Supreme Court revisits a trustee’s duty to account for unauthorised profits: Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10

Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10

Introduction

In Rukhadze v Recovery Partners GP Ltd, the Supreme Court recently revisited the previously settled law regarding a fiduciary’s duty to account for an unauthorised profit.

The Supreme Court upheld and restated pre-existing principle.

Notwithstanding, it is arguable that the Court in drawing together previously disparate strands in respect of the duty to account and in restating the law, at a minimum has re-emphasised the breadth of the duty and may have expanded the practical import of the duty, even if this was inadvertent.  The majority held that the duty to account is a standalone cause of action and not merely a remedy dependent on antecedent breach of some other duty.

The seven-member Supreme Court was unanimous in dismissing the appeal on the facts but was split on the key question of what role, if at all, causation should play.  A firm majority, 4 members joining in to support a single judgement by Lord Briggs, rejected the role of causation in respect of liability.

The issue in the appeal

The Supreme Court rejected the Appellant’s contention that there should be a “but for” style causation test imported into the test for liability such that where a fiduciary could have earnt the profit another way without breaching their duty, liability should not be imposed.  The majority of the Supreme Court preferred a quasi-strict liability approach where the duty to account does not even depend on a breach of duty, rather any profit earnt is automatically subject to a duty to account to the fiduciary’s principal.  Any injustice it appears can be resolved by fashioning an equitable remedy. The principles governing remedy were less clearly annunicated save that one mechanism is to allow for reasonable remuneration to ensure equity for a delinquent fiduciary who has expended effort to earn the profit.

The issue of an account for unauthorised profit will arise in a variety of situations where there is a fiduciary and corresponding duties: perhaps the most obvious is trustees acting in respect of trust property, but there are other situations such as directors and a company, between partners, agents acting for their principals, and solicitors acting for clients.  The categories in which fiduciary duties arise are not closed.  However, it must understood that not every duty situation will be such as to impose fiduciary duties – each case turns on its own factual matrix.

In this discussion, the terms ‘fiduciary’ and their ‘principal’ are used as might be used in an agency situation, but the same principles will equally to any situation where a fiduciary duty can be established

The rule is that before a fiduciary may properly and lawful make a profit from an opportunity discovered in the course of their duties as a fiduciary, they must obtain the fully informed consent of their principal/s; that is, the person or persons to whom the relevant duty is owed.

It is no defence that the opportunity was exploited honestly or in ignorance or that the principal had no intention of exploiting the opportunity; or even that the principal was incapable of doing so.  Neither will it be a defence that the principal jointly profited from the opportunity.  The only full defence is fully informed consent from the principal for the fiduciary to exploit the opportunity.

The facts of the case

The Claimants at first instance had obtained a business opportunity to recover very significant sums owed to the estate of a deceased billionaire.  The Claimants were acting for the family of that deceased billionaire.

The Defendants were engaged by the Claimants to assist in that venture.  The Defendants’ remuneration was a mix of salary and profit share but predominately, and significantly, the significant value in performing their functions for the Defendants was the profit share element to the remuneration.

The first instance decision and the decision in the Court of Appeal

The Judge, at first instance, found as a fact that there was an agreement emanating from the Claimant to share at least 40 percent of the profits with the Defendants.  There was a secondary finding that there was an understanding between the parties that the Defendants’ share in the profits may have increased to 50 percent.  However, that agreement was not concluded – never passing beyond a contingent future intention – and so not binding in law.

It was an important point at first instance and in the Court of Appeal that the share of profits did not arise from any property rights held or owned by the Defendants but was an element of remuneration.

The relationship between the Claimants and Defendants deteriorated in circumstances where the Defendants and the family enjoyed a solid relationship, and the Claimants were increasingly alienated from the family.

There was a negotiation concerning the transfer of the opportunity from the Claimants to the Defendants but when those negotiations broke down, the Defendants resigned and continued to provide the recovery services for the family.

There was no maintainable or sensible allegation of subterfuge, dishonesty or fraud on the part of the Defendants, but neither was it sustainable for them to argue that they were unaware of their duty to the Claimants where they had negotiated for a release of these very duties.

