Stevens v Hotel Portfolio II UK Ltd (In Liquidation) and another

A constructive trust of unauthorised profits immediately gives the beneficiary a proprietary interest in the profits. If the trustee dissipates them, the beneficiary generally suffers a compensable loss equal to the value of that interest. A person who dishonestly assists the dissipation is jointly liable for that loss.

The counterfactual asks what would have happened had the trustee performed the duties of the constructive trust. It does not assume away the earlier breach by which the profits were made. Although equity may exceptionally permit gains from one breach to be set against losses from another, the person seeking set-off must show that applying the ordinary no set-off principle would be clearly inequitable. Set-off is unavailable where it would defeat the constructive trust and allow a dishonest assistant to escape liability for destroying the beneficiary’s property.

A director secretly acquired three hotels from his company through a nominee and later made profits of about £103m from their resale. The company had received market value and could not itself have exploited the development opportunity. The profits were nevertheless held on an institutional constructive trust for the company. The director dissipated them, with the dishonest assistance of the respondent.

Foxton J held the respondent liable to compensate the company for the value of the dissipated profits: [2022] EWHC 383 (Comm). The Court of Appeal allowed the respondent’s appeal, holding that the director’s overall scheme had caused the company no loss: [2023] EWCA Civ 1120; [2024] Bus LR 160.

The issues were whether breach of a constructive trust of unauthorised profits could attract equitable compensation, whether dissipation caused loss under the applicable counterfactual, and whether the original gain could be set against that loss.

1. By a majority, allowing the appeal, the court restored Foxton J’s order. Lord Briggs gave the judgment with which Lord Reed, Lord Hamblen and Lord Richards agreed. Lord Burrows dissented.

2. An institutional constructive trust of unauthorised profits is a real, free-standing trust. From receipt, the profits belong beneficially to the principal. The trust is not merely a court-awarded remedy for the earlier breach of fiduciary duty. Its consequences include the ordinary personal remedies arising from breach.

3. The constructive trustee must preserve the trust property, disclose its existence, seek the beneficiary’s directions and transfer it on demand. Dissipation breaches those duties and ordinarily causes a loss equal to the value of the beneficiary’s proprietary interest. A dishonest assistant in that dissipation is jointly liable with the trustee to compensate the beneficiary. The rule limiting an assistant’s liability to profits personally received concerns disgorgement; it does not exclude compensation for a distinct loss caused by destroying trust property.

4. The compensatory counterfactual derived from Target Holdings Ltd v Redferns and AIB Group (UK) plc v Mark Redler & Co compares the actual position with the position had the trust duty been performed. Here, performance meant preserving the profits for the beneficiary. The counterfactual did not erase the earlier breach which generated the profits, because that would also erase the constructive trust whose breach was being examined.

5. Equity ordinarily prevents a trustee from setting a gain produced by one breach against a loss produced by another. The court may recognise an exception where applying that principle would produce a clearly inequitable result, usually because of the nature of the connection between the breaches. Connection alone is insufficient. The person seeking the exception bears the burden of showing that weightier equitable considerations outweigh the purpose of the no set-off principle.

6. No qualifying inequity existed. The acquisition, profitable resale and later dissipation were distinct transactions. Their material connecting features were dishonesty, concealment and personal enrichment. Allowing set-off would defeat the purpose of the constructive trust and permit the assistant to rely upon his participation in earlier dishonesty to escape liability for the later destruction of the beneficiary’s property.

7. Lord Burrows would have dismissed the appeal. He regarded the acquisition and dissipation as one dishonest scheme producing no overall loss. He also considered compensation inconsistent with the rule limiting an assistant’s disgorgement liability, the company’s election for an account of profits, and the prohibition against double recovery.

1. United Kingdom Supreme Court: By a majority of four to one, allowed the company’s appeal and restored Foxton J’s order: [2025] UKSC 28 .
2. Court of Appeal: Allowed the dishonest assistant’s appeal, holding that the overall scheme caused no loss and limiting his liability to his personal profit: [2023] EWCA Civ 1120 ; [2024] Bus LR 160.
3. High Court: Foxton J held that dissipation of the constructively held profits caused compensable loss and made the dishonest assistant liable for that loss: [2022] EWHC 383 (Comm) .