Visnic v Sywak & ors

CATCHWORDS : EQUITY - Remedies - equitable compensation - for breach of fiduciary duty - causation - extent to which connection required between breach and loss - to whom liability to account owed - where defendant owes duties to shareholder - whether liable to account to shareholder for breaches of duty to company - inquiry as to damages - necessity to show some loss or profit to justify reference.

LEGISLATION CITED : (CTH) Corporations Act 2001 (NSW) Uniform Civil Procedure Rules, r 13.4, Pt 46

Caffrey v Darby (1801) 31 ER 1159 Chan v Zacharia (1984) 154 CLR 178 Clough v Bond (1838) 40 ER 1016 Dawson, Re; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 84 WN (Pt 1) (NSW) 399 CASES CITED : Gould v Vaggelas (1985) 157 CLR 215 Hill v Rose [1990] VR 129 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 Spies v The Queen (2000) 201 CLR 603 Visnic v Sywak & Ors [2007] NSWSC 701

Milan Visnic (plaintiff) Peter Orest Sywak (first defendant) PARTIES : Adellos Pty Limited (second defendant) Parlamartu Pty Limited (third defendant) Castlove Pty Limited (fourth defendant) Donovi Pty Limited (fifth defendant)

Mr A W Street SC (plaintiff) COUNSEL : Mr M R Aldridge SC & Mr H Stitt (first defendant)

Thomson Playford (plaintiff) SOLICITORS : Turks Legal (first defendant) ERA Legal (second - fifth defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1278/03 Milan Visnic v Peter Sywak & 4 Ors JUDGMENT (ex tempore) 1 HIS HONOUR: On 3 July 2007 I delivered judgment and made orders declaring that the plaintiff Milan Visnic was entitled at law and in equity to one of the two issued shares in the capital of the fourth defendant Castlove Pty Ltd, nine of the eighteen issued shares in the capital of the fifth defendant Donovi Pty Ltd, two of the eight issued shares in the capital of each of the second defendant Adellos Pty Ltd and the third defendant Parlamatu Pty Limited, and beneficially entitled to a further two of the eight issued shares in the capital of each of Adellos and Parlamatu, being two of the shares that were held legally by the first defendant Peter Sywak in each of these companies. I made an order that Mr Sywak transfer to Mr Visnic two of the shares held by him in each of Adellos and Parlamatu, and that the register of each of the companies be rectified accordingly. As the result would be that each of the four corporations would then be deadlocked, I made an order, as the plaintiff sought, that each be wound up on the just and equitable ground [Visnic v Sywak & Ors [2007] NSWSC 701]. I said (at [123]): 123 The plaintiff has sought an order that it be referred to an Associate Judge to inquire into and certify the damages allegedly suffered by reason of the first defendant's breaches of fiduciary duty, and that the first defendant be directed to file an affidavit accounting for his dealings with the assets and income of the four corporations. I accept that, at least, in respect of the negotiations with the Business Associates, and as the legal owner of shares of which Mr Visnic was a beneficiary, that Mr Sywak was a fiduciary. However, the Statement of Claim identifies no damage resulting from a breach of fiduciary duty, other than depriving Mr Visnic of his shareholdings. It seems to me that the only damage that could have been occasioned to Mr Visnic is loss of the dividend that he might otherwise have received, but there is no evidence that dividends were declared or paid during the relevant period. Accordingly, as presently advised, it seems to me that there is not the necessary evidence of some damage that would be required to refer the matter for an inquiry. The orders that I have already pronounced will restore to him his shareholding. If there has been some breach by Mr Sywak of some obligation owed by him to any of the companies - whether as their accountant or as a director - prima facie, that is a matter for the liquidator to pursue. Lest I have overlooked something in this respect, however, I will reserve liberty to apply if it is desired to pursue an inquiry as to damages.

