Kupang Resources Pty Ltd v Commonwealth of Australia (No 4)

This is the latest chapter in a long saga of litigation spanning almost 20 years.

The genesis of the various proceedings are breaches of fiduciary duty owed by Phillip Grimaldi to the plaintiff, Kupang Resources Pty Limited (which, for consistency, I will refer to as Chameleon in recognition of its former name of Chameleon Mining NL, by which it was known throughout the relevant events). In 2004, as a de facto director, Mr Grimaldi appropriated Chameleon’s funds to enable the completion of a transaction in which Murchison Metals Limited, a company of which Mr Grimaldi was a director and a significant shareholder, acquired an interest in valuable iron ore mining tenements in Western Australia.

Mr Grimaldi obtained significant financial benefits from that transaction in the form of new shares and options in Murchison received as a “spotter’s fee” (Spotter’s Fee Securities) and an increase in the value of his existing Murchison shareholding (Existing Shareholding) via his nominees. He caused both types of securities to be sold from time to time, realising profits of some $36 million. Enjoying the abundant fruits of his breaches of duty, Mr Grimaldi then lived a life of some luxury: he purchased multiple properties in Sydney for his family, paid his rent on a harbourside residence, bought expensive items such as a Bentley and a power boat, and went on opulent trips including a safari in Africa.

On 29 November 2007, Chameleon brought proceedings in the Federal Court of Australia against Mr Grimaldi and Murchison, amongst others, relevantly claiming that Mr Grimaldi was liable to account to it for the profits he and his nominees had obtained as a result of his breaches of fiduciary duty (Chameleon Proceedings).

On 20 October 2010, Chameleon succeeded at first instance in the Chameleon Proceedings before Jacobson J, obtaining relief which included an order for Mr Grimaldi to account for profits made as a consequence of his breaches of fiduciary duty, with the amount of those profits to be determined in an inquiry: Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129 (Chameleon Judgment).

On 21 February 2012, Mr Grimaldi’s appeal to the Full Court of the Federal Court was unsuccessful: Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 (Grimaldi No 2).

Mr Grimaldi’s sudden influx of wealth eventually drew the attention of the Commissioner of Taxation (acting through the Australian Taxation Office (ATO)). The Commissioner pursued Mr Grimaldi from 2008 to 2010 for unpaid tax assessed on the premise that Mr Grimaldi and his superannuation fund were beneficially entitled to keep any profits earned on the Spotter’s Fee Securities and the Existing Shareholding. On 13 July 2009, the Commissioner obtained summary judgment against Mr Grimaldi in the Federal Court for $36,341,461.73 on that basis and ultimately settled the tax dispute with Mr Grimaldi and his nominees for close to $20 million. The majority of that sum was first paid to the New South Wales Treasury (NSW Treasury) in purported satisfaction of a proceeds assessment order obtained by the New South Wales Crime Commission under the Criminal Assets Recovery Act 1990 (NSW), before being paid to the ATO from a confiscated proceeds account. The sum was paid in tranches, the first of which was paid to the ATO on 21 October 2010, the day after the Chameleon Judgment was delivered.

The effect of this was that Chameleon’s victory at trial and on appeal in the Chameleon Proceedings proved to be strikingly hollow. By the time the inquiry ordered to determine the amount of profits to be disgorged by Mr Grimaldi was underway, most (if not all) of Mr Grimaldi’s remaining funds had been paid to the Commissioner. Mr Grimaldi entered voluntary bankruptcy on 2 July 2014 and the inquiry was never completed.

In these proceedings, commenced on 8 April 2020, Chameleon brings a claim against the Commonwealth of Australia for “knowing receipt” under the first limb of Barnes v Addy (1874) LR 9 Ch App 244. It contends that as a result of the orders made by Jacobson J following the Chameleon Judgment and by reason of Mr Grimaldi’s liability to account as a defaulting fiduciary, the profits made by Mr Grimaldi in relation to the Spotter’s Fee Securities and the Existing Shareholding (or their traceable proceeds) were “trust property”, such that the Commonwealth holds the funds the Commissioner received from Mr Grimaldi and his nominees on constructive trust for Chameleon or is otherwise liable to pay equitable compensation to it.

The proceedings raised several complex issues, most significantly in the application and ambit of the “trust property” component of Barnes v Addy. I received in excess of 450 pages of closely reasoned written submissions from Chameleon and the Commonwealth covering all issues.

In the orders made following the Chameleon Judgment, Jacobson J did not declare a constructive trust over the Spotter’s Fee Securities and the Existing Shareholding or their proceeds. Despite this, Chameleon contends that its knowing receipt claim should succeed because a fiduciary’s duty to account for unauthorised profits when referable to identifiable property is a fiduciary obligation with respect to property akin to a trust relationship or other custodial fiduciary relationships falling within the meaning of “trust property” for the purposes of the first limb of Barnes v Addy.

The Commonwealth submits that I should reject Chameleon’s case as failing at the first hurdle. The Commonwealth says that Chameleon’s claim is unsupported by authority and is contrary to the presently understood first limb of Barnes v Addy under Australian law as it applies to non-trustee fiduciaries. The Commonwealth goes so far as to say that the acceptance of Chameleon’s claim involves a radical change to the law by misreading binding authority, overlooking warnings provided in an area fraught with terminology that might confuse the unwary and would make categorical mistakes as to the place of a well-established personal remedy that sits outside the authorities and principles which define the boundaries of the first limb in Barnes v Addy.

Despite these various warnings from the Commonwealth, I have determined that on the contemporary understanding of the application of a claim in knowing receipt under the first limb in Barnes v Addy, which fixes on the conscience of the recipient, Chameleon’s case should succeed.

In summary, on the four principal issues that give rise to the acceptance of Chameleon’s knowing receipt claim against the Commonwealth, I have reached the following conclusions:

According to an ATO Audit Report dated 27 July 2009 (July 2009 Audit Report), Mr Grimaldi was a chartered accountant, an occupation in which he worked for 31 years. He spent 24 of those years providing advice to companies about their financing and structural requirements, advising on the listing on the Australian Stock Exchange (ASX) of around eight companies, including four mining companies. The July 2009 Audit Report also states in respect of Mr Grimaldi that from “1985 until 1989 he was involved in structuring and listing on the ASX a number of public companies including two mining companies [and] … also acted as a director and advisor to those companies” and from “1990 to 1997 he worked as a financial consultant involved in structuring international business ventures mainly between Australia, Malaysia, Philippines, Singapore and China”.

Despite those various business activities, Mr Grimaldi’s financial position was poor. He was made bankrupt in 1989, discharged from bankruptcy in 1998 and had minimal levels of reported income prior to 2004.

Chameleon has aptly described itself as having had a “colourful history” as a listed company. It was incorporated on 16 November 2001 and was listed on the ASX in 2003 as a mining exploration entity. Its directors were Gregory Barnes, Dick Whitbread and Landan Roberts. Mr Barnes and Mr Roberts both later faced criminal charges in relation to their actions while directors of Chameleon between 2001 and 2004. Most of Chameleon’s corporate life has been spent pursuing claims against Mr Grimaldi or arising from his conduct (such as these proceedings against the Commonwealth).

On 18 April 1997, Murchison was incorporated. In March 2000, Murchison became a public company. Originally known as Weboz Ltd, Murchison was initially engaged in investment in the information technology and telecommunications industries and, until at least 2003, its principal activities were the operation of a network of proprietary smart card payphones and public internet access units and the design and marketing of prepaid smart cards. In January 2004, its name changed to NiCu Metals Ltd. In October 2004, it changed its name again to Murchison.

Between 18 April 1997 and 12 November 2004, Mr Grimaldi was a director of Murchison. He held about half of its approximately 16 million shares, was in the top 20 shareholders of Murchison and was its controlling mind. The other director of Murchison at the relevant time was Mr Roberts.

One of the central components of Chameleon’s claims in the Chameleon Proceedings — and the transaction forming the factual substratum of these proceedings — was the acquisition by Murchison of interests in certain mining tenements in Western Australia (Iron Jack Tenements). The details of the transaction were the subject of factual findings by Jacobson J in the Chameleon Judgment and were not in dispute between the parties in these proceedings.

From around December 2003, the principal shareholder and director of Winterfall Pty Ltd (subsequently renamed Crosslands Resources Ltd), Nicholas Zuks, began negotiating with several persons and companies to buy the Iron Jack Tenements from them. Those negotiations culminated in Winterfall entering into a Heads of Agreement with the vendors on 19 February 2004 to purchase the tenements for $1 million, with Winterfall to pay the vendors a royalty of 80 cents per tonne of iron ore removed from the Iron Jack Tenements.

The purchase price for the Iron Jack Tenements was payable in instalments: $100,000 on execution, $400,000 within 60 days of execution (i.e. by 19 April 2004), and $500,000 within 24 months of execution.

Mr Zuks paid the first instalment with his own funds, but neither he nor Winterfall had the money to pay the second instalment. He was successful in obtaining several extensions of time for payment of the second instalment.

In about April 2004, Mr Grimaldi and Mr Barnes approached Mr Zuks about the possibility of Murchison acquiring an interest in the Iron Jack Tenements through a reverse takeover of Winterfall. As a result of those discussions, on around 30 May 2004, Murchison and Winterfall signed a Heads of Agreement, under which:

In about early June 2004, Mr Grimaldi, Mr Barnes and Mr Zuks agreed that Mr Grimaldi and Mr Barnes would be entitled to a “spotter’s fee” in the form of equity in Winterfall to be exchanged for equity in Murchison on completion of the reverse takeover. In early June 2004, an Addendum to the Heads of Agreement was executed which provided that new shares in Winterfall would be issued to nominees of Phillip Grimaldi at no consideration for introducing Murchison to Winterfall. These became known as the Spotter’s Fee Securities.

However, Murchison failed to pay the $350,000 due to Winterfall on execution of the Heads of Agreement. It did not have the funds to do so. The effect of Murchison’s inability to fund the payment to Winterfall meant that Mr Zuks stood to lose Winterfall’s interest in the Iron Jack Tenements, and Mr Grimaldi stood to lose the benefit of the commercial opportunity that he wished for Murchison to take up for his benefit.

Mr Grimaldi took matters into his own hands. In late June 2004, he made arrangements for Chameleon to make a share placement of 8 million ordinary shares at $0.045 cents per share for a capital raising of $360,000. The stated purpose for the share placement was for exploration activity at a gold mine in Palm Springs. Mr Barnes drew two cheques on Chameleon’s bank account for $56,250 and $96,500 respectively, each payable to one of the vendors of the Iron Jack Tenements. The source of the funds for the cheques was the capital raising which Mr Grimaldi had arranged on Chameleon’s behalf. Those payments to the vendors comprised more than 40% of the purchase price.

The reverse takeover of Winterfall was completed on 11 November 2004. It allowed Murchison to obtain ownership, through Winterfall, of the Iron Jack Tenements, which ultimately proved profitable for Murchison and its shareholders. It also resulted in shareholders in Winterfall receiving 80 million shares and some 30 million options in Murchison in exchange for their shares in Winterfall. Of those, 10 million shares and 12 million options were issued to Pinnacle Nominees Pty Limited, a nominee of Mr Grimaldi and Mr Barnes.

On 12 November 2004, Mr Grimaldi resigned from the board of Murchison.

In October 2004, Mr Grimaldi arranged with an accounting firm in Vanuatu, PKF Accountants, run by an accountant, Robert Agius, for the incorporation of a private company limited by guarantee in Vanuatu. As a result, Iron Ore Sales and Management (HK) Limited was incorporated on 9 November 2004. Its name was changed to IOS Management Ltd on 15 November 2004, and later to Iron Investments Limited on 6 July 2005. International Finance Trust Company Limited (IFTC), another Vanuatu-based entity controlled by PKF, was apparently involved in the incorporation of Iron or at least charged a fee for its incorporation. Iron became the ultimate destination of the Spotter’s Fee Securities.

On 11 November 2004, Mr Barnes on behalf of Pinnacle wrote to Murchison directing how the 10 million shares and 12 million options issued by Murchison were to be allocated. That included the allotment of 4 million Murchison shares and 5 million Murchison options to Iron on Mr Grimaldi’s instructions, and 84,000 Murchison shares and 770,000 Murchison options to MGG Capital Pty Ltd, the entity which acted as the trustee for Mr Grimaldi’s superannuation fund. A number of the options were exercised and converted to shares in 2005. It appears that around this time Mr Grimaldi also directed the transfer of some of the Existing Shareholding, which had substantially increased in value following the completion of the reverse takeover of Winterfall. The result of this was that in March 2005, Mr Grimaldi was the controller of some 6 million Murchison shares and 8.055 million Murchison options registered to Iron.

Mr Grimaldi proceeded to sell or cause his nominees to sell some of these Murchison securities for a substantial profit. Those nominees included Pinnacle, Iron, Yilgarn Infrastructure Limited, MGG Capital, MGG Capital as trustee for Webtel Management Super Fund (Webtel Super Fund), IFTC, CGI Investments Ltd and Ross Lorking. He generated significant profits through those sales amounting to about $36 million. The funds were held in New Zealand, in bank accounts held with the ANZ Banking Group (ANZ Bank) in the name of IFTC. The Murchison securities were held in trading accounts in the name of IFTC Broking Services Limited, which were with Goldman Sachs, BBY and (later on) Commonwealth Securities Ltd (Commsec).

Mr Grimaldi slowly repatriated the funds to Australia and used them for various purposes. He instructed IFTC to pay rent for his residential apartment. He travelled frequently, including to London and on a private safari in Africa, and instructed IFTC to pay various recipients to facilitate those trips. He purchased luxury items, including a Bentley Continental vehicle and a Sunrunner 14800 power boat. He also instructed IFTC to advance funds to his solicitor’s trust account which he used to acquire four properties in Sydney: one property at Miller’s Point and three properties at Pyrmont. Mr Grimaldi also instructed IFTC to buy and sell shares on behalf of Iron.

The Commonwealth initially put in issue:

But at the conclusion of the trial, the Commonwealth conceded that the relevant payments it received could be treated as the proceeds or traceable proceeds of the sale of the Spotter’s Fee Securities (T484). The issues raised by the Commonwealth regarding the Existing Shareholding therefore became otiose.

In February 2006, Project Wickenby commenced as a Commonwealth cross-agency task force set up to combat international tax evasion as an aspect of serious financial crimes, particularly through the use of tax havens.

The Commonwealth agencies involved in Project Wickenby were the ATO, the Australian Federal Police (AFP), the Australian Crime Authority, the office of the Commonwealth Director of Public Prosecutions (DPP), the Australian Securities and Investments Commission (ASIC) and the Australian Transaction Reports and Analysis Centre (AUSTRAC).

Some of the operations involved in Project Wickenby were assisted by state agencies, including the Police and the Crime Commission. These Commonwealth and state agencies were involved in various levels of information sharing under their statutory powers. The assistance and information provided by the Crime Commission to the Commonwealth agencies was given on an ad-hoc basis as a matter of comity between the Commonwealth and the State of New South Wales (NSW) to cooperate and was not provided under any formal agreement or legal obligation.

Project Wickenby ran for nearly 10 years, concluding on 30 June 2015. Project Wickenby was the largest tax evasion investigation that had ever been run in Australia, netting in excess of $2 billion in tax liabilities and recouping nearly $1 billion in outstanding revenue. Project Wickenby also resulted in the conviction of 46 individuals of various state and federal criminal offences.

The work undertaken in Project Wickenby led to both civil proceedings and criminal investigations. The civil proceedings principally involved the pursuit of taxation judgments on notices of assessment against the promoters of tax schemes, their clients and controlled entities. The criminal investigations were undertaken by the AFP, which led to prosecutions by the DPP and proceeds of crime actions by the AFP or the Crime Commission.

In 2006, as part of Project Wickenby, the AFP and the ATO began investigating whether Australian residents were engaged in an offshore tax evasion scheme through PKF, orchestrated by Mr Agius. That joint investigation was known as Operation Starlifter. The scheme under investigation involved the remittance of funds by Australian companies to a New Zealand bank account under the guise of a trading expense, which were ultimately remitted back to the relevant Australian company or a personal bank account of a director of the company. Mr Grimaldi became the subject of these investigations, which are outlined in detail below.

Michael O’Neill was an Assistant Commissioner at the ATO, being one of the Assistant Commissioners responsible for the day-to-day conduct of Project Wickenby. Mr O’Neill oversaw and conducted proceedings brought by the ATO against Mr Grimaldi (T103), which are outlined in detail below. Mr O’Neill was the only ATO witness called by the Commonwealth at the hearing before me. Mr O’Neill was extensively cross-examined at the hearing.

Steven Barns was the ATO’s primary auditor of Mr Grimaldi’s tax affairs. Mr Barns reported indirectly to Mr O’Neill (T104). Mr O’Neill gave evidence that Mr Barns had knowledge of the day-to-day conduct of the audit of Mr Grimaldi (T105). Mr Barns still works at the ATO and swore an affidavit on behalf of the Commonwealth in these proceedings. The Commonwealth did not call Mr Barns as a witness in the hearing before me and did not explain why it did not do so.

Aris Zafiriou was an acting director and later the director of the debt section of the ATO working on Project Wickenby (T105). Mr Zafiriou was the lead tax debt recovery officer for the ATO in the proceedings against Mr Grimaldi. Mr Zafiriou no longer works at the ATO but swore an affidavit on behalf of the Commonwealth in these proceedings. The Commonwealth did not call Mr Zafiriou as a witness in the hearing before me and did not explain why it did not do so.

Edwina McLachlan was and is a tax counsel at the ATO. As set out in detail below, Ms McLachlan was involved in the investigation of Mr Grimaldi and the settlement that was finally reached with him. As also set out in detail below, Ms McLachlan was involved in a late-night call with Mr Zafiriou about the Chameleon Judgment on the day the ATO found out about it. Ms McLachlan still works at the ATO and affirmed an affidavit on behalf of the Commonwealth in these proceedings. The Commonwealth did not call Ms McLachlan as a witness in the hearing before me and did not explain why it did not do so.

The rule in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, being the principle articulated by Kitto J at 308, Menzies J at 312 and Windeyer J at 320–321, has been distilled, summarised, expanded and explained in a number of authorities in the High Court of Australia, the Federal Court and the Court of Appeal of this court, principally including: Payne v Parker [1976] 1 NSWLR 191, Glass JA at 200–201; Flack v Chairperson, National Crime Authority (1997) 80 FCR 137, Hill J at 148–149; Adler v Australian Securities and Investments Commission (2003) 179 FLR 1; [2003] NSWCA 131, Giles JA (with whom Mason P and Beazley JA agreed) at [649]; Manly Council v Byrne [2004] NSWCA 123, Campbell J (with whom Beazley JA and Pearlman AJA agreed) at [44]–[61]; Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11, Heydon, Crennan and Bell JJ at [63]–[64]; Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53, Besanko, Perram and Katzmann JJ at [79]; Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ at [169] and Heydon J at [259] and [263]–[264]; Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61, Bathurst CJ, Bell P, and White JA at [49]; Ling v Pang [2023] NSWCA 112, Kirk JA (with whom Leeming and Mitchelmore JJA agreed) at [20]–[28]; SSABR Pty Ltd v AMA Group Limited [2024] NSWCA 175, Stern JA (with whom Ward P and Price AJA agreed) at [158]–[161]. These authorities support the following legal principles:

Chameleon submitted that, a week before the hearing before me and without explanation, the Commonwealth decided not to call Mr Barns, Mr Zafiriou and Ms McLachlan as witnesses in circumstances where they were all available and would be expected to have been called as witnesses by the Commonwealth. Relying on Jones v Dunkel, Chameleon submitted that I should draw inferences that their evidence would not have assisted the Commonwealth on the question of the ATO’s knowledge and that I can more readily draw inferences against the Commonwealth and in favour of Chameleon in relation to that issue in their absence.

I accept Chameleon’s submissions that I should make Jones v Dunkel inferences in respect of the specific factual matters that I have identified below.

Although the Commonwealth submitted that the absence of each of Mr Barns, Mr Zafiriou and Ms McLachlan is of no significance in circumstances where the Commonwealth had the Chameleon Judgment and actual knowledge of the liability of Mr Grimaldi, I do not accept that submission in respect of the relevant events in advance of delivery of the Chameleon Judgment. There are matters where it is appropriate for Jones v Dunkel inferences to be drawn about the knowledge of the ATO at particular points in time, which I have outlined in further detail below.

It is necessary to assess the credibility and reliability of the evidence given by Mr O’Neill in these proceedings.

In doing so, I have endeavoured to evaluate Mr O’Neill’s evidence, not only in the light of his responses during cross-examination, but also in light of the contemporaneous documents, the objectively established facts, the apparent logic of events and probabilities of human behaviour, the existence and nature of corroborative evidence, and the effect and impression given by the evidence as a whole.

This is in line with the appropriate approach to be taken by a trial judge in assessing the reliability of evidence given by witnesses in the course of trial proceedings. Among the salient principles that guide this undertaking are the following:

I am particularly conscious that Mr O’Neill gave evidence in 2024 about events which principally took place between 2008 and 2010. In those circumstances, I accept that his memory was likely to be imperfect even if he expressed himself with certainty about his recollections. In assessing Mr O’Neill’s evidence, I also recognise that he did not have a personal financial interest in the outcome of these proceedings.

The Commonwealth submitted that Mr O’Neill’s evidence is not relied upon in any area of controversy given the narrowing of issues. While I accept that the issues narrowed as a result of the concessions made by the Commonwealth, I do not consider that this narrowing resulted in Mr O’Neill’s evidence becoming irrelevant to issues that I am required to determine.

Chameleon submitted that, other than as evidence that the ATO shut its eyes to the obvious, or wilfully and recklessly failed to make inquiries that an honest and reasonable person in the position of the ATO would have made, I should not accept Mr O’Neill’s evidence on any matter unless it is an admission against the Commonwealth’s interests or it is corroborated by a contemporaneous document. Chameleon submits that this conclusion follows for at least the following five reasons, each of which I agree with.

Firstly, I do not know which parts of Mr O’Neill’s affidavit were drafted by him, the lawyers assisting him or some combination of both. In cross-examination, Mr O’Neill initially stated that his affidavit was written in his own words, that he is a solicitor without a practising certificate and where he discussed legal concepts in his affidavit it reflected his understanding of the law (T106). Later in the cross-examination, Mr O’Neill said that in drafting his affidavit he was assisted by lawyers and counsel but he did not know which parts of his affidavit were drafted by him and which parts were drafted by other people because it was “impossible for [him] to say, [that he] drafted that sentence and somebody else drafted this sentence” (T192–193). Mr O’Neill did say that whether he had written parts of the affidavit or someone else had, he had accepted the contents of the affidavit and asserted them to be true (T193), he settled the affidavit with his solicitors and stood by the contents of it (T149) and that he “adopted the affidavit” (T223).

Secondly, Mr O’Neill refused to accept obvious propositions or obvious errors in his affidavit when they were brought to his attention during the cross-examination.

One example of this was [103(i)(iii)] of Mr O’Neill’s affidavit which purports to record that a director of Chameleon met with officers of the ATO and provided information indicating that Chameleon “was not claiming any constructive trust or other proprietary claim against or interest in the shares and options issued to Iron”. In cross-examination, Mr O’Neill said that his knowledge of that assertion was based on a file note of a meeting on 4 June 2009 between officers of the ATO (Mr Papadopoulos and Mr Barns) with a director of Chameleon (Mr Karam) but agreed that the file note did not refer to Mr Karam making any such statement (T207–208). Despite conceding that matter and stating that the only source of his statement was the file note, in further cross-examination Mr O’Neill argumentatively refused to agree that his affidavit was wrong about that matter (T208–212). Mr O’Neill gave the impression that he would not concede an obvious inaccuracy in his affidavit because he thought it was unhelpful to the Commonwealth’s defence of Chameleon’s claim.

A further example was an issue which arose concerning inconsistency in the statements made in [105] and [107] of Mr O’Neill’s affidavit regarding whether the Australian Government Solicitor (AGS) did or did not obtain a copy of the originating process in the Chameleon Proceedings. Mr O’Neill said in those paragraphs respectively that the AGS did not obtain anything more than the originating process (at [105]) and did not obtain and/or provide ATO staff a copy of the originating process (at [107]). Mr O’Neill stated in cross-examination that the AGS did obtain a copy of the originating process and then said that he stood corrected by his affidavit, and he would rely on it (T140–141). There was an obvious inconsistency in the respective parts of the affidavit which Mr O’Neill initially acknowledged (T142), but then later said that he apologised if they were “ambiguous and inaccurate in relation to that matter” (T149). Mr O’Neill would not, however, simply acknowledge that they were directly inconsistent (T149).

Thirdly, despite Mr O’Neill giving evidence about the Chameleon Proceedings in [71], [72] and [103] of his affidavit, and initially saying in cross-examination that he turned his mind to the specific relief that was sought against Mr Grimaldi (T102), Mr O’Neill then repeatedly portrayed a significant lack of knowledge about the Chameleon Proceedings, examples of which included the following:

Fourthly, Mr O’Neill gave unreliable evidence concerning his understanding of the requirement of a defaulting fiduciary to account following a breach of fiduciary duty. In cross-examination, Mr O’Neill gave evidence that he understood each of the following (T109–110):

Mr O’Neill then gave evidence that if there was a breach of fiduciary duty, the principal could seek a declaration and one of the remedies would be an account of profits (T111–112).

Having given this evidence, Mr O’Neill was then asked a series of questions to which he professed ignorance regarding the legal position. Mr O’Neill was asked whether in the period from 2008 to 2010 he understood that a fiduciary who made a profit from a breach of fiduciary duty could use those profits to buy a motor vehicle (T112–113). Mr O’Neill’s initial answer was that the fiduciary could do so but legally they should not because the funds were held on trust as a result of the breach of fiduciary relationship (T112–113). Mr O’Neill then said that as a matter of fact the fiduciary could buy a motor vehicle with the profits, but the question was then clarified as to whether Mr O’Neill understood that the fiduciary would be legally entitled to use the profit obtained in breach of fiduciary duty to buy a motor vehicle (T113). Mr O’Neill answered that it was his understanding that the fiduciary would hold the funds in trust and he did not understand whether they were legally entitled to use it to buy a motor vehicle (T114). The questioning then turned to whether Mr O’Neill turned his mind to whether or not Mr Grimaldi could legally use the profit he obtained as a result of his breach of fiduciary duties owed to Chameleon to pay a tax debt. Mr O’Neill responded that he did not know the answer in the period from 2008 to 2010 or at the present time (T114–115). I consider these shifts in the position of Mr O’Neill’s evidence to be unsatisfactory although I do not go so far as to find that Mr O’Neill knowingly gave false evidence, which Chameleon urged me to do.

Finally, Mr O’Neill gave unsatisfactory evidence on which I could not rely regarding two topics: whether he received legal advice on the effect of the Chameleon Proceedings and whether he read the Chameleon Judgment at any time prior to these proceedings.

On the first topic of whether he received legal advice on the effect of the Chameleon Proceedings, Mr O’Neill in [72] of his affidavit gave the following evidence:

Mr O’Neill was asked repeatedly whether he could state any basis for the belief he expressed in [72] of his affidavit. Mr O’Neill gave various answers that he could not be precise as to how and when he formed the view (T143) and he was not aware of any particular document, a particular event, a particular discussion or point of time which led to his awareness (T144–145, T156 and T163–164). The run of Mr O’Neill’s evidence on this issue is exemplified in the following exchange (T164):

When Mr O’Neill was questioned the next day, he said that he did receive advice from the ATO’s lawyers, AGS lawyers and counsel, sometimes orally, in briefings on the trust law issues in relation to Mr Grimaldi and Chameleon but he could not say exactly when the advice was given or exactly who gave it (T202–203 and T222–223). The evidence he gave was as follows (T202–203):

Yet there is no reference anywhere in Mr O’Neill’s affidavit to receiving any advice from anyone at the ATO or the AGS about trust law issues in the Chameleon Proceedings (as Mr O’Neill acknowledged (T203)) and a subsequent call by Chameleon for the Commonwealth to produce any records of any such advice did not result in the production of any documents.

In the absence of any written records of that advice to support Mr O’Neill’s evidence of having received advice (sometimes only orally) and in light of the material change from the evidence that he had given the previous day that he had no specific or general recollection of a discussion with anybody about the nature of the relief that was being sought in the Chameleon Proceedings, I consider that I can safely infer that Mr O’Neill did not receive that advice in any written form. I also find that Mr O’Neill gave incorrect evidence in stating that he had received advice (which he said was only sometimes delivered orally) when he did not. This is highly unsatisfactory and damaging to Mr O’Neill’s reliability and credibility as a witness. Although Chameleon urged me to find that Mr O’Neill gave knowingly untrue evidence on this topic, I do not consider that it is necessary for me to do so.

On the second topic of whether he read the Chameleon Judgment, Mr O’Neill in [140] of his affidavit gave the following evidence:

In cross-examination, Mr O’Neill said he read the Chameleon Judgment sometime after it was published, at some stage in the context of preparing his affidavit and then stated that he read it at some time around 2010 for the purposes of issues relevant to the ATO’s tax administration or their work on Project Wickenby (T131–133).

When confronted with the apparent inconsistency between [140] of his affidavit and the evidence he gave in cross-examination, Mr O’Neill said he read the Chameleon Judgment but for reasons unrelated to Mr Grimaldi’s liability or any connection that might have with the Crime Commission matter (T135). Both versions of his evidence cannot be true. It is not necessary for me to make a finding about which one is true and which is incorrect.

I again consider that this evidence reflects poorly on Mr O’Neill’s reliability and credibility as a witness.

I observed Mr O’Neill closely in the witness box over two days. I was extremely troubled by the way in which he appeared to become increasingly uncomfortable that the words in his affidavit did not match the evidence he was giving in cross-examination. On several occasions, Mr O’Neill appeared to be unfamiliar with the evidence that was contained in his affidavit. Whether this was caused by parts of his affidavit having been written by someone else or a faulty recollection on his part is not necessary for me to determine.

I also consider that Mr O’Neill’s constant references in his cross-examination to words to the effect of an “increasing awareness” (T101, T143, T144, T156, T158, T162 and T221), “increasing understanding” (T143, T157, T201 and T202), “increasing intelligence” (T202) and “increasing knowledge” (T222) reflected an unnatural stance of a witness endeavouring to give evidence he perceived to assist the Commonwealth’s case. Perhaps this arose from the fact that Mr O’Neill has been employed at the ATO for the past 35 years (the last seven years of which have been on secondment to the Tax Practitioners Board), but I expected that a person who has risen to the seniority of the positions of Assistant Commissioner of the ATO and the ATO’s Chief Risk Officer would refrain from approaching the solemn task of giving evidence in that way.

