Dishonestly assisting directors: Hotel Portfolio II UK Limited v Ruhan and others [2023] EWCA Civ 1120

In the judgment at first instance, Foxton J found that the Director was liable for breach of trust and fiduciary duties owed to the Claimant by:

1.       acting in conflict between his interests and his duty to the Claimant (the "conflict duty");

2.       making an unauthorised profit (the "profit duty"); and

3.       failing to account for and dissipating the proceeds of the eventual onward sale of the three hotels which were held on constructive trust in favour of the Claimant (the "breach of trust").

The Dishonest Assistant was found to have dishonestly assisted these breaches of fiduciary duty by purporting to be in control of the Purchasing Company and applying the profits from the onward sale for the Director's purposes on the Director's instructions.

Foxton J awarded the Claimant the following:

1.       an account of profits of £102 million (plus compound interest of £60 million) against the Director for breaching his fiduciary duties on the original sale; and

2.       equitable compensation of £102 million (plus compound interest of £60 million) against the Dishonest Assistant for assisting the Director's breach of trust in dissipating that profit.

The Court of Appeal heard an appeal from the Dishonest Assistant who accepted that he was liable to account for any profits that he made personally but disputed that any award of equitable compensation could be made against him (and further claimed that the Foxton J had no power to order him to pay compound interest).

As summarised below, the Court of Appeal held that the Dishonest Assistant was not liable to pay equitable compensation and further set aside the award of compound interest on that basis.

The law and the Court of Appeal decision

The Claimant's position was that it was seeking: (i) an account of profits against the Director arising from the Director's breach of fiduciary duty in the original sale of the hotels; and (ii) equitable compensation against the Dishonest Assistant arising out of the separate breach relating to the disbursement of the profits held by way of constructive trust in its favour.

The Court of Appeal rejected this distinction between the breaches and concluded that the breaches were inextricably linked: the profits realised by the onward sale "brought to fruition the scheme on which [the Director] had embarked with the acquisition of the hotels"[1]. The Director's ultimate disbursement of the profits for his own purposes was only possible as a result of the Director's self-dealing in the original sale and the proceeds ultimately dissipated in breach of trust were only held on trust in the first place because the Director was liable to account for his profit as a result of his breach of fiduciary duty on the original sale.

In so finding, the Court of Appeal accepted the submissions on behalf of the Dishonest Assistant in reliance on Barlett v Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] 515 in which Brightman J held that a claimant is not entitled to recover from a trustee the loss suffered as a result of one breach of duty while ignoring a gain obtained as a result of another breach of duty arising in the "same transaction" – in that case a series of speculative property transactions.

The Court of Appeal also considered the case of Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667 and drew an analogy between the facts in this case and the concept of equitable set off, whereby cross-claims made by a defendant will be set off against a claimant's claim if the two claims are so closely connected that it would be manifestly unjust to allow the claimant to enforce their claim without taking into account the defendant's cross-claim.

On that basis, and on the facts of this particular case, Newey LJ held that the Director's breaches of his profit duty and the conflict duty on the one hand, and his breach of trust in dissipating the profits on the other, were "“so closely connected” that it would be “manifestly unjust” to allow [the Claimant] to focus exclusively on [the Director's] failure to account for the profits once they had accrued." [2] As the Director's breaches were part of the same transaction, it was necessary to consider the "total effect" of the Director's scheme and whether that transaction overall caused loss to the Claimant. On that question, the Court of Appeal decided that the Claimant had suffered no overall loss. The Court of Appeal therefore found that the High Court had been wrong to give judgment against the Dishonest Assistant in the amounts of the profits which had accrued to the Director (citing also Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) and Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908). To hold otherwise would in effect hold the Dishonest Assistant liable for profits made by the Director in circumstances where the law had chosen not to do so and, even in the words of Foxton J himself, "elides many of the distinctions between claims for an account of profits and claims for equitable compensation"[3].

The case demonstrates that while a dishonest assistant is liable, jointly and severally with the fiduciary, for all the recoverable losses caused by the breach assessed by reference to the overall effect of the fiduciary's conduct, a dishonest assistant is only liable to account for profits made by him personally.

Alternative and inconsistent remedies

Newey LJ further suggested (obiter) that as the Claimant elected for an account of profits against the Director, it may not be open to the Claimant to claim equitable compensation from the Dishonest Assistant as the Claimant has chosen between inconsistent remedies: "I find it hard to see that [the Claimant] could both have made the election in favour of an account of profits without which there would have been no trust and have had a claim… for compensation for breach of that trust."[4]

The claim for equitable compensation against the Dishonest Assistant is a claim for loss: if the Director pays £102 million to the Claimant or holds an equivalent sum on trust for the Claimant, then the Claimant would have been in the same position as if the Director had complied with their trust duty and not dissipated the assets.

While it was not the focus of the appeal, the Court of Appeal's judgment also dealt with some interesting issues regarding the claims and remedies available against the Director. One such issue was Foxton J's finding that the Director held the hotels (or more precisely his beneficial interest in the hotels) on a constructive trust for the Claimant immediately after their sale to the Purchasing Company, such that the profits generated by the onward sale were also held on constructive trust.

Trust over the proceeds of the onward sale

The Court of Appeal held that a trust does not automatically arise where a fiduciary purchases property in breach of the conflict duty in the absence of a claimant electing to rescind the transaction. However, the Director did automatically hold the profits of the sale of the property on trust for the Claimant as he made an unauthorised profit as a fiduciary and was obliged to account to the Claimant for that profit, applying the Supreme Court's reasoning in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45.

The Court of Appeal considered (obiter) what the position would have been if the Claimant elected to claim equitable compensation against the Director rather than an account of profits. The trust which would otherwise have arisen would be treated as never existing, as the trust arises from the Director's obligation to account for any benefit made as a result of the transaction in breach of fiduciary duty by making an unauthorised profit.

The case is an interesting illustration of the remedies which are available against directors who breach their fiduciary duties and against those who assist with such breaches. The Court of Appeal's common-sense conclusion meant that the Claimant was not able to circumvent the current law confining the dishonest assistant's liability to the profits they have personally made, to profit out of its own election on remedies against the Director or to increase the sums recoverable by relying on the Director's conduct in an artificially granular and isolated fashion.

Where breaches are part of a continuous course of conduct, it is necessary to consider whether that transaction caused loss to the claimant overall in considering claims for equitable compensation. In this case, the Court of Appeal determined it would be "manifestly unjust" to hold the Dishonest Assistant liable to pay compensation for the profits obtained for the onward sale of the hotels without considering the broader context of the transaction, whereby those profits could not have been obtained by the Claimant itself, and had only been obtained the Director "as part of a single scheme to generate a profit from the development of the hotels".[5]