FEDERAL COURT OF AUSTRALIA

LK Law Pty Ltd v Karas (No 4) [2025] FCA 1461

ORDERS

THE COURT ORDERS THAT:

1.    By on or before close of business 5 December 2025, the parties are to provide the Court with draft orders reflecting these reasons.

2.    I will hear the parties on the questions of interest and costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

O’SULLIVAN J:

OVERVIEW

1    On 16 August 2004, the second applicant (Mr Lipman) and the first respondent (Mr Karas) established an incorporated legal practice - LK Law Pty Ltd (LKPL) - the first applicant in these proceedings.

2    On 1 September 2004, LKPL commenced trading under the name “Lipman Karas”. Mr Lipman and Mr Karas were joined by nine former employees of another legal firm, Fisher Jeffries.

3    In these reasons, I use ‘LKPL’ to refer to the incorporated legal practice trading as Lipman Karas.

4    LKPL was incorporated pursuant to the Corporations Act 2001 (Cth) and in accordance with the provisions of the Legal Practitioners Act 1981 (SA). It was (and remains) an Australian proprietary company limited by shares. At the time of its incorporation until 31 May 2021, it had Mr Lipman and Mr Karas as its only directors.

5    The shareholding was structured such that there were 50 Class A1 shares, 50 Class A2 shares, 50 Class B1 shares, and 50 Class B2 shares, each of which carried voting rights. In addition, there were four redeemable preference shares which carried no voting rights.

6    Between the time of incorporation and 31 May 2021, Mr Lipman owned both legally and beneficially 50 Class A1 shares and in his capacity as trustee of the Lipman Family Trust, 50 Class B1 shares.

7    Between the time of incorporation and 31 May 2021, Mr Karas held 50 Class A2 shares, both legally and beneficially and in his capacity as trustee of the Karas Family Trust, 50 Class B2 shares.

8    The third applicant (Lipman Family Pty Ltd) and the second respondent (J&A Karas Pty Ltd) are incorporated companies and entities controlled by Mr Lipman and Mr Karas, respectively.

9    Mr Lipman and Mr Karas were also the only shareholders in and directors of Lipman Karas Office Pty Ltd (LKO) which provided administrative and support services to LKPL.

10    Approximately four years after LKPL was established and commenced trading, Mr Lipman and Mr Karas decided to establish a Lipman Karas practice in Hong Kong.

11    For regulatory reasons, it was not possible to establish a firm practicing Hong Kong law with the name ‘Lipman’ until a number of steps were undertaken. Consequently, in 2009, with the support of LKPL, Mr Karas established a law firm in Hong Kong under the name, Karas Lawyers. As a solicitor admitted in Hong Kong, Mr Karas was the sole proprietor.

12    At the same time, LKPL also established a firm, known in Hong Kong as a “foreign law firm”, practicing non-Hong Kong law and under the name, ‘Lipman Karas’ (Foreign Firm). In or about 2009, the Foreign Firm and Karas Lawyers entered into an Association Agreement within the meaning of the Legal Practitioners Ordinance (HK).

13    In late 2012, Karas Lawyers and the Foreign Firm merged with the approval of the Law Society of Hong Kong. Karas Lawyers changed its name to Lipman Karas following which it began trading in Hong Kong as a branch of LKPL practising Hong Kong law (LKHK).

14    In 2012, LKPL established an office in London, England known as Lipman Karas LLP (LKLLP). LKLLP operated as a partnership between Mr Andrew Ford, Mr Jeremy Scott and Lipman Karas UK Pty Ltd (LKUK) - a company of which Mr Lipman and Mr Karas were the directors and shareholders. Each of Mr Karas and Mr Lipman held 50% of the shares in LKUK.

15    LKUK in turn held 50% of LKLLP with Mr Ford and Mr Scott each holding 25% respectively.

16    In these reasons, the three entities, LKPL, LKHK and LKUK are together referred to as “Lipman Karas” or the “Lipman Karas Group”.

17    Following the deterioration of their relationship from in or about 2019, over opening up equity in Lipman Karas to various salaried principals, in late 2020, Mr Lipman and Mr Karas decided to separate their business interests.

18    They commenced negotiations and appointed a third party, Mr Richard England, as a facilitator to assist them in the resolution of their dispute.

19    In early-mid December 2020, Mr Karas had made overtures to Mishcon de Reya LLP (MdR), a legal firm registered in England and Wales, and the fourth respondent. Mr Karas entered into negotiations with MdR for it to acquire LKHK.

20    On 30 March 2021, Mr Karas executed a Framework Agreement with MdR. Subject to the approval of the SEPs, the Framework Agreement came into effect on 30 April 2021.

21    On 25 May 2021, Mr Lipman, Mr Karas, LKPL, Lipman Family Pty Ltd and J&A Karas Pty Ltd executed an agreement (Separation Agreement). Amongst other things, the Separation Agreement provided that by the effective date (31 May 2021), Mr Karas would resign as a director of LKPL and transfer his shares in LKPL to Mr Lipman (or his nominee). The parties gave mutual releases.

22    Following the separation of Mr Lipman and Mr Karas’ business interests, Mr Karas changed the name of LKHK to Karas LLP and became a Senior Equity Partner of MdR.

23    In September 2021, the Law Society approved an Association Agreement between Karas LLP and MdR. For the first three years of the association, MdR practised as a foreign firm in Hong Kong, practising non-Hong Kong law. To that extent, MdR and Karas LLP adopted the same process as that adopted by Karas Lawyers and the Foreign Firm between 2009 and 2012.

24    The dispute between the parties arose after Mr Lipman became aware of dealings that had taken place between Mr Karas and MdR while Mr Lipman and Mr Karas were negotiating their separation and whilst Mr Karas was still a director of LKPL.

25    The applicants bring claims against the respondents alleging breaches of fiduciary and statutory duties, breach of s 18 of the Australian Consumer Law and misrepresentation. The first respondent cross-claims alleging breach of confidentiality.

ISSUES

26    With that general explanation of the nature of the dispute between the parties and how it arose, a number of issues may be identified, many of which have numerous sub-issues. The principal issues are:

(a)    The alleged relationships between LKPL and LKHK, between LKPL and Mr Karas, and between Mr Karas and Mr Lipman;

(b)    Whether Mr Lipman and Mr Karas had a ‘profit-sharing’ arrangement;

(c)    Whether the regulatory regime in Hong Kong allowed for the relationships for which the applicants contend;

(d)    Whether Mr Karas owed LKPL equitable fiduciary duties and statutory duties, and if so, the scope and content of those duties;

(e)    Whether Mr Karas owed Mr Lipman equitable fiduciary duties and if so, the scope and content of those duties;

(f)    The extent of Mr Lipman’s knowledge of the dealings between Mr Karas and MdR;

(g)    Whether Mr Karas breached his fiduciary duties to LKPL and/or Mr Lipman;

(h)    In the case of knowing assistance, whether the law of Australia applies, or the law of England and Wales and Hong Kong;

(i)    Whether Mr Karas engaged in a dishonest and fraudulent design;

(j)    Whether MdR knowingly assisted Mr Karas in any breach of his fiduciary duties, or was involved in any of Mr Karas’ breaches of his statutory duties;

(k)    Whether Mr Karas contravened s 18 of the Australian Consumer Law, ss 181, 182 and 183 of the Corporations Act and/or whether the applicants are entitled to relief under s 7 of the Misrepresentation Act 1972 (SA);

(l)    Whether MdR is liable as an accessory to any breach by Mr Karas of s 18 of the ACL and/or ss 181, 182 and 183 of the Corporations Act;

(m)    Whether LKPL and/or Mr Lipman suffered loss, and if so, the quantum of that loss; and

(n)    Whether Mr Karas has established his cross-claim.

27    By way of a broad summary, insofar as the equitable fiduciary duties Mr Karas undoubtedly owed are concerned, the focus is on the scope and content of Mr Karas’ fiduciary duties, whether Mr Karas breached his fiduciary duties, and whether MdR knowingly assisted Mr Karas in the breach of those duties.

28    Whereas negotiations per se may not amount to a breach of a fiduciary duty, in this matter, Mr Karas placed himself in a conflict between his fiduciary duties and his personal interest by negotiating with MdR for MdR to acquire LKHK.

29    As a consequence of those negotiations, which were conducted in secret, Mr Karas entered into the Framework Agreement which came into effect on 30 April 2021. In that agreement, Mr Karas agreed for MdR to acquire LKHK such that Mr Karas dealt with the assets of LKHK, both tangible and intangible, whilst still a director of LKPL and whilst owing fiduciary duties to LKPL and/or Mr Lipman. Further, during the course of negotiations, Mr Karas promised to transition LKPL’s Hong Kong revenue stream from LKHK to MdR.

30    The Framework Agreement and Mr Karas’ admission as an SEP of MdR was subject to approval by MdR’s SEPs. That approval was given on 15 April 2021, subject to a condition concerning certain financial criteria, which was satisfied on 27 April 2021.

31    Mr Karas entered into the Framework Agreement during the time he was negotiating with Mr Lipman to separate their respective interests in LKPL and LKHK. By concealing his conduct from Mr Lipman, the persons to whom fiduciary duties were owed, which included LKPL, were denied the opportunity to protect or otherwise deal with the assets with which Mr Karas was dealing. As a result, the Separation Agreement was negotiated and concluded from a position of ignorance on the part of the applicants.

32    Had Mr Karas disclosed what he was doing to Mr Lipman, LKPL and Mr Lipman could have considered their position. One thing is certain, however and that is that LKPL and Mr Lipman were denied any opportunity to consider their position or otherwise take steps to protect or deal with the assets which were being dealt with by Mr Karas in conflict with his fiduciary duties and for his personal benefit.

33    Against that background, it is for the reasons which follow that:

(a)    As between LKPL and Mr Karas, Mr Karas occupied a position of trustee, alternatively as agent, and in so doing, owed equitable fiduciary duties to LKPL;

(b)    In the alternative, Mr Karas owed ad hoc equitable fiduciary duties to LKPL;

(c)    Mr Karas owed equitable fiduciary duties to LKPL as a director of LKPL;

(d)    Mr Karas owed statutory duties to LKPL in his capacity as a director of LKPL;

(e)    Mr Karas owed an equitable duty of confidence to LKPL;

(f)    In the alternative, Mr Karas owed equitable fiduciary duties to Mr Lipman as a partner in an overarching partnership;

(g)    In the alternative, Mr Karas owed ad hoc fiduciary duties to Mr Lipman;

(h)    Mr Karas breached his equitable fiduciary duties to LKPL and/or Mr Lipman. In so doing, Mr Karas engaged in a dishonest and fraudulent design;

(i)    The law of Australia applies to the determination of whether MdR knowingly assisted Mr Karas in breaching his equitable fiduciary duties to LKPL and/or Mr Lipman, however the result is the same even if the law of England and Wales, and Hong Kong applies;

(j)    MdR knowingly assisted Mr Karas in his breaching of fiduciary duties to LKPL and/or Mr Lipman;

(k)    Mr Karas breached s 18 of the ACL and ss 181, 182 and 183 of the Corporations Act;

(l)    MdR is not liable as an accessory in Mr Karas’ breaches of the ACL or the Corporations Act;

(m)    LKPL is entitled to declarations and an award of equitable compensation against Mr Karas in the sum of A$27.5 million;

(n)    Mr Lipman is entitled to declarations and an award of equitable compensation against Mr Karas in the sum of A$13.75 million;

(o)    As a consequence of its knowing assistance in Mr Karas’ breach of his equitable fiduciary duties to LKPL and/or Mr Lipman:

(i)    LKPL is entitled to declarations and an award on account of profits against MdR in the sum of A$15.6 million; and

(ii)    Mr Lipman is entitled to declarations and an award on account of profits against MdR in the sum of A$7.8 million; and

(p)    The cross-claim is dismissed.

PRELIMINARY MATTERS

34    In reading these reasons, a number of matters should be borne in mind.

35    First, the first to third respondents (Karas respondents) and the fourth respondent (MdR) adopted the other’s submissions. Where I refer to the Karas respondents’ position, submissions, or contentions on any particular matter (or the other way around), it should not be taken to mean to the exclusion of the other, or that I have not taken that other respondent’s position, submissions, or contentions separately made into account.

36    Second, the parties tendered a joint tender book as well as supplementary joint tender books. Those tender books are referred to either by the exhibit number followed by the volume and tab number (and occasionally page number) or the abbreviation ‘JTB’ or ‘SJTB’ followed by the volume and tab number (and if necessary, page number).

37    Third, for the convenience of the parties, I have referenced documents and transcript, however it should not be assumed that any reference is the sole reference which deals with the point being addressed.

38    Fourth, there is a paucity of documents from MdR in relation to its dealings with Mr Karas. The applicants made a number of submissions about the lack of documents from MdR, including a direction by Mr Libson, MdR’s then managing partner pursuant to cl 12.8 of MdR’s LLP deed preventing Mr Karas from accessing MdR’s documents.

39    The lack of documents is a cause for concern, however there is ample material upon which to base my decision.

WITNESSES

Applicants’ witnesses

40    The applicants called six lay witnesses.

Scipio John Lipman

41    Mr Lipman is the second applicant and a director of both LKPL and Lipman Family Pty Ltd.

42    Mr Lipman’s evidence-in-chief was contained in three affidavits sworn:

(a)    31 July 2023 – exhibit A4 (first Lipman affidavit);

(b)    2 November 2023 – exhibit A5 (second Lipman affidavit); and

(c)    22 December 2023 – exhibit A6 (third Lipman affidavit).

43    Mr Lipman graduated with a Bachelor of Arts from the University of Adelaide in 1976, has a Master of Arts (Laws) from the University of Oxford (1979) and a Master of Laws from the University of London (1980). He was admitted as a barrister in the United Kingdom through the Honourable Society of Lincoln’s Inn in 1980 and admitted to practice as a barrister and solicitor of the Supreme Court of South Australia on 5 October 1981.

44    Mr Lipman is a highly experienced commercial litigator and unsurprisingly his evidence was given with an eye closely attuned to his case.

45    Save for what I say below, generally Mr Lipman gave his evidence in a straightforward and confident fashion. On matters of fact, he answered questions directly and made appropriate concessions. He was cross-examined at length.

46    A significant part of the cross-examination focused on Mr Lipman’s statements in documents as to, amongst other things, the legal and/or equitable status of Mr Karas in conducting LKHK; the nature of the legal and/or equitable relationship between LKHK, LKLP, Mr Karas and Mr Lipman; and sums of money said to be owed from LKHK to LKPL. When challenged, on what I will refer to generally as legal and/or equitable relationship matters, and in particular that they were inconsistent with the case the applicants have now brought before the Court, Mr Lipman contended that a number of his views as to those matters expressed in documents prior to the entry into the Separation Agreement on 31 May 2021, were mistaken.

47    When being challenged on his prior views as to the legal and/or equitable interests Mr Lipman may have had in LKHK, Mr Lipman was acutely aware of the impact it might have on the applicants’ case and on occasions was evasive in cross-examination. However, as I have set out later in these reasons, ultimately the question of any legal and/or equitable interest that LKPL or Mr Lipman may have had in LKHK, is a matter for the Court.

48    Further, during the course of his cross-examination, and specifically towards the end of his cross-examination, when propositions were put to him, Mr Lipman repeatedly answered that he did not recall. Typically, having elicited an answer to a proposition, a document would then be put to him which confirmed the proposition put, following which Mr Lipman then agreed with the proposition. In taking that approach, I do not accept that Mr Lipman’s apparent lack of recollection was genuine in all cases, and it was clear to me he was astute to the possibility of giving an answer which was inconsistent with documentary evidence.

49    The Karas respondents are highly critical of Mr Lipman’s evidence, describing him as an inherently unreliable witness who is not a witness of truth but an advocate prepared to say anything he thinks will advance his case regardless of its truth.

50    I have no hesitation in rejecting that submission. In particular, I reject any suggestion Mr Lipman came before the Court other than as a witness of truth. Although there are aspects of Mr Lipman’s evidence which were unsatisfactory and/or where I do not accept what he says, that does not mean that I should reject his evidence in all things, or conclude that overall he is not a witness of truth.

51    Subject to the caveats I have set out above, overall, I consider Mr Lipman to be a reliable witness whose evidence I generally accept.

David Gary Edwin Cross

52    Mr Cross is a director and shareholder of LKPL. He is a Chartered Accountant and Legal Practitioner. He commenced his accounting career in 1988, becoming a chartered accountant in 1991. He worked on a number of investigations into major corporate collapses. Mr Cross obtained a Bachelor of Laws with Honours in 2005. During the course of his accounting and legal career, he worked with, amongst others, Mr Lipman and Mr Karas.

53    Mr Cross’ evidence-in-chief was contained in four affidavits sworn:

(a)    14 July 2023 – exhibit A29 (first Cross affidavit);

(b)    24 July 2023 – exhibit A30 (second Cross affidavit);

(c)    3 November 2023 – exhibit A31 (third Cross affidavit); and

(d)    3 March 2024 – exhibit A33 (fourth Cross affidavit).

54    Mr Cross was an impressive witness. He gave his evidence in a considered and careful fashion, making appropriate concessions. He is clearly someone who pays attention to detail.

55    The respondents submit that the Court should accept Mr Cross’ evidence, but not in its entirety.

56    I do not accept that submission and I have no hesitation in accepting his evidence in its entirety.

Brian Thomas Morris

57    Mr Morris is a well-known Chartered Accountant who has worked in accounting services for over 50 years. He has specialised in forensic accounting since 1991 but continued to consult generally in relation to technical issues and audit engagement. Mr Morris also provided management consulting services to clients. In 2014, he had established his own boutique forensic accounting advisory practice, ‘Morris Forensic’. He is a very experienced expert forensic accountant who has given expert evidence in many matters.

58    Mr Morris’ evidence-in-chief was contained in one affidavit sworn 21 July 2023 – exhibit A38.

59    There were two principal attacks on Mr Morris’ evidence in cross-examination, the first being his lack of independence, the second that he was purporting to give expert evidence.

60    The best way to describe the exchanges between Senior Counsel for the Karas respondents and Mr Morris in cross-examination is combative.

61    As the first line of attack, Mr Morris accepted that he is extremely well-known to both Mr Lipman and Mr Karas over many years and does not purport to be independent. He also accepted he was friends with Mr Lipman and Mr Karas but not close friends.

62    Although called for by the applicants, and notwithstanding his friendship with Mr Lipman, Mr Morris charged for his time in preparing his affidavit. Mr Morris said that it was suggested to him that it was more appropriate that he be paid rather than not be paid. However, when he prepared his affidavit, the question of payment was not discussed or touched upon. The payment came through the applicants’ solicitors, and he presumed it originated from LKPL, but he did not know. Mr Morris continued that he had kept time records of work done on the affidavit and the documents he had looked at. He discussed the time he spent with the applicants’ solicitors.

63    Mr Morris accepted that he assisted Mr Lipman in whatever assistance he sought and has been “in Mr Lipman’s camp” since the Separation Agreement was entered into, but in terms of this matter, he has had “very, very little to do with this case” over the last 18 months, other than the preparation of his affidavit: T 1009.23-1009.33.

64    As to the second line of attack, Mr Morris accepted that in Part E of his affidavit he expressed his views and opinions on the financial processes which were adopted at LKPL and LKHK and how the financial relationship between the two parties operated as reflected in the financial statements for both LKHK and LKPL. He also accepted that he expressed an opinion as to the approach adopted by Edwards Marshall, later Nexia Edwards Marshall, the external accountants to LKPL and LKHK. That said, Mr Morris disavowed that he was expressing any of those opinions as an expert, but was expressing opinions on matters that were clearly within his expertise and experience. He also denied any suggestion that he was giving expert evidence as that was not his intention. Rather, he said he was giving evidence on matters that he knew from his own experience and from interpreting accounting information as someone who was involved in the transactions in question and the various discussions about them: T 1001.4-1001.44.

65    Mr Morris accepted that he was not independent, but as I understood that evidence, it was by way of comparison with his role when giving evidence as an independent expert.

66    Nonetheless, Mr Morris accepted that some of the material was in the nature of expert evidence. He explained that if he had thought he was giving evidence as an expert he would have done so in accordance with the expert evidence provisions of the Court – r 23.13 of the Federal Court Rules 2011 (Cth) and GPN-EXPT. He explained that much of what was in his affidavit would not come before the Court if he was called as an expert saying, “so perhaps I’ve got two hats on”: T 1001.4-1001.33.

67    Mr Morris continued, that if he had thought he was giving expert evidence, he would have specifically identified the documents upon which he has relied and his reasoning, however he said he had done that in any event. He observed that the only thing he has not done, is to make the expert witness declaration in accordance with the Practice Notes.

68    Mr Morris was taken to various paragraphs of his affidavit, in particular [209], [210], [211] in relation to which he accepted that he expressed an opinion or made a statement of fact based on the knowledge he has from looking at financial records and accounts. He said that the reasoning behind those expressions of opinion or statements of fact was found in Part E of his affidavit and that he was giving evidence of observations drawn from reading the financial statements of either LKPL or LKHK and/or the various calculations associated with the sharing of profits: T 1003.10-1005.11.

69    Ultimately, Mr Morris accepted that at any time he appeared to express an opinion in Part E of his affidavit, which appeared to be an expert opinion, he was not intending for that to be the case, but rather an opinion of a reasonably experienced person with his background: T 1005.13-1005.18).

70    In general terms, the cross-examination did not focus on the contents of his affidavits but, as I have indicated, was directed to the two matters above.

71    In the course of his cross-examination, Mr Morris was taken to an email between him and Mr Lipman after the Separation Agreement had been entered into in which he made a disparaging and racist remark about Mr Karas (exhibit R23). He readily accepted the comment was disparaging and racist but characterised it as being sarcastic and directed to Mr Lipman in the context of his observations of Mr Lipman’s dealings with Mr Karas, in the period leading up to the Separation Agreement.

72    Mr Morris said his comments were in response to a final reflection made by Mr Lipman in that email in which Mr Lipman contrasted the speed with which Mr Karas concluded a deal with MdR with the “years of futility in trying to get the firm restructured” and that one could be “forgiven for thinking that Jason was more enthusiastic about the former than the latter.”

73    Mr Morris regretted making the statement. He characterised it as a comment being made in the context of his disappointment having worked for a long time in an attempt to put a proposal in place for the restructure of LKPL and LKHK - by way of admitting equity participants. He said Lipman Karas was a firm for which he had a very high regard but which, as a result of his proposal not being accepted was, in effect, dissolved: see generally: T 1010.33-T1012.10. I accept that characterisation but also consider that he viewed the parting of ways as largely driven by Mr Karas.

74    When cross-examined as to whether he considered Mr Karas to be greedy, Mr Morris was evasive.

75    The Karas respondents submit Mr Morris was not a witness of credit and admitted to partisanship, including making a disparaging, racist comment about Mr Karas to Mr Lipman and Mr Cross.

76    The Karas respondents described Mr Morris as giving “pseudo-expert evidence” in circumstances where he accepted he is not independent; accepted his evidence was in the nature of expert evidence, despite not complying with the common law or procedural rules; and accepted he had made partisan and racist comments to Mr Lipman and Mr Cross about Mr Karas. They submit this is sufficient to reject his evidence in its entirety.

77    They submit further that Mr Morris’ evidence is either third hand hearsay commentary, setting out his opinion on accounting exercises performed by Mr Cross and Nexia Edwards Marshall, or self-commentary on calculations he performed from late 2019/2020 in which he developed a financial model which was never adopted by the parties. To that extent, the Karas respondents submit that Mr Morris’ evidence can be discarded.

78    I do not accept those submissions.

79    There is no doubt that Morris is well-known to Mr Lipman and Mr Karas. There is also no doubt that Mr Morris worked closely with Mr Lipman and Mr Karas in an attempt to reach a resolution for a process for the admission of new equity participants into LKPL and LKHK.

80    Mr Morris’ evidence was not directed to Mr Karas’ character or the reasonableness or unreasonableness, as the case may be, of his conduct in relation to the proposal to admit new equity participants into LKPL and LKHK.

81    In particular, no submission is made by the Karas respondents that I should not accept Mr Morris’ evidence concerning the financial arrangements between Mr Lipman and Mr Karas, nor that part of his affidavit dealing with the “Equity Equalisation Exercise”.

82    There was no cross-examination on Mr Morris’ observations about the financial arrangements between Mr Lipman, Mr Karas, LKPL and LKHK, nor any suggestion in the Karas respondents’ submissions that Mr Morris’ observations as to those financial arrangements, or for that matter what the various financial statements revealed, were wrong.

83    This is one of those matters which occurs, not infrequently, where a witness of fact who has particular qualifications and experience gives evidence about matters which come within their area of qualification and experience but does not do so as an independent expert.

84    In limited circumstances, a witness of fact may give evidence in the nature of expert testimony which may be grounded in personal observation and experience within their professional field, rather than abstract reasoning or technical analysis. This is particularly relevant in cases where a witness of fact, such as a forensic accountant, gives evidence describing their own processes and findings, without purporting to draw conclusions as an expert.

85    In Weal v Bottom (1966) 40 ALJR 436 at 438–9, Barwick CJ explained that the evidence given by a lay witness as to their own experience and observations, “is not the expression of an opinion”.

86    In Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd (2011) 192 FCR 445; [2011] FCAFC 55 at [203] (Keane CJ, Lander and Besanko JJ) the Court considered evidence from a forensic accountant who explained which financial documents were relevant to the inquiry and had summarised their contents:

The exercise carried out by Mr Acton is often carried out by expert forensic accountants who identify the financial documents which are relevant to the inquiry. To the extent necessary, the documents are explained including their contents in order that the court can understand the company’s business. They are often explained to establish some trend in the company’s business activities both before and after the cause of action arose. The court could carry out the inquiry for itself. It could have regard to the underlying source documents and construct for itself the trends upon which reliance is put. However, the practice is to have forensic experts carry out the exercise in advance of the hearing in order to save the court the time and trouble of the exercise. It is an appropriate way of presenting evidence relating to the financial affairs of a company which claims to have suffered a loss. Their evidence assists a court in understanding transactions which involve complex accounting treatments. The evidence is a summary of the financial records of the company and admissible: Potts v Miller (1940) 64 CLR 282 per Dixon J at 302–303. It is not opinion evidence at all. It is a summary of the company’s financial records.

(emphasis provided)

87    In Hodgson v Amcor Ltd [2011] VSC 272, Vickery J clarified that evidence by a forensic computer specialist, describing what was discovered on seized computer hard drives and the factual steps taken to obtain that data, was admissible because it did not involve opinion nor inference.

88    Ultimately, there exists a category of opinion evidence in which a witness may generalise from observed facts within their personal experience in a field outside ordinary lay experience. Such evidence is not expert and is admitted as observed fact (see also Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73 at 75 per Lindgren J; Australian Securities and Investments Commission v Vines (2003) 48 ACSR 291; [2003] NSWSC 1095 at [20] per Austin J; Clark v Ryan (1960) 103 CLR 486 at 490-1; [1960] ALR 524; (1960) 34 ALJR 118 per Dixon CJ. See also Heydon J D, Cross on Evidence, LexisNexis, Sydney, 1991, looseleaf, at [29025]).

89    Mr Morris’ evidence in Part E of his affidavit was directed to the financial arrangements as they existed, primarily, between Mr Lipman and Mr Karas. Mr Morris explained the financial records, including the advice of Nexia Edwards Marshall, in relation to the Equity Equalisation Exercise so that the Court could understand how the financial relationship between Mr Lipman and Mr Karas worked. Mr Morris’ evidence was observed fact and was an appropriate way of presenting the evidence relating to the financial arrangements between Mr Lipman and Mr Karas. It is not opinion evidence, notwithstanding Mr Morris’ characterisation.

90    Mr Morris’ evidence assisted the Court in understanding the complex financial arrangements and accounting treatments that existed and summarised the financial records of both LKPL and LKHK, insofar as they involved the profit-sharing arrangements between Mr Lipman and Mr Karas. Indeed, such was the complexity of the financial arrangements, that neither Mr Lipman nor Mr Karas completely understood them.

91    Generally, I accept Mr Morris’ evidence but keep in mind his comments about Mr Karas, his disappointment that Mr Lipman and Mr Karas had parted ways, and my assessment that he considered that what had occurred as a result of Mr Karas’ conduct.

92    Nonetheless, as a result of his very considerable experience when giving independent expert evidence, I entertain no doubt that Mr Morris is acutely aware of his obligations in giving evidence to the Court, whether as a witness of fact or as an independent expert.

93    Overall, I do not consider Mr Morris’ evidence to be given in a partisan way, although given the attack made in cross-examination, it was certainly defensive.

94    I accept Mr Morris’ evidence as to the financial processes adopted at LKPL and LKHK, and how the financial relationship between Mr Lipman and Mr Karas and the two firms operated, as reflected in the financial statements for both LKPL and LKHK. I also accept Mr Morris’ evidence in relation to the Equity Equalisation Exercise.

Mary-Louise Rahaley

95    Ms Rahaley is the Chief Operating Officer of the first applicant, LKPL.

96    Ms Rahaley’s evidence-in-chief was contained in one affidavit sworn 14 July 2023 – exhibit A41.

97    Ms Rahaley is legally qualified and has been involved in the management of legal firms, both in Australia and overseas, for a number of years. As from 1 July 2021, she has been a director and shareholder of LKPL.

98    Prior to that time, Ms Rahaley worked with the Australian Consulate General in Guangzhou in the People’s Republic of China; with Sweet & Maxwell in Hong Kong as the Senior Legal Commissioning Editor; as Practice Manager for Clifford Chance’s Asia Litigation and Dispute Resolution Group, later as its United States Litigation and Dispute Resolution Group, and then undertook responsibility for its global business development.

99    In 2009, Ms Rahaley was appointed as Head of Business Development for the Merger and Acquisitions/Corporate Group of the then Mallesons Stephen Jaques. In early 2012, she commenced as Executive Director of Chaffetz Lindsey LLP, a boutique litigation practice in New York.

100    Ms Rahaley gave her evidence in a confident and straightforward manner, answered questions directly and made appropriate concessions in cross-examination.

101    I accept her evidence.

Brooke Hall-Carney

102    Ms Hall-Carney is a lawyer with a particular interest in information technology. She is now a principal with LKPL.

103    Ms Hall-Carney’s evidence-in-chief was contained in one affidavit sworn 3 November 2023 – exhibit A53.

104    Ms Hall-Carney gave evidence in a confident and straightforward manner, answered questions directly and made appropriate concessions in cross-examination.

105    I accept her evidence.

Kelly Lee McCartney

106    Ms McCartney is Mr Lipman’s personal assistant.

107    Ms McCartney’s evidence-in-chief was contained in one affidavit sworn 14 July 2023 – exhibit A54. She was not required for cross-examination on the basis that it is an agreed fact that exhibit R21, an email from Ms McCartney to Mr Lipman dated 20 September 2021, is a record of a dictation by Mr Lipman to Ms McCartney, typed by Ms McCartney, and sent by Ms McCartney to Mr Lipman.

Respondents’ lay witness

108    The Karas respondents called one lay witness.

Jason Demetrious Karas

109    Mr Karas graduated with a Bachelor of Economics from the University of Adelaide in 1990. He graduated from the University of Adelaide with a Bachelor of Laws (Honours) in 1991.

110    After working as an Associate to a Justice of the Supreme Court of South Australia, Mr Karas commenced employment with an Adelaide legal firm named Fisher Jeffries in 1993. During that time, he worked closely with a number of partners of that firm on major corporate collapses, including Mr Lipman.

111    Mr Karas became an equity partner at Fisher Jeffries in 2001.

112    Mr Karas was a director of LKPL until the Separation Agreement came into effect on 31 May 2021. He was also the sole proprietor of Karas Lawyers which merged with the Foreign Firm in late 2012 and became known as Lipman Karas (in these reasons LKHK).

113    After the Separation Agreement came into effect, LKHK changed its name to Karas LLP, then later Karas So LLP. Mr Karas is also a director of the third respondent, J&A Karas Pty Ltd.

114    Mr Karas’ evidence-in-chief was contained in two affidavits sworn:

(a)    29 September 2023 – exhibit R55 (first Karas affidavit); and

(b)    19 February 2024 – exhibit R57 (second Karas affidavit).

115    As with Mr Lipman, Mr Karas is a highly experienced commercial litigator and unsurprisingly his evidence was given with an eye closely attuned to his case.

116    The applicants submit that Mr Karas was a wholly unsatisfactory witness. They submit that the Court should reject his evidence, save where it amounted to an admission or was substantiated by contemporaneous materials or other reliable evidence.

117    I accept that Mr Karas was an unsatisfactory witness. In cross-examination he was, on occasions, antagonistic towards Senior Counsel, although in fairness to him, he is facing allegations which go to his honesty.

118    On numerous occasions he was evasive, giving answers which were not responsive. Not only were his answers not responsive, frequently he took the opportunity to give prolix answers in which he repeated a mantra which was a central theme of his defence. The mantra was that LKHK was not a branch of LKPL or being conducted on behalf of LKPL because that proposal was factually incorrect and legally impossible: e.g. T 1502.3. I have not accepted that position.

119    So too, Mr Karas often repeated various iterations of another mantra which was directed at Mr Lipman benefitting financially from the financial performance of LKHK in the sense of an equal sharing of profits. That mantra was that the equal sharing of profits was an arrangement reached on a voluntary basis provided he and Mr Lipman remained friends and that either of them could walk away at any time and the two of them did not stand on their legal rights: e.g. T 1267.24. That position is unsustainable, and I do not accept it.

120    Generally, Mr Karas was not prepared to make appropriate concessions nor answer questions directly. On those relatively few occasions when he did make concessions, it was after being placed in a position where he had no option.

121    As with Mr Lipman, Mr Karas answered on numerous occasions that he did not recall an event or a document, typically an email. In fairness to him, I accept that a number of these events occurred 15 or so years ago, but when faced with the documentation which supported the contention that was being placed before him, unlike Mr Lipman, Mr Karas maintained his denial, seeking to characterise the document in a way which was clearly wrong.

122    On other occasions he maintained disagreement with propositions put to him in the face of documentation which was contrary to the position he took.

123    There are numerous examples, a few will suffice.

124    Mr Karas’ evidence concerning the work he did in Hong Kong on what is known as the ‘Akai litigation’ involving Ernst & Young (accepting that it was complex litigation with a number of different actions, some of which were in Hong Kong and others in different jurisdictions), was not only evasive but given in a way in which he attempted to downplay his role in that litigation prior to his admission as a legal practitioner in Hong Kong. It does him no credit.

125    On other occasions, such as a proposal made in January 2008 to a Hong Kong solicitor, Mr Christopher Dobby, that he work for LKPL in an office in Hong Kong on the basis that the Hong Kong Office would be a branch office of LKPL and be fully funded, Mr Karas’ evidence was not only evasive, as I explain below, it was designed to obstruct. As to that evidence, I accept that what was described in a document attached an email from Mr Karas to Mr Dobby sent 23 January 2008 (JTB 1/8/27; 1/9/28) was, in reality, at a conceptual stage only and that it did not proceed. Nonetheless, Mr Karas’ repeated disagreement with the proposition that, as between Mr Karas and Mr Lipman, they had discussed a proposal or concept of setting up a branch office of LKPL in Hong Kong subject to the regulatory requirements of the Law Society by reference to the later acquired knowledge of those regulatory requirements, was used to obscure the focus of the questioning. That focus was that as between he and Mr Lipman, they had discussed the proposal or concept of setting up a branch office of LKPL in Hong Kong. Clearly, they had, however Mr Karas would not accept that proposition, ultimately denying it: T 1109.19-1109.28.

126    So too, his trenchant denial that there was an arrangement for the sharing of profits between LKPL, the Foreign Firm and Karas Lawyers, flies in the face of multiple documents, including an application for an Austrade Marketing Grant made 23 November 2010: JTB 4/370/1267; T 1253.9-1256.2. His repeated mantra to the effect that it was factually incorrect and legally impossible for there to be one integrated firm (LKPL and LKHK) in view of the Hong Kong Legal Practitioners Ordinance Regulations, was used as a basis to disagree with the proposition that Mr Lipman had any interest, of whatever type, in either Karas Lawyers or as it subsequently became, LKHK. That, notwithstanding that Mr Lipman, under LKPL letterhead, and Mr Karas, under his own name and as a 50% owner of LKPL, had written to the Hong Kong Immigration Department on 6 October 2009 in which they each advised that for the purposes of Mr Karas being able to establish a firm in Hong Kong, LKPL had agreed to underwrite Karas Lawyers to the tune of A$1 million. I deal later in these reasons with sharing of profits, but Mr Karas’ evidence that there was no arrangement for the sharing of profits as between Mr Karas and Mr Lipman, other than in accordance with his mantra, is false and I do not accept it.

127    Mr Karas’ denial that there was a financial merger between Karas LLP and MdR and his insistence that what is known as the Framework Agreement dated 30 March 2021 between Mr Karas, LKHK and MdR, which recorded that financial merger, was “imprecise language” and “broad commercial language” and “shorthand commercial language”, (JTB 70/6646/49820; JTB 70/6646/49824; T 1199.12; T 1201.42; T 1202.2) stretched credulity to the point where I entertain a significant concern as to whether, both in relation to this issue and other issues, he was consciously seeking to mislead the Court.

128    I was left in no doubt that Mr Karas believes fervently that he is correct in all things notwithstanding compelling evidence to the contrary. In particular, he justifies his actions with absolute confidence that he is correct. To that extent, notwithstanding his belief is misplaced, he uses that as justification for his actions and the position he takes irrespective of the truth of the matter. Unfortunately, much of his belief and consequently his evidence, is reconstruction made for the purposes of justifying his actions.

129    It is for these reasons that generally I am not prepared to accept his evidence, and certainly where it conflicts with the evidence of others, in particular Mr Lipman. I have no hesitation in accepting Mr Lipman’s evidence in preference to that of Mr Karas’.

130    It also has the consequence that where Mr Karas’ evidence is contrary to documentary evidence, I prefer the documentary evidence over that of Mr Karas’.

MdR’s lay witnesses

131    MdR called 6 lay witnesses.

Kevin Gold

132    Mr Gold is the executive chair of the fourth respondent, MdR. Mr Gold’s evidence-in-chief was given in two affidavits affirmed:

(a)    27 September 2023 – exhibit R84 (first Gold affidavit); and

(b)    4 July 2024 – exhibit R85 (second Gold affidavit).

133    Save for one aspect, Mr Gold was a satisfactory witness who generally gave his evidence in a straightforward fashion, answering questions directly. The one aspect was when he was answering questions which may impact on the liability of MdR. On those occasions, at times, he gave long, rambling, non-responsive answers and was evasive.

134    Mr Gold is clearly a highly experienced practitioner. He was the initial and main contact between Mr Karas and MdR.

135    At the time Mr Karas was introduced to Mr Gold, MdR was planning an Initial Public Offering (IPO). The acquisition of a niche Hong Kong practice happened to fit in well with that plan, but in any event, was part of MdR’s expansion into Asia, it having already a presence in Singapore.

136    Remarkably, for an experienced commercial law practitioner, he said that he kept no notes. I do not find that he destroyed any notes, but the fact no notes were kept, causes me concern. I make reference to the lack of documents during the course of these reasons.

137    Mr Gold was aware that Mr Karas was a part of LKPL and that he was extricating himself from LKPL: T 1925.36-40. He understood from Mr Karas that there were various considerations relating to financial matters because of the loan accounts between LKHK and LKPL. Mr Gold said that in the first conversation he had with Mr Karas, he was told, in effect, that he (Mr Karas) was “free to trade” and nobody has an equitable or other interest in the business”: T 1930.35-36. The reference to nobody having an equitable or other interest was in neither of his two affidavits tendered as his evidence-in-chief. His explanation for that omission was wholly unsatisfactory, in circumstances when he was well-aware, at the time he swore his affidavits, that it was alleged MdR was knowingly involved in Mr Karas’ breach of fiduciary duty: T 1930.3-1932.22. Mr Gold’s reference to no-one having an equitable interest is a recent invention and I do not accept it.

138    That omission is all the more remarkable when Mr Gold accepted that he knew Mr Karas was a partner of LKPL; the sole proprietor of LKHK; that there was a significant degree of financial integration between both firms; and that both firms used the same name – Lipman Karas. Further, Mr Karas told Mr Gold, in a due diligence memorandum prepared by Mr Karas on 16 January 2021, that LKHK evolved initially as a branch of LKPL and, “the Group policy has been to maximise LKPL’s profits and minimise LKHK’s profits such that LKHK’s profitability is consistently understated in the accounts”: JTB 62/5096/46307.

139    Still further, when asked about the economic integration between LKPL and LKHK, Mr Gold responded that the nature of Mr Karas’ relationship in relation to profits arising from Australia, was not something with which he was concerned: T 1975.1-1975.2.

140    I approach Mr Gold’s evidence in relation to matters which may impact on the liability of MdR with caution.

Rowena Herdman-Smith

141    Ms Herdman-Smith is General Counsel (Operations) of MdR and a partner in MdR. Ms Herdman-Smith’s evidence-in-chief was given in one affidavit affirmed 27 September 2023 – exhibit R86. She is an experienced litigator who was tasked with putting the Framework Agreement into effect. She was an impressive witness who gave her evidence clearly and concisely. I accept her evidence.

Richard Tyler

142    Mr Tyler is a partner at MdR and from 2021 MdR’s Chief Commercial Officer. Mr Tyler’s evidence-in-chief was contained in one affidavit affirmed on 27 September 2023 – exhibit R93. He was not required for cross-examination.

James Libson

143    Mr Libson was Managing Partner of MdR in 2020, having succeeded Mr Gold who had held that position before becoming Executive Chair of MdR. Mr Libson’s evidence-in-chief was contained in two affidavits affirmed:

(a)    27 September 2023 – exhibit R94 (first Libson affidavit); and

(b)    5 October 2023 – exhibit A100, but only as to limited paragraphs (second Libson affidavit).

144    Overall Mr Libson was a satisfactory witness whose evidence I accept.

Mayank Patel

145    Mr Patel was formerly the Chief Financial Officer of MdR. He no longer works with MdR. Mr Patel’s evidence-in-chief was contained in one affidavit affirmed 27 September 2023 – exhibit R87. He was an impressive witness who gave his evidence clearly and concisely. I accept his evidence.

Bambos Georgiou

146    Mr Georgiou was Chief Operating Officer of MdR at the relevant time. Mr Georgiou’s evidence-in-chief was contained in one affidavit affirmed 27 September 2023 – exhibit R88. He gave his evidence clearly and concisely. I accept his evidence.

Applicants’ expert witness

147    The applicants called one expert witness.

Jeffery Lewis Hall

148    Mr Hall was called as an expert valuer. He produced two reports - exhibits A89 and A90, the latter of which was in reply to the expert report of Mr Andrew Ross, called by the Karas respondents.

149    Mr Hall qualified in 1978 with a B.Sc. in Accounting from Kansas State University. He obtained a Master of Commerce in Finance from the University of New South Wales in 1986 and became a Chartered Financial Analyst in 1996. He is a Certified Public Accountant in the United States of America (1978) and a Chartered Accountant in Australia (1988).

150    Between 1995 and 2018 he held academic positions with Macquarie University as a Visiting Fellow at Macquarie Applied Finance Centre and as Principal Lecturer for the Mergers & Acquisitions Course in Sydney, Melbourne, Beijing, Singapore, Hong Kong and Tokyo as part of Macquarie University’s Master of Applied Finance Degree.

151    In 2001 he established Sumner Hall Associates Pty Ltd, a specialist advisory firm providing corporate advisory services in relation to mergers and acquisitions, divestments, capital raisings, corporate restructuring and financial matters generally. Sumner Hall Associates has as one of its principal activities the preparation of corporate and business valuations and the provision of independent advice and expert’s reports in connection with mergers, takeovers and capital reconstructions.

152    Prior to 2001 he held positions with Grant Samuel & Associates which included preparation of independent expert and valuation reports for businesses. He joined Grant Samuel from Ernst & Young Corporate Advisory Services Division.

153    He has a wealth of experience in valuation across a range of industries. In particular, he has provided numerous independent expert reports for non-litigation purposes such as, for example, Schemes of Arrangement and restructuring.

154    Mr Hall also has extensive experience in providing expert evidence for litigation related purposes.

155    Self-evidently, Mr Hall is highly experienced in valuation. He was an impressive witness. He gave his evidence in a clear, concise and focused way, making concessions where appropriate. To the extent that he gave longer answers, those answers were entirely appropriate. I have no hesitation in accepting his evidence.

Respondents’ expert witnesses

156    The respondents called two expert witnesses.

The Honourable Geoffrey Ma Tao-Li GBM, KC, SC

157    The Honourable Geoffrey Ma Tao-Li is a former Chief Justice of the Hong Kong Court of Final Appeal. Prior to his appointment to that position in 2010, he was Chief Judge of the High Court in Hong Kong, being the President of the Court of Appeal in Hong Kong between 2003 and 2010.

158    Mr Ma gave evidence to the regulatory regime as it applies to the practice of law in Hong Kong.

159    As one might expect, Mr Ma was an impressive witness who answered questions directly, concisely and with clear knowledge as to his subject. I have no hesitation in accepting Mr Ma’s evidence.

Andrew Ross

160    Mr Ross was called as an expert valuer. His evidence was adopted by MdR.

161    Mr Ross has over 35 years’ experience in the provision of financial advice, valuation and forensic accounting.

162    After joining Arthur Andersen in 1987, Mr Ross qualified as a Chartered Accountant in 1991.

163    He has a Graduate Diploma in Applied Finance and Investment through the Securities Institute of Australia and is a Member of the Chartered Institute of Arbitrators. Mr Ross is accredited by Chartered Accountants Australia and New Zealand (‘CAANZ’) as a specialist in both Business Valuation and Forensic Accounting.

164    Whilst at Arthur Andersen he spent time in the United States of America where he specialised in dispute analysis primarily involving accountants’ liability cases. In 1992, he assisted in establishing Arthur Andersen’s forensic accounting practice.

165    In 2010, Mr Ross moved to Korda Mentha.

166    He has prepared numerous valuations or provided valuation advice, both in the context of litigation and for the purposes of transactions.

167    He has significant experience in valuation across a range of industries as well as extensive experience in providing expert evidence for litigation related purposes, including in International Arbitrations. He has acted as a Court-appointed Referee and as an expert in Expert Determinations.

168    Mr Ross was an impressive witness who gave his evidence in a clear, concise and focused way. As is apparent, he is also highly experienced.

169    Ultimately it is necessary to prefer the evidence of one expert valuation witness over the other.

170    One difference that the applicants submit should lead the Court to prefer Mr Hall’s evidence over that of Mr Ross is Mr Hall’s experience in actual transactions. I accept that allows for some consideration, particularly when considering Mr Hall’s oral evidence and the basis upon which, in his experience, transactions occur.

171    In the circumstances of this matter, were that the only difference between the two expert valuers, it would not, of itself, necessarily lead me to prefer one over the other, however there are other matters at a more fundamental level which lead me to prefer Mr Hall’s evidence over that of Mr Ross.

172    I prefer Mr Hall’s evidence, on the basis that Mr Ross’ opinion is based on an assumption he was instructed to adopt, but which in the circumstances can only be described as unsustainable. I deal with that issue when dealing with the expert valuation evidence, but I emphasise that in making that finding, I mean no disrespect to Mr Ross, nor do I direct any criticism towards him.

FACTUAL NARRATIVE

173    In this section of my reasons, I set out by way of factual narrative the findings I have made and which are relevant to my consideration of the parties’ respective causes of action.

174    A number of the matters in the factual narrative are not contentious and arise either from admitted facts on the pleadings, or are simply not in dispute, such that the narrative comprises my findings. When relevant factual matters are in dispute, I make specific findings about that matter and explain my reasons for doing so.

175    To the extent a particular cause of action involves factual matters not dealt with in this section of the reasons, I deal with those further facts, as necessary, when considering that particular cause of action.

176    Some of the findings I made are serious. Accordingly, I adopt the degree of persuasion as that set out in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, 362.

The period prior to 2004

177    After a period of working as an Associate to a Justice of the Supreme Court of South Australia, Mr Lipman commenced employment in 1982 with a firm of solicitors in Adelaide, then known as Thomson Simmons, before resigning and joining Fisher Jeffries as an equity partner in 1988.

The beginning of LKPL: 2004 – 2008

178    In the course of his practice, Mr Lipman had been exposed to extensive national and international litigation in connection with major corporate insolvencies in Australia, such as the Bell Group and Bond Corporation litigation. That international litigation included, for example, recovery actions in overseas jurisdictions.

179    As part of his international work, Mr Lipman also came into contact with a number of insolvency and forensic accounting practitioners, as well as solicitors working in overseas jurisdictions.

