THE FIDUCIARY DUTY CLAIM AGAINST CRITCHLEY
156The plaintiff submits that Critchley breached his fiduciary duty to her by failing to disclose the following matters to her before she made her investment:
(a)that the net asset position of Parramatta South was nil;
(b)that there had been difficulties in obtaining a DA since 2004;
(c)that Parramatta South had no funds for any amendments to the DA required by the council or, if the DA was refused, for a merit appeal to the Land and Environment Court; and
(d)that Critchley was in a position of conflict of interest because he was a director of IQ which was the entity billing Parramatta South for the work for the DA and thereby receiving the plaintiff's money.
157The defendants object that matters (b), (c) and (d) were not pleaded or particularised, and that they are thereby prejudiced because they might have called evidence in relation to those matters. The general rule is that apart from cases where the parties choose to disregard the pleadings and to fight the case on some different basis, the relief which may be granted must be founded on the pleadings. This secures procedural fairness. See Dare v Pulham [1982] HCA 70, 148 CLR 658 at 664; Banque Commerciale SA in Liquidation v Akhil Holdings Ltd [1990] HCA 11, 169 CLR 279 at 286-287; Betfair v Racing New South Wales [2010] FCAFC 133, 273 ALR 664 at [51]; Entirity v Garsoft [2011] FCA 76 at [67]; Benton v Scott's Refrigerated Freightways Pty Ltd [2008] NSWCA 143 at [44].
158I uphold the objection in relation to matters (b) and (c). They were not pleaded or particularised nor mentioned in the plaintiff's opening written submissions. They appear to have emerged during cross-examination of Critchley and Brodie. I reject the objection in relation to matter (d): one of the particulars in the statement of claim is that Critchley failed to properly disclose "that the monies would be used by a further related company of which [Critchley] was a director". In the result, the plaintiff is entitled to argue that, if Critchley owed a fiduciary duty to her, it was breached because of non-disclosure of matters (a) and (d) above. In relation to that argument, I accept that the plaintiff did not know that Critchley was a director of IQ, although she knew that IQ was being paid by Parramatta South for work on the DA: see [90] above. She was not told expressly that Parramatta South's net assets were nil although she knew or should have known that the company was entirely reliant on her $100,000 to pay for the work on the DA.
159However, it is unnecessary to consider that argument further because in my opinion Critchley did not owe a fiduciary duty to the plaintiff.
160The plaintiff's case is not put on the basis that this was a prospective joint venture giving rise to a fiduciary relationship: cf United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; Friend v Brooker [2009] HCA 21, 239 CLR 129.
161The first basis on which the plaintiff submits that Critchley owed her a fiduciary duty was because he held himself out as providing financial advice or as an accountant. I reject the submission. He did not hold himself out in that way and I have concluded that he did not give her any financial advice. The plaintiff had no prior relationship with Critchley nor did she retain him to provide advice: cf Pavan v Ratnam (1996) 23 ACSR 214 at 225. She understood that Critchley was the business associate of Brodie, involved in the development and would be dealing with the financial side of things.
162The other basis on which the plaintiff submits that a fiduciary duty arose is that Critchley was the sole director of Parramatta South and the circumstances in which he dealt with her at the May meeting for the purpose of her purchasing shares in Parramatta South. The plaintiff relies on Brunninghausen v Glavanics [1999] NSWCA 199, 46 NSWLR 538.
