When the Court finds a breach of the director’s fiduciary duty but the company has suffered no loss…choose your remedy wisely!
The Court of Appeal judgment on 4 October 2023 in the matter of Hotel Portfolio II UK Ltd (In Liquidation) addressed an important issue relating to liability of a defendant for dishonest assistance in a claim for breach of fiduciary duty. At first instance, Foxton J concluded that “in acquiring the Hyde Park Hotels through [Cambulo], in the subsequent sale of those hotels, and in the investment of the profits the Second Defendant (“D2”) was acting at all times as the First Defendant (“D1”)’s nominee”. Foxton J further held that D1 had breached his fiduciary duties having failed to disclose his involvement with Cambulo to other directors and shareholders at the time of its purchase of the Hyde Park Hotels from Hotel Portfolio II UK Limited’s (“HPII”). D2 was found to have dishonestly assisted D1 in his breach of his fiduciary duty.
At first instance, HPII’s claims against D1 and D2 succeeded in relation to the breach of fiduciary duty and dishonest assistance respectively. HPII elected for an account of profits against D1 and equitable compensation against D2. D1 was ordered to account to HPII for circa £102m, whilst D2 was ordered to pay circa £102m as compensation. Both were ordered to pay pre-judgment interest, compounded with half yearly rests in the total sum of approximately £60m (“Judgment”).
Whilst a claimant cannot have as a remedy an account for profits and compensation for loss, HPII asserted that it was seeking compensation from D2 for loss in respect of a different breach from that for which it claimed an account for profits against D1. D2 sought to appeal the order for compensation and compound interest.
On appeal, Newey LJ found HPII was not entitled to “compensation of any kind” from D2 (nor any compound interest on such compensation), instead substituting the compensation with a remedy for an account of the profits D2 had made personally.
Background to the Claims
In May 2003, HPII had been sold to companies controlled by D1 was appointed as a director of HPII, which owned a portfolio of hotels including three hotels in London: Kensington Palace Hotel, Kensington Park Hotel and the Lancaster Gate Hotel (“Hyde Park Hotels”).
HPII was indebted to Morgan Stanley Bank International Limited and Thistle Hotels plc. These parties both agreed to a restructuring with D1 and resulting in the ownership of HPII being equally divided between the three of them.
In February 2005, Euro Estates Holdings Limited which was linked with D2 had become the sole shareholder in Cambulo Comercio (“Cambulo”) and in March 2005 a business sale agreement was concluded between HPII and Cambulo. Pursuant to this agreement, Cambulo had agreed to purchase the Hyde Park Hotels for £127m.
In August 2006, Cambulo sold the Lancaster Gate Hotel for £67.5m, realising a profit of £7.76m. In early 2008, the two Kensington Hotels, which had been developed in a joint venture between Cambulo and a company owned by the Candy brothers (“CPC”), were sold to an unconnected third party for £320m. This transaction resulted in a profit of around £94.5m for Cambulo. Foxton J found that D1 had failed to account to HPII for and disbursed these profits with the assistance of D2.
Significance of the judgment
Key arguments in the appeal centred on whether there had been a single breach or a series of breaches by D1 (with which D2) had dishonestly assisted), which could then allow HPII to opt for different remedies in respect of each breach (i.e. an account of profits against D1 for the first breach and equitable compensation against D2 for the second breach.
The Court of Appeal judgment sought to reconcile the authorities of Bartlett v Barclays Bank Trust Co Ltd and Brown v KMR Services Ltd in relation to the Court’s approach in determining whether the sequence of events in relation to the Hyde Park Hotels was to be construed as a single breach of fiduciary duty or a series of separate breaches of duty.
Single breach or series?
Males LJ considered both Bartlett v Barclays Bank Trust Co Ltd and Brown v KMR Services Ltd to determine whether the sequence of events was to be construed as a single breach or a series of separate breaches of fiduciary duty by D1, and whether the two breaches of fiduciary duty by D1 in which D2 assisted gave rise to an equitable compensation claim, in circumstances where the first breach caused no loss but the second breach, arising out of the first breach, gave rise to a potential gain.