2 By Notice of Motion filed on 4 October 2007, in purported pursuance of that liberty, Mr Visnic claims an order that an inquiry under (NSW) Uniform Civil Procedure Rules ("UCPR"), Pt 46, be held to determine the equitable damages suffered by the plaintiff from the first defendant's breaches of fiduciary duty, and/or an account of profits for the first defendant's breaches of fiduciary duty. By Notice of Motion filed on 15 February 2008, Mr Sywak seeks to have Mr Visnic's motion struck out pursuant to UCPR, Pt 13.4, on the basis that it cannot possibly succeed. 3 At the outset, I make some observations about some of the concepts referred to in paragraph 123 of my previous judgment. First, I accepted that, in some limited respects - namely, the negotiations with the business associates and as legal owner of shares of which Mr Visnic was a beneficiary - that Mr Sywak was a fiduciary. Secondly, I recorded that there appeared to be no evidence, nor even allegation, of damage resulting from any breach of fiduciary duty, other than Mr Visnic being deprived of his shareholdings. Thirdly, I identified a possibility that there might have been some breach by Mr Sywak of some obligation owed by him to the companies (as distinct from to Mr Visnic), which would be a matter for the liquidator to pursue. 4 It is clear that liability to pay equitable compensation or to account for profits is more extensive than liability to pay damages at common law, and is untrammelled by considerations of foreseeability and less constrained by considerations of causation than common law damages. The liability of a defaulting fiduciary to give restitution was examined by Street J, as the later Chief Justice then was, in Dawson, Re; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 84 WN (Pt 1) (NSW) 399 (particularly at 404-406). His Honour explained that the obligation of a defaulting trustee was essentially one of restoring to the trust estate the assets which had been lost consequent on the breach, and that the intervention after a breach of trust of a supervening act which destroyed or diminished the value of the assets, in respect of which supervening act the trustee was not negligent or otherwise responsible, nonetheless did not excuse the trustee if the assets would not have been in jeopardy but for the original breach of trust; the trustee was still obliged to give restitution. For this his Honour cited Caffrey v Darby (1801) 31 ER 1159, where the Master of the Rolls had said (at 1162): [Y]et if they have already been guilty of negligence they must be responsible for any loss in any way to that property; for whatever may be the immediate cause the property would not have been in a situation to sustain that loss if it had not been for their negligence. If they had taken possession of the property it would have been in his possession. If the loss had happened by fire, lightning or any other accident, that would not be an excuse for them, if guilty of previous negligence. That was their fault. 5 Street J observed that that statement was consistent with the proposition that, if a breach of trust has been committed, then the trustee is liable to place the trust estate in the same position as it would have been in if no breach had been committed: "Considerations of causation, foreseeability and remoteness do not readily enter into the matter" (at 404). 6 His Honour referred also to the judgment of Lord Cottenham LC in Clough v Bond (1838) 40 ER 1016 as being to the same effect, and concluded (at 405-406): The principles embodied in this approach do not appear to involve any inquiry as to whether the loss was caused by or flowed from the breach. Rather the inquiry in each instance would appear to be whether the loss would have happened if there had been no breach. … The cases to which I have referred demonstrate that the obligation to make restitution, which courts of equity have from very early times imposed on defaulting trustees and other fiduciaries, is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract. 7 Street J's judgment in Re Dawson has been cited many times and in many jurisdictions with approval. That said, it is clear that the focus of his Honour's observations was the restoration to the trustee's estate of what had been lost to it following the relevant breach of trust. 8 Similarly, in Hill v Rose [1990] VR 129, Tadgell J repeated that (at 144): The obligation imposed by courts of equity upon defaulting trustees and other fiduciaries is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract. It follows that the obligation is not limited or influenced by common law principles governing remoteness of damage, foreseeability or causation. 9 But the scope of liability to pay equitable compensation or account for profits is not unlimited. In Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534; (1991) 85 DLR (4th) 129, McLachlin J said (at 556; 163): Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach. The plaintiff will not be required to mitigate, as the term is used in law, but losses resulting from clearly unreasonable behaviour on the part of the plaintiff will be adjudged to flow from that behaviour, and not from the breach. Where the trustee's breach permits the wrongful or negligent act of third parties, thus establishing a direct link between the breach and the loss, the resulting loss will be recoverable. Where there is no such link, the loss must be recovered from third parties. 