Taken together, all of these matters adversely impact Mr O’Neill’s reliability and credibility as a witness in these proceedings. As I have indicated above, I have exercised caution in accepting his evidence on any matter unless it is an admission against the Commonwealth’s interests or it is corroborated by a contemporaneous document.

After going in and out of liquidation and administration and conducting an investigation in relation to Mr Grimaldi’s relationship with Chameleon and Murchison, on 29 November 2007, Chameleon commenced the Chameleon Proceedings in the Federal Court against Mr Grimaldi, Murchison, Mr Barnes, Winterfall and Pinnacle by filing a statement of claim.

The thrust of Chameleon’s case in the Chameleon Proceedings was that, through a series of transactions, Mr Grimaldi and Mr Barnes had taken shares and cash from Chameleon for the ultimate purpose of enabling Murchison to acquire a 60% shareholding in Winterfall and thus a controlling stake in the Iron Jack Tenements. Those transactions included the placement of shares in July 2004 and the drawing of the two cheques of $56,250 and $96,500 by Mr Barnes.

In essence, Chameleon alleged that Murchison’s reverse takeover of Winterfall and the acquisition of the Iron Jack Tenements were the result of the breaches of statutory and equitable duties owed by Mr Grimaldi and Mr Barnes to Chameleon.

In the statement of claim in the Chameleon Proceedings, Chameleon sought declarations under s 1317E(1) of the Corporations Act 2001 (Cth) against Mr Grimaldi that he contravened ss 180 to 182 of the Corporations Act, damages resulting from his breaches of statutory duties, an order that an account be taken of all profits made by him as a result of those breaches, and an order that he pay equitable compensation for his breaches of equitable and fiduciary duties owed to Chameleon and for his knowing involvement in breaches of fiduciary duty by Mr Barnes and Mr Roberts.

Chameleon sought more extensive relief against Murchison, Mr Barnes, Winterfall and Pinnacle. As against Murchison, Chameleon sought an order that Murchison held all or a proportion of its shares in Winterfall on constructive trust for Chameleon. It claimed that Pinnacle and Mr Barnes held any beneficial interest in the 10 million shares in Winterfall issued to Pinnacle on constructive trust for Chameleon. Chameleon sought an injunction restraining Pinnacle and Mr Barnes from transferring, mortgaging or otherwise encumbering that beneficial interest in those shares, and sought an order requiring Pinnacle and Mr Barnes to transfer the beneficial interest in those shares to Chameleon.

In respect of all the respondents in the Chameleon Proceedings, the statement of claim stated that Chameleon sought the remedies subject to its reserved right to elect between them.

On 29 November 2007, Chameleon notified the ASX of the claims in the Chameleon Proceedings. In that notification, Chameleon indicated that it had “reserved its rights to make an election between the remedies which are ultimately held to be available to it”. On the same day, Murchison issued an ASX announcement of its own, informing the market of the Chameleon Proceedings, referring to them as an “opportunistic claim” with “no substance”.

On 28 April 2008, Mr Agius was arrested at Perth airport following the investigation as part of Operation Starlifter and charged with conspiracy to defraud the Commonwealth and money laundering.

By May 2008, the AFP had identified a number of New Zealand foreign bank accounts in Australian dollars and an Australian Commsec account held by PKF. The AFP was concerned that these accounts were for the purpose of “assist[ing] Australian clients to reduce or avoid their Australian tax liability through the provision of various illegal schemes and scams”. Some of those accounts were held by IFTC. The AFP was concerned that IFTC was about to start withdrawing funds from the New Zealand accounts.

In around May 2008, the ATO began investigating the financial affairs of Mr Grimaldi.

As mentioned above, the Crime Commission was a state agency involved in Project Wickenby and Operation Starlifter to aid the Commonwealth agencies in the pursuit of the promoters, their entities and clients taking part in offshore tax avoidance schemes. One such scheme was that promoted by PKF through Mr Agius in Vanuatu through IFTC and IFTC Broking.

On 13 May 2008, the Crime Commission commenced proceedings number S12212/2008 in this court (Recovery Act Proceedings) by summons ex parte seeking:

The Crime Commission relied on the affidavit of Arthur Moerman sworn 13 May 2008 in seeking these orders in the Recovery Act Proceedings.

The Recovery Act Proceedings were brought on the basis that the DPP had commenced proceedings under the Proceeds of Crime Act 2002 (Cth) and restrained some property of Mr Agius, but not the foreign bank accounts or the share trading accounts. Operation Starlifter had not yet identified the beneficial owners of those accounts.

It is clear from these events that the Crime Commission was involved with the AFP and the ATO in the steps to be taken arising from Operation Starlifter.

On 13 May 2008, Hoeben J made orders in the Recovery Act Proceedings, amongst which were the following:

On 16 May 2008, Hoeben J made orders in the Recovery Act Proceedings under s 12(1)(d)(i) of the Recovery Act that the Public Trustee open domestic and international share trading accounts with Commsec and that the shares held by IFTC Broking in certain identified accounts be transferred into those accounts.

On 22 May 2008, the Public Trustee opened an account with Commsec into which the shares were transferred.

On 6 June 2008, IFTC and IFTC Broking appeared in the Recovery Act Proceedings through their solicitors, Atanaskovic Hartnell, and filed notices of intention to appeal the First Restraining Orders.

On 13 June 2008, IFTC and IFTC Broking were joined as defendants to the Recovery Act Proceedings and also filed a notice of appeal against the First Restraining Orders.

It was through Operation Starlifter that the ATO became aware that Mr Grimaldi had received monies from offshore that had not been declared as assessable income.

By 25 August 2008, the ATO’s investigation into Mr Grimaldi’s affairs was advanced; it had finalised a detailed profile setting out a “case theory” on his alleged offending (Grimaldi Profile). The ATO’s primary case theory was that Mr Grimaldi was the beneficiary of over $11 million from a New Zealand account controlled by Mr Agius, which was being used as a conduit to transfer funds to and from Australia as part of a “round robin arrangement” to minimise the tax liability of Australian taxpayers. The ATO’s alternative case theory was that Mr Grimaldi had been able to accumulate funds overseas that had not been reported as taxable income in Australia in prior years. On either theory, it was plain that the ATO considered Mr Grimaldi to be evading tax.

In cross-examination, Mr O’Neill said that it was likely that he read the Grimaldi Profile carefully because Mr Grimaldi was a high-risk case and he was asked to be directly involved in discussions with Mr Grimaldi (T122–123).

At [8] of the Grimaldi Profile, the ATO noted that Mr Grimaldi had been the director of 17 companies since the 2003 income year and, as at August 2008, Mr Grimaldi was a director of five companies.

The Grimaldi Profile also noted:

The table in the Grimaldi Profile at [37] demonstrates that between 2005 and 2009, there were 40 definite or possible transactions relating to Mr Grimaldi and IFTC, with none of those occurring in 2005, $136,269 in value occurring in 2006, $1,449,554 in value occurring in 2007, $9,685,160 in value occurring in 2008 and $7,270 in value occurring in 2009. The spike in the value of the transactions between 2006 and 2008 is significant.

It is plain from these details in the Grimaldi Profile that the ATO was aware that Mr Grimaldi had no other source of wealth prior to 2004 other than the profits that he subsequently earned from selling Murchison shares and trading in those proceeds. Mr O'Neill gave evidence that Mr Barns may have had knowledge of that matter (T126). In light of the fact that Mr Barns was not called as a witness, I infer that, in the absence of any contrary evidence, the ATO knew that Mr Grimaldi had no material source of wealth prior to the placement of the Murchison securities into Iron in November 2004.

The Grimaldi Profile at [24] referred to the Chameleon Proceedings in the following terms:

A footnote to that paragraph referred to an article in The Australian newspaper about the Chameleon Proceedings, which stated:

It is therefore clear that, as at August 2008, the ATO knew that the Chameleon Proceedings included claims against Mr Grimaldi by both Chameleon and Murchison. Mr O’Neill gave evidence that there were three important pieces of information contained in the Grimaldi Profile: the reference to Murchison being a company whose shares were being sold by Mr Grimaldi or entities associated with him; that Mr Grimaldi was formerly a director of Murchison; and that claims had been brought against Mr Grimaldi (T138–139). Mr O’Neill also accepted that to work out the tax law significance of the connection between the Murchison shares that Mr Grimaldi was selling and the Chameleon Proceedings, the ATO might need to know something about the nature of the claims being made in the Chameleon Proceedings (T138–139). Mr O’Neill also gave evidence that the key circumstances that were relevant were those that went to the heart of Mr Grimaldi trading in shares and making profits on those trades (T158–159). But there is no evidence that the ATO ever conducted an analysis of the claims made in the Chameleon Proceedings.

The Grimaldi Profile concluded (emphasis added):

There is no evidence that the ATO reviewed the claims made in the Chameleon Proceedings as part of any “further information” or “[f]urther in depth analysis”. Such a review would have involved consideration of the originating process, the pleadings, the evidence and the submissions in the Chameleon Proceedings. The evidence shows that this consideration was never undertaken by the ATO. There was simply no review conducted by the ATO of the Chameleon Proceedings.

On 11 September 2008, the Crime Commission sent a letter to the ATO in relation to Mr Agius concerning a significant flow of funds to and from a New Zealand bank account for IFTC, and substantial share trading undertaken by companies incorporated in Vanuatu under the Agius umbrella. The letter stated:

It is clear that the Crime Commission was sharing information with the ATO that identified Mr Grimaldi as a shareholder in Murchison through his private company and his status as a party to the Chameleon Proceedings.

The ATO also prepared a detailed profile on Murchison (referred to below as MMX) (Murchison Profile), which it finalised on 18 September 2008, just over three weeks after completing the Grimaldi Profile. The Murchison Profile at [1]–[2] states (emphasis added):

The belief stated in this final sentence of [2] was repeated later in the Murchison Profile at [13]. At this time, the ATO knew that Mr Grimaldi might be the ultimate beneficiary of shares in Murchison held by Vanuatu located entities.

It was also made plain that the Grimaldi Profile and the Murchison Profile were to be read together.

As stated in the Murchison Profile at [12], the impetus for the creation of the Murchison Profile was clearly Mr Grimaldi’s association with Murchison by his status as a former director of Murchison. The ATO was therefore aware of the connection between Mr Grimaldi and Murchison. It was this connection that caused the ATO to include Murchison as part of its investigation.

The Murchison Profile at [8] noted that as at February 2004, Murchison had issued 12.5 million shares to ATL Exploration Pty Ltd and Weboz. The Murchison Profile continued (all grammatical errors left in place):

By these paragraphs of the Murchison Profile, the manner in which Iron (the nominee for Mr Grimaldi) came to hold Murchison shares and options which comprised the Existing Shareholding (being those issued by Murchison) and the Spotter’s Fee Securities (being those directed by Pinnacle to be issued by Murchison) was known to the ATO.

A table recording the “main details” of Murchison in the Murchison Profile at [14] included information on the Chameleon Proceedings. Under the sub-heading “Other” it stated:

The ATO therefore had actual knowledge that it was alleged in the Chameleon Proceedings that Mr Grimaldi was a de facto director of Chameleon and that, together with Mr Barnes, he had caused Chameleon to issue securities to raise funds to acquire the Iron Jack Tenements. In other words, the ATO was aware that there was an allegation that Mr Grimaldi had misused Chameleon’s funds to allow Murchison to acquire an asset, which obviously would have involved a breach of fiduciary duties by Mr Grimaldi.

The evidence of Mr O’Neill was that the circumstances of the claim in the Chameleon Proceedings were also facts relevant to the tax audit (T158–159). This was obvious. Despite this, it was a matter that the ATO did not investigate in any detail. There is no evidence that the ATO ever obtained the originating process, the pleadings, the evidence or the submissions in the Chameleon Proceedings.

Iron (then referred to as IOS Management) was also included in the Murchison Profile at [46]–[71] due to its significant shareholding in Murchison. The table in the Murchison Profile at [50] described the numbers of Murchison shares held and disposed of by Iron, and details of the ANZ Bank account in New Zealand into which the proceeds were deposited and said at [50]:

The ATO knew that there had been a substantial sale of Murchison shares by Iron that raised proceeds of nearly $37 million, and it was fixing upon a capital gain made by Iron and/or Mr Grimaldi of the same amount.

By virtue of information said to have been provided by the Crime Commission and the AFP, it was stated under the heading “Assets” that 9.705 million shares in Murchison had been disposed of and under the heading “Bank account” that the proceeds of the disposal of Murchison shares had been deposited into an identified bank account with ANZ Bank in the name of IFTC. It was this bank account that was later used to pay the first $12.5 million of the settlement Mr Grimaldi reached with the ATO, the details of which are set out below.

The Murchison Profile also set out information regarding the trading and transfer of the Murchison shares. In particular, the Murchison Profile at [62] noted that on 25 April 2005 Iron had transferred 250,000 shares to Pinnacle at below market value (for consideration of $1), recorded that Pinnacle was affiliated with Mr Barnes, and Chameleon had commenced proceedings against both Mr Barnes and Pinnacle. After referring to a company of which Mr Barnes and Mr Grimaldi were both directors, the Murchison Profile stated at [62]:

The detail in the Murchison Profile at [61]–[71] set out all of the disposals of the Murchison shares by Iron, including the identification of the ANZ Bank account of IFTC into which proceeds of those disposals were paid (at [66] and [70]).

The Murchison Profile concluded at (all grammatical errors left in place):

As a result, it is clear that at 18 September 2008, when the Murchison Profile was finalised, the ATO knew:

I consider that the proper inference to be drawn is that it would have been obvious to the ATO officers who prepared the Grimaldi Profile and the Murchison Profile, Mr O’Neill and the other officers of the ATO who read the profiles, that as a step in the ATO’s investigation, they should obtain the originating process, pleadings, evidence and submissions in the Chameleon Proceedings so that they could understand the claims that had been made, the basis for those claims and how Iron came to acquire millions of Murchison securities for no consideration.

On or about 19 September 2008, there was a telephone conversation between Martin Woods (the solicitor acting for Mr Grimaldi and Iron) and Jonathan Spark (the Assistant Director of the Financial Investigations Division of the Crime Commission). During the call, Mr Wood said that Mr Grimaldi asserted a beneficial interest in the shares and funds in the IFTC accounts that were the subject of the First Restraining Orders.

On 22 September 2008, Mr Woods sent a letter to the Crime Commission requesting that the assets in accounts in the name of IFTC and IFTC Broking be excluded from the First Restraining Orders made by this court on 13 May 2008. According to the letter, that was because Iron was the “immediate” and Webtel Super Fund (with MGG Capital as trustee and Mr Grimaldi as sole beneficiary) the “ultimate” beneficial owners of the assets held in the accounts. The letter stated that (emphasis added):

As put in emphasis above, Mr Woods attached to the letter a copy of the “Trust Deed dated 7th July 2005” (July 2005 Trust Deed). The July 2005 Trust Deed would later be revealed to be “not a genuine document” to the knowledge of the ATO, the details of which are set out below.

The letter from Mr Woods was sent by the Crime Commission to the ATO on the same day, being 22 September 2008.

On 25 September 2008, Mr Grimaldi, Mr Woods and Holgen Sorenson (as counsel for Mr Grimaldi) met with representatives of the ATO (Antoine Tannous and Ivan Barba) and the Crime Commission (Tim O’Connor, Mr Spark, Lou Novakovic, Lesleigh Strohfeldt and Noel Stewart). Given that Mr Grimaldi was under active investigation by the ATO at this time, and in the absence of evidence from the ATO on this matter, I infer that Mr Tannous and Mr Barba were senior officers within the ATO. In the absence of Mr Barns as a witness in these proceedings giving evidence to the contrary, I also infer that what was said in this meeting was reported to him.

According to a short file note of the meeting, Mr Grimaldi said that he had no assets when he came back from overseas in 1998, all his wealth offshore came from Murchison and was invested in superannuation funds. This confirmed the position known by the ATO as recorded in the Grimaldi Profile dated 25 August 2008, which is that Mr Grimaldi had no other source of wealth than the proceeds from the disposal of Murchison shares.

The file note of the meeting on 25 September 2008 also records:

It appears from the file note that during the meeting Mr Grimaldi estimated that:

The first reason given by Mr Grimaldi for placing the funds in a nominee company in Vanuatu was that he was a director of Murchison. The ATO knew by this time that Mr Grimaldi ceased being a director of Murchison by 12 November 2004 (having resigned on 11 November 2004) so he must have been speaking of his state of mind on the receipt of shares by Iron on 11 November 2004. In doing so, it appears that Mr Grimaldi revealed his state of mind in around early November 2004, when he set up Iron and then directed Mr Barnes to cause Pinnacle to give four million Murchison shares and five million Murchison options to Iron and 84,000 Murchison shares and 770,000 Murchison options to MGG Capital from the 10 million shares and 12 million options issued by Murchison which were to be allocated.

The second reason given by Mr Grimaldi at the meeting for placing the funds offshore in November 2004 was a “suspicion with Chameleon”. Here it is plain that Mr Grimaldi was giving his state of mind in November 2004 and was not referring to any subsequent suspicion, such as when the Chameleon Proceedings commenced in November 2007. On its face, it appears that Mr Grimaldi is explaining that he put the Murchison shares overseas in November 2004 to put them out of reach from a claim to them by Chameleon based on some improper conduct by him. Mr Grimaldi’s reference to the “suspicion with Chameleon”, combined with the ATO’s then knowledge as recorded in the Grimaldi Profile and the Murchison Profile that the claims made against Mr Grimaldi in the Chameleon Proceedings involved the misappropriation of Chameleon’s funds, would have made it obvious to the ATO that it should investigate the Chameleon Proceedings to determine what Chameleon alleged Mr Grimaldi had done so that it could understand exactly what was the “suspicion with Chameleon”. As already stated, there is no evidence that any such investigation of the Chameleon Proceedings ever took place within the ATO.

A more detailed account of the meeting with Mr Grimaldi was recorded within the “Status Report: Beneficial Owners Investigation” dated 25 October 2008 (Beneficial Owners Report) prepared by Mr Novakovic and Mr Stewart, each of whom were forensic accountants at the Crime Commission. Under the heading “Phillip Felice Grimaldi”, the Beneficial Owners Report recorded the following matters as having been told to the Crime Commission by Mr Grimaldi during the meeting:

As is apparent from these excerpts of the Beneficial Owners Report, Mr Grimaldi was placing importance on the July 2005 Trust Deed to explain that the Murchison shares and options were held by Iron on behalf of MGG as trustee for the Webtel Super Fund. But Mr Grimaldi apparently had ready access to the proceeds of the sale of the Murchison shares and options to enable him to spend them for his own benefit. The existence of the Chameleon Proceedings was also raised at the meeting on 25 September 2008, once again demonstrating the obvious need for the ATO to understand the claims that had been made in it by investigating them, which was not done.

As outlined in more detail below, I infer that the Crime Commission later provided the Beneficial Owners Report to Mr Barns of the ATO in November 2008, that Mr Barns read it, and that it was also given to and read by Mr Zafiriou of the ATO in March 2009.

The summary in the Beneficial Owners Report in relation to Mr Grimaldi was then repeatedly used in other documents that were prepared in the course of the ATO’s investigation of him.

On 26 September 2008, Mr Grimaldi and Mr Woods had a further meeting with the ATO representatives, Mr Barba and Mr Tannous. A file note of that meeting states:

Attached to the file note was a document headed “Chronology of events GRIMALDI”, which does not include any reference to the commencement of the Chameleon Proceedings in November 2007.

The file note indicates that the ATO was focused entirely on the tax assessable on the proceeds of the sale of the Murchison shares and options and the profits earned from them. There was no mention of the transactions using the funds of Chameleon pursuant to which the Murchison shares and options had come into existence; the claims made in the Chameleon Proceedings; or any questions having been asked by the ATO officers about them. This is despite the Chameleon Proceedings having been specifically mentioned by Mr Grimaldi in the meeting with the ATO and the Crime Commission on the previous day and particularly Mr Grimaldi saying that a “suspicion with Chameleon” was a reason why the Murchison shares and options were placed offshore.

In the absence of Mr Barns as a witness in these proceedings giving evidence to the contrary, I infer that what was said in this meeting was reported to him.

Following the meeting on 26 September 2008, Mr Grimaldi and the Crime Commission came to an agreement to release the First Restraining Orders so far as they related to assets to which Mr Grimaldi claimed he was beneficially entitled.

On 10 October 2008, Mr Grimaldi, the Crime Commission and MGG Capital as trustee for the Webtel Super Fund executed a deed in which Mr Grimaldi asserted that he was the “ultimate beneficial owner of the property specified in the Schedule” to the deed. The “property specified in the Schedule” to the deed included 978,945 shares in Murchison, as well as the amounts of US$32,142.56 and A$14,263,136.36 held in ANZ Bank accounts in the name of IFTC.

In the deed, Mr Grimaldi stated that it was his intention to file a notice of motion in the Recovery Act Proceedings seeking “a declaration that he is the ultimate beneficial owner of the property specified in the Schedule”, and the Crime Commission and Mr Grimaldi and stated their intention to execute consent orders in the Recovery Act Proceedings which included their consent to that declaration. Consent orders to that effect were drafted, but IFTC and IFTC Broking (who, at the time, were represented by Atanaskovic Hartnell, the same lawyers acting for Chameleon in the Chameleon Proceedings) refused to execute them.

On 10 October 2008, Mr Grimaldi filed the notice of motion referred to in the deed. In his supporting affidavit sworn 10 October 2008, he deposed that in late 2004 he became beneficially entitled to 6.25 million Murchison shares and 7.25 million Murchison options expiring November 2009. He referred to the July 2005 Trust Deed in which Iron declared that it held Murchison shares and options on trust for the Webtel Super Fund, which he annexed to the affidavit. He described what had occurred with those shares and said that part of the proceeds of sale of the shares was held in three ANZ Bank accounts in New Zealand in the name of IFTC. He said he had agreed to pay $3 million to the ATO from those accounts in advance of tax assessments for him and his superannuation fund.

A copy of Mr Grimaldi’s affidavit sworn 10 October 2008 was provided by the Crime Commission to the ATO.

When the notice of motion came before the court on 17 October 2008, IFTC appeared and questioned the authenticity of the July 2005 Trust Deed that Mr Grimaldi had produced to show that the Murchison shares and options were held on trust for his superannuation fund. As indicated above, the July 2005 Trust Deed had been produced to the Crime Commission as an attachment to the letter dated 22 September 2008 from Mr Woods on behalf of Mr Grimaldi and it was mentioned at the meeting on 25 September 2008 with the ATO and the Crime Commission as recorded in the Beneficial Owners Report. After this hearing, the Crime Commission changed its position and was no longer willing to release assets from the First Restraining Orders.

As outlined below, on 15 July 2009, the ATO would be provided with an expert report which concluded there was prima facie evidence to support the proposition that the July 2005 Trust Deed was “not a genuine document”.

On 25 October 2008, the Crime Commission sought and obtained ex parte further orders made by Hoeben J in the Recovery Act Proceedings in respect of assets held in IFTC accounts, including:

Mr Spark swore an affidavit on 25 October 2008 in support of the application by the Crime Commission for the Further Restraining Orders. One of the exhibits to Mr Spark’s affidavit was the Beneficial Owners Report, which is summarised above.

At least part of the reason for the Crime Commission seeking the Further Restraining Orders was the existence of the appeal by IFTC and IFTC Broking in relation to the First Restraining Orders, and to ensure that, if the Court of Appeal set aside the First Restraining Orders, the assets subject to the First Restraining Orders would still be restrained.

On 6 November 2008, the Court of Appeal set aside the First Restraining Orders in the Recovery Act Proceedings, but the Further Restraining Orders remained in place: International Finance Trust Company Ltd v New South Wales Crime Commission (2008) 251 ALR 479; [2008] NSWCA 291.

On 3 November 2008, Mr Barns was allocated responsibility within the ATO to conduct an audit of Mr Grimaldi’s affairs under an Authority to Audit. The Authority to Audit was authorised by John Papadopoulos, a Team Leader at the ATO who Mr O’Neill described as a Senior Investigator on Project Wickenby.

The reasons expressed in the Authority to Audit were (all grammatical errors left in place):

This indicated that the focus of the ATO’s audit was on the Murchison securities and their proceeds.

During November 2008, Mr Barns issued a number of compulsory notices pursuant to s 264 of the Income Taxation Assessment Act 1936 (Cth) (s 264 notice(s)) to obtain documents and information from other sources. Three s 264 notices respectively dated 11, 19 and 27 November 2008 were issued to the Crime Commission, seeking the production of:

On 19 November 2008, Mr Barns made a submission to Mr Papadopoulos in respect of the s 264 notice dated 19 November 2008. The submission set out a “brief description of subject matter of enquiries” and stated that “[c]oncerns arise as to”:

This submission indicated that Mr Barns was concentrating on the whether Mr Grimaldi was entitled to the income or capital gain on the transfer of the Murchison shares and options and should have declared it for the purposes of the assessment of his income tax.

In light of the compulsory s 264 notices being addressed to the Crime Commission and in the absence of Mr Barns as a witness for the Commonwealth at the hearing of these proceedings giving evidence to the contrary, I infer that the Crime Commission produced all of the documents sought in them to the ATO.

As a consequence, and in the absence of Mr Barns giving evidence to the contrary, I infer that he received and read the Beneficial Owners Report produced to the ATO in November 2008. That inference also means that by November 2008, Mr Barns was aware that the authenticity of the July 2005 Trust Deed had been questioned by IFTC and that Mr Grimaldi had sought to obtain the release of the assets, which had been the subject of the First Restraining Orders, using a document that was potentially fraudulent.

On 24 November 2008, the ATO finalised a profile on Mr Barnes (Barnes Profile), who was at the time still a director of Chameleon, for the purposes of Project Wickenby and Operation Starlifter. The Barnes Profile at [8] notes that Murchison was then currently involved in the Chameleon Proceedings, that Chameleon was listed on the ASX in April 2004 with Mr Grimaldi as a top 20 shareholder, Mr Barnes as managing director and Mr Grimaldi a director of Murchison at that time.

The Barnes Profile at [8] also recorded that Chameleon and Murchison were both involved in mining activities in Western Australia and a dispute had arisen between them over the ownership and right to profits from a number of iron ore tenements. The Barnes Profile continued at [8] recording that Chameleon had brought claims against Mr Grimaldi, Pinnacle, Mr Barnes and Winterfall (then known as Crossland Resources Ltd). The Barnes Profile copied a segment from the RM Wise Research website, which provided as follows:

A link to the RM Wise Research website is contained in the profile.

While this extract from the RM Wise Research website summarised the nature of the relief that was being sought in the Chameleon Proceedings, it did not obviate the need for the ATO to take the obvious step of seeking to analyse the claims made in the Chameleon Proceedings. There is no evidence that the ATO ever did so.

On 12 December 2008, various ATO personnel (including Mr Barns and Mr Tannous) met with officers of the Crime Commission (including Mr Novakovic and Mr Spark) and the AFP to discuss the Recovery Act Proceedings and the restraining orders against IFTC and IFTC Broking over funds held in New Zealand bank accounts and share accounts in Australia. The minutes of the meeting prepared by Mr Barns record as follows:

It appears from the minutes that Mr Grimaldi was no longer asserting his beneficial ownership of Iron. It also must have been a warning sign to all present at the meeting that Mr Grimaldi had moved his share trading account away from Goldman Sachs because he did not want to disclose the beneficial owner of the Murchison shares.

The minutes also record that the Crime Commission held the view that it could not just settle with Mr Grimaldi because of the interests of other parties and “it could be seen that their money is being paid to the ATO”. The Crime Commission is recorded as seeking to understand the tax position. It appears that the Crime Commission was assisting the ATO in its task of attempting to determine who might be liable for a tax debt and recovering it.

The minutes set out the ATO’s position as follows:

As stated by Mr O’Neill in his evidence, the ATO had a practice of issuing alternative assessments when it was seeking to recover disputed tax debts, such as in the case of complex corporate and trust structures or where there was a dispute between claiming beneficiaries.

I agree with Chameleon’s submission that it would have been an obvious and appropriate course of action for the ATO to assess each of Mr Grimaldi, the Webtel Super Fund and Chameleon as if each of them was the true owner of the funds and the assets in the bank accounts that were the subject of the Further Restraining Orders. It appeared from the minutes that the ATO was determined to proceed with issuing an assessment and receiving the tax without giving any consideration as to whether Chameleon was one of the possible taxpayers.

On 17 December 2008, the ATO prepared an Audit Case Plan describing the audit to be conducted of Mr Grimaldi. It appears to have been prepared by Mr Barns and his supervisor, Mr Papadopoulos, both of whom are described as being in the Serious Non-Compliance Audit section of the ATO. In the section of the Audit Case Plan headed “KEY RISKS” under the subheading of “Identified Risks”, four issues were identified, three of which were:

Within each of these issues, the Audit Case Plan set out the various transactions in which Mr Grimaldi and Iron were involved in relation to the Murchison securities and their proceeds.

Under the heading “Proposed Actions”, the Audit Case Plan simply stated:

The Audit Case Plan also stated that further information was required and that the following s 264 notices will be issued to:

The Audit Case Plan concluded by stating that assistance from the Crime Commission would be needed.

On 19 December 2008, Mr Barns prepared a document titled “Submission for Authorisation to Issue Notice Under Section 264” (Submission for Authorisation of Grimaldi Notice) for a s 264 notice to be issued to Mr Grimaldi to attend and give evidence. In the Submission for Authorisation of Grimaldi Notice, a description of the subject matter of the enquiries states (all grammatical errors left in place):

The reasons for issuing the s 264 notice to Mr Grimaldi were stated in the Submission for Authorisation of Grimaldi Notice as follows (all grammatical errors left in place):

On 19 December 2008, the Submission for Authorisation of Grimaldi Notice was approved by Edward Van Der Pol of the ATO.

