Agarwala v Agarwala

A trustee whose possession of trust property began in breach of duty ceases to be in continuing breach when a court authorises that possession to protect the trustee’s right of indemnity pending sale. From that point, an account should ordinarily reflect the profits actually earned rather than hypothetical profits which the beneficiary might have earned in possession.

When calculating hypothetical profits for the earlier period, the court must deduct the expenses which would have been incurred under the parties’ arrangement. Distinct expenses should be allowed separately, but any overlap must be removed to avoid double recovery. An obligation to account for profits may end when the court instead orders payment of occupational rent.

The appellant was the legal owner and bare trustee of a property beneficially owned by the respondent. After excluding the respondent in July 2008, she operated the property through her estranged husband. The respondent claimed an account of the profits which he would have earned had he remained in possession.

His Honour Judge Moloney awarded £40,284 by reference principally to hypothetical profits between July 2008 and July 2014. His calculation treated a monthly payment due to the appellant as replacing, rather than supplementing, an allowance for managing the property.

The appellant appealed against the orders of 11 July 2014 and 30 April 2015. The central issues were whether the hypothetical calculation properly allowed for management and the monthly payment, and whether hypothetical profits remained recoverable after a December 2012 order authorised the appellant to retain possession.

1. Appeal allowed in part and remitted. The judge erred both in his treatment of the management expenses and in awarding hypothetical profits beyond 5 December 2012. The remaining figures found below were to stand, subject only to the adjustments directed by the Court of Appeal and the calculation of actual profits for the later period.

2. For the hypothetical account, the judge was entitled to find that the monthly payment contemplated by the parties had effectively become £500 rather than £800. The evidence supported the conclusion that the parties would have continued working together and that the appellant would have undertaken administrative and management work. The monthly payment could not therefore be removed from the calculation.

3. The monthly payment and the time-costed management allowance represented distinct expenses. The judge erred by substituting one for the other. There was, however, some overlap because both included book-keeping. The appropriate separate management allowance was therefore £250 per month, or £18,000 over six years, rather than £21,480. On that adjusted basis, the six-year hypothetical profit before basic-rate tax would have been £33,920.

4. The appellant’s possession had originally been a breach of her duties as bare trustee. That continuing breach ended when the court refused possession to the respondent and authorised the appellant to remain in possession from 6 December 2012. The order protected her right of indemnity against the substantial mortgage liability pending sale and had not been appealed.

5. Lawful possession did not release the appellant from accounting for profits. It changed the proper measure of the account. Hypothetical profits were recoverable only from July 2008 to 5 December 2012. From 6 December 2012 until 30 April 2015, she was required to account only for actual profits after appropriate expenses. Thereafter, the order for occupational rent replaced the obligation to account for profits.

6. The causation principles discussed in AIB Group (UK) plc v Mark Redler & Co Solicitors [2015] AC 1503 were considered, but it was unnecessary to decide whether the respondent’s conduct had interrupted causation. The change from unlawful to court-authorised possession supplied a sufficient basis for limiting the hypothetical account.

7. Because the later-period accounts were absent, the Court of Appeal could not substitute a final sum. The matter was remitted to His Honour Judge Moloney solely to calculate the revised amount. The remittal did not permit a general reconsideration of quantum.

1. Court of Appeal (Civil Division): In [2016] EWCA Civ 1252, the court unanimously allowed the appeal in part. It revised the basis of the account and remitted the calculation of the amount payable to His Honour Judge Moloney.

2. Cambridge County and Family Court: By orders of 11 July 2014 and 30 April 2015, His Honour Judge Moloney ordered the appellant to pay £40,284 by way of equitable compensation in the form of an account for loss of profits.

3. Earlier Court of Appeal proceedings: An earlier appeal against the December 2012 declarations and orders concerning beneficial ownership and possession was dismissed on 17 December 2013. No citation is stated in the judgment.

4. Cambridge County and Family Court: In December 2012, His Honour Judge Moloney declared the respondent to be the sole beneficial owner but refused his application for possession. The appellant was authorised to remain in possession while liable under the mortgage, subject to accounting and protective conditions.