180    In about the late 1990s, Mr Lipman began to think about setting up a specialist litigation practice with an international focus.

181    Mr Lipman’s interest in international work had grown as a result of him having worked internationally on matters in which he had been instructed in Australia and which included major litigation, such as the Duke Litigation, the Bell Litigation and the Southern Cross Commodities administration. The latter had involved recovery actions in London, England, during the course of which Mr Lipman worked with Mr Jeremy Scott. Some years later, LKPL established a practice in London in which Mr Scott was a principal.

182    One of the issues in pursuing litigation of this nature is funding. In the late 1990s, Mr Lipman had been introduced to Dr Louis Reijtenbagh through an insolvency practitioner with whom he had worked extensively. Dr Reijtenbagh was based in Europe and had sufficient resources to provide third-party litigation funding for litigation of this type.

183    Mr Lipman’s relationship with Dr Reijtenbagh revealed to Mr Lipman the opportunity to expand his practice internationally using funding provided by Dr Reijtenbagh to pursue what Mr Lipman described as “international litigation projects”. By that expression he meant, “the collapse of a major company and the series of legal actions that could be pursued by insolvency practitioners, particularly professional negligence claims against third party advisors and claims against directors for breaching their duties to the company.”: exhibit A4.

184    Mr Karas had worked closely with Mr Lipman on some of the major litigation Mr Lipman was engaged in, particularly Bell Group, and later the Royal Commission into the collapse of HIH Insurance Group.

185    That work also brought Mr Karas into contact with a number of insolvency and forensic accounting practitioners, as well as solicitors working in overseas jurisdictions. From in or about 1997, in the course of the Bell Litigation, Mr Karas also worked closely with Dr Reijtenbagh.

186    In or about 2002, whilst working together on the Royal Commission into the collapse of the HIH Insurance Group, Mr Lipman shared with Mr Karas his idea of establishing a specialist litigation practice which undertook international project litigation. Mr Karas shared Mr Lipman’s views about establishing such a practice.

187    Mr Lipman could not recall precisely what he said to Mr Karas about his ambitions at this time but spoke in general terms about his idea of establishing a specialist boutique litigation for this purpose.

188    Both Mr Karas and Mr Lipman were practicing at Fisher Jeffries and expressed their concern about the hours litigation lawyers at the firm were working, and the disproportionate levels of revenue they were creating for the firm, as opposed to other sections within it. They discussed, again in general terms, how that might be addressed.

189    Over the ensuing two years, the disparity between the hours worked and revenue earned became of increasing concern to Mr Lipman. In part, that was at least because the profit share amongst the equity partners of Fisher Jeffries was equal, save for a regime whereby a pool of funds was set aside for the purposes of awarding bonuses to a maximum of three equity partners. That required the approval of at least 75% of the firm’s equity partners.

190    In 2004, Mr Karas did not receive a bonus, which Mr Lipman described as a catalyst for further discussions with Mr Karas about the disparity in reward for effort and how that might be addressed.

191    Ultimately, Mr Lipman and Mr Karas agreed they would both resign as equity partners in Fisher Jeffries to set up their own specialist litigation firm. One of the factors that influenced that decision was the relationships that Mr Lipman and Mr Karas had each established with insolvency practitioners and other professionals involved in litigation.

192    Both Mr Lipman and Mr Karas resigned from equity partnership in Fisher Jeffries and retired from the practice on 31 August 2004.

193    At that time (and as is still the case), the Legal Practitioners Act permitted incorporated legal practices to practice the law. Incorporated Legal Practices are dealt with in Schedule 1 to the Legal Practitioners Act.

194    Pursuant to that Schedule, an incorporated legal practice is a corporation that engages in legal practice “in this jurisdiction”.

195    “Corporation” is defined as a company within the meaning of the Corporations Act or any other body corporate or body corporate of a kind prescribed by the regulations to the Legal Practitioners Act. There are no other kinds of body corporate prescribed by the regulations.

196    “Jurisdiction” is defined as a State or Territory of the Commonwealth of Australia.

197    As directors of an incorporated legal practice, Mr Lipman and Mr Karas were subject to the same rights and obligations as applied to the directors of any Australian Corporation governed by the Corporations Act: cl 8(5) and 31 of Schedule 1 to the Legal Practitioners Act.

198    Whilst cl 29 of the Legal Practitioners Act enables the regulations to override or exclude the application of Corporations Act provisions for Incorporated Legal Practices, there was no mention of the Corporations Act within the Legal Practitioners Regulations 2014 (SA), and thus no exclusion of the Corporations Act’s operation.

199    As I have noted earlier in these reasons, on 16 August 2004, LKPL was incorporated as a proprietary company limited by shares. It commenced trading as Lipman Karas on 1 September 2004.

200    Mr Lipman and Mr Karas were the only two directors. They did not enter into any shareholders agreement or other written agreement.

201    The decision to incorporate a company to conduct the proposed legal practice was made on advice to Mr Lipman and Mr Karas from one or more of Mr Brian Morris and Mr Ben Miels, the latter also being a chartered accountant who at that time worked for Nexia Edwards Marshall. They also received advice from an Adelaide based solicitor.

202    In particular, an incorporated practice was financially preferable to establishing a partnership to conduct the proposed practice. Mr Lipman explained in cross-examination that an incorporated legal practice had a range of financial advantages. Although unable to recall all of them, one such advantage was the ability to take dividends on which the company pays the first 25 or 27 cents in the dollar of tax, with the individuals paying the top-up or additional amounts: T 267.29-267.34.

203    As from the time LKPL commenced trading, Mr Lipman and Mr Karas ran it in a consensus fashion, such that neither of them would make a decision on behalf of LKPL on any matter of importance to the company without first obtaining the other’s agreement to the decision. In principle, that remained the position until 2020, although it became increasingly fraught from about 2019.

204    As from the time LKPL commenced practice, Mr Lipman and Mr Karas agreed that they would share in the profits of LKPL equally which would be through their respective shareholding entities.

205    I deal with the profit-sharing and financial arrangements in detail later in these reasons.

206    As part of running their specialist litigation practice, between 2004 and 2009, Mr Karas spent a considerable amount of time working on a substantial litigation matter being run in Hong Kong, in relation to the collapse of the company known as Akai Holdings Limited (Akai proceedings).

207    The liquidator who brought the Akai proceedings was Mr Nick Hill of RSM Nelson Wheeler, Hong Kong. One of the people working with RSM Nelson Wheeler was Mr Cosimo Borrelli, whom Mr Lipman and Mr Karas had known previously whilst he was working on the Bell Litigation. Following an approach from Mr Borrelli to both Mr Karas and Mr Lipman, ultimately the Akai proceedings were funded by Dr Reijtenbagh.

208    LKPL had no office space of its own in Hong Kong from which it could work, and when lawyers from Lipman Karas were in Hong Kong, they worked primarily from the offices of RSM Nelson Wheeler. At that time, because of regulatory reasons governing the practice of law in Hong Kong, it was not possible for LKPL to open an office in Hong Kong practicing Hong Kong law.

209    LKPL employees who were working in Hong Kong from time to time and providing assistance in the Akai proceedings had no permanent office accommodation from which they could work.

210    Various Hong Kong firms had been retained by the Akai liquidators. Since LKPL was not a Hong Kong law firm it could not give advice on Hong Kong law and its lawyers could not appear in Hong Kong courts. Consequently, the role played by LKPL lawyers, when acting for the Akai liquidators between 2004 and 2009, was to provide what Mr Karas referred to as back-office resources and consulting services to the Akai liquidators and their staff, as well as the partners and staff of the various Hong Kong law firms retained by those liquidators.

211    Mr Lipman estimated that commencing from 2004, he spent about 10% of his time working in Hong Kong on the Akai proceedings and Mr Karas about 20% of his time. There is a slight difference in timing between Mr Karas and Mr Lipman, but nothing turns on that.

212    Mr Karas spent an increasing amount of time in Hong Kong working with Mr Borrelli, Hong Kong law firms, and lawyers in other jurisdictions on the Akai litigation.

213    In September 2006, Mr Borrelli together with a colleague, Ms Jacqueline Walsh, commenced their own insolvency and restructuring practice in Hong Kong known as Borrelli Walsh.

214    In 2006, LKPL sublet space from Borrelli Walsh to provide an area out of which its employees, as well as Mr Karas and Mr Lipman, could work providing assistance in the Akai proceedings. That subletting arrangement was described by Mr Karas in an email to the “LK Team” sent 10 September 2006, which I assume was to LKPL solicitors generally, that the taking of space in the offices of Borrelli Walsh represented a large commitment on LKPL’s part, “to the advancement and growth of our international practice”: JTB 1/3.

215    In late 2006, Mr Lipman was aware of a number of large audit negligence claims in Hong Kong. That was the type of litigation in which LKPL, Mr Borrelli and other insolvency practitioners specialised, and it was litigation which Dr Reijtenbagh was interested in funding. It was those factors, together with Mr Karas’ interest in that type of international work, and his willingness to relocate to Hong Kong, together with Mr Lipman’s interest in international litigation, that was the genesis of what I find was the mutual intention of Mr Lipman and Mr Karas to expand LKPL’s practice into Hong Kong as a first step in establishing an international practice.

216    There were, of course, regulatory requirements in order to practice in Hong Kong, but subject to dealing with those, the clear intention of Mr Lipman and Mr Karas was to establish an office in Hong Kong, in whatever form was required.

217    That approach was consistent with the discussions between Mr Lipman and Mr Karas as early as 2002, when they had discussed setting up a specialist litigation practice with an international focus.

218    Mr Karas was interested in working in Hong Kong, more so than in Adelaide, because of the international opportunities it presented. Mr Lipman, whilst aware of the financial opportunities Hong Kong presented, was not interested in relocating to Hong Kong, but supported the idea of LKPL establishing a practice in Hong Kong.

Establishing a practice in Hong Kong: 2008 – 2009

219    The Akai litigation presented to Mr Lipman and Mr Karas the opportunity to develop a practice in Hong Kong, and in 2008 Mr Karas and Mr Lipman decided to establish a Lipman Karas practice in Hong Kong.

220    The Akai litigation settled in 2009.

221    Earlier in 2008, Mr Lipman and Mr Karas had considered the idea of setting up one integrated firm in Hong Kong funded by LKPL, subject of course to the regulatory regime in Hong Kong. On 6 January 2008, Mr Karas exchanged emails with Mr Christopher Dobby, a solicitor in Hong Kong, with whom Mr Karas had worked on the Akai litigation: JTB 1/7/25.

222    In that email, Mr Karas referred to the concept of a Hong Kong office for LKPL with it being one integrated firm with Australia.

223    In order to be able to practice law in Hong Kong, it was necessary for a legal practitioner to be admitted as a Hong Kong lawyer which involved sitting an overseas lawyers qualification exam.

224    In April 2008, Mr Karas announced to LKPL that Mr Tim Kentish, an employee of LKPL, would be moving to Hong Kong to establish, “a permanent and formal presence for [LKPL] in Hong Kong: exhibit A1; JTB 1/11/30.

225    In November 2008, LKPL engaged a Hong Kong firm of solicitors, Tanner de Witt (TDW), to provide advice with respect to the Hong Kong regulatory requirements relating to establishing a legal practice in Hong Kong. The instructions given to TDW were given by Mr Karas on behalf of LKPL. Mr Eddie Look of TDW (copying in Mr Nicholas Chan of TDW) provided initial advice by way of email to Mr Karas sent 14 November 2008 with the subject line, “Legal Presence in Hong Kong” (TDW’s initial advice): JTB 1/20/60.

226    The shared view of Mr Lipman and Mr Karas is reflected in the instructions to TDW and are recorded in TDW’s initial advice in the “background” section of the letter. That section records that LKPL is interested in establishing a legal presence in Hong Kong and that LKPL’s objectives included LKPL operating in Australia and Hong Kong as one integrated partnership.

227    Mr Look explained that if Mr Karas or Mr Kentish qualified to practice law in Hong Kong, one or both of them could seek a waiver of s 6 of the Legal Practitioners Ordinance (2 years supervised practice) from the Law Society which would allow them to practice as solicitors in Hong Kong on their own account or in partnership. Mr Look advised that immediately upon qualification, after such waivers were sought, a new Hong Kong firm could be established for the purposes of practising Hong Kong law, though only using the name(s) of one or more solicitors who were partners of the firm, such that if Mr Lipman was not qualified as a Hong Kong solicitor, the firm could not use the word ‘Lipman’ in its name.

228    Mr Look advised that a foreign law firm, not practicing Hong Kong law, could be established in Hong Kong as a separate entity to any new Hong Kong firm established to practice Hong Kong law, with separate income, expenditure, assets and liabilities. He continued that to bridge that separation, if LKPL wished to practice Hong Kong law under the name ‘Lipman Karas’, a first step was for the new foreign firm to apply to the Law Society to register its ‘Association’ with a local firm in Hong Kong. TDW’s initial letter of advice continued:

Registering Lipman Karas as a foreign law firm

9    If at some stage in the future, LK wishes to practise Hong Kong law under “Lipman Karas” under one integrated partnership, then LK would need to initially register itself as a foreign law firm in Hong Kong.

10    LK may submit an application for registration as a foreign law firm if all partner(s) who intend to practise in Hong Kong are foreign lawyer(s) and the firm intends to have within 2 months after registration, a place of business in Hong Kong for the purpose of practising foreign law. A fee of HK$ 35,000.00 will be payable to the Law Society for registration. If the firm fails to establish a place of business in Hong Kong within 2 months after its registration, the Law Society may cancel the registration.

11    Section 50B of the Legal Practitioners Ordinance provides for certain offences in relation to foreign lawyers, foreign firms and association. It provides, inter alia, that a foreign lawyer or foreign firm shall not take a Hong Kong solicitor into partnership or employ a Hong Kong solicitor. As a result, all the lawyers in the foreign firm must be registered foreign lawyers, who are not permitted to practise Hong Kong laws. Registering as a foreign lawyer is different from applying for admission as a Hong Kong solicitor. If you would like us to advise further on registration as a foreign lawyer, please let me know.

12    Unlike the Hong Kong firm, the registered foreign law firm can pursuant to section 4 of the Foreign Lawyers Practice Rules practise in the name of “Lipman Karas”.

13    After the name “Lipman Karas” has been used in Hong Kong for at least 3 years, then a firm practising Hong Kong law could after such time practise under this name even if Mr Lipman is not qualified to practice in Hong Kong.

14    At this time, there are no specific rules of the Law Society to govern international partnerships and conceivably, if the rules and practices do not change in 3 years time, then the partnerships can operate as 1 partnership under “Lipman Karas” practising in Australia and Hong Kong.

(emphasis provided)

Relationship in the first 3 years

15    If the New HK Firm can be established and if LK registers in Hong Kong as a foreign law firm, then these are 2 separate partnerships having their separate income, expenditure, assets and liabilities.

16    The separateness of the New HK Firm and LK can be bridged by the concept of association, permitted under section 39C of the Legal Practitioners Ordinance. Under this section, the Law Society may register as an “Association” a Hong Kong firm and a foreign firm if they have, or intend to have within 2 months after the registration, an agreement under which fees, profits, premises, management or employees are shared between the Hong Kong firm and the foreign firm (“Fee Sharing Agreement”). Such agreement may be subject to the review and approval of the Law Society. Where the two firms fail to enter into an agreement within 2 months, the Law Society may cancel the Association’s registration. A fee of HK$ 15,000.00 will be payable to the Law Society for the association.

17    Please note that after registration as an Association, only the Hong Kong firm can practise Hong Kong law and the number of foreign lawyers of LK in Hong Kong cannot exceed the number of Hong Kong lawyers in the New HK Firm.

18    If an Association is established between LK and the New HK Firm, then the 2 separate partnerships could contractually reorganise their financial affairs so as to mimic an integrated partnership.

(emphasis provided)

Options

19    To meet the primary objective of practising Hong Kong law and assuming that at least one of you or Tim [Kentish] qualifies in Hong Kong and can obtain a waiver of the restriction to practise as sole partner or in partnership on either Hong Kong practising certificate, then a new Hong Kong firm could be established under the name(s) of the relevant qualified person(s).

20    In addition, if the idea is that the New HK Firm will from a financial perspective be part of the LK partnership, then LK would need to register itself as a foreign law firm and enter into an Association with the New HK Firm so as to share fees, profits, premises, management and/or employees, as permitted by the laws and regulations.

21    It should be emphasized that under the Association, LK and the New HK Firm will be 2 separate and independent partnerships, save for the Fee Sharing Agreement.

22    After a period of 3 years as a registered foreign law firm, LK and New HK Firm can operate as 1 partnership and this integrated partnership could then use the name Lipman Karas.

…

(emphasis and square brackets provided)

229    Mr Lipman considered that the advice from TDW, relating to LKPL itself registering as a foreign firm in Hong Kong, could be satisfied by Mr Kentish setting up LKPL to practice foreign law in Hong Kong as a sole proprietor and as an agent for LKPL.

230    In a subsequent email from Mr Look to Mr Karas sent 13 March 2009, Mr Look advised in relation to setting up a firm to be known as Lipman Karas: JTB 1/45/114.

Setting up a Hong Kong law firm practising Hong Kong law under the name of Lipman Karas

1.    To establish a Hong Kong law firm practising Hong Kong law under the name of Lipman Karas, you would first have to register a foreign law firm (the “Foreign Law Firm”) under the name of “Lipman Karas” practising in Hong Kong the law of Australia.

2.    You are correct that all lawyers of the Foreign Law Firm must be registered foreign lawyers. The Foreign Law Firm is precluded from employing or taking Hong Kong solicitors. Hong Kong solicitors mean qualified Hong Kong solicitors with a practising certificate.

3.    If the idea is only for yourself and Tim (and no other partner) to work in Hong Kong, you may consider having Tim defer his application for a practising certificate. Tim may then register as a foreign lawyer to oversee the Foreign Law Firm. This does not affect Tim’s admission to the Hong Kong High Court and in the future, he may apply for a practising certificate when he wishes to practise as a Hong Kong solicitor.

4.    Alternatively, if both yourself and Tim are to work as Hong Kong solicitors (advising on Hong Kong law), you will have to arrange for a foreign lawyer to be registered in Hong Kong and to be the principal of the Foreign Law Firm.

5.    As a principal, he has to ordinarily reside in Hong Kong. He must ensure that the Foreign Law Firm is and can reasonably be seen to be properly supervised in accordance with the minimum standards referred to in our previous email.

6.    Three years immediately after the establishment of this Foreign Law Firm, a firm practising Hong Kong law (“LK Hong Kong”) can be established under the name of “Lipman Karas” (as a branch of Lipman Karas Australia) provided that:-

(i)    at least one of the principals of LK Hong Kong is a partner in Lipman Karas Australia; and

(ii)    one of the principals of LK Hong Kong had, for not less than three years during the five years immediately preceding the establishment of LK Hong Kong, been a partner in, or a consultant to, or employed by, the Foreign Law Firm or Lipman Karas Australia.

7.    Before one may be eligible to be the principal of LK Hong Kong, the above requirements would have to be satisfied, namely this person (i) is a partner of Lipman Karas Australia and (ii) had been a partner in the Foreign Law Firm or Lipman Karas Australia for not less than three years during the five years immediately preceding the establishment of LK Hong Kong.

8.    In addition, we are informed by the Law Society that the Foreign Law Firm would need to be closed before the establishment of LK Hong Kong. The reason is that Lipman Karas cannot practise in Hong Kong as a Hong Kong law firm and a foreign law firm at the same time.

…

14.    At the appropriate time, you may consider dissolving the New HK Firm or merging it with the partnership of LK Hong Kong, subject to the Law Society’s approval.

(emphasis provided)

Application to your Circumstances

15.    Applying the above rules to your circumstances and if the intention is for yourself and Tim (and no other partner) to be relocated to Hong Kong, you may consider as follows, bearing in mind that this is an example and also the reference to you could have been to Tim:-

a.    you become admitted to practise in Hong Kong and obtain a practising certificate to practise Hong Kong law. You will then become the sole practitioner of the New HK Firm perhaps under the name of “Karas & Co” or other combinations of your name. We understand from the Law Society that currently they do not have any restrictions as to whether you continue to be a partner of Lipman Karas Australia so long as you do not become a registered foreign lawyer in Hong Kong practising the laws of Australia.

b.    Tim becomes admitted to practise in Hong Kong but does not obtain a practising certificate to practise Hong Kong law. Tim then registers as a foreign lawyer and establishes the Foreign Law Firm which practises foreign laws (and not Hong Kong laws) only;

c.    Three years after the Foreign Law Firm has operated in Hong Kong, Tim then obtains a practising certificate and becomes a partner in LK Hong Kong and you will at that same time join LK Hong Kong as a partner and the New HK Firm will then close at that time;

d.    During the three years, “Karas & Co” could enter into an association with the Foreign Law Firm so that you could enjoy the fruits of the partnership as if Karas & Co was part of the whole partnership.

(emphasis provided)

231    TDW’s emails sent on 14 November 2008 and 13 March 2009 are important documents for a number of reasons. First, the separateness of the two firms, “can be bridged by the concept of association”. Under that scenario, the Law Society may register an “association” between a foreign firm and a local firm pursuant to which fees, profits, premises, management and employees are shared between the two firms. Under those circumstances, the two firms can contractually arrange their financial affairs so as to, “mimic an integrated partnership”.

232    Second, three years immediately after the establishment of the foreign firm, a firm bearing the name ‘Lipman Karas’ can be established practising Hong Kong law (as a branch of LKPL) provided:

(a)    At least one of the principals of [LKHK] is a partner in [LKPL]; and

(b)    One of the principals of [LKHK] had, for not less than three years during the five years immediately preceding the establishment of [LKHK], been a partner in, or a consultant to, or employed by, the foreign law firm or [LKPL].

233    Third, at the appropriate time, the new local firm may merge with the foreign firm, or the new local firm may be dissolved and a new firm practising Hong Kong law established (i.e. LKHK).

234    Fourth, during the three-year period of association, the foreign firm and the new local firm, “… can enjoy the fruits of the partnership as if [the new local firm] was part of the whole partnership”.

235    Both Mr Lipman and Mr Karas acted on the advice from TDW and carried into effect a structure that was in conformity with the Hong Kong regulatory requirements as advised by TDW: T 1157.27-1157.31.

236    At this point, it is convenient to deal with part of Mr Ma’s evidence about the Hong Kong regulatory regime.

237    Mr Ma prepared a report dated 9 November 2023 in which he answered a number of questions posed to him concerning the regulatory regime for legal practice in Hong Kong: exhibit R83.

238    Mr Ma observed that r 4 of the Solicitors’ Practice Rules contained a prohibition against a Hong Kong solicitor sharing profits with any person who is not a solicitor qualified to practise in Hong Kong. An exception to the prohibition in r 4 is contained in r 4(c):

4.    A solicitor shall not share or agree to share with any person not being a solicitor practising in Hong Kong whether by way of paying or arrange to pay a commission on business introduced by any such person not being a solicitor, or otherwise:

Provided that:

(a)    …

…

(c)    a solicitor whose firm is a party to an Association may share fees and profits with the Foreign Firm or firms in that Association.

(references omitted)

239    Mr Ma also observed that r 6 of the Solicitors’ Practice Rules provides:

The Council shall have power to waive in writing any of the provisions of these rules in any particular case or cases, either unconditionally or subject to such conditions as the Council may think fit to impose.

240    Mr Ma referred to the Hong Kong Solicitors’ Guide to Professional Conduct which provided in Chapter 4, Principle 4.16, Commentary 3:

1.    The Society is aware that some Hong Kong firms wish to share profits with their parent firms (or other firms with which they have an association) in overseas jurisdictions.

2.    The effect of rule 4 of the Solicitors’ Practice Rules (Cap 159 sub. leg.H) (“the Rules”) is a Hong Kong solicitor may not share profits with any unqualified persons, with certain specified exceptions.

3.    Pursuant to rule 6 of the Rules, the Council has the power to waive any of the provisions of Rules in any particular case either unconditionally or subject to such conditions as the Council may think fit impose.

4.    Accordingly, members who wish to share profits with lawyers practising overseas must apply for a waiver of rule 4. Applications should contain all relevant information and will be dealt with on a case-by-case basis by the Consents Committee. The fee for such application is $4,000.

241    Mr Ma accepted that given the exception in r 4(c) related to an “Association”, the contemplation of a waiver of r 4 in paragraphs 3 and 4 was referring to something outside of an Association between a registered Foreign Firm and a Hong Kong firm: T 1848.35-1848.38.

242    Mr Ma also accepted that under r 2A of the Solicitors’ Practice Rules, an exception to the rule that the name of a firm must be solely of the name or names of one or more solicitors who are principals of the firm was, relevantly, prescribed in r 2A, specifically r 2A(2)(b):

2A. Name of Firm

(1)    Subject to subrule (2), the name of a firm shall consist solely of the name or names of one or more solicitors who are principals of the firm.

(2)    Subrule (1) shall not preclude –

(a)    the use of the name of a predecessor or former partner in that practice;

(b)    in the case of a firm (Hong Kong firm) that is established as a branch of a firm that is carrying on the business of practising the law in a foreign jurisdiction (overseas firm), the use of the name of the overseas firm if –

(i)    for the period of 5 years immediately preceding the establishing of the Hong Kong firm, there had been a foreign firm of the same name practicing or advising on the law of a foreign jurisdiction;

(ii)    at least one of the principals of the Hong Kong firm is a partner in the overseas firm; and

(iii)    one of the principals of the Hong Kong firm had, for not less than 3 years during the 5 years immediately preceding the establishing of the firm, been a partner in, or a consultant to, or employed by, the foreign firm referred to in subparagraph (i) or the overseas firm; or

(c)    the use of a firm name –

(i)    in use at the date of the coming into operation of this rule; or

(ii)    approved in writing by the Council.

…

243    Mr Ma agreed that r 2A allows a Hong Kong firm to be established as a branch of a firm which is carrying on business of the practice of law in a foreign jurisdiction using the name of the overseas firm. He observed that there are number of firms in Hong Kong from the United Kingdom, the United States and Australia which operate in that manner: T 1852.20-1852.35.

244    On the basis of Mr Ma’s evidence, which I accept, the effect of the regulatory regime in Hong Kong is that it is only permissible for a solicitor admitted in Hong Kong to practice Hong Kong law. However, with the benefit of a waiver of r 4 of the Solicitors’ Practice Rules, and subject to one qualification, that does not prevent a Hong Kong solicitor or firm practising Hong Kong law operating as a branch of an overseas firm under the name of that overseas firm and sharing profits with the principals of that overseas firm. That is subject to the other prerequisites identified by Mr Ma being satisfied.

245    The qualification to which I have referred above, is that an unqualified person (from a Hong Kong perspective) whether admitted as an overseas solicitor or not, is unable to practice Hong Kong law either directly or by instructing a Hong Kong solicitor, such that the Hong Kong solicitor is no more than an agent of that unqualified person: T 1856.11-1856.23; T 1859.21-1859.30.

246    Mr Ma agreed that in the context of a partnership in which a Hong Kong solicitor is a partner in an overseas firm and thereby subject to direction from the overseas partners, there is no transgression of the regulatory regime in Hong Kong. In cross-examination, Mr Ma said: T 1860.5-1861.14:

Q:    … do you agree that it follows that provided you don’t transgress in relation to the control over legal services, which are set out in the ordinance and you’ve just, I think, described, the fact that you are a partner in an overseas firm means that you are subjected to a level of direction from your partners, provided, as I say, it’s not transgressing into the control over legal services?

A:    Well, you are obviously under the control of the – your partners in relation to the overseas firm, but you make an important proviso, which is that as – but as long as the practice of the Hong Kong firm isn’t directed or somehow influenced by your overseas partners who are not registered or qualified in Hong Kong.

Q:    And is the essence of that answer really directed towards the provision of legal services not being subjected to any control in contradistinction to the type of financial or administrative or budgetary matters that you described a little earlier?

A:    That’s right. It is about the provision of legal services within Hong Kong. I mean, administrative matters such as whom you would like to hire, how much rent you want to pay for premises in town – these are not the provision of – these don’t come within the umbrella of the provision of legal services.

Q:     And insofar as, for example, a partnership deed of an English parent firm said that each partner is the agent for their other partners, that would not be impermissible provided that it didn’t permit interference with the provision of legal services?

A:    Yes, I think that probably is right.

…

Q:    … If there is, for example, an injection of equity into a Hong Kong firm so as to enable a Hong Kong firm to acquire fixtures and fittings, there would be no difficulty with the Hong Kong firm owning those fixtures and fittings subject to an equitable interest in them being held by the overseas firm. Do you agree?

A:    I – I – I tend to agree. These just sound like administrative matters to me.

Q:    So is the delineation, really, provided that the Hong Kong practitioners are free to do in the practice of law that which sits with their rights and entitlements as the only qualified people, there is no difficulties with the overseas firm relationship as long as financially it falls within any waiver of profits?

A:    That is right. You – you – you put it on the basis as long as the Hong Kong lawyers are, in other words, left alone. The other way of putting it as long as the overseas people – the unqualified people don’t have any influence over the way the legal practice is run in Hong Kong or the provision of legal services; in other words, the – the delineation that you’ve referred to.

247    In relation to a partnership relationship, Mr Ma confirmed in cross-examination that provided the overseas partners does not control or interfere with the professional responsibilities of the Hong Kong partner as a qualified person (i.e. the actual provision of legal advice), that is a permissible relationship. Further, provided there is a r 4 waiver, there is no constraint upon a Hong Kong solicitor sharing profits with an overseas partner: T 1861.26-1961.38.

248    As to bodies corporate, Mr Ma confirmed in cross-examination that a body corporate cannot provide legal services in Hong Kong. However, there is no restriction on a Hong Kong solicitor having a financial relationship with an overseas firm which is an incorporated legal practice, as long as the company does not provide legal services in Hong Kong: T 1862.5-1862.16.

249    I accept Mr Ma’s evidence and deal further with the application of the regulatory regime in Hong Kong to the facts of this matter later in these reasons.

250    Returning to TDW’s advice, in cross-examination, Mr Karas was unable to recall anything beyond that which was in the two emails to which I have referred. Mr Karas’ lack of recall extended to not recalling whether in November 2008, he had a priority and objective of creating a structure whereby LKPL would operate in Australia and Hong Kong as one integrated partnership: T 1158.13-33. Mr Karas denied the Foreign Firm was set up by LKPL in Hong Kong with an aim to operating in Australia and Hong Kong as one integrated partnership that could be achieved upon expiry of the three-year period, on the basis that he did not think it is possible to achieve an integrated partnership in Hong Kong: T 1159.5-1159.9.

251    By that evidence, I understood Mr Karas to mean that Mr Lipman could not be a partner in LKHK. That is so, but it is possible to share profits with overseas principals with the appropriate waiver.

252    TDW’s advice was that a structure could be put in place whereby after 3 years, the Foreign Firm and Karas Lawyers could combine with LKPL and operate as one integrated firm.

253    I do not accept Mr Karas’ evidence concerning the intention in setting up the Foreign Firm. It is clear to me, and I find, that Mr Lipman and Mr Karas, through LKPL, established the Foreign Firm in Hong Kong and the Association Agreement between the Foreign Firm and Karas Lawyers was entered into for one purpose - which was to financially integrate the Foreign Firm and Karas Lawyers before merging the two firms after 3 years. At that time, one integrated firm was created comprising LKPL in Australia and LKHK as its branch in Hong Kong with Mr Karas as the resident principal in Hong Kong.

254    I accept that because of the Hong Kong regulatory regime, the concept of an integrated partnership was not possible given that LKPL was an incorporated body and Mr Karas and Mr Lipman were directors and shareholders.

255    Conceptually, there is a difficulty with one integrated partnership given Mr Karas and Mr Lipman were not partners in LKPL but directors and shareholders.

256    So too, LKPL was not a creature of a partnership, although I accept, absent the Hong Kong regulatory regime, there could be a partnership between Mr Karas and LKPL.

257    Accordingly, I find that the intention of LKPL, through Mr Karas and Mr Lipman, was to establish LKHK as a branch of LKPL, such that there was one integrated firm which shared profits and administrative, marketing and other non-legal services. That was subject to LKHK obtaining a waiver of r 4 of the Hong Kong Solicitors Practice Rules.

258    The key point is that there is no restriction for a Hong Kong solicitor to have a financial relationship, including the sharing of profits, with an overseas firm which is an incorporated legal practice, as long as the company does not provide legal services in Hong Kong: T 1862.5-1862.16.

259    I have referred to Karas Lawyers and the Foreign Firm merging. LKHK was established, in effect, either by the dissolution of both Karas Lawyers and the Foreign Firm and the subsequent establishment of LKHK, or by the merger of Karas Lawyers and the Foreign Firm. Nothing turns on the difference.

Mr Karas’ admission to practice in Hong Kong and his involvement in Hong Kong litigation prior to his admission

260    Both Mr Karas and Mr Kentish sat the overseas lawyers qualification exam in October 2008 and were notified in February 2009 that each had passed. Both were admitted as Hong Kong solicitors in July 2009.

261    Admission as a Hong Kong practitioner also required the applicant to satisfy a 3-month residency requirement, required by s 4(1A) of the Legal Practitioners Ordinance.

262    In order to fulfil this requirement, Mr Karas represented to the Law Society that he was employed by Borrelli Walsh: T 1126.1-1126.5.

263    On 17 April 2009, Mr Karas submitted to the Law Society and the Immigration Department of Hong Kong an undertaking that if granted permission to work in Hong Kong with Borrelli Walsh, he would neither offer his services to the public as a practitioner of foreign law, nor act as a Hong Kong solicitor: exhibit A65; T 1138.30-1138.34.

264    In cross-examination, Mr Karas agreed that he understood that he was making the undertaking in order to expedite the Law Society’s approval of his application for admission pursuant to s 4 of the Legal Practitioners Ordinance: T 1138.26-1138.28.

265    On 20 April 2009, Borelli Walsh offered employment to Mr Karas.

266    On 24 April 2009, Mr Karas forwarded to Mr Kelvin Fung, of the registration section of the Law Society, the signed letter of employment from Borrelli Walsh: exhibit A62; T 1127.4-1127.44.

267    In the covering letter, Mr Karas advises Mr Fung that he proposes to commence employment with Borrelli Walsh in Hong Kong on 1 July 2009.

268    Amongst other things, the letter from Borelli Walsh offers Mr Karas a position as senior manager commencing on 1 July 2009 (or later, depending on the Immigration Department of Hong Kong issuing a work visa) (cl 2); at a salary of HK$135,000 gross per month (cl 3); with a probation period of three months (cl 7); an obligation to devote his whole time and attention to the service of Borrelli Walsh and not to engage in other employment, consultancy or other business activity unless written permission is obtained from a director of Borrelli Walsh prior to commencing such activity (cl 10).

269    There is a relationship between obtaining a working visa from the Immigration Department of Hong Kong and the requirements both of the Legal Practitioners Ordinance and the Law Society in the sense that it was the proof of satisfaction of employment that sustained the working visa. In turn, that allowed Mr Karas to satisfy the regulatory requirement that he had resided in Hong Kong for at least three months immediately before his admission, and intended to reside in Hong Kong for at least three months immediately after admission: Legal Practitioners Ordinance s 4(1A)(a),(b); T 1134 .18-22.

270    Mr Karas maintained in cross-examination that he was employed as senior manager at Borrelli Walsh, yet he declared no income from Borrelli Walsh: T 1130.12-1130.20. He disagreed that he was the instigator of the offer of employment and further disagreed with the notion that he “procured” the letter of employment from Borrelli Walsh: T 1127.32.

271    Mr Karas disagreed with the proposition that, when he was seeking a letter of employment for the purposes of obtaining a working visa in Hong Kong, he never intended to be employed by Borrelli Walsh: T-1135.34-1135.37. He agreed that, by the letter of employment, he was getting a working visa to satisfy the Law Society that he could remain in the jurisdiction permissibly for at least three months, thereby satisfying the requirements of the Immigration Department: T-1135.39-1135.45.

272    On 29 May 2009, the Immigration Department of Hong Kong transmitted to Borrelli Walsh a notice of the grant of a visa for Mr Karas in connection with Borrelli Walsh’s sponsorship: exhibit A63; T 1136.8-1136.11.

273    Mr Karas was cross-examined about having led or managed litigation in Hong Kong when he was not yet admitted to practise law in Hong Kong: T 1092.23-1095.14.

274    Mr Karas’ evidence with respect to what he was doing in the period from July 2009 and following was that, “I continued to have the role that I had previously”. He said that his “activity as a Hong Kong solicitor was incremental over time”: T 1138.36-1138.42.

275    Mr Karas said in evidence that he did not act as a Hong Kong solicitor, either prior to 1 July 2009 or for the three months post-July 2009: T 1139.41-1139.43. He agreed that prior to 1 July 2009 and for three months after 1 July 2009, the style of work he was doing for Akai’s liquidators would meet his description of support or back-office work: T 1139.45-1139.47. He said that prior to 1 July 2009, he was an Australian solicitor with no status in Hong Kong: T 1140.7-1140.13.

276    Mr Karas accepted that his undertaking to the Law Society was that during the currency of Mr Karas’ three-month work visa, he would neither act as a Hong Kong solicitor nor offer any services to the public concerning his foreign jurisdiction of South Australia: T 1140.20-1140.24.

277    In response to the proposition that he was practising foreign law during the currency of the undertaking he had given to the Law Society, Mr Karas said, “I don’t believe so”. The cross-examination continued: T-1141.10-1141.12.

Q:    At the very least, you were practising law, whether it be Hong Kong law or foreign law, for Borrelli Walsh for in excess of 300 hours for the month of July 2009?

A:    I disagree. I was doing what I’ve described in paragraphs 33 and 46 of my affidavit.

278    In those paragraphs, Mr Karas deposes that LKPL was providing “support and assistance” in the nature of back of office resources and consulting services to the Akai Liquidators.

279    In fact, Mr Karas received no salary from Borrelli Walsh. As an Australian resident for tax purposes, Mr Karas declared no income from Borrelli Walsh in his Australian tax return for the financial year ended 30 June 2010. Under cross-examination, Mr Karas referred to an apartment where he lived in Hong Kong as being provided by Borrelli Walsh and in effect suggested, when pressed, that it was the apartment which was provided for him as payment for his employment by Borrelli Walsh during the three-month period: T 1128.13-1128.18; T 1130.1-1130.9; exhibit A1; JTB 3/271/920. That was not declared in his tax return either.

280    Mr Karas disagreed that he considered the most expedient way of satisfying the requirements of the Legal Practitioners Ordinance and the regulatory requirements of the Law Society in relation to residence was to obtain an offer of employment from Borrelli Walsh: T 1127.44-1128.2.

281    When pressed further as to whether he was, in fact, employed by Borrelli Walsh as a senior manager, he replied, “I believe so”, before answering when pressed still further, “yes”: T 1128.35-1128.41.

282    I do not accept that evidence. There is no doubt that Mr Karas did not receive any salary from Borrelli Walsh. Mr Karas’ suggestion that he received accommodation in lieu of salary is not supported by any document, and indeed is contrary to what is stated in Mr Karas’ purported contract of employment with Borrelli Walsh dated 20 April 2009, which specifies a salary of HK$135,000 gross per month: exhibit A62. The suggestion of accommodation in lieu of salary is a recent invention.

283    Still further, at the same time as he was purportedly employed by Borrelli Walsh, he was also a director of LKPL charging for work done in his capacity as a legal practitioner working on the Akai litigation. That was so, notwithstanding the purported employment contract provided at cl 10 that Mr Karas was to devote his, “whole time and attention to the service of the firm and shall not engage in any other appointment consultancy or business activity unless written permission is obtained from a director of the company prior to commencing such activity”. No written permission was tendered in evidence or otherwise referred to.

284    Again, when pressed in cross-examination, he was unable to reconcile being employed full-time by Borrelli Walsh whilst at the same time working with LKPL on the Akai litigation and rendering accounts for professional fees to his purported employer.

285    Further, the narrative to a fee note from LKPL to Borrelli Walsh dated 6 August 2009 for work done on the Akai matter during July 2009 reveals clearly that legal work was being done on the matter by LKPL lawyers, including Mr Karas, whilst he was resident in Hong Kong in July 2009. That fee note records Mr Karas performing work on the Akai litigation for 264 hours during the period 1 - 31 July 2009: exhibit A3; SJTB 105/9299/68133.

286    I am not satisfied that Mr Karas was employed by Borelli Walsh.

287    I find that Mr Karas’ purported employment as a senior manager at Borrelli Walsh from 1 July 2009 was directed at obtaining a visa from the Immigration Department to live and work in Hong Kong and in so doing, provided an expedient way of satisfying the requirements of s 4(1A) of the Legal Practitioners Ordinance and the Law Society’s requirements for the issue of a practising certificate.

288    My concern lies not simply for the obvious reason that Mr Karas made the application to the Law Society, which was copied to the Immigration Department in Hong Kong, on the basis of a purported contract of employment, which neither party had an intention of implementing, but that in the application to the Law Society, he proffered an undertaking that he would not offer his services to the public as a practitioner of foreign law or act as a Hong Kong solicitor. Nonetheless, it is apparent from LKPL’s fee notes that in July 2009, at the very least, he was offering his services to the public (Borrelli Walsh) as a practitioner of foreign law.

289    Mr Karas’ conduct on proffering an undertaking is of great concern when it is evident he did not comply with it. That conduct demonstrates not only a disdain for regulatory requirements, save for those which are most obvious, such as obtaining a practising certificate, but a preparedness to give and breach an undertaking for the sole purpose of achieving his objective - which in this case was to keep earning professional fees for LKPL (and thereby benefit personally) as a legal practitioner whilst maintaining he was not offering his services as a practitioner of foreign law in Hong Kong to the public.

290    That conduct was directly contrary to a warning given to Mr Karas by Mr Look in an email sent to Mr Karas on 22 April 2009 (exhibit A64), in which Mr Look said that Mr Karas would need to be watchful to see that he did not engage or be seen as engaging in offering services to the public as a practitioner of foreign law or acting as a Hong Kong solicitor whilst being employed by Borrelli Walsh.

291    In September 2009, Mr Karas sought a waiver of the two-year employment requirement under ss 6(6) and (6A) of the Legal Practitioners Ordinance in order to obtain a practicing certificate in Hong Kong.

292    In cross-examination, Mr Karas was shown an email exchange between himself and Mr Chan, of TDW copying in Mr Look, spanning the period between 2 to 4 September 2009, which Mr Karas said appeared to show that TDW was assisting Mr Karas in demonstrating his experience to the Law Society: exhibit A66; T 1142.30-1148.19. Enclosed with that email is a statutory declaration which had been amended by Mr Karas and which he intended to sign the same day.

293    A call for the signed statutory declaration went unanswered.

294    In the draft statutory declaration, Mr Karas declares at [10(f)] that, “from 1 July 2009 to the present, I have been employed on a full-time basis by Borelli Walsh Limited a Hong Kong company, as a senior manager handling insolvency and restructuring matters.” There is no evidence that was the case, indeed the evidence is to the contrary.

295    Paragraph 10(e) of the draft statutory declaration represents that Mr Karas’ involvement in the practice and management of LKPL has not been substantive nor regular since 1 July 2004. Mr Karas disagreed that [10(e)] was misleading. Clearly, it was.

296    Mr Karas also disagreed with the proposition that he deliberately and consciously misled Mr Chan concerning the role he was playing in LKPL at that time, and further disagreed that his evidence in relation to the statutory declaration was deliberately false. He maintained in his evidence that he was working on a full-time basis for Borrelli Walsh as an employee and said, “I appreciate the work is being charged by Lipman Karas, but I’m physically present in Hong Kong working for Borrelli Walsh”: T 1146.34-1146.35. I do not accept that evidence.

297    Further, Mr Karas disagreed with the proposition that, assuming it was made substantially in the form of the draft in exhibit A66, the statutory declaration was a misleading declaration: T 1147.6-1147.10. I do not accept that if the draft declaration was made substantially in the form of exhibit A66, it was not misleading. Clearly it was, and irrespective of whether the statutory declaration was a draft or not, both [10(e)] and [10(f)] were false and Mr Karas’ denial does him no credit.

Period of association: 2009 – 2012

298    Mr Karas was cross-examined about whether he and Mr Lipman both planned to establish and fully fund a Hong Kong office: T 1108-1111; T 1218-1221.

299    LKPL committed substantial funds to establishing a presence in Hong Kong. In February 2009, Mr Lipman and Mr Karas approved a payment of A$77,500 to be spent on IT infrastructure in setting up a permanent office in Hong Kong (T-1175.29-1175.36), in the second quarter of 2009, a A$1.65 million budget was fixed for an office fit out in Hong Kong: T-1175.35-1175.39.

300    Over the period from December 2008 to November 2009, Mr Lipman and Mr Karas authorised the payment of more than A$88,000 by LKPL for TDW advice: T-1176.30-1176.33. That significant financial assistance can only have been provided in the context of establishing one integrated firm.

301    Nonetheless, when it was put to Mr Karas in cross-examination that LKPL provided financial support to Karas Lawyers in furtherance of the objective of establishing ultimately one integrated partnership, Mr Karas denied the proposition saying, “[N]o, it was Mr Lipman and I as LKPL providing financial support to me as Karas Lawyers”: T 1215.29-1215.30. I do not accept that evidence.

302    Mr Karas contended that LKPL was prepared to underwrite Karas Lawyers to the tune of A$1 million with no guarantee of sharing in its profits, saying that at the time the guarantee/assurance was given, they had no gauge on whether Karas Lawyers/LKHK was going to be successful. He said that the Hong Kong venture was instigated by him and supported by Mr Lipman. He said that it was in Mr Lipman’s interests to support the Hong Kong venture as, if it were successful, there would be indirect financial benefits to Mr Lipman as it would result in work being referred by LKHK to LKPL: T-1241.20-1242.27.

303    I do not accept that evidence for the reasons which follow.

304    The applicants contend that, before 6 November 2009, Mr Lipman and Mr Karas had agreed that Karas Lawyers would share fees and profits with LKPL. Mr Karas disagreed with that proposition.: T 1224.9-1226.3.

305    I do not accept there was to be no sharing of profits. The sharing of profits was the whole basis upon which the establishment of LKPL, Karas Lawyers, the Foreign Firm, and subsequently LKHK proceeded.

306    In cross-examination, when asked whether he and Mr Lipman discussed the advantage of winning work in Hong Kong and performing it in Adelaide because of a differential in charge-out rates and cost of provision of the service, Mr Karas said, “I will accept it was something discussed at this time, but, as I said, - the position and the opportunity evolved over time in the way I’ve described.” The way Mr Karas had described it was that the competitive advantage diminished over time because, “over time [Dr Reijtenbagh’s family] were less prepared to have LKPL exploit that competitive advantage.”: T 1165.4-1165.5.

307    I do not accept that the competitive advantage diminished over time.

308    Whereas there was a cyclical nature to revenue, as one might expect, nonetheless there is no evidence that Dr Reijtenbagh’s family took the view ascribed to them by Mr Karas and the competitive advantage remained as is apparent from the ongoing profitability of the one integrated firm. Further, even if Dr Reijtenbagh’s family took that attitude, clearly there were other litigation funders prepared to fund international project litigation.

309    The model adopted for work being done by LKPL on LKHK matters carried very significant financial benefits to both Mr Lipman and Mr Karas.

310    Further, the contemporaneous documents are consistent with the sharing of profits and the operation of LKPL and LKHK as one integrated firm. In particular, in correspondence from Mr Karas to Mr Li of the Immigration Department in Hong Kong, dated 6 November 2009, Mr Karas states that, “Karas Lawyers will represent the interests of Lipman Karas in Hong Kong and will share fees and profits”.: JTB 2/162/595.

311    The same statement was made in LKPL’s letter to Mr Li, also dated 6 November 2009, signed by Mr Lipman: JTB 2/162/597.

312    I do not accept Mr Karas’ evidence, either in relation to Mr Karas’ denial of the objective of establishing one integrated firm, or “providing support to me as Karas Lawyers”. The clear objective was to establish one integrated firm in whatever form was allowable under the Hong Kong regulatory regime.

313    Nonetheless, Mr Karas maintained that the only purpose of establishing the Foreign Firm was in the hope that in three years’ time LKPL would be able to use a common name; nothing more: T 1193.40-1193.43. He disagreed that his objective as at September 2009 was to merge the Foreign Firm into the local firm that took the name Karas Lawyers in order to trade under one common name and with the merged firms in Hong Kong trading as a branch of LKPL: T 1193.27-1193.47. I do not accept that evidence for the reasons I have set out.