The s 264 notice issued to Mr Grimaldi required Mr Grimaldi to explain:

The issuance of the s 264 notice to Mr Grimaldi led to the ATO conducting an interview with Mr Grimaldi on 27 January 2009. That interview was recorded and transcribed. Present at the interview for the ATO were Mr Barns, Mr Van Der Pol, Don Gibson and Ian Young. Mr Grimaldi was also accompanied by his lawyer, Mr Woods and Mr Sorenson of counsel. The vast bulk of the questioning was conducted by Mr Barns.

As I have stated above, I infer that by this time the ATO had received the Beneficial Owners Report from the Crime Commission. In the absence of Mr Barns giving evidence, I also infer that Mr Barns had read the Beneficial Owners Report. Having read the Beneficial Owners Report, Mr Barns must be taken to have seen that it was suspected that Mr Grimaldi had engaged in an international tax evasion scheme, Mr Grimaldi had sought to seek the release of funds from the First Restraining Orders using a potentially fraudulent document and that Chameleon had brought the Chameleon Proceedings against Mr Grimaldi and others. In other words, Mr Barns had significant reason to treat Mr Grimaldi’s answers in the interview with considerable caution.

Mr Barns asked Mr Grimaldi about his background and his involvement in establishing mining ventures, to which Mr Grimaldi responded (emphasis added):

By this answer, Mr Grimaldi explained the background to Weboz, which went on to become known as NiCu and then Murchison, how it was that he had the Existing Shareholding in his name and in the name of Webtel Management Pty Ltd, all of which he admitted were worth “very, very little” by the end of 2004 and that he did not “have much else”.

Mr Grimaldi then further explained the transition of Weboz to a mining company as NiCu and then as Murchison, as well as the creation of MGG Capital as the new trustee of his superannuation fund to which part of the Existing Shareholding was transferred, saying:

Mr Grimaldi continued by saying that Weboz owed him a lot of money, that he did not get paid, or was paid a fraction of what he should have been paid, and his tax returns showed that. This was in keeping with what the ATO already knew — there was no other source of wealth for Mr Grimaldi prior to 2004 other than the profits that he subsequently earned from selling Murchison shares and trading in those proceeds.

Mr Grimaldi explained his connection to Mr Barnes, having met him in February 2002, with whom he “struck up a friendship” and who introduced him to “various people”.

According to Mr Grimaldi, at the time of the reverse takeover of Winterfall, Murchison was delisted, the Murchison shares were of “minimal” value, Murchison share prices would “never have gone up” and the value would have been “very little” except for the “Chinese explosion” in the growth of the demand for iron ore, which caused the prices to go up.

I agree with Chameleon’s submission that, based on Mr Grimaldi’s answers, shares in Murchison were worthless at the time Mr Grimaldi breached his fiduciary duties. Mr Grimaldi’s breach caused the acquisition of the Jack Hills Tenements and the whole of the increase in the value of the Jack Hills Tenements was therefore the profit that resulted from that breach.

During the interview, Mr Grimaldi then explained why he was given shares in Murchison, saying that:

Mr Grimaldi provided the following explanation for putting his Murchison shares into another entity through PKF in Vanuatu, first citing the escrow restrictions that applied for 24 months given his position as a director of Murchison and then “asset protection”, which he expressed in the following terms:

Having already stated to the ATO and the Crime Commission in the joint interview on 25 September 2008 that there was “a suspicion with Chameleon” which caused Mr Grimaldi to place the Murchison shares and options offshore, Mr Grimaldi was now identifying “accusation[s] and … litigation threats” from “another party” for his state of mind in November 2004 as a reason for doing so, to ensure that he had “asset protection”. In November 2004, no proceedings had been commenced against Mr Grimaldi, yet he was cognisant of the threat of them and the need to protect his assets from any claims. In the absence of evidence from Mr Barns, I infer that Mr Barns was aware that this other party was Chameleon. As a result, this answer gave even further cause for the ATO to make inquiries to determine the nature and extent of the claims made in the Chameleon Proceedings, which had been commenced in November 2007 and were brought to the ATO’s attention by at least 25 August 2008 when the audit profile of Mr Grimaldi was finalised.

These answers should have given Mr Barns an alert that Mr Grimaldi was conscious that he had done something wrong. Yet Mr Barns asked no follow up questions in the interview to ascertain what the accusations and litigation threats were, who made them, and why Mr Grimaldi felt the need to protect assets from those persons. These were obvious questions for Mr Barns to ask but they were not asked. In the absence of Mr Barns as a witness, there is no explanation why he did not ask these questions.

During the interview, Mr Barns asked Mr Grimaldi about the letter of 11 November 2004 in which Mr Barnes (on behalf of Pinnacle) wrote to Murchison directing how the 10 million shares and 12 million options issued by Murchison were to be allocated, which included the allotment of four million Murchison shares and five million Murchison options to Iron on Mr Grimaldi’s instructions, and 84,000 Murchison shares and 770,000 Murchison options to MGG Capital. Mr Barns started to ask a question commencing with “[w]hat was the reason…” at which point Mr Grimaldi interjected and volunteered the following information as a lengthy and difficult to understand explanation about the transfer of shares after the reverse takeover of Winterfall (all grammatical errors left in place):

In this answer, Mr Grimaldi’s explanation as to why he received the Murchison securities hinged on Mr Zuks being introduced to Mr Grimaldi and Mr Grimaldi being able to sell the Jack Hills Tenements to Murchison because of Mr Grimaldi’s ability to add value by introducing the Chinese steel mills to buy the iron ore produced. Mr Grimaldi was also admitting to having given instructions to Mr Barnes on where the Murchison securities were to be placed.

When asked why he was “one of the chosen few” to receive the shares in Murchison, Mr Grimaldi said (emphasis added):

In this answer, Mr Grimaldi emphasised that he received the Murchison securities because he helped Mr Zuks to “get it done” by convincing the shareholders and directors of Murchison to agree to buy the Jack Hills Tenements.

Mr Grimaldi’s answers were false. The real reason he received the Murchison securities was because he used Chameleon’s funds to complete the transaction. As detailed below, the ATO knew that those answers were false within a few weeks of the interview when it received information directly from Chameleon on 4 March 2009 outlining exactly how Mr Grimaldi had managed to “get it done”.

Mr Barns appeared not to have been completely satisfied with the answers he had received from Mr Grimaldi because he then sought a further explanation from Mr Grimaldi as to why he had received the Murchison securities in the following exchange:

These series of answers made no sense, particularly as they were inconsistent with answers given by Mr Grimaldi only moments before. Mr Grimaldi had only just said that he instructed Mr Barnes on where the Murchison securities were to go and now he was saying that Mr Barnes gave the shares to those who he felt were important.

In the absence of Mr Barns giving evidence, I readily infer that Mr Barns did not accept Mr Grimaldi’s explanation given Mr Barns’ statement that “it just seems strange” that the shares were being given away. I have no doubt that Mr Barns had every reason to believe that Mr Grimaldi had engaged in an offshore tax avoidance scheme involving dishonesty and that Mr Grimaldi was not being completely candid in the answers he gave. Mr Grimaldi’s answers on their face were not logical, lacked credibility and did not seem rational. The ATO was clearly in a position where it needed to gather information from other sources to test the answers which Mr Grimaldi had given during this interview.

The evidence of Mr O’Neill was that, given it appeared that Mr Grimaldi had engaged in a dishonest tax evasion scheme as stated in the Grimaldi Profile, the ATO had every reason to be very sceptical of Mr Grimaldi’s answers and obtain information from other sources to test and verify his assertions (T127–128). Mr O’Neill expressed himself in explaining these propositions as follows:

In further cross-examination, Mr O’Neill said that Mr Grimaldi’s explanation for why he received the shares and options in Murchison lacked credibility (T197).

In my view, it was incumbent on the ATO to do more than merely accept the explanations of a suspectedly dishonest Mr Grimaldi as the basis for treating him as the taxpayer in relation to the various transactions under investigation. The ATO had credible reasons to ask Mr Grimaldi more questions in this interview, particularly about the Chameleon Proceedings, and continue its investigations to determine the basis on which Mr Grimaldi had come to receive the Murchison shares and options. If Mr Barns had asked some questions about the Chameleon Proceedings, he would likely have come to learn that Chameleon alleged that Mr Grimaldi and Mr Barnes dishonestly took Chameleon’s money to enable Murchison to buy the Jack Hills Tenements. That opportunity was not, however, taken.

As it happens, on 4 March 2009 (less than six weeks after the interview of Mr Grimaldi), the ATO would be provided with information directly from Chameleon which would demonstrate that Mr Grimaldi gave false answers in his explanations as to why he received the allocation of the Murchison shares and options. I have dealt with the events of 4 March 2009 below.

On 11 February 2009, Mr Barns prepared an Amended Audit Case Plan in respect of the audit of Mr Grimaldi, which was approved by Mr Papadopoulos.

Under the heading “KEY RISKS” and subheading “NEWLY IDENTIFIED RISKS AND PROPOSED ACTIONS” the following matters appear in the Amended Audit Case Plan (all grammatical errors left in place):

It is clear from these statements that Mr Barns did not accept the explanation from Mr Grimaldi during the interview on 27 January 2009 as to the true ownership of the funds that were held in the IFTC bank accounts and was canvassing the possibility that beyond Mr Grimaldi, Iron and IFTC, the funds might belong to “someone else”. I am able to draw this inference with more confidence in the absence of Mr Barns giving evidence to the contrary.

The Amended Audit Case Plan mentioned that the ATO would continually liaise with the Crime Commission concerning information it may obtain to assist in the audit.

Also on 11 February 2009, the ATO prepared a s 264 notice addressed to Registries Ltd to provide a schedule containing a detailed list of transactions, including all transfers, sales, purchases and conversions, of all shares and options in Murchison for the period from 1 July 2002 and 31 December 2008.

On 3 March 2009, Norm Edwards of the ATO received a telephone call from Anthony Karam, a director of Chameleon, who said that he had information about “people who may be of interest” to the ATO and requested a face-to-face meeting with an ATO officer to see if the information was of interest to the ATO before he handed it over. Mr Edwards surmised that the “payment from [IFTC] must have something to do with Chamellion Mining [sic] (or perhaps others such as Bonacorso, Grimaldi or Greg Barnes)”. Mr Edwards then contacted Mr Tannous to see if someone could organise a meeting with Mr Karam. Mr Tannous told Mr Edwards that “Chamellion Mining [sic] is or has been in some legal dispute involving Murchison Metals”. Mr Edwards and Mr Tannous suggested that Mr Edwards contact Mr Barns “given his involvement with Grimaldi”.

Mr Barns then arranged to meet Mr Karam on 4 March 2009.

On 4 March 2009, Mr Barns and Mr Papadopoulos held a meeting with Mr Karam and Geoffrey Brazig, a consultant for Chameleon. The minutes of the meeting were prepared by Mr Barns.

The minutes of the meeting record that:

This was consistent with the answers given by Mr Grimaldi during the interview on 27 January 2009 that he also gave instructions to Mr Barnes on the allocation of the Murchison securities received by Pinnacle.

Under the heading “Gregory Barnes (GB) and Phillip Grimaldi litigation”, the minutes record the following (all grammatical errors left in place):

The information provided to the ATO during this meeting gave Mr Barns the answer to the question he had repeatedly asked Mr Grimaldi during the interview on 27 January 2009 to which he received inconsistent answers from Mr Grimaldi which, as I have found above, he had every reason to disbelieve — why was Mr Grimaldi receiving such a significant amount of Murchison securities? The answer given by the Chameleon representatives was that Mr Grimaldi and Mr Barnes had used Chameleon’s cash reserves to finance Murchison’s purchase of the Jack Hills Tenements for no consideration. As explained during the meeting, this was what Mr Grimaldi had arranged to “help them … get it done”.

The information provided by Chameleon gave the context for why Mr Grimaldi had said during the meeting on 25 September 2008 with the ATO and the Crime Commission that there was “suspicion with Chameleon” as a reason for placing the funds offshore in November 2004. The information also gave context to the “accusation[s] and … litigation threats” from “another party” as the reason Mr Grimaldi gave for the offshore “asset protection” during the interview on 27 January 2009. The ATO now knew precisely what the accusations and litigation threats were from Chameleon and why Mr Grimaldi was seeking to protect assets from them.

It was clear from the record of this meeting that Mr Karam and Mr Brazig provided documents to the ATO during the meeting to support their position, and indicated a willingness to provide further documents in answer to a s 264 notice and further information as requested by the ATO. The only qualification given for the willing provision of such further information was the need for Chameleon to prepare for the hearing of the Chameleon Proceedings at the end of March 2009. In effect, the ATO had been provided with an “open door” to seek any further explanation, information or clarification from Chameleon on any topic it wished.

During the meeting, Mr Barns and Mr Papadopoulos said that they would “issue a formal notice and collect the documents tomorrow”.

In the absence of Mr Barns giving evidence to the contrary, there is no evidence to indicate that anything said by Mr Karam and Mr Brazig during the meeting was or should have been disbelieved by Mr Barns. Mr Karam was a director of Chameleon giving credible and coherent information to the ATO about how the funds of Chameleon had been misused by two directors of Chameleon — Mr Grimaldi and Mr Barnes. This is to be contrasted with the answers given by Mr Grimaldi during his interview on 27 January 2009 which, as I found above, Mr Barns had every reason not to accept.

In my assessment, Mr Barns had a firm basis on which to conclude that Mr Grimaldi gave false answers during the interview on 27 January 2009 about why he had received the Murchison securities and that he should accept the information given to him during the meeting on 4 March 2009 as the most likely explanation, being Mr Grimaldi’s misuse of Chameleon’s funds involving a breach of Mr Grimaldi’s fiduciary duties.

In cross-examination, Mr O'Neill identified Mr Barns as the person at the ATO who would have the detail of the inquiries "to verify the truth” of what it were told by Mr Karam and Mr Brazig (T129). But Mr Barns was not called to give evidence to provide any such detail. In the absence of that evidence, I infer that there were no inquiries conducted by the ATO and that it accepted the truth of what it was told by Mr Karam and Mr Brazig.

In cross-examination, Mr O’Neill also gave evidence that Mr Grimaldi’s explanation lacked credibility and agreed that Mr Karam’s explanation for why it was that Mr Grimaldi received a substantial volume of shares and options in Murchison was a lot more coherent, rational and understandable than the one given by Mr Grimaldi during the interview on 27 January 2009 (T196–197).

Mr O’Neill also gave evidence that if the information provided by Mr Karam was true, it would be a breach of fiduciary duty by Mr Grimaldi, and the Murchison shares he received through Pinnacle would be a product of that breach of fiduciary duty (T200).

Mr O’Neill’s further evidence was that the information provided by Mr Karam “would be information that went into the audit”, that it “was obviously taken into account” and that he “assumed it was taken into account” (T197–198). But there is no evidence that the information and documents provided by Mr Karam was ever taken into account by the ATO. It was never recorded as providing any basis for the reasons expressed by the ATO for the approach that it took in the investigations, the audit or the tax assessments of Mr Grimaldi. Rather, the evidence reveals that it was ignored by the ATO.

In the absence of evidence to the contrary from Mr Barns and Ms McLachlan and any documents which evidence it, I also infer that the ATO did not obtain legal advice on the consequences of the conduct of Mr Grimaldi in using the funds of Chameleon to obtain profits for himself.

On 4 March 2009, the ATO issued a s 264 notice to Chameleon seeking:

The issuing of this s 264 notice had been a step which was outlined during the meeting on 4 March 2009 with Mr Karam and Mr Brazig.

Part of the explanation for seeking approval to issue the notice as set out in the Submission for Authorisation to Issue Notice Under Section 264 dated 4 March 2009 (Submission for Authorisation of Chameleon Notice) under the heading “Brief description of subject matter of enquiries” was that:

Chameleon subsequently produced approximately 60 pages of documents in response to that notice. Those documents included a diagram summarising the reverse takeover of Winterfall by Murchison. In particular, it recorded a placement of shares for “no consideration”, referred to “cheques [from Chameleon] to vendors of tenements for no return” and four million shares and five million options going to Iron (then known as IOS Management), which was Mr Grimaldi’s nominee.

The documents provided by Chameleon supported the matters which the ATO had been told in the meeting with Mr Karam and Mr Brazig on 4 March 2009. I infer that Mr Barns had no reason to doubt the information, which is an inference I am able to draw with greater confidence in light of the absence of Mr Barns giving evidence to the contrary.

In an effort to avoid a Jones v Dunkel inference arising from the absence of Mr Barns, the Commonwealth says that his absence is of no significance as the knowledge of the ATO before the Chameleon Judgment was only of allegations of wrongdoing, not facts. To support this submission, the Commonwealth seeks to make something of the facts that:

I reject this submission because it fails to recognise that what was presented by Mr Karam was not lessened in its significance just because he was not personally involved in the events concerning Mr Grimaldi's conduct. The ATO had before it a senior representative of Chameleon giving factual information about Mr Grimaldi’s conduct, supported by the documents presented to it. The information and material provided by Mr Karam demanded further investigation by the ATO, but none was ever conducted.

I agree with Chameleon’s submissions that by March 2009, the ATO did not have only “mere allegations” about Mr Grimaldi’s conduct. I consider that the ATO had factual information provided by Mr Karam in his capacity as a director of Chameleon, which was substantiated by the documents that Chameleon produced to the ATO in response to the s 264 notice. In my assessment, the ATO knew at this time that Mr Grimaldi had breached his fiduciary duties to Chameleon and profited from it. This was acknowledged by Mr O’Neill in some respects during cross-examination when he said (T157):

Even if the ATO did not have an actual awareness of the conduct of Mr Grimaldi, the ATO certainly had sufficient information to conduct obvious investigations into what had taken place. This included asking Chameleon to produce its banking records to demonstrate that funds had been drawn from its bank account and received by the vendors of the Jack Hills Tenements and interviewing any of Mr Grimaldi, Mr Barnes and Mr Zuks about these matters. The ATO did not take any of these steps. Of course, as I will detail below, once the ATO received the Chameleon Judgment (prior to its receipt of any of the payments impugned in these proceedings) there was no question that it was dealing with more than “mere allegations”.

On 24 March 2009, Mr Karam rang Mr Barns. The record of the call states:

The record of this conversation then contains the detail of Mr Karam’s telephone number.

There is no evidence that the ATO ever looked at the documents volunteered by Mr Karam or ever issued a further notice under s 264 requesting them. In the absence of evidence from Mr Barns to the contrary, I infer that the ATO did neither of these things.

On 25 March 2009, Mr Barns telephoned Mr Karam. The record of the call states:

There is no evidence that Mr Barns or any other representative of the ATO ever met Mr Karam “to go through the documents” at 10am on 1 April 2009 or at any other time. In the absence of evidence from Mr Barns to the contrary, I infer that the ATO did neither of these things.

As I have stated above, I do not regard the information provided by Chameleon on 4 March 2009 as “mere allegations” given the credible source of that information and the documents provided to support it. Mr Barns did not give evidence to say that he treated the information as only amounting to allegations. In my view, I should infer that at this stage the ATO had the basis on which to treat the information and documents provided by Chameleon as material facts for the purposes of the ATO’s investigation.

In any event, by the end of the trial, the Commonwealth conceded that the ATO knew everything contained in the Chameleon Judgment when it was delivered, which substantially lessens the relevance of these matters only being allegations at this stage.

Mr O’Neill gave the following evidence on this topic (T157):

I consider that if the ATO had any reason to believe that it could not yet conclude that Mr Grimaldi had breached his fiduciary duties in the manner explained by Chameleon, then the ATO had the power to issue s 264 notices to obtain the documents which went to those issues (including documents from Chameleon evidencing the payments made from Chameleon’s bank account and documents from the vendors of the Iron Jack Tenements evidencing their receipt of funds from Chameleon’s bank account). The ATO could also have conducted interviews with Mr Grimaldi, Mr Zuks and Mr Barnes so that each of them could explain the use of Chameleon’s funds.

There is no evidence that the ATO did any of those things. The ATO ignored all of the obvious warning signs that demanded further investigative action by it.

Mr O’Neill gave evidence that Mr Barns would be the person who would have the detail of the reasonable enquiries and specific enquiries conducted by the ATO during the course of the audit (T129). Mr O’Neill was not aware of what reasonable enquiries had been made and said “[y]ou have to ask Mr Barns that” (T146). In the absence of evidence from Mr Barns, I am more readily able to infer that no further enquiries of Chameleon or others in relation Mr Grimaldi’s breach of fiduciary duties were undertaken by the ATO.

In addition, there is no evidence that the ATO sought legal advice about the legal consequences of Mr Grimaldi’s conduct in using Chameleon’s funds in the reverse takeover of Winterfall. In the absence of evidence from Mr Barns and Ms McLachlan on the question of whether such legal advice was sought or any documents in support of its existence, I am also more readily able to infer that no such legal advice was sought or given.

On 27 March 2009, Mr Novakovic from the Crime Commission sent a facsimile to Mr Zafiriou of the ATO enclosing copies of the affidavits filed by the Crime Commission on 13 May 2008 (Mr Moerman) and 25 October 2008 (Mr Spark) in the Recovery Act Proceedings, along with a copy of the Beneficial Owners Report which was an exhibit to Mr Spark’s affidavit of 25 October 2008.

As extracted above, the Beneficial Owners Report provided detail about the claim made by Chameleon over the Jack Hills Tenements in respect of which the Chameleon Proceedings had been brought by stating:

In the unexplained absence of Mr Zafiriou giving evidence to the contrary, I infer that Mr Zafiriou received and read the Beneficial Owners Report. I also infer that having read the Beneficial Owners Report, Mr Zafiriou must be taken to have seen that it was suspected that:

On 24 April 2009, Mr Spark of the Crime Commission sent a letter to Mr Tannous of the ATO providing a copy of the deed dated 10 October 2008 between Mr Grimaldi, the Crime Commission and MGG Capital as trustee for the Webtel Super Fund in which Mr Grimaldi asserted that he was the “ultimate beneficial owner of the property specified in the Schedule”, being the Murchison shares and options and the amounts held in ANZ Bank accounts in the name of IFTC. Those were the assets which were the subject of the Further Restraining Orders obtained by the Crime Commission on 25 October 2008.

On 24 April 2009, Murchison made an announcement to the ASX, which gave the following update on the Chameleon Proceedings:

On 23 April 2009, Mr Zafiriou prepared an ATO office minute to Debra Unsworth (the ATO’s Assistant Commissioner, Debt), concerning a proposed Mareva injunction to prevent various taxpayers (including Mr Grimaldi, Webtel Super Fund and IFTC Broking) from dissipating their assets. There was no mention of any claims made by Chameleon with respect to these assets.

On 22 April 2009, the ATO issued amended assessments to Mr Grimaldi for the tax years ended 30 June 2006 (amended taxable income of $1,585,624 and net amount payable of $866,655.77) and 30 June 2007 (amended taxable income of $9,335,136 and net amount payable of $5,252,219.14) and a notice of assessment for the tax year ended 30 June 2008 (taxable income of $32,001,831 and net amount payable of $20,112,670.55), each of which were payable on 13 May 2009.

On 27 April 2009, Paul Cheetham (the ATO’s Assistant Commissioner of Project Wickenby) prepared an ATO office minute addressed to Michael Cranston (Deputy Commissioner of the ATO) on the subject of the “Assets Restrained By NSWCC”, which stated that:

Those assessments were accompanied by a report entitled “Reasons for Decision” (ATO Reasons), which the ATO produced in response to a call made during the cross-examination of Mr O’Neill. The ATO Reasons detailed the ATO’s analysis as to why Mr Grimaldi was liable to tax. Part of the ATO Reasons stated as follows:

I agree with the submissions made by Chameleon that there were the following flaws with this reasoning in the ATO Reasons:

I agree with Chameleon’s submission that in making the assessments the ATO relied on the inconsistent and implausible answers given by Mr Grimaldi (who it knew to be involved in a dishonest scheme) and an unsupported view of Mr Barnes’ state of mind in preference to the credible and coherent information it had received from Mr Karam which it failed to take into account. No reference to any of the information provided by Mr Karam appears anywhere in the ATO Reasons.

Mr O’Neill gave evidence that if Mr Karam had provided information or documents “relevant to the circumstances of Mr Grimaldi’s assessment, then it would have been taken into account” (T147). Mr O’Neill also said that it was a relevant factor in the ATO’s investigations why Mr Grimaldi had received the Murchison securities (T146–147), which was also relevant to assessing the tax liability of Mr Grimaldi (T154–155). Mr Karam had provided information on the reason why the Murchison securities had been received by Iron, yet the ATO paid no regard to that information in making the assessments.

I consider that it was wrong for the ATO to proceed on the basis that Mr Grimaldi was liable to pay tax on the Murchison shares and options and proceeds held by Iron, and the ATO had knowledge of facts which demonstrated that it was wrong. As submitted by Chameleon, I agree that the more important question the ATO failed to address was “can we take this money?” (T342).

On 11 May 2009, the ATO (by the Commissioner of Taxation) commenced proceedings in the Federal Court against Mr Grimaldi, Garry Bonaccorso, IFTC Broking and MGG Capital as trustee for the Webtel Super Fund seeking declarations and judgments against them for tax liabilities, interest and penalties (ATO Proceedings). The ATO claimed Mr Grimaldi was liable to pay a total of $20,112,670.51 in income tax and shortfall interest charges, and $15,246,261.45 in administrative penalties.

Having issued the assessments on 22 April 2009, the bringing of the ATO Proceedings just over two weeks later demonstrated the considerable speed at which the ATO was working to recover the tax debt from Mr Grimaldi.

The ATO’s application to the Federal Court in the ATO Proceedings also sought interim freezing orders over the assets of Mr Grimaldi and MGG Capital, which were made ex parte by Bennett J on 11 May 2009. The application for the freezing orders was supported by an affidavit sworn 11 May 2009 by Mr Zafiriou and an affidavit sworn 11 May 2009 by Mr Van Der Pol. Neither affidavit makes any reference to the Chameleon Proceedings or the information provided by Chameleon to the ATO on 4 March 2009.

The freezing orders made on 11 May 2009 in the ATO Proceedings applied over the assets of Mr Grimaldi up to the unencumbered value of $35,807,867.41, and the assets of MGG Capital as trustee of the Webtel Super Fund up to the unencumbered value of $6,151,624.64.

On 15 May 2009 at 2pm, a hearing was held before Bennett J of the Federal Court in the ATO Proceedings concerning the continuation of the freezing orders made on 11 May 2009. During the hearing, there was no reference to the Chameleon Proceedings or the information provided by Chameleon to the ATO on 4 March 2009.

On 15 May 2009 at 4:45pm, Mr Zafiriou received an email from Mr Tannous of the ATO, copied to Mr Van Der Pol amongst others, stating:

On 15 May 2009, Denis Stokes (Senior Executive Lawyer at the AGS) wrote to the Registrar of the Federal Court on behalf of the Commissioner in the ATO Proceedings stating:

On 18 May 2009, the Commissioner also issued a notice to produce to Mr Grimaldi in the ATO Proceedings to produce all affidavits he had filed in the Chameleon Proceedings. There is no evidence that those affidavits were ever produced to the Commissioner.

On 20 May 2009, Richard Chia of the AGS made a file note of a telephone call he received from the Federal Court registry informing him that Jacobson J had granted the Commissioner access to the initiating process in the Chameleon Proceedings but the application to inspect and copy all of the affidavits for Mr Grimaldi was denied on the basis that they had not yet been read in open court.

There is no evidence that the initiating process in the Chameleon Proceedings was ever obtained by the ATO. The evidence of Mr O’Neill is that the AGS did not obtain and/or did not provide to him, or to ATO staff working under him, with a copy of the originating process or pleadings in the Chameleon Proceedings. They were not contained on the audit file and they were not produced in these proceedings.

In the absence of evidence from Mr Barns, Mr Zafiriou and Ms McLachlan to the contrary, I agree with Chameleon that the available inferences I should make are that:

On 20 May 2009, a settlement conference was held between representatives of the ATO and Mr Grimaldi in relation to the ATO Proceedings. According to item 3 in the file note of that conference, Mr Grimaldi consented to the continuation of the freezing orders for 12 months, subject to him being able to access $350,000 from the assets of MGG Capital for legal costs in the Chameleon Proceedings “in which Grimaldi was involved”.

On 21 May 2009, the file note of the settlement conference held on 20 May 2009 was forwarded by the ATO’s principal litigator to internal recipients, including Mr Van Der Pol, Mr Zafiriou and Ms McLachlan, with a comment that “item 3 [ie the allowance for Mr Grimaldi’s costs in the Chameleon Proceedings] will likely require some discussion this afternoon”.

On 22 May 2009, Graham J of the Federal Court made freezing orders in the ATO Proceedings over the assets of Mr Grimaldi up to the unencumbered value of $35,807,867.41 and the assets of MGG Capital as trustee of the Webtel Super Fund up to the unencumbered value of $6,151,624.64 for a period of 12 months by consent. The freezing orders over the assets of MGG Capital contained an exception which provided:

On 22 May 2009, Graham J also made freezing orders against IFTC and IFTC Broking in the ATO Proceedings with effect up to and including 1 June 2009.

On 26 May 2009, Barbara Zakos (the ATO’s principal litigator) sent an email to internal recipients, including Mr Van der Pol, Mr Zafiriou and Mr O’Neill, attaching an article published that day in the Australian Financial Review. The article described the ATO’s claims against Mr Grimaldi and his interview with the ATO, and said:

In cross-examination, Mr O’Neill said that after he read the article, he did not ask to see the transcript of the interview with Mr Grimaldi on 27 January 2009 (T215). I consider it would have been the obvious thing for him to do but evidently, he chose not to do so.

On 1 June 2009, Graham J of the Federal Court continued the freezing orders against IFTC and IFTC Broking in the ATO Proceedings with effect up to and including 5 June 2009.

On 5, 9 and 23 June 2009, Graham J of the Federal Court continued the freezing orders against IFTC and IFTC Broking in the ATO Proceedings, the latter orders with effect up to and including 2 July 2009.

On 24 June 2009, the Commissioner filed a notice of motion for summary judgment in the ATO Proceedings against Mr Grimaldi, Mr Bonaccorso, IFTC Broking and MGG Capital. The application was supported by the affidavit sworn 23 June 2009 by Mr Zafiriou, which stated that as of 16 June 2009, Mr Grimaldi’s outstanding tax liabilities totalled $36,119,836.12, and Mr Zafiriou believed Mr Grimaldi had “no defence to [the] claim”. In that affidavit, there was no mention of Chameleon or its claim against Mr Grimaldi in the Chameleon Proceedings despite:

On 9 July 2009, Mr Zafiriou swore a further affidavit in the ATO Proceedings in which he stated that as of 8 July 2009, Mr Grimaldi’s outstanding tax liabilities totalled $36,341,461.73 and he again deposed that he believed that Mr Grimaldi had “no defence to [the] claim”. As was the case with his previous affidavit of 23 June 2009 in support of the summary judgment application, Mr Zafiriou made no mention of the Chameleon Proceedings in this further affidavit.

