Recovery Partners GP Limited & Anor. v Irakli Rukhadze & Ors.

A fiduciary must account for all unauthorised profits falling within the scope of the fiduciary duty. A pre-existing right to remuneration from the principal does not reduce the account. Only a proprietary interest which correspondingly limits the principal’s interest can exclude profits from it.

Unreasonable delay may justify restricting an account if granting full relief would be inequitable. Mere delay or standing by is insufficient. The court must preserve the strict rule’s deterrent effect.

An equitable allowance for the fiduciary’s skill, labour and risk is exceptional and fact-sensitive. It is available where taking the profits without recompense would be inequitable, provided that the allowance does not encourage fiduciary disloyalty. Culpability may justify reducing, rather than refusing, remuneration. The allowance may be a profit share and may be assessed robustly from factual evidence.

The defendants appropriated a business opportunity to provide asset-recovery services after the individual defendants had taken disloyal preparatory steps and resigned in bad faith from fiduciary positions. Following a liability trial, the claimants elected an account of profits. In the second phase, Cockerill J ordered payments subject to an aggregate maximum of US$129,576,750 plus interest: [2022] EWHC 690 (Comm).

The defendants appealed against findings that no binding antecedent profit-sharing agreement existed, that any such agreement would not restrict the account, and that delay did not justify a temporal restriction. They also sought a larger equitable allowance. The claimants cross-appealed against the 25% allowance granted for the defendants’ skill, labour and risk.

The central issues were the effect of an antecedent right to remuneration, the circumstances in which delay can restrict an account, and the principles governing an equitable allowance.

1. Appeal and cross-appeal dismissed. The trial judge was entitled to find that the parties’ approximate understanding about a profit share was not a binding contract. Essential matters remained uncertain, including the parties, legal structure, calculation of profit and precise percentage. Since there was no agreement, there was nothing to revoke.

2. The strict fiduciary rule required disgorgement of all unauthorised profits within the scope of the duty. A contractual right to remuneration for loyal service would not restrict the account after the fiduciary disloyally ceased providing that service. Only a pre-existing proprietary interest in the relevant asset, which correspondingly limited the principal’s interest, could exclude profits which had always belonged to the fiduciary. A contrary conclusion would undermine deterrence and leave the fiduciary with nothing to lose from breach.

3. Unreasonable delay or other unreasonable conduct may, in an appropriate case, justify restricting an account if justice requires. The restriction requires both unreasonable delay and circumstances making full relief inequitable, ordinarily involving material detriment to the defendant. Mere delay, even if lengthy, and merely standing by are insufficient. A claimant need not sue immediately upon discovering the breach and may reasonably wait to see whether a venture becomes profitable.

   Here the delay was reasonable. The defendants had not undertaken the significant material risks found in the mining authorities, and it was not shown that earlier proceedings would have changed their conduct. Full relief was therefore not inequitable.

4. An equitable allowance is exceptional in the sense that it is neither usual nor available as of right. The ultimate question is whether it would be inequitable for the beneficiary to take the profits without paying for the skill, labour and risk which produced them. An allowance must not encourage fiduciaries to place themselves in conflict. The fiduciary’s culpability is relevant, but misconduct does not invariably preclude an allowance; deterrence may instead be protected by awarding less than full remuneration.

5. The allowance may take the form of a profit share, particularly where that reflects the market for the services. Its quantification is an evaluative judgment and need not be mathematical or supported by expert evidence in every case. The pleadings and extensive factual evidence permitted a robust assessment. The pre-breach understanding and previous remuneration arrangements supported a percentage allowance, while culpability justified reducing it. The judge’s 25% figure was within the permissible range.

• Court of Appeal (Civil Division): By [2023] EWCA Civ 305, dismissed the defendants’ appeal and the claimants’ cross-appeal.
• High Court, Commercial Court: Following the second-phase trial, Cockerill J determined the account of profits, rejected the alleged binding profit-sharing agreement and temporal limitation for delay, and granted a 25% equitable allowance: [2022] EWHC 690 (Comm).
• High Court, Commercial Court: At the first-phase liability trial, Cockerill J held that the defendants had appropriated a business opportunity after breaches of fiduciary duty. No separate citation is stated in the judgment.