Court: United Kingdom Supreme Court (on appeal from [2024] EWCA Civ 423)
Subject: Fiduciary Duties, companies in liquidation, equitable compensation
Judges: Lord Hodge, Lord Briggs, Lord Sales, Lord Stephens, Lord Richards
Summary
This decision of the UK Supreme Court on fiduciary duties and equitable compensation is of relevance across a range of common law jurisdictions.
Further details
The Sheikh was a former director of a BVI company (the Company). The Company was placed into liquidation in 2011 upon which, by operation of the BVI Insolvency Act 2003, the Sheikh's powers as director ceased. At the time the Company was wound up, the Company was still the registered owner of shares in JJW Inc (a company associated with the Sheikh) (the Shares). Although the Sheikh's powers as a director of the Company had ceased, in 2016 the Sheikh (purportedly in his capacity as a director of the Company) caused the Company to transfer the Shares to another associated entity known as JJW Guernsey. The Stock Transfer Form through which the transfer occurred was backdated by the Sheikh to a date prior to the Company's liquidation. The following year, all of JJW Inc's assets and liabilities were transferred to another group company – JJW UK (the 2017 Transfer). Consequently, the shares in JJW Inc were left worthless.
The liquidators brought a claim against the director for breach of fiduciary duty and against the associated company for knowing receipt. The liquidators succeeded at trial but lost in the Court of Appeal, which held that the company had suffered no loss from the breach of fiduciary duty.
Fiduciary duties owed – On appeal to the Supreme Court, the Sheikh argued that he could not owe fiduciary duties because: (1) he had no relevant powers under BVI law at the time of the transfer of the Shares; and (2) there is a rule that a de facto fiduciary can only owe fiduciary duties where he has legal title to, or possession of, property. The Supreme Court unanimously rejected the director’s appeal:
- The Sheikh was under a fiduciary duty, irrespective of the absence of a power to transact on behalf of the Company. Fiduciary duties can arise ad hoc, including where there is an undertaking of fiduciary duty by the presumed fiduciary in circumstances where he or she has not made any conscious undertaking or considered the interests of the person to whom that duty is owed, and indeed has acted contrary to that person’s interests. If persons, although not appointed as trustees, take upon themselves the custody and administration of property on behalf of others, they are actual trustees and are fully subject to fiduciary obligations.
- It is not necessary that a person who has taken upon himself a fiduciary power to deal with property has title to or possession of that property before he can come under a fiduciary duty.
Equitable compensation – The liquidators appealed against the Court of Appeal’s finding that they were not entitled to equitable compensation because, so the Court of Appeal held: (i) there is a rule that equitable compensation is measured as at the date of trial; and (ii) in this case, the shares were worthless by the date of trial and the company therefore suffered no loss. The Supreme Court unanimously allowed the liquidators' appeal:
- There is no invariable rule that loss will be calculated as at the date of trial. When calculating an award of equitable compensation, the appropriate date to use to assess the value of what has been misappropriated is an open question which requires consideration of what is just and equitable as between the beneficiary and the trustee (or the principal and the fiduciary).
- Where a trustee or fiduciary has misappropriated trust property (or property under his fiduciary control) and the beneficiary (or principal) can prove that the property has value when misappropriated, the beneficiary suffers an immediate loss of value.
- If a defaulting fiduciary wishes to rely upon a later event as breaking the chain of causation between the breach and the beneficiary’s loss, the burden lies on the fiduciary to prove that later event and to show that it should be treated as having that impact on the analysis of causation. Without a clear and convincing innocent explanation, a defaulting fiduciary cannot rely on a later event as breaking the chain of causation where the fiduciary has or may have played some part in bringing about that later event. The Sheikh did not attempt to prove he played no significant part in and derived no significant benefit from the 2017 Transfer. Not only that, but there was sufficient evidence to indicate that he was more than just a bystander in the transfer.