314    Between June and November 2009, LKPL incurred close to AUD$500,000 in relation to establishing a permanent office in Hong Kong which was to be jointly occupied by the Foreign Firm and Karas Lawyers. In October 2009, Mr Karas submitted to TDW a proposed business plan for Karas Lawyers with respect to which TDW provided further advice, including that the full name of the overseas parent firm (i.e. Lipman Karas) should be the registered name of the Foreign Firm in Hong Kong.

315    On 12 October 2009, LKPL through TDW, applied for registration as a foreign law firm in Hong Kong and for the registration of Mr Kentish as a foreign lawyer in Hong Kong: T-1229.39-1229.43.

316    As part of that process, on 19 October 2009, LKPL sent a letter to Karas Lawyers stating that LKPL would “provide all financial support necessary for the establishment and ongoing operations of Karas Lawyers in Hong Kong”. In separate letters to the Immigration Department of Hong Kong sent 6 November 2009 to which I have referred earlier, Mr Lipman confirmed that LKPL would provide the necessary financial support for the ongoing operation of the registered Hong Kong firm, Karas Lawyers, up to at least A$1 million, and Mr Karas confirmed that Karas Lawyers would have sufficient working capital for its business and would represent the interests of Lipman Karas in Hong Kong, sharing fees and profits: T-1223.37-1223.45; JTB 2/162/595, 597.

317    On 17 November 2009, the Law Society notified TDW by letter, first of the approval by the Law Society for the registration of Lipman Karas as a foreign law firm in Hong Kong (JTB 2/190/174) and second, of the approval of the application for registration of an Association between Karas Lawyers and the Foreign Firm pursuant to s 39C of the Legal Practitioners Ordinance: JTB 2/191/676; T 1230.1-1230.9. On 19 November 2009, Lipman Karas was registered as a foreign law firm in Hong Kong pursuant to s 39C of the Legal Practitioners Ordinance: JTB 2/195/682.

318    The Association Agreement between Karas Lawyers and LKPL was executed initially by Mr Kentish for LKPL and Mr Karas for Karas Lawyers. It is dated 23 December 2009: JTB 3/268/912.

319    It is not possible to have an incorporated legal practice in Hong Kong. Since the Association Agreement was entered into between LKPL (the incorporated body) when in fact the Foreign Firm registered in Hong Kong had the name ‘Lipman Karas’ – an unincorporated body - on 2 February 2010 the Law Society wrote to TDW enquiring why the Association Agreement was entered into between LKPL and Mr Karas trading as Karas Lawyers: SJTB 105/9329/08223.

320    In response, on 17 February 2010, the Foreign Firm wrote to the Law Society in which it explained that Lipman Karas Pty Ltd is the name of the head office in Australia and Lipman Karas is the name of the branch office in Hong Kong. The letter enclosed a re-executed copy of the Association Agreement dated 17 February 2010 signed by Mr Kentish for the Foreign Firm in his capacity as the sole proprietor of the Foreign Firm and acting as LKPL’s agent in Hong Kong, and Mr Karas for Karas Lawyers: SJTB 105/9333/68228.

321    On 23 November 2010, LKPL applied in Australia for an Export Market Development Grant: JTB 4/370/1265.

322    That application, to which Mr Karas had input, was signed by LKPL’s then Chief Executive, Mr Tom Russo. In that application, LKPL said:

    Its “Team Members frequently travel internationally to prepare for and advise on trials and hearings in overseas courts …”: (at [5]);

    Jason Karas practices law as a registered Hong Kong law firm in accordance with the [Legal Practitioners] Ordinance under the trading name “Karas Lawyers”. Messrs Karas and Lipman, as the sole equity holders of [LKPL], have agreed that any profit derived by Mr Karas from the undertaking of Karas Lawyer’s Hong Kong business will be taken into account in determining profit distributions from, or capital contributions to, [LKPL]. This is based on the principle that Mr Karas and Mr Lipman will share equally from the profits derived from the [LKPL] legal practice as a whole (that is, all profit derived from [LKPL] [the Foreign Firm] and Karas Lawyers): (at [13]);

    The net profit derived from [LKPL] [the Foreign Firm] and Karas Lawyers are shared equally between the two equity holders, Messrs Lipman and Karas, being Australian residents: at [14]; and

    “For the purposes of this application we therefore submit that [LKPL], [the Foreign Firm] and Karas Lawyers should be treated as a single economic entity and applicant: (at [16]).

(square brackets provided)

323    Under cross-examination, Mr Karas agreed that the description was, at the time, overall a “fair enough description”: T 1282.13.

324    This letter provides a clear insight into how Mr Lipman and Mr Karas considered LKPL, the Foreign Firm and Karas Lawyers operated at the time.

325    When Mr Karas realised the significance of this document, he became evasive. Previously he had said that the sharing of profits was voluntary as between Mr Karas and Mr Lipman whilst they remained friends. I do not accept that to be the case and this letter, written to obtain the benefit of a Commonwealth export grant, is to the contrary.

326    Mr Karas’ evidence must also be seen against the then Hong Kong regulatory regime. If it had been possible to establish LKPL practising Hong Kong law from the very beginning, rather than having to establish Karas Lawyers and the Foreign Firm, I entertain no doubt that would have occurred without the need for the Foreign Firm, the entry into an Association Agreement, and the subsequent merging of the Foreign Firm into Karas Lawyers after three years.

327    I find that Karas Lawyers and the Foreign Firm were established in Hong Kong to comply with regulatory requirements then existing and that the common intention of Mr Lipman and Mr Karas, both as directors of LKPL and as individuals who chose to practice in Australia as an incorporated practice, was to expand LKPL’s practice internationally with the intention of establishing and operating one integrated firm.

328    I find as part of LKPL’s international strategy, Karas Lawyers was established with Mr Karas as a sole principal because that was the only way in which the international strategy could commence in Hong Kong. Mr Karas and Mr Lipman agreed to Mr Karas establishing Karas Lawyers as part of the international strategy and that step, informed by TDW’s advice on the objective of LKPL establishing a practice in Hong Kong, reflected their common intention in developing an international litigation practice.

329    The establishment of Karas Lawyers occurred at the same time as the establishment of the Foreign Firm. The entry into the Association Agreement was for the sole purpose of merging the Foreign Firm into Karas Lawyers after three years, which happened almost to the day. Once that occurred, LKPL could establish a firm with its name – Lipman Karas – in Hong Kong and practising Hong Kong law. That was the second stage of the international strategy insofar as Hong Kong was concerned.

330    In establishing LKHK in this way, LKPL established a branch office in Hong Kong practising Hong Kong law and moved steadily and inexorably towards its objective of establishing an international litigation practice with offices in different jurisdictions but as one integrated firm.

331    The fact that Mr Karas operated LKHK as a sole proprietor because of Hong Kong’s regulatory regime, does not detract from the common intention of Mr Lipman and Mr Karas to develop and grow LKPL to an international practice specialising in the niche market of international corporate insolvency and associated litigation with a presence in Hong Kong which, although part of one integrated firm, had in each jurisdiction (Australia and Hong Kong) a presence which reflected the applicable regulatory requirements.

332    I deal further with Hong Kong’s regulatory regime for legal practice later in these reasons when considering the Karas respondents’ defence of illegality, but it is simply inconceivable that Mr Lipman would expose himself financially (and others closely related to him) to the significant financial risk involved in allowing Mr Karas to pursue an agenda, which Mr Karas would have the Court accept was for his sole benefit. Further, the suggestion put by Mr Karas that the funds of that investment were only to be shared so long as Mr Lipman and Mr Karas remained friends is also unsustainable.

Karas Lawyers becomes Lipman Karas Hong Kong and obtains a profit-sharing waiver

333    On 8 October 2012, each of Karas Lawyers, LKPL and the Foreign Firm sent letters to the Law Society indicating, amongst other things, the intention to restructure the Foreign Firm and Karas Lawyers, with effect from 10 December 2012, on the basis that on 8 December 2012, the Foreign Firm would have been practising as a registered foreign law firm in Hong Kong for three years. The letter stated that from that point in time, it would then be permissible to practice Hong Kong law using the name Lipman Karas: exhibit A1 6/601, 602, 603.

334    The letters were signed by Mr Karas for Karas Lawyers, Mr Lipman for LKPL and Mr Kentish for the Foreign Firm. Mr Karas’ letter of 8 October 2012 enclosed the letter from Mr Lipman addressed to the Law Society.

335    Each of Mr Karas’ letter and Mr Lipman’s letter made reference to an application for a waiver of r 4 of the Hong Kong Solicitors’ Practice Rules to permit profits to be shared with the principals of Lipman Karas’ overseas offices, and that LKHK (previously Karas Lawyers) would be the Hong Kong branch of LKPL.

336    Mr Karas’ letter dated 8 October 2012 is important for a number of reasons.

337    First, it announces the clear intention of Karas lawyers, of which Mr Karas was the principal, to restructure the practice of Karas Lawyers and the Foreign Firm.

338    Second, the restructure would take effect such that Karas Lawyers will change its name to Lipman Karas (i.e. LKHK in these reasons).

339    Third, the Foreign Firm will cease to practice as a Foreign Firm in Hong Kong and LKHK will act as LKPL’s branch in Hong Kong.

340    Fourth, LKHK as the renamed Karas Lawyers, will seek a waiver of the prohibition on profit-sharing contained in r 4 of the Solicitors’ Practice Rules in order to enable the sharing of profits with the overseas officers of Lipman Karas, and that for the purposes of the distribution of profits, operate as a single economic entity.

341    Fifth, Mr Karas enclosed the letter from LKPL which confirmed its consent to the Foreign Firm ceasing practice and Karas Lawyers changing its name to Lipman Karas, “… to operate as the firms’ branch in Hong Kong.”

342    Apart from advising the Law Society that LKHK, as the renamed Karas Lawyers, will act as LKPL’s branch in Hong Kong, Mr Lipman’s letter dated 8 October 2012 supported the application by the then Karas Lawyers (soon to be LKHK) for a waiver of r 4 of the Solicitors’ Practice Rules to permit profits to be shared with the principals of Lipman Karas’ overseas offices. It enclosed LKPL’s cheque for HK$4,000, being the application fee.

343    Notwithstanding the content of his letter dated 8 October 2012, under cross-examination Mr Karas disagreed that the newly named LKHK, following the merging of the Foreign Firm into Karas Lawyers, was to stand as a branch office of LKPL. He disagreed on the basis that such a relationship was “impossible” and that the proposition was wrong: T 1205.12.

344    When taken to his letter dated 8 October 2012, he agreed that his objective in writing that letter was to obtain the approval of the Law Society to merge the foreign law firm into Karas Lawyers, to rename Karas Lawyers as LKHK, and to share profits with LKPL.

345    Nonetheless, he said that he did not recall but, “… [i]t was not my intention, because it is simply … an impossibility under the Hong Kong regulatory regime.” He continued that he did not recall if it was his intention to operate as a single economic entity with the Australian firm but to do so “is an impossibility”: T 1205.7-1205.45:

Q:     And are you resisting the notion that what was intended with Lipman Karas going back to 2012 was that the newly merged Lipman Karas Hong Kong, following the collapse of the foreign firm into Karas Lawyers, was to stand as a branch office of Lipman Karas Proprietary Limited Australia?---

A:     I disagree, because that’s simply impossible. It cannot be.

Q:     Well, can - - -?---

A:     The proposition is wrong.

Q:     Can we turn, then, to tab 601 in volume 6. And might this page be split with the following page. Now, this is a letter that you wrote to the Hong Kong Law Society in October 2012, three years after the foreign firm had been established; correct?---

A:     Correct.

Q:     And your objective in so writing was to obtain Hong Kong Law Society approval to the collapse of the foreign firm, the renaming of Karas Lawyers and the profit waiver; correct?---

A:     Correct.

Q:     And do you see at about point 5 on page 2 of 4, it says:

We enclose with this letter a letter from Lipman Karas’ principal office in Australia which confirms that Lipman Karas Australia consents to the cessation of practice of the firm’s current Hong Kong branch, LKHK, and Karas Lawyers changing its name to Lipman Karas to operate as the firm’s branch in Hong Kong.

?---

A:     Yes, I see that.

Q:     That was your understanding and intention in October 2012, wasn’t it?---

A:     It was my – well, firstly, I don’t recall. It was by reference to rule 2A. Reconstructing, I believe it was my understanding. But it was not my intention, because it is simply – there is reference in rule 2A, your Honour, to the creation of a branch. Rule 2A is dealing with the change of the name. It does not result in the creation of a branch office of the type that I have described, in terms of being a branch of the same company or partnership as the overseas entity. That is simply an impossibility under the Hong Kong regulatory regime.

Q:     Your intention, Mr Karas, was that the newly collapsed Hong Kong firm was to operate as a single economic entity with the Australian firm; correct?---

A:     I don’t recall my intention, but to do so is an impossibility.

346    I do not accept Mr Karas’ evidence. First, it was not an impossibility because it was possible to share profits with overseas principals and second, I do not accept Mr Karas did not recall his intention. This was a key step in Lipman Karas’ objective of establishing itself as an international practice with a focus on international project work.

347    Mr Karas’ evidence that the sharing of profits was “an impossibility” ignores not just the reality of what occurred, which was the sharing of profits generated out of LKHK and LKPL, at least as part of the accounting between Mr Karas and Mr Lipman for what I have found to be the one integrated firm, but is an attempt to erect a barrier to the applicants’ case where none in fact exists.

348    Further, the merging of the Foreign Firm into Karas Lawyers was a strategy adopted by Mr Lipman and Mr Karas as the two directors of LKPL in order to establish LKHK as part of the overall strategy by LKPL to develop an international litigation practice.

349    Still further, a decade later Mr Karas told Mr Gold of MdR, in a strategic plan provided by Mr Karas to Mr Gold in January 2021, that “LKHK evolved initially as a branch of LKPL”: JTB 62/5906/46307.

350    It is for these reasons that I do not accept that Mr Karas did not recall what his intention was. He was the main driver of the international practice strategy in a practical sense and it was a central tenet of that strategy to establish LKPL in different jurisdictions. Hong Kong, as a major financial jurisdiction, was a logical choice given the introduction presented by the Akai litigation.

351    Mr Karas was asked in cross-examination whether in October 2012, his intention was that the newly created Hong Kong firm was to operate as a single economic entity with LKPL. He responded, “I don’t recall my intention, but to do so is an impossibility”: T 1205.45-1205.46.

352    Part of the Karas respondents’ defence in this matter, is that the relationship advanced by the applicants between LKPL and LKHK, was contrary to the Hong Kong regulatory regime and so, is illegal. As will become apparent when I deal with those defences, I do not accept that to be the case. It is possible for a Hong Kong practitioner to share profits with an overseas firm. Mr Karas is wrong in his assertion that LKPL and LKHK could not operate as a single economic entity. I find Mr Karas’ intention was to establish a single economic entity comprising LKPL and LKHK and his denial does him no credit. That intention was shared by Mr Lipman.

353    Further, it is inconceivable that LKPL, and in particular Mr Lipman, would advance up to at least A$1 million without there being a long-term objective of establishing one integrated firm with offices in Adelaide and Hong Kong. There was simply no rational basis to provide support to Mr Karas as Karas Lawyers unless it was part of a long-term strategy to develop an international litigation practice, with the first step establishing LKPL in Hong Kong, in whatever form that might take, and taking whatever regulatory steps were required to achieve that objective. Further, I find that LKPL, through Mr Lipman and Mr Karas, proceeded on the basis of TDW’s advice. Still further, that process was also consistent with Mr Lipman and Mr Karas’ common intention to exploit the opportunity presented by the Akai litigation to market LKPL, through its Hong Kong office, in order to develop its international litigation practice.

354    On 29 October 2012, the Law Society sent a letter to Mr Karas indicating that its Consents Committee had resolved that the proposed change of name was in compliance with r 2A(2)(b) of the Solicitors’ Practice Rules and granting a waiver of r 4, “allowing Lipman Karas to share profits with the principals of the overseas offices of Lipman Karas”.

355    The waiver of r 4 is significant because by virtue of the Association Agreement, Karas Lawyers and the Foreign Firm were already able to share fees and profits so that the waiver clearly applied to the next step in the process, which was the establishment of LKHK as a branch of LKPL and the sharing of profits.

356    Once that Association Agreement finished, the r 4 waiver was required to allow the sharing of the profits to continue, albeit between LKHK and LKPL.

357    The r 4 waiver formed part of the strategy and allowed Mr Karas to share LKHK’s profits with overseas principals, in this case Mr Lipman.

358    In cross-examination, Mr Lipman agreed that he let eight years go by without knowing whether the r 4 waiver had been granted. He said that his expectation was that the r 4 waiver would have been granted because, “we wished to set up an association with the waiver. And so far as I was concerned, that was implemented.” Mr Lipman disagreed with the proposition that the existence of the r 4 waiver was a matter of complete indifference to him.

359    Mr Lipman agreed that he came to realise that the r 4 waiver did not mean that profits could be shared with LKPL itself as an incorporated legal practice: T 661.31-661.41. Nonetheless, that did not prevent the sharing of profits between the two directors which as I set out later in these reasons is what occurred.

360    Mr Karas was cross-examined about LKPL and LKHK being one integrated firm. He said that the vision of a truly integrated firm as a partnership was never implemented and that was a significant aspect of the eventual falling out between Mr Lipman and Mr Karas: T-1167.18-1168.33. I accept that evidence insofar as it is directed to one integrated partnership. That was because, whereas it was not possible for Mr Lipman to be a partner in LKHK, or for LKPL to be in partnership with Mr Karas, that did not stop there being one integrated firm with Mr Karas as the resident principal in Hong Kong.

361    As I have noted, Mr Karas was a director and shareholder in LKPL and was LKPL’s presence in Hong Kong. Further, under the Hong Kong regulations regime, Mr Karas could be a principal in an overseas law firm (i.e. LKPL). To that extent, there was one integrated firm.

362    Accordingly, I do not accept that simply because Mr Lipman or LKPL could not be a partner in a Hong Kong law firm, there could not be one integrated firm.

363    The Karas respondents contend that the relationship alleged by the applicants is a recent invention which has assumed importance in view of these proceedings and as a matter of law. I do not accept that contention.

364    Further, Mr Karas continually railed against there being any suggestion that LKHK was one integrated partnership with LKPL or a “branch office” of LKPL, contending that such a relationship was not possible under Hong Kong law. He repeatedly used the mantra that such a position was, “factually incorrect and legally impossible”.

365    It is apparent that Mr Karas focussed on the concept of an integrated partnership in one way - that one integrated partnership was legally impossible because Mr Lipman could not be a partner in Hong Kong. I have accepted that under the Hong Kong regulatory regime that was so, however with the appropriate waiver, it was possible for Mr Karas to share profits with overseas principal(s). Whereas a partnership was not possible, there was no restriction on there being one integrated firm with LKHK as LKPL’s branch office and Mr Karas as the resident principal.

366    Further, as I have set out earlier in these reasons when dealing with Mr Ma’s evidence, it is possible for there to be one integrated firm, subject to the qualification I have identified.

367    In 2012, a third ‘Lipman Karas’ entity commenced trading in London (LKLLP). Mr Lipman and Mr Karas were the two 50% shareholders of Lipman Karas UK Ltd which owned 50% of the LKLLP business.

368    Following the establishment of LKLLP, on 27 February 2012 Mr Karas sent an email addressed to the “LK Team” with an email address lkteam@lipmankaras.com. In that email, Mr Karas announced the establishment of Lipman Karas LLP in London and amongst other things said:

The London team will work closely with our teams in Australia and Hong Kong and, as with the Hong Kong office, operationally we will be one firm.

Establishing a London office … will create numerous opportunities for all of us to collaborate together on client projects and professional development and enable us all to promote LK as a specialist “Commonwealth” litigation practice with a truly international outlook and capability. It also creates opportunities for practitioners in the firm to spend time on secondment in other offices … : (JTB 4/411)

369    In or about December 2012, the Foreign Law Firm merged with Karas Lawyers and commenced trading as LKHK.

Mr Lipman and Mr Karas’ shared profits

370    When LKPL was established, Mr Lipman and Mr Karas agreed to share profits equally.

371    When LKPL commenced trading as Lipman Karas in 2004, Mr Karas and Mr Lipman also agreed that each would receive a monthly advance in an amount which was agreed between the two of them each year: T-328.37-328.47.

372    After agreeing on the amount of the monthly advance, that information would be provided to the relevant financial staff of LKPL who would arrange for the agreed amount to be paid to each of Mr Lipman and Mr Karas. There was no further communication with those staff members about the monthly advance unless there was a change to the agreed amount: T 332.45-333.10.

373    Their remuneration model became a little complicated over time. Instead of receiving partnership draws, each of Mr Lipman and Mr Karas agreed from the start that they would receive an advance from LKPL in the form of a loan which would be repaid at the end of the financial year by way of dividends declared by LKPL from its profits.

374    The dividends were paid to the Family Trusts which made distributions to the individual beneficiaries, including Mr Lipman and Mr Karas, who in turn repaid the loans made from LKPL to Mr Lipman and Mr Karas. The amount of the dividend in any particular year was the greater of the two loan balances at the end of the previous financial year such that, for example, if Mr Lipman’s loan balance at the end of the 2006 financial year was A$580,000 and Mr Karas was A$450,000, the dividend paid would be A$580,000.

375    It was important for the loan to be repaid, otherwise the outstanding loan balance would be deemed by the Australian Taxation Office under the Div 7A rules to be an unfranked dividend paid to Mr Lipman and/or Mr Karas, as the case may be.

376    No monthly advances were made by LKHK to Mr Karas until the end of 2020. All the advances were made by LKPL.

377    Until 2016, the loans to Mr Lipman and Mr Karas were recorded in LKPL’s general ledger and were recorded in LKPL’s balance sheet as assets. As from 2016, the monthly advances by LKPL to Mr Karas were recorded in Mr Karas’ LKHK loan account.

378    Personal expenses were in addition to the equal monthly sums advanced and were treated as part of the loan to the individual concerned. As I have noted above, that loan was repaid by way of a dividend declared at the end of the financial year in favour of each of Mr Lipman’s and Mr Karas’ family trusts in an amount which reflected the highest loan balance, after taking into account personal expenses, which were also paid by LKPL.

379    By way of example, in the 2005 financial year, Mr Lipman’s loan account balance as at the end of the financial year was A$181,037 and Mr Karas’ was A$187,468. Accordingly, on 1 July 2006, dividends were declared in favour of both Mr Lipman and Mr Karas’ entities in the sum of A$190,000: exhibit A38 [306].

380    There is one anomaly, which is that the LKPL income statement for the year ended 30 June 2006 records dividends in the amount of A$380,000, whereas the LKPL balance sheet as at 30 June 2006 reflects “Loans at call – unsecured” in the amount of A$583,847 owed by Mr Lipman, and A$452,758 as owed by Mr Karas.

381    In cross-examination, Mr Lipman agreed that the amount of the loans at call recorded in the LKPL’s books was substantially different to the amount of dividends declared for the 2006 financial year. He said that he could not explain that difference by reference to the practice of calculating and distributing dividends. Nor for that matter could anyone else.

382    Save for 2006, in each of the financial years between 2005 and 2016, dividends in LKPL would be declared in accordance with the practice I have described above. As I noted earlier, it was important to clear the LKPL loan each year.

383    Mr Lipman and Mr Karas shared profits from the inception of LKPL trading. When the Foreign Firm and Karas Lawyers were established, there was no discussion between Mr Karas and Mr Lipman as to how profits would be treated, but it is clear that the early arrangement for the equal sharing of profits continued.

384    Mr Morris gave evidence of the implementation of the profit-sharing arrangements between Mr Lipman and Mr Karas based in large part, but not entirely, on the financial records of LKPL and LKHK.

385    He was cross-examined on his affidavit (exhibit A38), during which it was suggested to him that in Part E of his affidavit, “The Equalisation Exercise” he was professing to express an expert opinion without addressing the requirements for an expert report set out in FCR 23.13, GPN-Expt. I have dealt with that point earlier in these reasons.

386    Mr Morris’ evidence addressed, in part, what the financial statements of LKPL and LKHK revealed in relation to the revenue, expenses, profits and dividends of LKPL and LKHK, as the case may be, for the financial years from 2005 to 2020: exhibit A38 [268] and following.

387    It is apparent from those financial statements that in the years up to and including the 2015 financial year, LKPL was profitable in all years since its formation.

388    Between 2010 and 2013, the Foreign Firm made profits in 2010, 2012 and 2013 after suffering a loss in 2011. Karas Lawyers suffered losses in 2010 and 2011 before turning a profit in 2012 and 2013: exhibit A38 [271]-273]. Notwithstanding those losses, profits were still shared equally between Mr Lipman and Mr Karas.

389    Taken together, the combined profit of the two Hong Kong firms grew from A$1,500 in 2010 to A$2.51 million in 2013. Neither Mr Karas nor Mr Lipman took advances from either of the Hong Kong firms during this period. The advances were paid by LKPL.

390    Following the Foreign Firm merging with Karas Lawyers in 2012 and Karas Lawyers changing its name to LKHK, profits increased from a combined HK$17.83 million in 2013 to HK$24.57 million in 2015 before declining to HK$6.06 million in 2019 and HK$6.60 million in 2020.

391    Mr Morris summarised the financial statements of LKPL over the years 2006 to 2020 in the following terms: exhibit A38 [303]-[307]:

(a)    Dividends were paid to each of the Lipman and Karas shareholders in equal amounts in each of the financial years from 2006 to 2015. The amount of the dividend that was declared in each year between 2006 and 2016 was an amount required to clear the loan accounts of Mr Lipman and Mr Karas at 30 June of the previous year;

(b)    Equal dividends were discontinued from and after the 2016 financial year, the dividends that were paid to the shareholders each year were, in every year, less than the profits for that year, which resulted in LKPL accumulating profits that peaked at A$24.44 million at 30 June 2017;

(c)    Additional dividends of A$10 million were paid to each of the Lipman and Karas shareholders in the 2018 financial year;

(d)    Preference dividends were paid to shareholders that were associated with Mr Cross, Mr Phillips, Ms Zander and Ms Hall-Carney (all Adelaide Principals) from and after the 2018 financial year;

(e)    Additional dividends to the relevant Lipman and Karas entities were provided for in the 2019 financial year (the financial statements disclose that these dividends were paid during the 2020 financial year);

(f)    The additional dividends of the 2019 financial year distributed all of the accumulated profits of LKPL at 30 June 2019, which was an outcome of the equalisation exercise; and

(g)    Dividends were provided for in the 2020 financial year. Those dividends distributed all of the profits of the 2020 year, with the dividends being paid during the 2021 financial year.

The Equalisation of Equity Exercise

392    Matters changed in 2016. What followed from 2016 is complicated by the fact that Mr Karas remained an Australian resident for tax purposes at all relevant times.

393    In January 2016, Mr Lipman agreed to Mr Karas receiving an increased monthly advance from LKPL from A$100,000 to A$160,000. There was no increase in the amount received by Mr Lipman and, as such, he continued to receive A$100,000 from LKPL per month.

394    As from 1 July 2018 to 30 June 2020, again with Mr Lipman’s agreement, Mr Karas’ monthly advance from LKPL increased to A$175,000 with Mr Lipman’s monthly advance remaining at A$100,000.

395    Until 2015, Mr Karas had paid his Australian tax from his own resources, however as from 2016, that tax was paid by LKHK and recorded in Mr Karas’ loan account with LKHK.

396    Notwithstanding Mr Karas’ advances were recorded in the loan account in LKHK’s general ledger after 2016, almost all the cash advances to Mr Karas continued to be made by LKPL and processed through an inter-entity loan account between LKPL and LKHK.

397    As and from 2018, credits were made against Mr Karas’ LKHK loan account (in which the monthly advances were recorded) from LKHK’s accumulated profits.

398    Since Mr Karas was an Australian resident for tax purposes, any income Mr Karas received in Hong Kong was taxed at Hong Kong tax rates, as well as Australian tax rates, but with a rebate given for Hong Kong tax paid.

399    Mr Lipman paid tax from his own resources.

400    Since the amounts advanced by LKPL to Mr Lipman and Mr Karas differed from 2016, and since Mr Karas as sole proprietor of LKHK had any profits from LKHK attributed to him, Mr Lipman and Mr Karas took advice from Nexia Edwards Marshall on how to deal with the changed situation. In December 2016, Mr Brenton Ellery of Nexia Edwards Marshall prepared a document titled, “Lipman Karas Group – Notes on Equalisation of Equity at 30/6/16”: JTB 24/2359.

401    That document provided recommendations as to the amounts of dividends to be declared by LKPL to reflect the profit-sharing arrangements between Mr Lipman and Mr Karas. It explained that tax payable by Mr Karas in both Hong Kong and in Australia, on Hong Kong profits, was excluded from Mr Karas’ drawings (advances) such that those drawings (advances) were after-tax in both Hong Kong and Australia. Hong Kong profits tax and Australian income tax paid by LKHK for Mr Karas were recorded in Mr Karas’ loan account in LKHK and treated as payments to him of monies on which all relevant tax had been paid. As a result, Mr Ellery proposed that Mr Lipman should receive a further dividend so that his after-tax drawings (advances) were the same as Mr Karas’, adjusted for the increased amount taken by Mr Karas.

402    The consequence is that from 2016, because there was a difference in advances paid to Mr Karas compared to that received by Mr Lipman, the profit distribution to Mr Lipman (or the relevant Lipman entity) was calculated so that:

(a)    Mr Karas’ advances and expenditure payments were regarded as after tax payments;

(b)    That sum was reduced by the additional advance received by Mr Karas; and

(c)    A dividend was paid to the relevant Lipman entity in an amount that would have the relevant Lipman entity with an after-tax amount equivalent to the reduced sum calculated in (b) above. That is, the relevant Lipman entity received a grossed-up amount to account for tax and to ensure Mr Lipman and Mr Karas’ (or their relevant entities) received the same amount, save for the additional advances received by Mr Karas.

403    That exercise is demonstrated by the following calculation taken from Mr Ellery’s 2016 ‘Equalisation of Equity’ document: JTB 24/2359:

4    For the period 1/7/15 to 30/6/16, Skip’s drawings were $1,785,065. It was agreed that Jason’s drawings would be $60,000 per month from January, so an expected amount of $2,145,065. Excluding the tax paid on HK profits, both in HK and Australia, Jason’s cash drawings were $2,384,169. Detailed and summary schedules are attached.

5    Skip should draw an additional $A 239,104 after tax to equalise cash drawings from 2015/6.

6    Tax paid for Jason in both HK and in Australia on HK profits is excluded from the above. Jason’s drawings are after tax in both HK and Australia. Skip’s drawings are by way of dividend and he has to pay additional tax on the dividend. As was agreed last year, Skip should receive a further dividend so that his after tax drawings are the same as Jason’s (adjusted for the $360,000 referred to above).

7    The adjustment for cash drawn to 30/6/16 is a further dividend of $A665.029 as calculated in the attached schedule.

404    Summary of drawings for year ended 30/6/16:

ADDITIONAL DIVIDENDS AND CASH TO SKIP LIPMAN

Dividend 1/7/16 on 2016 cash drawings

405    In December 2017, Mr Ellery prepared a document titled, “Lipman Karas Group – Notes on Equalisation of Equity at 30/6/17”: exhibit A39. The principles were the same as those previously set out in the same document but for the financial year ended 30 June 2016.

406    The consequence was that the relevant Lipman shareholder would receive a dividend which would leave it with an after-tax amount equivalent to the after-tax payments which had been made to Mr Karas. As is apparent, the focus is on the after-tax position.

407    The result of this process was that whereas dividends paid to Mr Lipman and to Mr Karas by LKPL were equal for the financial years ended 2006 to 2016, those paid to each of them by LKPL in respect of the financial years ended 2017 to 2020 differed because they took into account the profits Mr Karas received from Hong Kong and reduced the dividend to Mr Karas accordingly: T-374.10-374.19.

408    In 2018, Nexia Edwards Marshall provided further advice titled “Equalisation of Equity-2018”. That was followed by a further document titled “Equalisation of Equity 2019”: JTB 41/3872, 3874.

409    Both documents were marked as “subject to confirmation” although there is no suggestion that advice proffered in both documents was not implemented. In fact, the contrary is the case.

410    The 2018 and 2019, “Equalisation of Equity” documents record Nexia Edwards Marshall as having been requested to advise, “… the preferred method to sharing arrangement between Skip Lipman (Lipman) and John (sic) Karas (Karas) for profits earned in Hong Kong and Australia”.

411    Each document has as an introduction that:

Your intentions are that the interests of Lipman and Karas in Lipman Karas Australia, Hong Kong and UK are equal unless otherwise agreed.

Karas is a sole trader operating in Hong Kong, trading as Lipman Karas Hong Kong (LKHK). All profits of LKHK belong to Karas.

Lipman and Karas take cash drawings monthly from LKAUS and LKHK.

LKAUS declares dividends on the shares owned by the family trusts controlled by Lipman and Karas on 1 July year.

The intention is that the profits of LKAUS & LKHK are to be shared equally between Lipman and Karas (unless otherwise agreed).

No formal documentation exists.

LKAUS has amounts receivable from LKHK. This arises because LKAUS pays amounts on behalf of LKHK and Karas.

LKHK has become significantly profitable in its own right. Karas receives the LKHK profit.

The income of LKHK is declared in Karas’ personal income tax returns in Hong Kong in Australia.

412    Each document then sets out the same explanation of the equalisation process. As explained above, in broad terms, Mr Lipman (or the relevant Lipman entity) was to receive a franked dividend from LKPL to equalise the additional amount received by Mr Karas (or the relevant Karas entity) from LKHK. Each document records that, “[t]his is designed to ensure the after-tax equity rights of Lipman and Karas in the combined LKHK & LKAUS are equal”. In circumstances where, “Mr Karas’ tax on HK profits and Australian dividends is paid for him by LKAUS and is not counted in drawing for the purposes of equalisation”: JTB 41/3873, 3874/19632, 19640.

413    In cross-examination, Mr Lipman agreed that his tax returns, and the tax returns for his personal and family trusts, for the years ended 2009 to 2021, reflect that he did not receive any foreign income. He disagreed with the proposition that had he shared and been entitled to profits from Hong Kong, he would have declared those profits as foreign income. That was because a process was in place whereby he received a disproportionate amount of Australian income to give effect to his profit-sharing arrangement with Mr Karas, with other factors taken into account. Mr Lipman said he understood that process to have taken into account Mr Karas’ after-tax profits rather than the revenue of LKHK: T-375.40-375.42.

414    In view of the explanation from Nexia Edwards Marshall as to the Equalisation of Equity Exercise for 2018 and 2019 and the financial arrangements between Mr Lipman and Mr Karas in the period prior to 2018, Mr Lipman’s understanding was demonstrably correct.

415    Mr Karas did not agree that he and Mr Lipman had a profit-sharing arrangement, as set out in the 2018 equalisation exercise. He said that “profit-sharing arrangement” is a shorthand term used by the accountants: T-1241.45-1241.47.

416    I do not accept that evidence. Mr Karas’ characterisation of the expression “profit-sharing arrangement” as a shorthand term is not only wrong, it ignores the reality of the financial arrangements between the two of them.

417    So much so is evident from a consideration of the financial statements of LKPL and LKHK which were summarised by Mr Morris.

418    It is quite clear, and I find, that from the establishment of LKPL in 2004, through to the establishment of Karas Lawyers, the Foreign Firm and then the resultant LKHK in 2012, that the financial arrangements between Mr Lipman and Mr Karas were based on a profit-sharing arrangement. Whereas it is the case that from 2016, Mr Karas received greater monthly advances than Mr Lipman, that does not detract from the fact that at the end of each financial year, an exercise was conducted whereby dividends were declared in accordance with the Nexia Edwards Marshall advice to ensure the position was equalised.

419    Consistent with the arrangement for the equal sharing of profits generated from the combined operation of LKPL and LKHK, each of Mr Lipman and Mr Karas’ family trusts received dividends in each of the financial years from 2010 to 2016 of A$1,015,000; A$1,386,200; A$1,159,000; A$1,221,400; A$1,320,000; A$2,001,000 and A$1,250,000 respectively. As I have noted above, that was notwithstanding that the Foreign Firm suffered a loss in the financial year 2011 and Karas Lawyers suffered losses in financial years 2010 and 2011.

The operation of LKPL and LKHK as one integrated firm

420    Given his accounting background, Mr Cross was given oversight of financial matters concerning LKPL and was its Chief Financial Officer. His duties included reviewing financial reports prepared by Nexia Edwards Marshall, monitoring, managing and reporting on cash, as well as levels of work in progress and debtors. Mr Cross also worked with Mr Lipman and Mr Karas in relation to their requirements for reporting on financial matters. He had a limited authority to approve transactions but otherwise needed authorisation by Mr Lipman and/or Mr Karas.

421    He worked on the Akai matter with Mr Karas and others, with the majority of the legal work being done in Adelaide. However, as I have noted, LKPL had dedicated space within Borrelli Walsh’s office in Hong Kong. Mr Cross was sent invoices for LKPL’s occupation of that space.

422    Given the decision by Mr Lipman and Mr Karas to establish an office in Hong Kong, Mr Cross was involved in implementing the financial structure for that occur, such as the manner in which fee income was to be recorded in the accounting records.

Operations of the HK Office 2009-2012

423    The consequence of the Hong Kong regulation regime was that any profits of the Hong Kong office would need to be allocated to Mr Karas but accounted for in the overall accounting between Mr Lipman and Mr Karas. That was because although profits could be shared in accordance with the Association Agreement, Mr Kentish was the Foreign Firm principal (albeit as agent for LKPL).

424    As I have found above, from the time LKPL operated out of Hong Kong, albeit through Karas Lawyers and the Foreign Firm, the profits of the Hong Kong and Adelaide offices were treated such that Mr Lipman and Mr Karas shared the combined after-tax profits until 2016 and thereafter as per the Equalisation of Equity Exercise.

425    Not only were the profits shared equally, any losses were also to be shared equally. Losses incurred by Karas Lawyers and the Foreign Firm in the early years were borne by LKPL. Working capital was also provided by LKPL.

426    Mr Cross described the interaction between LKPL and the two Hong Kong entities as being one firm with two locations. In particular, LKPL funded the costs of the establishment and early operation of Karas Lawyers and the Foreign Firm. As an example, in June 2009, LKPL funded the fit-out costs of what became the office for Karas Lawyers and the Foreign Firm.

427    LKPL provided the accounting and billing functions for the Hong Kong offices with the vast majority of administrative support being provided by LKPL. Save for the time LKPL worked out of the Borrelli Walsh office in Hong Kong, LKPL provided business development, information technology and human resources support. A practice developed whereby following the establishment of the Hong Kong office, the bank statements and supporting documents were forwarded to Adelaide for recording and processing in the LKPL’s accounting system.

428    Mr Cross was responsible for approving the payroll for the two early Hong Kong entities.

429    LKPL charged both Karas Lawyers and the Foreign Firm for disbursements and management services.

430    Consistent with that approach, the LKPL budget for the year ending 30 June 2010 included the combined Adelaide (LKPL) and Hong Kong (Karas Lawyers and the Foreign Firm) operations.

431    To that extent, LKPL was operating both the Hong Kong and Adelaide practices.

432    Initial operations of the two early Hong Kong offices were unprofitable and cash flow was poor. LKPL supported the Hong Kong operations with Mr Lipman and Mr Karas receiving their monthly advances from LKPL, irrespective of the losses incurred by Karas Lawyers in 2010 and 2011.

433    As at December 2010, the Foreign Firm and Karas Lawyers owed LKPL, by way of separate inter-entity loans, a combined sum of just over A$1 million.

434    Although it was an iterative process, fee invoices from the two Hong Kong offices (and subsequently LKHK) did not differentiate between fees attributable to the work done by Hong Kong employees and work done by LKPL employees on Hong Kong matters. Rather, under LKPL’s accounting system, an amount equal to the fees attributable to LKPL employees for work done on Hong Kong matters was recorded as owing to LKPL on the issue of an invoice out of Hong Kong. That formed part of LKHK’s loan account with LKPL.

435    Fees attributed to Mr Lipman were recorded in LKPL’s accounts, whereas fees attributed to Mr Karas were recorded in the entity in which the particular matter was opened, which at that time could be LKPL or Karas Lawyers.

436    During the period from 2009 to 2012, LKPL’s involvement in an international dispute in connection with Carlyle Capital Corporation (CCC) had helped LKPL fund the two Hong Kong offices. That matter concluded in 2016.

437    Mr Cross was responsible for monitoring, managing and reporting on cash flow for LKPL, LKHK (and later LKLLP). Mr Cross had as his focus, to ensure sufficient funds were returned from LKHK to LKPL where LKPL’s practitioners were working on Hong Kong matters.

438    I find, that between 2009 and 2012, LKPL, Karas Lawyers and the Foreign Firm operated as a single economic entity.

Operations from 2012

439    Inevitably, an amount remained owing on the inter-entity loan between LKHK and LKPL with Mr Cross and Ms Sally Copley, the integrated firm’s financial controller, recommending payments from time to time from LKHK to LKPL to reduce the loan balance, depending on the cash position of LKHK at any particular time. Primarily, that loan was a reflection of work done by LKPL practitioners on LKHK matters. Mr Cross and Ms Copley established a practice whereby Ms Copley would assess LKHK’s cash position in view of its upcoming commitments and make a recommendation to Mr Cross about an amount to be returned to LKPL from LKHK. Once Mr Cross and Ms Copley had agreed on an amount, Ms Copley would then contact Ms Leung, LKHK’s office administrator, and arrange for a transfer of the proposed amount. Occasionally, Ms Leung would initiate payments.

440    LKPL established LKLLP in early 2012. Mr Cross was closely involved in establishing the London practice from a practical perspective and worked with Ms Copley on the financial reporting functions for that office.

441    LKPL was responsible for and provided significant support to LKLLP for information technology and finance, although LKLLP was largely self-sufficient from a cash flow perspective. Nonetheless, there were occasions when temporary funds were provided by LKUK, the company established by Mr Lipman and Mr Karas to hold a 50% interest in LKLLP.

442    An increase in significant matters from the Hong Kong office followed the conclusion of the CCC trial in 2016. Work on those matters was done by both LKHK and LKPL employees with frequent travel between the two offices undertaken.

443    Ms Copley continued preparing financial reports and information across all three offices. Client invoices for both LKPL and LKHK were prepared by LKPL.

444    In his role as CFO, Mr Cross said that from 2012 he adopted, “a holistic approach to assessing cash flow by reference to the position and needs of each of the three offices” and, “[I] referred to anticipated collections in relation to Adelaide and Hong Kong matters”: exhibit A29 [140].

445    Weekly management meetings were held involving the three offices over the period March 2012 - May 2021.

446    Mr Lipman and Mr Karas attended those meetings, although not every meeting. They were provided with the agendas and reports, including WIP and debtors updates for the three offices, as well as minutes of previous meetings.

447    There was constant communication in relation to financial matters between, amongst others, Mr Cross, Ms Copley and Ms Leung. As an example, in September 2013, LKHK received payment on a matter known as Moulin. Mr Cross enquired as to how much LKPL could be paid, given LKHK’s financial commitments in the near future, which resulted in LKHK transferring A$100,000 to LKPL.

448    Later, in October 2013, on the same matter, LKHK transferred HK$8.5m to LKPL after allowing for LKHK’s monthly commitments.

449    Monthly firm-wide performance reports were distributed by Ms Copley to the principals in each jurisdiction and to Mr Cross. Whereas Mr Lipman and Mr Karas were both “Principals” in Lipman Karas, only the two of them were directors of LKPL. Those reports listed the personnel in each office recorded, amongst other things, work in progress and fees charged for all fee earners across all three offices.

450    The monthly management report for January 2014 recorded there were six Principals based in Adelaide, four based in Hong Kong and two based in London. There were also:

(a)    Nine Special Counsel/Senior Associates based in Adelaide, two based in Hong Kong and two based in London;

(b)    12 Associates based in Adelaide, three based in Hong Kong and two based in London; and

(c)    Eight paralegals based in Adelaide, one in Hong Kong and three in London: exhibit A29 [201].

451    By April 2015 there were six Principals based in Adelaide, four based in Hong Kong and three based in London. There were also:

(a)    Nine Special Counsel/Senior Associates based in Adelaide, six based in Hong Kong and two based in London;

(b)    15 Associates based in Adelaide, three based in Hong Kong and five based in London; and

(c)    Seven paralegals based in Adelaide, none in Hong Kong and two in London: exhibit A29 [230].

452    By February 2016, there were seven Principals based in Adelaide, four based in Hong Kong and three based in London. There were also:

(a)    10 Special Counsel/Senior Associates based in Adelaide, six based in Hong Kong and four based in London;

(b)    12 Associates based in Adelaide, three based in Hong Kong and seven based in London; and

(c)    Eight paralegals based in Adelaide, one in Hong Kong and two in London: exhibit A29 [252].

453    By January 2017, there were seven Principals based in Adelaide, five based in Hong Kong and two based in London. There were also:

(a)    12 Special Counsel/Senior Associates based in Adelaide, seven based in Hong Kong and four based in London;

(b)    Nine Associates based in Adelaide, five based in Hong Kong and seven based in London; and

(c)    Eight paralegals based in Adelaide, one in Hong Kong and one in London: exhibit A29 [256].

454    By January 2018, there were 10 Principals based in Adelaide, six based in Hong Kong and two based in London. There were also:

(a)    11 Special Counsel/Senior Associates based in Adelaide, five based in Hong Kong and five based in London;

(b)    12 Associates based in Adelaide, six based in Hong Kong and seven based in London; and

(c)    Seven paralegals based in Adelaide, two in Hong Kong and one in London: exhibit A29 [273].

455    By June 2019, there were 12 Principals based in Adelaide, eight based in Hong Kong and two based in London. There were also:

(a)    12 Special Counsel/Senior Associates based in Adelaide, five based in Hong Kong and five based in London;

(b)    11 Associates based in Adelaide, 15 based in Hong Kong and seven based in London; and

(c)    Seven paralegals based in Adelaide, two in Hong Kong and three in London: exhibit A29 [290].

456    By January 2020, there were 13 Principals based in Adelaide, six based in Hong Kong and two based in London. There were also:

(a)    14 Special Counsel/Senior Associates based in Adelaide, nine based in Hong Kong and seven based in London;

(b)    10 Associates based in Adelaide, 13 based in Hong Kong and five based in London; and

(c)    Eight paralegals based in Adelaide, two in Hong Kong and three in London: exhibit A29 [290].

457    A new financial system and a new document management system (Ringtail) was provided across all three offices during the latter part of 2014 and early 2015. So too, a telephone/teleconference system capable of operating across the three offices was adopted later in 2015.

458    In or about 2015, a new financial system, known as 3E was introduced which produced weekly reports that showed and consolidated the three offices as well as giving an “LK-wide performance report”: exhibit A29 [208]. Ms Copley travelled to Hong Kong and London to train staff in those offices in the use of 3E.

459    LKPL and LKHK practitioners also worked on LKLLP matters. As an example, in December 2014 a payment was made to LKPL for approximately £369,576 (approximately A$670,000 at the time) for work done by both LKPL and LKHK practitioners for LKLLP. That amount was advanced to Mr Lipman and Mr Karas as drawings, to be recouped by a fully franked dividend in due course.

460    In November 2014, Lipman Karas published a book titled “The First 10 Years”: JTB 13/1305. Within that book:

(a)    In the section titled “A Personal Message from the Founders” on page 5, Mr Karas and Mr Lipman inform the reader that:

The journey of our first decade has established Lipman Karas as an international force in our specialist field. During this time, we have resolved or litigated cases as lead counsel in most jurisdictions in Australia, Bermuda, the British Virgin Islands, Canada, the Cayman Islands, the Channel Islands, England, Hong Kong, Indonesia, Malaysia, Mauritius, the Middle East, the Netherlands, the People’s Republic of China, Singapore and the United States as well as in various arbitral tribunals and through mediation;

(b)    In the section titled “LK in Focus-A Brief Profile” it is said:

Lipman Karas currently employs over 80 people-including 13 principals and 50 lawyers-across its offices in Australia, Hong Kong and London. Importantly, LK operates as one firm with multi-jurisdictional project-specific teams, providing clients with a unique cross-fertilisation of capability, expertise and adaptability.

(c)    In the section which sets out the profile of various individuals within Lipman Karas, at page 13, described as a “Founding Principal”, Mr Karas’ profile records that he “established the Hong Kong office in 2009”.

461    In March 2015, Ms Mary Louise Rahaley was employed by LKPL as Chief Operating Officer based in Adelaide and responsible for strategy and the direction of Lipman Karas as a whole. That involved marketing and business development as well as operational support to LKHK.