163The general rule is that a director of a company owes a fiduciary duty to the company as a whole and not to individual shareholders. The bare relationship between a director and shareholder cannot without more give rise to a fiduciary relationship. However, in some circumstances a director of a proprietary company may owe a fiduciary duty to a shareholder so long as it does not compete with the director's duty to the company as a whole: Brunninghausen at [58]. This principle is sensitive to, and requires close examination of the circumstances of the particular case. Circumstances which may point to the existence of a fiduciary obligation include the shareholder's dependence upon information known to the director, the existence of a relationship of confidence, reliance or trust; the vulnerability of the shareholder, the significance of any positive action taken by or on behalf of the director to promote the transaction; the structure of the shareholdings; and the significance of the particular transaction to the parties: Pavan v Ratnam (1996) 23 ACSR 214 (NSWCA); Coleman v Myers [1977] 2 NZLR 225 at 234; Glavanics v Brunninghausen [1996] 19 ACSR 204 at 218; R Austin and I Ramsey, Ford's Principles of Corporations Law 14th ed (2010) LexisNexis Butterworths [9.050] p 484, and the cases there cited. This is consistent with the seminal principle that "Rules of equity have to be applied to such a great diversity of circumstances that they can be stated in only the most general terms and applied with particular attention to the exact circumstances of each case": Boardman v Phipps [1967] 2 AC 46 at 123 per Lord Upjohn; approved in New Zealand Netherlands Society "Oranje" Inc v Kuys [1973] 2 NZLR 163 at 166 per Lord Wilberforce delivering the judgment of the Judicial Committee of the Privy Council.
164In Coleman v Myers the other family shareholders had trust and confidence in the directors, an attitude which the directors invited and encouraged and then exploited: at 325, 331, 371. It was held that the directors owed a fiduciary duty to the shareholders. Woodhouse J said at 324:
As I have indicated it is my opinion that the standard of conduct required from a director in relation to dealings with a shareholder will differ depending upon all the surrounding circumstances and the nature of the responsibility which in a real and practical sense the director has assumed towards the shareholder.
In the one case there may be a need to provide an explicit warning and a great deal of information concerning the proposed transaction. In another there may be no need to speak at all. There will be intermediate situations. It is, however, an area of the law where the courts can and should find some practical means of giving effect to sensible and fair principles of commercial morality in the cases that come before them; and while it may not be possible to lay down any general test as to when the fiduciary duty will arise for a company director or to prescribe the exact conduct which will always discharge it when it does, there are nevertheless some factors that will usually have an influence upon a decision one way or the other. They include, I think, dependence upon information and advice, the existence of a relationship of confidence, the significance of some particular transaction for the parties and, of course, the extent of any positive action taken by or on behalf of the director or directors to promote it. In the present case each one of those matters had more than ordinary significance and when they are taken together they leave me in no doubt that each of the two directors did owe a fiduciary duty to the individual shareholders.
165The passage was quoted with approval and applied in Glavanics v Brunninghausen (1996) 19 ACSR 204 at 218 by Bryson J who held that, in the circumstances of the case, a director owed a fiduciary obligation to a shareholder of a small proprietary company. An appeal from the decision in Glavanics was dismissed: Brunninghausen v Glavanics [1999] NSWCA 199, 46 NSWLR 538.
166Brunninghausen concerned a sale of shares by the plaintiff, the minority shareholder and director, to the defendant, the majority shareholder and director. Events had brought to an end the personal trust and confidential relationship between them. The defendant became the sole effective director, and the plaintiff took no active part in the business of the company. The defendant did not disclose to the plaintiff that he was negotiating on the company's behalf for the sale of its business for a price substantially greater than that reflected in the price attributed to the share sale agreement between the plaintiff and the defendant. The primary judge (Bryson J) and the Court of Appeal held that the defendant had acted in breach of a particular fiduciary duty of disclosure owed by him to the plaintiff as shareholder. The fiduciary duty was limited to disclosure necessary to negate the effect of taking advantage of his superior position to the detriment of the plaintiff who was "at the mercy" of the defendant and "vulnerable to abuse" by the defendant of his position: at [99]. More particularly, the duty was to disclose material matters affecting the value of the shares of which the defendant knew the plaintiff was ignorant. The plaintiff was awarded equitable compensation: at [52], [113], [117].
167In the course of a comprehensive analysis of the law, Handley JA (with whom Priestley and Stein JJA agreed) held that "the office of director in a proprietary company is, at least for some purposes, a fiduciary one in relation to the shareholders": at [100]. His Honour referred with approval to the special facts doctrine found in United States decisions under which the special facts of the case may take it outside the general rule that directors do not owe a fiduciary duty to shareholders when purchasing their shares: at [109] - [112]. One such decision was Van Schaack Holdings Ltd v Van Schaack 867 P 2nd 892 (1994) where Rovira CJ, delivering the opinion of the Supreme Court of Colorado En Banc, said at 898:
Holding corporate "insiders" to a duty to fully disclose all material facts and circumstances surrounding or affecting the value of shares is warranted ...because much of the information bearing on the value of a closed corporation's stock is not publicly available and because no market exists in which the shares of such a corporation can be valued through the interplay of market forces.
