Alan Schmidt, the appellant and defendant to the original proceeding, had been a director of the plaintiff company. It had been set up as a joint venture vehicle with two other parties to conduct a business of exporting live cattle to Israel. After Schmidt resigned, without the consent of the company or the two other parties, he took over the developing business of the company and made it his own.
The trial judge found Schmidt had breached his duties as a director and as a fiduciary to the plaintiff and had misused confidential information provided by the other two directors to the plaintiff company so Schmidt was ordered to pay equitable compensation in an amount reflecting two thirds of the value of the business he misappropriated: $2,774,803 and $899,606.34 interest. Schmidt appealed and on 31 July 2020, the Victorian Supreme Court of Appeal upheld the trial judgments on both liability and quantum: Schmidt & Anor v AHRKalimpa Pty Ltd (receiver appointed) & Anor  VSCA 193.
- Alan Schmidt had been involved in live cattle export since 1995 and his company Otway Livestock Exports Pty Ltd, the second defendant, held a live cattle export license.
- Between 2008 and 2011, Danny Ruschin and Haim Bzezinski, who later became part owners of the plaintiff company, developed a plan to export live cattle to Israel. They conducted detailed investigations and inquiries in Israel and formed relationships with two of Israel‘s largest importers.
- By 2011, Ruschin and Bzezinski were ready to find a business partner with experience in live cattle export and having an export license. After contact was made with Schmidt in late 2011, Schmidt and Bzezinski travelled to Israel to meet the potential customers.
- Discussions commenced with Schmidt about a joint venture between the three of them and lawyers were engaged to draw documents. These documents were never finalized but discussions continued with the 2 Israeli importers and in March 2013, arrangements for Voyage 1 and then Voyage 2 commenced. Both voyages suffered losses.
- Although a JV agreement was still not agreed, on 27 June 2013, the plaintiff AHRKalimpa Pty Ltd was incorporated as the JV vehicle, which after some toing and froing, was owned equally by the three of them through their private companies. Shortly afterwards, Voyage 3 was agreed. By September 2013, Voyage 4 was also under discussion but disagreements about JV terms continued.
- From early November 2013, Schmidt began making separate arrangements. On 8 November 2013, Schmidt began communicating with one of the Israeli importers regarding Voyage 3 on a confidential basis, without informing Ruschin or Bzezinski. He also received assistance from a business associate regarding his emails to the other parties and also advice to the effect that if he wanted to pursue other voyages on his own behalf, he needed to resign.
- At around this time, Schmidt also made a finance application to HSBC in his company Otway’s name regarding a cattle export business. The application did not mention AKRKalimpa, stated that Otway had developed a relationship with the largest two Israeli importers and portrayed an established and successful business with voyages already made or in progress, rather than an immature or speculative one. Ruschin and Bzezinski were not told about the application.
- On 25 November 2013, Schmidt tabled his resignation as a director of AHRKalimpa and provided executed transfers of his shares in the company.
- Otway continued to make arrangements regarding Voyages 3 and 4. Both were completed after Schmidt had resigned as a director.
- On 14 December 2013, with a locksmith and removalists, Schmidt broke into the premises being used by AHRKalimpa and without authority, removed the computer and all hard copy files located there. This gave him control over Voyages 3 and 4.
- Since then, Otway has continued to export live cattle to Israel with 20 voyages having been completed by end January 2018.
- Ruschin and Bzezinski obtained an export license in March 2016 but by then Otway had the market and they could not make any headway with the business.
- At trial, Schmidt conceded that Voyages 3 and 4 were on behalf of AHRKalimpa.
COURT OF APPEAL (Kyrou, Hargrave and Emerton JJA)
The appeal Court endorsed the judgment of trial judge Elliott J, making the following findings:
- At trial and on appeal there had been arguments about whether fiduciary duties survive the termination of a fiduciary relationship. The Court of Appeal said that they did “depending upon the circumstances of a particular case” .
- In this case, Schmidt was a fiduciary by reason of his position as director of the plaintiff and participant in the joint venture and in this context, the absence of formal documentation was immaterial if the arrangement had the characteristics of a JV.
- In addition, Schmidt had misused confidential information that Ruschin and Bzezinksi had brought to the JV.
