UK Court of Appeal clarifies novel point of law regarding dishonest assistance
The recent Court of Appeal decision in Hotel Portfolio II UK Ltd and another v Ruhan & others, regarding a novel point of law on dishonest assistance confirmed that a claimant cannot claim equitable compensation from a dishonest assistant, in circumstances where a claim for an account of profits has been made against the same individual, leading to reversal of the £160 million judgment.
In March 2005, Hotel Portfolio II UK Limited (“HPII”) sold three hotels to a company called Cambulo, which appeared to be under the control of Mr Anthony Stevens. In reality, Mr Stevens was at all material times acting as a nominee of Mr Andrew Ruhan, a director of HPII. Mr Ruhan, in breach of his fiduciary duties to HPII, concealed from HPII that he was the true purchaser of the hotels. The hotels were sold to Cambulo at market value.
Between 2006 and 2008, Cambulo sold the hotels to third parties for a total profit of approximately £100m, which accrued to Mr Ruhan. This gave rise to a further breach of his fiduciary duties to HPII since he failed to account to HPII for this profit. This money was subsequently dissipated by Mr Ruhan.
HPII went into creditors’ voluntary liquidation in April 2008. Proceedings were issued by HPII (in Liquidation) against Mr Ruhan alleging that he acted in breach of his fiduciary and other duties owed to the company. In addition to the claims against Mr Ruhan, HPII also sought an account of profits, equitable compensation and damages from Mr Stevens, on the basis that he dishonestly assisted in breaches of fiduciary duty by Mr Ruhan and was a participant in an unlawful means conspiracy with Mr Ruhan.
At first instance, the High Court found that Mr Ruhan breached his fiduciary duty by failing to disclose his interest in Cambulo and that he was liable to account for the profit he made from the subsequent sale of the hotels. Mr Ruhan was also found liable for breaching his duty as a constructive trustee by dissipating the profit. The Court found that Mr Stevens dishonestly assisted Mr Ruhan with these breaches and he was ordered to pay equitable compensation of £102m, and compound interest of almost £60 million. He appealed this decision.
The Court of Appeal set aside both the equitable compensation order and the compound interest order.
The Court considered that Mr Ruhan’s breaches and Mr Stevens’ assistance were a “single and uninterrupted course of conduct”. Mr Stevens was therefore only liable to account for the profits he had made out of his dishonest assistance. He could not be held liable for equitable compensation since HPII suffered no loss as a result of Mr Ruhan’s conduct.
The Court considered the principle set out in Barlett v Barclays Bank Trust Co Ltd (Nos 1 and 2)  515, where it was held that assessment of compensation payable for a breach of trust giving rise to both loss and gain for the beneficiary should include a set off of the gain against the loss where the loss and gain were occasioned by a single transaction (as opposed to separate and distinct breaches).
It was held that “it would be “manifestly unjust” to allow HPII to focus exclusively on Mr Ruhan’s failure to account for the profits once they had accrued. Whether or not HPII has suffered a loss should be determined by reference to the total effect of Mr Ruhan’s scheme. To put things differently, the “loss” stemming from Mr Ruhan’s treatment of the profits must be balanced against the claim to recover those very profits which arose from the same plan”.
The Court highlighted that “[e]quitable compensation is concerned with loss, but when the transaction is considered as a whole, HPII has suffered no loss. In contrast, an account of profits is concerned with the defendant’s gain. Equity is satisfied in this case by the award of an account of profits. Mr Ruhan is therefore liable to account as a fiduciary for the profits which he has derived from his breaches of duty, notwithstanding that they have caused no loss to HPII. Mr Stevens is similarly liable to account, but only for the profits which he himself has made from assisting Mr Ruhan.”
While agreeing with the leading judgment delivered by Newey LJ, Males LJ also noted that there are conflicting authorities on the question whether a claimant is entitled to recover damages or compensation for a loss suffered as a result of one breach of duty, while ignoring a gain obtained as a result of another breach of duty.
This case raised an interesting and novel question: are dishonest assistants liable to pay equitable compensation? The Court of Appeal has established that equitable compensation cannot be an available remedy where there have been two fiduciary breaches which are so closely linked (as they were in the present case), one causing a loss and the other a gain, without the loss being netted off against the profits. The Court of Appeal held that this would provide an unjust result.
The decision leaves the door open for future cases to develop this line of case law and, in particular, scope for further discussion about how closely connected multiple breaches are for the purposes of determining the remedies available.