10 That case also has been followed on many occasions. 11 The liability of a fiduciary to account was authoritatively stated by Deane J in Chan v Zacharia (1984) 154 CLR 178, in the following terms (at 199): Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. 12 It is notable that in that passage his Honour identifies the liability to account as one due to the person to whom the obligation - that is, the fiduciary obligation in question - itself is owed. 13 At least for the purposes of what has to be decided on this application , the following may be drawn from the cases to which I have so far referred. First, equity requires a fiduciary to restore to the trust estate anything lost from it as a result of a breach of duty. Secondly, a fiduciary is obliged to account for benefits or gains made by the fiduciary from a breach of duty to the person to whom the relevant fiduciary obligation was owed. Thirdly, while the obligation to make equitable compensation is not constrained to the same extent as liability to pay damages in common law by considerations of causation and foreseeability, nonetheless there must be some common sense connection between the loss or the profit and the breach in question. 14 Returning then to the present case, the only fiduciary duties which I accepted in my previous judgment were (1) in connection with the negotiations with the business associates and (2) as trustee of those shares that Mr Sywak held on trust for Mr Visnic. The only breach of such duty that I found - and indeed, the only breach of fiduciary duty which has been suggested in the present argument - was that Mr Sywak deprived Mr Visnic of his shareholding. I identified the possibility that, as well as the property in the shareholdings themselves, a dividend might have been declared or paid in respect of Mr Visnic's shares from which Mr Sywak benefited, but there was no evidence that any such dividend has been declared or paid during the relevant period; that has not changed, and there remains no evidence that dividends were declared or paid during the relevant period. In those circumstances, it seems to me now, as it seemed to me then, that restitution to the trust estate of the property of which it was deprived by the breach of the trust will be effected by the orders, already made, declaring trusts in respect of the shareholdings and requiring their transfer to Mr Visnic. 15 On the present application, however, it has been argued that there are additional benefits in respect of which Mr Sywak ought to be liable to account: in particular, to take the highest and least controversial of them, payments made or authorised by him from the assets of at least one of the companies to his personal superannuation fund which, for present purposes, I shall assume were made for his own benefit. Mr A W Street SC informs me, and I do not doubt, that there was some evidence of such a payment in the substantive proceedings, and I proceed on that basis. Assuming, as I do, that such payments were made by Mr Sywak, then it may well be that they were in breach of an obligation owed by him to the companies as a director of those companies or as accountant for those companies. But applying the test referred to by McLachlin J in Canson Enterprises Pty Ltd v Boughton & Co, they do not seem to me to be losses that, on any common sense view of causation, were caused by the relevant breach, namely, depriving Mr Visnic of his shareholdings; indeed, they seem to me to be entirely unconnected with and outside the scope of that breach. They arose from a different breach of a different duty, one owed to the companies; not the breach of the particular duties that, I have found, were owed by Mr Sywak to Mr Visnic. 16 While cases such as Gould v Vaggelas (1985) 157 CLR 215 and Spies v The Queen [2000] HCA 43; (2000) 201 CLR 603 were decided not in the field of equitable compensation but in that of common law damages, nonetheless the principle for which Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 stands is, in my view, of significance in understanding why a breach of a duty owed to the company is to be treated as distinct from a breach of a duty owed to a shareholder, and why the consequences of such a breach are outside the scope of the breach found in my principal judgment. As the Court of Appeal said in Prudential (at 222-223): In our judgment the personal claim is misconceived ... what he [ie, a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution of the value of the net assets of the company, in which he has … a ... shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company. 17 It might be argued that different considerations apply in respect of an account of profits, where the concern of equity is to require a fiduciary to disgorge any profits it has made in the circumstances to which Deane J referred in Chan v Zacharia. However, the proposition that in a case where the relevant obligation is owed to the company, any corresponding liability to account is also owed to the company, can be tested by asking what would be the position in the present case if the company had creditors. Assuming, as I do, that Mr Sywak has received benefits from one or more of the companies, then Mr Street suggested that the remedy would be a liability to account for one half of those benefits to Mr Visnic. If the company had creditors, plainly the obligation would be to return the whole - not one half - of the benefit to the company, so that it could be applied first for the benefit of the creditors and then division between the shareholders. Thus, it seems to me plain that, in respect of such breaches, where the duty breached, if any, was one that was owed to the company, the obligation to account is one that lies to the company and not to Mr Visnic. 