Magafas v Carantinos - [2007] NSWSC 416

No judgment structure available for this case.

CITATION: Anthony Magafas & Anor v Peter Carantinos & Ors [2007] NSWSC 416

HEARING DATE(S): 2/04/07, 4/04/07, 5/04/07, 11/04/07, 16/04/07 - 20/04/07, 23/04/06, 26/04/06

JUDGMENT DATE :
15 May 2007

JURISDICTION: Equity Division

JUDGMENT OF: Einstein J

DECISION: Plaintiffs' case made out. Parties to bring in short minutes reflecting reasons.

CATCHWORDS: Equity - Joint-venture/partnership - Trust and confidence - Fiduciary obligations - Unconscientious use by joint venture/partner of power arising from material circumstances - Practice and procedure - Finding that parties on each side of the Bar table acted with intent to defraud the Taxation Commissioner - Difficulties of assessing credit in that circumstance - Clean hands defence - Claims to account - Recipient liability - Constructive knowledge includes imputed knowledge - Distinction between 'mere notice' cases and circumstances where agent has active duties to perform and knowledge present to his mind is relevant to their performance - Where agent is authorised to commit principal to transaction, his state of mind being relevant to that transaction, for legal purposes acts of agent are acts of the principal and agent's state of mind constitutes state of mind of principal - Second defendant taken to have had knowledge of her husband where he was acting as her agent - Courts and Judges - Income tax fraud coming to attention of Court during hearing - Duty to bring facts to notice of executive branch of government

LEGISLATION CITED: Corporations Act 2001 (Cth)
Evidence Act 1995 (NSW)
Fair Trading Act 1987 (NSW)

CASES CITED: Barnes v Addy (1874) LR 9 Ch App 244
Birtchnell v Equity Trustees Executors and Agencies Co Ltd (1929) 42 CLR 384
Black Uhlans Inc v New South Wales Crime Commission & Ors [2002] NSWSC 1060
Blythe v Northwood [2005] NSWCA 221
Boardman v Phipps [1967] 2 AC 46
Briginshaw v Briginshaw (1938) 60 CLR 336
Brooker v Friend & Brooker Pty Ltd & Anor [2006] NSWCA 385
Brunninghausen v Glavanics (1999) 46 NSWLR 538
Chan v Zacharia (1984) 154 CLR 178
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Georginis v Kastrati (1988) 49 SASR 371
Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd (No 2) [2001] NSWSC 6
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
In the Marriage of P & P (1985) 9 Fam LR 1100
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410
Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1
Pacific Coal Pty Ltd v Indemitsu Queensland Pty Ltd (unreported, Supreme Court of Queensland, Ryan J, 21 February 1992)
Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402
Pedler v Richardson (unreported, Supreme Court of New South Wales, Young J, 16 October 1997)
Petera v Pty Ltd V EAJ Pty Ltd (1985) 7 FCR 375
Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679
Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309
Schipp v Cameron and others (unreported, Supreme Court of New South Wales, Einstein J, 9 July 1998]
Watson v Foxman (2000) 49 NSWLR 315
Warman International Ltd v Dwyer (1995) 182 CLR 544

PARTIES: Anthony Magafas (First Plaintiff)
Pac Com Pty Limited (Second Plaintiff)
Peter Carantinos (First Defendant)
Fotini Carantinos (Second Defendant)
Artesian Pty Limited (Third Defendant)

FILE NUMBER(S): SC 2670/06

COUNSEL: Mr T Alexis SC, Mr S Golledge (Plaintiffs)
Mr CRC Newlinds SC, Mr A Bowen (Defendants)

SOLICITORS: Rockliffs (Plaintiffs)
Munro Lawyers (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Einstein J

Tuesday 15 May 2007

2670/06 Anthony Magafas & Anor v Peter Carantinos & Others

JUDGMENT

The proceedings

1 These are proceedings brought by the plaintiffs Mr Anthony Magafas and Pac Com Pty Ltd [‘Pac Com’] against the defendants Mr Peter Carantinos and his wife Mrs Fotini Carantinos in order to determine the rights of the parties following business arrangements entered into between Mr Magafas and Mr Carantinos.

2 The central claim pursued by Mr Magafas [who has obtained leave under the Corporations Act 2001 to bring proceedings in the name and on behalf of Pac Com] is that in the early to mid-1990s he and Mr Carantinos entered into either a joint venture or a partnership for the acquisition, development and sale of real estate.

3 It is common ground that Mr Magafas and Mr Carantinos are the two directors of and equal 50% shareholders in Pac Com which is the trustee of the Karafas Trust, a hybrid unit discretionary trust of which Mr Magafas and Mr Carantinos were appointed ‘first appointers’ [and in respect of which members of the Magafas family and members of the Carantinos family are the beneficiaries]. It will be noted that the name ‘Karafas’ is a creative combination of the surnames of Mr Carantinos and Mr Magafas.

4 The case pursued by Mr Magafas [on his own behalf and by the derivative action brought on behalf of Pac Com] is that there was an agreement that Pac Com would be acquired to be the corporate vehicle for the parties’ property dealings. So much is clearly borne out by the evidence which is accepted as reliable.

5 It is fair to observe that the proceedings involve many questions of fact and that credit issues are pervasive. In essence the determination of the factual issues likely points the way to the determination of the proceedings.

6 Without being exhaustive there are a variety of causes of action relied upon by way of the contentions that:

i. as a consequence of the agreements said to have been entered into, each of Mr Magafas and Mr Carantinos owed to the other, fiduciary obligations in respect of the conduct of the joint-venture/partnership;

ii. Mr Carantinos breached those duties in a number of ways [as for example by causing property to be purchased in the names of himself and his wife rather than in the name of Pac Com] and by misappropriating moneys form Pac Com’s banking account with Westpac.

Corporations Act

7 Further representational causes of action are pursued claiming contraventions of s 42 of the Fair Trading Act 1987.

8 There is also a pleaded representation grounded upon the proposition that Mr Carantinos owed a duty to Mr Magafas to take reasonable care to avoid foreseeable risk of economic loss caused by inaccurate or misleading or deceptive representations or statements in relation to the partnership/joint-venture and the affairs of Pac Com.

9 It is presently unnecessary to deal with the sundry forms of relief pursued in the event that particular causes of action be upheld.

Fiduciary obligations-the principles

10 Before returning to the evidence it is perhaps convenient to refer to the principles.

11 There were no serious issues debated in terms of the generally accepted principles which inform the content of fiduciary duties in general or the occasions when those duties will bind parties to joint venture/partnership arrangements.

12 The basal principles having on many occasions been closely treated with by the High Court were most recently reviewed and re-endorsed by the New South Wales Court of Appeal in Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 (at [150]–[168]) per Tobias JA with whose reasons Mason P and Giles JA agreed.

13 For present purposes that analysis can be directly adopted in its entirety. In particular the following observations were made:

Noranda Australia Ltd v Lachlan Resources NL

Hospital Products Ltd v United States Surgical Corporation

Noranda

Birtchnell v Equity Trustees Executors and Agencies Co Ltd

"The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties whether embodied in written instruments or not, but also from the course of dealing actually pursued by the firm."

[158] …An understanding of the purpose or nature of the relationship is therefore crucial to a determination of the scope or extent of the fiduciary obligations arising from it. However, the relationship between the parties including its object or purpose needs to be considered in the context of the principles which inform the nature of a fiduciary relationship.

News Ltd v Australian Rugby Football League Ltd

Hospital Products

"[the] fiduciary undertakes or agrees to act for and on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise a power or discretion to the detriment of the other person who is accordingly vulnerable to abuse by the fiduciary of his position."

[161] Referring to the judgment of Gibbs CJ, with whom Wilson J substantially agreed, in Hospital Products (at 68-70) their Honours observed that the Chief Justice had accepted that, in the circumstances, it was not inappropriate to apply the test that a fiduciary relationship exists where the facts of the case establish that, in a particular matter, a person has undertaken to act in the interests of another and not in his or her own interests. The Court of Appeal in Hospital Products had added that it is the fiduciary's undertaking to subordinate his or her interests that gives rise to the beneficiary's expectation or trust and confidence that the fiduciary will act accordingly.

Brunninghausen v Glavanics

Hospital Products

"… The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense . The relationship … is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. …

because the latter is at the mercy of the former

Blythe v Northwood

Chan v Zacharia

Birtchnell v Equity Trustees; Consul Development Pty Ltd v DPC Estates Pty Ltd.

185. See also Warman International Ltd v Dwyer (1995) 182 CLR 544, where the Court said (at 557-8):

Birtchnell

Phipps v Boardman

Birtchnell

Background matters

14 Mr Magafas was the first-born child in his family. He had emigrated to Australia with his parents and then two brothers. He had three brothers: Gregory, Michael and Constantine [in order to distinguish between each of the brothers it seems convenient to refer to Mr Anthony Magafas as “Mr Magafas” or as “Tony” and to refer to his brothers by their Christian names]. Only Mr Magafas and Michael gave evidence.

