Auden McKenzie (Pharma Division) Ltd v Patel [2020] WTLR 1133

WTLR Issue: Winter 2020 #181





This was an appeal against summary judgment on a claim for equitable compensation for £13,149,479 plus interest at 2.5% pa compounded annually.

A was a director of R. A and his sister (Ms Patel) had founded R and had been sole directors and (directly and indirectly) owned all of the shares. Between 2009 and 2014, A had caused R to pay £13,763,452 against sham invoices to Dubai companies. The Dubai companies had retained 5-10% of the invoiced sums and paid the balance to A (and Ms Patel’s) personal bank accounts, to them in cash, and to third parties for the purchase of a New York apartment, goods, and services for their personal use. A accepted that this had been done to extract funds from R in a way which would evade the payment of corporation tax by R and the payment of income tax by A and Ms Patel.

By a share purchase agreement, A and his sister agreed to sell the entire share capital in R to Actavis Holdings UK Ltd (Actavis). Actavis assigned its rights to Chilcott UK Ltd (Chilcott) which completed the purchase.

Following investigations by HMRC, A made disclosures to them which resulted in a settlement under which the payments were treated as undeclared remuneration. A paid £14.6m to HMRC in respect of income tax and national insurance contributions on that deemed income and corporation tax which would have been payable by R, plus interest and penalties. R and Chilcott were unaware of the disclosures, negotiations, or settlement with HMRC.

R, Actavis, and Chilcott sued A, inter alia, for damages or equitable compensation for breach of fiduciary duty and an order that A hold the extracted sums on trust for R. R applied for summary judgment for equitable compensation of £13,149,479 plus interest. A made his own application for strike out and summary judgment on parts of the claims brought by Actavis and Chilcott, and applied for summary judgment on a counterclaim in respect of earn-out provisions in the share purchase agreement.

The applications were heard by Robin Knowles J who dismissed A’s application (from which there was no appeal) and gave summary judgment on R’s application. In fixing judgment at £13,149,479, credit was given for corporation tax paid by A as part of his settlement with HMRC.

A accepted that in procuring the payments by R, he had acted in breach of his fiduciary duties. However he resisted summary judgment on two bases. First, A argued that the breaches of duties had been authorised or ratified under the principle in re Duomatic Ltd. This was dismissed because that principle only applied to honest and lawful transactions, and there was no appeal in relation to it.

Secondly, A argued that, if the payments had not been made unlawfully, he and Ms Patel would have caused R to make equivalent payments to them as dividends or in some other lawful manner, such that R could show no loss flowing from the payments. This was dismissed by the judge and formed the primary basis of the appeal. R also challenged the judge’s decision not to reduce the amount of the judgment by reference to the corporation tax that R would have paid if the payments had not been made.

Held (allowing the appeal):

A’s case was that, had the payments not been made pursuant to the sham invoices, they would have been lawfully paid by R to the shareholders as properly paid dividends or remuneration. Given that A and his sister were the only shareholders and R had sufficient distributable reserves to pay such dividends, this was not so implausible as to be discounted on a summary judgment application. For the purposes of the application, therefore, it should be assumed to be true.

There was force in the submission that the judge had failed to operate on the assumption that this counterfactual would have occurred. It did not necessarily follow, however, that summary judgment should have been refused. The issue was one of law – whether a director could resist a claim for equitable compensation in respect of misappropriation of company funds on the ground that, had they not been misappropriated, they would have been lawfully transferred to the same persons for no value. In a summary judgment application, the question was not whether this was right, but whether A had a real prospect of successfully defending on this basis.

Breaches of duty take many forms; but in broad terms are often analysed with good reason as falling within three categories: first, transactions involving an unauthorised payment or disposal of or damage to trust assets causing loss to the trust; second, breaches of duties of loyalty involving the trustee making profits at the expense of the trust or by the use of information or opportunities available to the trustee in that capacity; and third, breaches of duties of skill and care causing loss to the trust.

This case fell into the first category. On its face, the loss to R was the amount of the payments. If an account in common form were ordered, the payments would be disallowed or falsified and A ordered to make good the loss. This would be a form of equitable compensation (Target Holdings v Redferns (a firm) [1996], Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011], and Interactive Technology Corporation Ltd v Ferster [2018] referred to). In such a case it was open to R to seek an order for compensation without first seeking an account (AIB Group (UK) plc v Mark Redler & Co [2015] and Barnett v Craggy [2018] referred to).

