with the assets of the Partnership in the interests of the partners as a whole, and not his separate personal interest. No express term of the Deeds and the Management Agreement released Stephen from that fiduciary obligation. The court would not readily find that Stephen was impliedly released from that obligation, unless the circumstances were clear, which is not the case.
In simple terms, there is no reason for the court to adopt a construction of the relevant parts of the Deeds and the Management Agreement which had the effect of releasing Stephen from the obligation to deal with the assets of the Partnership in a way that maintained the commercial reality and enforceability of Adelaide’s beneficial ownership of her remaining interest in the Partnership assets, or to construe the documents in a way that authorised Stephen in substance and effect to deal with Adelaide’s share in the assets of the Partnership for his own benefit and contrary to hers.
Clause 2.2 of the Principal Deed expressly obliged Adelaide, after any sale of the Hotel, to leave to Stephen in her will “her interest in the replacement asset”. These express words contemplate that Adelaide would continue to own a real asset and not only a nominal one.

Significance of the mutatis mutandis provision

It is then necessary to address the effect of the mutatis mutandis provision. This provision will only become relevant after the court is satisfied that Stephen has invested the proceeds of sale of the Hotel in a way that satisfies the requirement that the investment be a real replacement for the Hotel. If that is determined not to be so in the present case, then the meaning given to the mutatis mutandis provision will not be material.
Although the conclusion may be debatable, I have come to the view that the proper construction of clause 2.1 in the present case would permit Stephen to re-invest the proceeds of sale of the Hotel in a true replacement investment in circumstances where the Partnership did not earn an income, but that income was earned by the Trust.
That outcome would be consistent with the historical dealings between the Partnership and the Trust, as well as the provisions of the Deeds and the Management Agreement whereby Adelaide authorised the maintenance of the lease between the Partnership and the Trust, and relinquished her right to receive the distributions from the Trust.
The existence of such an authority in Stephen to make a replacement investment in a way that did not cause the Partnership to earn income would not, in my view, be inconsistent with the proposition that the replacement investment should be able to withstand a challenge that it involved in substance and in effect an immediate assignment of Adelaide’s beneficial interest to Stephen.
I acknowledge that this construction of clause 2.1 involves a liberal or expansive interpretation of the relationship between clauses 2.1 and 1.4 of the Principal Deed, as I observed at J [525]. The wording of the relevant provisions of the Principal Deed does not readily connect the mutatis mutandis application of the provisions in clause 1, concerning the management of the Hotel in relation to the replacement asset, to the provision in clause 1.4 of the Management Agreement, which empowered Stephen to grant or extend the existing lease to the Trust. However, in my view, having regard to the provisions of the documents as a whole, and the July Minutes, taken as part of the relevant surrounding circumstances, the mutatis mutandis provision should be construed as having the effect that Stephen could arrange the dealings between the Partnership and the Trust so that the latter rather than the former earned income from the asset, provided always that the investment was a true replacement investment.

Significance of disbursement of Hotel sale proceeds

Although Kim and the Stephen defendants submitted that the court should decide the question of whether the re-investment of the proceeds of sale of the Hotel made by Stephen were authorised, without the need to consider the detail of the evidence of the circumstances in which the re-investment was made, or what was done with the money, I have taken the view that at least some of that evidence is material to a proper determination of the issue.
Evidence of this nature will be relevant in any event to a consideration of the consequences, if Stephen is found to have made an unauthorised investment, which is a subject relevant to other issues between the parties that the court is required to determine.
The evidence justifies the following findings concerning the circumstances in which the proceeds of sale of the Hotel were paid by the Partnership to the Trust, and how the Trust disbursed the amount received by it after the loan was made:

The Partnership received a payment of $1,500,000 for the deposit under the contract for the sale of the Hotel on 20 March 2007.

The evidence suggests that the Partnership did not have its own bank account until a later time, after the lease of the Hotel to the Trust was terminated to enable the Partnership to conduct the business of the Hotel itself in the month or so before the completion of the contract of sale. The evidence does not establish how the $1,500,000 was banked, other than that it was paid into an account of the Trust on 20 March 2007.

The evidence does not specifically deal with the circumstances that caused the deposit to be dealt with in that way, in that neither Stephen nor Mr Morrison dealt with the matter. I infer that either Stephen or Mr Morrison caused the deposit to be banked into the Trust’s account to avoid the Partnership earning interest on the money.

There is no evidence of any discussion between Stephen and Mr Morrison that could have constituted the making of an oral loan of the amount of the deposit by the Partnership to the Trust. Whatever the arrangement was, it was not documented. There is no direct evidence in the annual financial statements of the Partnership or the Trust that, as at 30 June 2007, the deposit was treated as a loan by the Partnership to the Trust.