On 9 and 10 July 2009, Mr Grimaldi, MGG Capital and representatives of the Commissioner (including Mr O’Neill) participated in a mediation before the now late Roger Gyles AO QC in an attempt to settle the ATO Proceedings.

The ATO’s position paper dated 7 July 2009 for that mediation referred to Chameleon, Chameleon’s claims in the Chameleon Proceedings and Mr Grimaldi’s statement during the interview of 27 January 2009 as to why he moved the Murchison shares and options to Iron respectively in the following terms:

There is no reference in the position paper to the information which had been provided by Chameleon in the interview with Mr Karam on 4 March 2009 and the documents which had been provided by Chameleon in response to the s 264 notice. As I have found above, there were no further enquiries by the ATO regarding the information that Chameleon had provided despite Chameleon having indicated that it was prepared to provide further information and respond to any further s 264 notices which the ATO might issue.

The mediation was unsuccessful.

On 13 July 2009, Graham J of the Federal Court granted summary judgment against Mr Grimaldi in the amount of $36,341,461.73 in the ATO Proceedings (Grimaldi ATO Judgment). In the same orders, Graham J dismissed Mr Grimaldi’s application for a stay of the proceedings for recovery of monies due under the Grimaldi ATO Judgment.

On 15 July 2009, John Giorgiutti of the Crime Commission sent various documents to Mr Tannous of the ATO, amongst which was a Forensic Document Service Report by Michelle Novotny, a handwriting and questioned document examiner. The focus of that report was the significant degree of coincidence between the signature panels (including the signatures themselves, their placement relative to one another and to other features) on the July 2005 Trust Deed when compared with another document. Ms Novotny considered the degree of coincidence between those two documents was “highly unlikely” to have occurred naturally or by chance. Ms Novotny considered it “highly probable” that the signature panels had either between copied and pasted from one document to the other, or that both had been copied and pasted from a third document. The report concluded that there was “prima facie support for a proposition” that the July 2005 Trust Deed between Iron and MGG Capital was “not a genuine document”.

This report confirmed to the ATO that in October 2008 Mr Grimaldi had tried to secure the release of assets from the First Restraining Orders using a document likely to be fraudulent.

If there was any doubt within the ATO regarding the credibility of Mr Grimaldi by this time, it would have been swept away by the observations within this report. As mentioned immediately below, the Crime Commission certainly approached the 2025 Trust Deed in this manner. By this time, it must have been obvious to the ATO that Mr Grimaldi should be considered a dishonest person.

On 21 July 2009, Deputy Registrar Lee of this court made orders by consent under the Recovery Act in the Recovery Act Proceedings. Those orders contained notations which included:

The orders made by Deputy Registrar Lee on 21 July 2009 included:

The orders made by Deputy Registrar Lee on 21 July 2009 further noted:

Notation 20 to the orders made by Deputy Registrar Lee on 21 July 2009 provided:

On 23 July 2009, the Crime Commission filed a notice of motion seeking the effective control orders against Mr Grimaldi, which was supported by an affidavit sworn 22 July 2009 by Mr Grimaldi that stated in late 2004 he became “beneficially entitled” to 6.25 million shares and 7.25 million options in Murchison.

On 23 July 2009, Mr Giorgiutti of the Crime Commission sent a letter to Mr Tannous of the ATO providing copies of the notice of motion and the affidavit of Mr Grimaldi.

On 13 August 2009, IFTC and IFTC Broking filed a notice of appeal challenging the orders made on 21 July 2009 by Deputy Registrar Lee, including the Grimaldi Proceeds Assessment Order.

On 27 July 2009, Mr Barns produced a Report of Audit on Mr Grimaldi, which concluded that the total amount payable by Mr Grimaldi to the ATO was $35,762,956, comprising $19,531,792 in tax shortfall, $15,246,263 in penalties and $984,901 in interest.

Much of the Report of Audit repeated material which was set out in previous documents prepared by the ATO in relation to Mr Grimaldi, particularly the ATO Reasons.

The Report of Audit at [12.2] identified as a potential risk the concern as to whether the restraining orders obtained by the Crime Commission may not be maintained and noted:

The Report of Audit at [40] noted that concurrent assessments had been issued to Mr Grimaldi, MGG Capital as trustee for the Webtel Super Fund and IFTC Broking.

The Report of Audit at [115] referred to the affidavit sworn 10 October 2008 by Mr Grimaldi in which he stated that “in late 2004 [he] became entitled to beneficially receive” 6,250,000 fully paid ordinary shares in Murchison and 7,250,000 options in Murchison.

The Report of Audit also referred without qualification at [126] and [164.5.15] to the July 2005 Trust Deed between Iron and MGG Capital as trustee for the Webtel Super Fund, despite the fact that the ATO had already received the Forensic Document Service Report on 15 July 2009, which concluded that it was highly unlikely to be a “genuine document”. Concerns raised by third parties as to the authenticity of the July 2005 Trust Deed are noted at [164.8]–[164.9] but again no reference is made to the Forensic Document Service Report. This is inexplicable.

The Report of Audit at [145] noted that four properties located at Pyrmont appeared to have been purchased by Mrs Grimaldi, using funds from Iron being: 404C/24 Refinery Drive (Unit 404C); 403/24 Refinery Drive (Unit 403); 306/32 Refinery Drive (Unit 306); and 5D/2 Bowman Street.

The Report of Audit at [176] referred to the Chameleon Proceedings in the following terms:

The Report of Audit at [196] set out the ATO’s conclusion as follows:

Amongst the matters stated in the Report of Audit at [196.3] for this conclusion were the following (all grammatical errors left in place):

This is the same flawed reasoning that was contained in the ATO Reasons, as I have outlined above.

The Report of Audit at [253.4] stated that Mr Grimaldi had authorised the transfer of funds held by Iron as if they were his own, including for the purchase of a motor vehicle, numerous overseas trips for himself and his relatives, loans to enable his private company to purchase a property in Sydney at which he resided, loans to Mrs Grimaldi to purchase the four properties in Pyrmont and the payment of school fees for his daughter living in the United States.

Appendix A to the Report of Audit listed payments made by IFTC on behalf of Iron for what appeared to be personal expenses of Mr Grimaldi in 2005–2008, including transfers to a debit card, rent on Mr Grimaldi’s residence, purchase of a Bentley motor car, school fees and expenses for Mr Grimaldi’s daughter in the United States, property purchases by Mrs Grimaldi, dental expenses, travel expenses, purchase of furniture for Mr Grimaldi’s house and purchase of a boat.

There was no reference in the Report of Audit to the information which had been provided to the ATO by Chameleon on 4 March 2009, either through the interview of Mr Karam or the documents produced in response to the s 264 notice. Patently, this information had been disregarded by the ATO.

On 24 September 2009, an updated ATO profile of Mr Barnes was prepared, which described the Chameleon Proceedings in the following way:

On 26 September 2009, Mr Tannous of the ATO met with Mr Grimaldi and Mr Woods to “discuss tax issues and release of funds and shares from NSW CC injunction and placement of security acceptable to the ATO”. The file note of the meeting states that the discussion included whether the sale of Murchison shares gave rise to tax liability on the superannuation fund or for Mr Grimaldi personally as ordinary or statutory income. The file note records that (all grammatical errors left in place):

On 29 September 2009, the trial of the Chameleon Proceedings commenced before Jacobson J of the Federal Court.

The trial then continued before Jacobson J across 29–30 September 2009 and 1, 2, 6–9, 12–15, 19–23 October 2009, with final closing submissions being made on 3–5 February 2010.

On 6 November 2009, the ATO obtained registration of the Grimaldi ATO Judgment against Mr Grimaldi and freezing orders against Mr Grimaldi and IFTC Broking from the High Court of New Zealand.

As mentioned above, on 6 November 2008, the Court of Appeal set aside the First Restraining Order orders made on 13 May 2008. As part of that judgment, the Court of Appeal unanimously rejected a constitutional challenge to the validity of s 10 of the Recovery Act, a question on which IFTC and IFTC Broking obtained special leave to appeal to the High Court.

On 12 November 2009, the High Court determined that s 10 of the Recovery Act was constitutionally invalid and ordered that the proceedings brought by the Crime Commission be dismissed: International Finance Trust Co Ltd v New South Wales Crime Commission (2009) 240 CLR 319; [2009] HCA 49.

On 12 November 2009, the AGS wrote to Atanaskovic Hartnell (as the solicitors for IFTC and IFTC Broking) referring to the High Court’s judgment and asking IFTC and IFTC Broking to confirm that they continued to be bound by the undertakings given to the Federal Court in the ATO Proceedings.

On 13 November 2009, Atanaskovic Hartnell sent a letter to the AGS stating that they considered that IFTC and IFTC Broking remained bound by the undertakings they had given in the ATO Proceedings but providing notice in accordance with those undertakings that their clients would seek to deal with the restrained assets.

On 26 November 2009, the Crime Commission sent a letter to Mr Woods noting that while s 10 of the Recovery Act had been found by the High Court to be invalid, the Grimaldi Proceeds Assessment Order made on 21 July 2009 itself remained valid, and the Crime Commission reserved the right to commence new proceedings seeking declarations that various property (including certain shares as well as funds held by IFTC) were under the effective control of Mr Grimaldi.

On 26 November 2009, the letter from the Crime Commission that day was forwarded by email from Noel Stewart of the Crime Commission to Mr Tannous and Ms McLachlan of the ATO, amongst others.

On 27 November 2009, the Commissioner obtained judgment from Graham J of the Federal Court against MGG Capital in the sum of $25,909,612.54 (MGG ATO Judgment). The MGG ATO Judgment was based on an “alternative assessment” to the tax assessment that founded the Grimaldi ATO Judgment of $36,341,461.73 against Mr Grimaldi, the existence of which Graham J held at [66] did not estop the Commissioner from securing judgment against MGG Capital: Commissioner of Taxation v Grimaldi (No 9) [2009] FCA 1404.

On 30 November 2009, IFTC and IFTC Broking filed a notice of motion in the Court of Appeal seeking orders that all orders and directions in the Recovery Act Proceedings be discharged.

On 2 December 2009, the Crime Commission sent a letter to Mr Zafiriou which enclosed the notice of motion that had been filed by IFTC and IFTC Broking.

On 3 December 2009, the Crime Commission commenced further proceedings number S15399/2009 in this court (Further Recovery Act Proceedings) by filing a summons against Mr Grimaldi, Iron, MGG Capital and others seeking a declaration that the Grimaldi Proceeds Assessment Order made on 21 July 2009 was valid and, in the alternative, a new proceeds assessment order and declarations that Mr Grimaldi had effective control over all of the interests in property of Iron and MGG Capital, amongst other companies.

The application was supported by an Investigation Report dated 2 December 2009 prepared by Mr Novakovic and Mr Stewart of the Crime Commission, which set out the history of Mr Grimaldi’s dealings with the Murchison securities.

The Investigation Report noted:

The Investigation Report at [195] (second occurring) noted uncertainty as to whether Iron held the shares registered in its name on constructive trust but said that even if there was no constructive trust they believed that “the interests in property of Iron are under the effective control (within the meaning of “effective control” in the [Recovery Act]) of Grimaldi”.

The Investigation Report continued:

A statement of facts and circumstances filed in support of the Crime Commission’s summons attached the Investigation Report as providing the factual circumstances for the orders and declarations sought and concluded with contentions that Mr Grimaldi had engaged in criminal activity (including by his deployment in sworn evidence of the July 2005 Trust Deed, which was again characterised as an attempt to pervert the course of justice):

On 10 December 2009, Mr Giorgiutti of the Crime Commission sent a letter to Mr Tannous of the ATO providing copies of the summons and the statement of facts and circumstances with the attached Investigation Report in the Further Recovery Act Proceedings.

On 23 November 2009, Chameleon filed its lengthy written closing submissions in the Chameleon Proceedings.

Chameleon’s closing submissions at [247] refer to tracing schedules showing that Murchison had used $152,750 of Chameleon’s funds in the form of two cheques to pay the vendors of the Iron Jack Tenements in July 2004. As outlined above, this was information that Mr Karam had provided to the ATO on 4 March 2009.

Chameleon’s closing submissions at [251]–[252] set out the factual matters on which Chameleon relied to establish its causation argument that, without the payments of Chameleon’s funds, Murchison’s reverse takeover of Winterfall would have collapsed.

Chameleon’s closing submissions at [298] summarised the causation conclusion sought by Chameleon in the following terms:

Chameleon’s closing submissions at [423]–[426] set out the nature of the account of profits Chameleon sought from Mr Grimaldi as follows:

From 3 to 5 February 2010, the parties in the Chameleon Proceedings made their oral closing submissions.

On 5 February 2010, Jacobson J reserved judgment in the Chameleon Proceedings.

Beyond May 2009, there is no evidence that anyone from the ATO made any attempt to obtain any further information about the Chameleon Proceedings, observe the trial of the Chameleon Proceedings, request copies of the written submissions or took any step to understand the detail of Chameleon’s case against Mr Grimaldi in the Chameleon Proceedings. In the absence of any evidence from Mr Barns and Ms McLachlan, I am more readily able to draw the inference that none of these steps were taken by anyone at the ATO.

In cross-examination, Mr O’Neill gave evidence that he was not aware of anyone from the ATO making any inquiry of Jacobson J’s chambers to find out when judgment might be given in the Chameleon Proceedings (T234). There is no evidence that any further attempts were made by the ATO or the AGS to obtain access to the originating process or any attempts made by the ATO or the AGS to obtain the pleadings, the evidence or the submissions in the Chameleon Proceedings.

On 26 February 2010, the Commissioner was granted leave in the ATO Proceedings to file an amended application seeking a declaration that Mr Grimaldi was the beneficial owner of “those shares and funds held by” IFTC Broking and funds held by IFTC as identified in the freezing orders made on 22 May 2009 by Graham J of the Federal Court, and for an order that the Commissioner be granted an “equitable charge over [those] shares and funds”. It was supported by an affidavit sworn 22 February 2010 by Mr Barns which included reference to the ATO’s interview of Mr Grimaldi on 27 January 2009 and exhibited the transcript of that interview.

On 25 March 2010, the amended application was filed at the Federal Court.

On 19 March 2010, the Court of Appeal determined that the Grimaldi Proceeds Assessment Order made in the Recovery Act Proceedings was valid and still in effect: International Finance Trust Company Ltd v New South Wales Crime Commission (No 2) [2010] NSWCA 46.

The essence of the reasoning of Basten JA (with whom Allsop P and McLellan CJ at CL agreed) at [67]–[73] gives rise to the following central propositions concerning the operation of 29 of the Recovery Act by reference to the facts of that case:

In the summons filed 3 December 2009 in the Further Recovery Act Proceedings, the Crime Commission did not seek a declaration under s 29 of the Recovery Act. No such declaration was ever obtained by the Crime Commission in the Further Recovery Act Proceedings.

On 29 April 2010, a preliminary mediation conference was held between representatives of the ATO (including Mr O’Neill, Ms McLachlan and Mr Stokes of the AGS), Mr Grimaldi, Mr Woods and the mediator, the Honourable Michael McHugh AC QC, in advance of a mediation scheduled to occur on 18–20 May 2010.

On 18–20, 27 and 28 May and 1 and 9 June 2010, the mediation subsequently took place in circumstances where not all meetings involved the mediator, and not all meetings involved all parties. The Crime Commission declined to attend the mediation.

On 17 May 2010, Deputy Registrar Giurastante of this court made declarations by consent in the Further Recovery Act Proceedings that Mr Grimaldi had effective control (within the meaning of ss 7 and 8 of the Recovery Act) of Iron, Iron International, Ore Investments and MGG Capital as trustee for the Webtel Super Fund and their respective interests in property. The declarations made were based on a statement of agreed facts dated 14 May 2010 signed by the Crime Commission and by Mr Woods on behalf of Mr Grimaldi, Iron, Iron International, Ore Investments and MGG Capital. No declarations were sought, or made, under s 29 of the Recovery Act.

On 21 May 2010, Emmett J of the Federal Court granted additional freezing orders over the assets of Mr Grimaldi up to the unencumbered value of $36,341,461.73, and the assets of MGG Capital as trustee of the Webtel Super Fund up to the unencumbered value of $25,909,612.54 in the ATO Proceedings. The freezing orders over the assets of MGG Capital contained an exception which provided:

In dealing with the exception to the freezing orders for the purposes of the additional freezing orders, the ATO officers dealing with the issue could and should have sought a copy of the pleadings in the Chameleon Proceedings from Mr Grimaldi so that they would have a better understanding of the nature of the claims made and the relief sought. There is no evidence that the ATO made such a request.

On 8 October 2010, the ATO entered into two Deeds of Settlement with Mr Grimaldi and his nominees to settle their tax liabilities (Deeds of Settlement).

The first Deed of Settlement was made between the Commissioner, IFTC, IFTC Broking, Mr Grimaldi, MGG Capital (on its own behalf and as trustee for the Webtel Super Fund), YRC Nominees Pty Ltd, Iron and International Iron Holdings Ltd (First Deed of Settlement). The First Deed of Settlement concerned transfers of property and releases involving IFTC and IFTC Broking.

The effect of the material provisions of the First Deed of Settlement was as follows:

These steps in the First Deed of Settlement were designed to remove the obstacles of various court orders made in the Federal Court and this court so that payment could be made to the Commissioner towards satisfaction of the Grimaldi ATO Judgment.

The second Deed of Settlement was made between Mr Grimaldi, MGG Capital (on its own behalf and as trustee for the Webtel Super Fund), Ross Lorking, Gina Grimaldi, Mia Grimaldi, Tivation Pty Ltd, YRC Nominees and the Commissioner (Second Deed of Settlement).

The Second Deed of Settlement contains a number of matters under the heading “Context”, including:

The effect of the material provisions of the Second Deed of Settlement was as follows:

As is apparent from these provisions, the overall purpose of the Second Deed of Settlement was to enable Mr Grimaldi and MGG Capital (as trustee of the Webtel Super Fund) to pay $20 million to the Commissioner under the Payment Plan which would result in the Grimaldi ATO Judgment and the MGG ATO Judgment being satisfied and, subject to cl 5.2, the parties would be forever released from their tax liabilities in respect of the relevant years.

On 8 October 2010, Chief Clerk Shevlin of this court made orders by consent in the Recovery Act Proceedings as contemplated in the Deeds of Settlement (8 October 2010 Orders), which included:

The 8 October 2010 Orders enabled the payments to be made by Mr Grimaldi and MGG Capital into the bank account in the name of the Crown Finance Entity and then to be on-paid to the ATO “forthwith”.

On 11 October 2010, Emmett J made orders by consent in the ATO Proceedings, as contemplated in the Deeds of Settlement, to amend the freezing orders to enable the funds and shares to be dealt with.

On 19 October 2010, the first payment of $12,519,410.61 by Mr Grimaldi was received by the Crown Finance Entity.

On 20 October 2010, Charles Cheung of the NSW Treasury sent an email to Marilyn McMullen of the Crime Commission advising of the receipt of the funds and indicating that it intended to pay the money to the ATO the next day, on 21 October 2010.

On 20 October 2010, Jacobson J of the Federal Court delivered the Chameleon Judgment in the Chameleon Proceedings.

Although the Chameleon Proceedings concerned a number of transactions and allegations against Murchison, Mr Grimaldi, Mr Barnes, Winterfall, Pinnacle and Jack Hills Holdings Pty Ltd, the central transaction relevant to these proceedings was described by Jacobson J as the “July 2004 Placement”. Jacobson J made the following factual findings about the July 2004 Placement and the events surrounding it in the Chameleon Judgment at [50]–[60] (the reference to NiCu being the previous name of Murchison):

Jacobson J described Chameleon’s case in relation to the July 2004 Placement at [344]–[345] and [348] as follows:

Jacobson J found that Mr Grimaldi breached his statutory duties owed to Chameleon under ss 181(1)(a), 181(1)(b) and 182 of the Corporations Act, reasoning at [667]–[680] as follows (citations omitted):

Jacobson J had earlier addressed the fiduciary duties owed by Mr Grimaldi to Chameleon, finding that Mr Grimaldi was acting on behalf of Chameleon in relation to the capital raising in the July 2004 Placement by collecting the proceeds of the capital raising and depositing them in Chameleon’s bank account (at [634]) and undertaking to act in Chameleon’s interests and not his own interests, which was sufficient to give rise to a fiduciary relationship even if Mr Grimaldi was not a de facto director (at [689]). His Honour also found that Mr Grimaldi and Mr Barnes failed to disclose their personal interest in the advance of Chameleon’s money to Murchison to enable it to acquire an interest in the Iron Jack Tenements through the acquisition of Winterfall and they were advances which were procured by Mr Grimaldi and Mr Barnes in circumstances in which they had a direct conflict of interest and duty by reason of their entitlement to a fee for the successful consummation of the acquisition of Winterfall (at [688]).

Jacobson J then concluded that Mr Grimaldi had breached the fiduciary duties he owed to Chameleon, saying at [691]:

Jacobson J found that Mr Grimaldi was liable to account to Chameleon for the personal benefits or gains obtained by him by the misuse of his fiduciary capacity, saying at [693]:

Chameleon submits that when these findings concerning the breach of fiduciary duties are taken together it is plain that the conduct involved dishonesty by Mr Grimaldi and it was akin to a “theft of funds” (T316–317). Whatever pejorative is used to describe the conduct of Mr Grimaldi, it is very clear to me that Jacobson J found in terms that the conduct was dishonest (at [675]).

His Honour addressed the issue of the relief to which Chameleon was entitled across multiple sections of the Chameleon Judgment.

The first part of the analysis of the relief turned on the following factual findings made by Jacobson J regarding the benefits or gains obtained by Mr Grimaldi:

After reaching these factual findings, his Honour concluded at [810]:

The “separate chapter” in which Jacobson J dealt with the relief is Chapter 12 of the Chameleon Judgment, which runs from [918] to [1112].

Turning to the question of relief, his Honour said at [918]–[929]:

In relation to the imposition of a constructive trust over the shares in Winterfall held by Murchison, his Honour described the legal principles as follows:

When discussing why it would be inappropriate to impose a constructive trust over those shares, his Honour said at [978]–[984]:

Jacobson J held that Mr Grimaldi was liable to account to Chameleon for the 10 million shares in Murchison obtained by Pinnacle on completion of the reverse takeover, even though he did not receive all those shares, either as constructive trustee or by way of an account of profits (at [1076]–[1077]), and to account for the remaining shares as an accessory or to pay equitable compensation in respect of those shares (at [1078]).

The basis on which Mr Grimaldi was held liable to account to Chameleon for the profits he made on all of the 10 million shares in Murchison was expressed by Jacobson J at [1094]–[1096] as follows:

Jacobson J considered that the quantum of those profits was to be fixed on the value of the 10 million shares as at the date of judgment (at [1080]–[1084]), unless it could be shown that Pinnacle, Mr Grimaldi or his nominees disposed of the shares at an earlier date in which case the profits were to be determined by reference to the sale price of those shares (at [1111]).

Jacobson J held that for the purposes of the compensation order to be made for Mr Grimaldi’s breaches of ss 181 and 182 of the Corporations Act and Murchison being knowingly concerned in those breaches, the damage suffered by Chameleon includes the profit made by Mr Grimaldi or Murchison resulting from the contraventions (at [1105]).

The conclusions on relief were expressed by Jacobson J in the following way (at [1106]–[1112]):

At the conclusion of the Chameleon Judgment, Jacobson J ordered the parties to bring in short minutes of order to reflect his Honour’s reasons (at [1132]).

To summarise the Chameleon Judgment, Jacobson J found that Mr Grimaldi had breached the fiduciary duties he owed to Chameleon and was liable to account to Chameleon as a constructive trustee for the profits he made on the 10 million Murchison shares he obtained in breach of his duties, with a referee to be appointed to take that account.

In the Commonwealth’s closing submissions in these proceedings before me, it accepted that it knew the outcome of the Chameleon Proceedings as recorded in the Chameleon Judgment when it was delivered, being the liability of Mr Grimaldi to account as a constructive trustee and the relief ordered upon that finding of liability.

I agree with Chameleon’s submissions that the following four material consequences arose for the ATO on the delivery of the Chameleon Judgment:

On 21 October 2010, the day after the Chameleon Judgment was delivered, the ATO received $12,519,410.61 from the NSW Treasury. Those funds had been received by the NSW Treasury on 19 October 2010, the day before the Chameleon Judgment was delivered.

On 25 October 2010, Mr Zafiriou sent an email to Mr Stokes of the AGS, Ms McLachlan, Mr O’Neill and Mr Tannous of the ATO, amongst others, confirming that the amount of $12,519,410.61 had been allocated to Mr Grimaldi’s account.

On 21 October 2010 at 6.32pm, Mr Stokes sent an email to various ATO employees, including Ms McLachlan, Mr O’Neill, Mr Tannous and Mr Zafiriou, attaching an article from the Sydney Morning Herald of that day describing the outcome in the Chameleon Proceedings. The article relevantly stated:

Later that night, Mr Zafiriou and Ms McLachlan had a telephone call about the Chameleon Judgment. That is revealed by the fact that, on the morning of 22 October 2010, Mr Zafiriou sent an email to Ms McLachlan in response to the email of 21 October 2010 from Mr Stokes (which attached the article from the Sydney Morning Herald referred to above), the contents of which are set out in full below (all grammatical errors left in place):

There is no file note or other record of this conversation. It is the one and only documented conversation involving anyone within the ATO speaking about the Chameleon Judgment. It would appear that the Chameleon Judgment had raised a concern within the ATO of sufficient level for these two officers of the ATO to speak about it outside of normal working hours. Neither Ms McLachlan or Mr Zafiriou gave evidence about the conversation. In their absence, I infer that the conversation in the evening of 21 October 2010 did not raise any topic beyond that which is dealt with in the email of 22 October 2010.

I agree with Chameleon’s submissions that the expressed reliance on s 123(4) of the Bankruptcy Act 1966 (Cth) within that email was misplaced: that section provides that nothing in the Bankruptcy Act invalidates “a penalty or fine” imposed on a bankrupt in respect of an “offence against a law”, but Mr Grimaldi had not been found liable of an offence nor had a penalty or fine been “imposed” on him by a court. Rather, on 8 October 2010, this court had given effect to a settlement between the parties by making consent orders which were expressly noted to be “without admission”.

There is no other evidence of anyone within the ATO at this time giving any consideration to the fact that the finding in the Chameleon Judgment — that Mr Grimaldi was liable to account to Chameleon for the profits he had made on the Murchison shares to Chameleon, and therefore those profits did not belong to him — called into question the basis on which Mr Grimaldi had been assessed for tax on them.

Other than this conversation on 21 October 2009 between Mr Zafiriou and Ms McLachlan and the email the following day, there is no evidence that anyone within the ATO analysed the Chameleon Judgment to consider its impact on the course of action to which the ATO was committed in the Deeds of Settlement. I consider that I am able to infer that the telephone call and the email are the complete account of the ATO’s consideration of the effect of the Chameleon Judgment on the ATO’s settlement with Mr Grimaldi.

In my opinion, it was incumbent on the ATO to review the Chameleon Judgment closely and carefully, seek legal advice on it and consider whether the Deeds of Settlement should be set aside on the basis that they had been entered into on the false or misleading premise that Mr Grimaldi was beneficially entitled to the profits he had made for the sale of the Murchison shares and options. Instead, the ATO seems to have disregarded the Chameleon Judgment and continued receiving payments under the Deeds of Settlement as if it had not been delivered.

It reflects poorly on Mr O’Neill’s credit that in cross-examination he considered that after the Chameleon Judgment Mr Grimaldi could have sought a review or raised an objection to his tax assessments (T159 and T161–162), when Mr Grimaldi had contractually bound himself not to do so in the Second Deed of Settlement (cl 2.8 and the assessments listed in Schedule 1 to the Second Deed of Settlement). It will be recalled that Mr O’Neill signed the Second Deed of Settlement as delegate of the Commissioner. I agree with Chameleon’s submission that I can comfortably infer that the ATO would have resisted any attempt by Mr Grimaldi to seek a review of or object to any of the assessments in breach of cl 2.8 of the Second Deed of Settlement (T349).

On 20 December 2010, Jacobson J made final orders in the Chameleon Proceedings (Chameleon Final Orders), after hearing oral submissions from the parties on 10 December 2010.

A mixture of proprietary and personal relief was ordered against Mr Grimaldi in the Chameleon Final Orders. Stripped of their complexity and detail, the orders made against Mr Grimaldi in the Chameleon Final Orders were to the following effect:

The Chameleon Final Orders against Mr Grimaldi were qualified in two respects.

First, Mr Grimaldi was entitled to set off, in reduction of the amounts he was to pay Chameleon, any fees he had paid in relation to the exercise of the options and interest on those fees.

Secondly, order 17 provided a qualification to orders 12, 14 and 15 in relation to payment of share sale proceeds and the general order to account. That was because, in December 2009, Chameleon reached a settlement with Mr Barnes under which it received $6 million. Because the 10 million shares in Murchison and the 12 million options in Murchison were issued to Pinnacle, a nominee of both Mr Barnes and Mr Grimaldi, concerns were raised by Mr Thomson, the legal representative for Mr Grimaldi at the hearing on 10 December 2010, in relation to the final orders about Chameleon being paid twice in relation to the same assets, which was made more difficult because of the uncertainty as to whether Mr Grimaldi still held the shares in Murchison.

These issues were captured in the following exchange between Jacobson J and Mr Thomson at the hearing on 10 December 2010 in relation to the form of the final orders in the Chameleon Proceedings:

During the hearing on 10 December 2010, Mr Hutley SC, counsel for Chameleon, resisted the notion that for Mr Grimaldi to hand back the Murchison shares and account for the profits made on them would be “double dipping” for Chameleon and involve an inconsistency of remedies saying that “Mr Grimaldi, being a constructive trustee of the shares and options … disgorges all benefits”.

On each of 21 February 2011, 25 May 2011, 25 August 2011 and 28 November 2011, Mr Grimaldi made further payments of $250,000 to the NSW Treasury by depositing that amount into the account in the name of the Crown Finance Entity.