While Target Holdings and AIB establish that equitable compensation for unauthorised payments is not invariably a sum equal to the payments, the decisions in those cases are restricted to circumstances where the beneficiary has obtained the full benefit for which it bargained for, or where, if the trustee had fully performed its obligations, the loss would have been less than the amount of the unauthorised payment. In each case, the reduced figure is the loss that flowed directly from the breach of trust. In this case, not only were the hypothetical dividends not paid but there was no obligation on R or its directors to pay any such dividends.

A also had a narrower submission, which was that justice would not be done by requiring A to refund the payments where the same amounts would have otherwise been paid to himself and his sister.

While directors are not strictly trustees, they are in a closely analogous position and are treated as trustees as respects company assets under their control (Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] applied). Where a director causes a company to make unauthorised payments for no value, the director is liable to the company to pay compensation equal to the payments (Bairstow v Queens Moat Houses plc [2001] and HMRC v Holland [2009] applied). This provided grounds for concluding that A was not entitled to rely on the assumed fact that dividends equal to the payment would have been paid to him and his sister in response to the claim for equitable compensation.

However, since the order was for summary judgment, the court must be satisfied that the defence was unsustainable. The assumed facts were striking. The parties would have been in precisely the same position as they were immediately after the payments were made. Moreover, as sole shareholders, A and his sister were able at all material times to procure this result. No case of which counsel or the court were aware had raised facts as stark as these. While Target Holdings and AIB did not directly assist A, they did show a willingness of the courts to develop the equitable remedies for breach of trust and fiduciary duty and, where required to do what is practically just, to entertain some departure from the strict obligation of trustees and fiduciaries to restore the fund under their control. This potential for flexibility had been emphasised in cases and commentaries including Target Holdings, AIB, and Sinclair Investments. While a similar defence had been rejected in Bairstow, the directors in that case had been granted leave to appeal by the House of Lords but the case had settled. In this case the issue was raised in even starker form.

R’s argument that none of the counterfactual payments of dividends would have constituted a loss, properly so called, to the company, was not a conclusive point in R’s favour. Neither was the fact that A’s proposed defence would enable a dishonest director to effectively steal money from the company without redress. It did not accord with principle that equitable compensation should be payable only because the defendant had acted dishonestly. This did not mean that A would succeed if he established the facts on which he relied, but the court was not prepared to say that his defence was unsustainable in law.

Dicta in Parsons v BNM Laboratories Ltd [1964] that, as a general rule, where both lost earnings or profits and the damages are taxable, no account should be taken of taxation, carried considerable authority and had been followed in subsequent first-instance decisions (Deeny v Gooda Walker Ltd (No 2) [1996] and Nagel v Pluczenik Diamond Co NV [2017] referred to). It also reflected the fact that, where the judgment sum would be chargeable to tax in the year in which it was payable, the rate of tax might not be known until after the end of the year. However, in other first-instance decisions this general approach had not been followed where the judgment sum was chargeable to tax at a lower rate than the rate at which the lost profits or income would have been taxed (Amstrad plc v Seagate Technology Inc (1997) and BskyB Ltd v HP Enterprise Services UK Ltd [2010] referred to). Since summary judgment was being set aside, it was not necessary to determine the issue of quantum. However the court expressed the view that the issue was open to serious argument on both sides.

JUDGMENT DAVID RICHARDS LJ: [1] This is an appeal against a summary judgment on a claim for equitable compensation. The judgment is for £13,149,479, with interest at 2.5% pa compounded annually, making a total of £15,884,230. [2] The appellant, Mr Amit Patel, was a director of the first claimant, Auden McKenzie (Pharma Division) Ltd (the …
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Counsel Details

Christopher Pymont QC (Maitland Chambers, 7 Stone Buildings, Lincoln’s Inn, London WC2A 3SZ, tel 020 7406 1200, email and Ciaran Keller (Essex Court Chambers, 24 Lincoln’s Inn Fields, London WC2A 3EG, tel 020 7813 8000, email:, instructed by Maurice Turnor Gardner LLP (15th Floor, Milton House, Milton Street, London EC2Y 9BH, tel 020 7786 8710, email for the appellant.

Andrew George QC and Victoria Windle (Blackstone Chambers, Blackstone House, Temple, London EC4Y 9BW, tel 020 7583 1770, email, instructed by Byrne & Partners LLP (1 Plough Place, London EC4A 1DE, tel 020 7842 1616, email for the respondent.

Cases Referenced