As a result of this unique aspect of closed corporations, there arises the "necessity of preventing a corporate insider from utilising his position to take unfair advantage of the uninformed minority shareholders" and the imposition of a duty of disclosure is warranted as "an attempt to provide some degree of equalization of bargaining position in order that the minority may exercise an informed judgment in any such transaction.
168In Brunninghausen Handley JA at [50] noted that the primary judge had adopted the reasoning of Rugg CJ in the Supreme Judicial Court of Massachusetts in Goodwin v Agassiz (1933) 186 NE 659 at 661:
...circumstances may exist requiring that transactions between a director and a stockholder as to stock in the corporation be set aside. The knowledge naturally in the possession of a director as to the condition of the corporation places upon him a peculiar obligation to observe every requirement of fair dealing when directly buying or selling its stock. ...directors cannot rightly be allowed to indulge with impunity in practices which do violence to prevailing standards of upright businessmen. Therefore where a director personally seeks a stockholder for the purpose of buying his shares without making disclosure of material facts within his peculiar knowledge and not within reach of the stockholder, the transaction will be closely scrutinised and relief may be granted in appropriate instances.
169In Brunninghausen the fiduciary duty arose from the bare facts of the relationship and was held to have been breached at [54] - 58]:
54 If a fiduciary duty exists here it must arise from the bare facts of the relationship. These include the position of the defendant as the sole effective director, the existence of only one other shareholder, their close family association, the intervention of the mother-in-law to secure a family reconciliation , and the exclusive advantage or opportunity which the defendant's position conferred on him to receive any offers to purchase the company's business from third parties.
55 Any fiduciary duty arising from these facts must be one imposed by law. The defendant did nothing which could be construed as a voluntary assumption of such a duty. The judge held that the relationship between the parties did not create a comprehensive fiduciary duty but one which was limited to the disclosure of the unexpected offer by third parties to purchase the entire business. The existence of such a duty was denied in Percival v Wright and that case cannot be distinguished from the present. We can only hold that the defendant owed the fiduciary duty found by the judge if we decline to follow Percival v Wright .
56 The decision is not binding on this Court and the comments in Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 at 680 and the decision in Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543, which is distinguishable, do not prevent us from re-examining the decision. It has not been followed in Australia in circumstances comparable with the present.
57 The general principle that a director's fiduciary duties are owed to the company and not to shareholders is undoubtedly correct, and its validity is undiminished. The question is whether the principle applies in a case, such as the present, where the transaction did not concern the company, but only another shareholder.
58 Any statement that the defendant owed a duty to the company in relation to his dealings with the plaintiff over his shares is meaningless. Such a duty would lack all practical content. The company could not suffer any loss from the breach of such a duty, and had no interest in its loyal and disinterested performance. Where a director's fiduciary duties are owed to the company this prevents the recognition of concurrent and identical duties to its shareholders covering the same subject matter. However this should not preclude the recognition of a fiduciary duty to shareholders in relation to dealings in their shares where this would not compete with any duty owed to the company.
170Handley JA at [91] - [92] found "compelling" the following reasoning of Mahon J in Coleman v Myers [1977] 2 NZLR 225 at 277-8 concerning the fiduciary relationship imposed by law on promoters in relation to their company:
"...in any transaction involving sale of shares between director and shareholder, the director is the repository of confidence and trust necessarily vested in him by the shareholder, or by his legal status, in relation to the existence of information affecting the true value of those shares...when [a] director has, by reason of his office, knowledge of an impending advantage to the company which would appreciate the value of the shares...he is in possession of information which the shareholder is legally precluded from acquiring in the absence of the consent of the board. ...where the director ...makes an offer founded upon corporate information as to the value of shares which, by law, is placed outside the knowledge of the owner ...there is ...by reason of the statutory disability of the shareholder to compel disclosure of the relevant facts, a necessary confidence reposed in the director, by virtue of his status, in relation to his advantageous possession of material information ...it seems an untenable argument to suggest that the shareholders on an offer to buy their shares are not perforce constrained to repose a special confidence in the directors that they will not be persuaded into a disadvantageous contract by non-disclosure of material facts. In my opinion therefore there is inherent in the process of negotiation for sale a fiduciary duty owing by the director to disclose to the purchaser any fact, of which he knows the shareholder to be ignorant, which might reasonably and objectively control or influence the judgment of the shareholder in forming his decision in relation to the offer.