The first instance Judge found that the Defendants had breached their duties of undivided loyalty to the Claimant and that there was a duty to account.  The Defendants conceded (certainly by the hearings in the Supreme Court) that they had ‘teed up’ or lined up the opportunity while still working for the Claimant.

That finding led, on the state of the existing law, to finding of a liability for the Defendants to account to the Claimants for the profits earnt from working for the family.

However, the Judge found that the Defendants were entitled to an equitable accounting or offset to represent their efforts in undertaking the recovery work for the family.

The Judge took a very broad-brush approach to the issue of valuing the Defendant’s contribution and found it to be 25 percent.  There was an issue as to whether expert evidence was necessary to support or justify this finding in the Court of Appeal, with the Justices of Appeal noting that they were not convinced an expert could have formed a realistic view of remuneration in such an unusual transaction.  A broad-brush approach was all that was possible and was well within the broad discretion enjoyed by the Judge.

The finding of a 25 per cent remuneration discount on their damages, led the Claimants to appeal this finding to the Court of Appeal.  The Claimants arguing the remuneration should be less or nil and the Defendants arguing that the remuneration should be 40 or 50 percent (albeit conceding during the hearing that a discount must be made from the contractual position applying the binding precedent of Boardman v Phipps [1967] 2 AC 46.

The Court of Appeal refused to interfere with the 25 percent finding – it was within the Judge’s discretion, and it could not be said to be plainly wrong.

Significantly, the Court of Appeal found that the Judge was correct to hold that she could not make an order for the full recovery by the Defendants of the contractual or otherwise assessed value of their recovery work because the authorities (particularly Boardman) spoke of the necessity for a fiduciary to face a discount in the value of their work to discourage opportunistic exploitation of opportunities without authorisation.  If a fiduciary were guaranteed a full return on their work, then there would be an encouragement to seek the additional profit element in the copper-bottomed security that their work would be properly remunerated in any eventuality.

The Defendants were the substantial losers at first instance and in the Court of Appeal.  The Claimants reserved before the trial judge and the Court of Appeal, their position to seek to overturn the existing law; principally found in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 and Boardman v Phipps [1967] 2 AC 46.

The existing law and the appeal to the Supreme Court

As noted above, where a fiduciary earns an unauthorised profit arising out of the fiduciary relationship, that fiduciary will have a duty to account for that profit.

The duty to account has been described as “a stringent rule”; as “inflexible” in application; and effectively is akin to imposing quasi-strict liability where authority grounded in informed consent is not obtained prior to exploitation of an opportunity.

The question before the Supreme Court was whether the current test for requiring an account of profits should be altered to introduce a requirement that the fiduciary could not have made the same profit in a way that avoided a breach of duty, that is: ‘Could the same profit have been made but for the breach of fiduciary duty’?

The Defendants were seeking to introduce a test of “but for” causation.

The Defendants accepted that introducing such a ‘but for’ test would mean departing from two House of Lords authorities:  Regal v Gulliver & Boardman v Phipps

The Defendants accepted that they were advocating introducing a test of causation into the law where it had not played a role previously whether express or even on some hidden subterrain level.

The Defendants’ Counsel said in opening that the “law is settled but not on firm foundations” and so they were quite clear that they sought a wholesale revision of the existing law.

As noted above, the appeal point in the Supreme Court was not fully articulated much less decided in the context of the first instance Judgment or in the Court of Appeal.  Rather, the Defendants had reserved the position to argue on any eventual appeal to the Supreme Court.

As to the existing law, first turning to Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134:  It will be remembered that this case concerned a company (Regal) that owned and operated a cinema in Sussex.  There was an opportunity to take on leases for two more cinemas.  The company could only afford part of the purchase price, and directors of Regal took up the remaining shares.  The company and the directors, as joint shareholders in the new venture, all made profits but the other Regal shareholders put in issue the lack of authorisation of the directors’ profits.  There was no suggestion of fraud or wrongdoing on the part of the directors as it was clear that the company shared in the opportunity.