462    Mr Karas communicated to LKPL’s Adelaide-based principals via email dated 29 March 2015 that Ms Rahaley would focus on assisting Mr Karas and had not been employed as a general resource to be available to LKPL’s principals at large.

463    Nonetheless, Ms Rahaley’s role ranged across strategic and commercial matters as well as operational matters for all three offices, including marketing across all three offices, and along with Mr Karas, handling lease negotiations for LKHK.

464    In June 2015, Mr Karas announced to LKPL’s principals that a six-year lease had been secured over an office at Three Pacific Place in Hong Kong. In August 2015, Ms Rahaley oversaw LKHK’s move from level 17 of Admiralty Centre to the office at Three Pacific Place.

465    Amongst other things, Ms Rahaley negotiated the arrangements with information technology providers for LKHK, managed and conducted annual performance reviews and annual salary reviews for LKHK, recruited professional staff for LKHK, and coordinated meetings of LKHK Principals. Mr Lipman also attended performance review meetings for professional staff in Hong Kong between 2015 and 2019. Salary reviews were the subject of recommendations by Ms Rahaley for discussion with Mr Lipman and Mr Karas.

466    Mr Karas was engaged in salary reviews for Principals across LKPL and LKHK.

467    In March 2015, Ms Rahaley commenced working on a new website for “Lipman Karas”. As part of that, Mr Karas provided an e-brochure to Ms Rahaley which Mr Karas had commissioned and was working on in December 2014. The finalised brochure described, in part, Lipman Karas as employing, “ … over 80 people, including 13 principals and 50 lawyers, across its offices in Australia, Hong Kong and London” and that, “importantly, LK operates as one firm with multi-jurisdictional project specific teams, providing clients with a unique cross-fertilisation of capability, expertise and adaptability”: JTB 15/1527, 1528/5953-5957, 5958, 5959.

468    Ultimately, the Lipman Karas website went live in March 2016. Ms Rahaley deposed to the website including a statement that, “Lipman Karas opened its doors in Adelaide on 1 September 2004 with a team of 11 lawyers ... [w]e have not once looked back. LK opened offices in Hong Kong in 2009 and London in 2012 and has grown to a team of over 80 focussed professionals”. The “Capability” page stated, “With offices in Australia, Hong Kong and London and an established network of international contacts, we put together the optimal team for the duration of each project, combining specialist expertise and local knowledge”.: exhibit A41 at [205].

469    There is no doubt, and I find, that LKPL and LKHK operated as two offices which were fully integrated at a financial administrative and operational level so as to comprise one integrated firm. That integration reflected the overall strategy adopted by Mr Lipman and Mr Karas in or about 2009 to grow LKPL’s practice internationally. That is not only reflected in the administrative operational arrangements referred to, it is also reflected in the profit-sharing and other financial arrangements to which I have referred.

Proposals to open up equity: 2017 – 2020. The relationship between Mr Lipman and Mr Karas breaks down

470    In 2017, discussions commenced between Mr Lipman and Mr Karas about a proposed restructure of LKPL. In broad terms, it involved the admission of new equity participants.

471    In February 2017, Dr George Beaton, a professional services consultant who provided advice to, at least, Mr Karas over some years, exchanged emails with Mr Karas with respect to redressing the financial imbalance between Mr Lipman and Mr Karas, incentivising salaried principals and motivating those in LKLLP to realise the London office’s full potential. Dr Beaton provided advice, including the suggestion that salaried principals be admitted to equity with two classes: ‘Founders’, a closed class containing Mr Lipman and Mr Karas, and ‘Equity Principals’, for Mr Kentish, Mr Stephen Phillips, Mr Cross and others in the future, who would share in the combined profits of LKPL and LKHK: JTB 25/2426.

472    An equity proposal, circulated to Mr Cross, Mr Kentish and Mr Phillips by way of a letter dated 23 June 2017, addressed what was described as the ‘Equity Principal Performance Pool’. In broad terms, that was a remuneration model which involved the payment of dividends by LKPL on redeemable preference shares to family trusts in the case of Mr Cross and Mr Phillips. It was proposed that Mr Kentish would receive a direct payment from LKHK calculated in the same manner, rather than by payment of a dividend from LKPL. Importantly, the Equity Principals Performance Pool was to be, “calculated as a percentage of the net profits after tax of the Australian and Hong Kong firms …”.

473    In 2018, the relationship between Mr Lipman and Mr Karas started to deteriorate.

474    In December 2018, Mr Lipman appointed Mr Andrew Shaw, an Adelaide solicitor, as an external advisor to provide a draft memorandum of advice with respect to the proposed offer of equity to six salaried principals of LKPL. In cross-examination, Mr Lipman did not recall whether he informed Mr Karas of Mr Shaw’s retention in December 2018 and that he thought he was entitled to continue dealing with Mr Shaw on behalf of LKPL without the knowledge, consent or approval of Mr Karas, notwithstanding Mr Karas was a co-director of LKPL: T 477.1-477.18.

475    Mr Karas contends that Mr Lipman engaging Mr Shaw was indicative of Mr Karas being excluded from the management of LKPL, LKHK and LKLLP. I do not accept that contention for the following reasons.

476    First, a draft memorandum prepared by Mr Shaw, is addressed to Mr Lipman, Mr Karas and Mr Cross. Second, when a draft deed was provided to Mr Karas in September 2019, Mr Karas expressed his gratitude to Mr Lipman for the work done on the draft deed: JTB 37/3529/16204. Third, Mr Karas was actively engaged in the ongoing development of the draft deed, as is apparent from the emails from Mr Karas to Mr Shaw, Mr Lipman and Ms Rahaley sent 3 October 2019 (SJTB 97/8895/63081), see also the email from Mr Shaw to Mr Lipman and Mr Karas sent 10 October 2019 (SJTB 97/8901/63149), and the email from Mr Karas to Mr Lipman and Mr Shaw sent on 20 October 2019: SJTB 97/8926/63594.

477    In his email sent 3 October 2019, Mr Karas expressed his “more principled desire” that LKPL, LKHK and LKLLP comprise one firm and that to minimise or avoid having to deal with local regulatory requirements, a different entity be established as an overarching or umbrella entity.

478    That is not consistent with Mr Karas’ now expressed view that “he” was LKHK. That may have been the case from a local reputation point of view, but there was common management, common facilities such as IT and document management across, at least, LKPL and LKHK and LKLLP. Further, there was a sharing of profits between Mr Lipman and Mr Karas which took into account the profits and losses of both LKPL and LKHK. So too, capital was provided by LKPL to LKHK, all of which is consistent, and only consistent, with one integrated firm.

479    On 31 January 2019, Mr Lipman emailed Mr Karas a proposal to open up equity in LKPL in which he proposed that Mr Cross, Mr Phillips, Mr Kentish, Ms Hall-Carney, Ms Fiona Steffensen and Ms Kristy Zander be appointed as directors and shareholders of LKPL. In addition, that Mr Kentish and Ms Steffensen be made partners of LKHK, and LKHK have a contractual commitment with LKPL mirroring the “existing arrangement” (involving the combination of the profits of LKPL and LKHK to determine profit shares).

480    Mr Karas’ response was that he was unable to devote his full attention to it given the approaching trial in a matter named “Galleria”, and delayed consideration of equity participation. I accept Mr Karas’ attention was devoted to the approaching trial.

481    Nonetheless, Mr Lipman was concerned that delay would bring about the resignation of senior practitioners from within the firm.

482    In May 2019, Mr Lipman emailed Mr Karas attaching a draft equity proposal to offer equity to the then proposed participants and inviting comments on a proposed letter to them.

483    By mid-late May 2019, a position had been reached whereby Mr Karas was to provide a communication to the prospective equity participants in the near future.

484    On 8 June 2019, Mr Karas wrote to each of Mr Cross, Ms Hall-Carney, Mr Phillips, Mr Kentish, Ms Steffensen and Ms Zander in identical terms: JTB 35/3302, 3307.

485    In that email, Mr Karas said that his vision was for Lipman Karas (i.e. generally, not one specific office) to become one of the leading specialist global dispute resolution firms. He continued that it was his and Mr Lipman’s objective for the recipient of the email to, “have a full seat at the table”. He continued further that, “… you have my unqualified commitment that I will give this project the priority it deserves [after the conclusion of the “Galleria” trial] with a view to us discussing and considering alternatives and having suitable new arrangements in place before the end of the year but with effect from 1 July 2019”.

486    At this time, the majority of LKPL’s work was on LKHK matters.

487    In September 2019, Mr Lipman, Mr Phillips, Ms Hall-Carney, Ms Zander, Ms Rahaley and Ms Copley travelled to Hong Kong for the purpose of discussing the equity proposal with Mr Karas.

488    At that meeting, Mr Karas circulated a discussion paper prepared by Mr Tony Williams of Jomati Consultants prior to the meeting: JTB 37/3493, 3494. Mr Karas had retained Jomati Consultants without consultation with Mr Lipman.

489    In an email sent by Mr Williams to Mr Karas on 30 July 2019, Mr Williams recorded that, “you and Skip currently own all the equity of the Australian and Hong Kong offices …”: JTB 36/3410. That can only have come from instructions given by Mr Karas to Mr Williams.

490    The meeting in Hong Kong in September 2019, proceeded on the basis that Mr Lipman and Mr Karas together owned 100% of LKPL and 100% of LKHK. There was some disagreement about that, based on what a diagram prepared for the meeting by Mr Williams depicted, but on the basis of the facts as I have found them, there is no doubt Mr Lipman and Mr Karas considered each of themselves to be the 50% owners of LKPL and LKHK, as well as 25% owners of LKLLP: JTB 37/3494/15663.

491    Following that meeting, Mr Lipman circulated a draft shareholders deed to Mr Karas and the other proposed equity principals.

492    There were a number of iterations of the draft shareholder’s deed between September 2019 and January 2020: see JTB 37/3526/; 38/3587; 38/3594.

493    In each of those iterations, the common theme was that there was to be profit-sharing as between the LKPL and LKHK offices amongst the equity participants and that Mr Lipman and Mr Karas would continue to jointly manage LKPL and LKHK and “the international practice”:

(a)    September 2019 draft Deed cl.1.21 and the definition of “Firm”; cl 1.23 - Hong Kong office to be operated as if it were wholly owned and controlled by LKPL; cl 7.33 - profits of Hong Kong office to be taken into account in determining the total profit of the firm for each financial year: JTB 37/3526;

(b)    November 2019 draft Deed, Recital F, the definition of “Firm” in cl 1.22; the definition of “Interests in the Firm” in cl 1.27, which includes both legal and equitable interests; cl 5 – Decision making; cl 6 – Conduct of the Firm, including their devotion of the whole of the director’s time and attention to the Firm; cl 7.2 - discussion about the Hong Kong Partnership and the Hong Kong office to be made by the directors; cl 7.3 - Profits of the Hong Kong office: JTB 38/3587; and

(c)    January 2020 draft Deed, Recital F, the definition of “Firm” in cl 1.22; the definition of “Interests in the Firm” in cl 1.27, which includes both legal and equitable interests; cl 5 – Decision making; cl 6 – Conduct of the Firm, including the devotion of the whole of a director’s time and attention to the Firm; cl 7.2 - decisions about the Hong Kong Partnership and the Hong Kong office to be made by the directors; cl 7.3 – Profits of the Hong Kong office: JTB 38/3594.

494    The Karas respondents submit that the draft Deeds demonstrate that LKPL and LKHK were separate, which I understand as meaning that LKPL and/or Mr Lipman had no beneficial interest in LKHK of whatever nature. I do not accept that submission. What the draft Deed demonstrates is a proposed evolution of the one integrated firm known as Lipman Karas from the existing two director model to multiple directors, whilst at the same time, recognising local regulatory requirements.

495    In early December 2019, Mr Kentish advised Mr Lipman and Mr Karas of his resignation as a salaried principal of LKPL.

496    In December 2019, Mr Lipman appointed Mr Morris as an external advisor to assist in negotiating the proposed restructure of LKPL. Mr Morris prepared a proposed model.

497    In early February 2020, Mr Karas engaged Mr Michael Michaels, an accountant at Sims Richmond in Adelaide, to provide personal accountancy and taxation services.

498    On 25 February 2020, Mr Karas circulated a memorandum to Mr Lipman and the then proposed equity principals expressing his concerns about the model proposed by Mr Morris: JTB 42/3927.

499    Mr Lipman was cross-examined about emails he sent to Mr Karas on 26 February 2020 and 29 February 2020: T-299.1-299.24. In his email sent 26 February 2020, Mr Lipman expressed his concern to Mr Karas over his email sent 25 February 2020 and what Mr Lipman described as Mr Karas’ behaviour at a meeting with the proposed equity participants on 26 February 2020: JTB 42/3937/19960. Mr Karas deposed to his views as to Mr Lipman’s behaviour at that meeting. I do not need to make a finding about the behaviour of Mr Karas or Mr Lipman at that meeting.

500    In Mr Lipman’s email sent to Mr Karas on 29 February 2020 (JTB 42/3953/20037), Mr Lipman said that he was happy to have further discussions with Mr Karas about the future of the firm. Mr Lipman accepted in cross-examination that in this email, he expressed his preference for Mr Karas to discuss the terms of an agreement with the five proposed equity participants. Mr Lipman also accepted he was conveying that if that was not possible, he would side with the proposed equity participants and he and Mr Karas would need to work out the best possible basis for Mr Karas to practice independently: T 299.46-300.2.

501    On 29 February 2020, Mr Lipman also sent an email to the then proposed new equity participants (exhibit R10) in which he expressed his view that Mr Karas needed to speak to each of them and reach agreement with them about satisfactory terms, “for us to work together” and, failing that, Mr Lipman’s discussions with Mr Karas, “should focus on the best way for [Mr Karas] to work with us from outside the firm”.

502    Mr Lipman also accepted in cross-examination that by the end of February 2020, Mr Lipman was going to part ways with Mr Karas unless he agreed to a satisfactory partnership agreement or shareholder agreement to allow the five proposed equity participants to come into LKPL: T 299.1-300.12.

503    Mr Lipman continued in cross-examination that things got better and they got much closer to an acceptable compromise on everyone’s part: T 300.15-300.20.

504    Nonetheless, Mr Lipman accepted that by May 2020, the status quo insofar as it related to him and Mr Karas and the proposal to introduce further equity participants to be “horrible”, however he had not given up hope by this point. Rather, he accepted that he was trying to put great pressure, including financial pressure, on Mr Karas to agree with his proposal that new equity participants be brought in. Mr Lipman considered the application of such pressure, as part of a deliberate strategy, was appropriate conduct: T 305.11.

505    Mr Lipman denied that the process he was adopting reflected the strong possibility that he could not continue in practice with Mr Karas.

506    Much evidence was led about the attempts to agree a model for the introduction of new equity participants. It is fair to say that Mr Lipman, and the proposed equity participants on the one hand, and Mr Karas on the other, could not agree on a proposed structure.

507    In March 2020, Mr Karas engaged Dr Beaton and Ms Margaret Beaton (the Beatons), a registered organisational psychologist, with whom Mr Lipman and Mr Karas had dealt previously, to advise him personally.

508    On 16 June 2020, Mr Karas asked Dr Beaton and Mr Michaels to consider an alternative proposal involving Mr Karas giving up his interest in LKPL and Mr Lipman giving up his interest in LKHK. On 19 June 2020, Dr Beaton provided Mr Karas with the combined advice of Dr Beaton, Ms Beaton and Mr Michaels: JTB 50/4691. That advice gave a number of options, the second of which was to split Hong Kong from Adelaide and the fourth of which was to immediately start to plan his exit with the intention of being out of Lipman Karas by the end of 2020.

509    On 26 June 2020, Mr Karas provided a proposal to Mr Lipman and the then proposed equity principals that would see:

(a)    Mr Karas cease to be a director and shareholder of LKPL;

(b)    Mr Lipman surrender his equitable interest in LKHK;

(c)    LKPL supply LKHK with professional time and managerial services on a commercial basis to be agreed;

(d)    Mr Karas’ loan account in LKPL being repaid on a commercial basis to be agreed (this proposal reflected option 2 in the Beaton’s advice); and

(e)    ‘Lipman Karas’ remain one firm for all external purposes but with separate ownership of LKPL, LKHK and LKLLP “for internal purposes”: JTB 51/4776.

510    It is telling that Mr Karas recognised Mr Lipman as having an equitable interest in LKHK. The significance is not so much the characterisation of the interest, but the fact that Mr Karas said it, such that the suggestion by Mr Karas in these proceedings that he was free to deal with LKHK as he wished did not reflect his view as at 26 June 2020.

511    On 29 June 2020, Mr Lipman rejected Mr Karas’ proposal by email, and asked Mr Karas to accept a proposal which had been put forward by Mr Phillips earlier, but which Mr Karas had previously rejected.

512    The email also suggested that as from 1 July 2020, Mr Karas and Mr Lipman both revert to being advanced A$100,000 per month by “the firm” with repayment being made through the payment of dividends, as had occurred previously. Mr Karas disagreed with that proposal: JTB 51/4787.

513    Prior to sending his email to Mr Karas on 29 June 2020, rejecting Mr Karas’ proposal, Mr Lipman sent an email to the then proposed equity participants, Mr Cross, Mr Phillips, Ms Hall-Carney and Ms Zander, copying in Ms Rahaley, Ms Copley and Mr Morris: JTB 51/4785. The body of the email included the text of the email which Mr Lipman was to send to Mr Karas on 29 June 2020. That email reveals discussions between Mr Lipman and the then proposed equity participants, without Mr Karas’ involvement, and that Mr Lipman’s proposed response to a proposal put forward by Mr Karas that he would no longer be “part of LKPL or Hong Kong” was rejected.

514    Mr Lipman disagreed that he was deliberately seeking to exclude Mr Karas from an important aspect of management of the company: T 500.19-500.21. I accept Mr Lipman’s evidence. He was raising with proposed equity participants a proposal put forward by Mr Karas that they needed to know about and what Mr Lipman intended to do in response to that proposal.

515    Self-evidently, Mr Karas was holding out on a prospective equity participant model, as of course, was his right.

Cancellation of Mr Karas’ and Mr Lipman’s monthly advance

516    In July 2020, Mr Lipman unilaterally caused the company to terminate the monthly advance to himself and to Mr Karas: T 345.3-345.5.

517    Mr Lipman agreed that he took it upon himself to inform the financial staff responsible for making the monthly advance, of the company’s decision to terminate it. He told Ms Copley to make that change and was aware, from an examination of LKPL’s records, that Ms Copley knew that at all relevant times that Mr Karas did not agree with Mr Lipman’s conduct in respect of the monthly advance, although Mr Lipman said he could not recall whether Mr Cross knew that Mr Karas did not agree with the decision to unilaterally terminate the monthly advance: T 345.10-345.44.

518    In cross-examination, Mr Lipman agreed that he made the decision to terminate the monthly advance over strong objection by Mr Karas and that it resulted in considerable hostility and tension between them: T 345.7-345.8.

519    In cross-examination, Mr Lipman also agreed that the agreement with respect to a monthly advance being paid by LKPL to Mr Lipman and Mr Karas was an agreement between the company (LKPL) and the two directors for an indeterminate time. He disagreed that a change to the amount agreed between the company and the directors would require a variation to that contract, and did not formulate the agreement between the two directors and LKPL in that way: T 341.16-341.17. When asked how he formulated the contract, Mr Lipman said that the company would advance to the directors amounts agreed between the directors from time to time. His view of the agreement was that one director could unilaterally cease the monthly advance at any time: T 341.24-341.25.

520    Mr Lipman said that he regarded it as perfectly within his rights to terminate the monthly advance payable to himself and Mr Karas, without Mr Karas’ consent: T 346.1-346.3.

521    Mr Lipman said further that his conduct in terminating the monthly advance amounted to him saying to Mr Karas, “[i]f, but only if, you accept a monthly draw of A$100,000 will you get any draw at all”. He denied, however that his conduct amounted to economic blackmail of Mr Karas and instead gave evidence that he viewed it as wholly appropriate: T 349.24-349.30.

522    However, Mr Lipman agreed that his conduct was an attempt to put economic pressure on Mr Karas, but he disagreed that the purpose of that was to try to force Mr Karas to agree to take on Mr Lipman’s proposed new equity participants: T 349.37-349.38. When asked what his purpose was, Mr Lipman said that he wanted to open up equity in the firm and wanted Mr Karas to understand that for the firm to flourish, it needed to let people have proper professional progression: T-349.40-349.43.

523    On 1 July 2020, Mr Lipman sent an email to Mr Karas which summarised the reasons behind his unilateral decision that Mr Karas would no longer receive incentives from the firm, such as an enhanced monthly advance of A$175,000: T 355.36-355.45.

524    Mr Karas responded by objecting to what he characterised as the unilateral change of longstanding financial arrangements and stated that, “our current financial arrangements shall remain …”.

525    The monthly advances to Mr Lipman and Mr Karas stopped as from 1 July 2020.

526    I entertain no doubt that Mr Lipman’s actions in stopping the monthly advances unless both received the same amount was an attempt to force Mr Karas’ hand in relation to taking on new equity participants.

527    At this time, Mr Karas was receiving advice from the Beatons. I deal with that advice in detail when considering whether the scope of Mr Karas’ fiduciary duties had narrowed.

528    Nonetheless, it is quite clear, and I find, that on the basis of the correspondence between the Beatons and Mr Karas, Mr Karas was planning to separate himself from the Lipman Karas group in one form or another from in or about the end of July 2020. So much so is evident from the email to Mr Karas from Ms Beaton on 26 July 2020 in which she says that Mr Karas should keep his, “separation plans tightly under wraps” until Mr Karas was “ready to act”: JTB 53/5006.

529    There is no doubt Mr Karas was well-entitled to consider his future and it seems that by the end of August 2020, Mr Karas had determined to separate in some form from his relationship with Mr Lipman. I infer that fact from an email from Dr Beaton to Mr Karas sent 27 August 2020 in which the Beatons say that they (ie Dr and Ms Beaton) were, “pleased to read your decision Jason”, which identified what Mr Lipman’s options were and that it was “… time to prepare your defences … in addition to everything else needed to be done for the transition to separate offices and practices”: JTB 55/5142.

530    As I have noted, Mr Karas was perfectly entitled to decide to separate in some form from Mr Lipman. However, until he resigned as a director from LKPL, he retained the rights and obligations of directorship. To the extent Mr Karas had equitable fiduciary duties to LKPL and/or Mr Lipman, he was obliged to observe those fiduciary duties and not place himself in conflict between those duties and his personal interests.

531    On 23 November 2020, Mr Lipman sent an email to Mr Karas copying in Mr Cross, Ms Hall-Carney and Ms Zander in which he proposed to open up LKPL’s equity and decision-making to Mr Sam Gomersall, Ms Julia Dreosti, Mr Scott Foreman and Ms Rahaley, as well as those LKPL employees copied into the email.

532    In cross-examination, Mr Lipman agreed that Mr Kentish, Ms Steffensen and Mr Phillips were previous intended equity participants who, by the time of the email, had left the firm. Mr Lipman said he had not discussed with Mr Karas the proposal to join the four new proposed equity participants before sending the email to Mr Karas, but that he had discussed it with each of the proposed equity participants at that time. Mr Lipman disagreed with the proposition that, by doing so, he was deliberately excluding Mr Karas from an important management decision. Whereas Mr Lipman discussing the proposal to join four new equity participants with those equity participants was, at the least, unwise from the perspective of maintaining a harmonious relationship with Mr Karas, nonetheless, Mr Lipman’s discussions with the proposed equity participants went nowhere in the absence of Mr Karas’ approval. Further, it is clear that in relation to this issue, Mr Lipman was deliberately excluding Mr Karas and I do not accept his evidence to the contrary: T-498.5-498.38.

533    I note that on 12 March 2021, Mr Lipman sent an email to the then proposed equity participants of LKPL referring to, “various discussions concerning opening up of decision making and equity in the firm”: exhibit R9. In cross-examination, Mr Lipman agreed that he did not send a copy of the email to Mr Karas and that, at the time he prepared the email, a break-up with Mr Karas had not yet occurred but was imminent. Mr Lipman gave evidence that he thought it was perfectly within his rights to propose something to the proposed equity participants without telling Mr Karas.

534    To the extent that that related to events post separation, Mr Lipman had that right. What he could not do was implement it in the absence of Mr Karas’ agreement. It was not implemented until after the Separation Agreement came into effect.

Separation of Mr Lipman and Mr Karas’ business interests: Mr Karas begins dealing with MdR

535    In December 2020 and throughout 2021, whilst still a director of LKPL, Mr Karas engaged in communications with MdR.

December 2020

536    As at 30 November 2020, LKPL was awaiting payment from LKHK for work done by LKPL practitioners. One of LKHK’s bills had recently been paid, but LKPL was not paid by LKHK and on 30 November 2020, Mr Lipman was advised by Mr Cross that Mr Karas had paid himself US$1.085 million without notice to Mr Lipman.

537    On 4 December 2020, Mr Lipman wrote an email to Mr Karas, as well as other proposed equity participants, in which Mr Lipman raised the spectre of Mr Karas having engaged in either theft or a breach of fiduciary duties. Nonetheless, Mr Lipman did not consider the relationship with Mr Karas as irreparable. I deal with this email in detail when considering the scope and content of Mr Karas’ fiduciary duties in detail later in these reasons.

538    On 7 December 2020, Mr Karas contacted a recruiter he had engaged, Mr Jim Olivier, during which Mr Karas forwarded a news article regarding MdR’s acquisition of ‘Click! Licensing Asia Inc.’ Mr Karas requested that Mr Olivier, “have a word to Kevin Gold of MdR in London”: JTB 58/5475/44479.

539    Mr Olivier contacted Mr Gold by email on 10 December 2020, in which he informed Mr Gold he was making contact in relation to a litigation partner in Hong Kong who was interested in moving from his current position.

540    Mr Gold responded positively and on 11 December 2020, Mr Olivier sent Mr Karas’ CV to Mr Gold and identified Mr Karas as a, “founding partner of Lipman Karas” in the covering email: JTB 58/5526/44724. The CV was current as at 23 May 2019 and had as its footer, Lipman Karas in three locations, Adelaide, Hong Kong and London.

541    Mr Gold was aware of LKLLP in London as some MdR personnel had done some conflict work with them and it was apparent to him that Lipman Karas was trading in Australia, Hong Kong and London and they had three types of firm, “one a Pty Ltd and one a partnership and one a LLP”: T 1906.41-47. Mr Gold was aware, shortly after he received Mr Karas’ CV, that Mr Karas was a partner in all three firms: T 1907.4-1907.13. Mr Gold understood that as a partner of LKLLP, Mr Karas likely owed duties to the separate legal personality, Lipman Karas LLP, as well to the Australian practice (LKPL): T 1909.15-23.

542    On 14 December 2020, Mr Lipman, Mr Karas, Ms Hall-Carney and Mr Cross attended a meeting via Microsoft Teams. According to Mr Lipman, it was a hostile meeting in which Mr Karas’ attitude was made plain to Mr Lipman. Although Mr Lipman said in evidence that he entertained some doubts as to which way Mr Karas was going to go, I find that was not the case. Mr Lipman may have been too close to see it, but there is no doubt that from at least 14 December 2020, Mr Karas and Mr Lipman could no longer continue in business together.

543    Shortly after the meeting ended, Mr Lipman sent an email to Mr Karas, copied to Mr Cross and Ms Hall-Carney, in which Mr Lipman set out the text of a proposed email to all of the proposed equity participants: JTB 59/5540. The text of the email Mr Lipman intended to send to the proposed equity participants was conditional upon Mr Lipman and Mr Karas not achieving, “an acceptable resolution of our impasse, but I hope that won’t be so as you will see that I am accepting your having sole ownership of the Hong Kong office”.

544    The email to the proposed equity participants was never sent, at Mr Karas’ request, but its content is important. Specifically, it states that subject to various matters, there be a, “… total release of all claims anyone has against each other and termination of all agreements, trusts, understandings or arrangements between any party”.

545    Importantly, the proposed email contemplates an ongoing relationship between LKPL and LKHK but with a separation of interests between that of Mr Lipman and that of Mr Karas to occur at some indeterminate time in the future, albeit the relatively near future. Both the covering email to Mr Karas and the content of the proposed text raising a separation of interests, is a matter which reflects that both Mr Lipman and Mr Karas were of the view that their interests were not separated at that stage.

546    Mr Lipman accepted that at the time that he wrote the email to Mr Karas, there was no doubt in his mind that his relationship with Mr Karas was about to terminate: T 514.45-515.1. Mr Lipman continued in his evidence that, “he would have liked to have been able to keep the partnership together – the firm together with – with everyone in it”, but that by that stage he was, “feeling that was hopeless”: T 515.21-24.

547    By this time, it is clear, and I find, that Mr Karas and Mr Lipman had not separated their interests in the one integrated firm known as Lipman Karas but that Mr Lipman and Mr Karas had reached the point where that was to occur, at least at some time in the indeterminate future.

548    Mr Karas responded to Mr Lipman’s email sent on 14 December 2020 by an email sent on 15 December 2020 (JTB 59/5596) in which Mr Karas said the email forming part of Mr Lipman’s 14 December 2020 email to the proposed equity participants should not be sent. Mr Karas suggested each of them retain commercial lawyers and accountants to facilitate an orderly separation of their business affairs.

549    By email sent 15 December 2020, Mr Lipman replied to Mr Karas agreeing not to circulate the intended email: JTB 59/5596. Further, since Mr Karas had not signed off on the 30 June 2019 and 30 June 2020 accounts, Mr Lipman did not expect a separation in the foreseeable future.

550    A few days later, on 18 December 2020, Mr Lipman wrote to Mr Karas in which he reminded Mr Karas that the two of them remained shareholders and directors of LKPL, “with all of the legal and equitable duties that involves”. He also said, “since 1 July 2020 you have no entitlement to any private benefits from the firm or our relationship: JTB 59/5596.

551    I find that from the exchange to which I have referred above, by 14 December 2020, Mr Lipman and Mr Karas had agreed to separate their respective interests, but had not done so. Mr Karas was reminded specifically by Mr Lipman on 18 December 2020, that he remained a director of LKPL with the corresponding legal and equitable duties that involved.

552    Mr Gold and Mr Karas spoke via Microsoft Teams on 17 December 2020.

553    Mr Karas made handwritten notes from the call. The notes refer to an “IPO”. At that time, MdR was proposing an initial public offering.

554    During the call between Mr Karas and Mr Gold, which was an introductory call, Mr Gold explained to Mr Karas the history of MdR, as well as his own history. Mr Karas informed Mr Gold of his history. Mr Gold explored with Mr Karas how he envisaged he would work with MdR: exhibit R55 at [215]; exhibit R84 at [8]. Mr Gold said that Mr Karas made it clear in that first call, “… that LKHK was a separate business sharing a common brand and shared overheads with Lipman Karas Australia”.

555    Mr Karas accepted he told Mr Gold, either at the meeting on 17 December 2021, or at a later meeting on 23 December 2020, that he was a partner or co-owner of the Australian firm.

556    On 22 December 2020, in response to a query from MdR’s Lateral Recruitment Manager, Ms Charlotte Lynch, Mr Gold responded that a meeting had been arranged between Mr Gold, Mr Karas, Mr Libson and MdR’s partner in charge of MdR’s dispute resolution department, Mr Kasra Nouroozi, the following day. He continued by asking Ms Lynch to keep the contact with Mr Karas confidential as, “it is a much bigger play than an individual”.: JTB 59/5622/45095.

557    Self-evidently, the terms of that email reveal that Mr Gold was not just speaking about Mr Karas as a “lateral hire” but the LKHK practice as a whole. That is because, Mr Gold understood at that stage, LKHK to be a separate business, however he also knew Mr Karas was a partner in all three Lipman Karas practices and that the offices shared a common brand and shared overheads with LKPL.

558    Mr Gold met with Mr Karas, Mr Nouroozi and Mr Libson via Microsoft Teams on 23 December 2020. MdR has no notes of this meeting.

559    The meeting concluded with Mr Gold requesting that Mr Karas prepare a short business plan including, amongst other things, information relating to LKHK as an existing business and as part of MdR.

560    Mr Karas denied that an acquisition of LKHK was being discussed at those early stages. I do not accept that evidence. At the meeting on 23 December 2020, Mr Karas noted that integration was important. I find that at those preliminary stages an acquisition of LKHK by MdR was being discussed.

January 2021

561    On or about 5 January 2021, Mr Karas prepared the business plan Mr Gold had asked him to prepare: JTB 60/5669; T 1611.5-1611.6.

562    On 7 January 2021, a meeting took place between Mr Karas and Mr Gold. Mr Karas recorded the conversation in his notebook, totalling some six pages. In particular, the words, “Like JKD + popn”, “level of int is high”: “2 Ambition for Asia à HK on board as quickly à matter of opportunity fit into a predetermined strategy” were recorded by Mr Karas. The applicants submit that it can be concluded that MdR’s interest in Mr Karas and LKHK was high, as well as the importance of pursuing the acquisition quickly to, “fit into a predetermined strategy”.

563    I am prepared to infer MdR’s interest in Mr Karas was high, but the reference to a pre-determined strategy is meaningless without more and I am not prepared to draw any further inference.

564    In addition, Mr Karas’ notes of 7 January 2021 record discussions surrounding MdR’s attempt to establish a firm in New York, MdR’s firm structure, remuneration structure and remuneration committee, as well as MdR’s possible IPO. The applicants submit that it can be inferred that Mr Gold had material knowledge about the relationship between Mr Karas and Mr Lipman, and the interrelated offices in Australia and Hong Kong. I do not need to draw that inference because Mr Gold already knew that from his meeting with Mr Karas in December 2020, however the extent of Mr Gold’s knowledge is another thing and is a matter I deal with when considering the question of MDR’s knowledge later in these reasons.

565    Mr Karas provided his business plan to Mr Gold on 7 January 2021 after his conversation with Mr Gold that same day. The document was titled “Confidential – January 2021”: JTB 60/5678. The document comprises a series of dot points. It starts with ASIA and then addresses LKHK in which Mr Karas identifies that:

    LKHK had a present caseload and a realistic known pipeline of “circa 5 to 7 years”;

    The LKHK office consisted of 40 people (including 20 lawyers and 20 support staff) with Mr Karas as the sole proprietor and including three salaried principals;

    Revenue of circa HK$115m (US$15m/GBP 11m) in 12 months to June 2020;

    LKHK also generates additional revenue for LK London and Australia offices;

    The lack of strategic ambition of London and Australian partners has impeded growth of LK in those markets and internationally;

    Leads to LKHK exploring new opportunities which can be achieved by LKHK organically, or through a larger platform with like-minded partners;

    Acquisition of LKHK offers MdR a ready opportunity, in its core area, for a substantial Asia-wide/more global footprint;

    LKHK integration enables MdR to see, and to be seen, from both West and East;

    As a “young” firm, LKHK integration with MdR faces less hurdles than may be typically anticipated;

    LKHK integration also provides a new revenue source for MdR London and allied businesses, namely work generated in HK performed in London;

    LKHK, integrated into MdR London, also provides MdR London with additional capability and breadth of expertise;

    Core proposition - establish MdRHK through the acquisition and integration of LKHK, initially by way of mandatory three-year association between LKHK (local HK firm) and MdR London (Foreign Firm);

    There is a good reason to believe that MdRHK has a real potential to become a very significant contributor to MdR’s revenue, reputation and legacy;

    There is no reason why MdRHK could not become the leading complex disputes and private client advisor in HK/Asia – a “low hanging fruit” opportunity; and

    Essential that MdRHK integrates with and “plugs in” to MdR London, at both leadership and operational levels.

566    Notwithstanding Mr Karas’ disagreement, it is clear from this document that Mr Karas was proposing that MdR acquire or otherwise integrate LKHK with MdR. Mr Karas specifically points to LKHK’s current caseload and that the purpose of the business plan was for the acquisition of LKHK by MdR.

567    Mr Karas also specifically refers to “partners in Australia and London”. It follows from what I have set out, and I find, that by no later than 7 January 2021, Mr Karas was proposing to MdR that it acquire LKHK; that Mr Karas had said that he was the sole proprietor of LKHK but had partners in Australia and London; that LKHK generates additional revenue for Lipman Karas’ London and Australia offices; that LKHK’s integration with MdR provides a new revenue source for MdR London and its allied businesses, namely work generated in Hong Kong performed in London; and that LKHK integrated into MdR London provides MdR London with additional capability and breadth of expertise.

568    To that extent, Mr Karas was proposing that at the least, the relationship between LKPL and LKHK be mirrored with MdR. So much so is abundantly clear from the first dot point under the heading “MdRHK” which reads: “Core proposition - establish MdRHK through the acquisition and integration of LKHK”. So too, the process to be adopted was the same as that adopted by LKPL and LKHK.

569    At the time of providing his business plan to Mr Gold, Mr Karas was a director of LKPL and was proposing a course of action which would be to the detriment of LKPL. Mr Karas was also at the time contending to Mr Lipman that he (Mr Lipman) had a 50% beneficial interest in LKHK, yet was proposing for LKHK to be acquired or integrated with MdR with no reference to Mr Lipman and for the sole purpose of benefiting Mr Karas’ own interests at the expense of LKPL generally and Mr Lipman specifically.

570    Mr Karas’ disagreement in cross-examination that an acquisition was being contemplated at this time was false.

571    On 7 January 2021, Mr Gold emailed Mr Karas’ business plan to Mr Libson, Mr Nouroozi and himself with the note, “FYI to be discussed.”

572    At the time Mr Gold emailed the business plan, there was no doubt, and I find, that Mr Gold knew, as must Mr Libson and Mr Nouroozi, that Mr Karas was in partnership with others in Australia and London. However, as I have also found, the extent of that knowledge at that time was another thing. Nonetheless, that fact alone must have alerted them to the possibility that Mr Karas had, at least, fiduciary duties to the others with whom he was in partnership.

573    On 11 January 2021, Mr Gold, Mr Libson and Mr Nouroozi met via Microsoft Teams to discuss the proposal.

574    On 12 January 2021, Mr Gold sent a message to Mr Karas via WhatsApp stating, “[t]hank you very much for your plan, it hit all the right buttons” and “on timing, if we can, the optimum time for us would be to complete the transfer from April 9th (our new Financial year) but I would hope to conclude the deal much sooner”: JTB 60/5698.

575    On 13 January 2021, Mr Lipman sent an email to Mr Karas in which he proposed a separation model. On the basis that LKPL received between A$10 million and A$11 million of revenue per year, the model included a minimum payment from LKHK to LKPL: JTB 60/5714, 5715.

576    On 14 January 2021, Mr Karas and Mr Gold had a further meeting. Neither Mr Karas nor Mr Gold deposed to this meeting in their affidavits. Mr Karas made a note of the meeting in which he records that Mr Gold told him that Mr Libson and Mr Nouroozi were very supportive of an opportunity that a joint venture brings. Mr Karas notes further that there was a discussion about Mr Karas being a partner in MdR and that Mr Gold told him he would be, “the first person who would come in as a senior equity partner”. There is no doubt, and I find, that by this time, what was being discussed by both Mr Karas and Mr Gold was an acquisition of LKHK by MdR, in whatever form that might take.

577    On 19 January 2021, Mr Gold sent Mr Karas an email titled “Project Swift”: JTB 61/5828. In that email, Mr Gold indicated that he was seeking to, “scope the likely turnover, costs and people information”. He asked Mr Karas to prepare a due diligence on the three-year history of LKHK in relation to profit, loss and balance sheets; fees; time recording statistics by fee earner versus target; fees by client; fee earner; matter partner; originator (of work); department/group/business profitability; WIP days/debtor statistics and trends; liabilities of the business; claims history; and partner/employee details. Mr Gold also stated, “am trying to keep the circle of those in the know tight. You hopefully get the gist”.

578    On any view, the information Mr Gold was requesting from Mr Karas was confidential to LKHK, and by reason of at least the economic integration of LKHK and LKPL, confidential to LKPL and Mr Lipman. It was a road map to LKHK as a firm and a part of Lipman Karas in the wider sense. Of course, that information in that detail was only necessary in circumstances where an acquisition in some form of LKHK by MdR was being contemplated.

579    As to “the gist”, that can only refer to concealing the dealings between MdR and Mr Karas from others within Lipman Karas, particularly as Lipman Karas had an office in London.

580    That same day, Mr Karas referred to Ms Adams (Mr Gold’s Executive Assistant) a signed copy of a mutual non-disclosure agreement between “Mischon de Reya LLP” and “Jason Karas of Lipman Karas”.

581    On 21 January 2021, Mr Gold and Mr Karas spoke again during which Mr Karas made notes: JTB 62/5855. The first entry in that note is, “merged firm to open 9 April or ASAP after that”. The significance of 9 April is that was MdR’s year end for financial purposes.

582    Although there was much to happen between Mr Karas and MdR in the near future, not the least of which was the provision of the information sought by Mr Gold about LKHK, I find that by 21 January 2021, there was an intention, as between Mr Karas and Mr Gold on behalf of MdR, to merge LKHK with MdR with a new entity (or renamed LKHK) to open on 9April 2021.

583    On 26 January 2021, Mr Karas sent to Mr Gold the due diligence memorandum he had been requested to provide in response to Mr Gold’s email sent 19 January 2021: JTB 62/5905-5914. The first document in that due diligence memorandum (JTB 62/5906) is a document prepared by Mr Karas titled: “Project Swift. Confidential information provided under NDA – January 2021”.

584    In the due diligence memorandum, Mr Karas provided the following information relevant to this matter:

(a)    Current case-load and realistic known pipeline is circa 5 to 7 years of business;

(b)    For historical reasons, LHKH has not maximised its revenue and understated its profitability, due to group accounting policies;

(c)    HKD50+m of fees on LKHK projects billed by LK Aus and LKUK. This is potential future revenue for MdRHK/MdR London; and

(d)    As LKHK evolved initially as a branch of LK Aus, the group policy has been to maximise the profits of LK Aus and minimise the profits of LKHK. Commercially, LKHK’s profitability is consistently understated in the accounts.

585    Mr Karas’ statement that LKHK evolved initially as a branch of LK Aus (i.e. LKPL) is significant for a number of reasons. First, it establishes that MdR was aware of the branch relationship with LKPL. Mr Karas’ statement that the group accounts policy is directed to maximise LKPL’s profits and minimise that of LKHKs is not limited by any particular time period such that the position as stated was the current position. No explanation is proffered by Mr Karas as to why that is the case if, as he maintains before this Court, he was the sole legal and beneficial owner of LKHK.

586    The due diligence memorandum continues that there, “… is an almost unlimited expansion potential in MdR’s core areas”.

587    The due diligence memorandum attached a zip file which included:

(a)    LKHK’s financial statements for FY2015 to FY2019;

(b)    Fee schedules for FY2018 to FY220;

(c)    Performance reports for periods ending October 2020, June 2020 and June 2019; and

(d)    A debtor and WIP report.

588    Mr Georgiou, MdR’s then Chief Operating Officer and SEP of MdR, was sent a copy of Mr Karas’ due diligence memorandum on 27 January 2021.

589    Mr Lipman’s proposal, which had been sent to Mr Karas on 13 January 2021, was rejected by Mr Karas in an email sent on 31 January 2021, to which Mr Karas attached a separation proposal to Mr Lipman which would see Mr Karas become the sole owner of LKHK and Mr Lipman the sole owner of LKPL: JTB 63/6057. That document is important because Mr Karas proposes that he be the sole owner of LKHK. Clearly, at that time, he considered he was not the sole owner of LKHK.

February 2021

590    Further separate electronic meetings took place on 1 February 2021 between Mr Karas, Mr Gold and representatives of MdR’s Singapore office; between Mr Gold and Mr Karas; and between Mr Gold, Mr Karas and Mr Elliot Moss, an MdR partner and Chief Brand Officer.

591    A restricted Microsoft Teams channel for ‘Project Swift’, was created on 2 February 2021 which had a number of documents uploaded to it, including Mr Karas’ due diligence memorandum, LKHK WIP Debtors, LKHK Accounts from 2015 to 2019 and LKHK fees from 2018 to 2020. Mr Gold, Mr Karas, Mr Libson and Mr Nouroozi had access to the Project Swift channel initially, but later MdR’s then Chief Financial Officer, Mr Mayank Patel, as well as others, were granted access, including MdR’s Board and the SEPs.

592    On 4 February 2021, Mr Lipman emailed Mr Karas rejecting his proposal of 31 January 2021 and attaching a proposed deed containing a counteroffer: JTB 54/6116. In that email, Mr Lipman made it clear that Mr Karas remained a director of LKPL and that he was not relieved of any of his duties until separation was completed.

593    On 8 February 2021, Mr Karas sent a letter to Mr Lipman refusing to engage with the deed provided in Mr Lipman’s letter of 4 February 2021 and offering to accept A$15 million in full satisfaction of his interests in LKPL and LKHK.

594    By 9 February 2021, MdR and Mr Karas had advanced to the point where Mr Karas was being introduced to various litigation partners.

595    On 10 February 2021, Mr Karas offered to remain a non-executive chairman of the three ‘Lipman Karas’ entities until 31 March 2023 in exchange for “10% of any revenue growth above FY21 revenue for each of FY22 and FY23” in addition to the payment of A$15 million: JTB 65/6171-6172. On 15 February 2021, Mr Lipman wrote to Mr Karas rejecting his offer: JTB 65/6178.

596    On 13 February 2021, Mr Gold wrote a draft statement for MdR’s SEPs in his notebook. That draft statement records, in part, that: JTB 65/6177.

Lipman Karas was originally set up as a boutique litigation firm in Adelaide, Australia in 2004. Jason Karas left Australia in 2009 to set up the Hong Kong firm and in 2012 they set up a firm in London.

All three firms share a brand and certain infrastructure and there are various cross holdings in London.

In all other respects, they operate as 3 separate firms. We are only talking about the Hong Kong firm.

Hong Kong as [sic has] a specific law that requires any law firm to operate in association with a local bus before a licence will be granted to open a firm in your own name. The nature of the association allows a full financial integration. If approved we [sic] for 3 years as Karas LLP in association with Mischon de Reya. In all other respects there will be a total financial integration …

597    Later, Mr Gold notes in the same draft statement:

This acquisition cements overall the region our bus’s commitment to Asia.

598    A number of things flow from this draft statement. Whether or not it was provided to the SEP of MdR, it reveals that Mr Gold was aware of the association regime in Hong Kong. He explains in his draft note that the association process leads to a licence to use MdR’s own name in Hong Kong, that the nature of the association allows for a full financial integration and that in all other respects during the 3 year period, there will be a full financial integration.

599    Mr Gold made reference in his draft note to Mr Karas setting up LKHK in Hong Kong using Lipman Karas’ name. That can only mean he understood there to have been an association and thereby a full financial integration with LKPL.

600    Mr Karas wrote to Mr Lipman on 18 February 2021 in which he said to Mr Lipman that it was obvious the two of them were not going to reach agreement on the admission of new partners and that the two of them had not reached agreement on terms for a separation such that the status quo prevails: JTB 65/6204/47746.

601    Also on 18 February 2021, Mr Karas sent an email to Mr Cross, Ms Rahaley and Ms Copley in which he confirms he remains a director and shareholder of LKPL (about which I note there could be no suggestion to the contrary in circumstances where he had not resigned as a director) and in broad terms said he expected to be informed of all proposed decisions in relation to LKPL, copied into communication with Mr Lipman, and not having any directives from Mr Lipman implemented without Mr Karas’ approval.

602    In the meantime, whilst all this was going on, Mr Karas continued to receive the papers for the weekly management meetings, monthly performance reports and financial reports.

603    On 19 February 2021, Mr Karas had a meeting again with Mr Gold. Neither deposed to this conversation in their affidavits, however Mr Karas recorded contents of the conversation in his notebook: JTB 65/6211. Amongst the matters discussed were names for a new firm; the Hong Kong regulatory requirements relating to the integration of LKHK and MdR, as well as economic integration; MdR’s potential IPO; and the remuneration structure that would apply to SEPs, including Mr Karas, in the event of an IPO.

604    On 23 February, Mr Karas sent an email to the potential equity participants of Lipman Karas, copied to Mr Lipman, in which he stated Mr Lipman had made false statements to them before concluding with the statement, “I am committed to the firm and its ongoing success, despite Skips desire for a different future”: JTB 66/6273. At this time, Mr Karas was deep in negotiations with MdR.

605    On or about 23 February 2021, MDR Chief Financial Officer, Mr Mayank Patel, was delegated by Mr Gold to undertake a financial due diligence for the transaction with Mr Karas, in conjunction with Mr Georgiou and with MdR’s then Tax and Reporting Manager, Mr Kane Brewer. Mr Patel was also aware that the transaction was, “much more than a lateral hire because it wasn’t just one partner, one person, it was a whole team and established office.”: T 2130.16-20. I deal with Mr Patel’s financial due diligence later in these reasons.

