Federal Court of Australia

LK Law Pty Ltd v Karas (No 4) [2024] FCA 1461

SUMMARY

In accordance with the practice of the Federal Court in significant cases, the following summary has been prepared to accompany today’s orders. The summary is intended to assist in understanding the outcome of this proceeding. It is not a complete statement of the conclusions reached by the Court. The only authoritative statement of the Court’s reasons is contained in the published reasons for judgment.

On 21 December 2021, LK Law Pty Ltd (LKPL), Scipio John Lipman and Lipman Family Pty Ltd ACN 627 125 580 (the applicants) commenced proceedings against Jason Demetrios Karas, J&A Karas Pty Ltd ACN 627 126 112 and Karas LLP (the Karas respondents). Subsequently the fourth respondent, Mishcon de Reya LLP OC 399969 (MdR), a law firm practicing in, amongst other locations London, England, was joined to the proceedings.

LKPL was incorporated in Adelaide by both Mr Lipman and Mr Karas in 2004 following their resignation as equity partners from Fisher Jefferies. LKPL trades as Lipman Karas and was established as a boutique litigation practice with a vision to operate in both domestic and international jurisdictions. From in or about 2008, the firm sought to expand into Hong Kong.

Given regulatory constraints in Hong Kong, which restricts foreign lawyers from practising in Hong Kong unless admitted in Hong Kong, Mr Karas (who by then had qualified as a Hong Kong solicitor) became the principal of a local practice in Hong Kong - Karas Lawyers - whilst both he and Mr Lipman remained directors of LKPL. LKPL established a branch office in Hong Kong practising only foreign law – (the Foreign Firm).

As from 2009, a strategic plan was formulated, with the benefit of advice from a local Hong Kong firm, wherein pursuant to an Association Agreement, Karas Lawyers and the Foreign Firm, shared premises, profits and administrative functions between 2009 and 2012. This carefully planned business strategy envisioned the eventual integration of both Karas Lawyers and the Foreign Firm with the consequence that after three years of association the local entity and the Foreign Firm merged to become a branch of LKPL practicing in Hong Kong under the name Lipman Karas (LKHK). As from 2012, LKPL and what became LKHK operated as two offices fully integrated at an administrative, operational and financial level so as to comprise one integrated firm with LKHK as a branch office of LKPL.

The model adopted by LKPL was that some of LKHK’s Hong Kong work would be done by LKPL’s solicitors, whilst being charged at Hong Kong rates (LKPL’s Hong Kong revenue stream). That model was highly profitable.

In or about 2017, discussions commenced between Mr Karas and Mr Lipman in relation to the admission of new equity participants into the firm. It was from in or about 2018 that the relationship between Mr Karas and Mr Lipman began to deteriorate over, at least, this issue.

Communications from mid-2020 between Mr Karas and his personal advisors, Dr George Beaton and Ms Margaret Beaton, make it apparent that Mr Karas adopted a strategy for the separation of his business interests from Mr Lipman from about that time with the intention being that he would emerge from his business relationship with Mr Lipman as the sole legal and beneficial owner of LKHK. Mr Karas kept that strategy to himself.

In December 2020, negotiations between Mr Karas and Mr Kevin Gold, the then Chairperson of MdR, commenced. Whilst, depending on their nature and extent, negotiations per se may not amount to a breach of fiduciary duty, in this matter Mr Karas advanced his negotiations with MdR and concealed his dealings with MdR from Mr Lipman. In this case, the conflict between Mr Karas’ fiduciary duties to LKPL and Mr Lipman and his personal interest was manifest.

The negotiations between MdR and Mr Karas culminated with Mr Karas and MdR entering into a “Framework Agreement” on 30 March 2021. The Framework Agreement provided for Mr Karas to become a Senior Equity Partner of MdR and was subject to approval by MdR’s Senior Equity Partners.

A resolution seeking that approval was passed by the Senior Equity Partners on 15 April 2021, subject to the satisfaction of one Condition At that meeting, two resolutions were passed by MdR; the first, approving Mr Karas’ admission as a Senior Equity Partner of MdR, the second, approving the terms of the Framework Agreement.

The Condition to which I have referred, was that two members of MdR, one a Senior Equity Partner and member of MdR’s Board (Mr Georgiou), and the other MdR’s Chief Financial Officer (Mr Patel), were to prepare a report as to whether LKHK would make US$2 million on an annualised basis. On 23 April 2021, Mr Georgiou and Mr Patel concluded that would occur thereby satisfying the Condition.