Shortly after each payment was made, on 22 February 2011, 1 June 2011, 30 August 2011 and 30 November 2011 respectively, the Crime Commission sent a letter by email to ask the Crown Finance Entity (copying Mr Zafiriou and Mr Tannous amongst others, with the exception in the case of the 1 June 2011 email) to make the necessary arrangements to ensure that each payment was “immediately transferred” to the ATO.

On each of 24 February 2011, 6 June 2011, 1 September 2011 and 5 December 2011, a payment of $250,000 was made by the Crown Finance Entity to the ATO in respect of Mr Grimaldi.

On 21 February 2012, the Full Court of the Federal Court (Finn, Stone and Perram JJ) delivered Grimaldi No 2 in which their Honours dismissed an appeal brought by Mr Grimaldi in relation to the Chameleon Judgment.

On each of 24 February 2012 and 25 May 2012, Mr Grimaldi made further payments of $250,000 to the NSW Treasury by depositing that amount into the account in the name of the Crown Finance Entity.

Shortly after each payment was made, on 28 February 2012 and 30 May 2012 respectively, the Crime Commission sent a letter by an email to the Crown Finance Entity to make the necessary arrangements to ensure that each payment was “immediately transferred” to the ATO.

On each of 6 March 2012 and 31 May 2012, a payment of $250,000 was made by the Crown Finance Entity to the ATO in respect of Mr Grimaldi.

On 8 August 2012, Robert Ravanello of the ATO sent a letter to Van Cooney (the solicitor acting for Mr Grimaldi’s daughters, Mia Grimaldi and Gina Grimaldi) advising that upon settlement of the property sale of Unit 403 by them, a bank cheque in the amount of $855,000 payable to the NSW Treasury was to be provided to a representative of the Crime Commission.

On 16 August 2012, Mr Spark of the Crime Commission wrote to the Crown Finance Entity enclosing three cheques totalling $855,000 stated to be partial satisfaction of the Grimaldi Proceeds Assessment Order and asking for them to be deposited “URGENTLY” and that “GRIMALDI” be noted as the description.

On 17 August 2012, $855,000 was credited to the Proceeds Account of the NSW Treasury.

On 23 August 2012, Mr Cooney wrote to Mia Grimaldi and Gina Grimaldi confirming that of the sale proceeds of $867,160.87 from the sale of Unit 403, $855,000 had been paid to the NSW Treasury to be forwarded to the ATO. He described the process as follows:

Mr Cooney also stated that on settlement he provided to the purchaser’s representative a discharge of mortgage to be registered along with the transfer.

On 27 August 2012, $855,000 was paid by the Crown Finance Entity to the ATO.

On 14 August 2012, Bennett & Co, then the solicitors acting for Chameleon, sent a letter to the ATO, which stated as follows (all grammatical errors left in place):

This letter served to remind the ATO of what it already knew, being the outcome of the Chameleon Proceedings, as well as providing information about the Chameleon Final Orders.

On 7 February 2013, Robert Ravanello of the ATO sent a letter to Mr Cooney, (the solicitor acting for Mia Grimaldi and Gina Grimaldi) advising that upon settlement of a property sale of Unit 404C by them, a bank cheque in the amount of $850,000 payable to the NSW Treasury was to be provided to a representative of the Crime Commission.

On 7 February 2013, Arlene Cupay of the ATO sent an email to Mr Spark of the Crime Commission concerning the settlement of the sale of Unit 404C, the proceeds of which were said to be “held with the ATO as security” under the Deeds of Settlement. Ms Cupay said that a cheque for $850,000 made payable to the NSW Treasury was to be provided to a representative from the Crime Commission attending the settlement.

On 27 February 2013, Mr Spark of the Crime Commission wrote to the Crown Finance Entity enclosing two cheques totalling $850,000 asking for them to be deposited “URGENTLY” and that “GRIMALDI” be noted as the description.

On 28 February 2013, $850,000 was credited to the Proceeds Account of the NSW Treasury.

On 28 February 2013, Mr Cooney wrote to Mia Grimaldi and Gina Grimaldi confirming that from the sale proceeds of Unit 404C, $850,000 had been paid to the NSW Treasury to be forwarded to the ATO. He stated that (all grammatical errors left in place):

He also stated that on settlement he provided to the purchaser's mortgagee a discharge of mortgage to be registered.

On 8 March 2013, $850,000 was paid by the Crown Finance Entity to the ATO.

On 14 March 2013, Chameleon filed a bankruptcy notice against Mr Grimaldi for a debt in the amount of $31,560.44.

Mr Grimaldi succeeded in setting aside the bankruptcy notice.

On 2 July 2014, Mr Grimaldi voluntarily entered bankruptcy by filing a debtor’s petition.

As a result of the bankruptcy of Mr Grimaldi, the inquiry before the Honourable JW von Doussa AO FAAL KC to take an account of profits in accordance with the Chameleon Final Orders was adjourned and has remained in abeyance ever since.

The articulation of Chameleon’s claim in these proceedings appears in the further amended commercial list statement filed 28 October 2021 (FACLS). Section A of the FACLS is headed “Nature of Dispute” and contains the following succinct summary of Chameleon’s claim:

Chameleon’s claim, as stated in section C of the FACLS headed “Plaintiff’s Contentions”, can be distilled into the following main elements:

Chameleon says that a third party will “become chargeable” with trust property if “they received it with notice of the trust”: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ at [112].

Chameleon says that liability for knowing receipt also extends to a third party who “received property that was trust property, or was transferred in breach of fiduciary duty, or was traceable to property so transferred” where the third party had requisite knowledge (not merely constructive notice) of the breach of trust or breach of fiduciary duty so as to warrant the imposition of personal liability arising from the receipt”: Turner v O’Bryan-Turner (2022) 107 NSWLR 171; [2022] NSWCA 23, White JA (with whom Meagher and McCallum JJA agreed) at [92].

Chameleon relies on the elements of a claim under the first limb of Barnes v Addy which were set out in Simmons v NSW Trustee and Guardian (2014) 17 BPR 33,717; [2014] NSWCA 405 by Gleeson JA (with whom Beazley P and Barrett JA agreed) at [88] as follows:

Chameleon submits that their claim may be summarised in four points, each of which is contested (at least in part) by the Commonwealth:

In its closing submissions, the Commonwealth substantially narrowed the issues which it raised in defence of Chameleon’s claim. In doing so, the Commonwealth conceded three important matters:

In light of the above, the Commonwealth expressed the principal issues to be resolved with respect to Chameleon’s claim in the following way:

The primary issues for determination are as follows:

Chameleon’s submissions on what I will refer to as the “trust property” issue are detailed and complex, running to many hundreds of paragraphs. Those submissions seek to establish the applicable principles for a knowing receipt claim under the first limb of Barnes v Addy as they have developed under Australian law and provide Chameleon’s reply to the submissions made by the Commonwealth as to why Chameleon’s claim fails on that issue. I have set out Chameleon’s summary of its principal submissions below and then dealt with the detail of those submissions in my consideration of the relevant legal principles and my determination on the respective arguments of Chameleon and the Commonwealth.

Chameleon’s overall position is that the Spotter’s Fee Securities, and the profits from the sale of both the Spotter’s Fee Securities and the Existing Shareholding, were “trust property” in the hands of Mr Grimaldi or his nominees within the meaning of the first limb of Barnes v Addy. Chameleon says that the following three well established principles support this conclusion:

Chameleon says that the profit gained or earned by a defaulting fiduciary or its nominee by reason or use of their position is “trust property” for the purposes of a claim under the first limb of Barnes v Addy against a knowing recipient, which is supported by the application of basic equitable principles as well as the decisions of the Court of Appeal in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 and the Full Court of the Federal Court in Grimaldi No 2.

According to Chameleon, despite the differing ways in which the courts have applied “labels” to describe the fiduciary’s duty to account for profits as a personal remedy (such as requiring the fiduciary to pay a sum of money to the principal representing the value of that profit), a proprietary remedy (such as requiring the fiduciary to transfer an item of property to the principal representing the profit or its traceable proceeds or declaring that property to be held on constructive trust), or a combination of both, the same core principle has been applied: the defaulting fiduciary who obtains an unauthorised profit in the form of identifiable property has a duty to hold that property or its traceable proceeds for the benefit of the principal, which may be enforced by personal or proprietary remedies, or a combination of both.

Chameleon submits that the fiduciary’s duty to account for profits, when referable to identifiable property, is the basis on which that property is considered to be “trust property” for the purposes of the first limb of Barnes v Addy either because the existence of that duty meant that the fiduciary held the profit “on trust” for the principal (applying Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36, Deane J at 199) or the existence of the duty was a “fiduciary duty with respect to property” (applying Simmons, Gleeson JA at [88(1)]).

Chameleon says that applying the first limb of Barnes v Addy to this “custodial duty” is not dependent on the principal having a judicially recognised antecedent or current proprietary interest or on whether a given remedy, either personal or proprietary, has been or will be granted.

Chameleon argues that the application of these principles means that any third party who receives this “trust property” will be liable under the first limb of Barnes v Addy if that transfer and receipt amounts to a breach of the fiduciary’s custodial duty to hold the gain on behalf of the principal until it is disgorged and the recipient has the required degree of knowledge that:

On this analysis, Chameleon says that the Spotter’s Fee Securities, and the profits from the sale of the Spotter’s Fee Securities and the Existing Shareholding, were unauthorised profits obtained by Mr Grimaldi, by his nominee company or his alter-ego, Iron, by reason or use of his fiduciary position. The consequence of Chameleon’s case is that Mr Grimaldi and Iron had a duty to hold the Spotter’s Fee Securities and the Existing Shareholding for the benefit of Chameleon because they were held subject to a fiduciary duty with respect to property and thus were “trust property” for the purposes of the first limb of Barnes v Addy. Chameleon contends that it was this “trust property” or its traceable proceeds which were transferred to and received by the ATO in breach of Mr Grimaldi’s obligation to hold the property for the benefit of Chameleon, and the ATO had the required degree of knowledge of each of these facts.

The Commonwealth submits that the Chameleon Final Orders, properly interpreted, did not impose on Mr Grimaldi a fiduciary duty with respect to any property, including the proceeds of sale of both the Spotter’s Fee Securities and the Existing Shareholding. I have summarised the basis for this submission and then dealt with the detail of those submissions in my consideration of the relevant legal principles and my determination on the respective arguments of Chameleon and the Commonwealth.

The principal submissions made by the Commonwealth in support of this argument are summarised as follows:

To give context to the point of principle contended for by Chameleon in these proceedings, it is necessary to briefly examine the duties imposed on fiduciaries, the fiduciary’s liability to account for unauthorised profits and the nature of that remedy.

The modern expression in Australian law of the duty of loyalty owed by a fiduciary to the principal involving two overlapping proscriptive obligations and the equitable remedies which flow from their breach are helpfully encapsulated in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 by Gageler J at [67]–[69] as follows (footnotes omitted):

The remedies available to the principal as against the fiduciary who acted in breach of their duties were described in Ancient Order of Foresters by Gageler J at [74]–[75] in these terms:

Chameleon submitted that it is important to trace in a detailed way the historical derivations of these principles regarding fiduciary duties and the remedies which flow from their breach. As I have mentioned, the Commonwealth submitted that this historical excursion is unwarranted.

In light of the fact that it is agreed by Chameleon and the Commonwealth that the profits which were obtained by Mr Grimaldi were in breach of the fiduciary duty he owed to Chameleon and this was decided to be so in both the Chameleon Judgment and Grimaldi No 2, I consider that it is only necessary for me summarise these principles.

Since the early 20th century, the High Court has repeatedly held (for example, Furs Ltd v Tomkies (1936) 54 CLR 583; [1936] HCA 3, Rich, Dixon and Evatt JJ at 592; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8, Gibbs J at 394; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64, Mason J at 107; Chan v Zacharia, Deane J at 198–199; Warman International Ltd v Dwyer (1995) 182 CLR 544; [1995] HCA 18, Mason CJ, Brennan, Deane, Dawson and Gaudron JJ at 557; Breen v Williams (1996) 186 CLR 71; [1996] HCA 57, Gaudron and McHugh JJ at 108; Ancient Order of Foresters, Gageler J at [67]–[69]) that a fiduciary will be liable to account for a profit, gain or benefit if it was obtained:

The profit, benefit or gain so held by the defaulting fiduciary has been variously described as:

Under Australian law, fiduciaries duties are proscriptive, not prescriptive. If these obligations are breached, the errant fiduciary “must account for any profits and make good any losses arising from the breach”. So much was stated in Breen v Williams by Gaudron and McHugh JJ at 113 (footnotes omitted):

As I have explained in more detail below when dealing with the principles of liability for knowing receipt, I regard the fiduciary who has made an unauthorised profit to be subject to a fiduciary obligation to hold those profits for the benefit of their principal and to account for those profits to their principal. This obligation is not a standalone “prescriptive” fiduciary duty; it is simply the positive expression of that well established proscriptive duty, which is reflected within, but distinct from, the classical remedial response to such a breach.

To resolve the conflicting positions between the parties on the issue of “trust property” it is necessary for me to analyse the legal principles in relation to knowing receipt as they have been developed in the authorities since Barnes v Addy.

In addressing the issue of “trust property”, I will first consider the nature of the liability of a knowing recipient, the meaning of the liability to account “as a constructive trustee” and the state of the authorities on bringing a claim of knowing receipt against a non-trustee fiduciary.

Once I have done so, I will then address the ambit of “trust property” and the purported requirement that the transfer of “trust property” to the knowing recipient itself must be in breach of trust or fiduciary duty.

With a degree of hesitation (echoing the “reluctance” expressed and explained in Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266 by Leeming JA at [64]–[68]), I commence my analysis of the relevant principles with the much-quoted dictum from Barnes v Addy, where Lord Selborne LC said at 251–252 (emphasis added in underline):

The emphasised sentence is that which gave rise to the so-called two “limbs” of “Barnes v Addy liability” with the first being “knowing receipt”, where third parties “receive and become chargeable with some part of the trust property”, and the second being “knowing assistance”, where third parties “assist with knowledge in a dishonest and fraudulent design on the part of the trustees”: Farah Constructions, at [111]–[112].

The introductory sentences speak of the conferral upon a trustee of “legal power and control over the trust property” which impose in equity corresponding personal responsibilities. It is the extension of those personal responsibilities to third parties in their dealings with trustees with which Lord Selborne LC was concerned.

The issue in Barnes v Addy was whether two solicitors who acted in the appointment of a new trustee of conventional trust funds could be liable for that trustee's misappropriation of those trust funds. The solicitors had no knowledge of, or reason to suspect, a dishonest purpose in the transaction and no funds passed through their hands. The claim against them failed and the appeal was quickly dispensed with.

Under each limb, Barnes v Addy provides a means by which a third party who never assumed and never intended to be a trustee may be “treated as accountable in equity as a constructive trustee”: Hasler, Leeming JA (with whom Barrett and Gleeson JJA agreed) at [72]. The central concept of being “accountable in equity as a constructive trustee” is dealt with in more detail below.

The origin and utility of the labels “knowing receipt” and “knowing assistance” were explored by the High Court in Farah Constructions, at [112] as follows (footnotes omitted):

Lord Selborne LC’s ex tempore expression of this form of liability, delivered some 150 years ago and without reference to authority, has since become a canonical statement of equitable principle, with Barnes v Addy repeatedly considered and applied in Australia on countless notable occasions since: see, for example, Consul Development; Farah Constructions; Ancient Order of Foresters; Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557; [2007] NSWCA 191; Simmons; Scrivener v Cappello [2021] NSWCA 330; Blue Mirror Pty Ltd v Tan & Tan Australia Pty Ltd (in liq) [2024] NSWCA 253.

The dictum of Lord Selborne LC has also frequently been described as either a “rule of law” or “the rule in Barnes v Addy”. In this regard, one should remain cognisant of the following remarks made in Hasler by Leeming JA at [66]–[68]:

The latter of Leeming JA’s remarks at [67] were directed to liability beyond that of knowing receipt, but in my review of the authorities and the submissions before me in this matter, I find those remarks to be equally apposite in this context.

From the plethora of formulations to which my attention has been drawn, it is obvious that the expression of any such “rule” within a court's reasons — and of the “rule” of knowing receipt specifically — has and will frequently turn upon the “particular facts before the court in light of the legal landscape at the time”: Hasler, Leeming JA at [67]; see also Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344, Leeming JA (with whom Bell P and Brereton JA agreed) at [156].

Plainly, what is said of liability in knowing receipt in one case may not necessarily translate to the facts of another. For that reason, to select several cases and pick up (or pick apart) statements made by judicial officers divorced from their context in an effort to construct or defeat a claim in knowing receipt may invite error. Additionally, to do so is to further engage in what a former judge of the High Court, William Gummow, writing extra-judicially, has referred to as “an over refinement of verbal analysis” present in much of the contemporary case law concerning the two limbs of Barnes v Addy liability: W Gummow, “Knowing assistance” (2013) 87(5) Australian Law Journal 311.

In Grimaldi No 2, Finn, Stone and Perram JJ said the following at [249] about the “contemporary burden” of the principles enunciated by Lord Selborne LC in Barnes v Addy:

Considering these matters, within this judgment I have consciously refrained from contributing to that discord by way of a further context-specific restatement of the constituent “elements” of Barnes v Addy liability. The elements are as stated and as applied in Australian law since. My task sitting at first instance is to apply the law to the facts, not to recast the law in light of them.

Conversely, it is worth noting that to simply recount verbatim the statement of the “rule” as it was before Lord Selborne LC in 1874 dealing with a simple breach of trust case is to ignore the context in which the statement was made, the principled development of the law in the 150 years which have followed and, in some respects, overlooks significant instances where the law in this jurisdiction has subsequently diverged from the law as it stands in England.

There are two notable instances of the divergence of Australian law from English law on a claim for knowing receipt which are of consequence in this case.

First, the position now taken in England is that a personal claim in knowing receipt cannot succeed absent maintenance by the claimant of a proprietary interest in the subject property. There, it is said that “the extinction or overriding of a proprietary equitable interest by the time when the recipient receives the property defeats a proprietary claim” and “given the close link between the proprietary claim and the personal claim in knowing receipt, it would be logically inconsistent for the law to allow the personal claim in knowing receipt to survive where the proprietary claim has been defeated by the lack of a continuing proprietary equitable interest”: Byers v Saudi National Bank [2023] UKSC 51; [2024] AC 1191, Lord Hodge DP (with whom Lord Leggatt and Lord Stephens agreed) at [6].

That is not reflective of the position in Australian law. Here, the fact that there is no continuing proprietary claim or interest does not preclude a knowing recipient from being personally liable to account: Blue Mirror, Leeming JA (with whom Ward P and Michelmore JA agreed) at [30], citing McFee v Reilly [2018] NSWCA 322, Leeming JA (with whom McColl JA and Payne JJA agreed) at [108]; Turner, White JA (with whom Meagher and McCallum JJA agreed) at [103]; cf Byers.

As I have stated, Australian law recognises the constructive trust arising in this context as being remedial (not institutional) in character. In the case of an unauthorised profit or commercial opportunity obtained in breach of fiduciary duty for which the fiduciary is personally liable to account “as a constructive trustee”, liability in knowing receipt against a third party who received that benefit or opportunity at the direction of the errant fiduciary is not dependent upon some judicially recognised antecedent proprietary interest.

Secondly, and relatedly, English jurisprudence has conventionally approached the rationale for liability in knowing receipt as being primarily concerned with the protection of “rights of priority in relation to property”: Agip (Africa) Ltd v Jackson [1990] Ch 265, Millett J at 292–293.

While this rationale provides a neat answer to any proprietary claim to property in which the claimant has a subsisting equitable interest and which remains the hands of the recipient, Australian courts have observed that it does not provide “sufficient justification for imposing a personal liability to account” which is fault-based and “arises as a matter of conscience not of property”: Grimaldi No 2, Finn, Stone and Perram JJ at [263]–[267], cited in Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81, Leeming JA (with whom Bathurst CJ and Sackville AJA agreed) at [44]; McFee, Leeming JA at [106]. Personal liability in knowing receipt should therefore be “distinguished from claims based on the vindication of proprietary rights”: Chickabo Pty Ltd v Zphere Pty Ltd (2019) 57 VR 406; [2019] VSC 73, Sifris J at [184], citing Fistar, Leeming JA at [44].

While the judgment in Barnes v Addy is not to be understood as an exhaustive statement of the circumstances in which third parties may become liable following a breach of trust or fiduciary duty (Hasler, at [68]; Grimaldi No 2, at [24] and [248]; Farah Constructions, at [161]), it is the only form of liability pleaded by Chameleon in this case.

As outlined above, the well established position in Australian law that liability in knowing receipt is fault-based, the imposition of which is a matter of conscience, reflects the fact that liability of this kind is responding to conduct of an “unconscionable” character (in a similar sense to that used in Ancient Order of Foresters by Gageler J at [67]–[69]), first by the errant fiduciary and then, by extension, by the party who receives “trust property” with the requisite knowledge of its origins.

It has been emphasised that personal liability in knowing receipt it is not based upon “inflexible formulae”: Grimaldi No 2, Finn, Stone and Perram JJ at [247]. Nor, as mentioned above, is it parasitic upon pre-existing proprietary rights or interests in the subject property: Blue Mirror, Leeming JA (with whom Ward P and Michelmore JA agreed) at [30]; cf Byers.

It follows that it is not the mere receipt of “trust property” which is ultimately determinative of the recipient’s liability; the outcome of that inquiry will ultimately reflect equity’s concern with the conscience of the recipient: Break Fast Investments Pty Ltd v Rigby Cooke Lawyers [2022] VSCA 118, Kyrou, McLeish and Walker JJA at [113], citing Consul Developments, Gibbs J at 398, Stephen J at 412; Grimaldi No 2, Finn, Stone and Perram JJ at [267]; Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157 (Bell Group No 3), Drummond AJA at [2129]–[2130].

The equitable jurisdiction imposing personal liability on a knowing recipient is engaged in the manner summarised in Turner by White JA at [92] as follows:

It is for this very reason that so many cases brought in knowing receipt — and, to an even greater extent, knowing assistance — focus and turn upon the various form of knowledge on which liability arises, being those summarised in Blue Mirror by Leeming JA at [30]. Under Issue 2 described as “the knowledge” issue below, I have dealt in detail with the legal principles concerning the requisite knowledge for a knowing receipt claim.

To summarise, in my view, considering the application of the principles for a claim in knowing receipt under Australian law, the emphasis on the liability being fault-based and attaching to conscience is absolutely critical. It explains why a third party can be held personally liable as a knowing recipient and reduces the focus on the proprietary remedies to which that personal liability might give rise. It also serves to distinguish a claim in knowing receipt (where knowledge to the requisite degree is established at the time of receipt) from claims based upon the victim’s title to the property (as distinct from claims fixed upon the recipient’s conscience) such as the liability of an innocent volunteer to account for trust property or its traceable proceeds insofar as they remain in their hands: see, for example, Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252, Allsop P (with whom Campbell JA and Handley AJA agreed) at [108] and [154]; Fistar, Leeming JA at [40]–[48]. While they may overlap, these claims are distinct in significant respects and operate independently. As will become evident, both Chameleon and the Commonwealth have made various submissions and arguments which appear to be the product of the erroneous conflation of these distinct claims. Additionally, the Commonwealth’s position on some of the points at issue in these proceedings appears to better reflect the law of England more so than the position under Australian law.

Before descending into my consideration of the authorities concerning the extent of liability for knowing receipt, in light of the arguments raised by the Commonwealth concerning the importance of there being no constructive trust ordered over the profits made by Mr Grimaldi from his breach of fiduciary duty in the Chameleon Final Orders, it is necessary to set out the nature of the “constructive trust” which may arise in this context.

It is important to understand the various senses in which “constructive trust” has been used in the decided cases. This is because I am of the view that it partly informs the answer to a central question posed by the submissions in this case, being the ambit of “trust property” in the context of liability for knowing receipt and, specifically, whether it extends to an unauthorised profit over which a constructive trust (as a proprietary remedy) was never declared. In a similar vein, I consider the many uses of “constructive trust” among the authorities, particularly its use as an inconvenient shorthand for the phrase “liability to account as a constructive trustee”, partly explains the uncertainty surrounding this very issue.

It is clear from the legal principles I have outlined above that a fiduciary who derives a profit in breach of their duty will be liable to account “as a constructive trustee”, but that does not mean that the fiduciary necessarily is or will be declared to be a constructive trustee in the proprietary sense. That is because, since even before Barnes v Addy was decided, that label was understood to describe the amenability to a range of personal and proprietary remedies that might be available against an express trustee: Rolfe v Gregory (1865) 4 De GJ & S 576; (1865) 46 ER 1042, Lord Westbury LC at 579.

But what exactly does it mean for there to be a constructive trust under Australian law? Numerous judges in Australia and England have grappled with this question, seeking to resolve the ambiguity which seemingly arises on the use of the term “constructive trust”, including of the notion of a constructive trust in circumstances of a breach of fiduciary duty and claims under either or both limbs of Barnes v Addy.

As a former judge of the Court of Appeal, JC Campbell, pointed out, writing extra-judicially in “When and why a bribe is held on a constructive trust: The method of reasoning towards an equitable remedy” (2015) 39 Australian Bar Review 320, at 332:

In Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78, Deane J at 612–617 wrote extensively on the long running and wide debate which had occurred in the common law world about the nature and function of a constructive trust. It is not necessary to outline that debate, but the descriptions of the remedial constructive trust and the institutional constructive trust set out by Deane J at 613–614 are instructive:

Deane J concluded at 616–617 that “[o]nce its predominantly remedial character is accepted, there is no reason to deny the availability of the constructive trust in any case where some principle of the law of equity calls for the imposition upon the legal owner of property, regardless of actual or presumed agreement or intention, of the obligation to hold or apply the property for the benefit of another”.

To similar effect are the observations in Giumelli by Gleeson CJ, McHugh, Gummow and Callinan JJ at [3]–[4]:

In Giumelli, Gleeson CJ, McHugh, Gummow and Callinan JJ at [10] pointed out that whether a constructive trust will in fact be imposed as a remedial response to a fiduciary’s breach will depend on “whether, having regard to the issues in the litigation, there is an appropriate equitable remedy which falls short of the imposition of a trust”. Their Honours cited Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566; [1998] HCA 59, where Gaudron, McHugh, Gummow, Hayne and Callinan JJ at 585 said:

By reference to the comments in Giumelli at [2]–[4], in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44, Gummow, Hayne, Heydon, Kiefel and Bell JJ at [47]–[48] said (footnotes omitted):

Similarly, in John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19, French CJ, Gummow, Hayne, Heydon and Kiefel JJ at [128] said that a “constructive trust ought not to be imposed if there are other orders capable of doing full justice”. Their Honours then continued at [129]:

In Grimaldi No 2, Finn, Stone and Perram JJ began their analysis of the relevant principles relating to a constructive trust in the setting of unauthorised profits derived by a fiduciary and Barnes v Addy claims by distinguishing between claims of priority in respect of property (to which a defence of bona fide purchaser for value without notice may be available) and Barnes v Addy liabilities which “expose the persons to whom they apply to personal, to in personam, liabilities”. Their Honours at [251]–[253] stated the following:

In Grimaldi No 2, the Full Court returned to the distinction between the different notions of considering a party liable as a constructive trustee in a proprietary sense and in the context of personal liability under Barnes v Addy. The Full Court said at [667]:

As already mentioned, in Ancient Order of Foresters, Gageler J at [74] considered the notion of liability of a defaulting fiduciary as a “constructive trustee” to “serve no purpose other than to indicate amenability to the range of remedies traditionally available in equity against a trustee who is in breach of a similar proscriptive obligation” and that the remedies available “centrally include an order for equitable compensation and an order to account” at the option of the principal but that the “declaration of a constructive trust is warranted only if other equitable orders are not capable of doing complete justice in the circumstances of the case”.

It is clear that liability under either limb of Barnes v Addy is a personal liability which exposes the recipient or assistant to both personal and, where appropriate, proprietary consequences: Turner, White JA at [92].

Typically, proprietary remedies will hold the recipient accountable in rem for such of the property received (or its traceable proceeds) as “remains extant in that person’s hands”: Grimaldi No 2, Finn, Stone and Perram JJ at [254].

While proprietary remedies may be available, personal liability in knowing receipt differs materially from liability in proprietary, in rem, proceedings to make specific restitution to the “true owner” of property received either with notice of the claimant’s beneficial interest or as a volunteer: Grimaldi No 2, Finn Stone and Perram JJ at [251]–[252].

In other words, liability in knowing receipt is a personal liability and is not solely directed to the recovery of property remaining in the hands of a third party to which a defence of being a bona fide purchaser for notice may arise: GP Building Holdings v Voitin (2022) 69 VR 299; [2022] VSCA 210, Niall, Sifris and Walker JJA at [10].

As mentioned above, where a proprietary claim is not available, the recipient may nevertheless be liable personally to account to the person to whom the duty was owed: Grimaldi No 2, Finn, Stone and Perram JJ at [253]; Blue Mirror, Leeming JA at [30]–[33].

In Hasler, Leeming JA at [69]–[70] highlighted the different uses of “constructive trustee”, particularly those used in the English authorities, in the following terms:

The personal liability of a knowing recipient to account “as a constructive trustee” to the person to whom the fiduciary obligation was owed subsists even if the property has ceased to exist or is otherwise incapable of being held on constructive trust. It follows the personal liability of a knowing recipient is in no way dependent upon the eventual imposition or otherwise of a constructive trust as a remedy in respect of specific property. So much was observed in McFee by Leeming JA at [105]–[108]:

In a similar vein, the unavailability of a constructive trust in respect of specific property as against an errant fiduciary, says little about what remedy might be awarded against a recipient. In Ancient Order of Foresters, Gageler J observed when speaking of liability in knowing assistance, that while liability under Barnes v Addy requires proof of a foundational breach of fiduciary duty, the relief ultimately awarded against the errant fiduciary and persons to whom liability under Barnes v Addy may attach “will not necessarily coincide in either nature or quantum” at [76] (quoting Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48, Gummow ACJ, Hayne, Crennan and Bell JJ at [106]) (footnotes omitted):

Any suggestion that there must be some coincidence or contingency in the remedy awarded against an errant fiduciary and a knowing recipient cannot be good as a matter of law. Applying common sense, the utility of proprietary remedies against a fiduciary who has passed trust property to a recipient is doubtful. So too is the suggestion that the availability of such a remedy against a recipient is somehow contingent on the same remedy having been awarded against the errant fiduciary.