On the same day as the $1,500,000 was received by the Trust, $1,000,000 was paid out into Bowden Superannuation Investment Fund, which was the superannuation fund of Stephen and Louise. At this stage it is not clear what was done with the remaining $500,000.

The balance of the purchase price of $50,595,069 was received by the Partnership on 29 October 2007. On that date the Partnership had its own bank account, into which the balance of the purchase price was paid. On the same day the whole amount was transferred to an account of the Trust. That was done on the advice of Mr Morrison to ensure that the Partnership did not earn interest on the deposit.

There is no evidence of any discussion between Stephen and Mr Morrison to the effect that the payment of the money into the Trust’s account would create a loan from the Partnership to the Trust. There is no evidence that the basis of the transaction was even considered. The transaction was not documented in any way.

As at 30 June 2007, the Partnership was indebted to the Trust in the amount of $8,175,730.60: see J [266].

On the same date, the Partnership had non-current liabilities of $10,673,383.06: see J [266]. The parties did not contest a finding that both of these liabilities of the Partnership were repaid out of the proceeds of sale of the Hotel.

The annual financial statements of both the Partnership and the Trust, as at 30 June 2008, record a loan of $28,586,446.66 made by the Partnership to the Trust.

Both sets of annual financial statements were signed on 15 May 2009. I find that the accounts were prepared by Mr Morrison, to reflect his opinion as to how the net result of the payment of the purchase price of the Hotel by the Partnership to the Trust should be treated. There is no evidence as to when the draft accounts were prepared. There is no evidence that Stephen and Mr Morrison ever discussed how the payment should be treated, or what the terms of the transaction should be.

To the extent that the signing of the annual financial statements created evidence of a loan, the loan was unsecured, undocumented, and not subject to agreed terms. The loan was impliedly payable on demand. There was no agreement for the payment of interest by the Trustee. There was no term of the loan that prevented the Trustee from disbursing the amount loaned in whatever manner the Trustee saw fit.

Over the period between 29 October 2007 and 30 June 2012, a total of $4,316,960 was paid out of the Trust’s account for purposes treated as being for the benefit of Adelaide. That included a payment of $1,100,000 to Kim and Peter Jaeger on 27 June 2008, which Kim now accepts should be treated as having been paid at the request of and for the benefit of Adelaide, even though not paid to Adelaide.

Over the same period, an amount of $8,746,827 was paid out of the Trust’s account for the benefit of the Partnership. It is to be inferred that most of that money was applied in repayment of the Partnership’s external creditors.

Over the same period, a total amount of $9,167,006 was paid out of the Trust’s account to a number of companies described as the Bowden Group of companies. The primary payment was a sum of $7,957,257, paid on 2 June 2009. This amount substantially represented debts owed by the Trust to the Bowden Group of companies in relation to prior years’ distributions of income of the Trust that had not actually been paid to those beneficiaries.

In addition to the initial payment of $1,000,000 to Bowden Superannuation Investment Fund on 20 March 2007, a further $2,330,787 was paid out of the Trust’s account to the same payee over the period. The last two of the payments, being $1,100,000 on 8 May 2009, and $100,000 on 29 June 2010, were accounted for in the annual financial statements of the Partnership as being withdrawals by Stephen from his Partners Funds. The accounts for earlier periods do not disclose whether the same category of payments was treated as being withdrawals from Stephen’s Partners Funds for the earlier periods.

Over the period, substantial amounts were paid out of the Trust’s accounts for drawings by Stephen, Louise and their two children. The total net amount of the drawings was $13,573,238. The derivation of this net amount includes the effect of a total payment out of $16,000,000 on 8 August 2008 and 1 December 2008. Although the amounts do not reconcile easily, these payments were treated in the accounts of the Partnership for the year ending 30 June 2009 as having funded the drawings of Stephen listed in J [276] and [278].

A total amount of $16,966,691 was repaid into the Trust’s account by payments on 1 June 2009, 2 October 2009, 8 October 2009 and 10 November 2009, by way of reversal of the drawings of Stephen, Louise and their children.

Part of the effect of the reversal of the drawings was to enable the Trust to make a payment of $7,720,478 on 3 February 2010, to enable the purchase of the Cabramatta Inn Hotel.

No documentation was produced to record the terms of the loan made by the Trust of $7,720,478 to enable the purchase of the Cabramatta Inn Hotel. The loan was recorded as such in the annual financial statements of the Trustee and the borrower companies. The loan was made on an unsecured basis.

An amount of $8,196,417 was also paid out of the Trust’s bank account to fund the repurchase of the Hotel, and was apparently treated as a loan to Stephen and Louise.