As a consequence, the Framework Agreement took effect as from 30 April 2021. Later in 2021, Mr Karas became a Senior Equity Partner in MdR.

The terms of the Framework Agreement also placed Mr Karas in a direct conflict with his continuing equitable fiduciary and statutory duties to LKPL and with his continuing fiduciary duties to Mr Lipman.

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.

On 25 May 2021, Mr Karas and Mr Lipman signed a Separation Agreement, which was intended to formally divide their business interests with effect from 1 June 2021.

An attempt by MdR and Mr Karas to vary the commencement date of the Framework Agreement to 1 June 2021, after it had already commenced, was ineffective.

At all times, Mr Karas concealed his dealings with MdR such that Mr Lipman had no knowledge of the Framework Agreement or Mr Karas’ negotiations with MdR prior to Mr Lipman entering into the Separation Agreement. Those negotiations included that Mr Karas would transition LKPL’s Hong Kong revenue stream to MdR.

By concealing his conduct from Mr Lipman and LKPL, they were denied the opportunity to protect or otherwise deal with the assets with which Mr Karas was dealing, in clear conflict with his fiduciary duties and for his personal benefit. As a result, the Separation Agreement was negotiated and concluded from a position of ignorance on the part of the applicants.

Further, had LKPL and/or Mr Lipman known of Mr Karas’ dealings with MdR, I entertain no doubt whatsoever that Mr Lipman would not have entered into the Separation Agreement on its terms and I have found accordingly.

Mr Karas concealing both his negotiations and the fact that he had entered into the Framework Agreement exemplifies the seriousness of his conduct. This was no minor or inadvertent breach of fiduciary duties.

Against the Karas respondents, the applicants advance a multitude of equitable claims together with alleged contraventions of ss 181, 182 and 183 of the Corporations Act 2001 (Cth), s 18 of the Australian Consumer Law and s 7 of the Misrepresentation Act 1972 (SA).

Against MdR, the applicants advance equitable claims of knowing assistance in a breach of fiduciary duty, together with claims for accessorial liability under both the Corporations Act and the ACL in connection with the claims alleged against Mr Karas.

The focus of the breach of fiduciary duties claim lies on the existence of, as well as the scope and content of Mr Karas’ fiduciary duties.

This case is both legally and factually nuanced. Beyond the alleged fiduciary duty breaches and statutory contraventions themselves, it has required detailed analysis of a range of complex issues, including but is not limited to the permissibility of the parties’ relationships under the Hong Kong regulatory regime; the nature of the relationships between the entities and individuals involved; the scope and content of fiduciary and statutory duties allegedly owed; the applicable law for assessing knowing assistance (whether the law of Australia, or the law of England and Wales, and Hong Kong law); and the existence and quantum of any resulting loss.

I have found that in 2009, an express trust came into effect under which Mr Karas held both the tangible and intangible assets of what became LKHK, including goodwill and revenue, for the benefit of LKPL. In the alternative to an express trust, the conduct of the parties was such that an agency relationship existed whereby Mr Karas held and managed LKHK’s assets (both tangible and intangible) as agent for LKPL. Still further, as a director of LKPL, Mr Karas owed statutory and equitable fiduciary duties to LKPL.

In the further alternative, I have found that as between Mr Lipman and Mr Karas, an overarching partnership bridging operations in Australia and Hong Kong was formed. The arrangement was characterised by a mutual interest in the conduct of the Lipman Karas business across jurisdictions in compliance with relevant statutory frameworks, mutual confidence that each would engage in an enterprise for a joint advantage, shared profits and losses between the Australian and Hong Kong practices and mutual agency, such that each partner possessed authority to bind the other in matters related to their shared venture.

Beyond the established fiduciary categories of trustee, agent and partner, I have also found that Mr Karas owed ad hoc fiduciary duties to both LKPL and Mr Lipman.

Several defences were advanced as an answer to the alleged relationships, including illegality.

The argument that the relationship or its operations was rendered illegal by Hong Kong professional regulations fails. The evidence of the former Chief Justice of Hong Kong, the Honourable Geoffrey Ma Tao-Li as to the applicable principles makes it clear that there was no prohibition in Hong Kong against Mr Karas holding or managing the assets of LKHK for the benefit of LKPL or Mr Lipman under any of the alleged relationships.

