The Supreme Court has 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: Stevens v Hotel Portfolio II UK Ltd [2025] UKSC 28.
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. The result is that a dishonest assistant can be liable, jointly with the defaulting fiduciary, for losses caused by the dissipation. The Supreme Court held that 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.
The Supreme Court rejected the argument, which the Court of Appeal had accepted, that a gain to the beneficiary represented by the unauthorised profits could be set off against the loss caused by their dissipation in order to reduce, or extinguish, a dishonest assistant's liability where the two breaches were inextricably connected as elements of a single scheme. The decision leaves open the potential for equitable set-off, but not merely because the breaches are closely connected. Instead, the court may allow a set-off when there would otherwise be a "clearly inequitable result".
Background
The claimant company (HPII) owned three hotels around Hyde Park with substantial development potential but was unable to undertake that development. The first defendant, Mr Ruhan, was a director of HPII and was authorised to accept bids for the hotels in excess of £125 million. A Madeiran company, Cambulo, initially bid £127 million for the hotels, and later purchased them for £125 million. Cambulo was owned by companies associated with the second defendant, Mr Stevens. In fact, Mr Stevens acted as Mr Ruhan's nominee. Mr Ruhan, therefore, concealed from HPII that he was the real purchaser of the hotels.
Cambulo subsequently on-sold the hotels (after redevelopment in two cases) to unconnected parties, realising substantial profits. Approximately £102 million of those profits went to Mr Ruhan. He used £1.5 million of this sum to compensate Mr Stevens for his role in the arrangement and dissipated the rest on his own development projects in Qatar.
HPII's liquidator brought High Court proceedings against both Mr Ruhan and Mr Stevens, alleging that Mr Ruhan had breached his fiduciary duties and that Mr Stevens had dishonestly assisted him in doing so.
A detailed summary of the High Court and Court of Appeal decisions is available in our earlier blog post.
At first instance, Foxton J held that Mr Ruhan had breached his fiduciary duties to HPII by failing to disclose his interest in Cambulo (the first breach of duty). The profits realised through the on-sale of the hotels therefore represented unauthorised profits made by a fiduciary and, as a matter of law, were held on constructive trust for HPII. Mr Ruhan further breached his duties as trustee by dissipating those profits (the second breach of duty). Foxton J also held that Mr Stevens dishonestly assisted Mr Ruhan in both breaches. HPII elected for an account of profits from Mr Ruhan (in respect of his first breach of duty, ie making the unauthorised profits) and equitable compensation from Mr Stevens (for his dishonest assistance in Mr Ruhan's second breach, ie dissipation of the unauthorised profits). Each were ordered to pay c. £102 million (the amount of the unauthorised profits received by Mr Ruhan), along with almost £60 million in compound interest.
Mr Stevens appealed to the Court of Appeal, arguing that HPII had suffered no loss through dissipation of the profits and therefore he could not be liable to pay compensation. Mr Stevens argued that HPII only became the temporary beneficial owner of the profits as a result of Mr Ruhan's first breach of fiduciary duty, and that both the gain of the profits and their later loss through Mr Ruhan's second breach of duty were parts of a single pre-arranged fraudulent scheme, neither of which would have occurred if Mr Ruhan had performed his duties as fiduciary and trustee. The Court of Appeal accepted these arguments and allowed the appeal.
HPII appealed to the Supreme Court.
Decision
The Supreme Court allowed the appeal and restored the order against Mr Stevens made by Foxton J. Lord Briggs gave the leading judgment, with which Lord Reed, Lord Hamblen and Lord Richards agreed. Lord Burrows dissented.
It was common ground between the parties that Mr Ruhan became a constructive trustee of the c.£102 million immediately upon its receipt under an institutional, not merely remedial, constructive trust. It was inherent in that common ground that, from the moment Mr Ruhan received the monies, they belonged to HPII as beneficial owner. According to Lord Briggs, this was a "matter of cardinal importance" to the appeal.