606    On or about 23 February 2021, Ms Herdman-Smith first learned about LKHK through a conversation with Mr Libson, during which Ms Herdman-Smith was informed that there was an opportunity for a financial merger between LKHK and MdR: T 2112.1-2112.3. Ms Herdman-Smith was tasked by Mr Libson with considering the regulatory and operational requirements relevant to the sharing of financial reporting and office space within the confines of an association under Hong Kong law: T 2113.1-2113.10. Mr Libson also told her that this topic was subject to confidentiality.

607    During the conversation, Mr Libson informed Ms Herdman-Smith that Mr Karas was a partner of Lipman Karas.

608    Also on 23 February 2021, Ms Herdman-Smith met with Mr Gold. She recorded the contents of this conversation in the form of an email sent to herself that day: JTB 66/6281.

Jason Karas - Lipman Karas - Lit boutique out of Dentons. Jason went to HK 12 years ago. USD$15m. He is only SEP and 4 JPs and 15 lawyers and 20 support staff. He makes USD$3m. Long tail of big cases 3 sep shops under common brand Adelaide, Hong Kong and London.

Shared clients with us [REDACTED] not dishonesty but corporate recovery. Sued audit firms re corp failures. Chasing wrong doing in sovereign debt. JC approached KG as London branch (ex Withers fraud, Andrew Ford), AF he doesn't like. No ambition in London. With a strong platform and support can rapidly grow the business.

…

Not a branch office in HK, but would be association with Karas. Would be incorporated in our firm for income. Some complex HK issues - need to be in bed for 3 years - Project Swift in Teams

…

10 April is time to do these deals. Karas by far most profitable. [of other transactions mentioned in the email]

(square brackets provided)

609    On 23 February 2021, there was a meeting between the MdR Board and its Directorate, which advises the Board. The meeting occurred over two days – 23 February 2021 and 1 March 2021. Relevantly, Mr Gold, Mr Libson, Mr Georgiou were present both days for the Board. Ms Herdman-Smith was present on 23 February 2021, but not 1 March 2021. Mr Patel was present on both dates, but not as a member of the board. Both Ms Herdsman-Smith and Mr Patel were members of the Directorate.

610    After the meeting on 23 February 2021, Mr Patel was provided with access to Mr Karas’ due diligence material on the Project Swift Teams Channel: T 2131.10-2131.12; JTB 66/6282.

611    On or about 26 February 2021, Mr Patel reviewed the documents relating to Project Swift and provided a number of comments to Mr Gold: JTB 66/6319, 6320. Mr Patel considered Mr Karas’ statement in the due diligence memorandum that, “for historical reasons, LKHK has not maximised its revenue and understated its profitability due to group accounting policies” was significant to him as it implied that LKHK was a member of a group of enterprises which might be affected by a group accounting policy. Mr Patel understood this to mean that the group accounting policy was to have profits maximised in the Australian firm and minimised in the Hong Kong firm, and that these entities were part of a common ownership structure. Accordingly, Mr Patel wanted to understand whether there was a shifting of profits between members of a group.

612    In cross-examination, Mr Patel confirmed that it was not clear to him where the remuneration for Mr Karas was being dealt with in the financial statements.

613    In the comments section of an excel spreadsheet forming part of a memorandum Mr Patel sent to Mr Gold on 26 February 2021 (JTB 66/6320), Mr Patel noted that he had identified a need for more information, asking a number of questions, including:

    “What is the structure of HK business – a branch of Aus? A standalone partnership? LLP?”;

    “Profits – shared by JK only? Significant reduction to profitability in 18/19”;

    “Level of inter office billing – how much of HK income comes from Aus / Lon, hwo [sic] much does HK provide to Aus/Lon?”;

    “Note says no external debt/borrowings – but £0.5M of loan interest in 18/19? That’s quite a lot of interest for a small business – What is the level of borrowings and the terms? Loan from aus/Lon?”; and

    “What are the group revenue / accounting issues leading to understated profits in HK books? What is the magnitude of the understatement?”

614    Mr Patel’s questions concerning the structure of LKHK and whether it was a branch of LKPL is telling. Specifically, it raises fairly and squarely the relationship between LKHK and LKPL, particularly in circumstances where in Mr Karas’ due diligence document sent to Mr Gold on 26 January 2021, Mr Karas said that LKHK evolved initially as a branch of LKPL and that historically LKHK’s profits had been minimised and LKPL’s profits maximised.

615    I deal with Mr Patel’s financial due diligence later in these reasons.

March 2021

616    In late February or early March 2021, Mr Lipman was approached by Mr Mark Hoffmann QC, a barrister with whom Mr Lipman and Mr Karas had worked over a number of years. Mr Hoffmann QC proposed that he, Mr Borrelli, Mr Richard England and Mr Miels assist Mr Lipman and Mr Karas to achieve an amicable separation.

617    Subsequently, Mr Lipman and Mr Karas agreed to engage Mr England as a facilitator and on or about 23 March 2021, Mr Lipman and Mr Karas signed a facilitation agreement in counter parts: JTB 69/6551/49165-49169.

618    Clause 7 of the facilitation agreement provided that Mr Lipman and Mr Karas would participate in good faith throughout the facilitation.

619    On 1 March 2021, Mr Karas wrote to Mr Lipman in which he reminded Mr Lipman that the two of them were the only directors and shareholders of LKPL and that in the absence of any agreement between the two of them as to a different way forward, the status quo remained: JTB 66/6637/48088.

620    On 1 March 2021, at the resumed meeting of the board and directorate, Mr Patel relayed information in relation to his inquiries concerning Project Swift to that time, in particular, that profits were low in Hong Kong when viewed in isolation and that Mr Patel needed to understand the movement of profits due to group accounting issues: T 2541.21-2541.44.

621    It is recorded in the unsigned minutes of that meeting that Mr Karas had met with key members of MdR and that Mr Karas would have one more meeting with Mr Georgiou, Mr Patel and the Board before going forward. The unsigned minutes of the meeting note, in part, in relation to Project Swift, that: “[t]he proposal is to do an economic merger in the first instance, as you can’t do a legal merger for 3 years in HK, under local regulations”; that “JK is in the process of meeting the key people in litigation and believes that with a strong platform he can rapidly grow the business that he has built on a shoestring. The figures are consistent and show growth.”; “… KG will share the DD that we have done on this”. The unsigned minutes also record Mr Libson advising that, “[t]he three offices of LKHK are individually owned so there should be no problem with this.” That is significant because it reveals an awareness of a potential issue which at that stage it seems MdR had considered and dismissed. However, it was an observation that was made by Mr Libson divorced from any detailed financial due diligence work being done by Mr Patel.

622    I return to those minutes later in these reasons when dealing with MdR’s knowledge, but the statement that the three offices of LKHK are individually owned, in circumstances where LKHK used the name ‘Lipman Karas’ in Hong Kong, and that to do so, LKHK must have entered into an association with LKPL, such that there was managerial and financial integration, must have been evident to, at least, Mr Gold, Mr Libson, Mr Georgiou and Mr Patel. The statement that each of the three offices were, “… individually owned so there should be no problems with this”, demonstrates an awareness of a potential issue as to what the true position was in relation to LKHK’s financial integration with LKPL and what that meant in circumstances where Mr Karas was a partner in LKPL.

623    Consistent with what was recorded in the unsigned minutes of the meeting, Mr Karas had met with members of MdR’s litigation team on 25 and 26 February 2021. Neither Mr Karas nor Mr Gold, who was present on 25 February 2021, deposed to this fact in their evidence in chief. Mr Karas made notes of the meetings on 25 and 26 February 2021: JTB 66/6313.

624    On 1 March 2021, a conversation took place between Mr Gold, Mr Patel and Mr Libson in relation to Mr Patel’s queries that he had raised with Mr Gold. Given it was during the COVID-19 pandemic, it was not face to face. Mr Gold provided some information, which Mr Patel described as “high level”, including that Mr Karas was the sole equity partner of LKHK. Nonetheless, a number of matters were left unresolved and the conversation concluded with Mr Patel being tasked with investigating the unresolved queries with Mr Karas: exhibit R87 [9]-[10].

625    Mr Patel deposed that he carried out his financial due diligence on the basis that LKHK was a stand-alone entity and that Mr Karas was free to deal in respect of that part of the Lipman Karas Group: exhibit R87 [4]. As will become apparent, Mr Patel’s financial due diligence review revealed matters that should have raised concerns in relation to what Mr Karas had represented, at least to Mr Gold prior to this time, about the legal and beneficial ownership of LKHK.

626    That is particularly so when one considers that MdR is a large, international, law firm with a significant presence in commercial litigation. Questions such as the legal and beneficial interests in LKHK must have been front of mind of, at least, Mr Gold and Mr Libson, if not as at 1 March 2021 then certainly shortly thereafter.

627    On 3 March 2021, Mr Lipman sent a proposed Separation Deed to Mr Karas providing for a transfer by Mr Karas of his right, title and interest in LKHK to nominee(s) of LKPL and for LKPL to buy back all shares in LKPL owned by Mr Karas and J&A Karas Pty Ltd. In his response to Mr Lipman’s email of 3 March 2021 on that same day, Mr Karas stated that he would not be engaging with the deed, let alone signing it.

628    Self-evidently, by this time, no consensus between Mr Lipman and Mr Karas had been reached and Mr Karas remained a director of LKPL.

629    On 4 March 2021, results of MdR’s internal due diligence, undertaken by Mr Brewer, were communicated to Ms Herdman-Smith and Mr Georgiou. This disclosed that LKHK was a general partnership, with LKPL and LKLLP registered as branches of that partnership. The applicants contend it is inherently likely that this information was conveyed to Mr Gold, either by Mr Patel or Mr Georgiou. That may or may not be the case, but I accept it was likely.

630    On 4 March 2021, Mr Karas had a conversation with Mr Gold, Mr Georgiou and Mr Patel about, amongst other things, the inter-entity loan between LKHK and LKPL, the cleaning up of accounts and the loan being used as a “stick” by the Australian partners in negotiations. In addition, Mr Karas’ notebook records discussion of the creation of a new LLP to enter into an association with MdR and to be named as such, as well as Mr Karas becoming an SEP of MdR, that Hong Kong be conducted as a branch office at the expiration of three years with full economic integration, and during that initial three year period, Mr Karas was to conduct the firm with the revenues being to the account of MdR: JTB 67/6402.

631    It was during that conversation that the question of a “valve partnership” was raised by Mr Patel, i.e. a person who is a partner in two jurisdictions who receives all the profits from one jurisdiction (e.g. Hong Kong), with their profits from the other jurisdiction (e.g. United Kingdom), adjusted to take account of that partner’s receipts from Hong Kong.

632    Mr Patel said that he thought it was highly likely that on that occasion Mr Karas discussed his preference, “to close the books with LKAUS on a determined day and commence business afresh with MdR the next day”.

633    The 4 March 2021 conversation was Mr Georgiou’s first conversation with Mr Karas. Mr Georgiou said in evidence that he understood that by closing LKHK’s books with LKPL one day, and starting afresh with MdR the next, subject to any ongoing work, LKPL would cease to gain the economic benefits of the Hong Kong firm on one day, and MdR LLP would gain the economic benefits on the next (T 2543.36-2546.39). Mr Georgiou’s evidence cannot be correct in relation to LKPL performing ongoing work because at that stage there was no Separation Agreement which called for LKPL to continue doing some Hong Kong work. It is likely Mr Georgiou became aware of LKPL doing ongoing LKHK work at some time after 4 March 2021.

634    Nonetheless, I find that the concept that LKHK would close its books with LKPL one day and start a fresh with MdR the next, was raised at that meeting and that at the time it represented the intentions of both Mr Karas and MdR (the latter being through Mr Gold and Mr Georgiou). Whether it was possible was, of course, subject to a number of matters aligning.

635    By 4 March 2021, Mr Georgiou understood that LKHK was registered with the Law Society as a general partnership and that there was financial integration between the Hong Kong partnership and London and Australia.

636    Mr Georgiou told Mr Karas during the conversation that he wanted a clear delineation between his relationship with Australia/London and the new relationship that was being formed with MdR, as well as between the client matters being performed for the economic benefit of MdR rather than for Australia.

637    Whereas there is some doubt as to whether during this conversation there was a discussion about Mr Karas’ remuneration structure, in particular Mr Karas receiving profits from the newly formed LLP together with a top-up from MdR LLP, there is no doubt it was discussed with Mr Georgiou at or about this time. Further, Mr Karas’ remuneration was to be assessed by the London remuneration committee with the goal that the net profits of LKHK would ultimately be passed back to MdR.

638    There is no doubt, and I find, that based on the information obtained by Ms Herdman-Smith about an association between a Foreign Firm and a local Hong Kong firm, as well as Mr Karas’ own knowledge from what occurred with LKPL between 2009 and 2012, the concept being developed between MdR and Mr Karas was that Mr Karas would establish a new entity in order to form an association with MdR as a foreign firm in Hong Kong, with Mr Karas as partner of both firms in order to shift profits to MdR with MdR ultimately acquiring LKHK. To that extent, the arrangement was the mirror image to what existed at that time as between LKPL and LKHK. This all occurred when Mr Karas was still a director of LKPL.

639    Following the call on 4 March 2021, between 4 and 17 March 2021, Mr Patel exchanged emails with Mr Karas, as part of Mr Patel carrying out his financial due diligence, in which he sought to understand further LKHK’s loan accounts and case pipeline.

640    I deal with that email exchange, and a subsequent email exchange between Mr Patel and Mr Karas in April 2021, in detail when considering MdR’s knowledge.

641    On 17 March 2021, following a request by Mr Gold, Mr Tyler sent a draft Framework Agreement to Mr Gold: JTB 68/6502.

642    In his email, Mr Tyler referred to Mr Gold mentioning, I assume in an earlier conversation with Mr Gold, that “it” (i.e. the transaction), “is a financial merger but HK will continue to be supported by LK Australia”. Mr Tyler indicated he would need to clarify some aspects with Mr Gold.

643    At some stage, Mr Gold had been provided with documentary evidence of the applicable Hong Kong rules because on 19 March 2021, he forward to Ms Herdman-Smith an email from Mr Karas attaching r 2A of the Solicitors’ Practice Rules and related legislative provisions. Rule 2A provides that only a solicitor qualified in Hong Kong may form a branch of an “overseas firm within the territory”.

644    In any event, after various discussions between Mr Gold and Mr Tyler, and with subsequent input from Mr Karas, Mr Karas signed the Framework Agreement on 25 March 2021. Mr Gold signed the Framework Agreement for MdR on 30 March 2021, at which time Mr Tyler sent the executed document to Mr Karas: JTB 70/6646/49810.

645    At the time Mr Karas signed the Framework Agreement, he was still a director of LKPL.

April 2021

646    On 7 April 2021, Mr Gold emailed MdR’s SEPs with an attached “paper in support of the proposal for establishing an Association in Hong Kong and for Mr Karas to join the firm”: JTB 71/6794. In that paper, Mr Gold told the SEPs that they had access to the extensive due diligence contained in the Project Swift Teams channel and Mr Gold encouraged the SEPs to look at it.

647    Had the SEPs done so, they would have seen Mr Patel’s financial due diligence, including that Mr Karas was a partner at LKPL; shared in its profits with Mr Lipman; had that share of profits adjusted to take into account Mr Karas’ receipt of LKHK’s profits; that LKHK had a significant loan account with LKPL on account of work done by LKPL on Hong Kong matters; and that LKHK and LKPL were financially and administratively integrated.

648    MdR’s SEPs met on 13 April 2021, but no vote in relation to Mr Karas was taken.

649    On 14 April 2021, Mr Gold emailed MdR’s SEPs attaching a paper in the same terms as that sent on 7 April 2021.

650    Also on 14 April 2021, Mr Karas sent a letter to the Law Society requesting the approval to change the name of ‘Lipman Karas’ to ‘Karas LLP’.

651    On 15 April 2021, Mr Gold sent two proposed resolutions to MdR’s SEPs and equity partners. The first resolution was that Mr Karas be appointed a SEP of MdR with effect from 30 April 2021. The second resolution was to approve the terms of the Framework Agreement. The SEPs passed the resolutions subject to the condition that Mr Patel and Mr Georgiou prepare a report for the board that LKHK would generate Hong Kong profits in excess of US$2 million on an annualised basis: JTB 74/7138.

652    Mr Patel did not recall if Mr Nouroozi asked him to personally attend the meeting on 15 April 2021, although, he deposed that he may have been present. He deposed further that it was likely that Mr Nouroozi told him that there were partners inquiring as to the reference in the Karas documents about LKHK’s profitability as consistently understated in the accounts, however he could not recall. Mr Patel recalled that he spoke to the SEP meeting of the consequences of his due diligence inquiries and that he likely spoke about Mr Karas’ remuneration coming out of both jurisdictions. He also recalled that he spoke about how the profitability of the Hong Kong accounts, as a standalone proposition, was not that attractive, as well as the structure of the Australian firm.

653    Following a number of queries from MdR’s SEP and equity partners, on 16 April 2021, Mr Gold emailed MdR’s SEPs identifying conditions to the resolutions: JTB 75/7169:

Dear all

In deliberating the resolution for the appointment of Jason Karas (JK) as an SEP, it has been agreed that the HK opportunity resolutions currently before the Partners will be conditional upon:

1.    Receiving updated financial information from Lipman Karas HK;

2.    Mayank reviewing that information and determining the excess (or shortfall) of income above expenditure after tax and before drawings by JK; and

3.    An updated report thereon being presented to the Partners, with a surplus of USD$2m or more on an annualised basis being sufficient to treat as unconditional the approvals received.

If you have not already done so, please submit your vote by the requested deadline. If any questions, please contact me, James or Mayank.

Kevin

654    Mr Karas emailed Mr Patel, Mr Gold, Mr Libson and Mr Georgiou on 16 April 2021 (JTB 73/6926) in which he provided:

1.    Trial balance for LKHK at 30.6.2020.

2.    Draft financial statements for LKHK for 30.6.2020.

3.    Trial balance for LKHK at 31.12.2020.

4.    Email summarising revenue and expenses for Jan to March 2021 (note expenses include JK draw).

5.    5 year adjusted P&L summary – see below.

6.    Current Debtor and Work in Progress (WIP) summary.

…

b.    As previously advised (26.1.2021 memo), the group policy has been to maximise the profit of LKAus and minimise the profit of LKHK, consequently the profitability of LKHK is consistently understated in the accounts. In particular, LKHK receives neither any revenue benefit/management fee, nor any expense/cost relief, from the work it refers to LKAus, LKHK is also charged substantial interest by LKAus on an intra group loan account, see trial balances and draft financials.

c.    The 5 year adjusted P&L summary (item 5 above) prepared by my accountant, adds back to the LKHK P&L work done by LKAus and a corresponding additional salary cost (at 50% of the revenue). This shows the adjusted NPBT of the LKHK business, before any drawings to me, of about GBP3.3m (HKD35m) for 2019 and 2020.

d.    The draft financials for 30.06.2020 (item 2 above) show a partner’s deficit, which is due to my drawings being charged entirely to LKHK without LKHK receiving any benefit for the work referred to LKAus, per item b. above, or reflecting my share of income from LKAus. (I understand that the current partner’s deficit of HK$9.7m will reduce to about HK$1.8m post adjustments).

655    As is apparent, Mr Karas’ email records at c. above that LKHK’s revenue included LKPL’s portion.

656    Mr Patel sent an email to himself also on 16 April 2021 stating, amongst other things, that:

(a)    The “financial prospects are much improved once you factor in the Australian element of Jason’s practice”;

(b)    “JK anticipates that within a 12 month period the work he delivers to Australia can be transitioned to London”; and

(c)    “Success of investment will largely be driven by how much fees currently delivered to Australia are transitioned to London – which will not be visible in 2-dimensional P&L view”: JTB 73/7000.

657    Thereafter, there were further exchanges between Mr Karas and Mr Patel in relation to LKHK’s financial performance and the role played in that by LKPL.

658    On 21 April 2021, Mr Patel sent Mr Karas an email asking him further questions, in reply to which, amongst other things, Mr Karas confirmed that LKPL’s fees would be transitioned to fee earners in London over a period of time: JTB 74/7081.

659    There is no doubt, and I find, that a constant theme of the discussions between Mr Karas and MdR, specifically Mr Gold in their initial discussions, and with Mr Gold, Mr Georgiou and Mr Patel later, was that work which historically had been performed by LKPL on Hong Kong matters would be transitioned to MdR to the benefit of MdR and Mr Karas. Given that LKPL received between A$10 million - A$11 million per year from LKHK, such a transition would be to the detriment of LKPL and Mr Lipman.

660    On 22 April 2021, Mr Patel sent to Mr Georgiou a revised spreadsheet showing the estimated profits of LKHK for the 2021 and 2022 financial years following which Mr Georgiou emailed MdR’s Board attaching his and Mr Patel’s analysis, stating, “it is our view that the conditions articulated by Kevin in his email to the SEPs of 15 April have been met. Unless any of you have any strenuous objections, I will be sending a note to the SEPs saying that the Board is satisfied that the conditions in the resolution have been satisfied”. Amongst other things, the attachment stated that work referred to Australia by Hong Kong would transition to MdR over time: JTB 74/7137, 7138.

661    On 23 April 2021, Mr Georgiou sent MdR’s SEPs an email indicating that “the conditions have been satisfied and the resolutions passed”.

662    On 23 April 2021, Mr Georgiou informed Mr Karas by Whatsapp message that the resolution had passed and on 27 April 2021 Mr Libson confirmed to MdR’s SEPs and equity partners that the resolution directed to Mr Karas had passed: JTB 75/7167, 7170; 7197. At that time, Mr Karas was still a director of LKPL.

The Framework Agreement: JTB 70/6646

663    The parties to the Framework Agreement were MdR, LKHK (“a partnership registered in Hong Kong”) and Mr Karas.

664    Under the heading “Background”, the Recitals record:

D.    LKHK is affiliated with LK Australia and LK UK.

E.    JK is the sole proprietor of LKHK and co-founder of the Affiliates.

F.    The Parties wish to establish a framework to govern their respective rights and obligations in relation to a financial merger of LKHK’s business with Mishcon.

G.    This Agreement sets out the terms and conditions upon which the parties have agreed that such financial merger shall take place.

H.    The Parties expect and desire this financial merger to lead to the ultimate full acquisition and merger of LKHK by Mishcon upon the regulatory requirements for Mishcon to be able to open its own office in Hong Kong being satisfied.

I.    JK has provided a proposed paper dated 5 January 2021 that is included in the Schedule to this agreement for information.

665    Clause 1.1.4 defined the “Commencement Date” as having the meaning set out in cl 2.1. That clause, in turn, provided that the Agreement would commence with effect on 30 April 2021, subject to the satisfaction of “the Condition”.

666    “Condition” was defined in cl 3.1 as:

This Agreement is conditional upon the approval of the requisite majority of the SEPs [Senior Equity Partners of Mishcon in accordance with the Mishcon De Reya LLP Deed dated 23 April 2020] to the terms of this agreement and to the appointment of JK as an SEP with effect from the Commencement Date.

(square brackets provided)

667    Clause 3.2 provided that following the signing of the Agreement, MdR undertook to present the terms of the Agreement and the proposed election of Mr Karas as an SEP for approval by the SEPs as soon as reasonably practicable after 9 April 2021.

668    Clause 3.4 provided that upon confirmation of the satisfaction of the Condition, Mr Karas “… shall execute a deed of adherence to the LLP Deed”.

669    Clause 4.1 provided that with effect from the Commencement Date, or obtaining regulatory approval (not defined but clearly referring to regulatory approval by the relevant Hong Kong authorities), if that is not obtained by the Commencement Date, LKHK was to rebrand itself as “Karas LLP in association with Mishcon de Reya”.

670    In cl 5, under the heading “Financial Merger”, cl 5.1 provided that:

With effect from the Commencement Date, all ordinary course revenues and outgoings of LKHK shall be accounted for and be for the account of Mishcon.

671    Clause 5.3 provided that the parties are to collaborate “… in continuing with the existing arrangements with the Affiliates unless otherwise agreed, including the provision of IT support from LK Australia.”

672    Clause 5.4 reads:

JK shall be managing partner of the Hong Kong office, reporting to Kevin Gold and James Libson, Mishcon’s executive chairperson and managing Partner, respectively, and that liaising with Tahirah Ara, head of Mishcon Asia.

673    Clause 6.1 records the agreement of the parties that the terms of the Framework Agreement are to apply for the longer of three years from the Commencement Date and the date upon which Mishcon achieves its Hong Kong licence to open its own law offices. Upon that occurring, clause 6.3 provided that “… the Parties agree that LKHK shall be fully merged into Mishcon and the business will be rebranded, Mishcon De Reya Hong Kong or such other name approved by Mishcon”.

674    Clause 6.4 records Mr Karas’ undertaking to give his full time and commitment to the running of the Hong Kong office, to the servicing of client requirements and to growing the business of the Mishcon group for not less than the period required under clause 6.1 plus 3 years.

675    Clauses 6.5-6.8 provided:

6.5    Upon Mishcon becoming licensed in Hong Kong, JK undertakes to enter into such additional deed incorporating the terms of clause 6.4 and clause 11 as are reasonably required by Mishcon to maintain the purpose thereof for the agreed period set out in clause 6.4 notwithstanding the termination of this Agreement in accordance with its terms.

6.6    Mishcon shall use all reasonable endeavours to integrate its IT, accounting and other critical business support services with LKHK as quickly as possible from the Commencement Date with a view to these being fully operational and supported within 6 months of the Commencement Date.

6.7    In parallel with the Mishcon support set out in cl 6.5 being operational JK shall procure that all arrangements between LKHK and the Affiliates shall be terminated at the earliest practicable time.

6.8    JK shall cease to be a partner, member, shareholder or other participant of LK Australia and LKUK at the earliest opportunity following the Commencement Date and in any event within 6 months of the Commencement Date unless, in each case, otherwise agreed in writing by Mishcon.

676    Clause 11, to which cl 6.5 refers, is an indemnity provision by which Mr Karas indemnifies Mishcon for various events.

677    Termination of the Framework Agreement for cause is dealt with in cl 13 and pursuant to clause 16, any variation to the Framework Agreement is to be in writing and signed by the parties.

MdR’s submissions on the Framework Agreement

678    MdR submits, at a general level, that the Framework Agreement was in the nature of “an agreement to agree” in the event approval for MdR to open a practice in its own name was obtained from the Law Society. It submits further that the document is best described as a “highly conditional document”.

679    I do not accept the Framework Agreement was an agreement to agree. I accept that parts of the Framework Agreement were contingent upon acts to be taken by a third party (i.e. the Law Society) so that further steps could be taken, but the agreement was not wholly conditional.

680    MdR submits there was a clear and mutual understanding between Mr Gold and Mr Karas that the operation of the Framework Agreement was conditional upon obtaining the approval of the Law Society and that no merger (financial or otherwise) would bind either side unless, and until, that condition was satisfied. MdR submits that clauses such as cl 5.1 (ordinary course revenues and outgoings of LKHK to be accounted for and be for the account of MdR) were understood in light of that condition. I do not accept that submission for the following reasons.

681    First, in making that submission, MdR is referring to the subjective understanding of Mr Karas and those at MdR. Both are irrelevant under Australian law and the law of England and Wales, and Hong Kong. The meaning of the terms of a commercial contract is to be defined by what a reasonable businessperson would have understood those terms to mean: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35]; Wood v Capita Insurance Services Limited [2017] UKSC 24 at [10], [13] (Lord Hodge, with whom Lord Neuberger, Lord Mance, Lord Clarke and Lord Sumption agreed).

682    Second, the only reference to regulatory approval is in cl 4.1 which concerned the re-branding of LKHK to “Karas LLP in association with Mischon de Reya”. That refers to the association between Karas LLP and the MdR Foreign Firm. It does not deal with any merger.

683    Further, cl 4.1 is expressed to operate from the Commencement Date or obtaining regulatory approval. Upon that occurring, LKHK was to change its name. No other obligation under the Framework Agreement is affected by cl 4.1 regulatory approval, although it does play a role in any subsequent merger, in that the association is a step prior to MdR being able to open an office in Hong Kong and practising Hong Kong law in its own name.

684    Third, the subject of MdR practising Hong Kong law in its own name is the subject of cl 6.1. Clause 6.1 is used as a benchmark from which the minimum term of the Framework Agreement is determined.

685    Next, MdR submits that Recitals A to I in the Framework Agreement confirm the aspirational nature of the agreement and “give comfort”, but that the operative parts of the agreement do not come into operation until certain performance conditions are met. I accept the recitals are aspirational in nature but I do not accept that the operative parts of the agreement do not come into operation until certain performance conditions are met.

686    Recitals do not form part of a deed or agreement and do not have operative effect unless specifically incorporated into the operative part of the deed or agreement. One qualification to that principle is where the recitals record that the parties have agreed to something or will do some particular act or acts, and in the event the operative part of the document does not include the express provisions referred to under those circumstances, in the absence of a contrary intention in the operative parts of the document, “it may be safely inferred that the absence of a contractual provision was due to oversight or inadvertence”: Ansett Transport Industries (Operations) Pty Ltd v Commonwealth of Australia (1997) 139 CLR 54 at 72 (Mason J) citing Aspdin v Austin (1884) 5 QB 671 at 683.

687    Next, MdR refers to cl 6.3, which provided that:

Upon Mishcon becoming licenced in Hong Kong, the parties agree that LKHK shall be fully merged into Mishcon and the business will be rebranded, “Mishcon de Reya Hong Kong” or such other name approved by Hong Kong.

688    In this context, MdR submits that the contingency of approval by the Law Society meant that no merger would bind either party unless that condition was met. It submits that the “licence” referred to is at the end of the “association with MdR” and that it is implied by cl 6.3 that until that point, there is no “full” merger. On that basis, MdR submits that “the express terms of the Framework Agreement state that the full merger and rebrand are contingent” upon MdR becoming licensed in Hong Kong.

689    MdR’s submission proceeds on the basis that there is a full merger or nothing. I do not accept that submission.

690    If, contrary to my understanding, that is not MdR’s submission (i.e. there could be something less than a full merger) then the submission does not assist MdR. That is because whereas cl 6.3 provides that upon the identified events occurring a “full merger” is effected and Mr Karas’ business in Hong Kong will be rebranded ‘Mishcon de Reya Hong Kong’ (or such other name as may be approved by MdR), that does not mean that the financial merger called for by cl 5, in particular cl 5.1, is contingent upon the events in cl 6.3 occurring.

691    Clause 5 as a whole deals with the financial merger of LKHK and MdR. It also is clear from the clause that Mr Karas is to be the managing partner of the Hong Kong office, reporting to Mr Gold and Mr Libson. Further, the clause regulates hiring of partner level candidates for the Hong Kong office with MdR reserving to itself the final approval of any such hiring. Clause 5 does not say that is to occur only from the events in cl 6.3 occurring. On its face, cl 5 is directed to and provides for the financial merger of LKHK and MdR as from the Framework Agreement coming into effect.

692    Further, Mr Karas undertook to give his full time and commitment to running the Hong Kong office, to the servicing of client requirements, and to growing the business of the Mishcon Group for the longer of three years (from the Commencement Date) or the date MdR receives its Hong Kong license to open up its own law offices: cl 6.4. That was not contingent on the events in cl 6.3 occurring.

693    Still further, Mr Karas also agreed in cl 6.8 that he will, “cease to be a partner, member, shareholder or other participant of LK Australia and LKUK at the earliest opportunity following the Commencement Date and in any event within 6 months of the Commencement Date unless, in each case, agreed in writing by Mishcon”. That clause specifically contemplates Mr Karas having a contemporaneous role within LKPL whilst the Framework Agreement was in effect. It is not contingent on the cl 6.3 events.

694    Next, MdR submits that care needs to be taken when construing cl 5.1 on the basis that it does not include contractual debts, nor does it allow LKHK to ignore debts it owed to LKPL. Whereas it may be accepted that an agreement between MdR and Mr Karas could not affect LKHK’s contractual liabilities, whether to LKPL or otherwise, that is not the point. The point is that LKHK’s trading revenues and expenses are to be for the account of MdR.

695    Next, MdR submits that the cl 3 condition is a genuine pre-contractual condition, which if not met, would mean that no contract exists. I accept that submission.

696    MdR continues, by inviting the Court to find that because of the performance condition requiring Law Society approval of the association, the Commencement Date could be notional only until that approval was given. I do not accept that submission on the basis it is contrary to the terms of the Framework Agreement for the reasons I have set out above.

697    Next, MdR submits that a HK$30 million loan from MdR to Karas LLP in September 2021 demonstrates that MdR and Karas LLP were not “commercially integrated” at that time and that until they were, Karas LLP was obliged to account for and treat revenue and expenses pre-1 June 2021 differently from revenue and expenses post 1 June 2021. MdR submits that post 1 June 2021, it could not have been LKPL’s revenue. MdR’s submissions make the point that the applicants seek to make, which is that the Framework Agreement required Mr Karas and LKHK to account for revenue and outgoings for the account of MdR and that that obligation arose whilst Mr Karas was still a director of LKPL. Further, although MdR submits it was only post 1 June 2021 that the obligation to account arose and that LKHK’s costs after 1 June 2021 were its own, that is predicated on the date the Framework Agreement came into effect - being 1 June 2021, a proposition with which I deal below and do not accept.

698    The Karas respondents contend that the Framework Agreement could only take effect when MdR was able to practice in Hong Kong as a Foreign Firm. MdR observes that the Law Society approved MdR to practice in Hong Kong in association with Karas LLP on 3 September 2021 with MdR receiving notification to that effect on 7 September 2021. I do not accept that submission. Clause 5.1 speaks of accounting for the account for MdR with effect from the Commencement Date and is to the contrary, as are the other sub-clauses in cl 5 and the obligations in cls 6.4 and 6.8.

699    In response to the applicants’ submission that the consolidation of accounts between MdR occurred on 1 June 2021, MdR submits that the consolidation occurred once the Operating Agreement was signed. I do not accept that submission and note that MdR’s Financial Statements incorporated Karas LLP’s income from 1 June 2021.

700    MdR submits further that approval of the Association Agreement is properly characterised as a condition subsequent to formation but precedent to performance, citing Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537; Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep. 209.

701    I do not accept the submission that approval of the association is properly characterised as a condition precedent to performance of all the obligations contained within the Framework Agreement for the reasons I have given. Further, neither of these cases assist MdR. In both matters, the contract had come into existence, however the question was whether the obligation to perform the contract had crystallised. In the event the contingency remained unfulfilled, the other party could terminate the existing contract.

702    The Framework Agreement is quite clear. It came into effect upon the satisfaction of the Condition, which does not include the approval by the Law Society. On its face, cls 5, 6.4 and 6.8 of the Framework Agreement commenced with effect from the Commencement Date. That was the position whilst the next steps took place, which was the licensing of MdR in Hong Kong.

703    Clause 5 does not operate as a contingency, nor do cls 6.4 and 6.8. Those clauses set out obligations which crystallised upon the one and only condition being satisfied.

704    On a proper construction of the Framework Agreement, it proceeded by way of a staged process with the initial stages operative and continuing whilst the remaining stages were satisfied. Upon those later stages being satisfied, the initial obligations remained.

705    Further, it would have been easy for the parties to have made the implementation of cls 5 or 6.4 and 6.8 conditional on other steps being taken, but they did not.

706    Whether under Australian law or England and Wales, and Hong Kong law, the position is the same.

707    I find that as from 30 April 2021, the Framework Agreement came into effect.

The attempt after 30 April 2021 to vary the date the Framework Agreement came into effect was not effective

708    There is an issue between the parties as to whether the Commencement Date for the Framework Agreement was varied. I find it was not for the reasons which follow.

709    It was suggested to Mr Gold in cross-examination that he knew that Mr Karas was commencing a relationship with MdR without Mr Lipman’s concurrence. Mr Gold responded that he never addressed that point in his mind, before continuing: T 2034.47-2035.7:

But also I knew that the nature of this agreement wasn’t the end of the journey, it was rather the start of a journey. We expected that journey all being well to end by 30 April, so there was a full month in which to make good all those issues. But it was just not in my mind. Mr Lipman wasn’t in my mind at that time. What was in my mind is Mishcon de Reya and our business. I really didn’t address my mind to that. And nor did I wilfully not address my mind, it just was – Karas says I own this business, we accept it and we contract on that basis.

710    I do not accept that evidence. If Mr Gold’s genuine understanding was that Mr Karas owned LKHK both legally and beneficially, then there was no reason to change the date that the Framework Agreement came into effect. Of course, by that stage, Mr Patel had completed his financial due diligence and reported on it. I deal with the effect of that in the section of these reasons dealing with MdR’s knowledge, but the short point is that by well before 30 April 2021, if Mr Gold did not actually know Mr Karas was not the sole legal and beneficial owner of LKHK, it was because, at least, he had turned a blind eye to the issue.

711    Against that background, both Mr Karas and Mr Gold gave evidence that during a conversation on or about 25 May 2021 (the date the Separation Agreement was signed), they agreed to change the Commencement Date of the Framework Agreement to 1 June 2021. That was the date the Separation Agreement was to come into effect. From Mr Karas’ perspective, the change occurred to allow “a clean break” from his duties owed to LKPL.

712    On or about 26 May 2021, Mr Gold informed Ms Herdman-Smith that the Commencement Date had been changed from 30 April 2021 to 1 June 2021.

713    Ms Herdman-Smith agreed in cross-examination that Mr Gold told her that he and Mr Karas had agreed to vary the Commencement Date of the Framework Agreement to 1 June 2021. Ms Herdman-Smith informed Mr Tyler of that fact in an email sent on 26 May 2021.

714    However, in his evidence, Mr Gold said that moving the 30 April date was at the behest of Ms Herdman-Smith. When it was pointed out to Mr Gold in cross-examination that MdR’s defence pleaded a verbal agreement between Mr Karas and Mr Gold on or about 25 May 2021 to vary the Commencement Date to 1 June 2021, Mr Gold answered, “[s]o, there you go”: T 2046.5-2046.24.

715    Mr Karas deposed in the first Karas affidavit (exhibit R55 at [248]), that he did not consider it to be necessary for the Framework Agreement to be conditional on agreement being resolved between him and Mr Lipman as to the terms of their separation. Mr Karas explained that that was because he had decided to sever his business relationship with Mr Lipman, “… regardless of whether he and I reached agreement”. I do not accept that evidence.

716    Unless Mr Karas simply walked away, it was not possible to simply sever his business relationship with Mr Lipman. Mr Karas did not walk away and I do not accept that he would have done so. That is for a number of reasons:

(a)    First, Mr Karas needed to separate his business interests with LKPL and Mr Lipman before the arrangements he had entered into with MdR could proceed and Mr Karas receive the benefits of those arrangements;

(b)    Second, I have no doubt Mr Lipman would have taken steps to injunct Mr Karas should he have tried to set up competition with LKPL/LKHK/LKUK;

(c)    Third, Mr Karas could be replaced; and

(d)    Fourth, leaving Lipman Karas completely was an option raised by the Beatons with Mr Karas in mid-2020 (JTB 50/4691). Mr Karas did not take up that suggestion then, so there is no reason to suggest otherwise now.

717    In short, Mr Karas had no option but to remain at LKHK until he had resolved the basis upon which he and Mr Lipman separated their business interests and whether he liked it or not, Mr Karas remained in business with Mr Lipman until 1 June 2021.

718    Mr Karas’ also gave evidence that the Framework Agreement was predicated on extricating himself from LKPL and that the Framework Agreement did not come into effect until long after Mr Karas had extricated himself from LKPL: T 1673.8-1673.30; see generally T 1670.16-1673.32.

719    I do not accept that evidence.

720    In [248] of his first affidavit, Mr Karas deposes that “[t]he primary significance of the Commencement Date was as the date from which all ordinary course revenues and outgoings of LKHK would be accounted for and be for the account of MdR. No such accounting took place until after 1 June 2021, and only with effect from 1 June 2021”.

721    That is not to the point. The Framework Agreement gave rise to that obligation, as well as others, as from 30 April 2021.

722    Clearly, the need to separate Mr Karas’ business interests from that of Mr Lipman was important. If Mr Karas did not consider that to be the case, there was no need to extend the Commencement Date, nor would it have been necessary to do so.

723    MdR and the Karas respondents adopt each other’s submissions. MdR submits that Mr Karas “had every expectation that his separation from LKPL would be finalised” by 30 April 2021, and that if this did not in fact occur by then, “… he did not consider at first that the Framework Agreement needed to be varied where the separation was imminent and it was not necessary to his mind, to take unilateral steps.” MdR refers to T 1672.25-26, however when that single sentence is read in context with the rest of the evidence, it reveals that Mr Karas wanted to ensure there was no overlapping dates between the Framework Agreement and his ongoing obligations to LKPL and/or Mr Lipman: T 1672.5-1673.12.

724    MdR’s submission, to the extent any weight can be placed on it, only reinforces that Mr Karas considered the Framework Agreement to be operational as from 30 April 2021.

725    As to the purported change to the Commencement Date, the applicants submit that:

(a)    The change occurred after the Framework Agreement came into effect on 30 April 2021;

(b)    The change does not exempt pre-existing breaches of fiduciary duties; and

(c)    The change cannot be done because it was not in writing and signed by the parties pursuant to cl 16.1 of the Framework Agreement.

726    In reply to those submissions, MdR refers to Cirrus Realtime Processing Systems Pty Ltd v Jet Aviation Australia Pty Ltd (2023) 113 NSWLR 80 at 86 (Leeming JA) and submits that the changed Commencement Date is treated as the final date such that the applicants’ submissions in (a) and (b) above should not be accepted.

727    Cirrus does not assist MdR. It is authority for the proposition that a variation to an existing contract is determined at the time the variation is effected, it does not refer to an attempt to rewrite a provision concerning when a contract comes into effect, when that contract has already come into effect.

728    I accept the applicants’ submissions in (a) and (b) above.

729    As to (c), the applicants submit that based on English law, oral changes to a contract where there is a “[n]on-oral modification” clause, are invalid if the parties do not strictly adhere to it: Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 at [11], [12], [15] and [17] (Lord Sumption with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed). The applicants submit that the law of England and Wales applies, whereas MdR submits that Australian law applies.

730    The law of England and Wales applies. The Framework Agreement makes that clear in the governing law clause – cl 27.

731    Next, whereas MdR accepts that there could be a breach of fiduciary duty unrelated to the Commencement Date which is not absolved by the variation to the Commencement Date, any breach occurring by reason of the earlier date of commencement of the Framework Agreement has no consequence.

732    I do not accept that submission which somewhat misses the point. Mr Karas had entered into an agreement which, once it came into operation, contained provisions which were contrary to the interests of LKPL, of which he remained one of two directors, as well as Mr Lipman.

733    Next, MdR submits that third parties to agreements do not have the right to enforce the benefit provided to them in a contract. MdR submits further that in any event the applicants do not contend that the changed Commencement Date stopped them from receiving benefits, simply that the applicants argue the Barnes v Addy cause of action.

734    MdR submits that in circumstances where neither Mr Karas nor MdR challenge the changed Commencement Date as parties to the Framework Agreement, the applicants cannot submit successfully that 30 April 2021 is the actual Commencement Date.

735    I do not accept those submissions. It is not a question of the applicants enforcing the contract, it is a question of what Mr Karas and MdR did. Further, the submission that neither Mr Karas nor MdR challenge the changed Commencement Date seeks to make a virtue out of a vice.

736    Mr Karas and MdR entered into an agreement whilst Mr Karas was still a director of LKPL and became a party to an agreement which imposed obligations on him as from the Commencement Date, at which time Mr Karas remained a director of LKPL.

737    I find that the attempted variation of the Commencement Date was because at the least, Mr Karas was well aware of the significance of the Separation Agreement, his ongoing statutory and fiduciary obligations prior to the Separation Agreement coming into effect, and the manifest conflict in which he had placed himself. If Mr Gold was not actually aware of both Mr Karas’ statutory and fiduciary obligations and the potential breach of them, for the reasons I set out later, at the least, he turned a blind eye to it.

738    At the end of the passage of evidence to which I have referred above: T 1672.5-1673.12, it was put to Mr Karas that his evidence about the purported change in the Commencement Date for the Framework Agreement was dishonest. Mr Karas disagreed. I have no hesitation in finding that it was.

739    I find that although Mr Gold and Mr Karas agreed orally on or about 25 May 2021 to extend the Commencement Date of the Framework Agreement to 1 June 2021, that agreement was ineffective because the Framework Agreement had already commenced.

740    Further, although denied by Mr Karas and Mr Gold, I find the only reason to change the Commencement Date of the Framework Agreement to 1 June 2021 was in an attempt by Mr Karas to create an illusion, albeit false, that he had not entered into any agreement inconsistent with his statutory and fiduciary duties to LKPL and his fiduciary duties to Mr Lipman prior to the “Effective Date” of the Separation Agreement.

741    I find that the Framework Agreement came into effect on 30 April 2021.

742    As to the admission of Mr Karas into MdR’s partnership, Mr Gold said in evidence that according to the firm’s partnership deed, a SEP can only be appointed after receiving authorisation from the Law Society of England and Wales and signing the Deed of Adherence.

743    I accept Mr Karas did not become an SEP of MdR until he signed the Deed of Adherence to the LLP Deed – cl 3.4, albeit effective from 1 June 2021.

May 2025 - the Separation Agreement is concluded

744    After the Facilitation Agreement was signed on or about 23 March 2021, Mr England and Mr Hoffmann QC worked in an attempt to have Mr Lipman and Mr Karas reach an agreement for the separation of their interests in LKPL and LKHK.

745    Those efforts culminated in Mr Lipman and Mr Karas signing the Separation Agreement by counterparty both on their own behalf and for their respective corporate entities on 25 May 2021: JTB 79/7568.

746    Viewed from LKPL and Mr Lipman’s perspective, a critical aspect in the negotiations for the Separation Agreement involved ongoing work for LKPL from LKHK, which as from at least July 2019 had formed the majority of the work being undertaken by LKPL’s practitioners in Adelaide: exhibit A4 [319].

747    Ultimately the question of ongoing work for LKPL from LKHK was dealt with by cl 5.2 of the Separation Agreement.

748    Mr Karas provided a first draft of the Separation Agreement on 23 April 2021 to Mr England, Mr Michaels and Mr Miels. In the covering email (SJTB 101/9105), Mr Karas said:

You will see that clauses 5.2/5.3 assure Skip/LKPL of continuity of LKHK work for 12 months (cl 5.2/5.3), which is likely to be, although not promised to be, circa A$10m. This should address any concern on Skip’s part to not be “signing up to a business which is insolvent from day 1”. It also gives LKPL a year, which is plenty of time, to restructure its business however it wishes to going forward (including new revenue sources and cost/salary/bonus reductions).

That is not to say that there will not be future work for LKPL post 12 months, there may well be and the door is open, but that is not something I can promise or commit to (let alone contract), nor do I believe I should. Much will depend on the progress and status of the projects (as we know, projects usually take longer than anticipated) and on the human dynamics of the personal relationships.

(emphasis provided)

749    There is no evidence that this communication was shared with Mr Lipman and I find it was not.

750    Clauses 5.2 and 5.3 were subject to negotiation and evolved over time. However, prior to cl 5.2 being finally agreed, in an email sent by Mr Lipman to Mr England and Mr Hoffmann QC on 30 April 2021 (JTB 75/7239) Mr Lipman said that the most critical subject was the future revenue of LKPL. Mr Lipman expressed the view that LKPL would not enter into any agreement which rendered LKPL immediately insolvent or any transaction which did not permit LKPL to determine what its likely future revenue would be. In view of Mr Karas’ email sent 23 April 2021, Mr Lipman’s concern about LKPL’s future revenue and the prospect of LKPL becoming insolvent must have been raised prior to 23 April 2021.

751    Nonetheless, the statement by Mr Karas about the possibility of future work after 12 months must be seen against his note to Mr Georgiou sent on 21 April 2021 in which Mr Karas told Mr Georgiou: JTB 74/7076:

In relation to LKHK work presently done in LKAus/LKUK, I anticipate a run-off/transition period of circa 12 months, ie an incremental approach to prevent waste of client investment in existing resources.

No “new work” will be sent by LKHK to LKAus/LKUK, only continuation of their involvement in existing projects by way of run off, as above.

Within about a year, a rough estimate is similar revenue to MDR London as is presently sent to LKAus/LKUK, and/or growth in LKHK/MDRHK revenue, of about HKD50m+ per annum.