Further defences of affirmation, estoppel, and equitable election also fail.

I have found that Mr Karas breached his fiduciary duties to LKPL as trustee, alternatively as agent, or alternatively as a director. Further, I have found that Mr Karas’ conduct breached his fiduciary duties to Mr Lipman as partner in an overarching partnership. Still further, I have found that Mr Karas’ conduct breached his ad hoc fiduciary duties in the same manner as his orthodox fiduciary duties.

I have found that Mr Karas contravened his statutory duties under ss 181 and 182 of the Corporations Act.

In providing confidential information to MdR in the course of his negotiations, I have found that Mr Karas breached his duty imposed by s 183 of the Corporations Act and his equitable duty of confidence.

I have found that Mr Karas’ failure to disclose his dealings with MdR, his entry into the Framework Agreement, and the details of what Mr Karas had negotiated with MdR (including the transition of LKPL’s Hong Kong revenue stream to MdR), induced Mr Lipman and the applicants to enter into the Separation Agreement.

I have found that by failing to disclose his dealings with MdR, Mr Karas engaged in conduct that was misleading or deceptive, contrary to s 18 of the ACL, and that the applicants are entitled to relief pursuant to ss 236 and 237 of the ACL and s 7(1) of the Misrepresentation Act.

As to MdR, there is no doubt Mr Karas engaged in a dishonest and fraudulent design.

The legal framework for knowing assistance turns on whether MdR possessed the required level of knowledge that Mr Karas was acting in breach of his fiduciary duties to LKPL and Mr Lipman. The law of Australia applies to the knowing assistance claim. However, even if an alternative choice of law were adopted, such that the law of England and Wales, and Hong Kong applied, the result is the same.

I find that MdR had sufficient knowledge under Australian law to satisfy the test for knowing assistance. Board members, Mr Gold and Mr Georgiou, either wilfully shut their eyes to the obvious, recklessly failed to make inquiries that an honest and reasonable person would have made, or had knowledge of circumstances indicating Mr Karas’ breach of fiduciary duty to both LKPL and Mr Lipman.

Accordingly, the applicants have established an entitlement to relief against the Karas respondents and MdR.

By way of summary, I have found that:

(a)    Mr Karas breached his equitable fiduciary duties to LKPL as trustee, alternatively as agent, as a director of LKPL or otherwise owing ad hoc duties;

(b)    In the alternative, Mr Karas breached his equitable fiduciary duties to Mr Lipman as a partner in an overarching partnership or otherwise owing ad hoc duties;

(c)    Mr Karas breached his statutory duties to LKPL under ss 181 and 182 of the Corporations Act;

(d)    Mr Karas breached his equitable duty of confidence and contravened s 183 of the Corporations Act;

(e)    Mr Karas contravened s 18 of the ACL and s 7 of the Misrepresentation Act;

(f)    MdR knowingly assisted Mr Karas in his breaches of the fiduciary duties to both LKPL and Mr Lipman within the meaning of the “second limb” in Barnes v Addy; and

(g)    Accessorial liability claims against MdR in relation to Mr Karas’ breach of the Corporations Act and the ACL fail.

I have found that both LKPL and Mr Lipman are entitled to equitable compensation and/or an account of profits arising from the breaches of fiduciary duty by Mr Karas and the knowing assistance of MdR.

LKPL is entitled to equitable compensation in the sum of A$27.5 million from Mr Karas, reflecting the loss suffered as a result of Mr Karas’ breaches of statutory and equitable fiduciary duties, his equitable duty of confidence, his misleading and deceptive conduct and misrepresentation. That loss comprises the market value of LKHK as at 30 March 2021: A$15.6 million, plus two years of lost revenue: A$11.9 million. I have found that the loss does not include a capitalised sum for loss of future revenue after 23 June 2023.

As to MdR’s knowing assistance, I find that LKPL is entitled to an account of profits in the sum of A$15.6 million, representing the value of the benefit MdR received as at 30 March 2021; such sum representing the market value of LKHK.

In the alternative, Mr Lipman is entitled to relief in the sum of A$13.75 million from Mr Karas and A$7.8 million from MdR.

Declarations will be made in respect of the conduct of Mr Karas and MdR.

It is for these reasons that I make the following orders:

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.

O’SULLIVAN J

26 NOVEMBER 2025, ADELAIDE