The drawings by Stephen, Louise and their children were associated with a reduction in the amount of the loan from the Partnership to the Trust as at 30 June 2008 of $28,394,241, to $7,430,793.83 as of 30 June 2009: see J [274]. Apparently connected to the reversal of the drawings, the loan increased to $16,663,287.45 in the period to 30 June 2010: see J [283].

There is no evidence of any discussion between Stephen and Mr Morrison concerning these decreases and increases in the amount of the loan from the Partnership to the Trust. It is probable that the loan was treated in the accounts of the Partnership and the Trust in the manner in which it was treated as a result of decisions made by Mr Morrison, as to the best way to account for the transactions after they had occurred.

At all relevant times from the date when the Partnership entered into the contract of sale of the Hotel, Stephen was the sole person in management control of the Partnership and the Trust.

At all relevant times after the Deeds and the Management Agreement were entered into, it was Stephen’s belief that, if he caused the Hotel to be sold, he was entitled to deal with the proceeds of sale as if the money was his own.

During the same period, Mr Morrison had the same belief as Stephen as to Stephen’s entitlement to deal with any proceeds of sale of the Hotel as if they were his own.

Finding on authorisation

I find that Stephen was not authorised, as the managing partner of the Partnership, under the terms of the partnership agreement as modified by the Deeds and the Management Agreement, to apply the proceeds of sale of the Hotel by causing that money to be paid into the bank account of the Trust on 20 March and 29 October 2007, on the basis on which those payments were made, as set out above. The breach of Stephen’s duty as managing partner was complete as soon as the money was paid on each occasion, being in relation to the deposit and the balance of the sale price.
If the circumstances in which the monies were paid are considered holistically, as I believe they must be, there are no significant characteristics of the circumstances of the payments that would qualify the payments as replacement investments for the Hotel.
Although Kim has accepted that, from the point in time when the net effect of the payments was recorded in the annual financial statements of the Partnership and the Trust as constituting a loan of $28,394,241 from the Partnership to the Trust, the transaction took effect as a loan, I do not understand Kim to have accepted that there was in reality loans at the time that two payments were actually made. Not only were the transactions not documented, but on the evidence nothing was done objectively to create the relationship of lender and borrower. The payments were made for practical reasons involving the avoidance of the Partnership earning income. The persons who caused the payments to be made, being Stephen and Mr Morrison, believed that the proceeds of sale of the Hotel were Stephen’s to be dealt with as he saw fit. There is no basis for the court to infer that either person had a subjective intention at the time the payments were made to treat the money paid as being anything other than Stephen’s money. The subsequent decision to treat the net effect of the payments as creating a loan from the Partnership to the Trust was merely a matter of convenience, in order to provide a basis for properly accounting for distributions of income of the Trust on the one hand, and withdrawals of capital on the other, the latter of which could only be done through the accounts of the Partnership.
In assessing the nature and quality of the transaction constituted by the making of the two payments by the Partnership to the Trust, it is proper for the court to have regard to Stephen’s subjective intention at the time as to what would be done with the money. That is so because the real characteristics of a transaction will be affected in a practical way by the intention of the person who initiated and carried through the transaction. I find that Stephen paid the money into the Trust’s account for the purpose of using that money from time to time for his own purposes as he saw fit, though having regard to his obligations to Adelaide under the Principal Deed. Stephen had no intention to preserve the money in the Trust’s account to ensure that, at all times for the balance of Adelaide’s life, the Trust would be in a position to repay the amount of the loan on demand.
That is clear from the fact that, on the very day the first $1,500,000 was paid by the Partnership to the Trust, Stephen caused $1,000,000 to be paid out to the Bowden Superannuation Investment Fund.
As the basis upon which the amounts were paid by the Partnership to the Trust were not documented, the transactions could not at the time they were made be regarded as a replacement asset for the Hotel. In the period up to the time when the net effect of the transactions was brought to account as a loan, had Stephen and Mr Morrison died or become incapacitated, Adelaide would have been at a loss as to the basis upon which the Partnership’s funds had been paid to the Trust.
As the Partnership was not given any security for the Trust’s obligation to repay the amounts transferred to the Trust, and as there was nothing to prevent the Trust dissipating the amounts paid, as in fact occurred, the result of the payments could not realistically be described as a replacement asset for the Hotel. Even if the payments are taken to have given rise to loans from the inception, the loans were little more than nominal assets of the Partnership, as from the inception Stephen intended over time to cause the Trust to pay out the monies for his own purposes in a way that would have the result that the loans would be in name only, in the sense that the Trust would not have the capacity to repay them. Even though the actual payments out occurred on numerous occasions over the five-year period to 30 June 2012, I find that the fact of the payments merely evidences the implementation of an intention that Stephen had from the outset. (In this regard it should be noted that the amount retained by the Trust had been reduced to $5,959,128 over the two year period to 30 June 2009, before the amount in the Trust’s account was increased to $20,344,048 as a result of the repayment of $16,966,691 referred to in paragraph 141(18) above).