15 Mr Magafas had no tertiary qualifications. He was made bankrupt in 1998 as was his brother, Michael following a failed hotel development in the snowy Mountains. Mr Magafas was discharged from bankruptcy in March 1991. Notwithstanding that setback, across the whole of the time span of present relevance Mr Magafas was a director of one or more companies comprising a substantial family printing business originally commenced by his father. In truth the companies were technically not a group but simply a number of companies controlled by one or more of the Magafas brothers: for convenience herein called ‘the group’. By and large most of the wealth of the Magafas family in the early 1990s was actually owned by various companies and hence held through various shareholdings trusts and the like. The group would in time amass substantial surplus cash available for investment.

16 The affairs of the group were conducted professionally utilising an internal accountant to ensure that proper and accurate books and records were maintained. Those books and records were then provided to an external accountant KPMG in order, with the assistance of the internal accountant, to finalise the accounts and to prepare taxation returns. Minutes were kept of meetings and when various monies were advanced to family members by way of loan, this was properly documented in the books of whichever particular entity had made the loans.

First born meets first born

17 In about 1988 or 1989 Mr Magafas met Mr Carantinos who was then operating a business trading as “Communicado” which operated in the printing industry essentially as a middleman business outsourcing requirements of clients [sometimes described as ‘buying and selling printing’ - transcript 222.6]. Without purporting to be exhaustive, the business may be described as a translation and creative studio involved with graphic design and translation.

18 Mr Carantinos was a person with a Bachelor of Arts degree majoring in economics and philosophy, also holding a Master of Arts with honours in philosophy. He had lectured for some period at the University of Sydney in economics and philosophy. He was also of Greek background. Both men shared in common the fact that each was the first-born in his family and that each had emigrated to Australia with their respective families.

19 The developing friendship occurred in the context/background of Mr Magafas seeking to re-establish his business reputation and seeking to re-establish himself financially. As will be apparent from these reasons, the friendship was destined to come to a bitter ending, these proceedings demonstrating that neither of the friends had any scruples about defrauding the Taxation Commissioner for common gain.

Trust and confidence

20 One of the vital matters which requires to be understood in relation to this litigation concerns the nature and strength of the friendship which developed between the two men. This is because over the years of meeting with one another and dealing with one another from time to time, Mr Carantinos would give advice as to what he considered would be the best route for the Magafas printing business to take: be it a matter involving company structure, future business planning [as for example dealing with the impending problems concerning new technologies]; taxation management or otherwise. Indeed on occasion, Mr Carantinos attained a formal position within the Magafas printing business when he became a director of a group company. On another occasion described as “Project Butterfly”, the code name for a project aimed at investigating a public listing, Mr Carantinos was noted as chairman of a confidential meeting concerning future approaches to be taken to positioning the group in the market. He was noted as the person who would oversee within the group, a significant and somewhat sensitive planning for the future exercise. In time Project Butterfly became formalised into the corporation, as Centris Limited. Mr Carantinos became a director of Centris. The public listing never eventuated.

21 On yet another occasion in 1997 Mr Carantinos was joined for one day, as one of the employees of an employee benefit plan known as "Communications Technology Trust", when the directors of a number of group companies resolved to approve particular loans to identified employees for the purpose of those employees acquiring Employee Class Units [cf ExhibitD4].

22 At least one of the central issues in the case concerns whether or not the advice given by Mr Carantinos over these years and the part which he sometimes came to play in the Magafas printing business, were ever expressly or impliedly the subject of discussion in terms of any anticipated remuneration to be paid to Mr Carantinos for these activities. The clear finding is that these activities were given gratuitously and as part of the friendship. As the reasons will disclose, Mr Carantinos well understood that there were a myriad of ways in which his relationship with Mr Magafas could assist his own business activities. He proffered his advice, freely and often, without any anticipation of payment in that regard. He anticipated that any reward for the time that he spent giving the assistance already described would come aliunde the giving of that advice in the form of collateral benefits by reference to the relationship itself. He never expected any such payment. He never received any such payment. And on the other side of the ledger, Mr Magafas never considered that the advice and assistance given to his group by Mr Carantinos was being [or had been given] otherwise than gratuitously.

23 In truth as the evidence of Mr Magafas made plain, the sole ‘business’ relationship inhered solely in the real estate partnership/joint venture outlined below.

24 The two men formed a very firm and solid friendship during the whole of the period until the dispute leading to this litigation arose. It is crystal clear from all of the evidence that Mr Magafas saw Mr Carantinos as a person with a great deal of education and experience in all sorts of matters and particularly formed a very high opinion of him insofar as his ability as a businessman was concerned. He came to believe that Mr Carantinos had had a deal of experience in property development and also had a somewhat special ability ‘to see outside of the square’ in relation to general business matters. Mr Magafas was very impressed by the intellectual capacity of Mr Carantinos. Over the years up until the time of their relationship falling apart, the two men would regularly meet, very often over lunches, and would discuss all manner of things, both business and personal. Mr Magafas grew to repose absolute trust in Mr Carantinos as a friend and as a business partner. Indeed in time over the years Mr Magafas's three children came to refer to Mr Carantinos as their "Uncle Peter". Mr Carantinos spoke at the wedding of the elder son of Mr Magafas in late 2004. Mr Magafas appointed Mr Carantinos as his alternate executor in a 1995 Will, having appointed him as a joint executor in a 2003 Will.

A matter of central significance

25 Even at this very early stage in these reasons it is perhaps convenient to record a matter of central significance in terms of the ultimate findings dealt with in the judgment.

26 The centrepiece of the submissions advanced on behalf of Mr Carantinos, addressed the crucial questions of credit which had been litigated. The point made was that Mr Magafas' case was "unbelievably complicated factually and was almost impossible to slot into legal boxes" [transcript 860].

27 The proposition advanced was that it was the case of Mr Carantinos which was straightforward, simple and cohesive and which should be accepted.

28 Naturally the decision set out in these reasons is informed by many parameters: the evidence before the court being all-important. In cases such as the present, significance must be attached to:

i. such of the contemporaneous documentary evidence as is able to be relied upon;

29 In all of this the Court stands back from the detail and gives a decision on the balance of probabilities [accepting the requirement to observe the under mentioned line of authority in so far as concerns the gravity of the allegations of intent to defraud the Taxation Commissioner]. However this is not the first occasion when a business partner and extremely close friend has so come under the influence of another as to have stood by, whilst allowing that other very considerable freedom of decision and action. The hallmark of trust and confidence is often exhibited in what, with the benefit of hindsight, appears to have been totally un-commercial behaviour. The books are replete with innumerable examples of persons who have so come to trust a parental figure, close relation or close friend that they have been prepared to permit the person in whom the trust is reposed to act on their behalf. Mr Alexis, senior counsel for the plaintiffs, in being challenged by the Court [in relation to certain parameters of lack of precision and lack of documentation and lack of clarity in the case pursued by the plaintiffs] made the point [at transcript 841] in the following words:

for and on behalf of or in the interests of another person

30 It has to be remembered that the so-called “simple case” contended for on behalf of the defendants has, as an essential part, the proposition that there were no financial contributions made to the partnership or joint venture, following the agreement made between the Mr Magafas and Mr Carantinos in mid 1995. This case could only have succeeded were the Court to accept that Mr Carantinos was a retained and paid consultant of the Magafas Group of Companies. That case is rejected in the reasons which follow.

31 An important and pervasive finding is that Mr Magafas understood from his conversations with Mr Carantinos that the contributions to the so-called "cashbox" would be used by the latter for the purposes or object of the partnership/joint venture, and not for his own personal use. That Mr Carantinos was permitted a wide discretion in the use of the cashbox, albeit being imprudent conduct on the part of Mr Magafas, simply demonstrates the extent to which he placed absolute trust and confidence in Mr Carantinos.

The gravity of the allegations

32 There is a plethora of authority in support of the proposition that the Court is bound to see that a case of fraud is clearly proved. An allegation of fraudulent intent is one of the most serious allegations capable of being made. Actual dishonesty is said to be "the hallmark of fraud". The gravity of the allegation has been said to be such that whereas section 140(1) of the Evidence Act 1995 (NSW) stipulates a single standard of proof for all civil cases, namely the balance of probabilities, section 140(2) preserves the doctrine in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362; Pedler v Richardson (unreported, Supreme Court of NSW, Young J, 16 October 1997) at 10-11. See also McLelland CJ in Eq in Watson v Foxman (2000) 49 NSWLR 315 at 319. More recently in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 the High Court has put the matter in the following terms (at 449-450):

33 The High Court has pointed out that the evidence given by a man of his intention and state of mind, must be tested:

Pascoe v Commissioner of Taxation (Cth)

34 Those of the findings in this judgment holding that in common with Mr Magafas, Mr Carantinos acted with intent to defraud the Taxation Commissioner are made in circumstances in which that case has been soundly established consistently with the approach taken in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 [supra].

