Interactive Technology Corporation Ltd v Ferster

Equitable compensation is not confined to reparation for loss caused by a breach of fiduciary duty. It also includes substitutive compensation which restores the objective value of assets or funds disbursed without authority.

When construing an order for equitable compensation, the court may consider the pleadings and submissions made when the order was granted. Those materials cannot restrict the ordinary scope of the order’s express terms without a sufficient contextual basis. Accordingly, an assessment framed by reference to unauthorised remuneration may include restoration of the remuneration and associated payments, as well as compensation for consequential loss.

A company established that its former director had dishonestly caused it to pay him at least £4.48 million in unauthorised remuneration. Morgan J ordered equitable compensation to be assessed. He subsequently declared that the order concerned only loss resulting from the payments and that the company had elected between that remedy and repayment of the remuneration: [2017] EWHC 217 (Ch).

The company appealed against those declarations. It argued that equitable compensation includes both restoration of money disbursed without authority and reparation for consequential loss. The central issue was whether the assessment order was confined, either by the nature of equitable compensation or by its procedural context, to compensation for causally resulting loss.

Held, allowing the appeal and varying the order:

1. Equitable compensation is not restricted to compensation for loss. It is capable of including a payment which restores the value of assets or funds removed without authority by a trustee or other fiduciary. It may also include reparation for consequential loss caused by the breach.

2. Substitutive compensation and reparative compensation perform different functions. Where an account discloses an unauthorised disbursement, the beneficiary may falsify the account. The fiduciary must then restore the property or pay its objective monetary value. That award is restorative rather than compensation measured by actual loss. By contrast, where the fiduciary’s breach caused the failure to obtain property or otherwise harmed the beneficiary, the account may be surcharged and compensation is measured by the resulting loss. The analysis in Libertarian Investments Ltd v Hall [2014] 1 HKC 368 was applied.

3. Morgan J therefore erred in treating the words “equitable compensation” as necessarily referring to loss-based compensation. Although the pleadings and submissions were relevant to construing the assessment order, they provided no sufficient basis for restricting its express terms. The company had proposed an order referring broadly to compensation in respect of the unauthorised remuneration, and the director had agreed to that wording without qualification by reference to loss.

4. The company could contend on the assessment that compensation should include the equivalent of the unauthorised remuneration and the associated PAYE and National Insurance contributions. It could also seek compensation for the costs of restating its accounts and for consequential interest and penalties. The declarations confining recovery to loss and recording a binding election between inconsistent remedies were deleted and replaced accordingly.

5. Although causation arguments remained formally open for the assessment, the court observed that they were difficult to reconcile with a claim to recover sums dishonestly taken as remuneration without authority. The facts bore no relation to those in Target Holdings Ltd v Redferns [1996] AC 421 or AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58, [2015] AC 1503.

1. Court of Appeal (Civil Division): The appeal was allowed. The second and third declarations were deleted and replaced by a declaration permitting the company to seek both restorative compensation and compensation for consequential loss: [2018] EWCA Civ 1594.
2. High Court, Chancery Division: Morgan J declared that the assessment order concerned compensation for losses resulting from the unauthorised remuneration and that the company had made a binding election for that remedy: [2017] EWHC 217 (Ch).