Called to Account: Directors cannot keep profits made from a fiduciary relationship

The Supreme Court has provided a landmark judgment concerning directors’ duties, in particular their (and other fiduciaries’) obligations not to make profit which arises from the fiduciary relationship, without fully informed consent. Company directors and other fiduciaries, as well as companies themselves, should take note.

What is a Fiduciary?

A fiduciary is someone who is required to act in the best interests of another party, prioritising their client's interests above their own. This includes directors, who owe fiduciary duties to their company, and trustees, who owe fiduciary duties to the beneficiaries of the trust. 

Case Overview

Recovery Partners GP Ltd and another v Rudhadze and others UKSC 10 involved claims against several individuals who had been involved in providing asset recovery services to the family of a deceased Georgian businessman. The individuals in question all resigned from their former employers (SCPI and Revoker LLP), where they all had directors/partners roles and to whom they owed fiduciary duties. On leaving that employment they established a new corporate structure, secured the contract to provide services and made substantial profits. The former employers sued, claiming “account of profits” (that all profits the former directors made should be surrendered) based on breaches of fiduciary duties (that all directors owe to their companies). 

Arguments and Supreme Court decision

The former directors argued that an account of profits should be limited to cases where the profits were directly caused by breaches of fiduciary duties and would not have been made otherwise. They said that the law should be changed to allow fiduciaries to keep profits that were not caused by a breach of duty, or which the principal (in this case, the former employer) would have allowed them to keep.  

However, the Supreme Court upheld the decisions of the lower courts, which found that the former directors had committed breaches of fiduciary duty and were liable to account for the profits made from the business opportunity. The court emphasised that the fiduciary duty to account for profits is a strict one, and the directors could not defend their retention of the profits by arguing that they would have made them anyway or that the principal would have consented if asked. Importantly, the Supreme Court confirmed that the duty to account for any profit does not require a breach of any other duty.  It is an inherent part of the fiduciary relationship. 

Significance of the decision

This decision is important for several reasons:

1. Fiduciary Duties: The Supreme Court's ruling reinforces the strict nature of fiduciary duties, particularly the duty to account for profits made from a fiduciary position. It underscores the principle that fiduciaries must act with “single-minded loyalty” towards their principals and cannot retain profits made from their fiduciary relationship without fully informed consent.
2. No requirement to consider a “counterfactual”: While there must be a connection between the profits made and the fiduciary relationship, it is not necessary to show that the profits were made directly from a breach of that duty or consider a “counterfactual scenario” where no breach occurred.
3. Clarification of Equitable Principles: The judgment highlights that the duty to account for profits is an inherent aspect of the fiduciary's obligation of loyalty and is not merely a remedy for breach of duty.
4. Deterrence of Breaches: By upholding the strict enforcement of fiduciary duties, the decision serves as a deterrent to fiduciaries who might be tempted to exploit their position for personal gain. It emphasises the importance of obtaining informed consent from principals before engaging in activities that could lead to conflicts of interest.

Conclusion

This judgment should serve as a stark reminder to company directors and business owners, as well as others in a fiduciary relationship. It reinforces the need for directors to adhere to high standards of conduct and to avoid situations where their personal interests conflict with their duties to the company.

If you have any queries about directors' duties or need legal advice on fiduciary responsibilities, it is crucial to seek professional guidance and receive tailored advice on navigating complex fiduciary relationships.