The parties’ business arrangements

35 The efficient approach is to next move directly to the evidence concerning the parties’ business arrangements. This followed discussions between the two men which commenced in about 1992 when they determined to form a partnership or joint venture to buy and then either develop or sell, real property.

36 It is also noteworthy that although in all other respects Mr Magafas confided fully with his brothers in relation to every parameter of the family business, he did not confide in all of them, detail of his partnership/joint-venture/dealings with Mr Carantinos generally chronicled in these reasons. Generally he spoke to Michael to whom he communicated a deal of his general arrangements with Mr Carantinos.

37 However his evidence was that in his mind, all of those dealings were for the ultimate benefit of his family following the tradition that the first born in a Greek family is charged with looking after that family's long-term interests. Hence on his evidence, he saw himself as having that role as a first born, giving him the right to enter into arrangements in general terms on behalf of the family, without consulting family members. That was the spirit in which he came to advance corporate group funds to the partnership/joint ventures. He understood that Mr Carantinos had that same authority for the same reason in relation to his family.

38 It is necessary to travel through a number of business arrangements entered into between Mr Carantinos and Mr Magafas, some of which really do no more than provide a background to the particular matters in relation to which relief is sought. This necessity arises amongst other things because of the need to explain particular documents relied upon by the plaintiffs in the manner described below in these reasons.

Characterisation as joint venture or partnership a non-issue

39 Even before treating with the detail one matter can be mentioned only to observe that it can be put to the side. This concerns whether or not the agreements and relationships entered into and dealt with below are properly characterised as a partnership or a joint venture.

40 A treatment of the statutory definition of partnership, the judicially recognised characteristics of a partnership and the existence of fiduciary obligations whether a relationship was characterised as a partnership at law or as a joint-venture is to be found in Schipp v Cameron and others [unreported, Supreme Court of New South Wales, Einstein J, 9 July 1998] at 234-245. Reference was then made to the decision of Ryan J in Pacific Coal Pty Ltd v Indemitsu (Qld) Pty Ltd [unreported, Supreme Court of Queensland, Ryan J, 21 February 1992]. His Honour held that it was unnecessary to decide whether a particular agreement could be characterised as a partnership agreement for the reason that based on the form of the subject joint-venture agreement and the obligations which had been assumed by the parties, regardless of such a finding, a fiduciary relationship existed between the parties:

41 That is precisely the position in relation to the characterisation of the nature of the relationship between the parties dealt with in the present proceedings. In short the issue is academic for all material purposes.

42 There were some submissions advanced with respect to the decision in Brooker v Friend & Brooker Pty Ltd & Anor [2006] NSWCA 385. Whilst in some circumstances it may have become necessary to closely examine what was the ratio of that decision it suffices to observe that the findings set out in the present reasons raise no particular difficulties. This is because the factual findings mean that it is appropriate to direct that the accounting which is to take place differentiate as between where:

i. the accounting is to be by Mr Carantinos to Pac Com with respect to the proceeds of sales/profits of 39-41 Riverside Crescent;

ii. the accounting is to be by Mr Carantinos to Mr Magafas with respect to the proceeds of sales/profits from 43 Riverside Crescent;

iii. The accounting is to be by Mr Carantinos to Pac Com in relation to the contributions made to the partnership/joint-venture and the proceeds of sales/profits from the Riverside Crescent development.

The Barwon Holdings Property and Schwebel Street

43 In about June/July 1993 Mr Magafas and Mr Carantinos discussed the acquisition of 44 - 46 Princes Highway, St Peters ["the Barwon Holdings property"] an earlier development not the subject of the present proceedings.

44 Following the inspection of this property by Mr Magafas, he and Mr Carantinos discussed jointly purchasing the property.

45 The property was made up of two separate parcels on two titles. The property was purchased together – although one of those parcels was purchased in the name of Barwon Holdings Pty Ltd and the other parcel was purchased in the name of Mr Carantinos. However on the evidence of Mr Magafas both properties were purchased on behalf of both of them.

46 Mr Magafas nominated his brother Constantine to be a director of Barwon Holdings Pty Ltd to represent the Magafas family and to be a shareholder in the company with Mr Carantinos.

47 Contract for the purchase of the properties were exchanged in July 1993 in a circumstance in which ANZ bank loaned approximately $280,000.

48 Following completion of the purchase Mr Carantinos moved his Communicado business to occupy part of the ground floor of the property. The remaining part of the premises were refurbished. Mr Magafas arranged for a carpenter Mr Donnan to carry out repairs to the floor.

49 Mr Carantinos caused Mr Magafas to loan approximately $105,000 to the partnership in relation to this property.

50 This particular property development 'project', although not being the subject of the claim, has some features of it which are important to this litigation as the arrangement was part of the general relevant background and is said to explain the creation of a document which is said by the plaintiffs to contain an important admission.

51 The plaintiffs point out that one of the features of this early transaction was that Mr Magafas’ interest in the property transaction and in the renovation of it was not recorded in any document. The plaintiffs rely upon this parameter as being the first significant indication of the trust and confidence which Mr Magafas reposed in Mr Carantinos that they would carry out their first venture in this way.

52 In 1993 Mr Magafas bought a property at 2/15 Schwebel Street Marrickville from Mr Carantinos. Mr Carantinos provided Mr Magafas with vendor's finance of approximately $40,000 interest-free which was repayable at the discretion of Mr Magafas. The vendor finance was secured on nothing more than a handshake. The plaintiffs again pointed this out as indicative of their relationship at the time.

53 Later Mr Magafas experienced some cash flow problems with his printing business. A business known as Highlight Printing had recently been acquired. Mr Magafas asked Mr Carantinos if the loan funds of $105,000 from the Barwon Holdings property acquisition could be repaid. Mr Carantinos obliged and on 25 August 1994 provided Mr Magafas with a cheque made out to Constantine for the $105,885 amount which had been loaned.

54 On 17 September 1994 discussion took place between Mr Magafas and Mr Carantinos as to how the former could exit from the Barwon Holding arrangement. The focus of their discussion was calculating the value of Mr Magafas's 50% interest in those properties. The plaintiff submit that this reflected the underlying arrangement notwithstanding that half of the property was in the name of Mr Carantinos and at the other half was in the name of Barwon Holdings.

55 An agreement was reached whereby Mr Carantinos would buy out Mr Magafas' 50% interest in the Barwon Holdings properties for $55,000 minus the balance that Mr Magafas owed to Mr Carantinos for the vendor finance on Schwebel Street of $15,000, leaving a balance of $40,000.

56 The evidence given by Mr Magafas which is accepted as reliable is that he said to Mr Carantinos that this $40,000 amount could be paid by the end of that calendar year. As far as Mr Magafas is aware, Mr Carantinos never ended up paying that amount. The evidence of Mr Magafas is that the amount seems to have been lost in the subsequent events but as earlier indicated, no claim is advanced in this litigation in respect of this sum.

April 1995 and following

57 By about this time the cash flow problems which had been experienced by the Magafas business leading to the exit from the Barwon Holding arrangements had passed. By now Mr Carantinos was spending only very limited time managing his business Communicado the work of which was in decline. Mr Carantinos was for more interested at this time in managing his property portfolio.

58 Mr Magafas was working long hours ensuring that his printing business was a success. The business had now acquired FH Booth and Son, another printing business, and there was an expectation that following the acquisition of that business as well as Highlight Printing earlier on, he would enjoy reasonable cash flow.

59 In contra distinction Mr Carantinos had the time, qualifications and skills as well as experience in property investment to move with Mr Magafas into a property development mode which should advance the interests of each.

April 1995

60 Albeit that it is somewhat difficult to differentiate between the precise occasions when particular conversations took place, the balance of probabilities on the evidence adduced suggests that a critical set of discussions between Mr Magafas and Mr Carantinos took place in or about the first quarter of 1995 and likely continued over a number of months, these essentially constituting the inception of the business dealings treated with in this current litigation. These discussions form the linchpin of the claims pursued by the plaintiffs. Although crucial parts of the version of the discussions given by Mr Magafas are put in issue by Mr Carantinos, the findings accept as generally reliable, the versions of discussions given by the former. It is clear that viewing the entirety of the body of evidence before the Court, in substance the discussions were as deposed to by Mr Magafas.

61 Because of its significance it is convenient to set out in full the accepted content of some of the discussions, and to include some of Mr Magafas’ associated evidence (8 May 2006 affidavit):

Mr Magafas: “It is a great feeling to have come through the collapse of our business in 1987 and have started to re-build our empire. We have bought the property in Lawrence St that houses Stratagem and we have expanded the printing operations by buying the business of F.H.Booth and amalgamating our Grafika Press business into it, as well as buying Booth’s factory in Marrickville so that we will no longer be tenants.“

Mr Carantinos: “You certainly have made a remarkable recovery.”

Mr Magafas: “Yes but I have a few scars to show for it, but it has been quite educational. But to better plan for the future, why don’t you and I put our heads together to create a sort of foundation of wealth to provide for the needs of the Magafas and Carantinos families in case we’re not around.”

