The Court of Appeal has handed down judgment in Hotel Portfolio II UK Limited (in liquidation) & Anr v Ruhan & Ors  EWCA Civ 1120. Sebastian Kokelaar and Stephen Ryan (led by Anthony de Garr Robinson KC of One Essex Court) appeared for the successful appellant.
The appeal raised a novel point relating to liability of dishonest assistants to pay equitable compensation. It establishes that, where a dishonest assistant has assisted a fiduciary in committing two separate breaches of fiduciary duty, one which generated a profit and another which generated a loss, the dishonest assistant (and, for that matter, the fiduciary) cannot be ordered to pay equitable compensation in respect of the loss without taking into account the profit if the breaches of duty were so closely connected that it would be manifestly unjust to focus exclusively on the loss. The decision also affirms that a dishonest assistant can only be ordered to account for profits he personally made as a result of his dishonest assistance.
The proceedings arose out of the sale in 2005 of three hotels in central London by the first claimant (“HPII”) to a Madeiran company (“Cambulo”) ostensibly controlled by Mr Anthony Stevens. The hotels had potential for residential development. At the time of the sale HPII was in default of its obligations to its lenders and was under considerable pressure to sell the hotels as quickly as possible. Cambulo paid £125m for the three hotels which reflected the market value at the time.
Between 2006 and 2008 the hotels were sold to third parties with the benefit of planning consent, generating a profit of approximately £102 million. The profits were invested in other projects connected with Mr Andrew Ruhan, a former director of HPII, and eventually dissipated.
HPII (which went into liquidation in 2008) eventually issued proceedings against Mr Ruhan and Mr Stevens alleging that Mr Stevens and Cambulo had acted as Mr Ruhan’s nominee in connection with the acquisition of the hotels, their subsequent disposal and the investment of the profits. HPII’s claims included a claim against Mr Ruhan for breach of his fiduciary duties as a director in not disclosing his interest in the transaction to HPII and making an unauthorised profit, a claim against Mr Ruhan and Mr Stevens in the tort of unlawful means conspiracy, and a claim against Mr Stevens in dishonest assistance.
The decision at first instance
The trial judge (Foxton J) found that the nominee allegation was made out, that Mr Ruhan had failed to disclose his interest in Cambulo in breach of fiduciary duty, and that Mr Stevens had dishonestly assisted in that breach.
Accordingly, Mr Ruhan was liable (at HPII’s election) to account for the profit of £102 million he made on the subsequent sale of the hotels, or to pay equitable compensation in respect of any loss suffered by HPII.
As for Mr Stevens, the judge found (applying the decision of the Court of Appeal in Novoship (UK) Ltd v Mikhaylyuk  QB 499) that he was liable (at HPII’s election) either to account for any profits which he had personally made as a result of his dishonest assistance in Mr Ruhan’s breach of fiduciary duty, or alternatively to pay equitable compensation for any loss suffered by HPII. On the evidence before him, the judge was able to identify payments totalling £1.5m that were made to Mr Stevens in return for agreeing to act as Mr Ruhan’s nominee.
The judge found that the claim for damages in the tort of conspiracy failed because the conspiracy had not caused HPII to suffer any loss. It had sold the hotels to Cambulo at market value and had not been in a position to exploit the development opportunity presented by the hotels for itself.
He reached a different conclusion, however, in relation to the claim for equitable compensation against Mr Ruhan and Mr Stevens. He held that, although Mr Ruhan’s original breach of fiduciary duty did not cause HPII to suffer any loss, Mr Ruhan had committed further breaches of duty in failing to account for, and dissipating, the hotel profits, which were themselves held on a constructive trust for HPII. Mr Stevens had dishonestly assisted in those further breaches as well. HPII was entitled to claim equitable compensation for the loss of the profits caused by those further breaches, while ignoring the fact that it was only because of the original breach that the profits were made. In other words, HPII was entitled to be put into the position that it would have been in had Mr Ruhan committed his original breach of fiduciary duty (with Mr Stevens’ assistance), but then accounted to HPII for the profits made by that breach.
HPII elected to claim an account of the profits in the sum of £102 million from Mr Ruhan and equitable compensation in an amount equivalent to those profits from Mr Stevens. Both Mr Ruhan and Mr Stevens were also ordered to pay compound interest of almost £60 million.
Mr Stevens appealed to the Court of Appeal against the award of equitable compensation and, separately, the award of compound interest (with permission from the judge).
The Court of Appeal’s decision
The Court of Appeal (Newey, Males and Birss LJJ) allowed Mr Stevens’ appeal against the award of equitable compensation. Newey LJ gave the leading judgment.