752    Mr Karas’ email to Mr England and Mr Hoffmann QC was non-committal in relation to new work after 12 months, but he said specifically that the door was open to the possibility that LKPL would receive new work. In view of the Framework Agreement and the basis upon which the Condition in the Framework Agreement was satisfied, there was no prospect of there being any future new work for LKPL.

753    Mr Karas had concealed his dealings with MdR from Mr Lipman, such that the fact Mr Karas had promised to transition LKPL’s Hong Kong revenue stream to MdR was not made known to Mr Lipman. Further, Mr Karas’ statement to Mr England, Mr Michaels and Mr Miels was dishonest in view of his commitment to transitioning LKHK’s work (save for some specific projects) from LKPL within the following 12 months.

754    The point is that although I have found that Mr Karas’ communication with Mr England, Mr Hoffmann QC and Mr Miels on 23 April was not provided to Mr Lipman, because of Mr Karas’ conduct, there was nothing to put Mr Lipman on notice that future work from LKHK was an impossibility. That is a relevant consideration when I consider the ACL and misrepresentation claims against Mr Karas.

755    Mr Hoffmann QC circulated a revised Separation Agreement on 6 May 2021 which contained redrafted cls 5.2 and 5.3 and a new definition - “LKHK Projects”: JTB 76/7308. Those clauses now read:

5.2    From the Effective Date, Jason and LKHK will continue to utilise LKPL lawyers presently engaged on LKHK Projects until at least the date which is 18 months after the Effective Date. Those legal services are expected to generate about AUD $8 million in fees for LKPL, subject to the instructions of the respective clients for whom LKHK is engaged to provide legal services in respect of LKHK Projects and the continuation of the LKHK Projects.

5.3    From the Effective Date, until the date, which is at least 12 months after the Effective Date, LKHK will instruct LKPL and LKPL will provide legal services to LKHK in relation to the China Forestry, China Medical, Platinum, Hua Han, Moulin, Galleria and 1MDB projects, at the LKPL rates that are applicable for each of those LKHK Projects as at the Effective Date, to be invoiced monthly by LKPL to LKHK and paid by LKHK to LKPL when LKHK receives payment from its client.

756    Between 6 May 2021 and 13 May 2021, Mr Lipman circulated revised drafts of the Separation Agreement to Mr England and Mr Hoffmann QC: JTB 77/7414. The draft circulated on 13 May 2021 had a new definition inserted for “completion date” as being 30 July 2021, and an amendment to the Effective Date from 30 April 2021 to 30 June 2021.

757    As at 11 May 2021, the Framework Agreement between Mr Karas and MdR had commenced operating on the basis that the Condition in cl 3 of the Agreement, as well as a further condition imposed by the SEPs, had been satisfied on 27 April 2021.

758    On 18 May 2021, Mr Hoffmann QC circulated a further revised Separation Agreement which had been received from Mr Karas. The “Effective Date” had been changed to 30 April 2021, the definition of “LKHK Projects” was changed so that it referred to the projects referred to in paragraph 5.2, and there was a new cl 5.2 in the following terms:

5.2    From the Effective Date, until the date, which is 18 months after the Effective Date, Jason and LKHK will (a) instruct LKPL and LKPL will provide legal services to LKHK in relation to the China Forestry, China Medical, Platinum, Hua Hin, Moulin, Galleria and 1 MDB projects, and (b) continue to utilise LKPL lawyers presently engaged on the LKHK Projects, at the LKPL rates that are applicable for each of those LKHK Projects as at the Effective Date, to be invoiced monthly by LKPL to LKHK and paid by LKHK to LKPL when LKHK receives payment from its client. Those legal services are anticipated (but not guaranteed) to generate about AUD 12 million in fees (over 18 months) for LKPL, subject to (a) the instructions of the respective clients for whom LKHK is engaged to Provide Legal Services in Respect of LKHK Projects; and (b) continuation of the LKHK Projects.

759    Mr Lipman provided a further marked up version of the Separation Agreement on 21 May 2021 to Mr Hoffmann QC and Mr England: JTB 78/7531/53206. Relevantly for the purposes of this aspect of this matter, two changes made by Mr Lipman addressed the “Effective Date”, which was maintained as 30 June 2021, and cl 5.3 of the draft Agreement.

760    Mr Lipman explained the rationale behind maintaining the “Effective Date” as 30 June 2021 in the following terms:

The change in Effective Date is critical. Jason continues to be a Director of LKPL and he cannot avoid his obligations as a Director by imposition of a date retrospectively.

761    As to cl 5.3, Mr Lipman included a provision that Mr Karas use his best endeavours to ensure that LKHK will instruct LKPL in relation to the LKHK Projects until the completion of those Projects. Mr Lipman’s rationale for that change was that he did not want Mr Karas to sideline or marginalise the role of the Adelaide practitioners.

762    In his first affidavit (exhibit A4), Mr Lipman deposed: at [538.2] had he known of Mr Karas’ dealings with MdR, he would not have entered into the Separation Agreement and would not have proposed a provision in cl 5.3 whereby Mr Karas was to use his “best endeavours” to cause LKPL to receive A$12 million in fees over an anticipated 18 months.

763    There is force in Mr Lipman’s evidence. Mr Karas had signed the Framework Agreement which had come into effect on 30 April 2021 whilst he was still a director of LKPL.

764    Had Mr Lipman not entered into the Separation Agreement, Mr Karas was faced with either having to resign from LKPL, thereby giving up his right to share in profits and go his own way, or continue to work with LKHK. That still left Mr Lipman’s beneficial interest in LKHK.

765    Further, leaving LKHK was not an option for Mr Karas at that time because that was the practice which Mr Karas had agreed to be financially merged with MdR. Still further, Mr Karas had already determined that he was going to separate his business interests from Mr Lipman. In short, unless Mr Karas reached an agreement with Mr Lipman that involved Mr Karas retaining legal ownership of LKHK and acquiring LKPL’s or Mr Lipman’s beneficial interest in LKHK, he had nothing to offer MdR.

766    Faced with that reality, Mr Karas provided a revised version of the Separation Agreement on 25 May 2021 incorporating a number of proposed changes. Mr Karas retained the “Effective Date” as 30 April 2021, which was the initial Commencement Date of the Framework Agreement. In my view, the only basis for maintaining that date was to provide Mr Karas with the opportunity to claim that as from 30 April 2021 he was no longer a director of LKPL, owed no fiduciary duties to LKPL and/or Mr Lipman, such that he could not be seen to be in breach of those duties.

767    After some toing and froing, on 25 May 2021, a further revised version of the Separation Agreement was provided by Mr Hoffmann QC, incorporating Mr Karas’ further changes but which included a revised “Effective Date” date of 31 May 2021. The parties executed the Separation Agreement on 25 May 2021.

The terms of the Separation Agreement: JTB 79/7568

768    The recitals to the Separation Agreement record, amongst other things:

A.    LKPL conducts a legal practice in Adelaide under the name and style “Lipman Karas” (Adelaide Practice) from premises at Level 23, 25 Grenfell Street, Adelaide (Adelaide Premises).

B.    Jason is the sole proprietor of a legal practice conducted under the name and style “Lipman Karas” (LKHK) from premises at 23rd Floor, Three Pacific Place, 1 Queens Road East, Hong Kong (Hong Kong Premises).

…

E.    Skip and Jason are the Sole Directors of LKPL.

F.    Lipman Karas Office Pty Ltd (LKO) is a company which provides administrative and support services to LKPL. The shareholders in and directors of LKO are Skip and Jason.

…

H.    LKHK engages with LKPL to assist in the provision of legal services to clients of LKHK.

I.    A divergence of views as to the future, direction and ownership of LKPL and LKHK has led to a dispute between Skip and Jason (Dispute). As a consequence, Skip and Jason have agreed to resolve the Dispute by the separation of their business interests as described in this Agreement.

J.    This Agreement gives effect to the separation of the business interests of Jason and Skip from the Effective Date.

769    Definitions relevant to this consideration of the Separation Agreement include:

Balance Sum means the amount owed by Jason to LKPL, described in the Statement at Schedule 1 as ‘Cash paid to other party, determined in accordance with the Updated Statement adjusted to include the matters identified in paragraph 4.2 below.

December 2020 Financial Position means the Statement as at 31 December 2020 attached in Schedule 1 to this Agreement.

Effective Date means 31 May 2021.

LKHK Projects means the projects referred to in paragraph 5.2 hereof.

Updated Statement means the December 2020 Financial Position recalculated to the Effective Date.

770    Clause 3 provides that as soon as possible after the Effective Date, Mr Karas will resign as a director of LKPL and Lipman Karas Office Pty Ltd.

771    Clause 4 deals with the Updated Statement:

For the avoidance of any doubt, it is agreed that:

4.4.1    The December 2020 Financial Position reflects agreed transactions under this Agreement including (a) the repayment of LKPL of the loan of $10 million owing by LKPL to J&A PL; and (b) the repayment of LKHK of the loan owing by LKHK to LKPL; and

4.4.2    The payment of the Balance Sum will constitute the repayment of those loans by LKPL and LKHK respectively.

772    Clause 5.2 provides:

5.2    From the Effective Date until the completion of the LKHK Projects, Jason and LKHK will (a) instruct LKPL and LKPL will provide legal services to LKHK in relation to the China Forestry, China Medical, Platinum, Hua Han, Moulin, Galleria and 1MDB projects, and (b) continue to utilise LKPL lawyers presently engaged on the LKHK Projects, at the LKPL rates that are applicable for each of those LKHK Projects as at the Effective Date, to be invoiced monthly by LKPL to LKHK and paid by LKHK to LKPL when LKHK receives payment from its client, subject to the instructions of the respective clients for whom LKHK is engaged to provide legal services in respect of the LKHK Projects. Those legal services are anticipated (but not guaranteed) to generate about AUD$12 million in fees (over 18 months) for LKPL.

773    Schedule 1 to the Separation Agreement sets out the December 2020 Financial Position. Mr Karas was cross-examined on Schedule 1 during which his attention was directed to “SCENARIO 1” (JTB 79/7568/53463) which records the basis of the scenario as being LKPL/PLHK (sic LKHK) Loan is eliminated “on consolidation”.

774    That is consistent with what is set out in cl 4.4.1, which records the agreement that the December 2020 Financial Position reflects agreed transactions under the Separation Agreement involving repayment of a A$10 million loan owing by LKPL to J&A Karas Pty Ltd and the repayment by LKHK of the loan owing by it to LKPL. The payment of the Balance Sum is deemed to constitute repayment of those loans by LKPL and LKHK respectively.

775    Mr Karas disagreed that the total equity and shareholders loans reflected in the third column of “SCENARIO 1” was a calculation of the total equity in Adelaide, the total equity in Hong Kong and then the total equity consolidated on an assumed common ownership basis. He maintained that it was clear from the Separation Agreement that there was never any assumed common ownership: T 1780.8-1780.12.

776    I do not accept that evidence. It is clear to me that the consolidated column is precisely as was put by the cross-examiner, that is, it represents the total equity of LKPL and LKHK on a consolidated basis on an assumed common ownership and it is not the case that the Separation Agreement proceeded on the basis there was never an assumed common ownership. That is so for at least three further reasons.

777    The first is that if there was no common ownership there would be no need to consolidate the financial position of LKPL and LKHK.

778    The second is that to the extent the Karas respondents rely on Recital B which records that Mr Karas is the sole proprietor of LKHK, it says nothing about the beneficial interest in, or beneficial ownership of, LKHK.

779    Whereas in other situations that may seem as a distinction without a difference, in the circumstances of this matter where there had been assertions by both parties for and against Mr Lipman having a beneficial interest in LKHK, the consolidation of the financial positions of both LKPL and LKHK as part of the exercise in determining a financial separation, is an objective fact consistent only with common ownership.

780    That is also made clear by the entry under the heading “Adelaide” in “SCENARIO 1” which shows a loan due from LKHK to LKPL as an asset of Adelaide with a value of A$12,981,477. In the adjacent column for the same entry, LKHK has liability to LKPL of A$13,229,557 reflecting a consolidated position as a liability of A$248,090, being the difference between the two figures. Mr Karas accepted that was a foreign exchange difference.

781    In any event, the figure of A$248,090 is reflected in the net assets split, with each of Adelaide and Hong Kong being attributed a 50% share of the loan difference, ultimately reflected in the equity position for Mr Lipman and Mr Karas respectively with a total equity across the two firms of A$24,152,059.

782    That approach is consistent, and in my view only consistent, with common ownership across the two firms. Were there not common ownership, there would be no need to consolidate the position as between the two firms before then calculating the value of each share.

783    The third is that to the extent the Karas respondents rely on the recitals, Recital I refers to a divergence of views between Mr Karas and Mr Lipman concerning the future direction and ownership of both LKPL and LKHK. That is also consistent with common ownership.

June 2021 – September 2021

784    On 28 May 2021, Mr Karas prepared a note titled, “Liberation Day” and released it on 1 June 2021 to the members of LKHK: JTB 80/7654.

785    The note records, in part:

As most of you know, LK was set up 17 years ago in Adelaide by Skip and me and we set up LKHK 12 years ago and subsequently in London. Over the last few years, the LK Group reached its maximum potential and Skip and I have agreed to restructure its ownership.

So, as of next week, LKHK and LK Australia will be separately owned and operated businesses, and I will no longer be a partner of LK Australia. This is quite a deliberate choice on my part, to lead this office, and NOT either of the other offices.

(emphasis in original)

786    On 1 July 2021, the “karas.com.hk” website announced that following 12 years of being a part of Lipman Karas, the firm was now Karas LLP.

787    On 1 July 2021, Mr Lipman entered into a shareholders deed with Mr Cross, Mr Gomersall, Mr Foreman, Ms Rahaley and Ms Zander each of whom were appointed directors of LKPL.

September 2021

788    In September 2021, the Law Society approved the merger of Karas LLP and MdR and the registration of MdR as a Foreign Firm. Mr Karas executed a Deed of Covenant on Admission of a New Member, agreeing to be bound by the terms of the MdR partnership agreement dated 30 June 2021.

789    From 28 September 2021, the parties used 1 June 2021 as the date for financial dealings.

790    On 14 September 2021, MdR informed Companies House in the United Kingdom that Mr Karas had been appointed a “non-designated member” on 1 June 2021, and on 28 September 2021 Mr Karas signed the Deed of Adherence. The Karas respondents submit that until this date, the economic merger could not be recognised and Mr Karas was not an SEP. MdR submits that Mr Karas was not an SEP when he signed the Deed of Adherence and the Framework Agreement could not operate until the condition was satisfied. I accept Mr Karas was not an SEP until he signed the Deed of Adherence. I have not accepted that the Framework Agreement did not operate, nor have I accepted there was no economic merger (albeit limited), prior to this time for the reasons I have set out.

791    On 28 September 2021, MdR wrote on its website that (JTB 86/8260), it had received approval to open a branch in Hong Kong in association with Karas LLP:

(a)    Karas LLP and MdR would represent corporate, regulatory, government and private clients; and

(b)    Mr Karas would head the law firm as a dispute resolution specialist who founded Lipman Karas in 2009.

October 2021

792    In October 2021, Mr England adjudicated a dispute between Mr Lipman and Mr Karas, deciding that the balance sum payable by Mr Karas to LKPL pursuant to the Separation Agreement totalled A$5,570,469. On 19 October 2021, Mr Karas paid the balance sum to LKPL, receipt of which was confirmed by Mr Lipman the following day.

November 2021

793    On 19 November 2021, MdR, Karas LLP and Mr Karas agreed on the Operating Agreement (JTB 88/8461) which was stated to supersede and replace the Framework Agreement. The Operating Agreement had a Commencement Date of 1 June 2021. The arrangements between LKPL and LKHK and between Karas LLP and MdR followed the same process, save that the LKPL and LKHK arrangement was not reduced to writing.

794    Mr Gold was not made aware of the terms of the Separation Agreement until 25 November 2021, when Mr Karas sent it to him.

Mr Lipman’s knowledge of Mr Karas’ dealings with MdR

795    There is no doubt, and I find, that Mr Karas did not inform Mr Lipman that he was negotiating with MdR at any time prior to the Separation Agreement being executed, nor did he inform Mr Lipman that he had entered into the Framework Agreement at any time prior to the parties entering into the Separation Agreement, nor that as part of his negotiations with MdR, that he had promised to transition LKPL’s Hong Kong revenue stream to MdR.

796    It was not simply a case of Mr Karas not telling Mr Lipman, I find that he deliberately concealed his dealings with MdR.

797    There is an issue between the parties, however as to when Mr Lipman became aware of Mr Karas’ dealings with MdR. MdR contends that Mr Lipman, LKPL’s principals and other employees of LKPL, knew about the association between Karas LLP and MdR, but took no action. MdR submits LKPL was wilfully blind.

798    From the applicants’ perspective, the critical timeframe of LKPL’s knowledge is May 2021 when the Separation Agreement was entered into. They submit that Mr Lipman and LKPL only learned about MdR and Mr Karas’ dealings in late October 2021.

799    The circumstances relating to Mr Lipman’s knowledge of Mr Karas’ negotiations with MdR and my findings are set out below.

800    Between 2020 and 2021, LKPL’s practice administrator and Mr Lipman’s personal assistant, Ms McCartney, was granted access to Mr Karas’ emails and calendar, a fact of which Mr Karas was aware. Ms McCartney’s invariable practice was to delete any calendar invitations she received for Mr Karas. Since LKPL was continuing to provide IT support to Karas LLP after the separation, Ms McCartney continued to receive calendar invitations for Mr Karas which she continued to delete without reading its contents. The respondents plead that it is to be inferred that Ms McCartney brought the contents of emails she received between Mr Karas and MdR to Mr Lipman’s attention.

801    I am not prepared to draw that inference as there is no sound evidential basis upon which to do so. Whereas at some stage, in or around 2008, Ms McCartney was given access to Mr Karas’ emails with his knowledge and permission, that ceased upon Mr Karas’ request, although Ms McCartney could not recall when. Nonetheless, she still received calendar invitations for Mr Karas as a result. Ms McCartney asked for the calendar invitations function for Mr Karas to be removed from her email address, however the issue was not resolved by LKPL’s IT team and she continued to receive Mr Karas’ calendar invitations.

802    Accordingly, at the relevant time (i.e. as from December 2020), I find Ms McCartney received only calendar invitation emails insofar as they concerned Mr Karas and that Ms McCartney’s practice was to delete those calendar invitation emails without reference to Mr Lipman.

803    Ms McCartney was not cross-examined on her affidavit: exhibit A54.

804    On 1 June 2021, Mr Karas informed the Hong Kong employees of an “international platform”. According to his notes prepared on 28 May 2021, Mr Karas announced to them that he was working on an international association: JTB 80/7654.

805    Clause 5.7 of the Separation Agreement (JTB 79/7568) is a key aspect of the applicants’ claim regarding their knowledge of the dealings. Clause 5.7 provides:

5.7    As soon as practicable after the Effective Date, Skip and LKPL will transfer all IT, accounting, document management, legal database and other business support information and systems in respect of LKHK, LKHK personnel, LKHK matters and LKHK clients to such systems as designated by Jason and LKHK, with all such transfers to be completed by no later than 31 October 2021 or for such longer period as may be mutually agreed in writing.

806    On or about 30 June 2021, LKPL commenced exporting individual email mailboxes to the Karas LLP email system.

807    On 30 June 2021, Mr David Marshall, LKPL’s Chief Technology Officer, noticed an email containing five email accounts that were outside LKPL’s system with the business domain “@karas.com.hk”.

808    Later, on 1 July 2021, Mr Marshall forwarded the email dated 30 June 2021 containing the five unknown LKPL email addresses to Ms Hall-Carney, Mr Cross and Ms Rahaley.

809    That same day, Mr Cross forwarded Mr Marshall’s email to Mr Lipman and Ms Rahaley: JTB 82/7860. In his covering email, Mr Cross identified that the five email addresses were all MdR IT personnel and that following “some googling, looks like some kind of alliance with this firm with office[s] in London and Singapore”. Three website links were contained within Mr Cross’ email. Mr Cross later explained that his use of the term “alliance” meant “some form of relationship” or “some kind of working relationship”: T 888.43-889.4.

810    There is a dispute between the parties as to whether the recipients of Mr Cross’ email containing the website link opened that link and whether there was knowledge of the dealings between MdR and Mr Karas through the link. Ms Rahaley conceded that she opened the link.

811    When Ms Rahaley read Mr Cross’ email sent on 1 July 2021, Ms Rahaley understood that Mr Cross was referring to an alliance with MdR which she knew had an office in London and upon opening one of the websites embedded in Mr Cross’ email, established that MdR had an office in Singapore as well. Mr Lipman could not recall opening the link to the website contained in Mr Cross’ email, but I consider it likely that he did. In any event, he did not write to Mr Karas to find out what was happening and was unsure of whether LKPL wrote to Mr Karas. There is no evidence that any one at LKPL wrote to Mr Karas.

812    In his email sent on 1 July 2021, Mr Cross also mentioned a conversation he had with Ms Copley on 30 June 2021, whereby she told him that there was payment for an application to the Law Society on 15 April 2021 and that Mr Karas applied for registration as a foreign lawyer in Singapore in February 2021.

813    On 1 July 2021, Ms Rahaley replied to Mr Cross’ email. She stated that the timing of Mr Karas’ Law Society and Singapore applications were, “precisely when [Mr Karas] refused to respond about the BW [Borrelli Walsh] lease in Singapore” (square brackets provided) and that she understood MdR to be, “a really well regarded private international law and international arbitration firm”.

814    In early September 2021, Mr Cross was informed by Ms Copley that MdR had paid Karas LLP HK$30 million in August 2021. Mr Cross concluded that Mr Karas was making new arrangements for his own firm but accepted in cross-examination that this figure would be more than IT costs. During cross-examination, Mr Cross was pressed with the suggestion that he knew that there was an association between MdR and Karas LLP. Mr Cross did not recall this. I accept that Mr Cross could not recall whether he knew there was an association between MdR and Karas LLP as at early September 2021.

815    On 8 September 2021, Mr Cross emailed Mr Lipman and Ms Rahaley pointing out similarities between the Karas LLP and MdR websites (the “hmmmm email”): JTB 85/8183. MdR submits that this email confirmed the alliance in LKPL’s mind and that Mr Cross would have communicated this to Mr Lipman. The reference to LKPL’s mind by MdR is a reference to Mr Lipman’s mind and will of LKPL. I am prepared to accept that Mr Cross knew, or at least suspected, an alliance between MdR and Karas LLP, however there is nothing to suggest that Mr Cross relayed his suspicion to Mr Lipman on 8 September 2021 or knew the details of any such alliance.

816    On the same day, Mr Lipman forwarded Mr Cross’ email to Mr Ford of LK LLP in London.

817    On 9 September 2021, Mr Lipman emailed Mr Ford the following: (exhibit R16):

I think they [ie, Mr Karas and MdR] should get on well. I will be interested to see if Jason plans to sell his firm to them. Do you have any idea how they made contact with him, such as their favoured barristers.

I think that the PR crap was just put together by the same PR firm, but I have no idea what due diligence they did, what he told them and how he thinks he will be able to take orders from them, unless they have agreed to take orders from him.

I expect that Cos [Borrelli] might be involved somehow but have no real basis for this view.

I did see that M de R are planning an IPO and a push into [A]sia, both of which might be assisted by Jason.

(square brackets provided; emphasis added)

818    It is clear from the 9 September 2021 email that Mr Lipman did not know whether or not Mr Karas had sold LKHK (or Karas LLP as it was then known).

819    I find that Mr Lipman knew there were dealings between Mr Karas and MdR by on or about 9 September 2021, but did not know the extent or nature of those dealings. Certainly, prior to 9 September 2021, Mr Lipman knew that MdR and Mr Karas had “a relationship” consisting of IT support and financial help.

820    In or around mid-September 2021, Mr Cross became aware that the Hong Kong office had received a delivery of cupcakes from MdR which was accompanied by some form of a message in relation to the relationship between MdR and Karas LLP. Mr Lipman became aware of the delivery at about the same time as Mr Cross, but there is conflicting evidence as to how that came about. Nothing turns on who told Mr Lipman. The fact is that he became aware of it.

821    Mr Cross accepted that from at least 17 September 2021, IT support was not the basis of the relationship between MdR and Karas LLP.

822    On 17 September 2021, Mr Lipman emailed Mr Ford, “[t]he latest”: exhibit R19. In that email Mr Lipman referred to the cupcake delivery, in relation to which he said:

[a] tray of cup cakes were delivered to the HK office of Karas legal a short time ago with a note “congratulations on our new association from Mischon de Reya”

No one other than Jason knew a thing about this and Jason went off his nut at the receptionist for leaving the note on the gift and for putting the cupcakes out for everyone on the reception desk.

One concern is that Jason might try toget [sic] control of LKUK in order to demand the debt from LLP.

He might try to do this by offering more to buy my share than I will pay him for his.

Is it prohibited to make such a demand. It does place the financial interests of the creditor in conflict with the financial interests of the partnership.

More for me to think about.

823    This email demonstrates clearly that Mr Lipman neither knew nor suspected any type of formal association with MdR prior to 17 September 2021, and I find accordingly.

824    Consistent with Mr Lipman’s knowledge gained on or about 17 September 2021, on 20 September 2021, Ms McCartney emailed Mr Lipman a draft email to Mr England from Mr Lipman in which Mr Lipman referred to Mr Karas entering into an association with MdR: exhibit R21. That email was never sent.

825    On 22 September 2021, Mr Lipman had a discussion with Mr Ford. His note of that meeting refers to “Mr Nouroozi” and “Mr Gould [sic]”: exhibit A26.

826    This email explains how Mr Lipman became aware of Mr Nouroozi and Mr Gold. On 28 September 2021, Mr Cross was informed by a former colleague that MdR was opening a branch office in Hong Kong in association with Karas LLP. He then found a public announcement confirming this association.

827    On the same day, Mr Cross sent an email to “LK Law Pty Ltd” (a distribution group within LKPL) in which he provided the website links to the announcement of the association between MdR and Karas LLP. Mr Lipman forwarded the email to Mr Ford the same day: JTB 86/8260.

828    In early October 2021, Ms Rahaley became aware that the association between Karas LLP and MdR may have been in place for some time. That belief arose from an employee having received a bounce-back email referring to the MdR server. An LKPL principal asked Ms Rahaley if the IT systems of LKPL and Karas LLP were merged and whether MdR potentially had access to LKPL emails. Ms Rahaley was concerned that this was a potential cyber security issue.

829    The bounce-back email was sent by “postmaster@mishcon.com”, but the underlying email originally emanated from “zypartners.com” server and was sent to the “karas.com.hk”.

830    Ms Rahaley spoke to Mr Cross, Ms Hall-Carney, and Mr Lipman respectively about this potential issue. The parties dispute these conversations.

831    On or about 5 October 2021, Ms Rahaley spoke to Mr Cross about the bounce-back email. Mr Cross was concerned about the potential risk to LKPL’s IT systems where it was still merged with Karas LLP and considered that further investigations were necessary. Mr Cross said in cross-examination that Mr Marshall was on leave that week which explains why there was no communication with LKPL’s Chief Information Technology Officer about the issue. MdR submits that Mr Cross’ recollection of the date is wrong and there was no such conversation, particularly in view of a lack of any contemporaneous documentation.

832    I do not accept the submission that the conversation between Ms Rahaley and Mr Cross did not occur. It was a logical and entirely predictable step for Ms Rahaley to have spoken with Mr Cross about her concerns.

833    On or about 6 October 2021, Ms Rahaley spoke to Mr Lipman about the bounce-back email. Ms Rahaley did not depose to speaking with Mr Lipman in her affidavit: exhibit A41.

834    Mr Lipman also spoke to Mr Cross about the bounce back email on or about 6 October 2021, and they discussed the potential cyber security risk.

835    Mr Lipman was concerned about Mr Karas not satisfying his obligations under cl 5.2 of the Separation Agreement and cyber safety. Mr Lipman’s concern about Mr Karas complying with cl 5.2 can only have been because by that stage Mr Lipman knew of the association between Karas LLP and MdR and was familiar with what an association involved. Mr Lipman emailed Mr Cross on 7 October 2021 and requested he resend the email that had been previously sent, regarding the five individuals who were not recognised by LKPL, to him: exhibit R11.

836    There is no reason to doubt that the conversation between Ms Rahaley and Mr Cross and Mr Cross and Mr Lipman occurred. Still further, Mr Cross’ concerns centred on a connection between Karas LLP and MdR’s IT systems and a potential cyber risk to LKPL. It was both logical and predictable for Mr Lipman and Mr Cross to have discussed the issue both generally and in view of cl 5.2 of the Separation Agreement.

837    On 7 October 2021, Mr Lipman spoke to Ms Hall-Carney during which he asked about the bounce-back email and communicated his concerns about a potential cyber risk to LKPL. As such, on or about 7 October 2021, Mr Lipman told Ms Hall-Carney to organise searches to find emails referring to MdR, Mr Gold and Mr Nouroozi from 1 April 2021. MdR submits that this investigation was “an elaborate ploy” to access the terms of the contract between MdR and Mr Karas. I do not accept that submission. On 22 September 2021, Mr Lipman had become aware of Mr Gold (misspelt “Mr Gould”) and Mr Nouroozi which explains why he included them in his search instructions.

838    Following receipt of the email from Mr Cross with the five names, Mr Lipman emailed Mr Cross, copied to Ms Copley, and queried whether further information could be retrieved about the Law Society application on 15 April 2021 and whether it related to the five individuals: JTB 87/8337. Mr Lipman’s enquiry and its timing demonstrate that he did not know at the time why Mr Karas made an application to the Law Society and I find accordingly.

839    Mr Lipman did not recall the reason why he asked the search to commence on 1 April 2021. He accepted that it could be because he knew about Mr Karas’ application to the Law Society having been made on 15 April 2021.

840    Ms Hall-Carney emailed Mr Gordon-Edwards of LKPL’s IT Provider, Nuago, copied to Ms Rahaley, regarding the searches to be implemented: JTB 87/8350. Ms Hall-Carney requested that the search begin from 1 January 2021. No reason was given for that date, other than Ms Hall-Carney did not turn her mind to the relevance of 1 April 2021: T 1063.11-24.

841    Later on 7 October 2021, Ms Hall-Carney received an email with the overview of the search results which she forwarded to Mr Lipman in the form of an excel spreadsheet.

842    Ms Hall-Carney identified to Mr Lipman in an email, that she noticed that there was, “stuff around 6 Jan with Kevin Gold” and that the timeframe of the search should be extended to determine when the conversations with Mr Gold commenced: JTB 87/8315.

843    Mr Lipman forwarded Ms Hall-Carney’s email to Mr Cross, including the excel spreadsheets and the email he received from Ms Hall-Carney.

844    MdR submits that the results of the search, including the word “Mishcon”, demonstrate LKPL’s interest in MdR before the bounce-back email and contrary to the applicants’ submissions, show general knowledge of the relationship between Karas LLP and MdR. I do not accept that submission. I accept that Mr Lipman knew of a relationship between MdR and Mr Karas as from 17 September 2021, but there is nothing to suggest that the search that was conducted revealed a general knowledge about MdR. It was the 6 October bounce back email that initiated the search using the word “Mishcon”.

845    MdR submits that there was no reason for a cyber risk assessment to cover 15 months of searches and that Ms Hall-Carney did not provide a reason. However, when it is considered that no one at LKPL knew how far back there was any IT interface with MdR, extending the search further makes complete sense. In addition, it was for an extra period of 6 months. I entertain no doubt that had something from MdR been found even earlier, the search would have been extended further from that time.

846    On 8 October 2021, more overviews of the search results were received by Ms Hall-Carney from Nuago who shared them with Mr Cross and Mr Lipman. The contents of the emails were not included in these search results. Mr Cross was given full administrator role rights to conduct a review of the contents of the emails.

847    On 18 October 2021, Nuago exported the emails. Mr Cross commenced the review, printed relevant emails, and placed them into four red lever-arch folders to provide to Mr Lipman. Mr Cross’ review continued until 20 October 2021.

848    On 20 October 2021, Mr Lipman emailed Mr Karas that he confirmed receipt of the Balance Sum (a figure of $5.5 million) in accordance with the Separation Agreement.

849    Mr Cross provided the four red lever-arch folders to Mr Lipman on 21 October 2021. Mr Lipman reviewed the folders on the following day at which time the extent of Mr Karas’ dealings with MdR whilst still a director of LKPL became apparent.

The Karas respondents’ submissions on Mr Lipman’s knowledge

850    The Karas respondents initially contended that the applicants knew of Mr Karas’ dealings with MdR when Ms McCartney saw Mr Karas’ calendar invitations from MdR in 2020 and 2021. I have not accepted that contention.

851    Next, the Karas respondents submit that Mr Karas’ announcement on 1 June 2021 regarding the international platform likely reached LKPL due to the merged IT systems. They observed that Ms Rahaley communicated with Ms Leung in Hong Kong in relation to some limited matters after May 2021, once the separation had occurred. Alternatively, even if this announcement was not received by LKPL on 1 June 2021, Ms Rahaley was aware of a potential association on 1 July 2021. Ms Rahaley accepted that she understood from around early July that there was a potential relationship between MdR and Karas LLP, but that was not confirmed until 28 September when an announcement was made. Ms Rahaley also accepted in cross-examination that LKPL was interested in Mr Karas’ business plans, which Ms Rahaley discussed with Mr Lipman and Mr Cross, but that “[w]e were far more focused on LK than Mr Karas”. I accept that evidence.

852    Next, the Karas respondents submit that Mr Lipman, Mr Cross, Ms Rahaley and LKPL knew about the discussions between Mr Karas and MdR by 30 June 2021 and this was “essentially common knowledge” within LKPL. There is no evidence to support such a finding and to the extent I am asked to infer that was the case, I decline to do so. The Karas respondents also invite the Court to infer that Ms Rahaley and Mr Cross knew about the discussions between Mr Karas and MdR from February 2021. There is no basis upon which to draw that inference either and I decline to do so.

853    The Karas respondents submit that LKPL’s investigation into Mr Karas’ emails after the Separation Agreement took effect was improper. Further, they contend that Ms Hall-Carney’s evidence demonstrates that the searches were not performed due to an IT threat but instead to find documents for the court proceedings. I do not accept that submission. The evidence from Ms Hall-Carney is to the opposite. In particular, on 8 October 2021, Ms Hall-Carney sent an email to Nuago about cybersecurity, as well as to Mr Cross: exhibit A53 [72], [74], [82]-[85]. Ms Hall-Carney was instructed by Mr Lipman on 7 October 2021 to carry out high level simple word searches, as well as to conduct searches for Kevin Gold and Kasra Nouroozi. Ms Hall-Carney deposed, and I accept, that she was not instructed to undertake, and did not undertake, a specific search of Mr Karas’ email account: exhibit A53 [62]-[64].

854    Further, in cross-examination, Ms Hall-Carney observed that the bounce-back email dated 11 September 2021 came to her attention on 11 October 2021 when Ms Rahaley telephoned her. Still further, what was different about this bounce-back was that it came from a party not normally associated with an LKPL domain name: T 1063.26-1064.47.

855    The Karas respondents submit that Mr Cross eventually accepted that he knew of a potential relationship between Mr Karas and MdR on or around 1 July 2021, which prompted him to send an email to Mr Lipman with the links. That may have been so, but it does not translate into knowledge of what type of relationship it was or how it evolved. Mr Cross was receiving snippets of publicly available information released by Mr Karas and MdR to suit their timetable. The Karas respondents (and MdR) conflate knowledge at a particular point in time, prior to late October 2021, with knowledge of the overall dealings between MdR and Mr Karas.

856    Next, the Karas respondents submit that Mr Lipman, Mr Cross and Ms Rahaley knew about the relations between Mr Karas and MdR by 1 June or 30 June 2021 and the association by 17 September 2021. They refer to a part of Ms Hall-Carney’s cross-examination in which she agrees that, by an email dated 7 October 2021, Mr Lipman requested that the names of Mr Nouroozi and Mr Gold be added to the search terms: T 1062.40-1063.4. That evidence of Ms Hall-Carney does not support the respondents. By the time Mr Lipman asked Ms Hall-Carney to add those names to the search criteria, he had already had his conversation with Mr Ford (on 22 September 2021): exhibit A26; JTB 87/8306.

857    It follows that I do not accept the Karas respondents’ submissions which are founded on little more than supposition. To the extent I am asked to infer matters the subject of these submissions, there is simply no basis upon which to do so and I decline to draw the inferences sought.

858    Finally, in response to the applicants’ reliance on Mr Karas’ communications with MdR, the Karas respondents contend that in any event, the communications are mostly irrelevant and instead the agreements between the parties are important. These include:

(a)    The Framework Agreement dated 30 March 2021;

(b)    The Association Agreement dated 1 November 2021; and

(c)    The Operating Agreement dated 19 November 2021, which replaced the Framework Agreement and is not part of a pleaded claim by the applicants.

859    In view of my findings as to the negotiations between Mr Karas and MdR, the Framework Agreement, and when it came into effect, I do not accept that submission.

MdR’s submissions on Mr Lipman’s knowledge

860    MdR submitted that Mr Lipman’s evidence that he became aware of the dealings in late October 2021, was “manifestly untrue”. I do not accept that submission for the reasons I have set out above. Further, it cannot be put to one side that Mr Karas and MdR were at pains to keep their dealings with each other confidential and made known only to specific individuals. In the case of Mr Karas, he was careful to conceal his dealings with MdR from Mr Lipman. To suggest Mr Lipman is somehow at fault in those circumstances is without merit.

861    MdR submits that Mr Lipman knew about the commercial relationship between Mr Karas and MdR from 1 July 2021 and he did not act upon it. There is no evidence to support that submission nor is there sufficient evidence to provide a basis upon which to infer that was the case and I do not accept it.

862    MdR submits that after finding out in early September 2021 about the HK$30 million transfer from MdR to Karas LLP, Mr Cross had to know that this was more than an IT relationship. Mr Cross conceded as much during cross-examination. MdR contends further that Mr Lipman must have known about the payment, yet this was not in his affidavits. Mr Lipman said in cross-examination that he did not recall when he was advised of a HK$30 million payment to Karas LLP but that he was aware that such a payment had been made: T 613.36-614.5. Whether Mr Lipman knew prior to 8 October 2021 or not does not mean that Mr Lipman had knowledge of Mr Karas’ dealings with MdR prior to the Separation Agreement.

863    MdR submits still further that Mr Lipman knew about the money transfer from MdR to Karas LLP and that it is untenable that he did not know about, or remember, the payment and that he is dishonest when he “claims to be ignorant”. I do not accept that submission for the same reasons as set out above.

864    Next, MdR submits that Mr Lipman should not be believed in respect of his denials of being informed about Mr Karas and Karas LLP’s actions. That submission is based on Mr Lipman being the “mind and will of LKPL” and that his intention/expectation of being notified of Mr Karas’ actions. I do not accept that submission. The Separation Agreement having been signed, I accept that Mr Lipman’s interest in what Mr Karas did was of passing interest, save for the expectation that Mr Karas would comply with his obligations under the Separation Agreement.

865    Next, MdR refers to Mr Lipman’s evidence where he deposed in his first affidavit (exhibit A4 at [559.3]) to a secondary concern:

I also had a secondary concern, which was raised with me by Mr Cross shortly after my conversation with Ms Rahaley on 6 October 2021 about a potential cyber risk to LKPL by reason of an unidentified third party accessing Mishcon’s server and, in turn, accessing LKPL’s server or Mishcon accessing LKPL’s server.

866    MdR submits that Mr Lipman’s secondary concern is incorrect and an after-thought. I do not accept that submission. There was every reason to be concerned about an unidentified third party accessing LKPL’s server, and for that matter, MdR accessing LKPL’s server.

867    MdR contends that neither Mr Lipman nor Ms Hall-Carney explained how the search parameters would answer the cyber threat issue. MdR submits further that Mr Lipman knew about the nature of the relationship between MdR and Mr Karas by 7 October 2021, which did not impact, “the obligation under clause 5.2 of the Separation Agreement any more on 7 October 2021 than it had on 1 June, 1 July or 17 September 2021”. Mr Lipman eventually conceded that he knew the nature of the relationship by 7 October 2021.

868    MdR submits further that Mr Lipman’s evidence about his knowledge is not supported by the documents at the time and as such, he is mistaken.

869    I do not accept those submissions. The circumstances I have described and found are such that the investigation by Ms Hall-Carney had an IT thread. It was in the course of that investigation that the dealings between Mr Karas and MdR came to light. The search parameters used were clearly relevant to the time over which access had been made available to LKPL’s server in circumstances where that was not known. Self-evidently, it extended back some considerable time.

870    Further, although Mr Lipman knew of the nature of the relationship between Mr Karas and MdR by 7 October 2021, that does not mean he knew of the dealings between Mr Karas and MdR prior to the Separation Agreement being entered into and/or coming into effect.

871    Still further, Mr Lipman’s concern about Mr Karas not complying with cl 5.2 of the Separation Agreement had a sound foundation given his knowledge that Karas LLP and MdR had entered into an Association Agreement.

872    Next, MdR submits that the Court should find Mr Lipman’s evidence to be, “contrived, defensive and strategic, in an attempt to resist that knowledge of the relationship between MdR and Mr Karas had been brought to his attention by Mr Cross as early as 1 July 2021”. Some of the examples provided by MdR are Mr Lipman’s refusal to acknowledge that he opened the email links in the email sent on 1 July 2021 by Mr Cross, and his refusal to accept that “Sally” referred to in that email was a reference to Ms Copley. As to that last point, Mr Lipman did not refuse to accept that “Sally” referred to Ms Copley and such an assertion overstates the evidence. When asked if “Sally” referred to Ms Copley, his answer was that he presumed so: T 583.25-583.28.

873    Mr Lipman did not recall receiving Mr Cross’ email on 1 July 2021 and his answer needs to be seen in light of that evidence. Nonetheless, Mr Lipman accepted as a general proposition that Ms Copley was the financial controller, such that it made sense that she would be aware of something such as that which Mr Cross informed Mr Lipman in the email.

874    In response to Mr Lipman’s contention that he never opened the link provided in Mr Cross’ email sent on 1 July 2021 at 11:26am, MdR submits that this should be rejected and submits further that Mr Lipman and LKPL knew of the relationship between Mr Karas and MdR by 1 July 2021, and were sure of it by August 2021, but took no action.

875    MdR points to Mr Cross having looked at the MdR website and having seen that they had an office in Singapore, as well as having been suspicious about Mr Karas’ application to the Law Society on 15 April 2021. MdR submits that these matters would have alerted Mr Cross to a relationship before the Separation Agreement and that he informed Ms Rahaley and Mr Lipman of his suspicions. MdR reiterates that Mr Lipman’s “ignorance and disinterest” should be found to be wrong.

876    I do not accept that submission. I have found that it is likely Mr Lipman opened the links in Mr Cross’ email sent on 1 July 2021, but that does not result in the conclusion for which MDR contends. Mr Cross, Ms Rahaley and Mr Lipman were receiving snippets of publicly available information over some time which does not lead to the conclusion that Mr Lipman knew of Mr Karas’ dealings with MdR at an earlier point in time than late October 2021.

877    MdR submits further that Mr Cross and Ms Rahaley admitted that they were interested in the relationship in early July 2021, and Mr Lipman’s interest may be demonstrated by these proceedings, as well as the steps he would have taken if he had earlier knowledge of the relationship. It is for the reasons I have set out above that I do not accept those submissions.

878    Next, as to Mr Cross’ email on 1 July 2021 at 11:26am (the email with the embedded links), MdR submits that despite Mr Cross’ assertion that he did not draw a conclusion that there was an alliance in his email, in any event Ms Rahaley understood that Mr Cross was referring to an alliance. That submission does not accurately reflect the evidence. The cross-examination of Ms Rahaley was as follows: T 1050.28-1050.45.

Q:    So when you received this email from Mr Cross, I take it you went and looked at those sites in the same way as you looked at Mr Karas’ site?

A:    I don’t recall. I was aware generally of Mishcon de Reya. I don’t know that I – I needed to go to their website to ---

Q:    Well ---? ---

A:    I may have done, but I don’t remember.

Q:    Quite. And you see that Mr Cross says in the email the second line:

Looks like some kind of alliance —

Do you see that?

A:    I do.

Q:    And he then says:

… with this firm.

Q:    You understood the firm to be Mishcon; correct?

A:    Correct.

879    It is quite clear that Mr Cross did not know what the relationship was hence his reference in his email to “some kind of alliance”. It follows that he cannot have known how or when it evolved, just that at that time, there was some kind of “alliance”.

880    Further, MDR’s submissions overstate the position. It was Mr Lipman who had entered into the Separation Agreement. Ms Rahaley and Mr Cross were not partners in LKPL when the Separation Agreement was entered into, and as I have noted, the information they held were snippets that revealed nothing about Mr Karas’ prior involvement with MdR during the Separation Agreement negotiations.

881    As to Ms Rahaley’s knowledge about the bounce-back email before 11 September 2021 and the conversation with the unnamed LKPL principal as noted above in this factual summary, MdR submits that it is not plausible that Ms Rahaley had knowledge of this without Mr Lipman and Mr Cross also knowing about it. I accept that Mr Cross, at least, had knowledge of it. That does not translate to knowledge of Mr Karas’ dealings with MdR at an earlier point in time.

882    MdR contends that Mr Cross discussed his email sent on 8 September 2021 (the “hmmmm email”) and his conclusion with Mr Lipman, such that Mr Lipman’s “equivocation” as to whether he discussed it with Mr Cross should be dismissed. MdR questions Mr Lipman’s alleged denial of understanding when Mr Lipman forwarded Mr Cross’ email to Mr Ford. MdR contends that on 9 September 2021, when Mr Lipman wrote another response to Mr Ford, LKUK also knew about the relationship.

883    That submission is not supported by the text of the email in which Mr Lipman specifically says that he did not know what due diligence MdR did: exhibit R16. Further, Mr Lipman could not recall if he discussed the email with Mr Cross, but said it was highly probable that he did. That is not equivocation, it is being truthful.

884    MdR submits that the email search conducted by LKPL shows that LKPL knew more than the applicants let on in these proceedings. This is partly because Ms Hall-Carney extended the search parameters to 1 January 2021, not 1 April 2021 as initially asked by Mr Lipman. In asking Nuago to complete the search, Ms Hall-Carney did not explain the cyber risk concern nor the request to search results for material with the word “Mishcon”. From MdR’s perspective, they submit this revealed an interest in the MdR and Karas LLP relationship. That is hardly surprising given the recently acquired knowledge by Mr Lipman of the Karas LLP and MdR association, as well as the snippets of information Mr Lipman, Mr Cross and Ms Rahaley had obtained over the previous four months or so. Nonetheless, the submission goes nowhere.

885    MdR contends that Ms Hall-Carney knew that there was a relationship between Mr Karas and MdR. It submits that on 29 September 2021, Google Alerts informed Mr Cross about Ms Rahman being the MdR representative in Hong Kong, and Mr Lipman’s engagement in this by forwarding it to Mr Ford, “makes the ignorance and feigned disinterest of Mr Lipman, and the downplaying of knowledge and understanding professed by Mr Cross, all the harder to accept as genuine”. It submits further that Mr Cross, Mr Lipman and Ms Rahaley knew of the association by the end of September 2021.

886    MdR submits still further that Mr Cross knew that MdR was a law firm with offices in London and Singapore. Yet still further, MdR contends that Mr Cross knew that MdR did not provide IT services and that there should be a finding that his belief is a deflection of the knowledge of the relationship.

887    MdR also submits that even if Mr Cross did not know the specifics of the relationship by 1 July 2021, he knew that there was “some kind of alliance”. It submits that there should be a finding that Mr Cross knew the alliance was not for IT and that Mr Cross’ communications with Ms Rahaley demonstrates that they thought it was a “legal alliance”. MdR contends that Mr Cross would have discussed this with Mr Lipman, as evidenced by his email to management, Mr Lipman and Ms Rahaley.

888    I do not accept those submissions. I have already found that Mr Lipman found out about the association on or about 17 September 2021. That was a step in the process which culminated in Mr Lipman being informed of the bounce-back email on 6 October 2021.

889    Further, Mr Cross had not known about MdR previously and continued searching them online following the bounce-back email. By conducting searches online, Mr Cross discovered that the five unfamiliar accounts were MdR IT employees and determined that their IT experience meant that Mr Karas was setting up an IT system.

890    In any event, Mr Cross concluded that Mr Karas was establishing an IT system for his own firm since:

(a)    Mr Karas would no longer have access to the IT system in Adelaide from 30 October 2021 and he had stated that he aimed to be at the “cutting edge” of technology; and

(b)    MdR advertised that it provided services in “non-legal areas” and “data protection and information rights”.