It was also common ground that Mr Ruhan's dissipation of the profits represented a breach of his duties as trustee of the constructive trust. As Lord Briggs said, if the dissipation caused HPII a loss, subject to whether compensation can be ordered for loss caused by breach of a constructive trust of unauthorised profits (an issue left unresolved by the Court of Appeal) and the availability of set-off, this was a loss for which Foxton J was right to find Mr Stevens liable.
There were therefore three issues before the Supreme Court:
- whether, in principle, compensation can be ordered for loss caused by breach of a constructive trust of unauthorised profits;
- whether HPII in fact suffered loss as a result of the dissipation in this case; and
- if so, whether the unauthorised profits could be treated as a gain made by HPII, which could then be set off against the loss caused by their dissipation to reduce Mr Stevens's liability.
Can compensation be awarded for loss caused by breach of a constructive trust?
Lord Briggs rejected Mr Stevens's submission that the constructive trust of the on-sale profits was just a remedy for Mr Ruhan's initial breach of fiduciary duty, and the consequences said to flow from that. While the constructive trust could loosely be seen as equity's remedy for the breach of duty, it was not "just a remedy" for that breach. Once established, the constructive trust was a free-standing "real" trust, rather than merely a way of conferring additional proprietary remedies on the beneficiary. The profits were HPII's property from the moment of receipt by Mr Ruhan (or his nominee) and, if it had known about them, HPII could have required Mr Ruhan to transfer the profits on demand.
In those circumstances, Lord Briggs commented that it would be "extraordinary and contrary to basic equitable principle" if Mr Ruhan's dissipation of those profits did not give rise to a remedy of equitable compensation for HPII's loss of its proprietary interest in them.
Lord Briggs accepted that Mr Stevens could not be liable to account for Mr Ruhan's unauthorised profits, given that a dishonest assistant is only liable to account for profits they have themselves made (pursuant to the principle laid down in Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908). This did not mean, however, that Mr Stevens could not be liable, jointly with Mr Ruhan, for loss caused by dissipation of those profits.
Lord Briggs emphasised that the first breach of fiduciary duty consisting of the making of the profits is separate and distinct from the second breach consisting of dissipation of them. The latter is not about making unauthorised profits, but rather about dissipating or destroying trust property. Lord Briggs said there is no rule or principle that a dishonest assistant to the dissipation of trust property is only liable for what they have received, merely because the property in question came to be held on constructive trust because it represented an unauthorised profit.
Accordingly, Lord Briggs held that Mr Stevens could be liable to compensate HPII for any loss caused by dissipation of the profits.
Did HPII suffer loss?
In accordance with Target Holdings Ltd v Redferns [1996] AC 421 (as affirmed in AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58), in assessing loss for which equitable compensation for breach of trust can be awarded, the court will apply a "but-for" counterfactual. This requires the court to compare (i) the position the beneficiary would have been in but-for the breach of trust and (ii) the beneficiary's actual position as a result of the breach.
For this purpose, Mr Stevens argued that Mr Ruhan's breach of trust in dissipating the profits had to be aggregated with his earlier breach of fiduciary duty (ie the making and keeping of the unauthorised profits). Accordingly, the but-for counterfactual required a comparison between what would have been HPII's position had neither breach occurred and its position following both breaches. Applying that analysis, Mr Stevens argued that HPII had suffered no loss as it would neither have gained the profits nor lost them.
Lord Briggs rejected this argument. It was not supported by the authorities and would result in the constructive trust of unauthorised profits having no useful effect. The effect of the constructive trust is that the beneficiary is the owner of the unauthorised profits, and so has valuable proprietary remedies against the trustee and anyone who dishonestly assisted the trustee in making the unauthorised profits. However, those proprietary remedies may be rendered nugatory through dissipation of the trust funds. Accordingly, the constructive trust also enables a beneficiary to recover losses suffered as a result of dissipation from both the trustee and any individual who dishonestly assists in that dissipation. This is only possible, however, if the breach consisting of the making of the profits is not "airbrushed out" of the counterfactual by being aggregated with the breach consisting of their dissipation. To find otherwise would enable a dishonest assistant to get away "scot-free" from their dishonest assistance in the dissipation, which would not be a just or equitable outcome.
