Clegg v The Estate & Personal Representatives of Andrew Gregory Pache & Ors

A fiduciary who conceals that he is conducting a company’s business through an alter ego company may be required to account on the basis that all profits during the relevant period are accountable, subject to proof by the defendants that particular transactions were independently undertaken or earned. Where the whole business is accountable, the account should ordinarily be based on net profits before tax and depreciation, rather than gross profits. A co-director’s knowledge and failure to stop misconduct does not automatically justify equal contribution. Settlement monies may be credited against the account where attribution to the relevant profits is not obviously unsustainable. A pure volunteer who receives trust money may be liable to restore it despite lacking notice at receipt, subject to recognised defences.

Mr Clegg, an assignee of GAP Steel Trading Limited’s claims, sued the estate of his former co-director, Andrew Pache, and others. The claims concerned Pache’s diversion of steel-trading business and opportunities to Focusplay Limited, a company which the trial judge found to be his alter ego.

The trial judge ordered the Estate to account on a restricted basis, reduced the account by 50 per cent for the period after Mr Clegg discovered the misconduct, and credited settlement payments made by other defendants. Claims against Mrs Pache personally were dismissed, including a claim concerning £50,500 paid under a 2010 agreement. Mr Clegg appealed on the scope and basis of the account, contribution, settlement credit, future payments and Mrs Pache’s liability.

1. Disposition. The appeal was allowed in part. Ground B1 was allowed, with directions for a fresh account. Ground B4 was allowed and the 50 per cent reduction was removed. Ground C was allowed in relation to the £50,500 payment. The appeal was dismissed on grounds B5 and B6. Ground B2 required no further determination. Consequential orders and costs were reserved for written submissions.
2. Account of profits. Where a fiduciary has concealed that he conducted a business through an alter ego company, and the businesses are sufficiently similar, the account should begin on the basis that all profits of the alter ego company during the relevant period are accountable. The defendants must identify and establish any transactions or profits independently undertaken or earned. The concealment justified reducing the evidential burden on the claimant: paras 55–61. The court relied on the principle discussed in Bhullar v Bhullar [2003] BCC 711.
3. Where the whole of the defendant company’s business is accountable, the appropriate starting measure is net profit before tax and depreciation. Fixed overheads should not be excluded merely because the claimant initially relied on gross profits. A different basis could be argued if a significant part of the business were shown not to be accountable.
4. Contribution. Even if a knowledgeable and passive co-director may be treated as party to a fiduciary breach, that does not establish equal responsibility for the resulting loss. On the findings, Mr Pache committed and benefited from the misconduct, while Mr Clegg protested and obtained no benefit. Responsibility therefore fell wholly on Mr Pache, and the 50 per cent deduction was unjustified: paras 65–70.
5. Settlement and receipt. Although a claimant may generally appropriate an unallocated recovery among several claims unless the allocation is obviously unsustainable, the settlement was properly treated as substantially relating to FPL’s profits. The amount actually paid, £197,499.97, was therefore deductible: paras 71–79. A purely theoretical further payment under the 2010 agreement had no practical significance given FPL’s insolvency: paras 80–81.
6. Mrs Pache. The £50,500 payment was received by Mrs Pache as a pure volunteer. Applying Re Diplock [1948] Ch 465, a volunteer who receives trust property in breach of trust is bound by the beneficiary’s interest and may face proprietary or tracing claims. Notice at receipt is unnecessary if the recipient knows of the interest before disposing of the property. Possible defences included disposal before notice and change of position, but neither was advanced. The appeal was therefore allowed on this issue: paras 82–91.

• Court of Appeal (Civil Division) The court allowed the appeal in part, directed a fresh account on the basis stated in the judgment, removed the 50 per cent reduction, and allowed the claim concerning the £50,500 payment. Costs and consequential orders were reserved.
• Chancery Division, Manchester District Registry His Honour Judge Bird, sitting as a Judge of the High Court, found that Mr Pache had breached fiduciary duty through Focusplay Limited, ordered a restricted account against the Estate, made a 50 per cent deduction for the later period, credited settlement payments, and dismissed the personal claims against Mrs Pache.