171Handley JA held at [98] - [103] explained why the defendant owed a fiduciary duty to the plaintiff in the circumstances of that case:
[98] The plaintiff therefore was almost totally powerless. He had no legal right as a shareholder to inspect the company's books of account or financial records. He was entitled to copies of the annual accounts but realistically chose not to exercise it. Those alone would not provide any real guide to the value of his shares. He had no effective right to be informed of the negotiations for the sale of the company's business.
[99] The defendant, as the sole effective director, occupied a position of advantage in relation to the plaintiff. He could, if he saw fit, disclose information about the pending negotiations for the sale of the business but could not be compelled to do so. This gave him the capacity to affect the interests of the plaintiff "in a practical sense", and in the context of the negotiations with him "a special opportunity" to exercise that capacity to the detriment of the plaintiff who was "at the mercy" of the defendant and "vulnerable to abuse" by the defendant "of his position". Hospital Products ibid per Mason J at 96-7.
[100] After 1983 the defendant did not undertake in any factual sense to act in the interests of the plaintiff, or in the joint interests of the plaintiff and himself. However he continued to occupy an office with the advantages referred to. In my judgment it is open to this Court to hold that the office of director in a proprietary company is, at least for some pur-poses, a fiduciary one in relation to the shareholders. See generally Finn "Fiduciary Obligations" 1977 Chs 2, 4. Fiduciary duties are imposed on the holders of such offices by operation of law. As Professor Finn said in "Equity, Fiduciaries and Trusts" Youdan 1989 p34-p35:
"But whether or not a real trust and confidence is there ... the law simply prescribes that, in general, one party is entitled to expect that the other will act in his or their joint interests in those matters falling within the ambit of the [fiduciary] relationship ... against the background of the relationship, its nature and its purpose [the law] asks for what purpose one party has acquired rights, powers and duties in the relationship: to promote his own interests, the joint interest, or the interest of the other party alone. Insofar as it is either of the latter two, the relationship will be fiduciary to that extent". (emphasis supplied)
[101] Thus the question is not whether there is an expectation in fact, but whether the vulnerable party is "entitled to expect" a particular standard of conduct. Professor Finn continued at 47:
"... the expectation may be a judicially prescribed one because the law itself ordains it to be that other's entitlement. This may be so ... because that party should, given the actual circumstances of the relationship, be accorded that entitlement irrespective of whether he has adverted to the matter ...".
[102] In the present case there was a factual basis for some expectation on the part of the plaintiff...
[103] The plaintiff had no idea of the real value of his shares to the defendant while the latter continued to operate the company, and made no attempt to find out.
172In my opinion, as the defendants submit, Brunninghausen is distinguishable. It was concerned with the fiduciary duty of a director to an existing shareholder to disclose information affecting the value of the shareholder's shares in a small proprietary company which the director was purchasing. The director derived a personal, direct benefit from the transaction. The present case is concerned with a director's duty not to an existing shareholder but to someone purchasing shares in a small proprietary company. The consideration was paid to the company, Parramatta South, not to Critchley. Critchley's potential benefit, like that of the other shareholders, was tied to the fate of the company. In the latter situation, no case, so far as I am aware, has applied the law of the fiduciary rather than the law of the marketplace.