891    MdR contends that Mr Cross’ knowledge about the money transfer from MdR to Karas LLP likely caused him to send the email on 8 September 2021 to Mr Lipman and Ms Rahaley (the “hmmmm email”) and that, “[t]he clear import was that he had further confirmed the alliance between MdR and Karas LLP”. Again, that may be so, but it does not translate into knowledge other than what it revealed. As I have noted above, MdR speculates as to states of knowledge obtained piecemeal from the activities of parties who went out of their way to keep their interactions with each other secret.

892    MdR seeks a finding that it is probable that Mr Cross set up Google Alerts to, “keep a close eye on and keen ear out for Mr Karas’ activities in Hong Kong”. Again, that may be so, but that fact is probative of nothing other than wanting to keep an eye on what a firm in Hong Kong was doing in circumstances where Mr Karas had promised to send ongoing work to LKPL on Hong Kong projects. That was an issue in which Mr Cross had an interest as a (then) principal of LKPL.

893    Overall, it is MdR’s position that Mr Lipman, Mr Cross and Ms Rahaley knew about the relationship around the time that the Separation Agreement was signed. In response to the applicants’ submission that action would be taken if the relationship between Mr Karas and MdR was known, MdR contends that this, “rings hollow when compared to the supine inactivity in fact”.

894    In view of the matters I have set out, I have no hesitation in rejecting that submission.

The applicants’ submissions on Mr Lipman’s knowledge

895    During cross-examination, Mr Lipman and Mr Cross were questioned about how, as the public announcement happened in September, they would have known about the work that would have gone into it beforehand. It was suggested that they should have known the application to the Law Society would take six months, such that in September 2021 they would have known that the application would have been submitted in March 2021, which may have been prior to the Facilitation Agreement and Separation Agreement.

896    In response, the applicants submit:

(a)    First, Mr Lipman did not think about this at the relevant time;

(b)    Second, contrary to the cross-examination, the application by Karas Lawyers and the Foreign Firm in 2009 took under a month, not six months;

(c)    Third, the applicants submit that the application to the Law Society does not suggest that the date of the announcement meant that negotiations occurred before the Separation Agreement. This is because LKPL itself had previously applied to the Law Society and this process was “relatively short”; and

(d)    Fourth, the Karas respondents’ pleading that the applicants knew how long a merger would take to officiate should be rejected because the applicants did not understand the nature of the merger until they had access to the documents that established it and therefore could not form such an opinion.

897    I accept the applicants’ submissions, all of which are made on a sound evidential basis.

898    The applicants submit that LKPL/Mr Lipman did not suspect an alliance with MdR before 1 July 2021, that is, before the Separation Agreement was executed. The applicants suspected some connection relating to IT services after this date.

899    The applicants submit further that it was by the end of the review of emails by Mr Cross, and Mr Lipman’s review of these emails on or about 22 October 2021, that they understood that Mr Karas had commenced negotiations with MdR before the Facilitation Agreement and the Separation Agreement and that Mr Karas agreed to sell LKHK while he was a director of LKPL.

900    Save for the reference to selling, I accept that submission and I find accordingly.

901    Next, the applicants submit, and I find, that Mr Lipman was unaware of the extent of the dealings between Mr Karas and MdR until late October 2021. Whereas, Mr Lipman was aware of the IT support and financial assistance being provided to Karas LLP prior to October 2021, I find that Mr Lipman found out about Mr Karas’ negotiations to become a partner of MdR on or about 22 October 2021 after he had the opportunity to read the material contained within the four red level arch folders.

902    I accept that Mr Lipman, Mr Cross, Ms Rahaley or anyone else at LKPL, save of course for Mr Karas, knew nothing about Mr Karas’ relationship with MdR at the time the Separation Agreement was signed.

903    The applicants contend that Mr Lipman would not have entered into the Separation Agreement and would have taken steps to prevent Mr Karas’ dealing with LKHK had he known about the dealings between Mr Karas and MdR at the time. They invite the Court to draw an inference that the Separation Agreement would not have been entered into with this knowledge because:

(a)    Mr Lipman would not overlook Mr Karas’ clandestine dealings which he viewed to be a breach of duty and took seriously. I accept that submission. Mr Lipman had reminded Mr Karas on 4 February 2021 that he remained a director of LKPL. Indeed, Mr Karas reminded others within LKPL in or about February 2021 that he was a director of LKPL and that he expected to be kept informed;

(b)    Part of the Separation Agreement negotiations included Adelaide employees conducting Hong Kong work. The dealings between Mr Karas and MdR impacted upon LKPL’s Hong Kong revenue stream notwithstanding Mr Karas’ obligations in cl 5.2 in the Separation Agreement. Mr Lipman was clear that he would only enter into the Separation Agreement if LKPL’s “revenue” from Hong Kong would not be impacted; That puts it too high. There was only about 18 months of work from LKHK (Karas LLP) after the Separation Agreement;

(c)    Further, Mr Karas stated in an email sent on 21 April 2021 to Mr Georgiou that LKHK’s work would be transferred to MdR over 12 months, specifically stating that, “[no] ‘new work’ will be sent by LKHK to LKAus/LKUK”: JTB 74/7076 In an email sent on 23 April 2021 to Mr England, copied to Mr Miels and Mr Michaels, Mr Karas had said, in relation to the then cls 5.2 and 5.3 of the draft Separation Agreement that the door is open to future work for LKPL post 12 months. That representation made to Mr England in relation to the potential for future work for LKPL after 12 months was simply untrue. Had Mr Lipman seen this correspondence prior to the execution of the Separation Agreement, I entertain no doubt he would not have signed it;

(d)    Mr Lipman would not have removed Mr Karas’ obligation to use his “best endeavours” regarding the Hong Kong revenue for LKPL in the draft Separation Agreement in cl 5.2 or agree to release Mr Karas of his liabilities regarding his MdR dealings. Further, he would not have signed the Separation Agreement if he knew of the fact that there was an association. I accept that submission; and

(e)    The fact that Mr Lipman took no particular action upon learning of the fact of an association between Mr Karas and MdR in the period following the execution of the Separation Agreement and September 2021, does not stand in contradiction to Mr Lipman’s evidence that had he known what he came to know later, i.e. that Mr Karas had been dealing with MdR prior to the Facilitation Agreement or Separation Agreement, he would not have signed the Separation Agreement. Mr Lipman agreed that he, “signed the Separation Agreement expecting that Mr Karas would have no choice but to use Lipman Karas Adelaide” because he thought Mr Karas would find it too difficult to work with anyone else: T 586.40-586.48.

904    In cross-examination, Mr Lipman was adamant he would not have entered into the Separation Agreement had he known then what he knew on 17 September 2021 about the association between MdR and Karas LLP: T 630.36-630.39. I accept that evidence.

905    Immediately following that evidence, Mr Lipman was cross-examined on exhibit R21, which is an email dated 20 September 2021 that he drafted for Ms McCartney to type. It is an email to Mr England about LKUK. The point MdR seeks to make in its closing submissions is that the Court should infer that Mr Lipman knew there were “dealings” from as early as the beginning of July 2021. I have no hesitation in not drawing that inference. The evidence upon which Mr Lipman was being cross-examined was Mr Lipman’s email to Mr England. There is not a sufficient basis for me to draw an inference that Mr Lipman knew Mr Karas was dealing with MdR as early as the beginning of July 2021, in the sense that “dealing” meant in negotiations with MdR prior to the Facilitation Agreement and/or entering into the Framework Agreement prior to the execution of the Separation Agreement.

906    Further, I accept Mr Lipman’s evidence that if he had known about the communications, he would have communicated to MdR about his and LKPL’s interests in the Hong Kong office, sought urgent injunctive relief to prevent Mr Karas from dealing with the Hong Kong office, and not entered into the Separation Agreement.

907    Mr Lipman is a highly experienced and aggressive commercial litigator. I entertain no doubt that had he had the knowledge the respondents contend he had, he would have taken those actions. I add that on the other side, had Mr Karas been in Mr Lipman’s position, Mr Karas, who is also a highly experienced and aggressive commercial litigator, would have taken the same actions Mr Lipman described.

908    The matters to which the applicants refer are compelling. I draw the inference and find as a fact that had Mr Lipman known of Mr Karas’ dealings with MdR prior to the time he signed the Separation Agreement, he would not have signed it.

909    It is for these reasons that I find as a fact that Mr Lipman was unaware that whilst still a director of LKPL, Mr Karas negotiated with MdR, provided information about LKHK’s business, and signed the Framework Agreement.

Benefits to Mr Lipman and LKPL of the Separation Agreement and post-separation conduct

910    There is an issue between the parties as to the benefits LKPL and Mr Lipman received as a consequence of the Separation Agreement and the relevance of those benefits.

911    The Separation Agreement had an effective date of 31 May 2021: JTB 79/7568.

912    With effect from 1 June 2021, Mr Karas was no longer a director of LKPL and no longer a shareholder in LKPL.

913    The Karas respondents submit the Separation Agreement provided Mr Lipman with the following benefits:

(a)    All the LKPL shares in LKPL, which is a successful firm;

(b)    Sole directorship of LKPL;

(c)    Control and restructure ability;

(d)    Ability for LKPL to repay the 2018 loan owing to Mr Lipman;

(e)    Introduce principals in Adelaide;

(f)    New capital for LKPL;

(g)    A$5,570,469 from Mr Karas as the “balance sum” determined by Mr England on 8 October 2021; and

(h)    LKPL received work under cl 5.2, leading to A$9.5m for LKPL which otherwise could have ceased.

914    On 1 July 2021, LKPL was restructured via a Shareholders Deed which set out the shareholders and directors of LKPL from that date.

915    The Karas respondents rely on the Shareholders Deed between Mr Lipman and five new directors effective from 1 July 2021 to highlight the benefits received by Mr Lipman post the Separation Agreement: JTB 82/7865.

916    According to the Shareholders Deed, Mr Lipman’s loan was to be repaid by each director and shareholder lending LKPL 20% of their respective profit entitlements per annum, which was attributed to Mr Lipman’s 2018 loan, subject to the majority of directors deciding otherwise.

917    As part of the reconciliation in the Separation Agreement, Mr Lipman also benefitted from the Balance Sum, to which I have referred above, and which Mr England determined on 8 October 2021 in the sum of A$5,570,469.

918    The Karas respondents submit that Mr Lipman could now control and restructure LKPL, which he allegedly wanted from 2018. According to the Karas respondents, this allowed Mr Lipman to have the loan repaid and introduce principals, without whom this would unlikely be paid.

919    There is no doubt Mr Lipman received a benefit from the Separation Agreement. I deal with that issue and whether account needs to be taken of these benefits when determining the extent of any loss suffered by LKPL and/or Mr Lipman.

920    As a consequence of what Mr Lipman came to know when reading the material provided to him by Mr Cross in the 4 red lever arch folders, on 25 November 2021, the applicants’ then solicitors wrote to MdR requesting MdR disclose evidence of its dealings with Mr Karas, having put MdR on notice that Mr Karas’ conduct in negotiating with MdR, entering into the Framework Agreement and entering into the MdR partnership, gave rise to breaches of Mr Karas’ duties as a director of LKPL. Mr Gold replied by email on 1 December 2021 refusing to engage with Mr Lipman’s then solicitors.

THE PLEADED CAUSES OF ACTION

921    It is against the background of the facts as I have found them, that I consider the applicants’ causes of action. The applicants pleads numerous causes of action against the Karas respondents, all of which are primarily directed towards Mr Karas and which may be described in broad terms as follows:

(a)    Claims for breach of orthodox and ad hoc fiduciary duties to both LKPL and Mr Lipman;

(b)    A claim for breach of statutory duties as a director of LKPL under the Corporations Act;

(c)    A claim for misleading or deceptive conduct contrary to s 18 of the ACL through Mr Karas’ alleged concealment of his dealings with MdR during his separation negotiations with Mr Lipman;

(d)    A claim under the Misrepresentation Act; and

(e)    A claim for breaches of equitable and statutory duties of confidence through Mr Karas’ alleged disclosure of confidential information in concluding his dealings with MdR.

922    The applicants plead four causes of action against MdR which may be described in broad terms as follows:

(a)    A claim pursuant to the “second limb” in Barnes v Addy (1874) LR 9 Ch App 244, that MdR knowingly assisted Mr Karas in his breaches of the fiduciary duties Mr Karas is alleged to have owed to LKPL in furtherance of a dishonest and fraudulent design;

(b)    A claim pursuant to the “second limb” in Barnes v Addy that MdR knowingly assisted Mr Karas in his breaches of the fiduciary duties Mr Karas is alleged to have owed to Mr Lipman personally, in furtherance of a dishonest and fraudulent design;

(c)    A claim for accessorial liability under the Corporations Act in connection with Mr Karas’ alleged breaches of ss 181, 182 and 183 of that Act; and

(d)    A claim for accessorial liability under the ACL in connection with Mr Karas’ alleged misleading or deceptive conduct contrary to s 18 of that Act.

THE ALLEGED RELATIONSHIPS - TRUST, AGENCY, OVERARCHING PARTNERSHIP

923    A number of the causes of action against the respondents rely on alleged relationships giving rise to fiduciary duties which are said to be owed by Mr Karas to LKPL and/or Mr Lipman. In this section of the reasons, I address the alleged relationship(s).

924    Prior to doing so, it is convenient to address three matters raised by the respondents which apply to each of the alleged relationships:

(a)    The parties’ view as to each other’s beneficial interest in LKHK;

(b)    The defence of illegality; and

(c)    The other defences to the claimed relationships - estoppel, equitable election and affirmation.

The parties’ views as to each other’s beneficial interest in LKHK

925    On 26 February 2021, Mr Lipman wrote to Mr Karas in response to an assertion by Mr Karas that Mr Lipman had a 50% equitable interest in LKHK: JTB 66/6290, 6291. Mr Lipman disagreed that he held a 50% equitable interest in LKHK: JTB 66/6316. In cross-examination, Mr Lipman agreed that [479] of his first affidavit sworn 31 July 2023 (exhibit A4) provides an explanation as to why he made that assertion in his email. He agreed that he had deliberately made that statement for the purpose of achieving the most favourable terms for LKPL, but disagreed that that deliberate inclusion was inconsistent with the notion that he was mistaken in what he wrote with respect to his belief that he did not have a 50% equitable interest in LKHK. He said in cross-examination it was deliberately inserted because his focus at that stage was on the debtor/creditor relationship and trying to have the debt repaid, but that it was a mistake not to have referred to the equitable consideration: T 414.37-414.45. I accept that evidence.

926    On 11 March 2021, Mr Lipman sent an email to Mr England, copied to Mr Hoffmann QC, to which Mr Lipman attached a document of 34 pages entitled, “20210311 – Note to Richard England” marked ‘private and confidential’ in contemplation of the facilitation arrangement that was going to be entered into (note): JTB 67/6447. The note contained a very detailed version of how Mr Lipman described his case and why he had rights against Mr Karas. In cross-examination Mr Lipman said, amongst other things, that:

(a)    At the time he provided the note to Mr England, he had no intention of continuing in business with Mr Karas: T 429.41-430.12;

(b)    In [8] of the note, Mr Lipman used the term ‘sole trader’ which he accepted he used to convey that Mr Karas was the legal and beneficial owner of LKHK. He said that the use of that term in that way was a mistake. He disagreed with the proposition that [8] was written for the purpose of outflanking Mr Karas in the negotiations: T 434.10-434.17. I do not accept that it was not written for the purpose of outflanking Mr Karas in the negotiations;

(c)    Mr Lipman agreed that at [12] of the note, he was asserting that there was no relationship of principal and agent between LKHK and LKPL, which was inconsistent with his case in these proceedings: T 436.25-463.42. In this section of his evidence, Mr Lipman was evasive before saying that the inaccurate statement in [12] was made by mistake and by including it he did not knowingly mislead Mr England: T 438.46-439.10. I do not accept it was a mistake, however I do accept that Mr Lipman’s focus at the time was a recovery of debt. Further, had he known of Mr Karas’ dealings with MdR, I have no doubt Mr Lipman would have asserted a beneficial interest in LKHK;

(d)    Mr Lipman agreed that, in his statement in [21] of the note, he used the term ‘sole trader’ in the sense of legal and beneficial ownership. He said that that statement at [21] was contrary to the case he makes in these proceedings and is another mistake made in “characterising the story to Mr England” and overlooked when writing the note in good faith: T 440.20-440.28. It is for the same reasons set out above I do not accept it was a mistake;

(e)    Mr Lipman disagreed that the statements contained in the note, that he characterised as mistakes throughout the course of cross-examination on this line of questioning, were in fact true statements that he has tried to explain away having realised that they do not assist his case in these proceedings: T 440.39-440.43;

(f)    Mr Lipman agreed that, in asserting at [28] of the note that Mr Karas was a sole trader in Hong Kong, he used the term ‘sole trader’ in the sense of legal and beneficial ownership. He said his assertion of an argument on the basis of Mr Karas being a sole trader in Hong Kong was another mistake made in the preparation of the note and denied that his evidence of him making a mistake was false: T 442.14-442.25. I make the same point;

(g)    At [29] of the note, Mr Lipman disagreed with Mr Karas’ assertion that he (Mr Lipman) had a 50% equitable interest in LKHK. He agreed that such position was contrary to the case he is running in these proceedings and amounts to another mistake that he has made. He denied that evidence was false: T 443.6-443.26. I make the same point;

(h)    Mr Lipman agreed that his description of Mr Karas as a ‘sole trader’ at [32] of the note was an expression he used to convey that Mr Karas conducted LKHK as legal and beneficial owner;

(i)    Mr Lipman said that he made a mistake in saying to Mr England at [33] of the note that he was not a partner in the operations of LKHK and that the reason for making that mistake was that he had a completely different focus, namely the debtor/creditor relationship. He denied that he was saying he had made a mistake because he realised that the statements he made to Mr England are contrary to his case: T 452.35-453.45. Mr Lipman said that his statement in [33], that there was no trust over the business of LKHK, was untrue and that its inclusion in the note was also a mistake. I make the same point; and

(j)    Mr Lipman explained that in [37] of the note to Mr England, he is saying that Mr Karas is adopting two inconsistent positions, namely that he is a sole trader and that he is carrying on in partnership with Mr Lipman. Subsequently, Mr Lipman agreed with the suggestion that he was in fact saying that Mr Karas was carrying on the business of which he was legal and beneficial owner to suit what he perceived as his advantage at the time, but disagreed that such a position was inconsistent with Mr Lipman’s position now that Mr Karas was carrying on business with Mr Lipman: T 458.7-458.8.

927    Mr Lipman said that he did not recall whether he had considered legal advice about the contents of the note before sending it to Mr England: T 462.23-462.35. He agreed that it was likely that the claims for privilege set out in a schedule of claims for privilege in respect of documents dated 9 March 2021 were in respect of the note. He denied that the evidence he gave in relation to the mistakes contained in the note was a recent invention on his part: T 491.43-491.45. I do not consider Mr Lipman’s claims are a recent invention. Rather, they are a realisation of what, on any view, is a complex set of factual and legal circumstances.

928    On 1 April 2021, LKPL issued a letter to Mr Karas enclosing a letter of demand and draft statement of claim by its then solicitor, Iles Selley. The letter provided notice that Mr Lipman intended to seek leave to bring statutory derivative action pursuant to s 237 of the Corporations Act for the repayment of an outstanding balance of a loan against Mr Karas if he did not comply with the demand set out in the letter of demand: T 384.45-385.2.

929    After being shown an invoice in cross-examination (exhibit R8), Mr Lipman said he did not have a recollection of when he first instructed Iles Selley but agreed that it is likely that he instructed them in respect of the preparation of what became the draft statement of claim on or before 3 March 2021: T 384.40-384.43.

930    In cross-examination, Mr Lipman said that at the time of sending the letter of demand, he had in mind that Mr Karas was conducting LKHK as agent for Mr Lipman, as trustee for a trust of which Mr Lipman was a beneficiary, or in such a way as to render him subject to fiduciary duties either to LKPL or Mr Lipman, personally. Mr Lipman disagreed with the proposition that had he had causes of action in respect of those types of relationships he would have included those claims in the draft statement of claim. He said that the claim set out in the draft statement of claim was very much more direct, by which I understand him to mean as a simple debt claim: T 385.21-385.40.

931    Mr Lipman was cross-examined on the draft statement of claim (JTB 70/6700) which took the same theme as the cross-examination on the note. In [3.5] of that document, it is alleged that Mr Karas:

Is legally and beneficially entitled to and operates a legal practice in Hong Kong as a sole trader under the business name “Lipman Karas”.

932    Mr Lipman accepted that he gave instructions for the draft statement of claim; that he believed what he was saying when he gave those instructions; that he checked the draft statement of claim carefully before it was sent, but that nonetheless the allegation in [3.5] is untrue on the basis that it was a mistake entirely of his making.

933    Mr Lipman accepted that the wording of [3.5] was inconsistent with the case the applicants are running in this matter, but denied that giving instructions in the form of [3.5] involved him deliberately making an untrue statement. He accepted that the wording of [3.5] was faithful to the instructions he had given but again asserted a mistake in the drafting: T 402.31-404.3.

934    Mr Lipman agreed that by the draft statement of claim he was setting out what he considered to be his best case, in the sense of the simplest case to run, in order to succeed in recovering money from Mr Karas. He denied that by giving instructions in the form of [3.5] he was making a statement that was deliberately untrue. He said that the inclusion of [3.5] was a mistake but disagreed with the proposition that it was a “sloppy mistake”, and said that the mistake occurred because the concept of sole proprietorship and the concept of who owned a beneficial interest in LKHK was not his focus: T 389.34-389.35; T 411.17-31.

935    Mr Lipman did not accept that when the applicants opened their case by making a distinction between the legal position and the underlying equitable position, that was different to the way that he had used and understood the expression “sole proprietor” on the basis that he did not see the two positions as being inconsistent. He explained that the whole way in which LKPL set up the Hong Kong practice and made it compliant with Hong Kong regulations was consistent with LKPL having an interest in the Hong Kong business, notwithstanding that is inconsistent with what appeared in the draft statement of claim: T 406.1- 408.6.

936    Mr Lipman continued in cross-examination by accepting that in the draft statement of claim he was setting out his best case to recover money from Mr Karas, that he did so by reference to what he believed to be the truth, and that the best way to recover money from Mr Karas was a contractual recovery based on a debtor/creditor relationship: T 403.27-37.

937    Throughout the cross-examination, Mr Lipman insisted that the reference in the draft statement of claim at [19.3], [22] and [23.2] to Mr Karas being a sole proprietor, is a mistake: T 405.9-41, T 411.6-16.

938    Next, Mr Lipman was taken to [20.3.9] and [20.3.10] of the applicants’ reply to the first to third respondents’ fourth defence which plead that Mr Karas had contended to Mr Lipman on or about 24 February 2021 that he (Mr Lipman) had a 50% equitable interest in LKHK. Mr Lipman disagreed with the proposition that the reply, as pleaded on his instructions, was manifestly inconsistent with any assertion that what he said in [3.5] of the draft statement of claim was inserted by mistake: T 420.3-420.5.

939    I have said above in relation to the note Mr Lipman sent to Mr England that I do not accept Mr Lipman made a mistake. So too, in giving the instructions for the allegations in [3.5] to be made, I do not accept Mr Lipman made a mistake. However, as I have also found, the expression of Mr Lipman’s views as to the legal and/or equitable relationship between Mr Lipman, Mr Karas, LKPL and LKHK were made by him in the context of him being focused on the recovery of an alleged debt from LKHK to LKPL and not the wider issues that are involved in this matter.

940    The same may be said of Mr Karas’ often expressed view in this matter that he was the sole legal and beneficial owner of LKHK.

941    There are numerous examples where Mr Karas represents to third parties and to Mr Lipman that he and Mr Lipman owned LKHK on a 50:50 basis and that Mr Lipman had a beneficial interest in LKHK:

(a)    Mr Karas’ email to Ms Rachael Clark of Deloitte in London on 15 June 2010: JTB 1/349;

(b)    In 2015, LKUK, the 50% owner of LK LLP, sought to purchase a property in London. Mr Lipman and Mr Karas communicated with Mr Michael Gabbitas of Coutts Private Banking to fund the purchase. As part of that process, Mr Lipman needed to provide details of his assets and liabilities to Coutts. In an email sent to Mr Gabbitas on 16 April 2015, which is copied to Mr Karas, Mr Lipman informs Mr Gabbitas of the then value of his 50% interest in LKPL and LKHK and his 25% interest LK LLP (JTB 16/1572/6186). No objection was received from Mr Karas; and

(c)    Later, in February 2018, when LKUK was seeking to purchase a second property in London, Mr Karas asked Ms Copley to provide an estimate of the value (“mud map”) of Mr Lipman and Mr Karas’ 50% respective interests in LKPL and LKHK and their respective 25% interests in LK LLP: JTB 29/2794/11819.

942    Although in his first affidavit, (exhibit R55) Mr Karas deposed that when he read [3.5] of the draft statement of claim, it confirmed to him that Mr Lipman considered Mr Karas to be the sole legal and beneficial owner of LKHK. I do not accept that evidence for the reasons which follow.

943    First, as I have noted earlier, when confronted with an email from Mr Lipman sent on 19 February 2021 concerning a suggestion by Mr Lipman that Mr Karas owed LKPL approximately A$19 million, (JTB 65/6221) Mr Karas adopted the position that:

If we are to try and resolve the differences between us then there is a reality that needs to be understood and respected. That reality is that you and I are the sole owners of LKPL and that despite my sole trader status in Hong Kong, you have a 50% equitable interest in LKHK. There are no other shareholders or directors. (JTB 66/6290, 6291)

944    Second, on 28 May 2021, Mr Karas drafted his “Liberation Day” announcement to the staff of LKHK made on 1 June 2021. In that document, Mr Karas recorded that Mr Lipman and Mr Karas had decided to “split the ownership of the HK and Adelaide firms” and that “[a]s of next week, I will be the sole owner of LKHK and I will no longer be a partner of LK in Australia”: JTB 80/7656.

945    As to the application to Coutts Private Banking in February 2018, when Mr Karas was cross-examined on that email, he sought to draw a distinction between an economic interest and a beneficial interest: T 1470.25-1470.41. I do not accept that evidence and I have no doubt it was an attempt by Mr Karas to overcome an inconvenient hurdle to his defence.

946    It is evident that at various times commencing from in or about November 2020, Mr Lipman and Mr Karas took positions in relation to what interest the other may, or may not, have in LKHK. I treat none of that as confirmation of the accuracy of any assertion. Rather, both parties asserted positions which happened to conform with their particular agenda at any particular point in time and which was inconsistent with their respective positions taken at trial.

947    The fact that Mr Karas and/or Mr Lipman took a particular view at a particular point in time as to the nature of their respective interests in LKHK, does not carry any, far less any significant, weight in determining what the true nature of Mr Karas’ and Mr Lipman’s respective interests in LKHK was.

948    Ultimately, the nature of any interest LKPL, Mr Lipman and Mr Karas may, or may not, have had in LKHK is a matter for the Court, and the parties attaching labels to those interests does not advance the matter.

Illegality

949    The second matter is the alleged illegality of the applicants’ contended relationships.

950    Other than directorship, there are three types of well-recognised relationships alleged which give rise to fiduciary duties: trust, agency and overarching partnership. The applicants also allege ad hoc fiduciary duties.

951    The Karas respondents raise, amongst other defences, illegality as a complete answer to the trust claims, agency claims and overarching partnership claims.

952    The respondents plead that the pleaded relationships between Mr Lipman, Mr Karas, LKPL and/or LKHK are illegal and thereby void. That question arises at both a factual level and as a question of law in the sense that the Karas respondents contend the relationship for which the applicants contend was illegal and therefore impossible.

953    At [27] of the fourth statement of claim (SoC) filed on 6 December 2023, the applicants plead that in connection with the conduct of the practice of LKHK, for all relevant purposes, Mr Karas conducted the practice of LKHK as agent for LKPL and Mr Karas held any assets of LKHK (both tangible and intangible) on trust for LKPL.

954    At [28] of the SoC, the applicants plead that further, or in the alternative to [27], Mr Karas conducted LKHK as an agent for LKPL, or in the alternative, as trustee for LKPL. They repeat the same particulars as for [27].

955    The Karas respondents submit that the regulatory regime in Hong Kong is a hurdle to each of the applicants’ claims in agency, trust and overarching partnership.

956    In the Karas respondents’ defence filed on 20 December 2023, they plead, in relation to their defence of illegality at [27], that:

(a)    The validity and enforceability of the alleged agency and trust are governed by the laws of Hong Kong, or alternatively the laws of Australia;

(b)    If the validity and enforceability of the alleged agency or trust are governed by the laws of Hong Kong, the alleged agency and trust are illegal or contrary to Hong Kong law, and either void or unenforceable;

(c)    If the existence, validity and enforceability of the alleged agency or trust are governed by the laws of Australia, such agency or trust are not enforceable by an Australian court because the performance in Hong Kong of the alleged agency and trust is illegal or contrary to Hong Kong law; and

(d)    The alleged agency would require a finding that LKPL (an Australian company) was practising Hong Kong law in Hong Kong via an agent, in contravention of the applicable regulatory regime, for more than a decade.

957    At [28] of their defence, the Karas respondents repeat their assertions from [27] of the Defence to the allegations in [28] of the SoC.

958    At [28A] and [28B] of the SoC, the applicants plead that if Mr Karas did not conduct the practice of LKHK as agent for LKPL, or hold the assets of LKHK on trust for LKPL as pleaded in [27] and [28], then:

(a)    Mr Lipman and Mr Karas were parties to a partnership agreement, overarching the corporate and trust entities referred to above, under which the affairs of LKPL, LKHK and LKUK were to be conducted, with the object of generating profits to be shared by them both equally up until 2016, and thereafter on the basis that Mr Karas would be entitled to a greater share of the consolidated profits of LKPL and LKHK (Overarching Partnership Agreement); and

(b)    In the alternative to the above, the Overarching Partnership Agreement was confined to the affairs of LKPL and LKHK.

959    In their defence to the applicants’ pleading in [28A] and [28B], amongst other things, the Karas respondents again plead illegality.

960    The starting point for the Karas respondents’ illegality point is their pleading in relation to profit-sharing. At [22(a), (b), (c) and (d)] of the defence they plead:

a.    … the profits reported by LKHK were solely allocated to, and received by, Mr Karas;

b.    … further to paragraph 22(a) … at no time did Mr Lipman have a legal or beneficial interest in the profits reported by LKHK;

c.    … in the alternative to paragraph 22(b) … if, which is denied, Mr Lipman had any interest in the profits reported by LKHK, such interest was incapable of having any consequence for the purposes of section 2(1)(c) of the Partnership Act 1891 (SA);

d.    The profits reported by LKPL were shared between Mr Karas and Mr Lipman in the following manner (the profit sharing arrangement):

(i)    from the date of formation of LKPL, each of Mr Karas and Mr Lipman received money from LKPL in the form of monthly advances;

(A)    prior to December 2015, each of Mr Karas and Mr Lipman received the same monthly advance;

(B)    after about December 2015, Mr Karas and Mr Lipman agreed that Mr Karas was to (and Mr Karas did) receive a greater monthly advance than Mr Lipman;

(C)    after about July 2018, Mr Karas and Mr Lipman agreed that Mr Karas was to (and Mr Karas did) further increase the size of his monthly receipt relative to that of Mr Lipman;

(ii)    LKPL declared annual dividends in respect of the monthly advances made to Mr Karas and Mr Lipman;

(iii)    LKPL would declare further dividends, as agreed between Mr Karas and Mr Lipman;

Particulars

(A)    The profit sharing arrangement is recorded in a note prepared by Steven Wild of Nexia Edwards Marshall (the accountants for LKPL) on 15 June 2020, a note prepared by Steven Wild of Nexia Edwards Marshall on 22 June 2020, and the Notes of Equalisation of Equity for the 2018 financial year prepared by Nexia Edwards Marshall dated 20 December 2019.

(B)    The profit sharing arrangement is evidenced by the books and records of the parties.

(emphasis in original)

961    Self-evidently, the Karas respondents admit at [22(d)], that profits reported by LKPL were shared between Mr Lipman and Mr Karas. Further, at [22B], the Karas respondents plead that to give effect to the profit-sharing arrangement in [22(d)], in or about October 2012, Mr Karas obtained a waiver from r 4 of the Solicitors’ Practice Rules which enabled LKHK to share profits with Mr Lipman.

962    I have found that as part of the application by Karas Lawyers and the Foreign Firm to the Law Society for its consent to LKHK being established, Mr Karas enclosed with the application to the Law Society a letter from LKPL which confirmed that LKPL consented to the cessation of the practice of the Foreign Firm and to, “… Karas Lawyers changing its name to Lipman Karas to operate as the firm’s branch in Hong Kong”.: JTB 6/601, 602, 603.

963    Mr Ma considered that Circular 09-397 of the Solicitors Practice Rules (exhibit R83, p 355) was dealing with the notion of a Hong Kong firm which is relevantly a branch of an overseas parent, sharing profits with that overseas parent (T 1852.41-1853.2) and observed that a caveat to the sharing of profits was the degree of control over the legal services provided by the Hong Kong firm. Mr Ma confirmed that what is not allowed, is someone who is not a Hong Kong solicitor influencing the actual provision of legal services in Hong Kong in relation to Hong Kong law. To that extent, administrative services by the overseas parent, such as the hiring of staff, the payments of salaries to be paid, and the rental to be paid on premises, were probably not objectionable: T 1855.41-1856.23.

964    Mr Ma was taken to s 49 of the Legal Practitioners Ordinance which deals with a prohibition on a solicitor acting as an agent for an unqualified person. Mr Ma contrasted the situation in s 49(1)(a), which is a prohibition against a solicitor acting as an agent in any action or any matter in bankruptcy for any unqualified person, with the prohibition in r 4 of the Solicitors’ Practice Rules. Rule 4 does not speak to agency but speaks against the sharing of profits, usually with an overseas parent. If a person is the agent of a principal who is not qualified to practise in Hong Kong, r 4 does not permit that to occur: T 1857.23-1858.8.

965    In either an agency or a trust relationship, Mr Ma’s evidence contained within his report was that on the issue of agency, it is not permissible for a Hong Kong legal firm or a Hong Kong solicitor to conduct their legal practice as an agent for a principal that is an Australian company that operates a law practice in Australia: exhibit R83, Q-13.

966    On the issue of a trust, Mr Ma’s evidence contained in his report was that it is not permissible for a Hong Kong legal firm or a Hong Kong solicitor to hold the goodwill of their legal practice on trust for an Australian company that operates a law practice: exhibit R83, Q-15.

967    However, as I have set out earlier in these reasons, Mr Ma accepted that his answer in his report about an agency or trust relationship must be viewed within the prism of the evidence he gave in cross-examination to which I have referred earlier at: T 1860.5–1861.14, such that that provided that the agency relationship or the trust relationship did not extend to the provision of legal advice, but was confined to what was generally referred to as the administrative side of the practice, there was no prohibition against an agency or trust relationship: T 1861.16-1861.24.

968    Rule 4 of the Solicitors’ Practice Rules contains a prohibition against, “[a] solicitor [sharing] or [agreeing] to share with any person not being a solicitor practising in Hong Kong his profit costs …”. I assume the reference to “his” is an historical artefact.

969    It is important to understand just what it is that r 4 of the Solicitors’ Practice Rules prohibits and what a waiver under r 6 of the Solicitors’ Practice Rules is directed to.

970    Mr Ma accepted in cross-examination that the exception to the prohibition against sharing of profits in r 4(c) is directed to sharing, “fees and profits with the Foreign Firm or firms in that Association” and only applies to a solicitor whose firm is a party to an Association. Once that Association finishes and the merger between the Hong Kong firm and the Foreign Firm occurs, the prohibition in the preamble to r 4 operates. It is to that prohibition which the power to waive in r 6 is directed.

971    As I have noted, the prohibition is directed to “profit costs”. There is no definition of “profit costs” in the Solicitors’ Practice Rules or the Legal Practitioners Ordinance, although in the latter, “costs” is defined in s 2 to include fees, charges, disbursements, expenses and remuneration.

972    In the Guide, Chapter 4 deals with fees but there is no definition of “profit costs”.

973    “Profit costs” is a term sometimes used to describe a solicitor’s fees which comprises the recurring expenses or overheads of a solicitor’s office and his or her profit on those expenses or overheads: Quick on Costs, Thomson Reuters, Volume 1 [20.1200]. The term excludes disbursements: see Rutter v Sheridan-Young [1958] 2 All ER 13, 15. In Rutter, the phrase “profit charges” and not “profit costs” is used, however the two phrases seem to mean the same thing as they are said to have the same meaning in Quick on Costs.

974    Work in progress reflects the costs payable in respect of work done by LKHK. Those costs reflect LKHK’s recurring expenses or overheads and the profit on those expenses or overheads. The waiver of r 4 was expressed in the letter from the Law Society as being granted to permit the sharing of profits between LKHK and the principals of the overseas offices of LKHK: JTB 6/625. However, as I have noted, the only prohibition in r 4 refers to “profit costs” which represents the recurring expenses or overheads of LKHK’s office and the profit on those expenses or overheads, excluding disbursements.

975    In any event, by reason of the waiver of r 4, there was no prohibition against, and it was not illegal, for Mr Karas as the sole legal proprietor of LKHK to hold LKHK’s profits on trust for the principals of the overseas offices of LKHK. That extended to an incorporated practice.

976    Insofar as an “overarching partnership” is concerned, once again informed by Mr Ma’s evidence, there is no prohibition against Mr Karas being a partner in an overseas law firm whilst at the same time operating a Hong Kong law firm in his own right. To that extent, it was permissible for Mr Karas to be in partnership with Mr Lipman as part of an overarching partnership.

977    Accordingly, whether governed by the laws of Hong Kong or Australia, any relationship of trustee and beneficiary between Mr Karas and LKPL, principal and agent between Mr Karas and LKPL, or overarching partnership between Mr Karas and Mr Lipman, was not illegal, void or unenforceable.

978    The Karas respondents submit that a solicitor must not, in the course of practising, do or permit anything to be done that compromises their independence and integrity, or anything which could compromise independence. They submit that because of the prohibition on acting as an agent for an unqualified person, that is sufficient to dispose of the applicants’ trust, agency, partnership and fiduciary duty claims (the latter being the usual as well as the ad hoc fiduciary duties claim rather than the statutory duties applying to Mr Karas as a director of LKPL).

979    As part of that submission, the Karas respondents contend that irrespective of the various ways in which the applicants frame their case as to an interest in LKHK, pervading each of those relationships is an impermissible level of control by an unqualified person being either Mr Lipman personally or LKPL as an unqualified corporation.

980    The Karas respondents submit further that the aspect of control to which Mr Ma referred as not being objectionable (i.e. the general administrative services), was not how the applicants have advanced their case. They submit that the applicants contend for substantive control over profits and for Mr Lipman or LKPL to operate a partnership or control or influence over the business.

981    I do not accept those submissions for the following reasons.

982    First, to the extent any of those relationships may exist, the pleaded relationships were not illegal, void or enforceable.

983    Second, as to LKPL being an unqualified corporation, the Karas respondents’ submissions proceed on the basis that it is not possible for a corporation to practice the law in Hong Kong. However, when one considers the distinction between an unqualified individual and the inability of a corporation to practice the law in Hong Kong, it is a distinction without a difference. Neither are qualified to provide legal services in Hong Kong and yet the regulatory regime in Hong Kong allows the sharing of profits with unqualified (in the Hong Kong sense) persons. Mr Ma confirmed that it was permissible for a Hong Kong solicitor to have a financial relationship with an overseas firm which is an incorporated legal practice.

984    Third, whereas I accept that the applicants have advanced their case on the basis of having an equitable interest in LKHK, an entitlement to share in the profits of LKHK, and for LKPL to operate with LKHK as one integrated firm, that was not at any time directed at, or to use Mr Ma’s words, “having a say”, in how Mr Karas or others within LKHK actually provided legal advice in Hong Kong as solicitors qualified to practise in Hong Kong: T 1856.21-1856.23. Put another way, at no time did Mr Lipman or anyone at LKPL engage or in any way direct or interfere with the profit generating activities of LKHK, being the actual provision of legal services to LKHK’s clients by qualified legal practitioners. In that way, at no time was there any abrogation or any compromise of the fundamental responsibility of a Hong Kong legal practitioner to his or her client, to the regulatory authorities, and to the Court.

985    As to the Karas respondents’ contention that the applicants contend for substantive control over profits and for Mr Lipman as LKPL to operate a partnership or exercise control or influence over the business, that is not so. As part of one integrated firm, Mr Lipman and Mr Karas exercised a degree of control entirely consistent with the Hong Kong regulatory requirements.

986    Next, the Karas respondents submit that a Hong Kong “firm” has no separate legal personality. So much so may be accepted, but at all times the sole legal owner of LKHK has been Mr Karas. That is not inconsistent with others having beneficial interests in the Hong Kong branch of LKPL.

987    Next, the Karas respondents submit that there was a prohibition against any company from practising Hong Kong law or from any foreign company from practising foreign law. That is a distinction without a difference. The Karas respondents submit that on the basis of that prohibition, the Court should find that LKPL could never have had any role to play in the provision of legal services in Hong Kong. I accept that is the case for the reasons I have set out above, however that is not a basis upon which to find that LKPL had no beneficial interest in the practice of LKHK.

988    Next, the Karas respondents submit that an “Association” within the meaning of the regulatory provisions is not a partnership. So much so may be accepted, but the Association is part of a regulatory provision affecting the right to practice in Hong Kong. These provisions have no role to play in determining whether LKPL and/or Mr Lipman and Mr Karas agreed to establish a branch of LKPL in Hong Kong and conducted LKHK in that fashion or whether a relationship of trust, agency or overarching partnership existed. As I have observed previously, under certain circumstances, the regulatory regime permits the sharing of the profits of the Hong Kong business with others who are not qualified to practise in Hong Kong.

989    Next, the Karas respondents submit that the applicants’ emphasis on a waiver of r 4 of the Solicitors’ Practice Rules, obtained on 29 September 2012, is misplaced. They submit that Mr Ma did not accept the proposition that there could be a parent or branch relationship in the sense of ownership or control. That is not so. Although Mr Ma accepted that there would be restrictions on the sense of ownership or control, he nonetheless specifically embraced the concept of there being a branch office subject to the appropriate controls: T 1852.20-1852.35; T 1852-1853.36.

990    As part of their submissions concerning the waiver of r 4, the Karas respondents place weight on the fact that the waiver was never utilised. I accept that was the case, but it makes no difference. It is apparent from the factual findings I have made that Mr Lipman and Mr Karas attributed all of the profits made by Mr Karas in Hong Kong to Mr Karas. At the end of the financial year, there was an adjustment in the distribution of profits of LKPL to ensure that there was an equal distribution of profits such that both Mr Lipman and Mr Karas were treated equally. As I have noted in my factual findings, that process was subject to the difference in the monthly loan advances to Mr Karas and Mr Lipman after 2016.

991    Next, the Karas respondents refer to r 2A of the Solicitors’ Practice Rules. They submit that the applicants proceeded on the basis that a necessary consequence of the use of the name “Lipman Karas” in Hong Kong was a common partnership between LKHK and LKPL. The Karas respondents refer Mr Karas’ evidence at T 1207.12-1208.47 in support of that submission. That is not so. An examination of the transcript makes it clear that Senior Counsel was not contending that the use of the name “Lipman Karas” required a common partnership in the sense of Mr Lipman or LKPL being a partner in LKHK.

992    Next, the Karas respondents submit that by r 2A(2) of the Solicitors’ Practice Rules referring to a “branch” of a foreign law firm, does not mean that the Hong Kong firm is a separate entity in the nature of a corporate subsidiary, nor does it displace the regulatory requirements in relation to foreign control and unqualified practice. Again, so much so may be accepted but the conclusion by the Karas respondents said to follow from that proposition that, “[a] firm may operate as a ‘branch’ in common parlance, but it cannot operate as a subsidiary of, or agent or trustee for the Foreign Firm without breaching the [Legal Practitioners Ordinance] or the [Solicitors’ Practice Rules]”, is wrong for the reasons I have set out.

993    Applying the principles informed by Mr Ma’s evidence, and which I have set out earlier in these reasons:

(a)    There is no prohibition against, and it is not illegal in Hong Kong, for Mr Karas to act as an agent for LKPL (should that in fact be the case) in running LKHK, provided that he did not do so in a way where he was providing legal services as a Hong Kong solicitor on the instruction of LKPL, or for that matter, Mr Lipman. In circumstances where the agency was limited to running what in general terms may be described as the administrative side of LKHK, there was no prohibition;

(b)    On the basis of the facts as I have found them, there is no suggestion that Mr Karas or anyone in LKHK who was entitled to provide legal services as a Hong Kong solicitor was doing so on the instruction of anyone at LKPL, including Mr Lipman;

(c)    There is no prohibition against, and it is not illegal in Hong Kong, for Mr Karas to conduct LKHK as trustee for LKPL, nor is there a prohibition against, and it is not illegal in Hong Kong, for Mr Karas to hold assets of LKHK on trust for LKPL, including goodwill;

(d)    However, that is subject to the qualification I have already set out, which is that the actions of Mr Karas as trustee are directed to running what in general terms may be described as the administrative side of LKHK; and

(e)    On the basis of the facts as I have found them, there is no suggestion that Mr Karas, in conducting LKHK as trustee for LKPL, was providing legal services on the instruction of anyone at LKPL, including Mr Lipman.

994    As to holding the assets of LKHK on trust, including goodwill, on the basis of Mr Ma’s evidence and applying the law as he has described, it was permissible for Mr Karas to hold LKHK’s work in progress and goodwill, on trust.

995    It follows from what I have set out, that I do not accept the Karas respondents’ submission that if the integers of the alleged relationships of agency, trust and/or overarching partnership are established, they would be unenforceable at law on the grounds of illegality.

Other defences common to the claimed relationships

996    The Karas respondents raise a number of other defences to the allegations that there was an express trust, or in the alternative an agency relationship, or in the alternative an overarching partnership. One such defence relies on a contention that the applicants are estopped from asserting a beneficial interest in LKHK by reason of their claims of an express trust, agency relationship or overarching partnership.

997    They plead that the applicants are precluded by the operation of various categories of estoppel, specifically estoppel by convention, estoppel by representation, and estoppel by deed. They also plead equitable election and affirmation.

Estoppel by convention

998    The Karas respondents plead at [88] of their defence that:

At all times since the establishment of LKHK:

(a)    Mr Karas, Mr Lipman and the other applicants adopted a mutual assumption as to their legal relationship, namely that:

(i)    Mr Karas was the sole legal and beneficial owner of LKHK;

(ii)    the business of LKHK was not conducted as agent for LKPL, as trustee for LKPL or pursuant to any partnership with Mr Lipman;

and the parties have conducted their relationship and business and financial affairs on the basis of that mutual assumption;

(b)    Mr Karas, Mr Lipman and the other applicants each knew, and intended, that they would each act on that basis;

(c)    departure from that assumption will cause detriment, and further would be unconscionable.

999    The Karas respondents continue by pleading at [89] of the defence that further or in the alternative, Mr Lipman, Mr Karas and the other applicants:

(a)    … adopted a mutual assumption as to their legal relationship in conducting their separation and entering into the Separation Agreement, namely that no:

(i)    partnership arrangement between Mr Lipman and Mr Karas existed;

(ii)    agency or trust between LKPL and Mr Karas existed,

(b)    Mr Karas, Mr Lipman and the other applicants each knew, and intended, that they would each act on that basis;

(c)    departure from that assumption will cause detriment, and further would be unconscionable.

Principles

1000    “Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted on by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying”: Con-Stan Industries Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 244. See also Mineralogy Pty Ltd v Sino Iron Pty Ltd [2017] FCAFC 55 at [332], [333].

1001    This defence may be dealt with quickly.

1002    I do not accept that Mr Karas, Mr Lipman, and the other applicants adopted the pleaded mutual assumption at any time, nor that the parties conducted their relationship and business and financial affairs on the basis of that mutual assumption, nor that Mr Karas, Mr Lipman and the other applicants each knew and intended that they would each act on that basis.

1003    As to the further or alternative defence raised in relation to the Separation Agreement, I do not accept, again for the reasons I have set out, that the parties adopted a mutual assumption as to their legal relationship in conducting their separation and entering into the Separation Agreement, as pleaded by the Karas respondents, nor that Mr Lipman, Mr Karas and the other applicants each knew and intended that they would each act on that basis.

