Anthony de Garr Robinson KC successfully argued that equitable compensation and interest of £160 million was not available against the appellant despite his dishonest assistance in a breach of fiduciary duty and a subsequent breach of constructive trust. The Court of Appeal accepted that, on proper analysis, the breaches which he dishonestly assisted should not be seen as separate and distinct and their net effect was to cause the claimant no loss whatsoever. The Court also grappled with several interesting points of law in this difficult area.
The Facts
In 2005, Hotel Portfolio II UK Limited (“HPII”) sold three hotels to a Madeiran company (“Cambulo”). Cambulo appeared to be under the control of Anthony Stevens, whereas in fact Mr Stevens was acting as a nominee of Andrew Ruhan, then a director of HPII. By this means, Mr Ruhan concealed from HPII that he was the true purchaser of the hotels. However, the hotels were sold at market value and HPII suffered no loss as a result of the sale.
Between 2006 and 2008, Cambulo sold the hotels to third parties for a total profit of c. £102m. This money was dissipated
At first instance, Foxton J held that Mr Ruhan breached his fiduciary duty by failing to disclose his interest in Cambulo. Accordingly, he was liable to account for the £102m profit he made from the on-sale of the hotels. Mr Ruhan was also found to have breached his duty as a constructive trustee of that £102m profit by dissipating it. Mr Stevens was found to have dishonestly assisted those breaches. In respect of the second breach, he was ordered to pay equitable compensation of £102m, and compound interest of almost £60 million. He appealed.
The Court of Appeal set aside both the equitable compensation order and the compound interest order. The leading judgment was given by Newey LJ, who provided a powerful analysis of the dense patchwork of leading cases in this notoriously complex area.
“Single and Uninterrupted Course of Conduct”
The key point was Newey LJ’s categorisation of Mr Ruhan’s breaches, and Mr Stevens’ assistance, as a “single and uninterrupted course of conduct”, thus accepting Tony de Garr Robinson’s submission that there was an inextricable link between, on the one hand, Mr Ruhan’s ultimate disposal of the hotel profits for his own ends and, on the other, his breach of the self-dealing rule which allowed him to effect the sale of the hotels in the first place. That being so, Mr Steven was liable only to account for the profits he had made out of his dishonest assistance. He could not be liable for equitable compensation as HPII had suffered no loss as a result of Mr Ruhan’s conduct.
Newey LJ accepted Tony de Garr Robinson’s submissions based on Barlett v Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] 515, in which Brightman J held that where a breach of trust gave rise to both loss and gain for the beneficiary, in assessing the compensation payable it would be unjust not to set off the gain against the loss where the loss and gain were occasioned by a single transaction (as opposed to separate and distinct breaches). In addition, Newey LJ accepted that a helpful analogy was provided by the way in which equity allows competing claims to be set off against one another. In Geldof Metaalconstructie NV v Simon Carves Ltd [2010] 1 CLC, Rix LJ considered the circumstances in which equitable set-off is available. Newey LJ said:
“To adopt language used in ... Geldof, the account and compensation claims are, as it seems to me, “so closely connected” that it would be “manifestly unjust” to allow HPII to focus exclusively on Mr Ruhan’s failure to account for the profits once they had accrued. Whether or not HPII has suffered a loss should be determined by reference to the total effect of Mr Ruhan’s scheme. To put things differently, the “loss” stemming from Mr Ruhan’s treatment of the profits must be balanced against the claim to recover those very profits which arose from the same plan.”
Other interesting aspects of the appeal:
1. A re-examination of JJ Harrison (Properties) Ltd v Harrison [2002] BCC 729
Foxton J’s decision to award equitable compensation against Mr Stevens was based on his application of the well-known decision of Chadwick J in JJ Harrison. The judge relied on this case in holding that the hotels were held on a constructive trust for HPII immediately after their sale to Cambulo, such that the profits generated by the on-sale of the hotels were likewise held on constructive trust. On this view, there were two distinct breaches in which Mr Stevens had dishonestly assisted: firstly, the breach involving the original sale of the hotels to Cambulo; secondly, the breach involving the retention and dissipation of the subsequent profits.
Newey LJ re-examined the ratio in JJ Harrison: on his analysis, Chadwick J had not held that a constructive trust arises automatically whenever a fiduciary breaches the self-dealing rule. Such a holding would conflict with a substantial body of authorities showing that self-dealing transactions are voidable rather than void.
Rather, the constructive trust in JJ Harrison arose because the defendant director of the claimant had purchased land from the company having failed to ensure it was sold at its full market value, thus breaching his duty to act bona fide in the interest of the company. The sale was thus unauthorised. On this view, the case was a misappropriation case, not a self-dealing case.
HPII did have a proprietary claim over the profits made from the on-sale of the hotels, but this was because Mr Ruhan was a fiduciary and his profits were unauthorised. The grounds on which the trial judge had found separate breaches of duty by Mr Ruhan were undermined.
2. Election and inconsistent remedies
In an obiter passage, Newey LJ mooted the possibility that the appeal might have been allowed on the ground that, as equitable compensation and an account of profits are inconsistent remedies, a claimant cannot seek equitable compensation from a dishonest assistant if he has already sought an account of profits from the fiduciary.
3. No custodial duty is owed by a constructive trustee?
Most interestingly, Newey LJ doubted whether a claimant in HPII’s position could ever both elect in favour of an account of profits without which there would have been no trust, and pursue a claim for compensation for breach of that trust. In this connection he re-affirmed a special feature of constructive trusts set out by Millet J in Lonrho plc v Fayed [1992] 1 WLR 1 at 12:
“It is a mistake to suppose that in every situation in which a constructive trust arises the legal owner is necessarily subject to all the fiduciary obligations and disabilities of an express trustee.”
Anthony de Garr Robinson KC appered for the successful appellant, instructed by Richard Slade and Co. A copy of the judgment is below.
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