Company – Director – Breach of fiduciary duty – Dishonest assistance – First respondent with portfolio of hotels sold to companies controlled by R – R becoming director of first respondent – Hotels sold to company controlled by appellant – Appellant allegedly acting as R’s nominee – Judge holding appellant dishonestly assisted R in breach of fiduciary duty owed to company and ordering payment of compensation and interest – Appellant appealing – Whether appellant liable for equitable compensation – Appeal allowed
In May 2003, the first respondent company was sold to companies controlled by R, for between £42m and £47m. The first respondent owned a portfolio of hotels, including the Kensington Palace, Kensington Park and Lancaster Gate Hotels in London (the Hyde Park Hotels). R was appointed a director of the first respondent.
The first respondent was unable to exploit the development potential of the hotels and sold them to CM, of which the appellant was sole director, for a reasonable market price. CM then sold on the hotels to unconnected third parties for a substantial profit, which accrued to R.
The first respondent went into liquidation and issued proceedings together with its liquidator (the second respondent), alleging R had acted in breach of fiduciary duty in connection with the sale because he failed to disclose that CM was his nominee. Further, the sale to third parties constituted a further breach of fiduciary duty by R because he had made an unauthorised profit, for which he failed to account to the first respondent, from property which was subject to a fiduciary relationship.
They also sought an account of profits, equitable compensation and damages from the appellant, on the basis that he dishonestly assisted in R’s breaches of fiduciary duty and was a participant in an unlawful means conspiracy with R.
The judge concluded, amongst other things, that the appellant had dishonestly assisted R in his breaches of duty against the first respondent and ordered him to pay more than £102m as compensation for dishonest assistance together with almost £60m in interest: [2022] EWHC 383 (Comm) and [2022] EWHC 1695 (Comm).
The appellant appealed, challenging both the compensation and the interest.
Held: The appeal was allowed.
(1) Considered by itself, the first breach of duty (the sale to CM) caused the first respondent no loss. It had received the market price for the assets which it owned. Likewise, if both breaches were considered together as a single transaction or course of conduct, the first respondent had suffered no loss. It received the market price for the assets which it owned and was never in a position to obtain the profits from exploiting the development potential of the hotels which R was able to obtain.
However, the respondent contended that it could recover from the appellant, as equitable compensation, the profits made by R from the sale of the hotels (ie, compensation for the second breach) while ignoring the fact that it was only because of the first breach that those profits were able to be made.
(2) To succeed in a claim for dishonest assistance, a claimant had to prove: (i) that there was a breach of trust or fiduciary duty; (ii) that the defendant assisted in the breach; (iii) that the defendant was dishonest; and (iv) a causal link with relevant loss or gain: Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 considered.
A dishonest assistant could be held liable for personal profit. Compensation was not the only remedy available against dishonest assistants, but they could be ordered to account for any profit they had made themselves. However, a dishonest assistant was not liable to pay to the beneficiary an amount equal to a profit which they did not make and which had produced no corresponding loss to the beneficiary: Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499 considered.
Standing back from the detail, there was a single and uninterrupted course of conduct which, taken as a whole, caused the first respondent no loss. It was just that the appellant’s liability should be limited to his personal profit.
(3) The account and compensation claims were so closely connected that it would be manifestly unjust to allow the first respondent to focus exclusively on R’s failure to account for the profits once they had accrued. Whether or not the first respondent had suffered a loss should be determined by reference to the total effect of R’s scheme. The “loss” stemming from R’s treatment of the profits had to be balanced against the claim to recover those very profits which arose from the same plan. Furthermore, it did not assist the first respondent to invoke the (controversial) distinction between “substitutive” and “reparative” compensation. It was not entitled to compensation of any kind.
It had become clear that an errant fiduciary and a dishonest assistant could not be held liable for each other’s profits but only for their own, liability for loss was understood to be joint and several. To that extent, the dishonest assistant’s liability mirrored the fiduciary’s. That did not mean that a claimant could not succeed against a dishonest assistant without also bringing proceedings against the fiduciary; it was not difficult to envisage circumstances in which it could make sense to sue a dishonest assistant alone. However, if, as regards the relevant breach of fiduciary duty, the claimant had elected for an account of profits instead of compensation as against the fiduciary, compensation could not be sought from the dishonest assistant. For there to be scope for a claim for compensation for loss from a dishonest assistant, the fiduciary also had to be so liable.
(4) In the present case, the judge concluded that the first respondent’s claim for equitable compensation succeeded against R as well as the appellant. However, it was hard to see that the first respondent 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 (or at any rate one of any significance) for compensation for breach of that trust. A trust of the kind the first respondent alleged might enable it to trace profits into the hands of third parties, improve its position in an insolvency and allow the court to order a transfer in specie. However, it did not have the usual incidents of a trust.
The first respondent had not established any liability to pay equitable compensation as against the appellant. The order for the appellant to pay equitable compensation would be set aside together with the order requiring him to pay interest.
Anthony de Garr Robinson KC, Sebastian Kokelaar and Stephen Ryan (instructed by Richard Slade and Company) appeared for the appellant; James Pickering KC and Samuel Hodge (instructed by Spring Law) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Hotel Portfolio II UK Ltd and another v Ruhan and another
