Supreme Court underscores high standards expected of fiduciaries

The Supreme Court’s decision (113 pages/624 KB) “underscores the critical role of judicial precedent in our legal systems across the UK”, said Chris Dryland, litigation expert at Pinsent Masons. Judicial precedent ensures consistency and predictability in the application of the law, and in this instance, provides a clear framework within which fiduciaries must operate.

Dryland said: “This case reaffirms the established principle that fiduciaries must account for any profits made from their fiduciary relationship unless the principal has given fully informed consent for the fiduciary to retain those profits.” 

In this case, Irakli Rukhadze, Igor Alexeev, and Benjamin Marson, along with several associated entities (the appellants), were found to have breached their fiduciary duties by diverting a business opportunity away from their employer, Recovery Partners GP Ltd, and exploiting it for their own benefit. The lower courts had ordered the employees and associated entities to pay the profits made from this business opportunity to Recovery Partners. The appellants challenged this decision, arguing that the current test for an account of profits should be modified. They proposed that a fiduciary should only be required to repay profits if it could be shown that the same profit could not have been made without a breach of duty.

The Supreme Court, however, rejected this argument. The court reaffirmed the traditional equitable principle that fiduciaries must account for any profits made from their fiduciary relationship unless the principal has given fully informed consent for the fiduciary to retain those profits. The judges in this case emphasised that the duty to account for profits is a fundamental aspect of the fiduciary relationship, highlighting the importance of adhering to established legal principles to maintain the integrity of fiduciary relationships.

Kirsty Gallacher, litigation and regulatory specialist at Pinsent Masons, said: “The judgment illustrates the very high threshold which must be overcome to justify a judicial change in the law and a departure from enshrined principles of legal precedent.”

The ruling has significant implications for company directors, who are often in positions of trust and must be mindful of the complex and onerous obligations placed on them as fiduciaries. Directors are required to act in the best interests of the company and its shareholders, prioritising the company’s success over personal gain. This includes the duty to account for any profits made from their position, ensuring transparency and accountability.

Gallacher said: “The ruling serves as a useful reminder of the origins of why directors of companies are in law treated in an analogous position   to beneficiaries of a trust.”

The Supreme Court decision also highlights that the duty to account for profits is not limited to a specific timeframe but instead extends throughout the duration of the fiduciary relationship and beyond.

Gallacher said: “The continuing nature of the fiduciary duty to account, even after the end of the fiduciary relationship, is fairly onerous. Post-termination profits derived from, or made out of, a former fiduciary relationship will still be caught. It is something to bear in mind when a fiduciary relationship ends and one of the parties begins a new venture in a similar field.”