Conclusion on estoppel by convention

1004    I find that no estoppel by convention arises.

Estoppel by representation

1005    The Karas respondents plead estoppel by representation at [90] of their defence:

(a)    Mr Lipman and the other applicants represented to Mr Karas prior to entry into the Framework Agreement that:

(i)    Mr Karas was the sole legal and beneficial owner of LKHK (Ownership Representation);

(ii)    the arrangement the subject of paragraph 22 above had come to an end (No Sharing Representation);

(iii)    Mr Karas (as LKHK), Mr Lipman and LKPL would be separating their business interests (Separation Representation);

(iv)    following the separation, Mr Karas would retain LKHK and Mr Lipman would acquire all of LKPL (Second Separation Representation) …

(emphasis in original)

1006    The “No Sharing Representation” in [90(a)(ii)] of the defence refers to the alleged cessation of the profit-sharing arrangement pleaded in [22(d)] of the defence which I have set out earlier.

1007    The Karas respondents continue by pleading at [90(b)] of the defence that by each of the representations:

(b)    … the applicants induced Mr Karas to assume, and he did assume, that:

(i)    he was the sole legal and beneficial owner of LKHK;

(ii)    the contractual arrangement the subject of paragraph 22 above had come to an end;

(iii)    Mr Karas (LKHK), Mr Lipman and LKPL would be separating their business interests;

(iv)    Mr Karas would retain LKHK and Mr Lipman would acquire all of LKPL.

Principles

1008    In Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 674-675, Dixon J said:

The principle upon which estoppel in pais is founded is that the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations. This is, of course, a very general statement. But it is the basis of the rules governing estoppel. Those rules work out the more precise grounds upon which the law holds a party disentitled to depart from an assumption in the assertion of rights against another. One condition appears always to be indispensable. That other must have so acted or abstained from acting upon the footing of the state of affairs assumed that he would suffer a detriment if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption. In stating this essential condition, particularly where the estoppel flows from representation, it is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although substantially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment. His action or inaction must be such that, if the assumption upon which he proceeded were shown to be wrong and an inconsistent state of affairs were accepted as the foundation of the rights and duties of himself and the opposite party, the consequence would be to make his original act or failure to act a source of prejudice.

1009    The alleged representation in [90(a)(i)] of the defence is that the applicants represented to Mr Karas, prior to the entry into the Framework Agreement, that he was the sole legal and beneficial owner of LKHK. Certainly, as I have noted above, statements to that effect were made but as I have also noted, Mr Karas made statements to the contrary. I do not accept that Mr Karas was induced to assume that was the position. Both Mr Lipman and Mr Karas took differing positions depending on what their particular interest at the time required.

Conclusion on estoppel by representation

1010    I find that Mr Karas was not induced to assume that he was the sole legal and beneficial owner of LKHK, such that no estoppel by representation arises.

1011    That being the case, it is not necessary to consider the remainder of the estoppel by representation pleading.

Estoppel by deed (contract)

1012    The Karas respondents plead at [91] of the defence that:

… the Separation Agreement recorded that:

(a)    “[Mr Karas] is the sole proprietor of a legal practice conducted under the name and style “Lipman Karas” ...” [Recital B];

(b)    “LKHK means the legal practice conducted by [Mr Karas] as the sole owner from the Hong Kong Premises” [clause 1];

(c)    “Skip and LKPL agree and acknowledge to [Mr Karas] and LKHK that all HK WIP [work in progress] as at the Effective Date is and shall remain the property of LKHK” [clause 6.1];

(d)    “[Mr Karas] in his capacity as the sole proprietor of LKHK …” [clause 6.2];

(e)    there existed a debtor-creditor relationship between the parties (cll 4, 5, 6, and Sch 1),

thus giving rise to an estoppel by deed or convention.

Principles

1013    In Equity and Trusts in Australia, 7th ed, Professor Dal Pont at [10.10] describes Estoppel by Deed as being:

… a rule of evidence founded on the principle that “a solemn and unambiguous statement or engagement in a deed must be taken as binding between parties and privies, and therefore as not admitting any contradictory proof”. It dictates that either party to a deed, if sued in respect of obligations under the deed, may defend the action by virtue of a fact recited therein, the truth of which the parties have agreed to accept as the basis of their transaction. For this purpose, the deed must be shown to contain a precise and unambiguous statement of the fact(s) in question — not merely something from which its existence may be inferred — and that the statement is indeed that of the person denying the allegation. It is not necessary that the fact(s), the truth of which is assumed for the purposes of the transaction, be true. The estoppel only operates in proceedings that arise out of the transaction into which the parties entered upon the basis of the assumed facts, not in proceedings arising out of some other transaction.

(citations omitted)

See also Dabbs v Seaman (1925) 36 CLR 538 at 548 (Isaacs J).

The parties’ submissions and consideration

1014    The Karas respondents submit that Mr Lipman and Mr Karas entered into the Separation Agreement on terms which specifically recognised that Mr Karas was “the sole proprietor and legal and beneficial owner” of LKHK and Mr Karas has relied on those statements and carried out his side of the Separation Agreement.

1015    The applicants submit that there was no common understanding between the parties that Mr Karas was the sole beneficial owner of LKHK and that the financial compromise documented in the Separation Agreement reflected a mutual understanding that Mr Lipman and Mr Karas each held a 50% interest in LKHK.

1016    I do not accept the Karas respondents’ submission that an estoppel by deed arises.

1017    First, that is because there is nothing in the Separation Agreement which refers to the beneficial ownership of LKHK. In Recital B, the reference is to Mr Karas as the sole proprietor of LKHK, and in Recital I, it is recorded that, “[a] divergence of views as to the future, direction and ownership of LKPL and LKHK has led to a dispute between Skip and Jason”.

1018    To the extent the Karas respondents rely on these provisions, or any similar statements in the Separation Agreement, they do so on the basis of an inference, whereas it is well-established that for this species of estoppel to operate, the statements relied upon must be precise and unambiguous: Dal Pont (supra), Re Bond Ex parte Ramsay (1992) 25 ATR 61 at 74 (Hill J).

1019    Second, and in the same vein, the Karas respondents rely on an asserted state of facts as giving rise to legal consequences which are by no means certain.

1020    Third, the December 2020 Statement in Schedule 1 to the Separation Agreement proceeds on a consolidated assets and liabilities basis across LKPL and LKHK which is entirely inconsistent with Mr Karas having the sole legal and beneficial interest in LKHK: JTB 79/7568/53462.

Conclusion on estoppel by deed (contract)

1021    I find no estoppel by deed arises.

Equitable election

1022    At [93] of the defence, the Karas respondents plead that the applicants are approbating and reprobating, contrary to the doctrine of equitable election.

Principles

1023    Citing Viscount Maugham in Lissenden v CAV Bosch Ltd [1940] AC 412 at 417-419, the High Court in Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [57] (Gummow, Hayne and Kiefel JJ) observed that the equitable doctrine of election is different from the common law principle of putting a party to an election between alternative rights or remedies. The Court continued, “[e]quity fastens upon the conscience of a party taking under a deed or will and requires the party to choose between taking the benefit and accepting the burden of any stipulated conditions or rejecting the benefit: Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458 at 470 [66]”.

Consideration

1024    The Karas respondents’ submissions proceed on what they submit is the factual basis upon which the Separation Agreement was concluded, namely the separate legal and beneficial ownership of LKHK by Mr Karas, as well as the releases, entire agreement clause, and non-compete clauses contained within it.

1025    I have found that the factual basis upon which the Karas respondents proceed, namely Mr Karas’ sole legal and beneficial ownership of LKHK, does not exist. That is sufficient to dispose of this defence.

Conclusion on equitable election

1026    I find that the doctrine of equitable election is not made out.

Affirmation

1027    The Karas respondents plead that Mr Lipman and LKPL affirmed that LKHK was legally and beneficially owned by Mr Karas in early 2021: defence [52A]-[52F].

1028    The allegation of affirmation in early 2021 is based upon the draft statement of claim sent by the applicants’ then solicitors, Iles Selley, to Mr Karas in early 2021. I have dealt with that document earlier in these reasons and Mr Lipman’s evidence in relation to the allegations made within it. It is for those reasons that I do not consider Mr Lipman and LKPL affirmed in early 2021 that Mr Karas was the legal and beneficial owner of LKHK.

1029    The allegation of affirmation is also based upon the Separation Agreement: defence [60], [86]-[87]. The Karas respondents allege that Mr Lipman affirmed the Separation Agreement by accepting payment of the balance sum pursuant to the Separation Agreement whilst knowing about Mr Karas’ dealings with MdR.

1030    The defence continues at [86] and [87]:

86.    The Separation Agreement:

(a)    contains the Release, the Entire Agreement Clause, and the No Representation Clause;

(b)    was entered into after LKPL’s solicitors sent Mr Karas a letter of demand dated 1 April 2021 enclosing the draft pleading, as alleged in paragraphs 52A to 52F above;

(c)    was entered into in order to resolve the disputes between the parties, including the disputes alleged in the draft pleading, and following negotiations between the parties which were undertaken pursuant to the terms of the Facilitation Agreement;

(d)    contained provisions that operated inconsistently with Mr Karas (LKHK) being a trustee for LKPL or its agent or the existence of the alleged “overarching partnership agreement”.

Particulars

Paragraph 53 above is referred to and repeated.

Reliance is placed on the terms of the Separation Agreement, including Recital B, Recital H, clauses 4, 5, 6, 12.4, and Sch 1.

1031    Paragraph 87 of the defence identifies the acts the Karas respondents plead as constituting an affirmation of the Separation Agreement.

Principles

1032    Unlike equitable election, affirmation involves an election at common law as between rights, not remedies: generally see Heydon on Contract [31.640]-[31.920].

1033    What is required is knowledge by the applicants of facts giving rise to inconsistent legal rights. The words or conduct required to constitute such an election must be unequivocal and be consistent only with the exercise of one of the two sets of rights (i.e. to affirm or to rescind). In some cases, less unequivocal conduct may be sufficient to amount to an affirmation if performed with the actual knowledge of the right of election: Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 645-646 (Stephen J), 658 (Mason J).

Parties’ submissions and consideration

1034    The Karas respondents point to a number of matters which, they submit, leads to the conclusion that the applicants have affirmed the Separation Agreement.

1035    First, they submit that since the Separation Agreement became effective on 31 May 2021, LKPL has invoiced Karas LLP for work done on the matters identified in cl 5.2 of the Separation Agreement. That may be so, but I have found that Mr Lipman did not become aware of the extent of Mr Karas’ dealings with MdR until late October 2021.

1036    Second, they point to Mr Lipman restructuring LKPL by the Shareholders Deed which allowed for repayment of the loan owed by LKPL to Mr Lipman. The Karas respondents identify a number of other benefits:

(a)    Mr Lipman received the entirety of the shares in the LKPL on 1 June 2021;

(b)    Mr Lipman received the ability to control and restructure LKPL which allowed him to achieve the objectives by opening up equity in LKPL, as well as putting into place a mechanism for the repayment of his 2018 loan;

(c)    Mr Lipman received payments towards his 2018 loan from the introduction of equity participants, as well as payment by Mr Karas of the balance due in October 2021 pursuant to the Separation Agreement;

(d)    Mr Lipman received benefits from LKPL in the form of an annual draw and a share in the profits of LKPL;

(e)    LKPL itself benefitted from the Separation Agreement allowing it to settle a loan that it owed to Mr Karas in the sum of A$10 million;

(f)    LKPL has a contractual right for the continuation of work on the cl 5.2 matters; and

(g)    The Separation Agreement had the effect of allowing LKPL to repay Mr Karas’ 2018 loan account and Mr Lipman’s 2018 loan account.

1037    I accept that Mr Lipman and LKPL received these benefits.

1038    Third, the Karas respondents refer to the reconciliation procedure which resulted in a balance payment to LKPL from LKHK of approximately A$5.5 million. As a part of that submission, the Karas respondents submit that the accounting in Schedule 1 to the Separation Agreement shows Mr Karas as owning the entirety of LKHK. I have dealt with this issue above and do not accept that submission. The accounting in Schedule 1 is consistent, and only consistent, with Mr Lipman and Mr Karas having joint legal and beneficial interests in LKPL and joint beneficial interests in LKHK.

1039    Fourth, Mr Lipman sought to buy out Mr Karas’ shares in LKUK pursuant to cl 5.13 of the Separation Agreement. I accept that is so.

1040    The Karas respondents point to these matters as occurring in circumstances where Mr Lipman, Mr Cross, Ms Rahaley and LKPL were aware of Mr Karas’ discussions with MdR by at least 30 June 2021. Adopting MdR’s submissions, the Karas respondents invite the Court to infer that Ms Rahaley and Mr Cross were aware of Mr Karas’ discussions with MdR from as early as February 2021.

1041    I have not accepted MdR’s submissions and I have declined to infer that Mr Rahaley and Mr Cross were aware of Mr Karas’ discussions with MdR from as early as February 2021. So too, I have not accepted Mr Lipman, Mr Cross and Ms Rahaley were aware of Mr Karas’ discussions with MdR by at least 30 June 2021.

1042    The applicants submit that Mr Lipman, and thereby LKPL, only learnt of facts giving rise to the applicants’ claims after LKPL received payment of the balance sum on 19 October 2021. They submit that it was not until late October 2021 that Mr Lipman became aware that Mr Karas had negotiated arrangements with MdR in respect of LKHK at a time when he was still a director of LKPL and before entry into the Separation Agreement. I have made factual findings to that effect.

1043    The applicants point to the fact that although Mr Lipman’s personal assistant received calendar notifications concerning Mr Karas’ dealings with MdR, her unchallenged evidence is that she neither read them nor told anyone about them. I have accepted that is the case.

1044    The applicants submit that the pieces of information that came to light about a possible connection between MdR and the then Karas LLP after 1 July 2021, did not indicate that any arrangements had been struck prior to the Separation Agreement or at a time when Mr Karas was still a director of LKPL. They refer to an email from Mr Lipman to Mr Ford sent on 8 September 2021 in which Mr Lipman stated that he would be, “interested to see if Jason plans to sell his firm to [MdR]”: exhibit R16. They submit this email establishes that Mr Lipman was not aware that Mr Karas had already entered into the Framework Agreement prior to the execution of the Separation Agreement.

1045    I have found that is the case and I accept that submission.

1046    So too, the applicants submit that the announcement of an association between Karas LLP and MdR does not mean that suspicion or knowledge of the dealings between Mr Karas and MdR existed prior to the Separation Agreement, whilst Mr Karas was a director of LKPL and whilst he still owed fiduciary duties to Mr Lipman and LKPL. I accept that submission insofar as it is directed to Mr Karas being a director of LKPL. I also accept the submission in relation to fiduciary duties owed to Mr Lipman and Mr Karas, with which I deal later in these reasons, and find were in place.

1047    The applicants point to the searches that were undertaken in October 2021 following a bounce-back email giving rise to security concerns and observe that as a result of these searches Mr Lipman and Mr Cross:

(a)    Reviewed documents sent and received by Mr Karas;

(b)    Learned that the negotiations between Mr Karas and Mr Gold commenced in December 2020; and

(c)    Understood that the Framework Agreement had been struck between Mr Karas and MdR before the Separation Agreement and at a time when Mr Karas was still a director of LKPL.

1048    The applicants also point to the unchallenged evidence of Mr Lipman that on or about 22 October 2021, Mr Cross provided Mr Lipman with four red lever arch folders which comprised a subset of the results to searches undertaken of LKPL’s email system.

1049    I have dealt with Mr Lipman’s knowledge earlier in these reasons. I have found that Mr Lipman had no knowledge, other than disparate pieces of information, as to the dealings between Mr Karas and MdR until after he had received and considered the four red lever arch folders on 22 October 2021.

1050    Ultimately, whether there has been affirmation depends on the state of Mr Lipman’s knowledge and LKPL’s knowledge at the relevant times.

1051    As I have found, there is no doubt that Mr Lipman and LKPL had no knowledge of Mr Karas’ negotiations with MdR prior to the execution of the Separation Agreement.

1052    As to post Separation Agreement conduct, Mr Karas paid the balance sum owing on 19 October 2021 and Mr Lipman sought to buy out Mr Karas’ shares in LKLLP on 20 October 2021. That was prior to Mr Cross providing the information to Mr Lipman in the four red lever arch folders on 21 October 2021.

1053    I have found that Mr Lipman had no knowledge of Mr Karas’ dealings with MdR prior to the Separation Agreement, nor did he have knowledge sufficient to give rise to an unequivocal election consistent with an informed decision to affirm.

Conclusion on affirmation

1054    I find that, by their conduct, the applicants have not affirmed the Separation Agreement.

MR KARAS’ RELATIONSHIP WITH LKPL - TRUST AND AGENCY

1055    At [27.1] and [27.2] of the SoC, the applicants plead that “in connection with the conduct of the practice of LKHK for all relevant purposes”, Mr Karas conducted the practice of LKHK as agent for LKPL and that Mr Karas held any assets of LKHK (both tangible and intangible), on trust for LKPL. (emphasis provided)

1056    The particulars to those allegations are as follows:

…

27.4    Mr Karas represented to Mr Lipman on 6 November 2009, and Mr Lipman, and thereby LKPL, agreed, that “Karas Lawyers will represent the interests of Lipman Karas in Hong Kong and will share fees and profits”.

27.5    LKPL undertook to provide all financial support necessary for the establishment and ongoing operations of LKHK on the mutual understanding of Messrs Lipman and Karas, or alternatively on the understanding of Mr Lipman, fostered by the conduct of Mr Karas, as referred to in paragraph 27.4 above.

27.6    At all relevant times following the dissolution of the registered foreign firm, “Lipman Karas”, in 2012, LKHK was held out to the public in both Australia and Hong Kong by, and with the knowledge and concurrence of, Messrs Lipman and Karas, as being integrated with the Australian office of LKPL.

27.7    A material part of the practice of each of LKHK and LKPL involved Australian based lawyers employed by LKPL working on matters in respect of which LKHK had been engaged by the client.

27.8    Work that was undertaken by LKPL’s lawyers on LKHK’s files was charged by LKHK as part of invoices that were sent to clients.

27.9    Messrs Lipman and Karas shared equally in the consolidated profits of LKPL and LKHK, subject to additional compensation which was agreed to be paid to Mr Karas …

27.10    Mr Karas was otherwise failing to devote his time and attention to LKPL’s Australian business by reason of his involvement in the LKHK business.

27.11    LKPL provided material back-office administration and accounting functions for LKHK.

27.12    The financial arrangements between LKHK and LKPL were not on arm’s length terms.

1057    At [28] of the SoC, the applicants plead that Mr Karas conducted LKHK as an agent for LKPL, or in the alternative, as trustee for LKPL. (emphasis provided) They repeat the same particulars as for [27].

1058    It is apparent from the difference between the allegations in [27] and [28] of the SoC that the applicants make a distinction between Mr Karas acting in connection with the conduct of the practice of LKHK either as an agent or by holding any of LKHK’s assets on trust for LKPL on the one hand ([27]), and Mr Karas conducting LKHK as an agent or in the alternative as trustee for LKPL on the other ([28]). I deal with that difference as part of considering the alleged relationships.

Mr Karas held the assets of LKHK on express trust for LKPL

1059    The applicants’ trust claim proceeds on the basis of an alleged express trust.

Principles

1060    There is no disagreement between the parties as to the applicable principles.

1061    It is well-established that the absence of a written instrument does not preclude the finding of an express trust in connection with particular property. In Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6; (2015) 255 CLR 62 at [3] French CJ observed:

The question whether an express trust exists must always be answered by reference to intention. An express trust cannot be created unless the person or persons creating it can be taken to have intended to do so. Absent, as in this case, an explicit declaration of such an intention, the court must determine whether intention is to be imputed. It does so by reference to the language of the documents or oral dealings having regard to the nature of the transactions and the circumstances attending the relationship between the parties.

(emphasis provided; citations omitted)

1062    His Honour continued at [7] by identifying the three certainties necessary for an express trust: (1) intention to create a trust must be clear; (2) it must be clear what property is subject to the trust; and (3) it must be reasonably certain who the beneficiaries are: Kauter v Hilton (1953) 90 CLR 86, 97 (Dixon CJ, Williams & Fullagar JJ).

1063    The question is one of objective intention to be determined by reference to the outward manifestations of the intentions of the parties with regard had to the totality of the circumstances: Legal Services Board v Gillespie-Jones [2013] HCA 35; (2013) 249 CLR 493 at [119] (Bell, Gageler and Keane JJ). Further, the time of assessment of the intention will be the time when the trust was purportedly created: Bosanac v Commissioner of Taxation [2022] HCA 34; (2022) 275 CLR 37 at [113] (Gordon and Edelman JJ).

1064    The limited circumstances when subjective intention is relevant do not apply in this case: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253; at [115] (Heydon and Crennan JJ).

Applicants’ submissions and consideration

1065    The applicants submit that the evidence establishes the requisite intention to create an express trust whereby Mr Karas would hold the assets of LKHK (the trust property), both tangible and intangible, and including the revenue of LKHK, for the benefit of LKPL. That included the expenses of LKHK which were incurred for the benefit of LKPL. They identify 10 factual matters.

1066    First, by January 2008, Mr Karas and Mr Lipman had agreed that LKPL would establish and fund a Hong Kong practice to be conducted by a Hong Kong based lawyer on behalf of LKPL. Further, the instructions to TDW evince an intention to pursue that course and for there to be a single integrated firm.

1067    I accept that was the case. There is no doubt that on the facts as I have found them, Mr Karas was one of the moving forces, but equally it was not entirely of his making. Mr Lipman was a willing participant in the development of an international practice and without his agreement, co-operation and support, including agreeing for LKPL to underwrite the venture in Hong Kong to a very significant extent, the establishment of LKHK, in whatever guise the regulatory requirements allowed, simply would not have happened.

1068    Second, TDW recommended, and LKPL implemented, a process which led to the establishment of LKHK after a period of association between Karas Lawyers and the Foreign Firm with LKHK using the name “Lipman Karas” in Hong Kong and being established as a branch of LKPL.

1069    I have found that to be the case.

1070    Third, LKPL provided funds to establish Karas Lawyers, as well as the Foreign Firm, and underwrote Karas Lawyers for up to A$1 million. I have found that to be the case. Further, in a letter sent by Mr Karas to Mr Li of the Immigration Department of Hong Kong, Mr Karas said that “Karas Lawyers will represent the interests of Lipman Karas in Hong Kong and will share fees and profits”: JTB 2/162. So too, Mr Lipman confirmed to Mr Li, under Lipman Karas letterhead in a letter dated 6 November 2009, that “Karas Lawyers will represent the interests of Lipman Karas in Hong Kong and will share fees and profits”: JTB 2/164.

1071    Fourth, Mr Karas applied for, and Mr Lipman consented to, the Law Society granting a waiver of r 4 of the Solicitors’ Practice Rules.

1072    There is no doubt that was the case and I have found accordingly: JTB 6/601, 603. Further, Mr Karas made the application, although LKPL paid the relevant fee for the application to the Law Society to waive r 4.

1073    Fifth, Mr Lipman and Mr Karas agreed from the outset that the combined profits of LKPL and LKHK would be shared equally unless agreed to the contrary.

1074    I have found that was the case from the time LKPL, trading as Lipman Karas in Australia, commenced practice. It remained the position during the time Karas Lawyers and the Foreign Firm traded in Hong Kong and continued after the Foreign Firm merged with Karas Lawyers to become LKHK. That changed in 2016 when Mr Lipman and Mr Karas agreed that Mr Karas would receive a greater monthly advance than Mr Lipman. It was also the reason advice was provided by Nexia Edwards Marshall as to how the Equity Equalisation Process should occur.

1075    The sixth factual matter raised by the applicants is the Equity Equalisation Process that I have described.

1076    Seventh, the applicants contend that the attempts to open up equity in LKPL and LKHK were postulated on the basis that LKHK profits were to be treated as if owned by LKPL. I accept that contention and find that to be the case: JTB 27/2618/10883.

1077    However, this did not occur at the time the alleged express trust was created. There are competing authorities as to whether subsequent events may be used as evidence to reflect the relevant intentions at the time the trust was created: see Bosanac at [113]; cf Trustees of the Property of Cummins v Cummins [2006] HCA 6; (2006) 227 CLR 278 at [65] (Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ).

1078    I do not consider that in the circumstances of this matter, the attempts to open up equity in LKPL and LKHK being postulated on the basis that LKHK profits were to be treated as if owned by LKPL can provide an evidentiary basis to support the inference of an intent to create an express trust some nine or so years earlier.

1079    Eighth, the applicants contend that Mr Karas stressed to MdR that LKHK’s profits were controlled by a “group policy” which led to LKHK’s profits being understated.

1080    I have found that to be the case. Although it is directed to an historical position, because it reflects what that position was from the establishment of the Hong Kong office, whether as Karas Lawyers, the Foreign Firm, or LKHK, it reveals the intention at the time the Hong Kong offices were established. To that extent, the evidence reflects the arrangements which had existed since Karas Lawyers, the Foreign Firm, and LKHK commenced practice in Hong Kong, and provides an evidential basis as to the intention to create an express trust at the time LKHK was established as a branch of LKPL.

1081    Ninth, the applicants contend that the treatment of tax was consistent with LKHK being conducted by Mr Karas on behalf of LKPL. Prior to 2015, Mr Karas paid tax on LKHK profits personally. After that time, LKPL paid Mr Karas’ tax on LKHK profits. The applicants submit that payment of Mr Karas’ Hong Kong tax by LKPL demonstrates an inextricable financial integration with LKPL.

1082    I have found that the payment of Mr Karas’ Hong Kong tax was in accordance with the applicants’ contentions. Nonetheless, it seems to me that this factual scenario is too remote, in a temporal sense, to provide evidence of an intention to create an express trust. However, I accept that the facts demonstrate that LKPL and LKHK were integrated from a financial perspective.

1083    Tenth, the applicants contend that from 2009 there were numerous representations by Mr Karas about joint ownership of LKHK with Mr Lipman.

1084    Although LKHK did not come into existence until 2012, prior to that time, Mr Karas was the sole proprietor of Karas Lawyers which operated in association with the Foreign Firm. That was part of the strategy to ultimately form LKHK. Given the regulatory regime in Hong Kong, Mr Lipman could not be a legal owner of LKHK, nor for that matter Karas Lawyers, such that the only option was for LKPL to have a beneficial interest.

Karas respondents’ submissions and consideration

1085    The Karas respondents submit that the trust claim fails on the basis that:

(a)    As a matter of law, the trust claims cannot be made out or in the alternative, even if they could be made out, it would be void for illegality;

(b)    For evidentiary reasons, as a matter of fact; and

(c)    In any event, because each or any of the pleaded defences are sufficient to defeat the trust claim.

1086    I have dealt with the pleaded defences in (c) earlier in these reasons.

1087    The applicants’ claim of an express trust (clarified in opening submissions as express and not constructive) proceeds on the basis of an inference that there was an intention to create a trust. The Karas respondents submit that to draw such an inference, the Court must be satisfied that objectively, the parties intended to create an equitable interest in a third party and that the trust relationship is the appropriate means of creating the interest and giving effect to that intention.

1088    As to the objective intention, the Karas respondents submit that the applicants bear the onus of establishing an intention to create a trust. There is no issue that is the correct position, however the Court can infer an intention to create a trust, “from other language used by them, from the nature of the transaction and from the circumstances attending the relationship between the parties”: Byrnes at [112] (Heydon and Crennan JJ) citing Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) [2000] HCA 25; (2000) 202 CLR 588 at [34] (Gaudron, McHugh, Gummow, and Hayne JJ).

The trust claim does not fail as a matter of law nor was it void for illegality

1089    I have concluded that the existence of a trustee/beneficiary relationship is not contrary to the regulatory regime in Hong Kong, such that the contention that any trust claim would be void for illegality fails.

1090    That is so whether the applicable law is that of Australia or Hong Kong.

1091    Next, the Karas respondents contend that even if there could be an interest as alleged, such a contention fails to satisfy the required element of certainty of property.

1092    The Karas respondents submit that insofar as the property comprises the work in progress/accounts receivable, those are personal or statutory rights held by Mr Karas against the clients of LKHK and not exercisable by Mr Lipman or LKPL.

1093    Whereas those rights may be personal or statutory rights legally held by Mr Karas against LKHK’s clients, there is no reason why they cannot be held on trust with the beneficial interest residing in LKPL, and the Karas respondents do not seek to explain why that is not the case.

1094    On the same point, the Karas respondents submit that the right to practice law in Hong Kong is something that neither Mr Lipman nor LKPL had. Again, that may be accepted, but it goes nowhere. The right to practice in Hong Kong is not an asset held on trust, rather the trustee - Mr Karas, is carrying on the practice with the benefits of that practice in the form of profit costs being held on trust, along with other tangible and non-tangible assets. As I have noted above, that is the very reason for the trust.

1095    Still on the same point, the Karas respondents submit that insofar as the trust property is said to have comprised the goodwill in the practice of LKHK, that is intrinsically linked to Mr Karas’ personal reputation and exertion. The Karas respondents refer to DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1984] 1 in NSWLR 510 at 518-519 where the Court said:

The obligation attaches to the trustees in personam, but it is also annexed to the property so that the equitable interest resembles a right in rem. It is not sufficient that the trustee should be under a personal obligation to hold the property for the benefit of another, unless that obligation is annexed to the property.

1096    Again, that may be accepted but it goes nowhere. The basis of the submission is that “Mr Karas’ right to practice in Hong Kong was a personal right that he held, and it could not have been held for the benefit of any other person in a manner which influenced Mr Karas without contravening Hong Kong law” (emphasis provided).

1097    LKPL did not influence Mr Karas in the manner in which he practised Hong Kong law.

1098    The trust property, being the assets of LKHK (both tangible and intangible), were, in part, a result of Mr Karas’ personal reputation and exertion which, in the case of goodwill, created an asset in which an equitable interest existed. To that extent, the goodwill formed part of the property of the trust. Accordingly, I do not accept that the goodwill of LKHK could not be the subject of a trust.

1099    Still on the issue of the property the subject of the trust, the Karas respondents submit that the applicants make no attempt to identify those assets. I do not accept that submission. In short, the applicants identify the assets as those comprising the tangible and intangible assets which provide component parts of the practice known as LKHK, including its goodwill and its profits.

1100    The final point raised by the Karas respondents on this issue is that on either of the alternatives pleaded, the trust claim fails. The two alternatives pleaded at [27] and [28] of the SoC respectively are that Mr Karas:

(a)    In connection with the practice of LKHK for all relevant purposes, held any assets of LKHK (tangible or intangible) on trust for LKPL; and

(b)    Conducted LKHK as trustee for LKPL;

on the basis of illegality.

1101    It is for the reasons set out above that I do not accept the submission in relation to the first of the two alternatives.

1102    As to the second of the two alternatives, to the extent it was submitted that the actual provision of legal advice by Mr Karas was done in his capacity as a trustee, I accept that was not possible as a matter of Hong Kong law. That is because there is the very real possibility of Mr Karas’ duties as trustee coming into conflict with his duties to LKHK’s clients. However, the applicants disavow any suggestion that Mr Karas conducted LKHK as trustee for LKPL in a way which would contravene s 49 of the Legal Practitioners Ordinance. That must be so and to the extent Mr Karas conducted the practice of LKHK as trustee for LKPL, save for the actual provision of legal advice, I accept that Mr Karas conducted LKHK as trustee for LKPL and that in doing so, the trustee relationship was not illegal.

The trust claim does not fail as a matter of evidence

1103    The Karas respondents submit the trust claim fails as a matter of fact for evidentiary reasons.

1104    The express trust alleged is said to arise by inference. The factual findings I have made provide an abundant basis upon which a clear inference may be drawn that objectively LKPL intended to create a trust by which Mr Karas was to hold the assets of the practice which later became known as LKHK, on trust for LKPL.

1105    The relevant time was in 2009 when Mr Karas, acting as a director of LKPL, sought advice from TDW as to how Lipman Karas might establish a presence in Hong Kong. Following that advice, LKPL financed and otherwise supported the establishment of Karas Lawyers and the Foreign Firm; financed and otherwise supported the entry into an Association Agreement between Karas Lawyers and the Foreign Firm which allowed the sharing of profits; financed and otherwise supported the merging of the Foreign Firm into Karas Lawyers after three years of association; consented to Karas Lawyers’ subsequent change of name to “Lipman Karas”; consented to LKHK operating as a branch of LKPL in Hong Kong; and consented to and paid for the application for a r 4 waiver.

1106    The structure implemented by Mr Lipman and Mr Karas was one which ultimately led to the establishment of LKHK and which stipulated that Mr Karas would conduct LKHK as a branch of LKPL and as one integrated firm.

Conclusion on express trust

1107    Objectively, the matters I have identified in this part of my reasons and in my factual findings are entirely consistent with an intention to create a trust, the identity of the assets of that trust, and the identity of the beneficiary of that trust, such that there is certainty of intention, certainty of assets, and certainty of beneficiary.

1108    I find an express trust was created in or about 2009 by which in connection with the practice initially of Karas Lawyers and then in 2012 of LKHK, for all relevant purposes, Mr Karas held the assets of LKHK, both tangible and intangible, on trust for LKPL.

Mr Karas held the assets of LKHK as an agent for LKPL

1109    I have set out the pleaded case above.

1110    The applicants advance an alternative case, that Mr Karas held the assets of LKHK (including revenues) as agent for LKPL.

1111    Given my finding that an express trust existed, the question of any agency relationship between Mr Karas and LKPL falls away. Nonetheless, I deal with the alternative case as if there was no express trust.

1112    The Karas respondents make the same submissions as to factual contentions for both the trust claim and the agency claim.

Principles

1113    There are two fundamental requirements for there to be an agency relationship:

(a)    Both the principal and the agent must have consented to the basis of the relationship; and

(b)    The agent has been conferred authority to act on the principal’s behalf.

1114    As to the first element, whether or not there is consent is determined objectively and a formal contract is not necessary. What is necessary, is the existence of an instruction or request from the principal and an undertaking of the duty or task by the agent: Morgans v Launchbury [1973] AC 127 at 140 (Lord Pearson).

1115    As to the second element, in NMFM Property Pty Ltd v Citibank Ltd (No 10) [2000] FCA 1558; (2000) 107 FCR 270 at [522], Lindgren J observed the, “notion of one person’s having actual or apparent authority to act, or in fact acting, as representative of or for or on behalf of another person, is clearly central to the notion of agency”.

1116    In Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786; (2022) 162 ACSR 1 at [47], Abraham J observed:

Whether a relationship of agency exists depends not on the terminology adopted by the parties, but on the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent. The actual incidents and content of the relationship (the 'factual relation') to which the parties have consented may demonstrate that, as a matter of fact, they have consented to an agency relationship. The consent of the parties need not necessarily be to a relationship that the parties understand or accept to be one of principal and agent. Rather, it is sufficient if what they have agreed to is a state of fact that amounts in law to such a relationship, notwithstanding that it may have been the subject of express disclaimers. In such circumstances, the courts may infer an agency: South Sydney District Rugby League Football Club Ltd v News Ltd; [2000] FCA 1541; (2000) 177 ALR 611 at [132]-[135].

(emphasis added)

1117    A court will look at the practical reality of the relationship to determine whether in the absence of express terms, objectively an intention may be inferred from the parties’ conduct as to whether there is consent and a conferral of authority.

1118    It is important to keep in mind that the agent must act in a representative capacity with the consequence that it is the legal content of the consensual agreement between the parties that is critical: Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 at [194] (Allsop P; Bathurst CJ and Campbell JA agreeing).

Applicants’ submissions and consideration

1119    The applicants submit that there are a number of factual findings which support a finding that an agency relationship existed.

1120    First, the applicants contend that Mr Lipman and Mr Karas had agreed by January 2008 that LKPL would establish and fund a legal practice that would be conducted by a Hong Kong based lawyer on behalf of LKPL. They observe that did not occur because of the regulatory requirements of which they were then unaware, but there is no doubt that the intention for LKPL to establish a legal practice in Hong Kong remained.

1121    I accept that contention and have found that to be the case.

1122    Second, the applicants contend that Mr Lipman and Mr Karas’ intention was for LKPL to operate in Australia and Hong Kong as one integrated firm. They submit that whilst recognising, on the basis of the advice received from TDW, that only a solicitor admitted to practice in Hong Kong could practice Hong Kong law, nonetheless the assets of LKHK could and would be jointly held and the management of both firms could and would be conducted on the basis of one integrated firm. They refer to the instructions given to TDW in November 2008 and the subsequent admission of Mr Karas as a Hong Kong practitioner.

1123    The applicants submit further that the process advised by TDW for the establishment of a local firm (Karas Lawyers), a Foreign Firm operated by Mr Kentish as LKPL’s agent in Hong Kong, and the merging of that Foreign Firm into Karas Lawyers after 3 years to become Lipman Karas in Hong Kong was, in fact, implemented.

1124    I accept that submission and have found that to be the case.

1125    Third, the applicants submit that in late 2009, Mr Karas represented to the Immigration Department of Hong Kong that he was a 50% owner in LKPL and that LKPL would provide working capital to Karas Lawyers to the extent of A$1 million.

1126    I have made factual findings to that effect and have referred to the correspondence from Mr Karas to the Immigration Department of Hong Kong on 6 November 2009, in which Mr Karas said: JTB 2/162:

Lipman Karas will provide working capital. If required to, Lipman Karas will provide working capital to Karas Lawyers up to a sum of at least A$1,000,000 (approx HK$7,000,000). Karas Lawyers will represent the interests of Lipman Karas in Hong Kong and will share fees and profits.

1127    Fourth, the applicants contend that in 2012, Mr Karas wrote to the Law Society seeking consent to change the name of Karas Lawyers to Lipman Karas and requesting a waiver of r 4 of the Solicitors’ Practice Rules. He advised the Law Society that LKPL consented to that course with the former Karas Lawyers (now LKHK) operating as LKPL’s branch in Hong Kong.

1128    I accept that contention.

1129    Fifth, the applicants contend that Mr Lipman and Mr Karas caused LKPL to underwrite Karas Lawyers, the Foreign Firm and LKHK. LKPL funded the operations in Hong Kong over a number of years, which included the acquisition of assets required for the operation of the firm in Hong Kong.

1130    I accept that contention.

1131    Sixth, the applicants contend that consistent with a mutual intention to establish an agency relationship in connection with the assets of LKHK, there was a profit-sharing arrangement between Messrs Lipman and Karas in relation to the entirety of the aggregated profits of the two law firms.

1132    I have made factual findings to that effect in relation to the profit-sharing arrangement and accept that contention.

1133    Seventh, the applicants submit that from the inception of the Hong Kong practice, whether initially as Karas Lawyers in association with the Foreign Firm, and thereafter as LKHK, Mr Lipman and Mr Karas had a mutual intention that their respective 50% interests in the Hong Kong practice be held indirectly through LKPL as one integrated firm. As to the concept of integration, the applicants identified three limbs to those contentions being:

(a)    LKPL provided financial support to LKHK;

(b)    The operations of the two firms were “integrated”; and

(c)    The integration involved LKPL performing work on Hong Kong matters as part of “one firm”.

1134    I have found that LKPL provided financial support to LKHK, the operations of the two firms were integrated, and as a part of that integration, LKPL performed work on Hong Kong matters. To that extent, it is clear that LKPL and LKHK were for all intents and purposes conducted as one integrated firm, save of course for the actual practice of law in Hong Kong which only Hong Kong admitted solicitors could do.

1135    Eighth, the applicants contend that Mr Karas and Mr Lipman dealt with proposed equity participants in 2019 and 2020 on the assumption that LKPL and LKHK were jointly owned. The applicants contend that is also consistent with mutual intent to establish an agency relationship in connection with the assets of LKHK.

1136    I accept the first part of those contentions and have made factual findings about the assumption of joint ownership in 2019 and 2020. As to the second part of those contentions, I am not satisfied that what occurred in 2019 and 2020 is consistent with a mutual intent to establish a relationship some 10 years earlier. Nonetheless, how Mr Lipman and Mr Karas dealt with the proposed equity participants is relevant as to whether an agency relationship existed at that time.

Karas respondents’ submissions and consideration

1137    The Karas respondents submit that the agency claim must fail:

(a)    As a matter of law, because the agency claim cannot be made out and in the alternative, even if it was made out, would be void for illegality;

(b)    As a matter of fact, the agency claim fails for evidentiary reasons;

(c)    As a matter of fact, because even if the agency claim could be made out, the underlying legal relationship on which the claim is based was terminated by 20 July 2020, or in the alternative by 14 December 2020; and

(d)    Because further, or in the alternative to the matters above, each or any of the other defences are sufficient to defeat the agency claim.

1138    In this section of my reasons, I consider (a) and (b) above. I have dealt with the other defences ((d) above) earlier in these reasons. I consider the question of whether the agency claim fails by reason of termination of that relationship by July 2020 or alternatively 14 December 2020 ((c) above), later in these reasons when considering the scope and content of any fiduciary duties owed by Mr Karas to LKPL.

The agency claim does not fail as a matter of law nor is it void for illegality

1139    The Karas respondents submit that as a matter of law, agency cannot be made out at all, or alternatively, even if such a relationship could be made out, it would be void for illegality.

1140    The basis of the submission of illegality is that Mr Lipman and LKPL could not practice law in Hong Kong. I have dealt with that point.

1141    The allegation at [27] of the SoC is that in connection with the conduct of the practice of LKHK, for all relevant purposes, Mr Karas conducted the practice as agent for LKPL. At [28] of the SoC, the allegation is that Mr Karas conducted LKHK as an agent for LKPL, although in their closing submissions the applicants disavow advancing any case that Mr Karas was LKPL’s agent in connection with the conduct of the legal practice in a way which would infringe s 49 of the Legal Practitioners Ordinance.

1142    The applicants advance a claim that Mr Karas held the assets of LKHK as agent for LKPL and do not advance a case that Mr Karas could enter into a retainer agreement with a Hong Kong client as agent so as to create a legal relationship directly with LKPL.

1143    It is for these reasons that I do not accept the Karas respondents’ submission that as a matter of law, agency cannot be made out, or that if it is made out, it is void for illegality.

The agency claim does not fail as a matter of evidence

1144    The Karas respondents submit that there is no probative evidence which establishes that objectively, Mr Karas accepted any mandate from LKPL to act as its agent.

1145    First, as to the applicants’ reliance on the fact of and implementation of TDW’s advice, the Karas respondents submit that the advice was premised on LKPL itself registering to practise foreign law in Hong Kong and then entering into an association with Karas Lawyers. They submit that advice was never implemented.

1146    The Karas respondents point to a distinction between arrangements raised by the Immigration Department of Hong Kong and the proposed association arrangement based on TDW’s advice, submitting that it is the arrangements of the former upon which the applicants place emphasis.

1147    That is a distinction without a difference. Self-evidently, no matter the structure adopted from a regulatory perspective, if the immigration requirements cannot be satisfied, the recommended regulatory strategy cannot be implemented. That does not impact upon the intention of Mr Karas and Mr Lipman as directors of LKPL, and Mr Karas as the proposed resident principal in Hong Kong, to establish an agency relationship.

1148    I have found that Mr Lipman and Mr Karas caused LKPL to implement the strategy advised by TDW. The fact that there were other requirements, not regulatory but immigration related, that caused some changes to the process eventually adopted, does not change the effect of my factual findings as to the parties’ intentions.

1149    The Karas respondents submit further that in relation to the Foreign Firm, the Association Agreement between it and Karas Lawyers was contractual between Mr Kentish and Mr Karas. They submit that neither Mr Lipman nor LKPL were parties to that agreement, nor that the agreement provided for profit-sharing, but to the contrary, provided for separate invoicing between the two firms.

1150    The Karas respondents submit still further that references by the applicants to communications which refer to LKHK “representing the interests of LKPL” cannot found a contractually binding arrangement between Mr Karas and Mr Lipman in the absence of evidence of such an agreement being carried into effect.

1151    I do not accept those submissions for the reasons which follow.

1152    First, the establishment of the Foreign Firm had Mr Kentish as the agent of LKPL in Hong Kong. In his capacity as a director of LKPL, Mr Karas must be taken to have approved of the establishment of the Foreign Firm, particularly in circumstances where the intention of LKPL was to establish a practice in Hong Kong under the name Lipman Karas. To the extent that Mr Kentish entered into an agreement with Mr Karas personally, he did so as LKPL’s agent.

1153    Second, the Association Agreement did not need to specify sharing of profits. That is a right which is contained in r 4 of the Solicitors’ Practice Rules.

1154    Third, the Foreign Firm could not invoice for work done by it on Hong Kong law matters because it was a requirement that the Foreign Firm did not advise on Hong Kong law. Indeed, it invoiced LKHK for its time who then invoiced its clients.

1155    Fourth, I have made a number of factual findings that both Mr Lipman and, crucially, Mr Karas represented to the world that LKHK represented the interests of LKPL, not the least of which was a representation to the Law Society in support of the application to practise in Hong Kong under the name Lipman Karas. That can only have been the case if Mr Lipman and Mr Karas, as directors of LKPL, agreed that Mr Karas would operate a practice in Hong Kong on that basis. The fact that in the application to the Law Society to practice under the name Lipman Karas in Hong Kong, Mr Karas:

(a)    Stated that LKHK would act as LKPL’s branch in Hong Kong;

(b)    Sought a waiver of r 4 of the Solicitors’ Practice Rules; and

(c)    Enclosed a letter from LKPL, signed by his co-director Mr Lipman, consenting to the change of name, the waiver of r 4, and enclosing a cheque for payment of the fees to obtain a waiver;

is consistent, and only consistent, with LKHK representing the interests of LKPL in Hong Kong.

1156    Further, as I have also noted in my factual findings, in November 2014, Lipman Karas published a book titled “The First Ten Years” (JTB 13/1305) in which the reader is informed that Lipman Karas operated as one firm, globally.

1157    On the issue of financial support, the Karas respondents submit that insofar as LKPL provided financial support to LKHK, that support was provided through the Foreign Firm or alternatively through LKPL. That submission supports the applicants’ submission that the directors, Mr Lipman and Mr Karas, caused LKPL to underwrite Karas Lawyers, the Foreign Firm and LKHK.

1158    Next, the Karas respondents submit that a finding of a profit-sharing arrangement is of no relevance in determining whether there was an agency relationship.

1159    I do not accept that submission. The existence of a profit-sharing agreement, in circumstances where Mr Karas was the legal owner, is a fact which is relevant to the question of whether a relationship of agency existed.

1160    Next, the Karas respondents submit that Mr Lipman admitted there were no discussions as to profit-sharing in 2009 or in 2012, such that there was no express oral agreement in relation to the profit-sharing in LKHK. They continue that unless the Court is prepared to accept that any agreement in relation to drawings and dividends from LKPL in 2004 was sufficiently broad to encompass the position after LKHK was formed, no such profit-sharing arrangement existed in relation to LKHK.

1161    The Karas respondents submit further that since there were no discussions as to profit-sharing in 2009 or 2012, there can only be an enforceable agreement for that to occur in circumstances where the parties assented to such an agreement with the intention that it be binding. Consequently, the Karas respondents submit that the applicants’ contentions as to a profit-sharing agreement depend on the inference of an agreement from a clear manifestation of mutual assent.

1162    The short answer to that submission is that it clearly was the case. Prior to 2016, equal profit-sharing occurred. The change in monthly advances to Mr Lipman and Mr Karas respectively that occurred from 2016 proceeded on the basis that there was an Equity Equalisation Exercise to be carried out, as I have discussed in my factual findings.

1163    In Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCAFC 1833; (2001) 117 FCR 424 at [369] Allsop J (as his Honour then was) observed that:

Contracts … can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting “i’s” and crossing “t’s” or where they think they have done so. … Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract.

1164    Whereas I accept that there should be a clear manifestation of mutual assent, I do not accept that did not occur. As I have noted, apart from the changes in monthly advances that occurred from 2016, profit-sharing proceeded from the inception of LKPL in 2004 and included Karas Lawyers, the Foreign Firm and LKHK.

1165    On any view, sharing of profits over a 17-year period amounts to a clear manifestation of a mutual assent to the sharing of profits.

1166    Further, in Mr Karas’ application to the Law Society on 8 October 2012 (JTB 6/601), Mr Karas said, “… an exemption is sought from the prohibition against profit sharing contained in Rule 4, to permit Lipman Karas (the renamed Karas Lawyers), with effect from 10 December 2012, to share profits with the principals of the overseas offices of Lipman Karas”. In the first Karas affidavit (exhibit R55) Mr Karas deposed at [25] that:

25.    In formal internal or external communications, Mr Lipman and I used the title of “principal” or “equity principal”, instead of “partner”. This was because LKPL was an incorporated legal practice and therefore the title “partner” was not appropriate as that was more apt to describe a partnership. However, in less formal communications and in day-to-day discussion, we would frequently refer to each other and to salaried principals as “partners”.