
In this article for Practical Law, Sebastian Kokelaar discusses the recent decision in Lifestyle Equities CV v Ahmed [2024] UKSC 17. The case confirms that a defendant who is ordered to account for profits that they have received through their wrongdoing can only be ordered to account for profits which they have personally received.
Background
The common law’s response to wrongdoing is to require the wrongdoer to compensate the victim for the loss he has suffered. It does not strip the wrongdoer of any gain he may have made from his wrongdoing. Equity, concerned as it is with discouraging unconscionable conduct, is not so relaxed about a wrongdoer holding on to his ill-gotten gains. It allows a victim of certain types of wrongdoing to claim the gains-based remedy of an account of profits, instead of compensation for loss. This remedy is available against fiduciaries (such as trustees and agents) who profit from their position in breach of duty, against non-fiduciaries who infringe intellectual property rights or breach a duty of confidence, and very exceptionally for breach of contract (Attorney General v Blake [2001] 1 AC 268).
An account of profits may also be ordered against a person who is liable as an accessory to certain types of equitable wrongdoing. In Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, the Court of Appeal confirmed that the remedy of an account of profits is available against someone who has dishonestly assisted in a breach of fiduciary duty, albeit on a more restricted basis. Because a dishonest assistant is not a fiduciary, it is not possible to determine the scope of their liability by reference to a pre-existing duty. Instead, the common law rules of causation are to be applied by analogy. Accordingly, where the remedy of an account is sought against a dishonest assistant, it is necessary to show that there is a sufficiently direct causal connection between the profits and the dishonest assistance. Further, the court has a discretion to decline to order an account of profits if it would be disproportionate to do so. The remedy of an account of profits is probably also available against someone who is liable in knowing receipt (see Ultraframe (UK) Ltd v Fielding [2004] EWHC 1638 (Ch) at paragraph 1577).
Whose profits?
Where an account of profits is sought against a dishonest assistant or knowing recipient, or against a defendant who has been held to be jointly and several liable with others for a wrong in respect of which the remedy is available, the question arises for whose profits the defendant should be ordered to account. Should they be liable to account for all the profits made from the wrongful conduct, or only those profits which they personally received? The first of these options has gained some traction in other jurisdictions (for example, in Canada Safeway Ltd v Thompson [1951] 3 DLR 295 a Canadian court held that dishonest assistants were jointly and severally liable for the profits made by the defaulting fiduciary)but it is now clear that it does not represent English law.
In Hotel Portfolio II UK Ltd (In Liquidation) v Ruhan [2023] EWCA Civ 1120 (at paragraphs 43, 44, 60 and 67) the Court of Appeal recently confirmed what was implicit in its reasoning in Novoship, namely that the remedy of an account of profits against a dishonest assistant is limited to profits received by the dishonest assistant; they cannot be ordered to account for the profits received by the fiduciary whom they assisted. In this respect, a dishonest assistant’s liability to account for profits differs from his liability to pay equitable compensation for loss, which is generally co-extensive with that of the fiduciary (see Grupo Torras SA v Al-Sabah [2001] CLC 221 at paragraph 119).
Hotel Portfolio was cited with approval by the Supreme Court in Lifestyle Equities CV v Ahmed [2024] UKSC 17 (see Legal updated, Accessory liability requires knowledge even when primary liability is strict (Supreme Court)) In that case, Lifestyle brought claims for trademark infringement and passing off against various defendants. This included two companies and their directors, the Ahmeds, who were sued on the basis that they had procured the companies to do the acts complained of or had engaged in a common design with each other or the companies.
At trial the judge found the companies liable for infringing Lifestyle’s trademarks and passing off. He found that the Ahmeds were jointly and severally liable with them. Lifestyle elected to claim an account of profits from the Ahmeds and argued that they were liable to account for the profits made by the companies. This was rejected by the trial judge who held that the Ahmeds were only liable to account for profits received by them personally, which included a proportion of their salaries and a loan made by one of the companies to Mr Ahmed. The Court of Appeal dismissed an appeal by the Ahmeds against the judge’s finding that they were jointly and severally liable with the companies, and an appeal by Lifestyle against the judge’s finding that the Ahmeds were only liable to account for profits personally received by them. Both sides then appealed to the Supreme Court.
The Supreme Court allowed the Ahmeds’ appeal on liability (on the basis that they had lacked the requisite knowledge for accessory liability to arise) but it went on to consider the issues raised by the cross-appeal. It agreed with the courts below that it followed from the very nature of the remedy of an account of profits that the only profits for which a person should be ordered to account are profits which they have made, not the profits made by someone else. To order a person to account for someone else’s profits would not be disgorging a gain, but paying a penalty or fine (at paragraph 158).
What counts as a profit?
The Supreme Court made it clear (at paragraph 168) that the mere fact that a fiduciary has a substantial interest in a company that knowingly receives trust property does not make the fiduciary personally accountable for the receipt. This cast doubt on the correctness of CMS Dolphin Ltd v Simonet [2002] BCC 600 in which Lawrence Collins J held that a director who had diverted an business opportunity to a partnership and then company in which he was interested was liable to account for the profits made by the partnership and the company from the opportunity.
Applying this by analogy to a defendant who is an accessory to a breach of fiduciary duty, or is jointly liable for another wrong in respect of which the remedy of an account of profits is available, it would seem that such a defendant cannot be ordered to account for profits made from the wrongdoing by a company merely because he has an interest (even a substantial interest) in the company. A claimant would have to show that the profits (or some benefit representing them) flowed from the company to the defendant personally (for example, in the form of a dividend).However, in cases where it can be shown that the company is nothing more than the alter ego of, and a “piggy bank” for, the defendant, there may still be scope for the court to hold that receipt of the profits by the company is to be treated as receipt by the defendant.
Applying these principles to the facts of the case, the Supreme Court held that, even if the trial judge had been right on the question of liability, he had been wrong to treat a proportion of the salaries paid by the company to the Ahmeds, and a loan made by the company to Mr Ahmed, as profits for which they were liable to account. As to the loan, the Supreme Court made the (fairly obvious) point (at paragraph 171) that a person does not make a profit just by borrowing money. Only if the loan was interest-free or at a less than a commercial rate of interest might the borrower be said to have made a profit (in a sum equal to the interest saved) or if it could be shown that the loan was really a disguised dividend. The trial judge had made no finding to this effect. As to the salaries, there was no basis for saying that these were in reality a way of extracting profits from the company. The trial judge had expressly accepted that they had been paid in respect of work done by the Ahmeds, and there was no evidence that the Ahmeds had been paid more than their services were worth (at paragraph 173).
Conclusion
The Supreme Court’s decision in Lifestyle Equities confirms at the highest level that a defendant who is ordered to account for profits that they have received through their wrongdoing can only be ordered to account for profits which they have personally received, not any profits received by the fiduciary whom they dishonestly assisted or a co-defendant with whom they are jointly and severally liable. It also provides welcome clarification that profits received by a company in which the defendant is interest cannot, without more, be treated as profits which the defendant has personally received, nor can loans and salary received by the defendant from the company, unless such benefits can be shown in reality to have been a way of extracting profit.
Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com.