It is clear from the authorities that the liability of a knowing recipient to account “as a constructive trustee” is simply a formulation of liability and is distinct from the constructive trust as a remedy; it is a label which indicates amenability to the “range of remedies traditionally available in equity against a trustee who is in breach of a similar proscriptive obligation”. That range of remedies may, or may not, include a declaration of a constructive trust in respect of specific property — in either case the label is apt: Ancient Order of Foresters, Gageler J at [74].

In cases of this kind, the “constructive trust” is adopted as a “vehicle to secure personal accountability” and this constructive trusteeship will not always generate a proprietary consequence: G E Dal Pont, Equity and Trusts in Australia (8th ed, 2023, Thomson Reuters) at 1160–1161 [38.100].

In other words, the knowing recipient is not a trustee (unless declared otherwise) but must account “as if they were one”: Hasler, Leeming JA at [69]–[70]; Break Fast Investments, Kyrou, McLeish and Walker JJA at [112].

It is worth noting that the position under English law is quite different, with an institutional constructive trust arising when a fiduciary acts in breach of their fiduciary duty and gains an unauthorised profit: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, Lord Browne-Wilkinson at 714–715; Hotel Portfolio II UK Ltd (in liq) v Stevens [2025] UKSC 28; [2025] 3 WLR 293, Lord Burrows at [121]–[123]. In English law, profits made by a fiduciary “from the fiduciary relationship are treated by equity as held upon constructive trust for the principal from the moment of their receipt by the fiduciary”: Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2025] 2 WLR 529, Lord Briggs (with whom Lord Reed, Lord Hodge and Lord Richards agreed) at [2].

Under English law, the fiduciary must account for unauthorised profits, which means “not merely revealing their existence, but paying them to the principal, or otherwise treating them as the principal’s property”: Recovery Partners, at [2]. So understood, the constructive trust arising over a fiduciary’s unauthorised profits is an institutional constructive trust, the recognition of which “involves no exercise of discretion by the court”: Recovery Partners, at [23]. The “fiduciary duty to account for profits is a rule governing the conduct of fiduciaries which exists in its own right” which is “imposed by equity on all fiduciaries” and “does not depend upon a demand for an account by the principal, or upon an order of the court”: Recovery Partners, at [20]. Importantly, the “fiduciary duty to account is not just a remedy. The duty arises at the moment when the profit is received and, in terms of timing, marches hand in hand with the constructive trust which obliges the fiduciary to treat the profit as belonging to his principal”: Recovery Partners, at [22]. The fiduciary’s obligation to account for profits is a self-standing “duty arising on the receipt of the profits, rather than just a remedy for breach of fiduciary duty”: Recovery Partners, at [25].

The obvious point of difference is that under Australian law a constructive trust as a remedy may or may not arise for a breach of fiduciary duty where unauthorised profits have been earned, but in England it is imposed institutionally giving rise to an immediate proprietary interest over the fund representing those profits for the principal as beneficial owner of that fund: Hotel Portfolio, Lord Briggs at [23]–[25], [28]–[29] and [100].

A possible further point of distinction is the characterisation of the obligation imposed on an errant fiduciary to account for its unauthorised profits as a “self-standing” (and apparently prescriptive) fiduciary duty as distinct from a remedy for breach of that core proscriptive obligation. This is a matter I will return to below.

It follows that, under English law, the argument raised by the Commonwealth that the Chameleon Final Orders did not impose a constructive trust over the proceeds of Mr Grimaldi’s breach of fiduciary duty and are therefore not “trust property” would never arise because at all times those proceeds would be held on constructive trust and so would readily be regarded as “trust property”.

For the reasons I will shortly explain, I do not consider that the lack of the declaration of a constructive trust over Mr Grimaldi’s profits within the Chameleon Final Orders means that Chameleon cannot maintain a claim for knowing receipt of the traceable proceeds of those profits.

A threshold issue in Chameleon’s claim is whether liability in knowing receipt may attach not only to persons dealing with trustees in the conventional sense, but also to non-trustee fiduciaries such as directors or shadow directors of a company. On this point, in Farah Constructions, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ at [113] notably observed (footnote omitted):

In noting this “assumption” in the law, the High Court referenced two authorities (to which I will return in due course):

Relevantly, the High Court’s remarks in Farah Constructions at [113] were made in the course of allowing the appeal from the decision of the Court of Appeal which found third parties liable on both a knowing recipient and restitutionary basis: Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309.

Broadly speaking, in Farah Constructions it was alleged that third parties had received information in breach of a joint venturer’s fiduciary duty and had derived some benefit from that information. The High Court rejected the Court of Appeal’s conclusion on knowing receipt for two reasons. Firstly, there was no relevant “receipt of property to which a fiduciary obligation attached” (Farah Constructions, at [115]–[117]). Secondly, in any event, neither of the third parties had the requisite knowledge to sustain a claim in knowing receipt against them.

The High Court in Farah Constructions resoundingly rejected the separate restitutionary ground as an independent basis for the decision in circumstances where such a ground was not pleaded. The High Court considered this approach was either the effective abandonment of the knowledge requirement for knowing recipient liability contrary to established authority and the seriously considered dicta of that court in Consul Development, or it was the recognition of a new and additional avenue of relief which tends to render knowing recipient liability under Barnes v Addy otiose and was not an appropriate step for an intermediate appellate court to take (Farah Constructions, at [134]).

This is a convenient point for me to observe that the comments in Farah Constructions concerning a “radical change” in the law (on which the Commonwealth relies to describe Chameleon’s arguments) were made in an entirely different context in circumstances where there was no property, and so no property to which fiduciary obligation attached, and the High Court was invited by the respondent to accept the receipt of a “benefit” in lieu of property as a basis for liability in knowing receipt. The High Court rejected that proposed “radical change” in the law and confirmed that liability in knowing receipt is confined to benefits of a proprietary character: Farah Constructions, at [117]–[118], as discussed in Bell Group No 3, Drummond AJA at [2152]–[2155].

For present purposes, what emerges from the High Court’s consideration of this issue in Farah Constructions is that knowledge is central to liability under knowing receipt. Liability for knowing receipt is fault-based and it is wrong as a matter of principle to consider it as being some “species of unjust enrichment” or “restitution-based” as a means of explaining why the element of dishonesty element found in the second limb is not equally applicable to the first limb (Farah Constructions, at [148]). Put simply, it is and always has been the knowledge of the nature or origins of the property received which binds the recipient’s conscience in an action for knowing receipt.

In Farah Constructions, the High Court commenced its analysis of the issue of knowing receipt stating that the reasoning of the Court of Appeal would be examined on the assumption that a fiduciary duty to disclose the subject information was owed and had been breached, contrary to their conclusion otherwise (at [109]). Evidently, the issue as to whether liability in knowing receipt could attach to third parties in their dealings with non-trustee fiduciaries generally — that is, as a matter of principle — was not contested, either in the Court of Appeal or in the High Court, and so the correctness of this assumption in the law was not examined.

It follows that Farah Constructions is “not authoritative for any proposition concerning the liability of third parties pursuant to the first limb of Barnes v Addy for knowing receipt in connection with fiduciaries who are not trustees": Pittmore, Leeming JA at [156]. That is because any proposition which has been assumed to be correct without argument in a superior court is not binding on a lower court even when it forms part of the ratio decidendi: see Coleman v Power (2004) 220 CLR 1; [2004] HCA 39, McHugh J at [79]; CSR Ltd v Eddy (2005) 226 CLR 1; [2005] HCA 64, Gleeson CJ, Gummow and Heydon JJ at [13].

After I reserved my judgment in these proceedings, the High Court delivered judgment in Naaman v Jaken Properties Australia Pty Ltd (2025) 99 ALJR 295; [2025] HCA 1. In Jaken, albeit without the benefit of any argument and so in circumstances where it was not necessary to decide the point, Gordon, Edelman and Steward JJ (dissenting in the result) noted without elaboration the assumption in the law referred to in Farah Constructions at [113], stating at [84] as follows (emphasis added in underline):

While their Honours simply noted the assumption without more, it is difficult to construe the introductory sentence to that paragraph as anything other than apparent approval of the proposition (noting their Honours’ dissenting conclusion appeared also to proceed on that very footing, but the issue was not expressly decided).

In Jaken, the principal issue that divided both the Court of Appeal and the High Court was whether a successor trustee owes a fiduciary duty to the former trustee not to deal with trust assets so as to destroy, diminish or jeopardise the former trustee’s entitlement to be indemnified or exonerated out of those very assets: Jaken Properties Australia Pty Ltd v Naaman [2023] NSWCA 214 (Jaken Court of Appeal decision).

In essence, the majority of the Court of Appeal (Leeming JA with whom Kirk JA agreed, Bell CJ dissenting) in the Jaken Court of Appeal decision held that a successor trustee is subject to a “duty” enforceable in equity by the former trustee of the kind contended, but that duty was not fiduciary in character. Leeming JA considered that a former trustee can prevent their successor in dealing with trust assets in ways which would destroy, diminish or jeopardise the former trustee's entitlement to be indemnified from those assets, and that this is a simple consequence of the nature of the former trustee’s entitlement to indemnity having proprietary aspects which survive their removal (at [37]). In this way, the former trustee’s right may be expressed as casting a correlative “duty” on their successor not to deal with trust assets in that manner (at [37]). However, mere recognition of the equitable proprietary rights enjoyed by the former in property held by the latter does not entail a personal relationship of trust and confidence to which Barnes v Addy liability attaches (at [38]). A majority of the High Court substantially agreed and the appeal to that court was dismissed: Jaken, Gageler CJ, Gleeson, Jagot and Beech-Jones JJ at [6], [12], [49] and [50].

Relevantly for present purposes, the entire premise of the Jaken litigation was that if the contended duty was owed and it was fiduciary in character (being a proscriptive duty not to deal with trust assets in the impugned manner), third parties who knowingly receive or participate in a breach of that duty could be held liable “under either or both limbs of Barnes v Addy” engaging both "personal and proprietary responses": Jaken Court of Appeal decision, Leeming JA at [35], [37] and [127].

This is significant in circumstances where, while it was argued in Jaken that the relationship between a former trustee and their successor itself answered the description of beneficiary and trustee respectively, even the dissenting reasons in both the Court of Appeal and the High Court do not appear to ground the purported fiduciary duty as falling squarely within that status-based paradigm: Jaken Court of Appeal decision, Bell CJ at [19]–[24]; Jaken, Gordon, Edelman and Steward JJ at [88]–[89] and [92]–[96].

Further, I note that in each court through which the Jaken litigation travelled, the threshold question as to whether liability may attach to third parties “under either or both limbs of Barnes v Addy” appears to have been whether the relevant duty was fiduciary in character, not whether the fiduciary duty was owed in the capacity as trustee.

While the proposition has been characterised by the High Court in both Farah Constructions and Jaken as an assumption in the law, there is a substantial body of first instance and intermediate appellate authority, some of which post-date Farah Constructions, suggesting (but not always deciding) that the first limb of Barnes v Addy can and does apply to non-trustee fiduciaries: The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239 (Bell Group No 9), Owen J at [4641]; Kalls Enterprises, Giles JA at [157] and the cases cited there; see also Simmons, where Gleeson JA at [87] characterised the observation of the High Court in Farah Constructions at [113] as an “acceptance” of the proposition “in the absence of any argument to the contrary” and, on that footing, described the elements of a knowing receipt claim at [88] as follows:

These decisions also necessarily extend the concept of “trust property” in the strict sense to include, at least, property held or controlled subject to a fiduciary obligation or, to use the phrasing adopted by the High Court in Farah Constructions at [116], “property to which a fiduciary obligation attached”. By way of a non-exhaustive list, these authorities include (in chronological order):

I recognise that courts have occasionally noted the absence of submissions to the contrary when proceeding on the basis that knowing receipt liability extends beyond “trust property” in the strict sense and applies to fiduciaries who are not trustees: see, for example, McFee, at [45] where Leeming JA, citing the High Court’s observation in Farah Constructions, noted the absence of any submission that liability in knowing receipt was confined to trustees. See also Simmons, Gleeson JA at [86]–[92].

The Commonwealth did not submit in this case that Barnes v Addy liability would not apply to Mr Grimaldi as a non-trustee fiduciary. In the absence of argument on the point, my overarching view is that the “assumed” state of the law — being that knowing recipient liability can apply to third parties in their dealings with non-trustee fiduciaries — is correct. In any event, to the extent there is any doubt, a contrary submission was made in Kalls Enterprises and, after reviewing the authorities, Giles JA at [159] decided that the first limb of Barnes v Addy did apply to the breach of fiduciary duty by a director.

As others have said before me, the above-listed authorities should be followed unless or until “the High Court says otherwise”: Kalls Enterprises, Giles JA at [152]–[159]; Bell Group No 3, Drummond AJA at [2135]–[2136], Carr AJA at [2723]–[2733]; Gordon, Black J at [61]; K & A Laird, Black J at [114] and [117].

As a matter of equitable principle, I am of the view that the “extension” of liability for knowing receipt to non-trustee fiduciaries is entirely consistent with extension of the second limb of Barnes v Addy to non-trustee fiduciaries despite Lord Selborne LC’s trustee-focused formulation of the “rule”. The rationale for extending liability in that regard is said to be that “equity intervenes in order to deter conduct which directly undermines the high standards required of fiduciaries, and because it is inequitable for such persons to “retain benefits” deriving from their conduct”: Hasler, Leeming JA at [75]; Consul Development, Gibbs J at 396–397. It is also because there is no reason in principle to distinguish between a party who assists with knowledge in a breach of trust, and a party who assists with knowledge in a breach of fiduciary duty: Pittmore, Leeming JA at [154]–[157]. As I have already observed, in respect of either limb, it reflects the fact that liability is personal, fault-based and attaches as a matter of conscience: Grimaldi No 2, Finn, Stone and Perram at [259] and [267].

As I have mentioned, just as liability under either limb of Barnes v Addy extends to non-trustee fiduciaries, it must therefore necessarily extend beyond “trust property” in the strict sense. Unfortunately, just how far it extends, and the precise basis and scope of the extension, is less clear.

Of course, on the facts of Barnes v Addy, it is not surprising that the language used was necessarily directed — or at least appears to have been directed — to “trustees” and so “trust property” in the strict sense of those terms. However, as has been stated by the Court of Appeal, even that is debatable owing to the state of flux in the law and usage of those terms in the 19th century.

In Pittmore, Leeming JA at [157] observed in relation to liability for procuring or inducing a breach of trust that:

Whatever its intended meaning when deployed by Lord Selborne LC in 1874, the breadth of “trust property” in knowing receipt has undeniably widened in the many years that have followed.

One of the main areas to which the first limb has been held to extend is where the legal property of a party is under the control and management of a fiduciary; a company director exercising control over company property subject to fiduciary obligations is the paradigmatic (but not the only) example. In cases of this kind, the relevant property was the legal property of the company prior to the relevant breach; it was property over which the directors exercised control and in respect of which the directors owed fiduciary obligations. In a tidy case of knowing receipt in this context, that property is then usually transferred in breach of fiduciary duty to the recipient who accepts the property with requisite knowledge of the breach.

The conceptual difficulty presented by this case is whether “trust property” extends in knowing receipt cases to property which was obtained in breach of fiduciary duty, where such property was not the legal property of the company and which perhaps did not even exist prior to the breach, such as where a director of a company makes an unauthorised profit or obtains a proprietary benefit or gain by diverting a commercial opportunity in breach of either proscriptive obligation.

As I have already outlined above, this profit, benefit or gain by the defaulting fiduciary has been variously described as “belonging in equity” to the principal (Furs v Tomkies, at 592), and as being “held by him in trust for his cestui que trust” (Keith Henry & Co, at 350); “held by the fiduciary as constructive trustee” (Chan v Zacharia, at 198); “held by him as a constructive trustee” (Hospital Products, Mason J at 107–108); subject to the “imposition of a constructive trust” (Warman, Mason CJ, Brennan, Deane, Dawson and Gaudron JJ at 563–564); and in respect of which the fiduciary is “liable as a “constructive trustee”” (Ancient Order of Foresters, Gageler J at [74]). As I have also already concluded, I regard these expressions as meaning no more than that the defaulting fiduciary owes a fiduciary obligation to account for such profits, benefits or gains to the principal.

If property so obtained is then transferred into the hands of a third party recipient with requisite knowledge of the circumstances in which it was obtained, are they liable in knowing receipt?

While the extension of “trust property” in the paradigmatic example provided above is not contentious, consideration of the rationale for the extension of “trust property” within those cases may shed light on the answer to this question.

In Soar v Ashwell [1893] 2 QB 390, Bowen LJ at 397 stated the following:

In Re Lands Allotment Co [1894] 1 Ch 616, directors who misapplied company money were considered to be trustees, or trustees by implication of law, of those moneys, so as to be entitled to the limitation of actions against trustees in respect of trust property prescribed by s 8 of the then Trustee Act 1888 (UK). Lindley LJ said at 631:

In reaching the same conclusion, Kay LJ said at 638–639:

I cannot understand either of these passages as saying any more than company officers who misapply company property in breach of their fiduciary obligations will be liable to account for that property “as a constructive trustee”.

That liability to account depends upon the scope, rather than the mere existence, of a fiduciary relationship; that is to say, it depends on whether fiduciary obligations are owed in relation to the property: Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400, Millett LJ at 415–416; Sze Tu v Lowe [2014] NSWCA 462, Gleeson JA at [359]–[361]; Twigg v Twigg [2022] NSWCA 68, Brereton JA (with whom Bell P and Payne JA agreed) at [173].

The reasoning in Re Lands Allotment Co was later relied upon by the English Court of Appeal in Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 (Belmont No 2) to sustain a knowing receipt claim in relation to a transaction which involved the plaintiff company giving financial assistance for the purpose of purchasing its own shares. In deciding whether the plaintiff company was entitled to a constructive trust over the funds it had advanced, Buckley LJ (with whom Waller LJ relevantly agreed) at 405 said:

Goff LJ (with whom Waller LJ also relevantly agreed) added at 406–410:

In Belmont No 2, it was held that, owing to a genuine belief on the part of the directors that the transaction was a good commercial decision, City (the recipient) could not be liable in knowing assistance (as there was no dishonest and fraudulent design to assist with) but could be, and was, liable in knowing receipt. This is because City had received funds in breach of fiduciary duty with knowledge of the breach; money had been misapplied by the directors of Belmont about which City (though its directors) had knowledge and so it was said that City had “received trust funds (i.e. funds belonging to Belmont of which Belmont’s directors were trustees) in such a way as to become accountable for them”.

The approach in Belmont No 2 has been followed in Australia to support the conclusion that the first limb applies to the dealings of company directors with respect to company property: Grimaldi No 2, Finn, Stone and Perram JJ at [275]; Bell Group No 9, Owen J at [4748] and [4765]; Super 1000, White J at [208]; Bell Group No 3, Drummond AJA at [2143]–[2144]; Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580, Southwell J at 623–624.

In Kalls Enterprises, Giles JA referred at [153] to the observation of the High Court in Farah Constructions at [113] before stating that a “number of cases have applied the first limb to persons receiving property with knowledge of breach of a director’s fiduciary duty”. His Honour proceeded to refer, at [154]–[156], to the reasoning in each of Belmont No 2 and Re Lands Allotment Co that explained the extension of “trust property” in this context, before stating at [157]–[159]:

Two conceptual bases for this extension of “trust property” were identified in Bell Group No 9. The first treats company directors, by analogy, as trustees of company property under their control. The second basis does not depend on characterisation of the subject property as “trust property” in either the strict or constructive sense prior to the disposal, but involves extended understanding of the phrase to include property disposed of in breach of fiduciary duty. In Bell Group No 9, Owen J at [4776]–[4779] stated that:

In expressing his support for the latter view, Owen J cited the decisions in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 and Evans v European Bank Ltd (2004) 61 NSWLR 75; [2004] NSWCA 82. I will return to each of these decisions below.

In Bell Group No 9, Owen J at [4801]–[4804] went on to briefly consider why a constructive trust on the principles of Barnes v Addy arises in respect of property received by a third party which is not itself trust property (emphasis added in underline):

It bears noting that in Bell Group No 9, Owen J found that liability for knowing receipt can extend to contractual rights granted in breach of fiduciary duty, including in share mortgages, mortgage debentures, guarantees and indemnities. Those contractual rights did not exist and were not “property of the company” prior to the breach; they were created in breach of fiduciary obligation by virtue of the impugned transactions themselves.

On appeal, in Bell Group No 3, Drummond AJA considered the ambit of “trust property” in knowing receipt by reference to the confines of the decision in Farah Constructions “in its application to persons who receive benefits at a company’s expense as a result of the breach by the company's directors of their fiduciary duties” as being limited to benefits of a “proprietary nature” that is subject to some fiduciary obligation and “capable of being held on trust”: Bell Group No 3, Drummond AJA at [2149]–[2163]. Relevantly, in doing so, his Honour at [2158]–[2159] stated that:

In Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71, Mason P (with whom Stein and Giles JJA agreed) characterised the “extension” of liability in knowing receipt to “property protected by fiduciary or statutory fiduciary obligations” as “well established” at [60]:

Robins was a conflict of interest case. The directors in that matter caused “an improper diversion” of the company's money to gain advantage for themselves as major shareholders of the recipient company. Mason P (with whom Stein and Giles JJA agreed) referred to Belmont No 2, and explained at [64] the passages extracted above as being demonstrative of the fact that liability in knowing receipt can be applied to property which is not "trust property" in the strict sense at the time of its misapplication by directors acting in breach of their duties. The relevant misapplication in Robins was the payment of purchase money for real property bought by the recipient company without any material benefit to the first company. Those payments were held to be in clear breach of fiduciary and statutory duties: Robins, Mason P at [48].

The prevailing view in this jurisdiction appears to be that reflected in the words of Mason P in Robins, at [60] and [64] where his Honour characterised the “extension” of liability in knowing receipt to “property protected by fiduciary or statutory fiduciary obligations” which was not “trust property” in the strict sense at the time of its misapplication. Another way of saying the same thing is “property in respect of which a fiduciary obligation attached” (Farah Constructions, at the heading to [116], as noted in Bell Group No 9, Owen J at [4775]).

This remains the prevailing view among the other authorities, although the phrasing differs from case to case, to encompass the receipt of:

As to whether “trust property” in this extended sense is capable of capturing an unauthorised profit or diverted commercial opportunity obtained in breach of fiduciary duty, I am of the view that it is property which is subject to a fiduciary obligation or to which a fiduciary obligation attaches because it is property which “belongs in equity” to the principal and in respect of which the errant fiduciary is obliged, and will be liable, to account “as a constructive trustee” to their principal. I consider property of this kind is within the ambit of “trust property” in the context of a claim in knowing receipt based on breach of fiduciary duty, as are the traceable proceeds of that property. I have reached this conclusion by reference to the above listed cases generally and from the following cases specifically.

In Timber Engineering Co Pty Ltd v Anderson [1980] NSWLR 488, two employees diverted a portion of their employer’s business and profits to themselves and their companies. In concluding that each employee has placed themselves in a position of conflict and had taken advantage of this position to gain profits for which they were accountable, Kearney J at [5]–[10] considered the issue and characterised the benefits obtained as “trust property” for which the fiduciaries and the knowing assistants were liable to account as constructive trustees in the following way (footnotes omitted):

Chickabo concerned a partner making (through an entity controlled by him) an unauthorised profit exceeding $11 million following an investment by him in a client of the partnership, as well as receiving (through a second entity controlled by him) an additional payment of some $4.8 million (which was characterised as a “gift”) from an entity controlled by another client of the partnership. The partner did not disclose either the investment opportunity (as required by the Partnership Deed) or the additional payment to the partnership. Each of the investment and the additional payment were held to be unauthorised profits obtained in breach of fiduciary duty and the entities to which those profits were directed were held liable in knowing receipt. On this point, Sifris J observed at [145] (by reference to s 33(1) of the Partnership Act 1958 (Vic), which provides for statutory accountability of partners in respect of private profits):

Sifris J further characterised those profits at [184] and [187] as “property obtained in breach of fiduciary duty” which his Honour considered to be property to which it was “well established that the principles under Barnes v Addy extend” (footnotes omitted, emphasis added in underline):

As a matter of equitable principle, this must be correct. I cannot understand how liability in knowing receipt could operate in this context with any practical effect if the position were otherwise. The prospects of recovery from a fiduciary who had obtained proprietary benefits in breach of their proscriptive obligations would be rendered precarious (noting the fiduciary's personal liability would be unaffected) by a simple transfer of the property, irrespective of the knowledge or conscience of the party receiving it. I have never understood the eye of equity to be so narrow in its enquiries.

In Consul Development, broadly speaking, Mr Grey was a manager and director of several companies pursuant to a service agreement which required him to devote himself exclusively to the business of those companies. His duties included investigating properties for the purpose of investment. In breach of fiduciary duty, Mr Grey entered into an arrangement with Mr Clowes whereby Mr Grey would disclose properties identified as suitable for investment, Mr Clowes would arrange for their purchase, and each would share in their financing and any profits. Particularly relevant are the following observations of Gibbs J at 396–397 (footnotes omitted, emphasis added in underline):

In this passage, Gibbs J expressed the view that a person who knowingly assists or participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit received as a result of such participation. His Honour considered this would be so even though the benefit obtained could not properly be considered “trust property” either in the strict or constructive sense. The rationale for this position is said to be both the maintenance of the strict standard to which fiduciaries are held and the inequity which would result in allowing the third party to retain the benefit resulting from their participation in the breach. In further support of this conclusion, Gibbs J at 397–398 referred to the decision of the Privy Council in Cook v Deeks [1916] 1 AC 554 (on appeal from the Supreme Court of Ontario), in the following terms (footnotes omitted, emphasis added in underline):

In essence, Cook was a case in which directors of a construction company negotiated for and obtained a contract for their own benefit in conflict with, and to the detriment of, the company. Following successful negotiations, but prior to execution of the formal contract, the errant directors formed another company to carry out the work and obtain the benefit of the contract. The conduct of the directors was held to be in breach of fiduciary duty in circumstances where the directors could not retain the benefit of the contract for themselves and must account for that benefit to the company.

The company formed to secure the benefit of the contract was equally liable to account as it had received or “acquired” that benefit “with full knowledge of all the facts”. As Gibbs J observed in Consul Development, no order declaring any of the defendants a constructive trustee was ever made, but both the defendants and the company formed were personally liable to account for any benefits received under the contract. This kind of factual matrix, where the errant fiduciary uses the corporate creature to “secure the profits of, or inflict the losses by, their breach of fiduciary duty”, is fairly commonplace and (despite being somewhat “artificial”) the company formed is usually amenable to a claim under either limb of Barnes v Addy because the knowledge of the principal wrongdoers is imputed to it: Grimaldi No 2, at 243, citing, among others, Cook, at 565.

In summary, I have found that the ambit of “trust property” in a case of knowing receipt has been held to extend to property transferred “in breach of fiduciary obligation”, property “held or controlled subject to a fiduciary obligation”, property “protected by” a fiduciary obligation, “property to which a fiduciary obligation attached”, property “traceable to” a breach of fiduciary duty, property which “was the proceeds” of a breach of fiduciary duty, and property “obtained in breach of fiduciary duty”.

The next issue of principle presented by the arguments in this case is whether the relevant disposition or transfer of the property (or its traceable proceeds) to the alleged knowing recipient must itself be a breach of fiduciary duty in the strict sense or whether liability can extend to those who (adopting similar shorthand to that used in Blue Mirror by Leeming JA at [2]–[4]) I will refer to a “downstream recipient”. As his Honour explained in the circumstances of that case, an “immediate recipient” (who received property or its traceable proceeds) can be distinguished from a “downstream recipient”, being the person to whom the immediate recipient transferred the “trust property” or its traceable proceeds.

It may be the case that the “immediate recipient” of the impugned profits in this case was not Mr Grimaldi, but his corporate alter egos or nominees (being the vehicles used to secure his profit). Through the series of transactions detailed above, Mr Grimaldi then transferred, or otherwise directed for those funds to be transferred, to the NSW Treasury following which those funds were to be “immediately transferred” to the ATO.

To my mind, there are three possible answers to the question available on the authorities before me, none of which assist the Commonwealth:

In any case, my conclusion is that where a third party receives “trust property” (or its traceable proceeds) with the requisite knowledge that the property is property to which a fiduciary obligation attaches or which has been obtained in breach of fiduciary duty, their conscience is bound; they are a knowing recipient of that property, and they will be personally liable to account as a constructive trustee in respect of it.

To confine liability in knowing receipt by a technical argument to the effect that the impugned transfer of “trust property” or its traceable proceeds by an immediate recipient to a downstream recipient must itself be a transfer in breach of fiduciary duty in the strict sense appears to be contrary to both authority and principle. It speaks to the echoes of a rationale proffered in respect of liability in knowing receipt which fixes upon rights of priority in relation to property.

As I have outlined above, that rationale is not reflective of the fault-based justification for liability which is favoured in Australian law, being one directed primarily to conscience rather than the vindication of proprietary rights. The authorities I explained above make plain that the proper confines of fault-based liability in knowing receipt is the conscience of the recipient, not the precise mechanism of the receipt: Grimaldi No 2, at [263]–[267]; McFee, Leeming JA at [106]; Chickabo, Sifris J at [184].

As this is a more technical point, it will be necessary to refer in greater detail to the authorities upon which I have reached these alternate conclusions, beginning with the decision of the Court of Appeal in Evans.

In Evans, a fraudster had debited approximately USD$47.5 million from credit card accounts held by residents of the United States. Some USD$7.5 million of the proceeds of that fraud found their way to European Bank, in a deposit account in the name of Benford Ltd, a company under the control of the fraudster. European Bank then placed the funds in an interest-bearing deposit with Citibank in Australia. The receiver of Benford brought proceedings to recover the funds, including on the basis of knowing receipt. European Bank brought a cross claim against Citibank seeking repayment of the amount. Spigelman CJ (with whom Handley and Santow JJA agreed) considered that Benford held the stolen funds as trustee for the defrauded credit card holders under the principles in Black v S Freedman & Co (1910) 12 CLR 105; [1910] HCA 58, an example of an institutional constructive trust which arises “automatically” and “immediately upon acquisition of the property” (at [111]–[116]): see also Sze Tu, at [162].

