Clarification of the English Law's 'Account of Profits' remedy provided
In the landmark case of Rukhadze v Recovery Partners GP Limited, the UK Supreme Court has established a clear standard for when the account-of-profits remedy applies to recover unauthorized profits made by fiduciaries. The ruling, handed down in 2025, sets a "bright line" test that emphasizes the high standard of loyalty expected of fiduciaries such as company directors and trustees.
The case involved three former directors of a company that provided asset recovery services. After leaving the company in 2012, the defendants developed a lucrative business opportunity on their own account. The defendants were accused of breaching their fiduciary duties by bad-mouthing the company to win the contract, resulting in net profits of $179 million.
The High Court found all three defendants guilty of breaching their fiduciary duties and awarded the company $134 million plus interest, after deducting an equitable allowance for the defendants' work and skill. On appeal, the Court of Appeal rejected the defendants' argument that a "but for" causation test should be applied. The Supreme Court unanimously agreed, reinforcing the strict application of the account-of-profits rule for company directors, trustees, and other fiduciaries who make unauthorized profits from their position.
The "bright line" test requires a clear, direct causal link between the fiduciary role and the unauthorized profits to apply the account-of-profits rule. The ruling clarifies that only profits made in direct breach of the fiduciary duty—specifically where the fiduciary exploits information, opportunities, or position arising from their role without proper authorization—will trigger the account-of-profits remedy.
The duty to account for profits is an equitable principle that requires fiduciaries to act with single-minded loyalty towards their principals. This means that any profit or benefit accrued by individual directors or trustees as a result of their fiduciary role is automatically considered to be the property of the company or trust. Traditional defences, such as the argument that profits would have been made regardless of the fiduciary appointment, will not be considered in the application of the duty to account for profits.
Fiduciaries should be aware of the potential consequences of benefiting from information or opportunities gained via their appointments. If in doubt, they should ensure that proper authority is received from their principals. The Rukhadzev v Recovery Partners GP case reinforces the principle that fiduciaries have a strict duty to act in the best interests of their principals or beneficiaries.
The UK Supreme Court has confirmed a strict application of the equitable duty on fiduciaries (such as trustees and directors) to "account" for any profits made in connection with their capacity as a fiduciary. The ruling serves as a strong reminder to all fiduciaries to maintain absolute loyalty and avoid conflicts of interest.
In the business world, fiduciaries such as company directors and trustees must maintain absolute loyalty towards their principles, especially in financial matters. The Rukhadzev v Recovery Partners GP case underscores this principle, emphasizing that any profits obtained by these fiduciaries in connection with their roles are presumed to belong to the company or trust they represent.
Therefore, when making decisions that could potentially impact their finance or business, fiduciaries should ensure they have the proper authority from their principals to avoid conflicts of interest and potential legal consequences.