Mr Carantinos: “That means this structure may have to outlive the original founders. You’re talking about a ten year plan.”

Mr Magafas: “Yes, at least ten years. That’s why it has to be insulated against third party claims. When we terminate the arrangement profits will be split 50/50.”

Mr Carantinos: “Well why do you need me. You’re capable of making your own investments?”

Mr Magafas: “Because you have one thing I don’t have, that is time. The digestion of the acquisitions my family made will be concluded soon. This should allow me access to surplus cashflow from the printing business that I can make available to a new partnership we might consider forming. Someone needs to be focused on how this surplus of funds is applied in order to drive the funds harder to achieve a much higher yield.”

Mr Carantinos: “Higher yields mean higher risks, and the sort of property deals I envisage are larger scale projects that require supervision.”

Mr Magafas: “Exactly my point. Supervision requires time and I don’t have the time to make available, as I am working at the factory from the early morning hours and I am still at it late at night, but you, you have both the time and the qualifications. In any case my brothers and I can still make our own passive investments and create a separate portfolio to the one I am discussing with you.“

Mr Carantinos: “I see where you’re coming from. But I am not liquid with funds. I don’t have a business to generate funds like you. All my assets are still in properties.“

Mr Magafas: “That’s O.K. All we need to do is select an investment that is within the combined budgets of both of us. We then develop and sell the asset and roll the profits into the next deal.”

Mr Carantinos: “Explain the concept to me again.”

Mr Magafas: “It will work like this. Either of us will make funds available to the new venture. But I should then be able to provide most of the cashflow that will be needed to fund the holding charges as well as the costs associated with the development of the projects we undertake. All you have to do is to locate suitable properties talk to Council and look after back office administration.“

Mr Carantinos: “How do we account for the funds we put into the venture.”

Mr Magafas: “The way I see it, is that it doesn’t matter whoever of the two of us puts in the money, when we terminate the partnership it is a simple process of accounting to establish who put in what amount of funds and then we can be re-paid. I also suggest an interest rate of say 8% be applied to the funding.“

Mr Carantinos: “O.K. Let’s do it. But the interest has to be 8% capitalized.”

Mr Magafas: “We need to get advice on what sort of structure we need, whether a company or a trust. An entity suitable for tax purposes as well as offering protection from third party claims.”

”My parents are getting on in years. I’m concerned about the need to provide for them adequately in their old age. Also for my children and for my brothers, just in case something happens to me.”

Mr Carantinos said: “I understand this. I also have to make provisions for my mother.”

[23] It was my understanding that it was intended that the Carantinos family would provide the service of Mr Peter Carantinos who, as I understood from statements he had made to me referred to above, had a tertiary background in economics and finance, was good at tax management, who had free time available and had an upbringing in property matters and also had available his mother, Elly, with her experience in office administration and management available to contribute her services.

Mr Carantinos: “We will need a decent parcel of money in order to do a large deal.”

Mr Magafas: “What I suggest is that we begin to gradually move funds from our printing businesses over the next few years into an Income Bearing Account. This will build up a cashbox for the new partnership without putting strain on the printing businesses.”

Mr Carantinos: “Can Communicado be the recipient of the funds for the new partnership?”

Mr Magafas: “What is the reason for that?”

Mr Carantinos: “I am having some pressure to lodge my annual reports and because I don’t have a trading business I don’t have any income in the form of sales to show. Is it okay to put the funding of the new partnership through Communicado’s books and then I can transfer it to the new company when we set it up? This will give me an income stream.”

Mr Magafas: “How will it work, it needs to be simple.”

Mr Carantinos: “I will raise Communicado invoices to your printing businesses and you pay those invoices into Communicado.”

Mr Magafas: “What about the plan we discussed some time ago to find you an income from a trading business. Any luck finding a business for you to run?”

62 The essence of the above described arrangement involved the formation of a partnership to be regulated by the following terms:

i. Either partner could make funds available but Mr Magafas would provide the overwhelming bulk of those funds from his printing businesses;

ii. Mr Carantinos would locate certain properties, deal with councils in terms of development applications and the like, and attend to back-office administration [in short Mr Magafas would be providing the capital and Mr Carantinos would be providing his time and skill];

63 Agreement had been reached on the above parameters. There were then discussions about getting advice in relation to the sort of structure needed to operate the partnership/joint-venture and the discussions included reference to whether what had been discussed should be operated through a company structure or a trust structure or a combination. One important element was that Mr Magafas wished to ensure that the foundation was protected from third party claims and was hence concerned to ensure that the assets were held by a corporate entity. Ultimately that corporate entity, Pac Com, was incorporated on 15 January 1997 with Mr Carantinos and Mr Magafas as sole directors and equal shareholders each holding 100 shares. Mr Carantinos was appointed company secretary.

64 Mr Magafas gave evidence that following the above exchange with Mr Carantinos, Mr Magafas caused payments to be made to Communicado on his understanding that these funds were to support the company yet to be formed to represent the partnership. The finding is that this was a shared understanding.

65 The evidence does establish that between November 1995 and March 2002, approximately $480,000 was paid by the Magafas Group of Companies to Communicado. The plaintiffs contend and the Court accepts that this evidence, read in the light of the arrangements reached in the discussions between the two men, constitutes a powerful indication of the existence of a partnership or a joint venture between the two men.

66 It can now be seen that the basis upon which these funds were paid forms the critical divide on the evidence given by the respective main actors. To the contrary of the evidence given by Mr Magafas, Mr Carantinos contends that the funds so paid were purely and simply genuine payments as the consideration for consultancy and other advice and assistance which he gave to the group over the years across which these funds were paid, as is said to be documented by the invoices which he sent to the group generally correlating with the payments from that group. There is an absolute denial of the proposition that the funds were by agreement simply paid to Mr Carantinos' business trading as Communicado, to bolster its sales figures. There is an absolute denial that these monies were paid for the purpose of developing any cashbox for any partnership/joint-venture. Mr Carantinos has given evidence born out by the tendered tax returns that the receipt of those funds from Mr Magafas were declared as business income in the tax returns of Communicado/Mr Carantinos as that is what they were. It is perhaps convenient at this point in time to observe that on the evidence, across at least the 1995 and 1996 financial years, in general terms the invoices approximated the sum of $100,000 per year.

67 It seems convenient albeit again at this early stage of these reasons, to make clear that the finding of the Court based upon all of the evidence is that the agreement between the parties was always that Mr Carantinos would be compensated by receiving 50% of the profit of the material developments the subject of any joint-venture/partnership activities engaged in. There was never ever any suggestion, arrangement or agreement for Mr Carantinos to receive remuneration of any type, whether for management fees, administration expenses, advice or otherwise and whether to come from Mr Magafas or from the Booth Group.

68 The finding is that the substratum of the agreements and arrangements reached was based upon the proposition that the essential provision of the funding would be from the Magafas Group which was seen as likely able to handle this parameter, with Mr Carantinos providing his skills and time in relation to locating real estate development properties and carrying out the general administrative and other work [as for example dealing with councils for development consents] necessitated when such a property would become a target for acquisition. The agreement of course permitted either party to contribute capital and in that event interest at 8% capitalised would be paid on such funds to such contributing party. Indeed Mr Carantinos conceded that Mr Magafas was to be the funder for the Pac Com purchases [transcript 579.25].

The version of the relevant conversation given by Mr Carantinos

69 The version of the relevant conversation put forward by Mr Carantinos [13 September 2006 affidavit at [136] et seq] had been as follows:

[136] Sometime in early January 1997, after I had received the above letter from Balmain MB, I had a conversation with Tony.

Mr Carantinos: I am looking to do a joint venture with a major corporation such as Macquarie Bank or Multiplex to pursue a future in property opportunities. What I have in mind is to set up an arrangement with a capital provider whereby I would be guaranteed management fees and running expenses while the provider contributes 100% of the capital required for the venture. The profits from the venture would then be split on a 50 / 50 basis.”

Mr Magafas: “That sounds interesting. What sort of properties are you thinking about?

Mr Carantinos: “As you know, I’ve taken out an option over 39 & 41 Riverside Crescent. Fotini and I have purchased 43 Riverside Crescent. If the three properties are consolidated they will make a great development site. They should accommodate twelve 3-storey terraces. There’s going to be a few bob in those. I’ve done the value adding research and it looks like it will be profitable.”
[This development project is referred to in the reasons below]

Mr Magafas: “Property is picking up now.”

Mr Carantinos: “Yeah, I think there are better days ahead. I’m looking to team up with a large outfit to finance bigger projects.”

Mr Magafas: “Borrowing money?”

Mr Carantinos: “No, the alternatives are now much broader than when we were kids. I’m looking at a joint venture deal where they provide all the capital including my management and expenses, in return for half the profit.”

Mr Magafas: “Well why can’t I take their place? I could use the business profits. Things are going well.”

Mr Carantinos: “Yeah, but don’t forget what happened last time. You came into Barwon Holdings with me but pulled out within a year, because of your cash flow.”

