Nigel Stephen Clegg v Estate & Personal Representatives of Andrew Gregory Pache (Deceased) & 5 Ors (2017)
Where a company director had breached his fiduciary duty by diverting funds and business opportunities to a second company in which he had a concealed beneficial interest, the starting point should be that the second company account for all of its profits during the relevant period.
The appellant (C) appealed against the terms of an order that the respondent estate account for profits derived from breaches of fiduciary duty of the deceased (P).
C and P were joint shareholders and co-directors of a company trading in steel (G). C alleged that from 2004 until shortly before his death in 2010, P had carried on a steel trading business for his own benefit through an alter ego company (F). C discovered P's actions in 2007 and had objected, but taken no further action. C, on behalf of G, brought proceedings against P's estate claiming that P had diverted funds and business opportunities to F in breach of his fiduciary duty to G and sought an account for all F's gross profits from 2004. He also brought a claim based on unjust enrichment against P's wife in respect of payments she received from F. The judge accepted that P had breached his fiduciary duty, however, after reviewing the expert accountancy evidence, he was not satisfied that all of F's profits were attributable to that breach. He directed that there be an account for profits by reference to a list of specific transactions. He limited C's recovery after 2007 to 50% to reflect that from that time he was also in breach of fiduciary duty for failing to prevent P's misconduct. Finally, he found there was no basis for any claim of unjust enrichment.
Account for profits. The judge addressed the issue as to the ambit of the account of F's profits by reference to an unspoken but basic assumption that it was for C to prove each item of profit alleged to be accountable. It was easy to understand why he had taken that approach having regard to the fact that C's case was heavily dependent upon detailed schedules, and in light of the case management direction that those schedules should be subjected to the independent analysis of a single joint expert. However, the court was satisfied that C's case was also presented before the judge in the much simpler way for an account of all F's profits. Although the judge was right to require a further account, it should have been directed on the basis that all of F's profits during the relevant period should be accountable, subject to the exclusion of such transactions or profits as the estate could show were independently undertaken or earned. Having regard to the active steps taken by P to conceal his personal involvement in F during all but the last year of the relevant period, justice required the account be taken in that way thereby reducing the burden upon C in relation to individual transactions. That finding was subject to one important reservation: the basis upon which that profit should be identified was net profits, before tax and depreciation. The court saw no reason for not deducting fixed overheads and expenses (see paras 46-61 of judgment).
Deduction to reflect C's breach of fiduciary duty. Even if the judge had been entitled to treat C, from 2007 onwards, as being in breach of fiduciary duty jointly with P, the burden of responsibility for those breaches fell squarely on P. Far from encouraging or consenting to P's conduct, C protested it, but his concerns were ignored by P. There was no basis for apportioning to C any share of liability for G's loss (paras 65-70).
Unjust enrichment. P's wife maintained at trial, and the judge accepted, that she had no notice that payments which P arranged for F to make to her involved a breach of his fiduciary duty. However, she advanced no defence to liability in unjust enrichment and the claim against her should not have been rejected (paras 82-91).
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