Many lawyers will remember from law school the strict "no profit" rule in Boardman v Phipps [1967] 2 AC 46 for those in fiduciary positions, including trustees and company directors. The "no profit" rule provides that a fiduciary must account to the principal for any profits made by the fiduciary from the fiduciary relationship (by, for example, paying those profits to the principal or treating the profits as the principal's property), unless the principal has given its informed consent that the fiduciary may keep them.
In Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, the UK Supreme Court was asked whether a fiduciary's liability to account for unauthorised profits should include all profits that have been earned from the fiduciary's breach of duty, or whether the Court should consider the hypothetical "but for" situation and only require the fiduciary to account for the difference between their actual profits, and what they would have hypothetically earned if they had not breached their obligations. This is an important decision for anyone considering resigning from their fiduciary position and setting up a competing business.
The Supreme Court was required to consider two long-standing House of Lords decisions, Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 and Boardman v Phipps in determining the appeal. The Supreme Court unanimously dismissed the appeal, giving separate judgments containing different reasons for their decisions. The majority was clear in its view that the rigour of the "profit rule" is a fundamental aspect of the fiduciary relationship and the severity of the law acts as a deterrent to a fiduciary's departure from their undertaking of single-minded loyalty to the principal.
Background
The dispute arose when the appellants negotiated and provided 'recovery services' to the family of a wealthy Georgian businessman, Arkadi Patarkatsishvili (Badri), after leaving their previous employer, Salford Capital Partners Inc. (SCPI). The appellants held senior positions with SCPI, which had been engaged by Badri’s family to recover and manage the disorganized and dispersed assets of Badri's estate.
The contract that the appellants secured with the Badri family was lucrative. Shortly after the appellants' completion of the recovery services, SCPI sued for an account of profits, alleging breach of fiduciary duty as the appellants had exploited business opportunities and confidential information acquired in their fiduciary capacities at SCPI, to benefit themselves in dealings with the Badri family.
The appellants argued that applying the "but for" causation test, they should not have to account for any profits at all. The appellants argued they had resigned from SCPI before any disloyal steps were taken and SCPI would not have received the incentive payment in any event.
The Supreme Court disagreed and dismissed the appellate challenge.
Lord Briggs for the majority
Lord Briggs delivered the majority opinion for the Court. He noted that the "no profit" rule exists as a duty in its own right, and it is not simply a remedy in the case of breach of trust. The duty to account arises on receipt of the profits made from, out of, or otherwise sufficiently connected with the fiduciary relationship. The purpose of the rule is to deter fiduciaries from undertaking the conflicting activity in the first place.
Lord Briggs was not persuaded by the appellants' arguments and concluded that introducing a "but-for" test (ie, showing that the profit would have been made even without breach of duty) to identify accountable profits would undermine the fundamental principle of a fiduciary's single-minded loyalty. His Lordship commented that, in this situation, the appellants had "embarked on a course of conscious disloyalty to the principals while in office as directors" and reaped the profits after leaving their fiduciary post.
In Lord Briggs' view, the law, as it currently stands, acts as a sufficient deterrent to a fiduciary to avoid a possible breach, with the account of profits being a virtual certainty, and the equitable allowance for a fiduciary's work in generating the profits being a discretionary remedy.
Lord Leggatt
Lord Leggatt agreed with the outcome of the majority judgment, but for different reasons.
His Lordship noted that it was commonplace to express the "profit rule" as being that "a trustee or other fiduciary must not make a profit out of his trust".1 In his Lordship's view, this is a misrepresentation which has the effect of treating the consequence (in some cases) of a breach of a fiduciary duty as if it were itself the breach.2
The true principle is that the fiduciary is under an ongoing duty to not use any property (including confidential information or any opportunity that is the principal's exclusive right to exploit) for the fiduciary's own benefit, or for any purpose outside of the scope of the fiduciary's authority, and this duty persists even after the termination of the relationship.
Where the fiduciary breaches this duty, the principal is entitled to seek one of the following remedies:
- Compensation from the fiduciary for any loss suffered by it, as a result of the breach; or
- An account of profits by the fiduciary, as a result of the breach (or to claim a proprietary remedy).
To determine a 'causal link' between the breach and any recoverable loss or profit, the Court must apply the "but for" test of causation. In Lord Leggatt's view, the application of the "but for" test is already a requirement in the law to demonstrate a causal connection between the profits for which the defendant is liable to account and the breach of fiduciary duty.3
On this analysis, Lord Leggatt considered that the appellants were liable and were rightly ordered to account for the profits made, subject to an equitable allowance for the work done to generate the profits.
What do we expect this to mean for New Zealand?
The divergent opinions from the Supreme Court indicate some ongoing debate about the appropriate causation considerations when investigating breaches of fiduciary duties, and any profits that may have flowed from those breaches.
The Singaporean Court of Appeal in UVJ v UVH [2020] SGCA 49 has applied a "but for" test similar to that provided by Lord Legatt in his opinion, and it remains unclear precisely what direction our Supreme Court might take if asked to consider this issue afresh.
What is clear for fiduciaries, including company directors, is that they must carefully consider their roles and responsibilities, including their obligations of loyalty to the company. Conflicts of interest must be avoided, and fiduciaries must not use their positions for personal gain except in cases where the fully informed consent of the principal has been obtained in advance.
This article was co-authored by Eilis Donnelly (senior solicitor) and Hēmi Daly (law clerk).
1Judgment of Lord Leggatt at [93].
2Judgment of Lord Leggatt at [93] – [94].
3Judgment of Lord Leggatt at [172].