Mr Magafas: “The cash flow is good now. When was the last time I had money over the Christmas break?”

Mr Carantinos: “But a venture like this will require ongoing management fees and expenses, plus, when you do find a property, substantial injections of money will be needed, in big lumps.”

70 This evidence in so far as questions of remuneration to be paid to Mr Carantinos is rejected. It is unnecessary to deal with all of the above parameters of the conversation otherwise than to observe that it is rejected to the extent inconsistent with the evidence given by Mr Magafas.

71 Under cross-examination Mr Carantinos gave the following evidence:

“Q. So should his Honour understand that in this conversation you were proposing that Mr Magafas pay $300,000 a year for you to continue as a consultant to the Booth group and devote your time and resources to developments for a venture in property development with Mr Magafas?
A. Yes.

Q. Is this the first time in your evidence that the subject matter of being paid as both a consultant and a manager of property development vehicle was discussed with Mr Magafas?
A. Yes.

Q. And do we understand therefore that the first time you ever said to Mr Magafas that you wanted to be paid $120,000 plus expenses of 80 in addition to $100,000 for consultancy fees was during this conversation?
A. Yes, is this dated about the - if it happened at the end of 96, the beginning of 97, yes.

Q. The properties that you were considering with him at the time at Riverside Crescent, and I appreciate you say that only included 39 to 41, were being considered for purchase at $225,000 each?
A. No.

Q. Look at half way down page 36?
A. Yes.

Q. You there tell Mr Magafas, according to your affidavit, that, "If we are going to do a deal for 39 and 41 they can be bought for $225,000 each". Do you see that?
A. Yes.

Q. So let's get things in perspective here. On the one hand you were saying to Mr Magafas, "Well, we can pick these properties up for $450,000 but you're going to have to pay me $300,000 a year for consultancy fees as well as management fee and expenses"?
A. Yes.

Q. And you say all this occurred in the one conversation, do you?
A. Yes.

Q. And may I suggest to you that what you tell us on page 36 in the words that you attribute to Mr Magafas--
A. Yes.

Q. --"yes, there's enough to accommodate that. Let's do it"--
A. Yes.

Q. --is a complete and utter lie?
A. No, it isn't.

[Transcript 696]

72 After Pac Com was incorporated on 15 January 1997 Mr Magafas came to understand that Mr Carantinos arranged for funds to be transferred from the Communicado bank account to the Pac Com bank account with Westpac, doing so pursuant to the arrangement which had been discussed to fund Pac Com's acquisition of properties.

73 Even after Pac Com was incorporated and a bank account was set up, the arrangement with the 'invoicing' to Mr Magafas' group of companies and the payments to Communicado still continued so as to maintain mutual benefit [Mr Magafas's companies receiving a tax deduction for such payment, and Mr Carantinos being able to prove some income (beyond the rental income) to potential lenders].

74 It was also accepted by Mr Carantinos that Mr Magafas left the bookkeeping and record-keeping concerning Pac Com to the former [transcript 537.45].

Examining the cashbox contention more closely

75 Under sustained and careful cross-examination, Mr Magafas was closely tested on the cashbox contention. In essence that testing exercise threw up the following responses:

i. Mr Magafas accepted that the idea was to quarantine some of the cash flow from his group's business by putting money aside over time in order to build up a fund to be utilised when an attractive investment opportunity may arise [Transcript 241-242];

ii. He accepted that at the time he was aware that Mr Carantinos' business ‘Communicado’ had its own cash flow problems and that notwithstanding this knowledge he had not required that the moneys had to be held by Communicado in some form of separate or trust account [Transcript 242.24];

iii. It was put to Mr Magafas that there was a central inconsistency in that to which he had agreed: once a parameter of that to which he acceded involved Communicado receiving the moneys paid across and using those funds as necessary in the event of particular cash flow problems, the idea of the gradual buildup of an immediately available cashbox would fall away;

iv. He coped under cross-examination with this matter by contending that there was no licence given to Mr Carantinos/Communicado to spend the money, contending that in fact Mr Carantinos had other income from his so-called rental properties and that the agreement was simply to put Mr Carantinos/ Communicado into an advantageous position qua its balance sheet/ profit and loss account showing impressive sales as income;

v. His evidence was that showing an income in addition to rental income was important for Mr Carantinos since he was a geared property investor who was heavily reliant on borrowed funds to manage his property portfolio and it was important for Mr Carantinos to be in a position to demonstrate serviceability of loans to his lending bankers;

vi. His evidence was that these payments constituted his contributions to the partnership as Mr Carantinos well knew;

vii. His evidence was that Mr Carantinos kept a sales ledger that recorded sales which occurred from time to time but also kept a separate ledger for "sales" to the Magafas Group of companies;

viii. He had accepted that Mr Carantinos/Communicado would be depositing the funds into the ordinary account held by Communicado [Transcript 247.11];

ix. He accepted that Mr Carantinos had said that he wanted to disclose something that was not income as income, and accepted that thinking outside of the square it was the case that Mr Carantinos in fact did not need his help for this subterfuge as it would have been possible for Mr Carantinos to simply prepare bogus books [Transcript 247];

x. He accepted that he knew at the time that Mr Carantinos had made the suggestion that the latter had wanted to use him to effectively create false books for the purpose of misleading third parties [Transcript 249.16];

xi. He also knew at the time that Communicado had saved up tax losses this being an important matter because, had there not been such losses available to be utilised, the arrangement would to the contrary of creating a cashbox of 100% of the money being provided to Mr Carantinos' business, and instead would have been 100% less any tax payable by such business [Transcript 250.1];

xii. The same line of questioning involved Mr Magafas accepting that in relation to the series of invoices admitted into evidence and the payments which were made to Communicado, he was dealing dishonestly with the Deputy Commissioner of Taxation and was doing so conscientiously and deliberately [Transcript 242.12];

The Dulwich Hill properties

76 The finding is that in early 1996, Mr Magafas and Mr Carantinos had a number of conversations regarding properties located at 39 to 43 Riverside Crescent, Dulwich Hill.

77 Mr Magafas gave evidence which is accepted as reliable [8 May 2006 affidavit at paragraph [27]–[28]] as follows:

Mr Carantinos: “I have secured 2 properties in Dulwich Hill by taking out an option for $20,000.”

Mr Magafas: “That’s great. We have made our first move. What is the next step?”

Mr Carantinos: “I will begin negotiating with the owner of 43, because it is in a derelict state whereas the one on the other side is a well maintained home and the owners will be asking too much to sell.”

Mr Magafas: “Why do we need a third property?”

Mr Carantinos: “Our architect John Lewis has already commenced discussions with Marrickville Council. The council is definitely not in favour of allowing development of 39-41 Riverside on their own and has already rejected a development application for 39-41. John Lewis has indicated to council the possibility of incorporating number 43 as well in our submission and it appears that he has had a favourable reaction.”

Subsequently, in anticipation that further funds would be required following the exchange of contracts referred to in paragraph 37.4 below, I caused additional funds to be paid to Communicado totalling $33,000 in December 1996, $33,800 in January 1997, $25,000 in February 1997, and $15,000 in March 1997.

78 The further evidence given by Mr Magafas [affidavit in reply dated 13 March 2007 at paragraph [44]] which is also accepted as reliable included the following:

Mr Magafas: “How much are they each asking?”

Mr Carantinos: “The one in Dulwich Hill I can do with an option. Probably $465,000 as an unconditional sale or $480,000 plus $15,000 with an option for about nine months. The warehouse is going to be about $200,000 to $300,000.”

Mr Magafas: “What sort of location do the properties have?”

Mr Magafas: “My instinct tells me we should buy the Riverside properties, especially when we may be able to buy the one next door.”

Mr Carantinos: “I agree with you. But it is a more expensive site.”

Mr Magafas: “But that should not be a problem. I am sure we have parked sufficient funds in Communicado to do the purchase. In any event I can arrange for more funds for what sounds like a good property.”

Mr Carantinos: “Alright, I’ll investigate further and advise you of the outcome.”

79 Mr Carantinos denies speaking to Mr Magafas about the Riverside properties before having purchased the option over 39 - 41 Riverside [paragraph 49 of Mr Carantinos’ 13 September 2006 affidavit].

80 The finding is that Mr Carantinos and his wife had as purchasers, exchanged on the purchase of 43 Riverside on 3 December 1996 [Exhibit P5 opening bundle, p15] for $245,000, without Mr Magafas’ knowledge. This was before Pac Com Pty. Limited was incorporated: the resulting finding is that the property was purchased on trust for the partnership or joint-venture between Mr Magafas and Mr Carantinos.

outside

81 43 Riverside Crescent was settled on 24 January 1997. The funds to enable the settlement were advanced by the National Australia Bank which took a registered mortgage over the property.