Significance of first judgment

It is necessary that I say something about the aspects of the first judgment upon which Louise has relied to support her claim that she is entitled to have the case against her dismissed.
The parties, during the first hearing, made submissions in respect of a series of identified issues. One of those issues was described by Kim in her outline opening submission as “the position of Louise”, which was primarily concerned with “the extent of Louise’s knowledge”. In her final submissions, under the same heading, Kim made submissions primarily directed to the issue of Louise’s state of knowledge, at the time she apparently received parts of the proceeds of sale of the Hotel.
Louise made extensive submissions on the issue of her own liability in chapter 11 of her final submissions. The bulk of those submissions go towards making out the following claim, set out in paragraph 11.8: “There is no evidence that the second defendant had direct knowledge of any breach of fiduciary duty by the first defendant, nor is there any evidence that the second defendant possessed knowledge as would have put a reasonable person on notice of a breach of fiduciary duty by the first defendant”.
Broadly, in preparing the first judgment, I adopted the policy of determining all of the issues that were in contest between the parties, even where the better view may have been that the particular issue did not arise for determination under the order for the determination of separate questions, because it was a matter going to relief.
At J [648] to [675], I canvassed aspects of the extensive submissions made by the parties on the issue of Louise’s state of knowledge at the time she received any parts of the proceeds of sale of the Hotel.
I did so under the heading “Notice by Louise of breach of fiduciary duty”.
It is true that I said at J [675], which is so heavily relied upon by Louise:

… The point is that for Kim to establish that Louise personally received money that might be traced to the proceeds of sale of the Hotel with knowledge that she had received the money as a result of breach of fiduciary duty by Stephen, it would be necessary to establish in a precise way the state of knowledge at the time of receipt. Kim did not begin to undertake that exercise, having regard to Louise’s apparent role in the affairs of the Trust, and the underlying complexity of the financial transactions.

Given the terms of the order for the separate determination of questions, this paragraph did not express a positive finding that Kim had failed to prove that Louise had personally received money that might be traced to the proceeds of sale of the Hotel, with knowledge that she had received the money as a result of breach of fiduciary duty by Stephen. That was not the matter to be determined at the hearing. The real point of the paragraph was the observation that “it would be necessary to establish in a precise way the state of knowledge at the time of receipt”. My observation that Kim did not begin to undertake that exercise was not intended to convey that she had failed to prove her case against Louise, but to explain why the court could not determine the question that the parties wanted to be determined. The reason was that it is premature for the court to determine the issues going to ‘knowing receipt” before the time has arrived where the evidence is capable of establishing the amounts received by Louise, and the context of those receipts, in sufficient detail to enable Louise’s mental state to be determined.
In-so-far as Louise appears to have relied upon what was said at J [675], and other parts of the first judgment that dealt with the issue of notice by Louise of breach of fiduciary duty, Louise has misunderstood the significance of those observations in relation to the questions required to be separately determined.
It is appropriate for the court to clarify one aspect of the first judgment that was the subject of an oral submission made by Kim at the second hearing. At T 29.26-42, Kim submitted that, at J [671], the court made a binding finding that Louise “had the relevant notice from 5 August 2010”. The position was put more accurately by Kim at T 31.22, where it was submitted that “once [Louise] then got Stephen’s affidavit and Adelaide’s claim, she was aware of the possibility that these might be Adelaide’s funds”. In fact what I said at J [671] was that, once Louise read Stephen’s solicitors’ letter dated 5 August 2010, or once she read Stephen’s affidavit, “Louise must have been aware of the possibility that Stephen was liable for a substantial amount to Adelaide”. That is not a finding that, from that time onwards, if Louise received any part of the proceeds of sale of the Hotel, her state of knowledge was such as to make her liable to account to Kim for that receipt. The thrust of my discussion about the notice issue was that I had concluded that the issue could not properly be determined without there being findings of fact in relation to the circumstances in which the funds were received by Louise.

