Keystone Healthcare Ltd v Parr

The Court of Appeal dismissed the appeal and upheld the judge's award that Mr Parr must disgorge an unauthorised profit arising from his concealment of a fraud on Keystone. The court applied established equitable principles that require a fiduciary who makes a profit from his position to account for it (Regal (Hastings); Murad; FHR), and noted the statutory codification in section 176 and section 178 of the Companies Act 2006. The court held that a mismatch between the company to which the fiduciary duty was owed (Keystone) and the company which effected the payment (Holdings) did not prevent Keystone from recovering the secret profit, provided there was a sufficient nexus between the breach and the profit. The court rejected the submission that the remedy required the same causation test as equitable compensation: an account of profits is concerned with stripping the fiduciary of the unauthorised gain rather than compensating the principal.

Background and parties: Keystone Healthcare Ltd (Keystone) was a healthcare employment agency owned by Mr and Mrs Ward and Mr Parr. Mr Parr was a director. Following Mr Parr's departure, Keystone alleged that Mr Parr had been party to a fraud which resulted in £128,022 being transferred to his personal account and that, unknown to Keystone and the Wards, Mr Parr sold his shares at full value rather than at the 50% discounted 'bad leaver' price that would have applied had his misconduct been known.

Procedural posture: The appeal to the Court of Appeal was from HHJ Stephen Davies (Chancery Division) who, after trial, gave judgment for Keystone against Mr Parr for £650,612.04 in respect of the 'overpayment claim'.

Nature of the claim and relief sought: Keystone sought recovery of an unauthorised profit/overpayment relating to the monies paid by Keystone Healthcare Holdings Ltd (Holdings) for Mr Parr's shares. The pleadings included claims framed both as damages for breach of fiduciary duty and, as advanced at trial, as an equitable claim for disgorgement of an unauthorised profit.

Issues for the court:

• Whether a mismatch between the duty-holder's principal (Keystone) and the third party that effected the payment (Holdings) barred recovery by Keystone.
• Whether liability to account required the breach to have caused the profit in the same way as requires causation for equitable compensation.
• Whether there was a sufficient nexus between the breach and the receipt of the enhanced price.

Court's reasoning and conclusions: The court emphasised that the equitable rule requiring a fiduciary to account for unauthorised profits is concerned with stripping the fiduciary of gains made in circumstances of conflict, not with making the principal whole. Authorities such as Regal (Hastings), Murad and FHR support recovery of a secret profit even if the money came from a third party. Section 176 and section 178 Companies Act 2006 were cited as statutory confirmation of the equitable principle. The court distinguished claims for equitable compensation (where causation of loss is required) from claims for disgorgement: while some connection is necessary, there is no requirement of causation in the same form as for damages. The judge had found that, had Mr Parr disclosed his misconduct, he would have been removed and the bad leaver provisions would have operated so that Keystone could have acquired the shares at the discounted price; that finding established a sufficient nexus. The mismatch between Keystone and Holdings therefore did not bar Keystone's recovery. The appeal was dismissed.

Other observations: The court also regretted non-compliance with the practice direction on citation of authorities by the parties' bundles of authorities.

Appeal dismissed. The Court of Appeal held that Keystone was entitled to recover the unauthorised profit received by Mr Parr despite the fact that the payment was made by a separate company (Holdings). The court applied equitable authorities (Regal, Murad, FHR) and Companies Act 2006 sections 176 and 178 to conclude that a mismatch between the company owed the duty and the company paying the money does not defeat an account of profits, provided there is a sufficient nexus between the breach and the profit; the judge's factual finding of such a nexus was entitled to stand.

Appeal from the High Court of Justice, Chancery Division (His Honour Judge Stephen Davies, sitting as a High Court judge) C30MA690. At first instance HHJ Stephen Davies gave judgment for Keystone against Mr Parr for £650,612.04 in respect of the overpayment claim. The Court of Appeal ([2019] EWCA Civ 1246) dismissed Mr Parr's appeal on 16 July 2019.