- This was not a case where a director had resigned out of frustration and then pursued fresh opportunities that came his way respecting which he owed no duties. The events leading to the resignation were maneuvers to enable Schmidt to continue to conduct the business through Otway and the business that Schmidt conducted after his resignation was the business that AHRKalimpa had been actively pursuing.
- Schmidt was able to conduct the business without paying any consideration to AHRKalimpa for it by using the company’s books and records that he had misappropriated and assuming control of the company’s stock in trade (the cattle) and its contracts (for Voyages 3 and 4).
- This was a flagrant breach of director’s duties.
- Further Schmidt was able to do this only because of his position as director and the steps he had taken while still a director.
- Therefore, Schmidt’s fiduciary obligations continued after his resignation.
- The circumstance that no JV agreement was ever finalized did not mean that there was no business to expropriate. When Schmidt resigned, Voyage 3 was underway and Voyage 4 commenced in January 2014 and at trial, Schmidt conceded that these voyages were conducted on behalf of AHRKalimpa.
- Importantly, the Court of Appeal also accepted that Voyages 6 to 20 were likewise a continuation of that business. “They had the same key attributes as Voyages 1-4, They involved one of the key Israeli customers and the same confidential information that Ruschin and Bzezinski had disclosed to Schmidt. The fact that due to changed commercial circumstances [one dropped out] after Voyage 4 … does not detract from that proposition” .
- The Court of Appeal also accepted the trial judge’s finding that there had been a window of opportunity in 2013 to develop the business and that when Ruschin and Bzezinski tried to re-enter the market once they obtained an export license, their attempts “were thwarted because Otway had established trading relationships with the customers introduced by [Ruschin and Bzezinski’s company]”.
- The Court of Appeal also accepted the trial judge’s approach to the assessment of equitable compensation which is aimed “at restoring the innocent party, as nearly as possible, to the position in which he or she would have been in had the breach of fiduciary duty not occurred” .
- Equitable compensation is generally assessed at time of trial with the full benefit of hindsight and indeed, until restitution is made, breaches are said to continue. Further although dishonesty or fraud is not necessary for a breach of duty to occur, the severity of the breach and degree of culpability may be relevant.
- Here the trial judge decided that the most appropriate characterization of the loss was the loss of the business itself rather than as a mere loss of opportunity, with particular emphasis placed upon the consequences of the misappropriation of the books and records. To assess this loss (that is, to value the business), the judge applied a capitalization of future maintainable earnings methodology with the valuation occurring as close as practicable to the date of trial. The capitalization multiple was chosen to take account of risk factors generally associated with businesses of this nature.
- After assessing the capital value of the business, two thirds was then allocated to the plaintiff company which, since Schmidt’s departure, had been jointly owned by Ruschin and Bzezinksi.
- No allowance was made for the Schmidt’s skill, expertise and expenses nor was any discount made respecting the first two lossmaking voyages but neither was Schmidt called upon to account for the benefits he and his family had received while Schmidt was conducting the business, such as a director’s salary, cars and interest free loans. Further the early losses were part of the factual matrix for assessing growth and risk factors.
- Schmidt’s liability arose despite his resignation because:
- using confidential information given to him as co-joint venturer and then director, while still a JV participant and director, he took steps behind the other directors’ backs to secure the company’s business for his own benefit;
- after he resigned, he misappropriated the company’s book and records;
- then, using the company’s books and records and its confidential information, he took control of the company’s assets and thereafter continued to conduct a business that had the same key characteristics of the company’s business; and
- the opportunity to develop a comparable business was lost to the company by reason of the confined nature of the market and inevitable delays while an export license was obtained (which Schmidt would have understood through the confidential information) and because Schmidt took the opportunity himself through his misuse of confidential information and misappropriation of the books and records.
- Further as Schmidt had been found to have appropriated the business, in practical terms, the remedy was that he be ordered to pay for it but with the value of the business assessed with the benefit of hindsight at time of trial plus interest.
- Had there been a well drawn JV agreement in place, it could have regulated the relationship between the parties and even had a dispute arisen, contractual principles would probably have applied imposing less draconian duties upon the parties and different criteria respecting the assessment of loss and damage.
- Finally, if you are thinking about leaving a JV or other business partnership, get legal advice first!
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please also note that the law may have changed since the date of this article.