The English Law 'account of profits' remedy clarified

The UK Supreme Court, in the recent case of Rukhadze v Recovery Partners GP Limited , decided that the equitable duty on fiduciaries (such as trustees and directors) to "account" to their principals for any profits made in connection with their capacity as a fiduciary is to be applied strictly. This means that if unauthorised profits are made that are sufficiently connected to the fiduciary relationship, the principal is entitled to recovery of those profits regardless of whether the principal could have made the profits if the fiduciary did not or the fiduciary could have made the profit without a breach of duty.

The duty to account

The duty to account for profits is a strictly applied equitable principle. Company directors, trustees and other fiduciaries are expected to "act with single-minded loyalty toward their principals (or beneficiaries)" and, therefore ,must account to those principals or beneficiaries for any profits made from the relationship, unless the principal has given their informed consent to the profits being retained.

Under the current law, any profit or benefit accrued by individual directors or trustees as a result of their fiduciary role is automatically considered to be the property of the company or trust.

Traditional defences – for example, the argument that the profits would have been made regardless of the fiduciary appointment (that is, a "but for" counterfactual) – will not be considered.

Rukhadze v Recovery Partners GP

In Rukhadze, the defendants were three former directors (or other fiduciaries) of a company that provided asset recovery services. The company had a lucrative business opportunity with a potential client, which the defendants went on to develop (and profit from) on their own account after they parted ways with the company on acrimonious terms in 2012. The company later claimed that the defendants had breached their duties as fiduciaries and sought an account of profits.

At first instance, the High Court agreed that all three defendants had breached their fiduciary duties – the defendants had deliberately bad-mouthed the company in order to win the contract and had earned net profits of $179 million as a result. The court allowed an equitable allowance of 25% for the appellants' work and skill but awarded the remainder (a total of $134 million plus interest) to the claimant.

On appeal, the Court of Appeal rejected the defendant appellants' submission that a "but for" causation test should be applied. In essences, the defendant appellants sought to argue that they would have been awarded the contract (and received substantial profits) even had they not acted in breach of their fiduciary duty. The defendant appellants were given permission to appeal to the Supreme Court.

The Supreme Court unanimously concurred that the "but for" causation test should not be applied and, as a consequence, the duty to account for profits is to be strictly applied where a fiduciary makes unauthorised profits from the fiduciary relationship.

Osborne Clarke comment

The Supreme Court's decision sets a strict, "bright line" test for the application of the account-of-profits rule and remedy and is a reminder of the high standard of "single minded loyalty" expected of company directors and the stringency with which the court will approach directors, trustees and other fiduciaries that make unauthorised profits from their position.

Company directors, trustees and others in fiduciary positions should be alive to the consequences of benefiting from information or opportunities gained via their appointments (whether or not the appointment has ended) and, if in doubt, ensure that proper authority is received from their principals.