Ratification by Adelaide

Louise submitted that the court had failed in the first judgment to deal with an argument put by Louise, that Adelaide had ratified the decision of Stephen to make an unsecured, non-interest-bearing loan of the proceeds of sale of the Hotel to the Trust, because she signed the Partnership’s annual financial statement for the year ended 30 June 2008, after it was pointed out to her that the accounts showed that the Trust owed a debt to the Partnership of $28,586,446.66.
Louise consistently used variations of the term “ratified” to describe the legal consequences of Adelaide’s actions. Ratification is a term that is more apt to describe the situation where a person purports to enter into a contract on behalf of a principal, but without authority to do so, and the contract subsequently becomes binding on the principal by reason of some act of adoption: see Union Bank of Australia Ltd v Rudder (1911) 13 CLR 152. It is more appropriate to speak in terms of the person to whom the fiduciary duty is owed consenting to what would otherwise be a breach of duty by the fiduciary after full disclosure of relevant circumstances.
As a preliminary matter, Louise submitted that J [67] contains an error, in-so-far as it states that Stephen and Mr Morrison met with Adelaide for the purpose of arranging for Adelaide to sign the 30 June 2008 financial statements personally.
I accept that it was an error to state that Stephen was present. The annual financial statements for the year ended 30 June 2008 were signed by Adelaide in the presence of Mr Morrison and Kim and Peter Jaeger. The true position is recorded at J [611], which was in that part of the first judgment where I was actually dealing with the significance of these events. The error was made as part of my statement of the primary facts, and it was corrected when I actually dealt with the issue.
Louise put this argument with some vehemence. Her written submissions are to be found in pars 165 to 177.
The essence of Louise’s argument is that Adelaide signed the 30 June 2008 Partnership financial statements after Mr Morrison had pointed out to Adelaide that the accounts recorded that the Partnership had made an interest-free loan to the Trust, and that this was done in the presence of Kim and Peter Jaeger. Mr Morrison was not challenged on the evidence that he gave. Kim and Peter Jaeger were not called to contradict that evidence. Accordingly, Louise submitted, the making of the interest-free loan was understood and consented to by Adelaide. Louise therefore says that Kim is now estopped from asserting that the loan was not made with Adelaide’s authority.
I dealt with this issue generally at J [609] to [629]. At J [612], I referred to my earlier analysis of the pleadings, and to the particular allegation in Louise’s defence that, to the extent that Stephen was required to account to Adelaide as alleged by Kim, he did so account. At J [613], I observed that I did not consider that this allegation properly pleaded a defence by Louise that Adelaide authorised and consented to any breaches of fiduciary duty or failure to account by Stephen. It was probably sufficient to raise a defence of settled accounts against Adelaide.
I then explained why, on the evidence, Louise could not maintain a defence that there were settled accounts, that would preclude Louise from asserting that Stephen was not authorised to deal with the proceeds of sale of the Hotel in the manner that he did.
However, I considered the matter more generally at J [628], and I said that there was no reason to believe that Adelaide was informed of what the Trust did with the money, so that Adelaide’s claim concerning the application of the money could not be regarded as being settled by signing the Partnership’s annual financial statement.
I would not have come to a different conclusion, had I accepted that Louise had pleaded a defence of ratification or estoppel, or more strictly consent after full disclosure, as a result of Adelaide’s having signed the 30 June 2008 Partnership financial statement. I will now give my reasons for this conclusion, to deal with the possibility that the view that I took as to the defences that were available on Louise’s pleadings may be found to have been too restrictive.
I will deal first with Louise’s reliance upon the fact that Kim and Peter Jaeger did not give evidence of what happened at the time Adelaide signed the 30 June 2008 Partnership financial statements.
I do not consider this failure to give evidence to have had any significance. The reason is that I do not think that Louise has made out a case of ratification, or estoppel, even if all of the evidence given by Mr Morrison on the issue is accepted. My finding that Adelaide did not consent after full disclosure to the making of the unsecured, interest-free loan does not depend upon any part of Mr Morrison’s evidence being contradicted, whether by Kim and Peter Jaeger, or by any other means.
A sufficient statement of the principles that govern the giving of consent after full disclosure of a breach of fiduciary duty is found in Meagher, Gummow and Lehane’s Equity Doctrines & Remedies (5th ed) at [5-130], where the learned editors say:

If a person occupying a fiduciary position wishes to enter into a transaction which would otherwise amount to a breach of duty, a fiduciary must, if liability is to be avoided, make full disclosure to the person to whom the duty is owed of all relevant facts known to the fiduciary, and that person must consent to the fiduciary’s proposal… What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given. The circumstances of the case may call for independent and skilled advice from a third party.

