Court Of Appeal Finds Directors' Misappropriation Of Client Money Did Not Cause Company's Wider Trading Losses

The Court of Appeal has held that, although directors committed a serious fraud by misappropriating client money over several years, the trading losses incurred by their company were not, as a matter of law, caused by that wrongdoing: Next Generation Holdings Limited & Anr v Alec Finch & Anr [2026] EWCA Civ 1015. 

The decision is a reminder of the limits of causation in claims for breach of fiduciary duty and unlawful means conspiracy. The court will closely examine the relationship between the specific wrongdoing and the loss claimed in order to determine whether the loss flows from and is attributable to the wrongdoing. The court will not permit a claimant to recover losses that were merely occasioned by the wrongdoing, rather than directly caused by it. Accordingly, trading losses that result from a company’s underlying business, and which the wrongdoing merely concealed or enabled the company to sustain, are not recoverable.

The decision also confirms, applying well-established principles, that directors do not, without more, owe a duty to prevent their company from trading at a loss or while insolvent. Nor is causing a company to continue to trade in those circumstances itself unlawful. Where there is a prospect of future profitability, directors are entitled to take the view that accepting a period of loss-making trade is in the interests of the company and its creditors, and should not be criticised for acting on that view so long as it is properly held.

Background

The case concerned Ambon Brokers Limited (previously AFL Insurance Brokers Limited, or “AFL”), a wholesale insurance broker. In accordance with its FCA authorisation, AFL was required to comply with Chapter 5 of the FCA’s Client Assets Sourcebook, which required client money to be held on trust in separate accounts, distinct from AFL’s own money. 

Between August 2011 and September 2017, the Finches (directors of AFL and FCA-approved persons) improperly caused money to be drawn from AFL’s client money accounts to meet AFL’s business expenses and trading losses. To cover up these drawings, the Finches, together with AFL’s then CFO, caused false income accruals to be entered into the company’s accounting records, generating fictitious surpluses on the client money accounts. By September 2017, the deficit on the client account had grown to £3,510,000.

In September 2017, Next Generation Holdings Limited (“NGHL”) purchased a majority shareholding in AFL. 

After acquiring the shares, but prior to discovering the fraud, NGHL made several significant capital investments into the company. In 2020, after the fraud came to light, NGHL injected further capital to enable AFL to restore the funds that the Finches had misappropriated from the client money accounts. Parts of AFL’s business were subsequently sold, and the remainder entered a solvent wind-down. 

NGHL brought claims against the Finches for fraudulent misrepresentation and breach of warranty in connection with its acquisition of shares in AFL. Separately, AFL claimed damages on the basis that the Finches had dishonestly breached their fiduciary duties as directors and had conspired with AFL’s then CFO to cause AFL loss by unlawful means. 

Finding for NGHL and AFL, the High Court found that there had been a very significant deficit of £3,510,000 in AFL’s client money accounts as at the date of the share sale, and that this was attributable to a fraud by the Finches. NGHL’s claims for fraudulent misrepresentation and breach of warranty were therefore made out.

In respect of AFL’s claims, the court found that the Finches had dishonestly breached their duties as directors of AFL under s.172(1) of the Companies Act 2006 (“CA 2006”) by causing AFL to misappropriate client money. The court found that this paid “no proper regard to AFL’s relationships with insurers and brokers or the desirability of maintaining a reputation for high standards of business conduct”. It also found that the Finches had acted with AFL's then CFO in causing AFL to trade at a loss and giving a false picture to NGHL of AFL’s finances so as to bring about the share sale, knowing the inevitable consequences. On that basis, the Finches were held liable in the tort of unlawful means conspiracy.

The High Court awarded substantial damages to NGHL to compensate it for the capital contributions it had made to AFL. Substantial damages were also awarded to AFL for various items, including pre-sale trading losses (for which the size of the client money deficit was used as a proxy) and post-sale trading losses (which figure was deemed to include the cost of investigating the Finches’ wrongdoing). Against those sums, the High Court applied a credit in respect of amounts realised from the sale of parts of AFL’s business.

The Finches were permitted to appeal only on the ground that the High Court had erred in holding that AFL’s trading losses were caused by the Finches’ fraud. The appeal accordingly did not affect the damages awarded to NGHL. 

Decision

The Court of Appeal allowed the appeal, holding that as a matter of law AFL’s trading losses were not caused by the Finches’ breaches of duty or unlawful acts.  Snowden LJ gave the lead judgment, with which Peter Jackson LJ and Bean LJ agreed.

Before turning to the recoverable heads of loss, the court addressed two key questions of principle: (i) the nature of the breaches of fiduciary duty and unlawful means; and (ii) the correct approach to causation and loss in claims for equitable compensation for breach of fiduciary duty and in the tort of unlawful means conspiracy.

