LK Law Pty Ltd v Karas (No 4)

LK Law Pty Ltd, trading as Lipman Karas, was founded in Adelaide in 2004 by Scipio Lipman and Jason Karas. The firm later expanded beyond Australia, including into Hong Kong and London. The reasons show that the Hong Kong office became commercially important and that Mr Karas was the resident principal there, while both founders remained central to the broader enterprise.

The dispute arose when the founders decided to separate their business interests. That is a familiar commercial setting for many SMEs and professional firms. What made this case unusual was the Court’s finding that, before the Separation Agreement was entered into, Mr Karas had already been secretly negotiating with Mischon de Reya LLP for it to acquire the Hong Kong practice and enter into a financial merger involving that practice. The Court also found that a Framework Agreement had been entered into before the Separation Agreement and that a later attempt to alter its commencement date was ineffective.

The applicants said this was not just hard bargaining during a breakup. Their case was that Mr Karas was still bound by duties to LK Law and to Mr Lipman, that he concealed the negotiations, that he disclosed confidential information in the course of those dealings, and that his silence induced the Separation Agreement. The Court’s reasons indicate that the applicants succeeded on the central allegations.

A major issue was the legal character of the Hong Kong operation and Mr Karas’ role in relation to it. The applicants advanced several alternative characterisations. They argued that Mr Karas held the Hong Kong assets on express trust for LK Law, or acted as its agent, or was in an overarching partnership with Mr Lipman. They also relied on his position as a director of LK Law and alleged ad hoc fiduciary duties. The Court’s contents show that each of those alternatives was considered in detail.

Those structural questions mattered because they determined whether Mr Karas owed duties of loyalty, disclosure and proper use of opportunities and information in relation to the Hong Kong practice. The Court also had to decide whether those relationships were permissible under the Hong Kong regulatory regime. According to the catchwords, the Court held that the relevant relationships were permitted.

The case then moved from structure to conduct. The Court had to decide whether the secret negotiations and non-disclosure amounted to breaches of fiduciary duty, breaches of statutory directors’ duties under ss 181, 182 and 183 of the Corporations Act, breach of confidence, and misleading or deceptive conduct by silence under s 18 of the ACL. It also had to decide whether the Separation Agreement and its release clauses defeated the claims, whether rescission was available, and whether Mischon de Reya was liable for knowing assistance.

The Court’s catchwords and contents indicate a broad win for the applicants on the core issues. The Court found that the relevant relationships were legally permissible under the Hong Kong regulatory regime. It found that an express trust was established, and in the alternative that agency was established, and in the alternative that an overarching partnership existed. The Court also found equitable fiduciary duties were established and that their scope and content were not reduced in the way the respondents argued.

On that basis, the Court found that Mr Karas breached fiduciary duties owed to LK Law and Mr Lipman. The reasons also indicate findings that he breached ss 181, 182 and 183 of the Corporations Act, breached an equitable duty of confidence by disclosing confidential information during the negotiations, and engaged in misleading and deceptive conduct by silence under s 18 of the ACL by not revealing his dealings with Mischon de Reya.

The Court also dealt with the claims against Mischon de Reya. It found knowing assistance in the fiduciary breaches, applying Australian law and finding the necessary knowledge under the first three Baden categories. However, the Court did not find statutory accessorial liability against the fourth respondent under the Corporations Act or the ACL on the claims considered. On the ACL point, the catchwords indicate the Court found the fourth respondent was not carrying on business in Australia for the relevant purpose.

As to relief, the Court held that causation was established and that the applicants were entitled to declarations and monetary relief. The reasons indicate LK Law elected to seek equitable compensation against Mr Karas and an account of profits against Mischon de Reya, with alternative statutory damages claims also pleaded. The Court said rescission was not available because it was practically impossible to unwind the parties’ dealings after four years and because mutual trust and confidence had broken down.

One of the most useful parts of the decision for business owners is the Court’s treatment of the Separation Agreement. Many founders assume that once a separation deed is signed, earlier conduct is effectively buried. The Court’s reasons show that this assumption can be wrong.