The requirement for an effective consent to a breach of fiduciary duty is thus usually described in terms of the giving of free and fully informed consent.
Louise’s case was that Stephen was authorised by the terms of the partnership agreement, as modified by the Deeds and the Management Agreement, to cause the Partnership to make an unsecured, interest free loan of the proceeds of sale of the Hotel to the Trust. Once that loan had been made, and it was maintained in the accounts of the Trust and the Partnership, that was the end of the matter. It was immaterial how the Trust disbursed the money, even if monies were paid out solely for the benefit of Stephen.
Louise’s informed consent argument mirrored this submission, in the sense that she put that all that was required was for Adelaide to be shown the page in the financial statement that recorded the existence of the loan, so that once she signed the financial statement, she had consented to Stephen’s conduct. It did not matter, according to Louise, that Adelaide had not been told anything about what the Trust had done with the money. To give this observation some substance, the 30 June 2008 financial statements were not signed until 15 May 2009, at which time, according to the money trail, only $15,361,780 of the proceeds of sale of the Hotel remained with the Trust.
For the reasons that I have given above, certain aspects of how the Trust dealt with the money paid to it by the Partnership are relevant to the whole question of whether Stephen caused the Partnership to acquire a replacement investment. Adelaide could not be found to have effectively consented to the investment unless she had been fully informed of these matters, and she was not.
As I observed at J [623], Mr Morrison had an absolute belief that the effect of the July Minutes, and any subsequent agreement between the parties, was that Adelaide only held the legal title to her remaining interest, that she held the beneficial interest on trust for Stephen, and that Stephen was entitled to deal with the property of the Partnership, including the Freehold, as if it was his own.
In my view, it is clear from the evidence that Mr Morrison gave as to what he said to Adelaide at the time, that he did not tell her that there was an argument that Stephen’s conduct was not authorised by the partnership agreement, or the Deeds and the Management Agreement, and that it may have amounted to a breach of fiduciary duty owed to Adelaide, for which she might be entitled to some remedy against Stephen. When Adelaide signed the 30 June 2008 Partnership financial statement, it was not with any knowledge that her conduct might amount to a retrospective acceptance of Stephen’s conduct, notwithstanding the possibility that it may have involved a breach of fiduciary duty.
Other, specific aspects of Mr Morrison’s evidence militate against a finding that Adelaide gave her free and fully informed consent to Stephen’s conduct.
Mr Morrison said that he explained to Adelaide in 2008 that the entire proceeds from the sale were put into the Trust, and posted taxation liabilities for both Stephen and Adelaide, which had to be reflected back into the Partnership: “so I indicated that the funds were all sitting in the family trust but the funds had to come back to the Partnership to pay their respective tax bills” (T 186.30). If that statement was made to Adelaide, it would have caused her to understand that the Trust retained the funds, when that was not the case.
Mr Morrison also said (T 186.48):

A. I can’t specifically remember what I spoke to her about but in essence there was a global financial crisis hitting at that time and I had moved or recommended Stephen and Louise and Adelaide reallocate funds to minimise their exposure to term deposits in bank accounts. I didn’t go into detail with her every line because they were complex issues and I did not want to – I tried to shield her of any intricate details. Her main concern was where her money was.
…
Q. What did you say to her?
A. I said to her that the money is being dealt with in line with an agreement of the 2003 deeds and the family minutes and that was the way that we were paying for all of her lifestyle expenses, holidays, $1000 a week drawings and motor vehicle expenses, all of the lifestyle expenses that she was accustomed to having paid.

First, Mr Morrison specifically suggested to Adelaide that the arrangement accorded with the Deeds and the Management Agreement, when I have found that it did not.
Secondly, Adelaide conveyed to Mr Morrison that her main concern was where her money was. What was told to her did not inform her that the money had not been retained in the Trust’s account.
It may be that the statement made by Mr Morrison, concerning the effect of the global financial crisis, was a summary of what was said. However, the evidence given by Mr Morrison would have conveyed to Adelaide that funds had been reallocated to minimise exposure to term deposits in bank accounts. That was an entirely inadequate description of what was happening to the money in the Trust’s account.
Finally, when asked a question about whether he had a specific discussion with Adelaide about the non-payment of interest on the loan, Mr Morrison said (T 190.14):

A. Not specifically, because, as I said, she wasn’t a person of financial nous, and it was too complicated for her. She would say, “I understand I trust you,” but they were complex issues for her to understand.

It is mystifying how Louise could submit that the mere signature placed by Adelaide on the 30 June 2008 annual financial statement for the Partnership could constitute free and informed consent to any breach of fiduciary duty by Stephen in the face of this evidence.

