Earlier this week, the Supreme Court gave a judgment in Rukhadze and others v Recovery Partners GP Ltd and another. The decision will be important to company directors and others with fiduciary duties as it makes it clear that if they profit from their position as a result of breaching their duties, they may have to repay the whole amount.

What are fiduciary duties?

Directors owe fiduciary duties to their company, but fiduciary duties are not limited to a director-company relationship. They will arise whenever someone undertakes to act for or on behalf of another in a particular matter, in circumstances which give rise to a relationship of trust and confidence. 

In essence, the core obligation is single-minded loyalty. The concept of loyalty in this context requires the party to act in good faith and to refrain from benefitting from their position without consent. It includes the duty not to exploit property, information or opportunities received through their position. 

Beyond the director-company relationship, fiduciary relationships arise where there is a trustee and beneficiary relationship, but they also can arise contractually in modern commercial arrangements.

What happened?

The appellants worked for the respondents, a company incorporated in the British Virgin Islands and an English LLP. They held positions of responsibility, and therefore owed fiduciary duties to the respondents.

The appellants diverted a lucrative business opportunity from the respondents, pursuing it for the own benefit instead. 

The Hight Court ordered the appellants to repay the respondents the profits they had made from that business opportunity, and their appeal to the Court of Appeal was unsuccessful.

Supreme Court’s decision

The Supreme Court has clarified that those breaching their fiduciary duties may be liable to repay the whole amount of any profit received. While the case did not involve a director-company fiduciary duty, the same principles would apply where a director breaches their duties. 

The appellants in this case argued for a modification of the law, so that they should not have to account for any profit they would have made in any event, had there been no breach of duty. 

The Supreme Court unanimously rejected this argument, albeit for varying reasons. Therefore it remains the case that where a party breaches their fiduciary duties, in the absence of fully informed consent, they are liable to account for that profit in full.

The decision is important for company directors and others with fiduciary duties. The law is crystal clear that if they profit from their position as a result of breaching their duties, they may be liable to repay the whole amount - even if they feasibly could have made a the same profit without any breach.