Breach of Fiduciary Duty - What Action Can Be Taken?
The Court of Appeal considered the equitable remedies available against a company director.
Facts
Mr Clegg and Mr Pache were joint shareholders and directors of GAP Steel Trading Limited (GAP). GAP traded with, amongst others, a separate limited company called Focusplay Limited (FPL), in what were believed to be ordinary arms' length business transactions.
In 2007, Mr Clegg discovered that from 2004 Mr Pache had been carrying on a steel trading business for his own benefit through FLP, which he beneficially owned and controlled. Mr Pache had therefore been acting in breach of fiduciary duty to GAP. Despite Mr Clegg's objections, FPL continued to trade for GAP's benefit. GAP went into insolvent administration in December 2008. Mr Pache died in October 2010 and GAP's administrators assigned all of GAP's claims arising out of Mr Pache's misconduct to Mr Clegg. He brought claims against Mr Pache's Estate, FPL and Mrs Pache, in relation to payments which Mrs Pache had knowingly received from FPL and which resulted in her unjust enrichment. The judge at first instance ordered the Estate to account for the profits derived from Mr Pache's breaches of fiduciary duty or to pay equitable compensation for GAP's loss. The judge also granted a money judgment against the Estate in respect of the balance which he found owing on Mr Pache's directors' loan account with GAP, however this was reduced to reflect what the judge found was Mr Clegg's breach of fiduciary duty on the basis that Mr Clegg knew of the breach of fiduciary duty from 2007 onwards. All personal claims against Mrs Pache were dismissed.
Mr Clegg was unhappy with the ambit of, and restrictions upon, the account ordered against the Estate, the quantum of the money judgment against the Estate and the dismissal of his claims against Mrs Pache. He therefore appealed to the Court of Appeal.
Decision
The Court of Appeal (CA) upheld the appeal.
Account for profits - the CA was satisfied that all of FPL's profits during the relevant period should be accounted for, with the exception of such transactions or profits as the Estate could show were independently undertaken or earned. In light of the active steps taken by Mr Pache to conceal his personal involvement in FPL during the majority of the relevant period, justice required that the burden upon Mr Clegg in relation to identifying individual transactions should be reduced.
Deduction to reflect Mr Clegg's breach of fiduciary duty - even if the judge had been entitled to treat Mr Clegg, from 2007 onwards, as being in breach of fiduciary duty jointly with Mr Pache, the burden of responsibility for those breaches fell squarely on Mr Pache. Mr Clegg protested against Mr Pache's behaviour, but his concerns were ignored - at one point, he was told to mind his own business. There was therefore no basis for apportioning any liability to Mr Clegg for GAP's loss.
Unjust enrichment - Mrs Pache maintained, and the High Court judge accepted, that she did not know that the payments which she was receiving involved a breach of Mr Pache's fiduciary duty. However, the CA held that she had advanced no defence to liability in unjust enrichment and therefore the claim against her should not have been rejected.
Best Practice
The CA decision indicates an important approach to the question of burden of proof in a case involving account for profits. The CA held that where a defendant is liable to account, the usual burden of proof is reversed. In effect, this means that a Claimant does not need to prove a connection with the breach of fiduciary duty and certain specified transactions, but rather for the defendant fiduciary to show that their profits were not received as a consequence of the breach of fiduciary duty. This case illustrates the need to put in place robust director's service agreements, to act on any breach of fiduciary duty quickly, and that the account for profits remedy can be an effective tool available to the wronged company.