Lord Briggs added that, if the application of the but-for test required the court to ignore the initial breach, the counterfactual would not merely operate but-for the breach (ie the breach consisting of dissipating the profits), but also but-for the constructive trust that created the duty not to dissipate. In Lord Briggs's view, that amounted to "using a technique to assess a loss caused by a breach in a way that throws out the baby with the bath water". By analogy, Lord Briggs noted that in applying the but-for test of causation to a breach of contract, the court must assume that, but for its breach, the contract was performed rather than broken. It never requires the court to assume there was no contract in the first place.
In Lord Briggs's view, the correct counterfactual was therefore one in which Mr Ruhan had not dissipated the profits, not one in which there were no profits and therefore no constructive trust. Consequently, applying the but-for analysis of the loss caused by dissipation of the profits, Lord Briggs concluded that the breach had caused HPII to lose the whole value of its beneficial interest in the profits.
Was equitable set-off available to Mr Stevens?
The general rule is that a trustee is not permitted to set off gains caused by one breach of trust against losses incurred by another. This "no set-off principle" is sometimes said to be subject to an exception where the two breaches arise in the same transaction or are closely connected.
Having reviewed the limited case law and commentary on this supposed exception, Lord Briggs held that the true principle is that the court may recognise an exception when application of the general rule would produce a "clearly inequitable result", not simply because a connection exists between the loss and the gain.
Lord Briggs returned to the fundamental purpose of a constructive trust – to recognise unauthorised profits made by a fiduciary as belonging to the beneficiary from the moment of their receipt. In Lord Briggs's view, to allow the gain represented by the unauthorised profits to be set off against the loss caused by their dissipation would entirely defeat that purpose. By contrast, in refusing a set-off, the purpose of the constructive trust would be achieved – those responsible for dissipation of the profits would be held personally liable for the beneficiary's loss of its proprietary interest in the same. In Lord Briggs's view, this analysis provided a strong, even compelling, reason for allowing the no set-off rule to take effect.
Lord Briggs rejected the suggestion that refusing a set-off would make the dishonest assistant personally liable for the trustee's profit "by the back door", in conflict with the principle laid down in Novoship. In circumstances where a dishonest assistant has contributed to the beneficiary's loss, it is irrelevant that the loss is equivalent to the trustee's profit. The Novoship principle protects a dishonest assistant from liability to disgorge a trustee's profit where there has been no corresponding loss to the beneficiary. It cannot be used to wipe out a real loss, by allowing a set-off of the gain which constitutes the trust property that has been dissipated.
Lord Briggs concluded that there was no reason why refusing a set-off would be inequitable or unjust in this case. He therefore rejected Mr Stevens's defence.
Dissenting judgment
Lord Burrows disagreed with the conclusion of the majority for various reasons, including because he considered that, when considering equitable compensation for dishonest assistance, the court must consider the breaches of fiduciary duty that have been assisted "as a realistic whole". In his view, where the principal wrongdoer's breaches comprise both making profits and dissipating them, a person who assists either from the start or only with the dissipation "cannot be held liable for loss attributable just to the dissipation because the principal wrongdoer's single wrongful scheme has produced no overall loss to the victim of the wrongdoing".
Lord Burrows also considered that imposing a liability on the dishonest assistant to compensate the beneficiary for a loss comprising the principal wrongdoer's failure to account for the profits was inconsistent with the principle that a dishonest assistant is not liable to account for those profits. In addition, Lord Burrows considered that the majority's award of equitable compensation for dishonest assistance was inconsistent with HPII's election for an account of profits against Mr Ruhan, and could lead to double recovery by HPII.
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