TGIF 18 September 2026 – Court of Appeal confirms claw back from ATO for knowing receipt

This week’s TGIF considers the Court of Appeal’s recent decision in Commonwealth of Australia v Kupang Resources Pty Ltd [2026] NSWCA 161, upholding a decision clawing back settlement payments made to the ATO from funds raised in breach of fiduciary duty, plus interest up to judgment.

Key takeaways

• Any person knowingly receiving a settlement or other payment from funds obtained in breach of fiduciary duty should be aware of the risk of claw back. Statutory duties are not a shield, and in this case, the Australian Tax Office (ATO) was not immune from having the requisite knowledge to become a knowing recipient. 
   
• The treatment of funds obtained in breach of fiduciary duty as constructive trust property arises from the moment of breach and subsists after a settlement is reached or a claim is litigated through to final orders.
   
• For example, an order that a defaulting fiduciary account for profits does not strip those profits of their proprietary character as trust property. The doctrine of merger may not be available to the recipient, i.e. to argue along the lines that fiduciary duties in respect of the funds have now merged in the final orders, because the third party recipient may not be able to establish that they are a privy of the defaulting fiduciary.

Background

The matter concerned c.$15 million in payments to the ATO arranged by Mr Grimaldi, under a compromise reached with the ATO in 2010. 

The payments were made using the traceable proceeds from the sale of certain shares in Winterfall Pty Ltd (Winterfall). It was common ground that Mr Grimaldi had obtained the shares in breach of the fiduciary duty he owed, as a de facto director, to Kupang Resources Pty Ltd (then known as Chameleon Mining NL) (Chameleon).

Mr Grimaldi was alleged to have arranged Chameleon to raise capital, with about $152,750 being used to assist Winterfall to buy the Iron Jack mining tenements in WA, in return for a 'spotter's fee' of Winterfall shares.

Mr Grimaldi sold the Winterfall shares for a c.$36 million profit, paid into offshore accounts he controlled (Sale Proceeds). The ATO, already investigating those accounts under its 'Project Wickenby' and 'Operation Starlifter' investigations, assessed additional tax and penalties and subsequently entered into a compromise, under which Mr Grimaldi paid over $15 million out of those same accounts.

Broadly in parallel, Chameleon obtained orders that Mr Grimaldi account for the Sale Proceeds, with judgment handed down shortly after the compromise was reached between Mr Grimaldi and the ATO.

Chameleon then successfully sued the Commonwealth as a knowing recipient of trust property under the first limb of Barnes v Addy. 

The Commonwealth then appealed to the Court of Appeal.

Court of Appeal’s decision 

There were two central issues on appeal: 

• whether the Sale Proceeds were ‘trust property’; and 
   
• whether the ATO had the requisite knowledge as recipient. 

A third issue, raised late in the piece, was whether the ATO had acted with ‘want of probity’, which the Court of Appeal confirmed was not a separate element.

Trust property 

The Court emphasised that a constructive trust over proceeds derived from a breach of fiduciary duty arises at the moment of breach, rather than from the date of a Court order.

It is therefore necessary to identify the nature and timing of a fiduciary’s breach of the duties not to profit by reason of their position, nor to place themselves in a position of actual or possible conflict of interest. This case involved the preference of the fiduciary’s own interest over the duty of loyalty.

Further, the constructive trust extends beyond the profits derived from the principal's property to ‘new property' that the principal never legally owned, nor could have derived itself. The purpose for the rule being strict in this way is to remove any temptation for the fiduciary to prefer their own interests, rather than to compensate the principal.

The Court distinguished the case from observations made by Gageler J (as his Honour then was). It said that where the no-conflict rule alone is invoked, the relevant timing may be when the fiduciary refuses to return the property, rather than on receipt. It also said that the constructive trust ‘label’ served no purpose other than to indicate amenability to a range of remedies. The Court emphasised that the constructive trust was an institutional trust arising from the moment of breach.

The Commonwealth advanced a series of what Bell CJ described as ‘bold submissions’ against the finding that the Sale Proceeds were ‘trust property’.

• First, it submitted that although an errant fiduciary is liable to account as a constructive trustee, the profits do not thereby become ‘trust property'. However, the Court found this overlooked why the fiduciary is liable to account at all. An undisclosed profit belongs to the company in equity from the moment of breach. This is the 'proprietary base' that permits tracing. In this case, it was common ground that the Sale Proceeds were traceable.
   
• Second, the Commonwealth submitted that Chameleon had only an ‘inchoate interest’ in the Winterfall shares and Sale Proceeds until obtaining orders in 2010 (which occurred shortly after the 2010 compromise). The Court found this submission ran against a long line of authority that the constructive trust over the proceeds of a breach arises institutionally, from the moment of breach and independently of any curial declaration. 
   
• Third, the Commonwealth submitted that the constructive trust was a ‘remedial institution’, which the Court found to be unhelpful. The Court clarified that constructive trusts arising from breach of fiduciary duty do not involve any judicial discretion. That a constructive trust may sometimes be imposed as a remedy over property not previously held on trust, or only where no other remedy is suitable, does not exclude the implication of a trust by operation of law.
   
• Finally, the Commonwealth submitted that the character of the Sale Proceeds was altered by the 2010 judgment that Chameleon had obtained, which granted a personal remedy against Mr Grimaldi to account. In rejecting this submission, the Court observed that Chameleon’s proprietary interest survived those orders. It also observed that a personal remedy does not deprive a beneficiary of its right to recover against a third party who knowingly receives trust property that cannot, in good conscience, retain it. In any case, the Commonwealth had not established that it was Mr Grimaldi’s privy for the purpose of any election between the remedies.

Knowledge

On the second issue, the Commonwealth conceded it knew the Sale Proceeds were traceable to Mr Grimaldi’s breach, but submitted that the ATO’s conscience could not be fixed with liability for knowing receipt where it was statutorily bound to pursue his tax-related liabilities. The Court rejected that submission, endorsing the primary judge’s statement that the ATO does not have some special status which immunises it against possessing the requisite knowledge to make it liable as a knowing recipient, or absolves it from conducting the sorts of inquiries that should be conducted by an honest and reasonable person.

Comment

The decision re-affirms the proprietary consequences of a breach of fiduciary duty. It confirms that unauthorised profits (and their traceable proceeds) are impressed with a trust from the moment of breach, rather than from the date of a Court order.

The decision underlines the risk of settlement payments to regulators or other third parties being subject to claw back if they are funded by proceeds of a breach of fiduciary duty.