In Bartlett, it was held that where there are profits and losses, both resulting from, in this case, breaches of trust, the loss may not be set against the gain except where they arise in the same transaction. By contrast, in Brown the Judge found that where there has been separate, in that case, breaches of contract, the plaintiff is entitled to an “independent and separate” cause of action in respect of each breach.
Males LJ suggested that the key to reconciling these apparently conflicting positions is in Bartlett’s reference to losses and gains arising “in the same transaction”. Males LJ found a useful analogy with ‘equitable set off’ a whereby ‘an inextricable connection’, “arises when a cross claim is so closely connected with the claimant’s demands that it would be manifestly unjust to allow the claimant to enforce payment without taking into account the cross claim”. On this basis, he concluded that it would be “manifestly unjust” to hold D1 (and therefore D2) liable to pay compensation in circumstances which HPII could never have made those profits itself and such profits were only realised by D1 as part of a single scheme to generate profits from the development of the hotels. He found this to be distinguishable from the position in Brown in which the actions giving rise to the breaches were regarded as independent and separate. He concluded that equitable compensation is concerned with loss, and HPII had not suffered any loss. The claim for account of profits was concerned with the defendants’ gain, and therefore D1 and D2 were liable for the profits they had each respectively made.
Election of different remedies
Newey LJ found that the Order of Foxton J did not distinguish between different breaches by D1 of his fiduciary duty and therefore the election by HPII for a remedy for account of profits against D1 was made in respect of the totality of D1’s conduct. Furthermore, there was nothing to indicate that HPII’s election for account of profits (or the Order for it) was limited just to the original sale of the HPII hotels which would then leave HPII free to claim compensation from D1 for misapplication of the profits (as HPII had claimed). Instead, he found that the “sale was inextricably connected to the profits for whose loss HPII is seeking compensation” and despite the fact that the whole process took some years before the profits were realised on the hotels (which was not surprising with regard to redevelopments), there was no interruption in the implementation of D1’s overall scheme or D2’s role in it; there was a single and uninterrupted course of conduct which as a whole had caused no loss to HPII.
Newey LJ held that therefore, having suffered no loss, D2’s liability was limited to his personal profit, confirming the already established position in Ultraframe and Novoship, that a dishonest assistant should be liable for any profit he had made himself, but not for any profits made by the fiduciary. Newey LJ did not accept that any attempt to distinguish between “substitutive” or “reparative” compensation (as HPII had sought to to) made any difference in these circumstances, in which he found for the reasons above that HPII was not entitled to compensation of any kind.
Further analysis
Newey LJ, obiter, identified a further and more fundamental objection to HPII’s compensation claim, as he did not consider that it was possible to claim compensation from the dishonest assistant where a claimant has elected for an account of profits instead of compensation as against a fiduciary – for there to be scope for a claim for compensation for loss from a dishonest assistant, the fiduciary should also be liable for the same.
Foxton J had identified two breaches – firstly the breach in respect of the sale of the hotels to himself as a director, giving rise to a claim for account of profits against D1 for his self-dealing with the trust property for his own purposes, and secondly a breach in relation to the disbursement and application of the profits realised on the development of the hotels, being the breach from which HPII’s equitable compensation claim arose against D2 for his dishonest assistance in that breach. Newey LJ however, did not accept that the type of trust created by the first breach could give rise to a claim for a breach of that trust in relation to the investment of the trust property (i.e. the disbursement of the proceeds of the sale) and therefore no separate claim for compensation for misapplication of a benefit could be maintained (and even if it were possible in principle no substantial amount could be awarded in respect of it).
Mark Goodwin is Founder and Managing Partner of Provenio Litigation LLP. Hannah Catterall is a Partner at Provenio Litigation LLP and Flynn Saturley is a Trainee Solicitor at the firm.
Provenio acted for D1 with George Spalton KC and Carola Binney of 4 New Square Chambers.