In Evans, the claim against European Bank in knowing receipt failed on two bases. First, in accordance with longstanding principle established at least since Foley v Hill (1848) 2 HL Cas 28, European Bank did not “beneficially” receive the funds on deposit (at [171]). Second, it could not be said that the deposit with European Bank constituted a misapplication of the trust funds in breach of trust, which his Honour considered to be an “essential aspect” of liability in knowing receipt. His Honour observed the following at [160]–[163] (emphasis added in underline):

It is helpful to understand the following matters. As I have mentioned, his Honour held that, as the Vanuatu-based “emanation of the fraudsters”, Benford held the stolen funds as trustee for the defrauded credit card holders in accordance with the principles in Black v S Freedman & Co. His Honour considered that, for the purposes of liability in knowing receipt, Benford’s deposit of those funds with the European Bank in the circumstances of this case was not a breach of that trust such that there could be no liability in knowing receipt because those trust monies were not “misapplied” by their transfer to the European Bank; the transfer to the bank itself was not “breach of trust” in circumstances where the funds were not being dissipated, merely held on deposit. His Honour said the following at [162]–[163]:

On one view (despite His Honour using the phrase “fiduciary obligation”), support for the rather narrow proposition that it is essential in an action for knowing receipt that the transfer to the alleged knowing recipient must itself be the relevant breach of trust or fiduciary duty in the strict sense could be found in Evans, within the following statement of Spigelman CJ at [160] (emphasis added in underline):

Whether his Honour actually intended to lend support for that narrow proposition, or whether the emphasised text was merely intended to contextualise the broader proposition that for an action in knowing receipt there must be a foundational transfer, diversion or disposition of “trust property” in breach of fiduciary duty, is less clear.

As a matter of equitable principle, in circumstances where liability in knowing receipt is accepted to be personal and fault-based, I can only understand the emphasised text as contextualising his Honour’s statement of broader principle confined to the facts of the case before him. This is the only way in which I have been able to reconcile the many authorities to which I have been referred which extend recipient liability not only to those who were the “immediate recipient” of "trust property" but also to those regarded as "downstream recipients" in the sense described above, some of which include the cases cited by Spigelman CJ at [161] as being “various expressions” of the very proposition his Honour expressed at [160]: see, for example, El Ajou and Belmont No 2.

Perhaps notably, the rejection of liability in knowing receipt in Evans was on two grounds which his Honour considered separately, and in both respects his Honour relied upon statements made by Millett J in Agip (Africa).

In Agip (Africa), Millett J considered the requirement that funds be received beneficially was foundational to liability in knowing receipt and an essential requirement “if receipt-based liability is to be properly confined to those cases where the receipt is relevant to the loss” (at 292). This statement was relied upon by Spigelman CJ in his Honour’s finding that the property the subject of the claim must be “beneficially” received, but it too reflects the suggestion that there must be some causal nexus between the breach and the receipt, or to put it another way, that the transfer to the recipient itself must be in breach of either trust or fiduciary duty.

To the extent the need for such a causal nexus between the breach and the receipt has been suggested, it has not found favour in this jurisdiction, and the statements made by Millett J in Agip (Africa) are frequently confined as reflecting the “property protection” rationale for liability in knowing receipt which, subsequent to the decision in Evans, was the subject of serious doubt by the Full Court in Grimaldi No 2, Finn, Stone and Perram JJ at [267]; see also GP Building, Niall, Sifris and Walker JJA at [21].

As a matter of principle, it is difficult to understand why an action for knowing receipt should not extend to downstream recipients simply because the subsequent transfer (i.e. that from the immediate recipient to the downstream recipient who takes with the requisite knowledge) might not itself be a breach of trust or fiduciary duty in the strict sense. That does not align with intermediate appellate court authority subsequent to Evans on this issue: see, for example, Blue Mirror and Australasian Annuities. It is also difficult to reconcile with the wholesale rejection of “causation questions” in this context by the High Court in Farah Constructions, at [199]:

I will now refer to two of the cases listed by Spigelman CJ in Evans at [161], statements from which were said to support the proposition his Honour expressed at [160]. As I have stated, I do not interpret his Honour as lending support to the narrow proposition contended by the Commonwealth in these proceedings. While I am aware that proposition has found support in England, I could find no positive treatment of it in this jurisdiction, including in Evans: cf Courtwood Holdings SA v Woodley Properties Limited [2018] EWHC 2163 (Ch), Nugee J at [12] and [190]–[202] applying Brown v Bennett [1999] BCC 91; Brown v Bennett [1999] 1 BCLC 649.

I have discussed Belmont No 2 above. For present purposes, I observe that the impugned receipt there (in the hands of City) was in fact the result of two transactions, with the second being conditional upon completion of the first. The first transaction which was held to be in breach of fiduciary duty involved the purchase by Belmont from Mr Grosscurth of all the share capital in a company known as Maximum for the sum of £500,000. The second transaction involved Mr Grosscurth using £489,000 of that £500,000 to purchase all of the share capital in Belmont from City. Mr Grosscurth was the immediate recipient of funds transferred in breach of fiduciary duty, while City was what one might call a “downstream recipient”.

The decision in Belmont No 2 has been considered or cited at the intermediate appellate court level with apparent approval on several occasions: see, for example, Grimaldi No 2, at [275]; Kalls Enterprises, at [157]–[158]; Robins, at [60]–[65].

The facts in El Ajou are complex. At their core is a “boiler room” share selling scheme run briefly by three Canadian fraudsters through two Dutch companies. For present purposes, the central facts are these: the plaintiff’s investment manager was bribed to subscribe on behalf of the plaintiff in parcels of practically worthless shares sold by the fraudsters (via the Dutch companies) at gross overvalue. Acting in breach of fiduciary duty, the investment manager participated in the scheme and caused some £13,051,221 to be debited from the plaintiff’s account. The relevant transactions took place between February and May 1985. The plaintiff’s funds then quickly moved in a series of complex multi-jurisdictional transfers involving Geneva, Gibraltar, Panama and back through Geneva. Mr Sylvain Ferdman, a Swiss fiduciary agent, acted for the Canadians in their incorporation of various entities and movement of funds.

In July 1985, Mr Ferdman was put on notice that the plaintiff was investigating the share purchases in circumstances where an entity controlled by Mr Ferdman had subscribed for shares in another company at 25 cents a share which were later sold to the plaintiff at $8.25 a share. In October 1985, Mr Ferdman was on notice of express allegations of fraud. Although Mr Ferdman was also a director and the Chairman of Dollar Land Holdings plc (DLH), his appointment was nominal, and the affairs of BLH were conducted by its controlling shareholders and William Stern.

The proceedings in El Ajou concerned £1.3 million that the plaintiff sought to trace into DLH. That sum was said to have been invested by the Canadian fraudsters (following their introduction by Mr Ferdman to Mr Stern) via various Panamanian entities as part of a property development joint venture with DLH in Battersea, London. It was paid in early 1986 in two tranches of £270,000 and £1,030,000 to the solicitors acting on the purchase of the Battersea site for Dollar Land Holdings London (a subsidiary of DLH who subsequently assigned their interest in the Battersea project to DLH). In late 1987, when the property market declined and criminal investigations into their fraud ensued, the Canadians sought to divest themselves of their share in the project. Mr Ferdman (who had since signed resigned from DLH) informed Mr Stern, who negotiated a transaction under which DLH agreed to purchase their share at substantial undervalue while simultaneously selling the entire project at a substantial project. That transaction was completed in March 1988.

At first instance, the plaintiff’s case in knowing receipt failed for a lack of knowledge. Specifically, while Millett J found that Mr Ferdman eventually (if not, initially) knew of the fraud and later knew (or assumed) that funds invested into the Battersea project represented its proceeds, his Honour refused to impute that knowledge to DLH in circumstances where Mr Ferdman was never the “directing mind and will” of DLH. On the other hand, Mr Stern was the “moving force” behind DLH and while his Honour considered that Mr Stern’s knowledge could be attributed to DLH, there was insufficient evidence that he knew (or ought to have known) that the funds invested by the Canadians represented the proceeds of their fraud.

On appeal, despite Mr Stern being the “moving force” of DLH, Nourse, Rose and Hoffmann LLJ were content to treat a Mr Ferdman as the directing mind and will of DLH in respect of the impugned transactions so that his knowledge of the fraud could be imputed to DLH who was therefore liable under knowing receipt.

Two aspects of this decision in El Ajou are notable for comment.

First, this case concerned the extension of liability to the recipient of property arising from a breach of by a non-trustee fiduciary (as addressed above). The relevant breach in this case stretched back to the misapplication of funds by the plaintiff’s investment manager. Secondly, DLH was not the direct recipient of funds paid in breach of fiduciary duty. Those funds were paid into the Dutch companies and subsequently traversed the globe; their traceable proceeds landed in the hands of DLH (a downstream recipient) and so the transfer to DLH was not made in breach of any fiduciary duty. It was, however, property (or its traceable proceeds) to which a fiduciary obligation attached.

As I have mentioned previously, El Ajou, was one of two cases cited by the High Court in Farah Constructions at [113] as authority for the statement that “it has been assumed, but rarely if at all decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary”.

That reference to El Ajou appears to be a reference to Hoffmann LJ’s statement at 700 to the effect that “trust property” in this context extends to assets received which are “traceable to a breach of fiduciary duty” (with the decision proceeding on that very basis):

The decision in El Ajou has been considered or cited with apparent approval in several decisions of the Court of Appeal: see, for example, Kalls Enterprises, Giles JA at [138] and [152]; Turner at [93]; Evans, Spigelman CJ at [160]–[161].

It appears to be clear from these authorities that liability for knowing receipt can arise for a downstream recipient of the traceable proceeds of a breach of trust or fiduciary duty, even where the transfer to that downstream recipient was not itself a breach of trust or fiduciary duty in the strict sense of those terms: Blue Mirror, Leeming JA at [2]–[4], [7], [28] and [156]–[158].

Drawing all of these threads from the various legal principles together, I conclude that a third party will be personally liable for knowing receipt under the first limb of Barnes v Addy if it receives unauthorised profits (or their traceable proceeds) obtained in breach of fiduciary duty with the requisite knowledge. This is because the errant fiduciary is subject to a fiduciary obligation to account to the principal for those profits as a constructive trustee and liability will attach to a knowing recipient (in both the “immediate” and “downstream” sense) as a matter of conscience.

Having dealt with the relevant legal principles at considerable length, I can swiftly deal with my consideration of the parties’ respective competing arguments, which naturally follows from my consideration of the relevant principles.

I wholly reject the Commonwealth’s arguments that this case turns on the proper interpretation of the Chameleon Final Orders, which it says left Chameleon with nothing more than a personal right to payment of a sum of money and so there was no “trust property” which could give rise to a claim of knowing receipt against the Commonwealth.

If the Commonwealth’s submissions were accepted it would follow that, absent the declaration of a constructive trust in the proprietary and remedial sense, a knowing recipient of property obtained in breach of fiduciary duty could escape liability simply by pointing to the lack of “trust property” in the narrow sense of that phrase. For a start, that is not consistent with the authorities in cases where knowing receipt has attached to third parties in their dealings with the directors of a company.

In the Chameleon Judgment, Mr Grimaldi was held to have breached the fiduciary duties he owed to Chameleon (at [691]) and was liable to account to Chameleon for the profits obtained through his breaches as a constructive trustee (at [693] and [982]). Those were entirely orthodox findings arising from Mr Grimaldi’s conduct, in keeping with Furs v Tomkies, Keith Henry & Co, Chan v Zacharia, Hospital Products, Warman and Ancient Order of Foresters. I regard those profits as belonging in equity to Chameleon.

The liability of Mr Grimaldi to account extended to Iron and Webtel Super Fund as his nominees, who also held those profits as a constructive trustee in favour of Chameleon: Grimaldi No 2, at [556].

I regard the profits and their traceable proceeds to be “property to which a fiduciary obligation attached” (Farah Constructions, at [116]) and property “obtained in breach of fiduciary duty” (Chickabo, at [187]) and therefore “trust property” for the purpose of a claim of knowing receipt under the first limb of Barnes v Addy. Whether or not a remedial constructive trust over those profits was ultimately ordered as part of the Chameleon Final Orders is entirely beside the point.

In short, I completely agree with Chameleon’s submission that the fiduciary’s obligation to account for unauthorised profits is the basis on which that property is considered to be “trust property” for the purposes of the first limb of Barnes v Addy. This is either because the existence of that obligation meant that the fiduciary held the profit “as a constructive trustee” for the principal (applying Chan v Zacharia, Deane J at 198) or the existence of the obligation was a “fiduciary duty with respect to property” (applying Simmons, Gleeson JA at [88(1)]).

I also find, to the extent that it is necessary, that the transfer of the “trust property” to the ATO in the form of the Admitted Receipts was in breach of the fiduciary obligation which Mr Grimaldi owed to Chameleon to account for the unauthorised profits.

Accordingly, the findings in the Chameleon Judgment are entirely consistent with Chameleon being able to later assert a claim of knowing receipt against any third party (such as the ATO) who received the traceable proceeds of the profits arising from Mr Grimaldi’s breach of fiduciary duty. Contrary to the Commonwealth’s submission, no merger of the rights of Chameleon against Mr Grimaldi into the Chameleon Judgment prevents Chameleon from pursuing its rights against those third parties who received its trust property with the requisite knowledge and are therefore bound as a matter conscience (Grimaldi No 2, at [263]–[267]; McFee, at [106]; Chickabo, at [184]; see also GP Building, where the knowing receipt claim arose only after proceedings against the errant fiduciary had concluded and he had been made bankrupt).

It follows that I also reject the Commonwealth’s submission that these proceedings are an abuse of process.

Having found that Chameleon has satisfied the requirement that the ATO received “trust property” for the purposes of the first limb of Barnes v Addy, it is then necessary to consider whether the ATO had the requisite level of knowledge to make it liable as a knowing recipient of that trust property.

Chameleon says that the ATO as a third party will “become chargeable” with trust property “if they received it with notice of the trust”: Farah Constructions at [112].

Chameleon submits that the ATO had the requisite degree of knowledge that:

Chameleon says that there are different levels of knowledge required depending on whether there is a proprietary remedy or a personal remedy sought under the first limb of Barnes v Addy. That submission is wrong as a matter of law, and I have dealt with it below.

As to the proprietary claim, Chameleon relies on the following principles:

Chameleon says that the degree of notice required for a personal claim includes at least the first four categories in the scale of knowledge outlined in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, by Peter Gibson J at 575–576, although these categories are artificial and are not to be applied rigidly, citing Grimaldi No 2, Finn, Stone and Perram JJ at [260], Bell Group No 3, Lee AJA at [1122] and Pittmore, Leeming JA at [191]. Chameleon also relies on the notion of there being a “want of probity” in the conduct of the third party who received the property, citing Consul Development, Stephen J at 410 and Turner, White JA at [142].

I will deal with the detail of Chameleon’s submissions in my consideration of them below.

The Commonwealth submits that it had no relevant knowledge of any potential or actual breaches by Mr Grimaldi of any fiduciary duty with respect to any proceeds of sale used to pay the NSW Treasury or the Commonwealth. They say that this is because there was no such duty apparent from the Chameleon Judgment or the Chameleon Final Orders, and it is the Chameleon Judgment and knowledge of its contents (with the consequential orders) that is determinative of the Commonwealth’s knowledge.

The Commonwealth argues that any knowledge of wrongdoing was only put by Chameleon as knowledge of allegations, with no claim of a duty on the part of the ATO to determine whether the allegations were well-founded.

The Commonwealth says that the Crime Commission and then the ATO through Project Wickenby carried out a thorough and forcefully litigated investigation into the tax avoidance scheme promoted by Mr Agius and the many clients who appeared to have sought to shelter their gains from trading in Australian listed securities through the use of Vanuatu-based companies holding funds in New Zealand. The Commonwealth points to the work of the Crime Commission and the ATO that included exercising compulsory powers of investigation, freezing orders, discovery, litigation in multiple courts, and the work of forensic accountants and other investigators.

The Commonwealth submits that the plain object of that work included identifying who were the true beneficial owners of the shares and funds held by IFTC as restrained by this court on the application of the Crime Commission so that the guilty party could be punished and properly taxed with appropriate penalties and interest charges. The Commonwealth asserts that the ATO was indifferent whether the party properly taxed was IFTC, Mr Grimaldi, his self-managed superannuation fund or another person (including Chameleon) had they come forward to claim an interest in the funds and shares. The Commonwealth points out that there is no explanation why Chameleon did not do so.

The Commonwealth claims that the investigation included looking into the Chameleon Proceedings. It says the primary record it obtained was the announcement by Chameleon to the ASX on the commencement of the Chameleon Proceedings on 25 November 2007, which stated that Chameleon was claiming personal relief only against Mr Grimaldi but proprietary relief against Murchison. The Commonwealth says that this perfectly accords with the originating application and pleadings that were filed in the Chameleon Proceedings.

The Commonwealth points out that the ATO’s investigation into the financial affairs of Mr Grimaldi included the meeting on 4 March 2009 with Mr Karam (a director of Chameleon) and that Chameleon did not plead any reliance on this meeting. The Commonwealth says that the conclusion I should draw from the meeting with Mr Karam is that he was aware of Mr Grimaldi establishing and controlling Iron and he could provide documents in relation to that issue. It also relies on Mr Karam’s view Iron was used to hide related party issues and, because Mr Grimaldi was looking at getting a divorce, he would probably want to reduce his exposure to bankruptcy and possible tax liabilities. The Commonwealth says that there was no suggestion by Mr Karam that one of the reasons for establishing Iron was to hide property belonging to Chameleon.

The Commonwealth submits that its true understanding of the Chameleon Proceedings was contained in the ATO’s mediation position paper dated 7 July 2009, which simply referred to the existence of the Chameleon Proceedings, that Chameleon claimed to have an interest in the Jack Hills Tenements and that Chameleon alleged that Mr Barnes and Mr Grimaldi caused Chameleon to issue securities sold to raise funds that were then used by Murchison to acquire the Jack Hills Tenements.

The Commonwealth says that knowledge of allegations is not even constructive notice sufficient to ground liability under the first limb of Barnes v Addy, relying on the decision of Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276; [1969] 2 WLR 427 (and the authorities in Australia which have followed it) to establish that even knowledge of an express claim for a declaration of trust or other proprietary relief against property in the hands of a party, along with identified sworn evidence, does not constitute relevant knowledge. The Commonwealth says that it certainly had no duty to determine whether Chameleon’s claims were well-founded, even if it could.

The Commonwealth submits that absent even constructive notice (fifth category of notice in Baden), it could not have any high category of knowledge because it is wrong to say that it should have determined for itself whether any breach was committed or await the outcome of the Chameleon Proceedings. The Commonwealth submits that it would be absurd to require the ATO to await potentially for some years (including appeals) with ongoing cross-border litigation and freezing and restraint orders in place before determining taxation liabilities. The Commonwealth says that Chameleon treats allegations as justifying the rest of the world stopping and waiting, which is not the law and if it wanted that outcome, it should have sought injunctions and freezing orders itself.

The Commonwealth accepts that the ATO knew all of the findings in the Chameleon Judgment from the time it was delivered on 20 October 2010, being the day before the ATO received the first payment from NSW.

In Consul Development, Gibbs J at 397–398 expressed the view, without finally deciding, that the following statement in Selangor by Ungoed-Thomas J at 1590 was the requisite level of knowledge to be proved in knowing assistance claims and knowing receipt claims:

Gibbs J at 398 said the following about the various categories of knowledge:

In Consul Development, Stephen J (with whom Barwick CJ agreed) at 412–413 considered that for a knowing receipt case the requisite level of knowledge was best expressed as follows:

As is evident, Stephen J said that it was “equity’s concern for the state of conscience of the defendant” which was relevant to the level of knowledge to be found to support a knowing receipt claim. His Honour also observed at 410 that in Carl Zeiss, Edmund Davies LJ at 300–301 took the view that “want of probity” was “a feature which recurs through and seems to connect all those cases drawn to the court's attention where a constructive trust has been held to exist”.

Stephen J at 410 also expressed the view that it was not clear why there should be any distinction between the level of knowledge required for a knowing receipt case and a knowing assistance case.

The so-called Baden categories of knowledge are the five categories expressed in Baden, by Peter Gibson J at 575–576 and 582 being:

In Farah Constructions, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ at [174]–[178] said (footnotes omitted):

Although these statements were made as applying the Baden categories (1) to (4) to second limb claims of knowing assistance, they have subsequently become accepted as also applying to first limb claims for knowing receipt, as outlined below.

In Grimaldi No 2, Finn, Stone and Perram JJ surveyed the existing Australian authorities regarding the knowledge element in a knowing receipt case. Their Honours at [260]–[261] said this of the Baden categories:

In addition, as mentioned above, their Honours in Grimaldi No 2 at [267] recognised that under Australian law the liability for knowing receipt “should be seen as fault-based and as making the same knowledge/notice demands as in [knowing] assistance cases”.

The conclusion expressed in the Grimaldi No 2, at [268]–[269], was that the weight of authority for a knowing receipt case involved the application of categories (1) to (4) of the Baden categories, with constructive notice in category (5) excluded. In those paragraphs, Finn, Stone and Perram JJ said:

In Simmons, Gleeson J (with whom Beazley P and Barrett JA agreed) at [90]–[92] described the applicable categories of knowledge for a first limb claim under Barnes v Addy in the following way:

In Pittmore, Leeming JA at [191] also warned against the rigid application of the Baden categories but recognised that they are helpful, saying:

The emphasis on the relevant matters attaching to the “conscience” of the recipient was outlined in Turner. White JA at [142]–[143] expanded on the notion of lack of probity and unconscionability underlying the reasons for application of the Baden categories by saying:

In Blue Mirror, Leeming JA at [30] commented that the Baden category (4) knowledge was treated as sufficient in Kalls Enterprises, at [176]–[199], a position which was confirmed in Grimaldi No 2, at [263]–[270] and applied in Turner, at [139].

The Commonwealth relied heavily on Carl Zeiss. In that case, the East German Carl Zeiss foundation brought proceedings against the West German Carl Zeiss foundation for the alleged wrongful use of the name “Carl Zeiss”. The plaintiff later amended its pleading to allege that all the assets and property of the defendant in the United Kingdom belonged to the plaintiff or was held on trust for it. Before the trial, the plaintiff brought further proceedings against Herbert Smith and another law firm, both of which had acted for the defendant at different times, alleging that they received their fees and disbursements from the defendant on notice that the funds belonged to the plaintiff.

At first instance, Pennycuick J held that the proceedings against the law firms obstructed the course of justice and were contrary to public policy. The Court of Appeal unanimously dismissed the appeal, treating the principal issue as whether the solicitors had sufficient knowledge of receiving money from their principal paid in breach of trust. In the appeal, Danckwerts LJ at 290 held that:

Applying the principles in the authorities since Barnes v Addy, Danckwerts LJ at 293 said:

Sachs LJ at 296 considered that a “doubtful equity” is not enough to ground a case of notice or knowledge and “no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess”. Sachs LJ at 297 also found that a defendant’s solicitor is under no duty to inquire into the accuracy of the facts alleged by the plaintiff in the pleading nor to assess the result of any conflict in the evidence.

Edmund Davies LJ at 300–301 analysed the circumstances in which English law held that a constructive trust exists, determining that a “want of probity” was a concept which could distinguish those cases in which one arose. Edmund Davies LJ said at 301:

Edmund Davies LJ at 304 found that:

The decision in Carl Zeiss has since been taken to stand for the proposition that mere notice of a third party’s claim is not sufficient to render a solicitor acting for a client liable for a first limb claim under Barnes v Addy, unless the solicitor knows the claim to be true or had a duty to inquire as to the validity of the claim but did not do so when such an inquiry would have shown the claim to be true. It does not mean that mere allegations can never be sufficient to render a third party liable for a claim of knowing receipt, so I reject the Commonwealth’s submission based on it. Instead, I consider that in every case it is necessary to conduct a fact specific inquiry of the knowledge of the recipient across all of the Baden categories (1) to (4).

Finally, to avoid any doubt, to the extent that either party has submitted to me that Baden category (5) constructive notice is sufficient basis upon which to sustain liability in knowing receipt, that submission is rejected.

The submission advanced by Chameleon, and reflected in submissions advanced by the Commonwealth, that “there are different levels of knowledge required depending on whether there is a proprietary remedy sought or a personal remedy sought under the first limb of Barnes v Addy”, is also rejected.

Both submissions are wrong as a matter of law and appear to be the product of an elision between:

A claim in knowing receipt (where knowledge to the requisite degree is established at the time of receipt and so binds the recipient’s conscience) differs markedly from claims based upon the victim's title to the property such as the liability of an innocent volunteer to account for trust property or its traceable proceeds insofar as they remain in their hands: see, for example, Heperu, Allsop P (with whom Campbell JA and Handley AJA agreed) at [108] and [154]; Fistar, Leeming JA at [40]–[48]. As I mentioned at the outset of my analysis of the relevant legal principles, in these proceedings both parties made submissions and arguments which appear to be the product of the erroneous conflation of these distinct claims.

A recipient of property without notice of another’s proprietary interest in the property is antithetical to a knowing recipient. To that extent, it is true that these two worlds collide, but even a volunteer without notice would not be liable in knowing receipt. In the same breath, I would repeat that a claim in knowing receipt in this country is not contingent upon the demonstration of a continuing proprietary interest (and so priority) in subject property at all.

This is a matter to which I will return below in dealing with Issue 3, which considers the Commonwealth’s submissions as to the operation of the bona fide purchaser for value without notice defence in these proceedings.

Chameleon made submissions summarising the extent of the ATO’s knowledge as at:

Based on the factual findings I have already made, I accept Chameleon’s submissions about the ATO’s knowledge as at each of those dates, as outlined below.

I accept the following summary of the ATO’s knowledge of factual matters as at 27 January 2009 as submitted by Chameleon:

In my view, there is a credible basis on which the ATO would have been suspicious of the explanations given by Mr Grimaldi, particularly in circumstances where the ATO knew that claims had been brought in the Chameleon Proceedings in which Chameleon was asserting that Murchison held the shares in Winterfall on a constructive trust for Chameleon, Winterfall held the Jack Hills Tenements on constructive trust for Chameleon and that Mr Barnes and Mr Grimaldi used the funds raised by Chameleon for Murchison to acquire the Jack Hills Tenements.

I also accept the following summary of the ATO’s knowledge of the Chameleon Proceedings as at 27 January 2009 as submitted by Chameleon (most of the contents of which appeared in the ATO’s Barnes Profile dated 24 November 2008):

I accept the following summary of the ATO’s knowledge of factual matters as at March 2009 following the interview with Mr Grimaldi on 27 January 2009 and the meeting with Mr Karam and Mr Brazig on 4 March 2009 as submitted by Chameleon:

I also accept the following submissions made by Chameleon that even if I was not satisfied that the ATO had actual knowledge of the facts as at March 2009, the ATO had more than ample knowledge of the facts under each of the categories of notice (2), (3) and (4) described in Baden:

I also agree with Chameleon that the unexplained absence of Mr Barns from the witness box to give evidence for the Commonwealth gave rise to inferences that either Mr Barns had actual knowledge of the relevant matters or Mr Barns had closed his mind to the obvious. Mr O’Neill identified Mr Barns as the person within the ATO who would hold the relevant knowledge. I am able to infer that the failure of the ATO to obtain any relevant information about the Chameleon Proceedings other than what Mr Karam gave it and the failure of Mr Barns to follow-up any investigative steps following the meeting with Mr Karam gives rise to the further inference that the ATO chose to ignore the information and tax Mr Grimaldi anyway. It appears that the ATO chose to ignore the information it received from Chameleon because that was inconvenient to the approach it had already determined to take, which was to proceed with amended assessments for Mr Grimaldi.

In Mr O’Neill’s evidence, he stated that it was not ATO policy to await the outcome of proceedings to which it is not a party which might lead to the possible bankruptcy of an individual due to debt, damages or the like. Mr O’Neill stated that the ATO would depart from that position only where the taxpayer raised those matters as a reason for deferring enforcement or considering alternative assessments. Mr O’Neill said that nothing in the pleadings and other documents in the Chameleon Proceedings would have motivated him to await the outcome of the Chameleon Proceedings before seeking to issue a notice of assessment and judgment against Mr Grimaldi. To my mind, this highlights the issue of wilful blindness on the part of the ATO in relation to the Chameleon Proceedings. Despite everything the ATO knew about the Chameleon Proceedings, it had adopted a policy of not awaiting the outcome of them but instead following an exclusive focus to recover a tax debt from Mr Grimaldi. There are no further references within the ATO material of any further contact with Mr Karam. In effect, the ATO had instituted a policy of wilful blindness in relation to the claims in the Chameleon Proceedings akin to a “tax now, ask questions later” approach. Although in this case, it did not even bother to ask any questions later.

I also accept the following summary of the ATO’s actual knowledge of factual matters as at 21 May 2010 as submitted by Chameleon:

As already mentioned above, the Commonwealth accepts that the ATO knew all of the findings in the Chameleon Judgment from the time it was delivered on 20 October 2010, the day before the ATO received the first payment from NSW.

But having received the Chameleon Judgment, other than an exchange between Mr Zafiriou and Ms McLachlan immediately after it, the evidence reveals that there was scant consideration within the ATO on the effect of the Chameleon Judgment on the course that the ATO had already agreed with Mr Grimaldi as contained in the Deeds of Settlement. Instead, the ATO knowing accepted payments of more than $15 million directly from the profits made by Iron on the sale of the Spotter’s Fee Securities, which were the “trust property” of Chameleon.

I accept Chameleon’s submissions that the ATO conducted itself with a want of probity sufficient to fix its conscience with liability for knowing receipt, particularly in the following respects:

The Commonwealth places emphasis on the fact that at all times the ATO exercised its statutory functions and should not be expected to have to await the outcome of the Chameleon Proceedings before acting to tax Mr Grimaldi. The problem with this submission is that it is detached from the facts of this case. The ATO does not have some special status which makes it immune from possessing the requisite knowledge to make it liable as a knowing recipient or immune from conducting the sorts of inquiries which should be conducted by an honest and reasonable person. In particular circumstances such as in this case, the ATO did possess knowledge which required it to make further investigations and await the outcome of the Chameleon Proceedings. The ATO had sufficient knowledge from the investigations it did conduct to require it to investigate further. It also knew that the Chameleon Proceedings would determine the very issue which was central to the statutory functions it was carrying out — determining who was beneficially entitled to the profits which had been made by Mr Grimaldi through his nominee Iron.