Louise’s amendment application

On the last day of the hearing, and indeed within the last hour of submissions, Louise made an application to amend her defence.
The application to amend was opposed by Kim, and after hearing argument, I determined that the application to amend should be refused. The circumstances did not permit me to give reasons for my decision, and I informed the parties that I would give my reasons at the same time as my judgment on the substantive issues. The following are those reasons.
The amendment sought by Louise would have added the following par 35 to her defence:

In answer to the whole of the claims made against the Second Defendant as identified in the Plaintiff’s Outline of Submissions dated 14 November 2016 (as set out at page 29), the Second Defendant says that:-
a.   Clause 6.5 of the Deed between Adelaide Emily Bowden, Stephen James Bowden and Kim Jaeger (“the Principal Deed”) provides that the Plaintiff as the Executor of the Estate of the late Adelaide Emily Bowden will not challenge any distributions of income from the Bowden Family Trust made solely for the benefit of members of the First Defendant’s immediate family, and not maintain any entitlement to a right of distribution of income or capital or both from the Bowden Family Trust;
b.   At all material time the Second Defendant was an immediate family member of the First Defendant;
c.   By reason of the terms of Clause 6.5 of the Principal Deed, the Plaintiff is contractually barred, and further or in the alternative is estopped, from challenging any distributions of income from the Bowden Family Trust made to the Second Defendant as a distribution of income or capital and further is contractually barred, and further or in the alternative is estopped, from maintaining any claim in respect of any distribution of income or capital from the Bowden Family Trust.

In essence, Louise wished to argue that she could enforce an estoppel by deed against Adelaide and Kim based upon the terms of clause 6.5 of the Principal Deed. By that term, Adelaide and Kim agreed that Stephen would be free to distribute any income from the Trust to members of his immediate family, and that they would not challenge any such distributions of income from the Trust, and would not maintain any entitlement to a right to distribution of income or capital or both from the Trust.
In my view it was not appropriate to permit Louise to amend her defence at such a late stage of the proceedings, based upon the principles established by the High Court in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27. In particular, no explanation was given as to why the defence was not raised in a timely way; and with all due respect, the application to amend appeared to be a late invention by Louise’s legal representatives.
However, in my view the making of the amendment would also have been futile, as it was based upon a misunderstanding of the principles governing estoppel by deed and the effect of clause 6.5 of the Principal Deed.
First, Louise was not a party to the Principal Deed, and in my view she did not have standing to enforce any estoppel based upon that deed. That conclusion is not affected by the fact that Louise was a party to the Divorce Deed, which in a general way was one of the suite of deeds and agreements entered into by the family. The drafter of the deeds took some care to decide which persons were appropriate parties to the various deeds and agreements, and there is no reason to conclude that the parties objectively intended that aspects of the Deeds and the Management Agreement could effectively be enforced by persons who were not named as parties to them. The suite of deeds and agreements was intentionally structured in a way that would have the opposite effect.

In any case, the proposed defence misconceived the effect of clause 6.5. It only restricted the entitlement of Adelaide and Kim to the income and capital of the Trust, and to complain about distributions of the income of the Trust to members of Stephen’s immediate family. The clause said nothing at all about Adelaide’s rights in relation to her remaining capital interest in the Partnership. Kim’s rights against Louise, if they arise, will flow out of her involvement in Stephen’s conduct in breach of his fiduciary obligation to Adelaide under the Partnership, not the Trust. The fact that the nature of that breach may have involved the loan of the proceeds of sale of the Partnership’s Hotel to the Trust, and to some extent, that payments may have been made as distribution of income of the Trust, does not change the character of Louise’s potential liability to Kim.
In any event, little of the money disbursed by the Trust took the form of payments of income of the Trust. Payments of capital were carried out through the Partnership. The Trust made loans, and not distributions of capital. The Trust also paid its own debts.
Consequently, in my view, it would be futile to permit Louise to make the amendment she applied for leave to make.
It should be noted for completeness that, even though Louise did not seek to plead a defence based upon the effect of cl 6.5 of the Principal Deed until the last day of the hearing, in par 5.5.11 of her written opening submissions Louise put the argument that Adelaide expressly renounced her entitlement to distributions of capital and income from the Trust, and authorised Stephen to make distributions from the Trust in favour of himself and his family, by means of cl 6.5. The submission that Adelaide covenanted that she would not challenge any of the distributions from the Trust made for the benefit of the family of Stephen was briefly repeated in par 11.17 of Louise’s closing written submissions.
The submission that cl 6.5 authorised Stephen to make “distributions” from the Trust misstates the effect of the clause, in that the authorisation is only given “to distribute any income” from the Trust, and does not apply to the capital.
Although I did not expressly deal with this argument in the first judgment, in my view it fails for the reasons given above. In its terms, it could only apply to distributions of the income earned by the Trust on its own investments. It could not apply to distributions of the Partners Funds from the Partnership. It would not protect any of the defendants from participation in any breach of fiduciary duty by Stephen. Louise does not have standing to enforce cl 6.5, in any event.