However, the governing principle was succinctly stated by Lord Russell of Killowen:

“The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”

Equally, the breadth of the principle is apparent from Boardman. It will be recalled that in Boardman, that Mr Boardman was a trustee of a trust that held a 27 per cent shareholding in a third-party company.  Mr Boardman formed the view that to protect the trust’s interests, a majority holding in the company was required.  Mr Boardman did not seek the fully informed consent of the trust’s beneficiaries before he took a personal sharing holding in the Company.  Out of the transaction eventually both the trust and Mr Boardman realised a profit for the turnaround of the company – entirely consistent with Mr Boardman’s plan.  However, a beneficiary alleged a conflict and sought an account of profit.

Wilberforce J ordered just such an account but provided for the reasonable remuneration of Mr Boardman with a discount to discourage future breach of duty.  The Court of Appeal upheld Lord Wilberforce’s approach.

These cases established the breadth and inflexibility of the rule as liability did not depend on dishonesty or seemingly whether the principal could exploit the opportunity; or even whether had the fiduciary acted differently, the principal might have made a loss (as arguably was the case in Boardman).

The duty to account arose purely and simply from the lack of authorisation.

Conclusions: Supreme Court restating or broadening the no profit rule

 Thus, the question in seeking to lessen the impact of the “inflexible rule” is whether there is a role for causation and specifically “but for” causation which in turn invites a consideration of hypothetical counter-factuals.

It appears to be accepted near universally that there must be some link or connection between the fiduciary relationship and the unlawful profit.  Further, it is always important to consider the factual matrix in which the duties are said to arise to ensure there is a fiduciary relationship at all.  However, for liability to be imposed there has never been a question of a formal causal link or causal connection – the question has been a more informal question of whether the wrongful conduct of the fiduciary is linked to the profit gained.

The Appellants were seeking to argue that causation was relevant in assessing a counterfactual – what might have happened if the Appellants had made their profit lawfully.  The most extreme version of such an argument would be where it could be argued that the principal would have authorised the profit had they been asked at the time.

Lord Briggs (with whom Lord Reed, Lord Hodge, and Lord Richards agreed) did not consider this link to be about causation and the key justification is that the duty to account does not depend on proof of any actionable loss; it is a duty to disgorge wrongful gains.

It had often been thought that the duty to account arose from a breach of the duty of undivided loyalty, but the majority did not posit the correct approach as depending on breach of any other duty at all; it arose from a profit made where there was a want of proper authorisation.  As Lord Briggs noted (at para 20): “It is in my view of particular importance in the present context to note that the fiduciary duty to account for profits is a rule governing the conduct of fiduciaries which exists in its own right.”

Lord Leggatt in his dissent argued that the link between the duty and the profit required a consideration of causation.  However, His Lordship found that causation was made out on the facts of the appeal and joined the majority on the outcome on the facts.

Lords Burrows and Rose each focused on the public policy behind the no-profit rule and whether it was appropriate to over-turn Regal and Boardman where it was implicitly accepted causation played little to no role; to which both answered “no”.

Thus, the outcome on the facts of the appeal was unanimous; the rationale varied.

A secondary question is then whether causation has any further formal or informal role in fashioning the remedy when taking an account.  In this regard, there is then the question of the extent of the profit to be subject of the account.  First, should the account of profit be limited in time or by reason of causation more generally?  Second, there is a perhaps separate (but important) issue as to whether the fiduciary should be rewarded for their effort in exploiting the opportunity and achieving the profit for which they must then account.

After Rukhadze, the focus for those defending clients where an account of profits is being sought, must be on the latter of those two considerations and the question of whether a duty to account ceases after a period of time may be a very difficult argument to mount in the future.

In relation to the first question that is whether causation principles can ground a time limit to the account, there is these dicta of Lord Briggs (at para 41):

“My acknowledgement that an element of factual causation often plays a part in the identification of profits for which a fiduciary owes a duty to account does not mean that causation, even of this non-“but for” kind, is a condition for the identification of such profits in every case. Sometimes fiduciaries receive or make profits for which they are plainly accountable, without the need for any causative analysis. For example, a company director who keeps for himself rents paid by a tenant of company-owned property is plainly liable to account to the company.”

However, these dicta appear to be more addressed to the question of whether the profit arises in a duty situation in the first place, rather than whether the duty to account would at some point cease due to a lack of causative connection.

Watch this space as the lower Courts attempt to unpick Rukhadze v Recovery Partners GP Ltd, particularly as to the scope of the account.