173A conclusion that there was no fiduciary duty in the present case is also consistent with the decision that there was no fiduciary duty in the comparable case of Pavan . In that case R proposed to engage in a strata building development of a property and incorporated a company as the development vehicle. R was a director and the controller of the company and he and his wife were the shareholders. R was a tax accountant and proposed to P, his client, that P reduce his tax liability by investing in the development. P agreed and invested by buying one of the units in the development from the company. P lost his investment money. P unsuccessfully sued R for breach of fiduciary duty, breach of contract and negligence. P accepted that R did not act in the capacity of financial advisor as such, but submitted that in the circumstances R had a duty of a fiduciary character to take steps to secure the funds: at 222-223. Beazley JA (Meagher JA agreeing) noted at 224-235:
...there are difficulties in attempting to find an all embracing statement of principle to categorise a relationship which, as Mason J pointed out in Hospital Products is "infinitely varied". It is preferable to approach the matter by looking at all the circumstances of the case and determining whether there are factors which solely, or in combination, establish the nature of the relationship as a fiduciary one. This is the approach to be found in Hospital Products and also finds expression in Lloyds Bank Ltd v Bundy [1975] QB 326 per Sachs LJ at 341:
Such cases tend to arise where someone relies on the guidance or advice of another, where the other is aware of that reliance and where the person upon whom reliance is placed obtains, or may well obtain, a benefit from the transaction or has some other interest in it being concluded. In addition, there must, of course, be shown to exist a vital element which in this judgment will for convenience be referred to as confidentiality. It is this element which is so impossible to define and which is a matter for the judgment of the court on the facts of any particular case.
The cases establish that a number of factors may characterise a relationship as being of a fiduciary nature. They include: vulnerability, reliance and the presence of loyalty, trust and confidence. The notion of vulnerability, as used in this context, is not to be understood in the sense of any "weaker party" concept. Rather, it refers to the circumstance where another party agrees (not necessarily contractually) "to act on behalf of or in the interests of another and, as such, is in a position to affect the interests of that other person in a legal or practical sense. As such, fiduciary relationships are marked by vulnerability in that the fiduciary can abuse the power or discretion given him or her to the detriment of the beneficiary": see Hodgkinson per La Forest at 168. Reference is also usefully made to Professor Finn's (now Justice Finn of the Federal Court of Australia) description in The Fiduciary Principle at 50-1:
... fiduciary responsibities [sic] will be exacted where the function the advisor represents himself as performing, and for which he is consulted, is that of counselling an advised party as to how his interests will or might best be served in a matter considered to be of importance to his personal or financial well-being, and in which the adviser would be expected both to be disinterested, save for his remuneration, and to be free of adverse responsibilities unless the contrary is disclosed at the outset.
In determining whether the circumstances in this case gave rise to a fiduciary relationship, the following characteristics of the relationship are relevant:
(i) the respondent and the appellant were in a tax accountant/client relationship;
(ii) in the course of and as part of that relationship, the respondent, from time to time, advised the appellant on appropriate financial structures and investment directions;
(iii) in 1983, the appellant was concerned to minimise his tax liability;
(iv) at that time, separate from his accountancy practice, the respondent had himself decided to pursue a particular investment opportunity, namely the development of land at Penrith upon which he proposed to build industrial units;
(v) the respondent acquired Nupace Pty Ltd as the investment vehicle;
(vi) there was no contractual relationship between the appellant and the respondent in respect of the project, although the respondent "introduced" the appellant to the project; and
(vii) there was no evidence of any representation by the respondent to the appellant that any monies he committed to the project were to be held "on trust", or were to be kept separate from Nupace Pty Ltd's monies; or were not to be utilised by Nupace Pty Ltd during the course of the development.
None of these circumstances point to the existence of a fiduciary relationship. Although the appellant undoubtedly had confidence that the project would be successful and it may well have been that that confidence was engendered by the fact the respondent was involved with it, there are none of the indicia of vulnerability, reliance or confidence in the sense which those matters bear in the context of a fiduciary relationship.
174Pavan is comparable to the present case notwithstanding that (a) P in that case invested by purchasing property from R's company whereas the plaintiff in the present case invested by purchasing shares in Critchley's company; and (b) R was P's tax accountant whereas in the present case there was no pre-existing relationship between the plaintiff and Critchley.