Once all of the findings I have made above in relation to the ATO’s knowledge and the Commonwealth’s acceptance of the ATO’s knowledge of all the findings in the Chameleon Judgment are put together, it is abundantly clear that the ATO had actual knowledge of the following crucial components at the time when it received each payment from Mr Grimaldi under the Second Deed of Settlement:

In particular, the ATO knew that the proceeds of sale of the Spotter’s Fee Securities were held in the bank accounts from which the ATO received payments from Mr Grimaldi.

To put matters bluntly, the ATO knew exactly:

Before arriving in this state of actual knowledge within category (1) of the Baden categories, there were many occasions on which the ATO acted with a lack of probity in its investigations, particularly following the interview of Mr Grimaldi in January 2009, after the meeting with Mr Karam in March 2009 and after receipt of the Chameleon Judgment in October 2010. In these instances, I consider that the state of the ATO’s knowledge could be correctly characterised as satisfying each of the following:

As I have mentioned above, the ATO’s attitude appears to have been one of “tax now, ask questions later” but in the case of Mr Grimaldi it did not even ask the later questions when it became obvious that it should do so. The investigations undertaken by the ATO demonstrate a “want of probity” in how Mr Grimaldi came to receive the Spotter’s Fee Securities. But once the ATO knew all of the findings in the Chameleon Judgment, actual knowledge of Mr Grimaldi’s conduct replaced anything that might have required for Chameleon to rely on the other Baden categories of knowledge to establish the ATO’s liability.

In essence, I am thoroughly convinced that in all the circumstances the Commonwealth is liable for knowing receipt under the first limb of Barnes v Addy as a matter of conscience.

The Commonwealth raises a defence to Chameleon’s claim on the basis that NSW (acting through NSW Treasury) was a bona fide purchaser for value of each of the Admitted Receipts and therefore any pre-existing interest of Chameleon in those traceable proceeds was extinguished by the payments of each of the Admitted Receipts into the account in the name of the Crown Finance Entity.

The deployment of this defence in this context and on these terms reflects continued reliance by the Commonwealth on English authority in this case — where it is necessary in that jurisdiction to demonstrate a continuing proprietary interest in the subject property in order to bring either a personal or proprietary claim in knowing receipt of it — in the sense that the Commonwealth say any proprietary interest in the proceeds was extinguished by their payment to NSW and cannot be “revived” in the subsequent payment of those funds to the ATO: Byers, Hodge LJ (with whom Leggatt and Stephens LLJ agreed) at [3].

As mentioned previously, that position does not reflect Australian law and so the utility of this defence in this context — where NSW is not a party to these proceedings, the funds transited through NSW as a mere conduit and no funds were “beneficially received” in the relevant sense by NSW — is dubious at best. It also speaks to the elision of two distinct claims which I discussed above, and which is outlined very clearly in Grimaldi No 2, at [251]:

In my view, the potential application of this defence in this context is primarily confined to the Commonwealth’s submission that, by NSW being a bona fide purchaser for value, it in turn conferred good title to the property onto the ATO (that argument again being one orientated toward disputes over rights of priority in respect of property). In any event, to the extent I am mistaken in this view, I have dealt fully below with the respective arguments advanced by each of Chameleon and the Commonwealth on this issue.

Given that I have found that the Commonwealth bears the onus in making out this defence, I have summarised its submissions on this issue first before I summarise those of Chameleon.

The Commonwealth says that if NSW was a bona fide purchaser for value without notice then any equitable proprietary interest which Chameleon might otherwise have had will have been extinguished without the possibility of revival, even if the Commonwealth had sufficient and relevant knowledge of the breach of fiduciary duty by Mr Grimaldi.

In summary, the Commonwealth made the following submissions in support of its position:

In summary, Chameleon submits that the Commonwealth’s defence that NSW was a bona fide purchaser for value without notice should be rejected because:

The classic expression of the defence of a bona fide purchaser for value without notice in the common law rests in Wilkes v Spooner, in which Vaughan Williams LJ (with whom Fletcher Moulton and Farwell LJJ agreed) said at 483:

The defence is one which gives the person who claims an interest in property which has been acquired from the bona fide purchaser for value without notice with protection whether that person took their interest with or without notice and whether or not they were purchasers for value provided they did not participate in an original breach of trust: Jonray (Sydney) Pty Ltd v Partridge Bros Pty Ltd [1969] 1 NSWR 621; (1969) 89 WN (Pt 1) (NSW) 568, Herron CJ, Jacobs and Asprey JJA at 577, approved in Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671; [1976] HCA 30, Barwick CJ, Mason and Jacobs JJ at 674–677.

The onus of pleading and proving all elements of a defence of bona fide purchaser for value without notice falls on the person who seeks to rely upon it: Mills v Renwick (1901) 1 SR (NSW) Eq 173; 18 WN (NSW) 213, Simpson CJ in Eq at 213; Parbery v QNI Metals Pty Ltd (2018) 131 ACSR 27; [2018] QSC 240, Jackson J at [220]; see also Barclays Bank Plc v Boulter [1998] 1 WLR 1, Mummery LJ at 8, applying Pilcher v Rawlins (1872) LR 7 Ch App 259, James LJ at 268–269, Attorney-General v Biphosphated Guano Co (1879) 11 Ch D 327, Thesiger LJ at 337, In re Nisbet and Potts’ Contract [1905] 1 Ch 391, Farwell J at 402, In re Nisbet and Potts’ Contract [1906] 1 Ch 386, Collins MR at 404 and Wilkes v Spooner, Farwell LJ at 486.

For the reasons I have set out below, I consider that the Commonwealth fails in its defence that NSW is a bona fide purchaser for value without notice.

The operation of the relevant provisions of the Recovery Act on their proper construction do not have the effect for which the Commonwealth contend because they do not make NSW a purchaser for value.

My analysis of the relevant provisions of the Recovery Act, their operation and application as at the relevant dates in 2009 and 2010 mostly accepts the detailed submissions made by Chameleon on this issue. My analysis is as follows:

For this reason, I consider that NSW was not a bona fide purchaser for value without notice taking the property free of any interests that Chameleon might have in it.

It is unnecessary for me to refer to any of the evidence from Mr Spark (T268–269) as to how the Crime Commission understood the operation of s 29 of the Recovery Act or for me to give any consideration to any amendments made to the Recovery Act in 2012. I agree with the Commonwealth that neither of those matters can be legitimately used in the exercise of properly interpreting the operation of the relevant provisions of the Recovery Act in 2009 and 2010.

It is clear that by operation of s 27(7) of the Recovery Act as at July 2009 and s 28C(6) of the Recovery Act as at September 2010, the amount a person is required to pay under a proceeds assessment order “is a debt payable by the person to the Crown on the making of the order and is recoverable as such”. As a result, the Grimaldi Proceeds Assessment Order on 21 July 2009 created a debt owing by Mr Grimaldi to the Crown.

But, as explained above, the decision in IFTC v Crime Commission meant that the effect of s 29(4) of the Recovery Act is the definitions of “interest in property” (s 7) and “effective control” (s 8) did not permit property to be disposed of in order to satisfy the Grimaldi Proceeds Assessment Order, absent a declaration by the court under s 29(1) of the Recovery Act. In light of there being no declaration under s 29(1) of the Recovery Act by the court in the Recovery Act Proceedings and the Further Recovery Act Proceedings, none of the property which was declared to be under the effective control of Mr Grimaldi was permitted to be used to satisfy the Grimaldi Proceeds Assessment Order. Mr Grimaldi had no other material source of wealth other than the funds in the IFTC accounts held for Iron and as a result of the effective control declarations on 17 May 2010 the assets of Iron were not available to satisfy the Grimaldi Proceeds Assessment Order without there being a declaration under s 29(1) of the Recovery Act. This is because other property was not “readily available” to satisfy the Grimaldi Proceeds Assessment Order.

To make the property of Iron, Iron International, Ore Investments and MGG Capital (as trustee for the Webtel Super Fund) which had been declared to be under the effective control of Mr Grimaldi available to satisfy the Grimaldi Proceeds Assessment Order, it was necessary for the Crime Commission to give notice under s 29(3) of the Recovery Act to any other person who the Crime Commission had reason to believe may also have an interest in the property to which the application related. There is no evidence that the Crime Commission gave any such notice or notified any party whose interests might be affected under the general law. No necessary declaration under s 29(1) of the Recovery Act was ever sought by the Crime Commission. This is despite the fact that notation 17(i) to the orders made on 21 July 2009 stated that the Crime Commission intended to apply for an order under s 29 of the Recovery Act that the interests specified in the schedules to the orders were “available to satisfy” the Grimaldi Proceeds Assessment Order. This was amongst the notations to which Basten JA was referring in [69] of IFTC v Crime Commission that were “relevant to an understanding of the legislative scheme and the steps which will need to be taken before the interests of the appellants are adversely affected”.

The result is that the none of the assets of Iron, Iron International, Ore Investments and MGG Capital (as trustee for the Webtel Super Fund) declared to be under the effective control of Mr Grimaldi were available to satisfy the Grimaldi Proceeds Assessment Order. The consequence is that the payments made under the Deeds of Settlement by Mr Grimaldi to NSW did not extinguish the debt owed to the Crown and so no valuable consideration was given by NSW in return for each of the payments.

I reject the Commonwealth’s submission that the absence of a declaration under s 29 of the Recovery Act is immaterial because a proceeds assessment order need not be paid out of assets declared to be under the effective control of the wrongdoer. In the present case, it is abundantly clear that Mr Grimaldi had no other assets from which to satisfy the Grimaldi Proceeds Assessment Order than those which had been declared to be under his effective control and that the latter assets were used to satisfy the Grimaldi Proceeds Assessment Order. The making of a declaration under s 29 of the Recovery Act therefore became critical to the permitted use of those assets under Mr Grimaldi’s effective control.

Accordingly, I consider that, to the extent it is relevant in these proceedings, the defence of bona fide purchaser for value without notice also fails because there was no consideration given by NSW.

A further reason that the defence of bona fide purchaser for value without notice fails in this case is that, as a matter of fact, each of the payments made by Mr Grimaldi to NSW was immediately passed to the ATO at the direction of the Crime Commission. NSW did not receive or keep any of the payments for its own use or benefit. This is classically a case of a ministerial receipt which would defeat any claim in knowing receipt brought against NSW in circumstances where those funds must be “beneficially received”.

Under the Second Deed of Settlement, payments up to the amount of $19,531,791.93 were to be made by Mr Grimaldi to NSW in the form of bank cheque to the “NSW Treasury” or transfers to the Crown Finance Entity (cll 2.3 and 2.4). Under the ATO Payment Order made on 21 July 2009, NSW was obliged to pass on those payments to Treasurer to the ATO.

Chameleon does not allege that NSW received the funds as agent for the ATO but instead asserts that NSW received the funds as the ATO’s nominee under the Deeds of Settlement with an obligation to pass them to the ATO under the orders made on 21 July 2009 (order 10) and 8 October 2010 (order 9).

Chameleon says that the three reasons identified by the Commonwealth as to why NSW was interposed in the payment arrangements are:

Chameleon argues that none of these reasons indicate that the payments from Mr Grimaldi were received for the use and benefit of NSW but merely explain why NSW was no more than a channel or conduit to pass the funds from Mr Grimaldi to the ATO. I agree.

There are a number of decisions which set out the notion of the ministerial style of “receipt” where the money is not received by a party for its own use and benefit. A key case is that of Evans, which I have considered earlier in this judgment. As mentioned above, one of the issues on appeal was whether European Bank was liable under the first limb of Barnes v Addy for knowing receipt. Spigelman CJ (with whom Handley and Santow JJA agreed) at [163]–[175] surveyed and applied the principles from the authorities which contrasted the position of banks who received money for their own benefit (for example, in the satisfaction of a debt or conscious application to an overdraft) and banks who receive money in the ministerial role as a mere depository or channel and therefore cannot liable for knowing receipt. Spigelman CJ at [166] said that this treatment of banks “may be an application of the maxim that equity looks to the intent not to the form”.

Several of the authorities relied upon in Evans at [171]–[173] are instructive.

In the same manner, two single judge decisions of this court have applied the same distinction to individuals who were not banks:

I agree with the submissions of Chameleon that each receipt of the payments made by Mr Grimaldi to NSW was not retained for its own use or benefit, but that NSW was merely a channel through which the funds were immediately passed to the ATO at the direction of the Crime Commission. This is demonstrated by the following matters:

For the same reasons as stated above, the absence of a declaration under s 29(3) of the Recovery Act means that there was no lawful entitlement by NSW to apply the funds received from Mr Grimaldi for its own benefit in discharging Mr Grimaldi's debt under the Grimaldi Proceeds Assessment Order. The only lawful basis on which NSW received and dealt with those payments was in a ministerial capacity to pass them on immediately to the ATO.

I reject the argument made by the Commonwealth that the payment of money to NSW under the Recovery Act pursuant to court orders cannot amount to a ministerial receipt because it involves a public body receiving money under a public statute. In my view the principles relating to ministerial receipt can apply across public bodies and individuals as well as private bodies and individuals. It is not the type of body which receives the payment that matters but it is the nature of the receipt by that body which informs the issue of whether there has been a ministerial receipt and, indeed, a knowing receipt.

As a result, in my opinion, NSW was a mere depository or a channel through which the funds were received by the ATO and therefore NSW did not receive the funds for the purposes of knowing receipt liability and the defence of bona fide purchaser for value without notice cannot operate where there was no such receipt.

The Commonwealth bears the onus to prove that NSW had no notice of Chameleon’s interest in the funds which were used by Mr Grimaldi to pay the instalments to NSW.

The Commonwealth argues that NSW lacked any knowledge, even constructive notice at the level of Baden category (5), which is the minimum degree of notice necessary to defeat the priority of a bona fide purchaser for value, citing the Grimaldi No 2, at [251]–[252], because:

Chameleon accepts that the knowledge of the Crime Commission as a statutory corporation is not attributable to NSW, which means that item (c) of the Commonwealth’s argument is not relevant. It is therefore not necessary to consider the level of the Crime Commission’s knowledge.

I agree with Chameleon’s submissions that the critical matter for the Commonwealth to prove to discharge its onus was the actual state of mind of NSW, which could not just be demonstrated from legal submissions and inference but had to be proved by evidence of the facts, and there is no evidence of the actual state of mind of NSW. I am not prepared to infer that NSW could not have had any personal knowledge of relevant matters before the Chameleon Judgment was delivered simply because it was a stranger to the events and a stranger to the Chameleon Proceedings and the Recovery Act Proceedings.

As I have stated above, I also agree with Chameleon’s submissions that Carl Zeiss was a case where there was evidence of the precise nature and extent of the knowledge of the recipients which was exclusively limited to allegations, the evidence demonstrated that they had no knowledge of the underlying facts and it illustrates that it is essential to know precisely what the recipient did, and did not know, in order to then determine whether that level of knowledge is sufficient to put them on notice. Absent a starting point of the actual state of mind of NSW, which cannot be assumed in the absence of evidence, it cannot be said that NSW did not have any knowledge other than mere allegations and that it had no duty to inquire further.

It is not enough for the Commonwealth to prove that no relevant information was passed onto NSW by the Crime Commission or the ATO. I agree with Chameleon that all this would do is to rule out the Crime Commission and the ATO as sources of information for NSW but would not rule out any other source.

The subpoena that was issued to the NSW Treasury at the request of the Commonwealth does not provide a proper basis from which the actual knowledge of NSW can be established because category 3 of the subpoena only sought the production of documents limited to communications between the Crime Commission and the Crown Finance Entity or the NSW Treasury about the payments made by Mr Grimaldi to the Crown Finance Entity, the sources of funds to make those payments the payments made by the Crown Finance Entity to the ATO, the Chameleon Proceedings and the Chameleon Judgment. The subpoena did not seek to determine the knowledge of the NSW Treasury from any other source.

I also accept Chameleon’s submission that I should not draw any inferences about the state of knowledge of NSW when the Commonwealth has not called any relevant witness and where the subpoena that the Commonwealth issued to the NSW Treasury failed to seek all relevant documents.

Accordingly, the Commonwealth has failed to prove that NSW was not on notice for the purposes of the defence of a bona fide purchaser for value without notice.

Chameleon argues that the direct recipient (NSW) of the payments made by Mr Grimaldi is not asserting priority against the interests of Chameleon. It is the third party recipient (the ATO) who is attempting to rely on the interposition of NSW as an innocent purchaser to make good their own title. As a result, Chameleon says that the relevant lack of good faith must be that of the ATO as it is the party seeking to use the innocent purchaser to protect their own title.

In The Serious Fraud Office v Litigation Capital Limited [2021] EWHC 1272, Foxton J said at [136] that the circumstances in which an absence of bona fides could prevent the purchaser of the legal estate without notice from asserting priority over a prior equitable interest would be “rare” and:

I agree with Chameleon that this is a case in which the lack of good faith on the part of the ATO is directly relevant to the ATO’s assertion of superior title to that of Chameleon based on the ATO’s failure to ensure that third party interests were protected in the structure of the settlement with Mr Grimaldi as contained in the Deeds of Settlement and the orders which were made to support it. Each of the following matters support this conclusion:

There is no issue that Chameleon was never provided with any notice under s 29(3) of the Recovery Act or the general law. The result was that consent orders were made in the Recovery Act Proceedings on 21 July 2009 and 8 October 2010 to support the settlement structure chosen by the ATO and agreed with Mr Grimaldi, without any procedural fairness being provided to Chameleon. The ATO seeks to rely on a settlement regime which is structured to interpose NSW for the ATO’s own benefit so that a better title for it can be asserted.

I consider that I should not countenance the ATO being able to assert a better title to the proceeds it received from Mr Grimaldi by interposing NSW to structure the payment flow in the manner it did when the ATO had the requisite knowledge of Chameleon’s interests (as I have found) and failed to act to ensure that those interests should be safeguarded in a procedurally fair way.

As a result, the ATO’s defence of bona fide purchaser for value without notice also fails due to their lack of bona fides which affects the receipt by NSW.

Chameleon seeks to trace the Spotter’s Fee Securities which were issued to Mr Grimaldi or his nominees, profits earned on the sale of the Spotter’s Fee Securities and profits earned from the increase in the value of the Existing Shareholding into the payments made by Mr Grimaldi to the ATO.

The Commonwealth does not dispute the tracing of the Spotter’s Fee Securities proceeds to the Commonwealth based on a charge over a mixed fund.

The Commonwealth seeks to defend specifically Chameleon’s claim in respect of the payments of $855,000 (paid by cheques to the Crown Finance Entity on 27 February 2013 and paid to the ATO on 8 March 2013) and $850,000 (paid by cheques to the Crown Finance Entity on 16 August 2012 and paid to the ATO on 27 August 2012) on multiple bases. As stated above, that those payments came from the sale of the two properties in Pyrmont.

The classic description of the process of tracing is set out in Foskett v McKeown [2001] 1 AC 102, in which Lord Millett said at 128:

The following tracing principles are relevant to the present case:

The relevant facts concerning the two properties which were acquired by Mrs Grimaldi and later sold by her daughters, Gina Grimaldi and Mia Grimaldi, are uncontroversial.

On 16 June 2006, with settlement occurring on 28 July 2006, Mrs Grimaldi acquired Unit 404C for $850,000 and became the sole registered proprietor.

In November 2005, Mr Grimaldi caused a nominee to transfer 1.1 million Murchison shares from the Existing Shareholding to IFTC which, between January and May 2006, sold them for $576,875.51.

Between 31 May 2006 and 24 July 2006, IFTC transferred a total of $301,329.02 to the trust account of Mr Woods at the request of Mr Grimaldi.

A total of $327,382.35 was paid from the trust account of Mr Woods to fund the purchase of Unit 404, being the total of $70,000 paid out on 15 June 2006 and $257,382.35 paid out on 25 July 2006. This amount came out of the $386,759.21 which had been received into Mr Woods’ trust account between 15 June 2006 and 31 July 2006 in the form of deposits labelled as advances from “MGG Capital atf Webtel Super”. In the July 2009 Audit Report, the ATO treated these payments as unconditional payments made by Mr Grimaldi from the funds held by Iron.

As a result, Chameleon is seemingly entitled to trace the amount of $301,329.02 from the proceeds of the Existing Shareholding which were used to fund the acquisition of Unit 404 for $850,000, which represents 35.45% of the purchase price.

On 1 May 2007, with settlement occurring on 29 May 2007, Mrs Grimaldi acquired Unit 403 for $825,000 and became the sole registered proprietor.

From 8 June 2006 to 11 May 2007, Iron realised $1,274,853.42 from its sale of Murchison shares with the proceeds (save for $56,185.77) remitted to the ANZ Bank accounts held by IFTC.

On 21 May 2007, IFTC transferred $777,000 to the trust account of Mr Woods at the request of Mr Grimaldi.

On 29 May 2007, $774,004.86 was paid from the trust account of Mr Woods to fund the purchase of Unit 403. This amount came from the $776,002.66 which had been received into Mr Woods’ trust account on 29 May 2007 in the form of a deposit labelled as an advance from “MGG Capital atf Webtel Super”. In the July 2009 Audit Report, the ATO treated this payment as an unconditional payment made by Mr Grimaldi from the funds held by Iron.

As a result, Chameleon is seemingly entitled to trace the amount of $774,004.86 from the mixed fund of Murchison shares and options held by IFTC which were used to fund the acquisition of Unit 403 for $825,000, which represents 93.82% of the purchase price.

On 27 March 2009, Mrs Grimaldi received Unit 403 and Unit 404C free of mortgage debt under a binding financial agreement with Mr Grimaldi.

On 9 August 2009, Mrs Grimaldi died leaving a will under which her daughters, Gina Grimaldi and Mia Grimaldi, were her sole beneficiaries.

On 18 February 2010, probate of the will of Mrs Grimaldi was granted by this court.

On 16 March 2010, the Commissioner filed an application in the Family Court of Australia seeking to set aside the binding financial agreement and seeking restraining orders against Mr Grimaldi, MGG Capital and the executor of Mrs Grimaldi’s estate (Ross Lorking) concerning the implementation of the binding financial agreement and distribution of the estate.

On 7 April 2010, Mr Grimaldi, MGG Capital and Mr Lorking gave undertakings to the Family Court that they would take no further action in respect of the distribution of the estate of Mrs Grimaldi and not deal in any way with the property in the estate.

On 8 October 2010, the Second Deed of Settlement was executed with Mia Grimaldi and Gina Grimaldi as parties. The Second Deed of Settlement provided for Gina Grimaldi and Mia Grimaldi (defined in cl 1.1 as “Mortgagors”) to mortgage their “Secured Properties” (defined in cl 1.1 to include Unit 403 and Unit 404C) to the Commonwealth (cl 3.4.1). Mia Grimaldi and Gina Grimaldi were not yet the registered proprietors of those properties (although entitled to be under s 93 of the Real Property Act 1900 (NSW) (RPA)), but warranted that they were the sole beneficiaries referred to in the will of Mrs Grimaldi (cl 5.7, first occurring).

On 8 October 2010, a mortgage in registrable form over three properties (including Unit 403 and Unit 404C) was executed and stamped. The Memorandum of Mortgage gave the Commonwealth a full first ranking interest over each property (cl 2.1.1 and cl 1.1.1 ‘Secured Money’).

On 8 November 2010, the mortgages were registered.

On 16 August 2012, Unit 404C was sold for $910,000.

As stated above, at settlement, a total of $855,000 was paid to NSW Treasury using three cheques which were delivered by the Crime Commission to the Crown Finance Entity on 16 August 2012 and then credited to the Proceeds Account of NSW Treasury on 17 August 2012. The mortgage to the Commonwealth was also discharged. On 27 August 2012, $855,000 was paid by the Crown Finance Entity from the Proceeds Account to the ATO.

On 28 February 2013, Unit 403 was sold for $850,000.

As stated above, at settlement, a total of $850,000 was paid to NSW Treasury using two cheques which were delivered by the Crime Commission to the Crown Finance Entity on 27 February 2013 and then credited to the Proceeds Account of NSW Treasury on 28 February 2013. The mortgage to the Commonwealth was also discharged. On 8 March 2013, $850,000 was paid by the Crown Finance Entity to the ATO.

The Commonwealth says that Chameleon is unable to trace the proceeds of the Murchison shares and options into Unit 403 and Unit 404C and then into the payments received by NSW and the ATO because the mortgages in favour of the Commonwealth were discharged using the funds of the purchaser in each case, not the funds of the vendors, Gina Grimaldi and Mia Grimaldi.

I reject this argument for the reason given by Chameleon as it is abundantly clear that on the settlement of the properties the purchasers paid funds to the vendors, which were received by them to enable the discharge of the mortgages. The settlement letters on 23 August 2012 (Unit 404C) and 28 February 2013 (Unit 403) sent by Mr Cooney to Gina Grimaldi and Mia Grimaldi actually describe that the funds were “received” by the vendors and then distributions made from the amounts received.

Based on the evidence outlined above, I accept Chameleon’s submissions that on the conventional basis, the proceeds of the sale of the Spotter’s Fee Securities and the Existing Shareholding were used to fund all or part of the acquisition of Unit 403 and Unit 404C were traceable into the proceeds of sale of those properties when they were ultimately sold.

Based on the conventional tracing exercise, I have concluded that Chameleon can trace:

The Commonwealth argues that even if Unit 403 and Unit 404C were acquired using traceable proceeds, the registered mortgages of the Commonwealth gives it an indefeasible title free of any equities even if it had notice of any breach of fiduciary duty by Mr Grimaldi by operation of ss 42 and 43 of the RPA.

The relevant part of s 42 of the RPA states:

The relevant part of s 43 of the RPA states:

For the reasons given by Chameleon, I consider that this defence is misconceived and should be rejected.

The debt which was secured by the registered mortgage over Unit 403 and Unit 404C arose under the Second Deed of Settlement under which Mr Grimaldi and MGG Capital agreed to pay the Settlement Sum and the Settlement GIC to the Commissioner in accordance with the Payment Plan. Gina Grimaldi and Mia Grimaldi provided the registered mortgage and were not even the debtors for the debt secured by the registered mortgage.

Section 42(1) of the RPA provides indefeasibility to the title of the Commonwealth as a registered mortgagee but it does not make the debt secured by the mortgage indefeasible nor does it make title to the payments received by the Commonwealth to discharge the mortgage indefeasible either.

Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81; [2007] HCA 53 concerned the granting of two Torrens title registered mortgages to secure monies owed by the mortgagor and others to the mortgagee under separate loan agreements, with each mortgage containing a covenant by the mortgagor to pay the secured monies to the mortgagee. The mortgages were then transferred and registered under the Land Title Act 1994 (Qld). The issue was whether the debts under the loan agreement were assigned upon the registration of the transfers of the mortgages. Kiefel J (with whom Gleeson CJ, Gummow J, Hayne, Heydon and Crennan JJ agreed) at [55]–[56] held that the registration of the mortgages under the statute did not transfer the debts which they secured, stating at [55]:

I disagree with the Commonwealth’s argument that the mere fact that it received the payments and then discharged its registered mortgage means that it has an indefeasible title to the payments it received from the sale proceeds of Unit 403 and Unit 404C. The debt owed by Mr Grimaldi created by the Second Deed of Settlement existed independently of the registered mortgages, the terms of which did not even contain a covenant to repay since Gina Grimaldi and Mia Grimaldi as registered proprietors of Unit 403 and Unit 404C were not even the debtors.

The claim which has been brought by Chameleon does not seek to impugn or challenge the Commonwealth’s title to the registered mortgage that it had over Unit 403 and Unit 404C but instead asserts that because the ATO knew about the source of the payment it was about to receive, the ATO had an obligation as a knowing recipient to not apply that payment in partial discharge of the debt under the Second Deed of Settlement.

The Commonwealth also appears to be arguing that:

I consider that this mischaracterises the claims being made by Chameleon. As I have found above, the ATO had knowledge of Mr Grimaldi’s breach of fiduciary duty which entitles Chameleon to claim the traceable proceeds of that breach from the Commonwealth. Chameleon has done so by demonstrating that as a matter of fact those traceable proceeds were the source of part of the payments made on 27 August 2012 and 8 March 2013 to the ATO. Section 42(1) of the RPA provides indefeasible title in respect of the mortgage and so protection from proprietary claims but not personal claims in the nature of that made by Chameleon.

Chameleon does not seek to impugn the title to Unit 403 and Unit 404C, nor the title to the Commonwealth’s mortgages in rem (which have since been discharged). The claim which is made by Chameleon attaches to the conscience of the Commonwealth, not the title to any property over which it held a registered mortgage.

As is made clear in Turner by White JA at [92]–[103], ss 42 and 43 of the RPA do not affect the liability of a third party who knowingly receives property to a personal claim, even though proprietary remedies may be available. The indefeasible title to each of Unit 403 and Unit 404C remains (and so would the indefeasible title to the mortgage if it still existed and title to the mortgage was being impugned here) but ss 42 and 43 of the RPA cannot stop the right of Chameleon to identify the traceable proceeds of a breach of fiduciary duty and being entitled to them. In my view, they do not have the broader operation which is asserted by the Commonwealth.

Chameleon is entitled to the traceable proceeds of the Spotter’s Fee Securities and profits earned from the increase in the value of the Existing Shareholding into the payments made by Mr Grimaldi to the ATO. As a result of this conventional tracing exercise, those payments included $322,595 of the $855,000 payment received by the ATO on 27 August 2012 following the sale of Unit 404C and $797,470 of the $850,000 payment received by the ATO on 8 March 2013 following the sale of Unit 403.

The outcome of these proceedings is that I am satisfied that the Commonwealth is liable for Chameleon’s claim in knowing receipt under the first limb of Barnes v Addy. Specifically:

Chameleon has comprehensively succeeded against the Commonwealth in its claim. Chameleon is entitled to:

I will allow the parties seven days from today within which to agree to the specific form of orders which follow from the reasons I have set out above. If there is an agreed set of orders, I will make them in chambers.

If no agreement can be reached on the specific form of orders within seven days from today, then the parties are to inform my Associate by email. I will then list the proceedings for a further hearing to determine the orders to be made and make directions for the provision of short submissions in advance of that hearing.