18 Again, the position can be tested by speculating that if, notwithstanding the breach that I have found in respect of Mr Visnic's shareholding, Mr Sywak had acted properly as a director, there would be no liability to account in respect of the payments into the superannuation fund. On the other hand, if he had not taken Mr Visnic's shares, but authorised the payments to be made to the superannuation fund, there would still be a liability to account to the company, regardless of the absence of any breach of duty to Mr Visnic. 19 All these considerations point firmly to the conclusion that the matters about which it is now suggested Mr Sywak ought be required to account to Mr Visnic are matters in respect of which he is obliged to account, if at all, to the company and not to Mr Visnic. 20 For those reasons, I am of the view that, even were there no other obstacle to the grant of the relief sought, Mr Visnic is not entitled on the merits to the inquiry which he seeks. In short, so far as the breaches of fiduciary obligation owed to him are concerned, no damage or profit such as would attract an inquiry has been identified over and beyond the depreciation of his shares which will be remedied by the restitution to him of the shareholding, which has already been decreed. So far as it is suggested that there is a liability to account in respect of other amounts received by Mr Sywak, any liability to account is owed, if at all, to the relevant company and not to Mr Visnic. 21 The same result is supported by two other considerations. The first is that, in reserving liberty to apply for an inquiry, I had expressed the qualification "at least" in the second sentence of paragraph 123 - lest it might be established on further argument that Mr Sywak's fiduciary obligations to Mr Visnic went further than those which I accepted - and the qualifications "it seems to me" and "as presently advised" in the fourth and fifth sentences - which were intended to reflect the circumstance that the identification of damage for the purposes of an inquiry had not been addressed in the submissions at the substantive hearing, and that I wished to afford Mr Visnic an opportunity to point to anything further in respect of damage that I might have overlooked in the course of preparing the judgment. I did not contemplate that evidence not before the Court at the time of the final hearing would be received on the liberty to apply; but as I have said, I accept that there was evidence before me insofar as the payment to the superannuation fund is concerned, and at least in that respect the present application would not have been precluded by the absence of requisite evidence. Nonetheless, what I had in mind was that I might be persuaded that Mr Sywak's fiduciary obligations were more extensive, or that my attention might be drawn to evidence of damage that I might have overlooked in respect of the breaches then found. Evidence and argument on the present application has not persuaded me on either of those matters to a different position. 22 Secondly, it is also of some relevance, as Mr M R Aldridge SC points out, that whereas Mr Sywak, in the principal proceedings, proposed that he be afforded an opportunity to buy out Mr Visnic pursuant to (CTH) Corporations Act 2001, s 233(1)(d) - albeit acknowledging that that would be a much less likely result if, as eventuated, my conclusion was that the shareholdings were in equity equal - Mr Visnic pressed for a winding up order and resisted any suggestion that Mr Sywak should be afforded the opportunity of obtaining alternative remedy. Mr Visnic might have sought, but did not seek, an order under s 233(1)(g) authorising him to institute, prosecute, defend or discontinue proceedings in the name and on behalf of any of the companies. This also tells against now allowing him a remedy in the nature of a derivative action in these proceedings. 23 This result will not leave Mr Visnic without a remedy. First, insofar as breaches of duty to the company are established, the liquidator can pursue them. There is some evidence that the liquidator is investigating those matters, although it obviously cannot be foretold to what extent the liquidator will pursue them. Secondly, if the liquidator does not do so, then Mr Visnic may bring a derivative action pursuant to Corporations Act s 236 and s 237, subject to obtaining the leave of the Court to do so. 24 For those reasons, the plaintiff's Notice of Motion should be dismissed. It is unnecessary to deal further with the defendant's Notice of Motion. 25 My order is that the plaintiff's motion filed on 4 October 2007 be dismissed, with costs. 26 I have made an order dismissing the plaintiff's Notice of Motion. It seems to me that, as the parties have agreed that both motions can be dealt with together, that effectively exhausts the defendant's motion at the same time because, although not necessarily pursuant to UCPR, Pt 13, rule 4, the defendant has obtained dismissal of the plaintiff's Notice of Motion. The order I have made should be regarded as disposing of both motions. **********

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