82 On Mr Magafas’ evidence, accepted as reliable, in or about February 1997, he was told by Mr Carantinos that 43 Riverside had been bought, and in particular, bought in Mrs Carantinos’ name [Mr Magafas’ 8 May 2006 affidavit, paragraph 41]. [Mr Carantinos had denied that this conversation took place at all and claimed that Mr Magafas was well aware that Mr and Mrs Carantinos had purchased 43 Riverside prior to the incorporation of Pac Com [paragraph 165, Mr Carantinos’ 13 September 2006 affidavit].

83 It was not until after the appointment of the Joint Administrators of Pac Com on 4 November 2005 that Mr Magafas became aware that 43 Riverside Crescent had in fact been purchased by both Mr Carantinos and his wife [Mr Magafas’ 8 May 2006 affidavit paragraph 42].

84 On 13 January 1997, Mr Magafas and Mr Carantinos met with Mr Kevin Munro, a solicitor, about a suitable structure or vehicle for their capital acquisitions [Mr Magafas’ 8 May 2006 affidavit paragraphs 30-31]. Mr Munro advised that the property be purchased by a hybrid trust that was eventually set up as The Karafas Trust.

85 Pac Com Pty Limited was incorporated on 15 January 1997.

86 On 16 January 1997, Mr Carantinos and Mr Magafas met with Mr Kotowicz, a solicitor, to execute necessary documents to cause Mr Carantinos to nominate Pac Com as his nominee to exercise the option to purchase 39 and 41 Riverside. Such nomination then took place [Mr Magafas’ 8 May 2006 affidavit, paragraph 37].

87 On 17 January 1997 Pac Com exchanged on the contract for the purchase of 39 - 41 Riverside Crescent, the purchase price being $470,000. At that time the Karafas Trust did not exist [the trust deed not having been executed until 11 February 1997: cf the seal register of Pac Com Exhibit P31].

88 In March 1997 Pac Com settled on the contract for the purchase of 39 - 41 Riverside Crescent. The funds to enable settlement were advanced from HP Custodians which took a registered mortgage over 39 - 41 as security.

89 It follows that at material times with respect to numbers 39 and 41 Riverside Crescent, Pac Com was the joint venture vehicle [albeit there was not yet any trust established].

90 However the position was different in so far as number 43 Riverside Crescent was concerned: this is because the contract for the purchase of that property preceded the incorporation of Pac Com. Nor was there any evidence of a reconveyance so as to provide Pac Com with a legal interest in number 43. Hence number 43 is seen to have been purchased on trust for the anterior partnership/joint-venture between Mr Magafas and Mr Carantinos.

The Balmain NB mortgage proposal

91 The mortgage proposal arranged by Mr Carantinos for finance through Balmain NB [Exhibit P28] makes entirely clear that the proposition was for the three properties in Riverside Crescent to be acquired in one line for development accordingly. The document describes both Mr Carantinos as well as Mr Magafas as applicants and in terms advises that the applicants have also purchased the adjoining cottage, 43 Riverside Crescent. The factual finding is that each of the three Riverside Crescent properties were acquired as part of the joint-venture/partnership.

92 In July 1998 Mr Carantinos phoned Mr Magafas with the information that the Council has approved the DA on the Riverside properties.

93 Contracts for sale of 39 - 43 Riverside from Pac Com to Dimension Line Developments Pty Ltd were dated 3 May 1999 and exchanged on 6 May 1999. There were two contracts involved:

i. Pac Com contracted to sell numbers 39-41 for a price of $1.08 million;

94 A deposit of $296,000 was paid by the purchaser (cheque to Pac Com), representing 20% of the total purchase price for the sale of 39 - 43 Riverside Crescent of $1,480,000 [para 52, Mr A Magafas 8 May 2006]. This deposit was released to the vendor and was paid into the joint account of P & F Carantinos [ie Mr and Mrs Carantinos].

95 In June 1999 the Booth factory roof that sustained severe damage during the April 1999 hailstorm collapsed during roof replacement.

96 Settlement of the sale of 39 - 43 Riverside occurred on 16 November 1999 [para 69, Mr A Magafas 8 May 2006]. By reason of a prior termination of the contract, following initial default of the purchaser, and forfeiture of the deposit which had been released, the whole of the purchase price due under the two contracts [$1.48 million] was paid on completion. Whilst Mr Carantinos has disclosed the distribution of the proceeds of sale of numbers 39-41, on the evidence there has not been any accounting provided in respect of the proceeds of sale of number 43 nor of the basis for apportionment of any profit across the sale of the three properties. It is worthy of note that the settlement date for the purchase of the Hoechst property [treated with below] was 9 days after 16 November 1999.

97 Mr Magafas gave evidence accepted as reliable that Mr Carantinos has never accounted to him for the proceeds of the sale of 39 - 41 Riverside.

98 On his evidence accepted as reliable, Mr Magafas only discovered [on investigation of the General Ledgers of The Karafas Trust supplied to the Administrators by Mr Michael Egan] that Mr Carantinos had in fact withdrawn the profits of the Riverside sale which had settled in November 1999 [see Mr Magafas’ 8 May 2006 affidavit, paragraphs 60.6 to 60.8 for ledger details].

The tax bill discussion

99 In about September 2003, Mr Carantinos phoned Mr Magafas regarding a substantial tax bill of over $150,000 that Mr Carantinos had to meet due to having taken the profits from the sale of Riverside [paragraph 75, Mr Magafas’ 8 May 2006 affidavit]. Mr Magafas gave evidence in his 8 May 2006 affidavit which is accepted as reliable, that Mr Carantinos told him he had used the proceeds from the Riverside sale to fund “our share of the Hoechst property purchase”. The more particular facts concerning this property are referred to below.

100 After this conversation, Mr Magafas drew two personal cheques - one dated 15 September 2003 for $70,000 and one dated 18 September 2003 for $50,000 – to Mr Carantinos on the basis of his belief induced by Mr Carantinos, that all profits from the Riverside sale were rolled into the Hoechst site purchase.

101 The version of events given by Mr Magafas is clearly to be accepted in contradistinction to that given by Mr Carantinos. The latter whilst accepting that he used funds provided to him by Mr Magafas to pay for his tax, had difficulty in explaining why that had occurred and ultimately came forward with no explanation at all. His cross examination included:

“Q. And you certainly didn't understand that Mr Magafas was going to pay your tax for you, did you?
A. Certainly not.

Q. You understood that he was helping you out?
A. No.

Q. You certainly didn't understand that it was a gift, did you?
A. That's another matter.

Q. Is the answer to my question yes or no? Did you have that understanding or didn't you?
A. A gift in a - no, I didn't, I didn't think it was a gift. ..

Q. Mr Carantinos, what I am suggesting to you is that you made plain to Tony Magafas that you had a tax problem, you needed some help to pay it--
A. I said that wasn't the case - oh, I see, sorry.

102 Other evidence which substantiates the proposition that 43 Riverside Crescent had been acquired as part of the joint-venture/partnership includes:

i. Exhibit P1, as well as the cheque butts Exhibit P 18, which establish not only that the architectural and consulting fees were paid out of Pac Com in relation to the development which embraced the three sites, but which also establish that council rates and water rates for number 43 were also paid out of Pac Com.

ii. The evidence that development consent in relation to the three properties had been obtained.

iii. Whilst it is certainly somewhat difficult to work through the diagram to be found at Exhibit P5 page 34, the evidence given by Mr Magafas in this regard at least gives some corroboration to the proposition that at the time, he was informed by Mr Carantinos that the two current assets included Riverside.

iv. There is also the objective fact that after development consent had been granted, steps were taken to sell all three properties in the one line which ultimately occurred which is consistent with the proposition that the whole purpose and object of the acquisition of all three properties was always for sale in one line.

v. When the deposit was paid over by the purchaser [cf cheque at page 50 of Exhibit P5 in the sum of $296,000 relating to the sale of all three properties], that amount was deposited by Mr Carantinos into his personal account as to $150,000 he then paid $115,500 as his share of the deposit on the Hoechst site, all of this taking place on 28 May 1999.

vi. Mr Carantinos gave evidence [transcript 713.45] that out of the proceeds of sale of 39-41, Pac Com had discharged the mortgage to the National Australia Bank over number 43, as well as over Mr Carantinos' own house.

vii. it is also clear from Exhibit P35 that Mr Carantinos instructed Konstan Lawyers [who acted on the sale of the three properties] that they were on settlement to pay out not only the mortgage in respect of which Pac Com was the mortgagor over numbers 39 and 41, but also to have discharged out of those proceeds, the mortgage to the National Australia Bank over number 43 and to do so out of the proceeds of numbers 39 and 41.

