Case law update

IPA Insolvency Practitioner newsletter, May 2025

An insolvency case law update prepared by Jean Boldero, Associate Director at Manolete Partners PLC.

Jean is Associate Director for the North West at Manolete Partners, joining in January 2023 after 32 years at Addleshaw Goddard. A specialist in insolvency and fraud-related litigation including breach of directors’ duties and unlawful dividend claim, Jean played a key role in developing Addleshaw Goddard’s insolvency litigation practice in Manchester. She qualified as a solicitor in 1987, moving into insolvency in 1989. Jean has served on several regional professional committees, including R3, and was named a Rising Star in the 2023 edition of The Legal 500.

No Ifs or Buts – Supreme Court affirms the Profit Rule 

The principle

It is an established principle in equity that fiduciaries owe a duty of undivided loyalty to their principals.  This duty underpins the “profit rule” which in insolvency cases crops up most commonly in the context of the misuse by directors of company property.  If a director makes a profit out of their position as a fiduciary they must account to the company for that profit, unless they had the company’s fully informed consent. 

The challenge

The appellants in the case of Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10 attempted to persuade the Supreme Court to depart from existing precedent to introduce a “but for” test. The appellants argued that the existing profit rule was counter-intuitive and old-fashioned, resulted in unpredictability and, on occasion, excessive harshness, and was ultimately unjustifiable.  The appellants’ arguments were not accepted by the Court. 

Background

Recovery Partners GP Ltd and associated parties (the respondents) were retained by the family of a deceased Georgian billionaire to recover his assets which were held by a variety of complex schemes and individuals in a wide range of jurisdictions. Mr Rukhadze and others (the appellants) held senior positions with the respondents, including as directors.  There was a falling out which involved the appellants resigning their roles and criticising the respondents to the deceased’s family.  The appellants were then engaged directly by the family in place of the respondents, receiving $179 million for carrying out this work.

The respondents brought proceedings against the appellants claiming that the appellants had breached fiduciary duties and should account to the respondents for the profits they had made.  The trial judge held that the appellants had been in a fiduciary relationship with the respondents and that it was through this relationship that they acquired the business opportunity to work for the family. The judge found that the appellants had committed breaches of fiduciary duty and were liable to account to the respondents for the profits they had made, less an equitable allowance of 25% for their efforts.  The judge’s decision was upheld on appeal to the Court of Appeal.

The issue on the appeal to the Supreme Court was whether the existing test for requiring an account of profits should be altered to introduce a requirement that the fiduciary could not have made the same profit in a way that avoided a breach of duty – in effect that a fiduciary should not be required to account for profits they could have made even if they had not breached a duty (the counterfactual).  The appellants argued that in the circumstances of their case, this would mean that they did not have to account for any profits because even if they had resigned from their positions with the respondents before they committed any breaches of fiduciary duty, they would still have been retained to carry out the recovery work for the deceased’s family. The appellants accepted that introducing a “but for” test would mean departing from existing House of Lords authorities.

Decision of the Supreme Court

Because of the importance of the case it was heard by a panel of seven Justices.  They all reached the same conclusion but with some differences in analysis.  The dismissal of the appeal was unanimous.

The lead judgment of Lord Briggs confirmed the following:

• Profits made by a fiduciary belong to the fiduciary’s principal; from the moment profits are made they are held on constructive trust for the principal and have to be accounted for. The fiduciary is required to both reveal the existence of the profits and pay them over to the principal.

• The fiduciary is not liable to account if the profit is unrelated to their duty but it is not open to a fiduciary to resign from their position in order to mask an unauthorised profit. Where a fiduciary makes a profit after the end of the fiduciary relationship they will still have to account for those profits if they were made out of, from or are sufficiently related to that relationship.

• A “but for” causation test has no application and there is no basis for applying a “but for” counterfactual.  An order for an account of profits is an order for specific performance of a basic duty of fiduciaries to treat any profits arising out of their fiduciary role as belonging to their beneficiaries.  The introduction of a new “but for” test would “water down the simple duty not to go there at all without the principal’s informed consent” into a duty only to avoid making and keeping profits from a conflict situation which the fiduciary cannot show they would have been able to make anyway, or by showing the principal would have consented if asked. 

• The essential purpose of the profit rule is to deter fiduciaries from giving in to the human temptation to depart from their obligation of loyalty to their principal (for their own benefit).  The introduction of a “but for” test would undermine the essence of the duty by treating it as a mere remedy for a separate breach and water down the chief distinctiveness, the inevitable nature of the obligation to account for profits, to fiduciaries who might otherwise be tempted to be disloyal.

• The principle that the fiduciary can receive an equitable allowance for the application of their work and skill in obtaining the profits made provides an effective means of mitigating against excessive harshness and provides protection against injustice. 

Conclusion

The Supreme Court’s decision provides certainty for officeholders pursuing breach of fiduciary duty claims against directors or former directors of insolvent companies.

The law remains that a fiduciary must account to their principal for any profits gained from their position as a fiduciary.  This applies for example to a director who makes a personal profit from a company’s property or business opportunity. The rule is strict and it is not a defence that the fiduciary would have made the profits even if they had not breached their fiduciary duties, that the principal would have consented to the fiduciary keeping the profits if asked, or that the principal would not have been able or willing to take advantage of the opportunity themselves.

Content courtesy of IPA principal sponsor Manolete Partners PLC.

Manolete Partners PLC is an investment business focused on dispute finance. It is not a law firm and does not provide legal advice.

Please note that guest articles do not necessarily represent the views of the IPA.