Conclusion

It will be necessary for the parties to consider these reasons for judgment in order to determine the substantive orders that should now be made, and the procedural orders that should be made for the further conduct of the proceedings.
The parties should investigate whether it is possible for them to cooperate to complete the money trail exercise, and for that purpose it will be necessary for Kim and the Stephen defendants to involve Louise.
The parties should also attempt to agree upon the procedural orders that will be necessary to complete the money trail exercise, if that cannot be done cooperatively, and for Kim to obtain whatever other evidence is necessary for the purpose of quantifying the relief to which she is entitled.
At an appropriate stage, it will be necessary for Kim to make an election as to the remedy that she will seek from the court. The court has found that the partnership agreement, as modified by the Principal Deed and the Management Agreement, did not oblige Stephen to acquire a replacement investment with the proceeds of the Hotel that would cause the Partnership to earn a profit in its own name. While it is a matter for Kim to consider, it may flow from this finding that the remedy of an account by the relevant defendants is the proper remedy for her to elect.
The parties should also consider the advisability of their accepting the appropriateness of the court’s adopting the court interest rate as a proxy for the amount of profit earned by any defendant (other than profit actually earned from the direct investment of the proceeds of sale of the Hotel), so that all parties will be spared the costs of a judicial determination of the actual profits. The use of the court interest rate as a proxy would still leave open the need to determine whether the amount of the proxy profit should be determined on a simple or compound basis.
The parties should arrange with my Associate to fix a further directions hearing at a convenient time for the purpose of the court making the necessary substantive and procedural orders. If there is disagreement, the parties should submit proposed orders at least three days before the directions hearing.
During the second hearing, the court was asked to make a number of orders by consent of the interested parties. It is not necessary to explain the reasons for the orders, and I will make them now.

The Court declares that the sixth defendant, Bowden Property Investments Pty Limited (“BPI”), is not a “Hotel Company” for the purpose of:

clause 8.8 of the Principal Deed (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016);

clause 6.8 of the Family Deed (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016);

clause 4.9 of the Divorce Deed (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016);

clause 3.8 of the Management Agreement (as defined in paragraph 49 of the reasons for judgment dated 29 June 2016).

The Court notes that:

the late Adelaide Bowden is currently the registered holder of 50 ordinary shares and 1 B Class share in BPI;

upon receipt of notice of an election or a completed transfer form pursuant to sub-rule 12.2(a)(i) or (ii) of the Constitution of BPI, the first defendant, as the sole surviving director of BPI, will cause BPI to register the plaintiff (either in her capacity as executor of the estate of the late Adelaide Bowden or alternatively the plaintiff in her personal capacity), as the holder of the 50 ordinary shares and 1 B Class share in BPI currently registered in the name of the late Adelaide Bowden;

the plaintiff is not obliged to transfer the said shares, or any of them, to the first defendant pursuant to clause 3.1 of the Principal Deed or otherwise; and

the plaintiff and the first and third to tenth defendants have (without admissions) agreed that the plaintiff will commence separate proceedings in respect of the further relief sought by the plaintiff in relation to BPI as a result of the declarations and notations made in paragraphs 1 and 2(a)-(c) above.

The list of transcript corrections sent by junior counsel for Kim to my Associate as an attachment to an email dated 16 December 2016 will be added to the transcript at the end of the transcript for 23 November 2016.

**********

Decision last updated: 31 March 2017

Medium Neutral Citation:	Jaeger v Bowden (No 3) [2017] NSWSC 324
Hearing dates:	21 – 23 November 2016
Decision date:	31 March 2017
Jurisdiction:	Equity
Before:	Robb J
Decision:	The court directs the parties to bring in short minutes of order to give effect to these reasons for judgment, and by consent of the interested parties, the court makes the orders set out in paragraph 481.
Catchwords:	EQUITY – Partnership – Breach of fiduciary duty – Sale of hotel owned by partnership – Whether distribution of proceeds by first defendant was a breach of fiduciary duty – Consideration of partnership agreement and subsequent modifications – Whether distribution of proceeds was ratified – Whether first defendant entitled to set off – Whether first defendant withdrew more than his share of capital from the partnership’s account – Whether plaintiff entitled to an accounting – Whether accounting should be conducted on a wilful default basis – Assessment of interest. SUCCESSION – Wills, probate and administration – Construction and effect of testamentary disposition. PRACTICE – Effect of first judgment – Whether proceedings as against the second defendant should be dismissed.
Legislation Cited:	Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 Garcia v Delphino [2003] NSWSC 1001 Jaeger v Bowden (No 2) [2016] NSWSC 897 Maguire v Makaronis (1996) 188 CLR 449 Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146; [2002] NSWCA 22 MLW Investments Pty Ltd v Tacsum [2006] NSWSC 1256 Union Bank of Australia Ltd v Rudder (1911) 13 CLR 152
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