Visnic v Sywak

Case [2009] NSWCA 173

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Visnic v Sywak [2009] NSWCA 173

FILE NUMBER(S):
 40097/08

HEARING DATE(S):
14 May 2009

JUDGMENT DATE:
1 July 2009

PARTIES:
Milan Visnic (Appellant)
Peter Sywak (Respondent)

JUDGMENT OF:
Spigelman CJ Campbell JA Macfarlan JA   

LOWER COURT JURISDICTION:
Supreme Court

LOWER COURT FILE NUMBER(S):
SC 1278/03

LOWER COURT JUDICIAL OFFICER:
Brereton J

LOWER COURT DATE OF DECISION:
3 July 2007; 31 March 2008

LOWER COURT MEDIUM NEUTRAL CITATION:
Visnic v Sywak [2007] NSWSC 701; Visnic v Sywak [2008] NSWSC 427

COUNSEL:
A W Street SC, J A English (Appellant)
M R Aldridge SC (Respondent)

SOLICITORS:
Lander & Rogers (Appellant)
Polczynski Lawyers (Respondent)

CATCHWORDS:
CORPORATIONS – distinction between company and shareholders – limitations on shareholders' rights to enforce duties owed to company
EQUITY – equitable remedies – accounts and inquiries – sufficient connection – scope of breach of fiduciary duty – inquiry to determine equitable damages and/or account of profits by reason of breaches of fiduciary duty – whether sufficient connection between breach of fiduciary duty and inquiry for purposes of determining account of profits – whether breach was a conflict of interest and duty – deprivation of shareholding – evidence of benefits and profits – distinction between trust and fiduciary relationship
EQUITY - equitable remedies - accounts and inquiries - whether trial judge took into account irrelevant considerations - fiduciary's conduct capable of constituting breach of duties owed to companies
EQUITY – equitable remedies – election between equitable compensation and disgorgement damages
WORDS & PHRASES – “sufficient connection”

LEGISLATION CITED:
Corporations Act 2001 (Cth)
Uniform Civil Procedure Rules 2005

CASES CITED:
Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 83 ALJR 196
Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534
Chan v Zacharia (1983–1984) 154 CLR 178
Friend v Brooker [2009] HCA 21; (2009) 255 ALR 601
Hill v Rose [1990] VR 129
Hunter Area Health Service v Presland [2005] NSWCA 33; (2005) 63 NSWLR 22
In re Coomber; Coomber v Coomber [1911] 1 Ch 723
Keech v Sandford (1726) Sel Cas T King 61; 25 ER 223
Lumbers v W Cook Builders Pty Ltd (in liquidation) [2008] HCA 27; (2008) 232 CLR 635
Maguire v Makaronis (1996–1997) 188 CLR 449
New South Wales v Paige [2002] NSWCA 235; (2002) 60 NSWLR 371
Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] AC 514
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204
Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211
Sullivan v Moody [2001] HCA 59; (2001) 207 CLR 562
Warman International Limited v Dwyer (1994–1995) 182 CLR 544

TEXTS CITED:

DECISION:
Appeal dismissed with costs.

JUDGMENT:

- 10 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA  40097/08

SPIGELMAN CJ
CAMPBELL JA
MACFARLAN JA

Wednesday 1 July 2009

Milan Visnic v Peter Sywak

FACTS

Justice Brereton found that Mr…

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Visnic v Sywak [2009] NSWCA 173
Case
[2009] NSWCA 173
Decision Date

CaseChat Overview and Summary

The appeal concerned a dispute between Mr Visnic, a shareholder, and Mr Sywak, who was found to be a fiduciary in certain respects concerning four corporations. Mr Visnic sought an inquiry into alleged breaches of fiduciary duty by Mr Sywak, including an account of profits and equitable damages. The primary issue before the Court of Appeal was whether the trial judge erred in refusing to order such an inquiry.

The legal issues before the court included whether a shareholder could pursue a personal claim for loss suffered by a company due to a fiduciary's breach, the scope of a "sufficient connection" required to link a breach of fiduciary duty to an inquiry for an account of profits, and whether the trial judge considered irrelevant factors in his decision. The court also considered the distinction between a shareholder's personal loss and the company's loss, and the principle that a fiduciary may be required to disgorge benefits even if the beneficiary could not have personally obtained them.

The Court of Appeal, in dismissing the appeal, reasoned that a shareholder cannot recover damages for a loss that is merely a reflection of the company's loss. The court affirmed that a shareholder's personal loss arises from the diminution in the value of their shareholding, which is a consequence of the company's loss, not a direct personal loss. The court found that the appellant's submissions involved an impermissible conflation of duties owed to the company and personal claims. Even if a conflict of interest and duty existed regarding the shares, it did not establish a sufficient connection to warrant an inquiry into other potential breaches. The court also noted that any benefits of which the appellant was deprived could be addressed in the winding-up of the companies, and as a shareholder, he had no direct right to monies distributed by the corporations to Mr Sywak.

The appeal was dismissed with costs.

Orders

Orders of the court

Appeal dismissed with costs.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

SPIGELMAN CJ
By reason of the winding-up order made, at the request of the appellant, in the first judgment, any order of this character pursuant to s 233(1) of the Corporations Act was no longer in issue at the time of the second judgment. However, the words “and otherwise” in the prayer for relief set out in [6] above, are sufficient to found a claim for an order, based on equitable principles, for an inquiry into what the order sought characterised as “the management of the affairs” of the four corporations. That was the matter which, together with the option of claiming equitable damages in lieu, had been reserved at the time of Justice Brereton’s first judgment, after which the appellant sought the order referred to at [3] above. This was the subject of his Honour’s second judgment from which this appeal is brought.The Judgments of Brereton J With respect to the matters which remained in issue, Brereton J said in his first judgment:“[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.” I have indicated at [3] the order for an inquiry which the appellant sought by Notice of Motion consequent upon this judgment. In his second judgment his Honour said:“[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.”

Ratio Decidendi

Legal Principle Established

Established by: SPIGELMAN CJ

In any event, the appellant’s submissions involve an impermissible elision. Even if there was breach in the sense of a conflict of interest and duty with respect to the shares, that did not involve any breach which would permit an inquiry into whether there had been any other conflicts of that character in conduct which can be seen to be related to the original breach in some way or another. That proposition goes well beyond the bounds of a “sufficient connection”.The Irrelevant Considerations Issue The appellant contended that his Honour erred when he said that the conduct which the appellant sought to investigate could constitute a breach of duties, including fiduciary duties, owed to the company. The appellant submitted that this was an irrelevant consideration. It is not clear that this was an important, let alone determinative, factor in his Honour’s conclusion that the breach he actually found had no connection with what the appellant sought to achieve by an account. In any event, his Honour was correct to say that restoration of any benefits of which the appellant had been deprived could be achieved in the course of the winding-up and that, as a shareholder, the appellant had no right to direct access to the monies distributed by the respondent to himself through his exercise of control of each of the four corporations. This is not to suggest that the appellant could be denied relief because he would not have been entitled to himself obtain the particular benefit which his fiduciary had appropriated. The principle identified in Keech v Sandford (1726) Sel Cas T King 61; 25 ER 223 has been applied on numerous occasions to disgorge a benefit which a beneficiary could never have for himself or herself. The fact that the appellant is a shareholder and would not have been entitled to receive any of the payments made to the respondent by the corporation would not be determinative. However, his Honour correctly applied the reasoning in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) supra at 222-223:“In our judgment the personal claim is misconceived ... what he [that is, 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.”