UK Supreme Court – fiduciary duties decision

Last week, the UK Supreme Court gave an important decision about fiduciary duties – in Rukhadze v Recovery Partners GP Ltd.  The decision has implications for company directors and others with fiduciary duties – because it makes it clear that, if they profit from their position as a result of breaching their duties, they may have to disgorge all of the profits.

The background to the case sounds quite exotic.  And the case and the resulting judgments are quite long.  In simple terms, three individuals working for a corporate advisory firm who had been appointed to pursue a lucrative ‘recovery services’ business opportunity for a Georgian oligarch, decided to leave the firm and pursue the opportunity for their own benefit.

At first instance, they were found to have breached fiduciary duties owed to their principal (their former firm).  On the taking of an account of profits, they were found to have earned around USD $170m from the pursuit of the business opportunity.  Consequently, they were ordered to account to the principal (former firm) for the entire amount of those profits – less a 25% equitable allowance to reflect the work they had done in generating it.

On appeal to the Supreme Court, the three argued that the law concerning a fiduciary’s obligation to account for profits earned from a fiduciary position was too harsh.  Instead, they argued that they should only be required to account for the difference between:

• profits that they actually earned, and
• profits that they would hypothetically have earned if they had not breached their fiduciary duties.

The difficulty with this line of argument is that they were asking the Court to depart from two previous, and long-standing, decisions of the UK House of Lords which established that a ‘but for’ approach to causation is inappropriate in this context.

The UK Supreme Court delivered four judgments – each giving different reasons for concluding that the appeal must be dismissed.  The majority judgment held that the obligation to account for profits was an essential feature of a fiduciary obligation, that it was well-established that it did not depend on any counterfactual (‘but for’) analysis, and that there was no compelling reason for departing from the earlier decisions.

Explainer:  fiduciary duties

Directors owe fiduciary duties to their company.  But other relationships of trust and confidence give rise to such duties – where someone undertakes to act for or on behalf of another.

The core obligation in such a relationship is said to be that of loyalty.  In this context, loyalty requires the person (in whom that trust is placed) to act in good faith and to refrain from benefitting from their position without informed consent.  It extends to a duty not to exploit information or opportunities (or property) received through their position. [This is not thinly-veiled, international, political commentary].

Besides company directors, fiduciary relationships arise in trustee / beneficiary relationships.  And they also can arise in some commercial arrangements (i.e. contractually).

Takeaway – for company directors

The decision is important for company directors (and others with fiduciary duties).  If a fiduciary profits from their position as a result of a breach of their duties, they expose themselves to liability to repay the whole amount.  This is so even if they conceivably could have made the same profit without any breach.

For company directors, it is important to note that the duty of loyalty (the duty spelled out in section 131 of the Companies Act to act in good faith and in what the director believes to be the best interests of the company) – means that conflicts of interest must be handled appropriately.  Typically, this means that they must be avoided.  And fiduciaries must not use their positions for personal gain – except with the (fully informed) consent of the principal which must be obtained in advance.

For more information, please contact me.