He began by considering the judge’s conclusion (applying the decision of the Court of Appeal in JJ Harrison (Properties) Ltd v Harrison  BCC 729) that the hotels themselves had been held on constructive trust for HPII immediately following the sale to Cambulo, so that the profits from the subsequent sale of the hotels, which represented their traceable proceeds, had also been held on constructive trust for HPII. Newey LJ disagreed with this analysis. He pointed out (at paras. 27 to 29) that a breach by a fiduciary of the self-dealing rule (i.e. the rule that a fiduciary must not sell trust property to himself without disclosing his interest in the transaction and obtaining the beneficiary’s consent) is generally understood to render the transaction voidable, rather than void. On that basis, the hotels themselves were never held on trust for HPII; it merely had a right to rescind the sale (which it never exercised). If the position were otherwise, HPII would have been the beneficial owner of the hotels as well as the money which Cambulo paid for them, which did not make sense. The JJ Harrison case did not provide support for HPII’s argument because, properly understood, it was a case in which the defendant director had not merely failed to disclose his interest in the sale of company property, but also breached his fiduciary duty to act in the best interest of the company by failing to ensure that the sale was at full value. It was therefore a misappropriation case, rather than a pure self-dealing case.
This did not mean, however, that HPII had not had a proprietary claim to the hotel profits. It is now clear, following the decision of the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC  AC 250, that a fiduciary who makes an authorised profit from his position holds that profit on a type 1 constructive (i.e. a true trust) for his principal. Mr Stevens had not sought to argue otherwise.
It was argued on his behalf, however, that Mr Ruhan’s breach of his custodial duty as a constructive trustee (and the assistance given by Mr Stevens in respect of it) were so inextricably bound up with the original breach of the original breach of the self-dealing rule that HPII’s claim for equitable compensation had to be assessed by reference to the overall effect of the parties’ conduct, rather than merely what had happened after the profits had been made. In other words, the appropriate counterfactual scenario for assessing loss was a scenario in which the fraudulent scheme had not been implemented at all, rather than a scenario in which it had been partially implemented up to the point at which the profits were made. In that scenario, HPII would have been no better off because it was unable to demonstrate that it would have sold the hotels to someone else for more money or gone on to realise the profits itself.
The authorities relied upon by Mr Stevens included Barlett v Barclays Bank Trust Co Ltd (Nos 1 and 2)  515 in which Brightman J held that the general rule that, where a trustee is liable in respect of distinct breaches of trust, one of which has resulted in a loss and the other in a gain, he is not entitled to set off the gain against the loss, did not apply where the loss and the profit arose in the same transaction and it would be unjust not to take the profit into account in assessing the amount of equitable compensation payable by the trustee. Mr Stevens also relied on the principles governing equitable set-off as summarised in Geldof Metaalconstructie NV v Simon Carves Ltd  1 CLC 895, i.e. equitable set-off is only available where the cross-claims are so closely connected that it would be manifestly unjust to enforce the claim without taking into account the cross-claim.
Newey LJ accepted Mr Stevens’ submissions. He held that sale of the hotels to Cambulo was inextricably connected to the profits for the loss of which HPII was seeking compensation. Mr Runan caused Cambulo to buy the hotels in the hope that he could generate a profit from them for his own benefit. There was no question of the profits being the product of an independent plan. As for Mr Stevens, he was involved in the scheme from the outset. Newey LJ concluded (at para. 67):
“Standing back from the detail, there was a single and uninterrupted course of conduct which, taken as a whole, caused HPII no loss. That being so, it strikes me as just that Mr Stevens’ liability should be limited to his personal profit. That conclusion is borne out by Ultraframe and Novoship, where the Courts took the view that a dishonest assistant should be liable for any profit he had himself made, but not for the fiduciary’s. To adapt language used in The Nanfri and Geldof, the account and compensation claims are, as it seems to me, “so closely connected” that it would be “manifestly unjust” to allow HPII to focus exclusively on Mr Ruhan’s failure to account for the profits once they had accrued. Whether or not HPII has suffered a loss should be determined by reference to the total effect of Mr Ruhan’s scheme. To put things differently, the “loss” stemming from Mr Ruhan’s treatment of the profits must be balanced against the claim to recover those very profits which arose from the same plan.”
That was enough to dispose of the appeal. Newey LJ went to question, however, whether it was even possible, as a matter of law, to bring a separate claim for compensation against a fiduciary in respect of the misapplication of unauthorised profits held on a constructive trust and whether, even if such a claim was possible, a substantial amount could be awarded in respect of it. Where the principal elects to claim the benefit of the unauthorised profits, rather than claim equitable compensation for loss, his claim against the fiduciary is arguably limited to a claim for an account of those profits (paras. 71 and 72).
Males LJ delivered a short judgment of his own in which he agreed with the judgment of Newey LJ. He agreed that the test for equitable set-off was a useful guide to whether a gain and a loss arise in the same transaction. Applying that test, he concluded at para. 86:
“Equitable compensation is concerned with loss, but when the transaction is considered as a whole, HPII has suffered no loss. In contrast, an account of profits is concerned with the defendant’s gain. Equity is satisfied in this case by the award of an account of profits. Mr Ruhan is therefore liable to account as a fiduciary for the profits which he has derived from his breaches of duty, notwithstanding that they have caused no loss to HPII. Mr Stevens is similarly liable to account, but only for the profits which he himself has made from assisting Mr Ruhan.”
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