Disputes Yearbook 2025:
Civil Fraud

Supreme Court clarifies scope of liability for directors and fiduciaries

The Supreme Court issued a number of judgments this year concerning liability for breach of fiduciary and/or directors' duties. Three are of particular note.

In the first case, the Supreme Court confirmed that a fiduciary, including a company director, is liable to account for all profits made out of their position as such. They cannot circumvent liability by arguing that "but for" the breach they would have made the profits in any event – for example because, if asked, the principal would have consented. The court may, however, award an equitable allowance to reduce the amount of accountable profits where the fiduciary has devoted hard work and skill, and potentially put their own capital at risk in obtaining such profits. 

In so deciding, the Supreme Court unanimously declined to change the law governing a fiduciary's liability to account for profits. The decision confirms the strictness with which the equitable principles that attach to a fiduciary relationship are to be applied. The "no profit" rule requires a fiduciary who makes a profit out of their position (such as by exploiting a business opportunity they became aware of by virtue of being a fiduciary) to account for that profit unless the principal provides informed consent to the fiduciary keeping it. It is closely linked to the "no conflict rule", which prohibits fiduciaries from placing themselves in a position where their interest and duty may conflict. The essential purpose of both rules is to deter individuals who have undertaken an obligation of undivided loyalty to someone else from being tempted to fall short of that obligation for their own gain.

In the second case, the Supreme Court restored an order requiring a third party who dishonestly assisted a company director in making and then dissipating an unauthorised profit to pay equitable compensation equal to the amount of that unauthorised profit. In so doing, the Supreme Court confirmed that, in cases involving multiple breaches of duty, such as the making of unauthorised profits and the subsequent dissipation of those profits, the two breaches must be viewed as separate and distinct. 

A dishonest assistant can therefore be liable, jointly with the defaulting fiduciary, for losses caused by the dissipation. In the Supreme Court's view, this does not contradict the established principle that a dishonest assistant can only be liable to account for profits they have themselves made (and not those made by the defaulting fiduciary). It is irrelevant that the compensation awarded against the dishonest assistant may be equal to the profit gained by the defaulting fiduciary.

In the final case, the Supreme Court clarified that anyone who assumes fiduciary powers can be held liable for breach of those duties, even without having formal authority. This liability extends to those who intermeddle with company assets, regardless of whether the wrongdoer personally receives the misappropriated property or channels it to another entity under their control.

The decision also confirms that equitable compensation aims to restore the value of misappropriated property, and that the date for valuing loss is not fixed by rigid rules. Instead, the courts will consider what is just and equitable in the circumstances, with regard to the substance and purpose of transactions. The Supreme Court further clarified that if a defaulting fiduciary is involved in, orchestrates, or benefits from subsequent events that destroy the value of the misappropriated property, they cannot rely on those events to avoid or reduce their liability for the original breach unless they can provide an innocent explanation.

Conscious awareness of representation is not a requirement for the tort of deceit

The Board of the Privy Council held that, for a claim in the tort of deceit, there is no legal requirement for a claimant to show that it was consciously aware of representations made by the defendant or understood them to have been made. The decision clarifies that claimants may be able to prove reliance on a representation where they have acted on an unconscious assumption. However, claimants will need to prove that: (i) the assumption was reasonable; and (ii) there was a causal link between the defendant's words or actions and the claimant's assumption.

As an opinion of the Privy Council this decision is not binding on the English courts. However, the judgment specifies that this represents the law of England and Wales as well as Bermuda, and it is likely to be persuasive in future cases before the English courts, given that the members of the Board of the Privy Council also sit in the Supreme Court.