Breaches of fiduciary duty and unlawful means 

On the first question, the Court of Appeal observed that there was no suggestion that the Finches had breached their duties in relation to the commercial aspects of AFL’s insurance broking business that operated at a loss. Nor had the High Court found that the Finches had misappropriated assets of AFL over which they had control as fiduciaries. Rather, the breach of fiduciary duty was wrongly causing AFL to take money belonging to AFL’s clients and using it to pay AFL’s trading expenses and liabilities. The unlawful means were causing AFL to misappropriate client money in breach of trust, and the use of false accounting to conceal that breach. 

The Court of Appeal noted that the High Court judge's remarks suggested that he might have considered the Finches’ conduct in causing AFL to incur trading losses to constitute either a breach of duty under s.172(1) CA 2006 or unlawful means. If so, the Court of Appeal held that would have been wrong: directors do not, without more, owe fiduciary duties not to cause or allow their company to trade while insolvent or at a loss. Nor is it unlawful for directors to cause or permit their company to trade in those circumstances. The wrongful trading jurisdiction under s.214 of the Insolvency Act 1986 does not impose a direct duty on directors but rather empowers the court to require a contribution to the assets of an insolvent company where a director fails to take all steps to minimise loss to creditors once they know, or ought to have concluded, that there was no reasonable prospect of the company avoiding going into insolvent liquidation or insolvent administration. 

Drawing on the Supreme Court’s decision in BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Court of Appeal noted that a director's duty to promote the success of the company (s.172 CA 2006) is modified once the director knows or ought to know that the company is insolvent or that insolvency is imminent. However, at no stage did the Supreme Court suggest that a director has a duty to ensure that the company does not trade while insolvent or at a loss. Indeed, directors may reasonably take the view that it is in the interests of the company and its creditors to accept a period of loss-making trade in anticipation of future profitability, and they are not to be criticised for acting on that view if it is properly held. 

Causation and loss 

On the question of causation and loss, the Court of Appeal noted that the High Court had adopted AFL’s suggested approach, which drew an analogy with wrongful trading cases. This approach had led the judge into error because “he adopted too broad a brush in relation to the losses claimed and did not focus on the necessary relationship between the breaches of duty and the trading losses claimed.”

Drawing on principles of causation in tort (deriving from South Australia Asset Management Corp v York Montague (“SAAMCO”) [1997] AC 191, Hughes-Holland v BPE Solicitors [2018] AC 599 and Galoo v Bright Grahame Murray [1994] 1 WLR 1360), the Court of Appeal reiterated that liability is normally limited to those consequences which are attributable to the wrongful act. A defendant is not responsible in law for every loss that follows from that wrongful act: the law distinguishes between a mere precondition or occasion for a loss and an act which gives rise to a liability to make good that loss by way of damages. In the Court of Appeal’s view, although the principles in SAAMCO, Hughes-Holland and Galoo concern negligence claims, there is no reason why the same approach should not also apply to the tort of unlawful means conspiracy. 

As to claims for equitable compensation for breaches of duty not involving a misapplication of trust property, the Court of Appeal held (following AIB Group (UK) plc v Mark Redler & Co [2015] AC 1503) that a structurally similar approach applies. The foreseeability of loss is generally irrelevant. Rather, the loss must be caused by the breach in the sense that it must flow directly from it. The court must therefore undertake a causation analysis, asking whether the loss claimed flowed directly from the breach and was attributable to it. Such an analysis will necessarily require an examination of the nature of the breach and its connection with the loss said to have resulted from it. 

Applying these principles, the Court of Appeal found that AFL’s pre-sale trading losses arose from the ordinary transactions of AFL’s underlying insurance broking business; they did not flow directly from the Finches’ breaches of duty. If anything, the causal relationship ran in the opposite direction: the trading losses arose independently in the course of AFL’s business, and it was the manner in which the Finches responded to those losses – by misappropriating client funds – that was wrongful. 

As to the post-sale period, the Finches’ continued concealment of earlier misappropriation constituted a further breach of duty but that concealment merely provided the occasion for subsequent losses (and indeed a period of trading profit) to be made. Those losses and profits resulted from the way in which the company conducted its business and were not the direct result of the concealment or attributable to it. 

The Court of Appeal did accept that the Finches’ breaches of duty had directly caused AFL’s liability to restore the sums taken from the client money accounts in breach of trust, together with the costs of investigating the wrongdoing. Accordingly, such sums were recoverable by AFL. However, the judge had been wrong to hold that AFL could recover its trading losses. On that basis, the court substituted damages or equitable compensation in the sum of £3,510,000, plus investigation costs, in place of the damages ordered by the judge in respect of trading losses (£7,114,167). Further, contrary to the High Court's findings, AFL was not required to give credit for the proceeds received on the sale of its business (£2,847,038), since that sale was not attributable to the earlier wrongdoing. The net result was a reduction of £598,994 in damages awarded to AFL.