Exhibit P44

186 Exhibit P44 [referred to below in the reasons] comprised a cheque butt of Communicado upon which the following had been written in the handwriting of Mr Carantinos:

187 Mr Alexis SC appearing for the Magafas parties, put the following submission to the court during final address concerning the occasion [transcript 743] when Mr Carantinos had been shown the cheque butt and asked to read the contents of the note:

188 For the reasons given by Mr Alexis that very inference is appropriate to be drawn and is drawn.

The lack of clean hands defence

189 It is unnecessary in dealing with the unclean hands defence to go further than the decision of Campbell J in Black Uhlans Inc v New South Wales Crime Commission & Ors [2002] NSWSC 1060 where the principles were comprehensively treated with [at [157] and following]. That seminal analysis inter alia point up the following crucial matters:

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

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

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

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

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

193 Importantly and as observed by Campbell J in Black Uhlans, equitable relief is always discretionary and other factors can influence the exercise of the discretion. Here those factors include the injustice in permitting Mr Carantinos against the case proven by the plaintiffs, to avoid the obligation to account.

Dealing with the District Court proceedings

194 Reference has earlier been made to the September 2003 tax bill discussion. The evidence clearly establishes that on a number of occasions leading up to June 2003 Mr Carantinos inquired of Mr Magafas as to whether any of the companies in the group had tax losses which he said he needed. Subsequently the tax bill discussion occurred. Mr Magafas agreed to lend those moneys to assist Mr Carantinos as Mr Magafas felt he had a duty to assist his partner, believing that the Riverside profits were rolled over to fund the Hoechts site development costs and as he thought that it had absorbed all of their profits from the Riverside Sale.

195 In these circumstances, this appears to have been a one- off arrangement. The finding is that Mr Magafas is entitled to judgment in the claim pursued in the District Court statement of claim for the amount claimed plus interest.

196 The cross claim mounted against Pac Com requires to be dismissed.

Issues concerning the pleadings

197 The defendants sought to advance submissions concerning the suggested inadequacy of the pleadings to cope with the case said to now be put forward by the Magafas parties. In this regard the defendant submitted inter alia as follows:

198 In this regard the propositions of the Magafas parties are of substance. In short:

i. In paragraph 10 of the Outline of Defendants’ Submissions, the matters pleaded in paragraphs 1, 3, 4, 24 and following of the Amended Statement of Claim appear to have been overlooked.

ii. Importantly, the pleading [as part thereof] refers to Mr Magafas’ primary affidavit sworn on 8 May, 2006 which was served with the initiating summons.

iii. The pleading clearly articulated the formation of the partnership/joint venture with attendant fiduciary obligations which came to be attracted in relation to the Riverside Crescent development and the acquisition of the Hoechst site.

v. Paragraph 24 of the Amended Statement of Claim complains of Mr Carantinos’ failure to account in relation to all monies received from the sale of the Riverside Crescent development and Mr Carantinos’ withdrawal and appropriation of monies from Pac Com’s bank account.

vi. Paragraph 28 of the Amended Statement of Claim specifically refers to Mr Carantinos’ conduct in breach of the duties pleaded in paragraph 3 and paragraph 6A.

vii. Whilst it is true that paragraph 17 of the Amended Statement of Claim particularises Mr Magafas’ primary affidavit at [63.1] and [63.3] which relate to the $500,000 paid to Pac-Com on 14 March, 2002 “ to meet its share of the ongoing holding and development costs of the St. Peters’ property” , this is not the only contribution relied upon in relation to the Hoechst site.

viii. In paragraph 63.5 of his primary affidavit, Mr Magafas says that the sum of $700,000 referred to in [63.3] was, to his understanding, part of the profits from the sale of the Riverside development.

rolled”

Breach of fiduciary duty by Mr Magafas?

199 There was also advanced by the Carantinos parties the proposition that none of the moneys were actually payments by Mr Magafas but that in fact:

i. The payments represented the proceeds of a clear breach of fiduciary duty by him.

200 As the Magafas parties have contended:

i. Mr Magafas's case and evidence which is accepted is that he caused payments from companies in the Magafas Group of Companies to be made to Communicado and that between November, 1995 to March, 2002, these payments totalled approximately $480,000: primary affidavit at [25].

the entity responsible for payment of the invoices within the Booth Group was entered

at the direction of Tony”

iii. It has to be observed that the Magafast parties seek an accounting with respect to the Mr and Mrs Carantinos' use and dealings with those monies that were, on the Court's findings herein, received by Communicado as contributions to the partnership or the joint venture.

what basis the funds were paid to Communicado from time to time

what the Mr

Carantinos did with the funds once they came into his possession

Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd

Were the funds misappropriated by Mr Magafas?

201 I accept that the evidence does not establish that these funds were misappropriated by Mr Magafas from companies in the Magafas group. This follows from the affidavit evidence of Michael Magafas at [14] which is accepted as reliable: he had understood the way in which contributions to the partnership or joint venture would be made.

202 The assertion made in the case advanced by Mr Newlinds that Mr Magafas “stole” the money and kept it secret from his brothers (noting that Gregory and Constantine owned 10% each), was not established by the evidence and notably was not accepted by Mr Michael Magafas [who owned the other 40%] in cross examination.

The claims to relief

203 For the reasons given above Mr Carantinos is obliged to provide Mr Magafas with an account in relation to the contributions made to the partnership/joint-venture from mid-1995:

[This is now accepted by Mr Carantinos: outline submissions at [85] – [86]]

ii. Mr Carantinos must account to Mr Magafas with respect to the proceeds of sale/profits from 43 Riverside Crescent.

(a) insofar as they were used by Mr Carantinos to acquire the shares in Artesian, to enable that Company to purchase the Hoechst site at St. Peters;

in accordance with the agreement between Mr Carantinos and Mr G. Gav.

The position of Mrs Carantinos

204 In Say-Dee [supra] Tobias JA [at [207] et seq] examined with care the current state of the authorities with respect to the occasions when "recipient liability" was appropriate to be imposed. As His Honour observed it is presently well established that:

i. on the one hand, the 'accessory' liability second limb of Barnes v Addy applies where a third-party knowingly assists a trustee or fiduciary in breach of the trustee or fiduciary's duties, hence requiring actual knowledge on the part of the third party of the breach;

Barnes v Addy

205 As His Honour further observes, the authorities have then become concerned in examining questions of recipient liability, with the question of what has to be the nature and extent of the knowledge on the part of the recipient of the benefit, of the fiduciary's breach of duty.

206 As occurred in the approach taken by Tobias JA in Say Dee, in the present context constructive knowledge at least includes imputed knowledge; that is to say Mrs Carantinos will be taken to have had the knowledge of her husband where he was acting as her agent in acquiring 43 Riverside Crescent. The finding presently is that Mr Carantinos was indeed acting as Mrs Carantinos' agent in this regard. The following evidence is sufficient to justify this finding:

i. In Mr Carantinos' affidavit evidence at [131], he said that he instructed the agent to negotiate with the owner of 43 Riverside Crescent “ on mine and my wife’s behalf” … I was examining the possibility of the development… I engaged architects".

ii. He then refers to engaging architects and obtaining other professional advice to determine the viability of the project.

iii. At [133] he refers to approaching Balmain NB to obtain finance for the purchase of all three properties “ for myself and my wife” .

iv. Mr Carantinos then refers to the exchange of contracts for 43 Riverside Crescent at [134].

v. At [164] he deposed that "43 Riverside Crescent was purchased in the name of myself and my wife… My wife and I finance this purchase entirely ourselves through our joint home loan facility

vi. It is plain from Mr Carantinos' evidence that he was acting as the agent of his wife in relation to the purchase of 43 Riverside Crescent.

vii. There is no evidence which on examination justifies a finding that the Mrs Carantinos acted independently to her husband in that regard. She, according to Mr Carantinos' evidence, was content to leave it entirely to him.

[Those documents comprised:

a) a copy of the Contract for Sale of Land relating to 43 Riverside Crescent, Marrickville dated 6 May 1999 which shows that the property was in the joint name of Mr & Mrs Carantinos;

b) the Transfer by which that sale was completed which is signed by each of Mr & Mrs Carantinos;

c) the bank account into which the monies were paid being a National Australia Bank account in the name of Mr & Mrs Carantinos; and

:

· the above described copy bank statement of Mr and Mrs Carantinos, records the receipt on 7 May, 1999 of the deposit cheque in the sum of $296,000 for the sale of 39, 41 and 43 Riverside Crescent.

· in his primary affidavit, however, the first defendant had deposed to having deposited the deposit cheque into his personal account at [188] on page 49.

· the enquiry made by Mrs Carantinos recorded in the above described memo was clearly well after the sale of 39, 41 and 43 Riverside Crescent.]

ix. Mr Carantinos had deposed that he had negotiated a sale for the three properties [185] and accepted at [711] that the sale arrangements were made entirely by him and that the sale price of number 43 was decided entirely by him

x. He also accepted at [711] and had deposed at [188] in relation to the deposit cheque for $296,000 for the sale of the three properties released on exchange that he had deposited the cheque into his personal account

xi. Mrs Carantinos did not give evidence.