The Court held that, as a matter of both construction and equity, the release clauses in the Separation Agreement did not extend to undisclosed fiduciary breaches unknown to the parties at the time of execution. That is a significant point for any business negotiating an exit, buyout or split. A broadly worded release may still fail if the conduct in question was hidden and outside what the parties actually knew they were compromising.

The Court went further. Because it found misleading and deceptive conduct by silence, it held that the release clauses were unenforceable pursuant to s 237 of the ACL. In practical terms, a release is not a cure for a deal procured by concealment. If one side signs without knowing that the other has already lined up a side transaction over a key business asset, the release may not protect the non-disclosing party.

This part of the case is especially relevant where founders divide up business units, client books, territories or overseas offices. If there are undisclosed negotiations, side arrangements or framework agreements in the background, the legal risk can survive the separation document and become the centre of later litigation.

The judgment is also a reminder that cross-border business structures need to be documented carefully. A major part of this case turned on how the Hong Kong practice was held and operated, and whether the relevant trust, agency and partnership relationships were legally permissible. The Court did not accept that complexity or offshore regulation made the duties disappear. Instead, it worked through the structure and found the relevant relationships were established.

For businesses, the practical risk is that overseas offices are often built informally. One founder may be the local face of the office, hold local licences, manage local staff and maintain local client relationships. Another founder or the Australian company may still believe the office is part of the wider enterprise. If those assumptions are not documented, a later dispute can become expensive and highly fact-specific.

Good documentation should deal with ownership of goodwill, entitlement to profits, authority to negotiate strategic transactions, use of confidential information, and disclosure obligations if an external buyer or merger partner approaches. If the structure relies on trust, agency or partnership concepts, that should be recorded clearly and checked against local regulatory requirements. This case shows that those details can decide whether a business opportunity belongs to the enterprise or can be taken privately.

The case is not only about the conduct of an insider. It also matters for outside firms, investors, acquirers and advisers who deal with one side of an internal business dispute. The Court found knowing assistance against the fourth respondent, even though the statutory accessorial claims did not succeed. That distinction is important. A third party may avoid one statutory pathway but still face equitable exposure if it knowingly assists a breach of fiduciary duty.

For advisers, the practical lesson is to test the authority and duties of the person across the table. If a founder, director or principal says they can deliver an office, revenue stream or client base without the knowledge of the company or co-owner, that should trigger careful due diligence. Ask who owns the asset, whether there is a board approval process, whether any trust or agency arrangement exists, and whether the person is using confidential information belonging to the business.

Professional advisers should also document what they were told, what they asked, and what assumptions they relied on. In a later dispute, those records may matter. The Court’s reasons show that knowledge and participation can become central issues where a third party proceeds with a transaction despite signs that the insider may be acting disloyally.

This decision will be most relevant to businesses with concentrated control over a business unit. That includes founder-led companies, professional firms, family businesses, and businesses with interstate or overseas offices. If one person effectively controls a region, office or client stream, the business should not assume that person can privately negotiate over it just because they are the local operator.

The Court’s approach also shows that legal duties can overlap. A person may simultaneously be a director, trustee, agent, partner or fiduciary in a more general sense. In practice, that means businesses should not rely on narrow labels when assessing risk. The safer approach is to ask whether the person is in a position of loyalty and confidence in relation to the opportunity or information in question.

For founder exits, the case supports a disciplined process. Before signing, require disclosure schedules covering current negotiations, draft agreements, side letters, buyer approaches and use of confidential information. Make sure the agreement states what has been disclosed and what assumptions each side is making. If there is an overseas office, include a clear statement about ownership, control and future dealings. Those steps will not eliminate all disputes, but they reduce the chance of signing a separation agreement built on incomplete information.

The judgment is dated 26 November 2025. The Court ordered the parties to provide draft orders reflecting the reasons by 5 December 2025 and said it would hear the parties on interest and costs. The judgment record also includes a table of corrections dated 18 February 2026. Readers using the case for detailed chronology, figures or final relief should check the corrected reasons and any subsequent orders dealing with interest and costs.

The hearing dates listed in the judgment show that the matter was heard over multiple sittings in March, April, July and August 2024. The reasons run to 2302 paragraphs, which helps explain why the case covers so many overlapping legal issues and factual periods.