207 Hence the submission advanced by the defendants of "significant personal involvement" of Mrs Carantinos is not supported by the evidence given by Mr Carantinos and the above-described documents the subject of the late tender [executing the memorandum of transfer as a registered proprietor and telephoning the Solicitor acting on the sale of the three properties, after the sales were concluded] fall short of demonstrating significant personal involvement. In any event, this material certainly does not rebut the conclusion arising from the evidence that the first defendant was acting as the authorised agent of Mrs Carantinos in relation to both the purchase and the sale of 43 Riverside Crescent.

208 Accordingly the obligation of Mrs Carantinos to account is seen to arise.

209 In Permanent Trustee Australia v FAI General Insurance Co Ltd 50 NSWLR 679 Handley JA [with his reasons Meagher and Powell JJA agreed] made observations on the differences to be found in imputed knowledge cases as between:

i. on the one hand, 'mere notice' cases where any duty of the agent was simply to communicate information to the principal or so that it could be acted on by others so that the agent would ordinarily have no duty to pass on information received otherwise than in the course of his agency;

210 His Honour observed (at [88]) that in the latter situation in circumstances where the agent is authorised to commit the principal to a transaction, his state of mind being relevant to that transaction, for legal purposes the acts of the agent are the acts of the principal and the agent's state of mind must be the state of mind of the principal as well.

211 His Honour continued (at [89]) as follows:

212 These observations confirm the above-described finding of imputed knowledge.

The bifurcated issues in relation to the purchase of Felton Woods Manor

213 In light of the findings the clear relief appropriate to be granted with respect to this investment concerns the entitlement of Pac Com to an account.

214 There is however a second claim to relief pursued pursuant to the Fair Trading Act, 1987 (NSW). The claim is that Mr Carantinos made the following misleading/deceptive representations, in trade and commerce, to Mr Magafas:

215 The claim requires to be dismissed at least for the following reasons:

i. it having become plain fairly shortly that the property was unable to be sold or sold quickly, alternative arrangements in which Mr Magafas acquiesced were put in place: these included Mr Carantinos' mother managing the hotel with others.

ii. Mr Magafas was of course a joint shareholder in Pac Com and there is no evidence of his taking any particular steps to try to sell the property nor at the time to suggest any misconduct in having been misled.

iii. Mr Magafas makes the claim that it becomes apparent [from paragraph 304 of the affidavit made by Mr Carantinos] that when he purchased the property at auction he had not intended to buy it and did not have his finance in place, which is then said to be proof of the misleading and deceptive conduct.

216 I reject the contention that reliance has been proven.

217 I reject the contention that any damages flowing from the suggested misleading and deceptive conduct have been proven.

218 The circumstances do not support this claim to relief.

219 The same finding seemingly covers the cause of action alleging breach by Mr Carantinos of a duty to Mr Magafas to take reasonable care to avoid foreseeable risk of economic loss caused by suggested inaccurate or misleading or deceptive representations or statements in relation to the partnership or, alternatively, the joint venture and the affairs of the Pac Com.

Section 232 of the Corporations Act

220 The plaintiff had further sought to rely upon a cause of action claiming that Mr Carantinos is shown to have conducted the affairs of Pac Com contrary to the interests of the members of Pac Com as a whole, in fashion seen to be oppressive, unfairly prejudicial or unfairly discriminatory against Mr Magafas within the meaning of s 232 Corporations Act.

221 As far as I can recall there were virtually no submissions ultimately addressed in relation to this as a separate or discrete cause of action. Presumably the matter simply falls away having already been covered by the earlier reasons. However in the event that I have inadvertently overlooked matters put to the Court in final address and still to be pressed in relation to this cause of action, the parties have leave to address submissions on the matter following the delivery of the judgment.

Returning to the pleading issue

222 The Court’s reasons for allowing the late claim to amend paragraph 9 (ii) of the statement of claim are published together with this judgment.

223 I accept as of substance the plaintiffs submission which was that:

i. The amended Statement of Claim at [9] pleads that Mrs Carantinos took her interest in 43 Riverside with notice of the beneficial interest of the first plaintiff and/or the second plaintiff.

ii. The particulars refer to the primary affidavit of the first plaintiff at [41].

Referring the papers

224 Where a tax fraud is disclosed in evidence, it is the Court's duty to draw the evidence to the attention of the relevant authorities for such action as may be appropriate; In the Marriage of P & P (1985) 9 Fam LR 1100 [at 1108 et seq]; Petera v Pty Ltd V EAJ Pty Ltd (1985) 7 FCR 375 [at 380]; Georginis v Kastrati (1988) 49 SASR 371 [at 376]. For these reasons the registrar of the Court will be directed to forward a copy of these reasons for judgment to the Attorney-General and to make available as may be required, the full transcript of the proceedings and the exhibits for inspection by any officers authorised in that behalf by the Attorney-General or by the Commissioner of Taxation.

Short minutes of order, costs and other matters

225 The litigation having included so many factual and legal issues, in the event that any particular claim to relief is suggested as having been overlooked, the parties are given leave to raise such a matter with the Court and it will be dealt with appropriately.

226 It seems likely that the parties will be in a position to agree upon short minutes of order to reflect the above reasons. In the event of any difficulties in this regard the Court will formulate the precise orders which are appropriate to be made. Costs may be argued as soon as practicable.

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Citations

Magafas v Carantinos [2007] NSWSC 416

Most Recent Citation

PETGIA Pty Ltd as Trustee for the Valenti Family Trust v Pettigrew [2013] WADC 82

Cases Citing This Decision

11

Carantinos v Magafas [2008] NSWCA 304

COLLINS & RICARDO [2016] FamCA 211

Leary v NSW Trustee and Guardian [2017] NSWSC 1113

Cases Cited

23

Statutory Material Cited

1

Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309

Warman International Ltd v Dwyer [1995] HCA 18

Briginshaw v Briginshaw [1938] HCA 34

CITATION:	Anthony Magafas & Anor v Peter Carantinos & Ors [2007] NSWSC 416
HEARING DATE(S):	2/04/07, 4/04/07, 5/04/07, 11/04/07, 16/04/07 - 20/04/07, 23/04/06, 26/04/06
JUDGMENT DATE :	15 May 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Einstein J
DECISION:	Plaintiffs' case made out. Parties to bring in short minutes reflecting reasons.
CATCHWORDS:	Equity - Joint-venture/partnership - Trust and confidence - Fiduciary obligations - Unconscientious use by joint venture/partner of power arising from material circumstances - Practice and procedure - Finding that parties on each side of the Bar table acted with intent to defraud the Taxation Commissioner - Difficulties of assessing credit in that circumstance - Clean hands defence - Claims to account - Recipient liability - Constructive knowledge includes imputed knowledge - Distinction between 'mere notice' cases and circumstances where agent has active duties to perform and knowledge present to his mind is relevant to their performance - Where agent is authorised to commit principal to transaction, his state of mind being relevant to that transaction, for legal purposes acts of agent are acts of the principal and agent's state of mind constitutes state of mind of principal - Second defendant taken to have had knowledge of her husband where he was acting as her agent - Courts and Judges - Income tax fraud coming to attention of Court during hearing - Duty to bring facts to notice of executive branch of government
LEGISLATION CITED:	Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Fair Trading Act 1987 (NSW)
CASES CITED:	Barnes v Addy (1874) LR 9 Ch App 244 Birtchnell v Equity Trustees Executors and Agencies Co Ltd (1929) 42 CLR 384 Black Uhlans Inc v New South Wales Crime Commission & Ors [2002] NSWSC 1060 Blythe v Northwood [2005] NSWCA 221 Boardman v Phipps [1967] 2 AC 46 Briginshaw v Briginshaw (1938) 60 CLR 336 Brooker v Friend & Brooker Pty Ltd & Anor [2006] NSWCA 385 Brunninghausen v Glavanics (1999) 46 NSWLR 538 Chan v Zacharia (1984) 154 CLR 178 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Georginis v Kastrati (1988) 49 SASR 371 Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd (No 2) [2001] NSWSC 6 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 In the Marriage of P & P (1985) 9 Fam LR 1100 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 Pacific Coal Pty Ltd v Indemitsu Queensland Pty Ltd (unreported, Supreme Court of Queensland, Ryan J, 21 February 1992) Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402 Pedler v Richardson (unreported, Supreme Court of New South Wales, Young J, 16 October 1997) Petera v Pty Ltd V EAJ Pty Ltd (1985) 7 FCR 375 Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 Schipp v Cameron and others (unreported, Supreme Court of New South Wales, Einstein J, 9 July 1998] Watson v Foxman (2000) 49 NSWLR 315 Warman International Ltd v Dwyer (1995) 182 CLR 544
PARTIES:	Anthony Magafas (First Plaintiff) Pac Com Pty Limited (Second Plaintiff) Peter Carantinos (First Defendant) Fotini Carantinos (Second Defendant) Artesian Pty Limited (Third Defendant)
FILE NUMBER(S):	SC 2670/06
COUNSEL:	Mr T Alexis SC, Mr S Golledge (Plaintiffs) Mr CRC Newlinds SC, Mr A Bowen (Defendants)
SOLICITORS:	Rockliffs (Plaintiffs) Munro Lawyers (Defendants)