W and the defendant embarked on a project with the aim of acquiring a substantial interest in an English company, TSE, which started with the acquisition of 125,000 TSE shares in 2002 (the first tranche). In 2003 they attempted to make additional acquisitions of TSE shares, such attempts involving three of W’s companies, including the plaintiff. The overall scheme was that funds would be provided by one company, Assanzon, for the acquisition of shares for another company, Momentum, which were held for its beneficial owners which were principally the plaintiff company, Libertarian. The funds were transferred from Assanzon to a trust account set up by the defendant which W believed was held in the name of Assanzon or Momentum. In fact, the trust account was held in the name of the defendant’s company, Axdale.
An initial tender for TSE shares in 2003 via this project failed. During this period, the defendant periodically transferred various sums in and out of the trust account without W’s knowledge or authority, many to another account in Axdale’s name. A further tender was attempted in November/December 2003 with further funds being transferred to the trust account. This resulted in additional shares being acquired (the second tranche).
In January 2004, further funds were transferred from the trust account. The defendant claimed these had been used to successfully acquire an additional 1,777,000 TSE shares (the third tranche) which he said were held in a trust structure for the plaintiff’s benefit.
Subsequently it became urgent for W to obtain control of the 1,777,000 TSE shares in order to take advantage of a general open offer by a third party to purchase the shares. However he failed to obtain the relevant documents from the defendant and so did not benefit from the third party offer. It was subsequently found that the claim regarding the purchase of 1,777,000 TSE shares in January 2004 was false, such shares having not been bought and no explanation having been provided as to how the money transferred from the trust account had been used instead.
Both courts below found that the defendant was in breach of fiduciary duties owed to the plaintiff. Both courts acknowledged that the findings would justify an award of equitable compensation on a wilful default basis to restore the plaintiff to the position it would have been in if the defendant had honoured his fiduciary obligations. However, both courts held that evidential deficiencies prevented the granting of such relief, ordering an account to be taken with an interim payment pending said account.
The defendant appealed, arguing that the provision of funds by W and his companies for the acquisition of the third tranche of shares was merely a loan to the defendant and Axdale creating a debt but no fiduciary duty and therefore there should be no equitable compensation. The defendant accepted that Axdale had been overpaid and owed W and his companies the amount of the interim payment already made but no more.
The plaintiff cross-appealed, seeking an immediate award of equitable compensation on a wilful default basis.
Held, dismissing the defendant’s appeal and allowing the plaintiff’s cross-appeal and making an immediate award of equitable compensation:
- 1) A fiduciary relationship may arise as aspects of a commercial relationship. Although parties’ relationships may be generally non-fiduciary, particular obligations may import fiduciary duties and equitable remedies. The important focus is on the nature of the obligation in question. A person attracts fiduciary duties if he undertakes an obligation to act in the interests of another. Such fiduciary duties may arise from one of two sources: agency or a relationship of ascendency or influence by one party over another or dependence or trust on part of that other. An example of an agency type situation giving rise to fiduciary duties involves a case where a person receives money or other property for and on behalf of as trustee of another person (at , ,  and ).
- 2) Where a party is found to have undertaken an obligation to act in another’s interest, it is necessary to determine what precisely the fiduciary duty owed consists of (at ).
- 3) The defendant’s argument that the transfer of funds by W to the defendant was merely a loan was rejected. The findings that the defendant was in breach of his fiduciary duties owed to the plaintiff were unassailable. In taking charge of the funds entrusted to him and agreeing to undertake the intended acquisitions, the defendant became trustee of the funds to apply them for the aforesaid purpose and undertook fiduciary obligations to act in the interests of the beneficial owners of M (principally the plaintiff) in the acquisition. The absence of subjective intention to create a trust was irrelevant in a case like the present. Further, the argument that the defendant could not have been in a fiduciary relationship because he did not exercise any discretionary powers was unsound. It is in the context of ‘ascendancy’ cases that the courts have identified this as an essential feature of the fiduciary relationship. The crucial fact was that the defendant was entrusted with funds for the specific purpose of acquiring the shares as agent for Momentum and the plaintiff (Momentum’s beneficial owners). He was trustee of the money and a fiduciary in managing the acquisition (at ,  and ).
- 4) The defendant was therefore under a duty when pursuing the share acquisition to act in good faith, not make a profit out of his trust, not to place himself in a position where his duty and his interest might conflict and not to act for his own benefit without the informed consent of his principal. The defendant had plainly breached some or all of those fiduciary duties. The defendant wilfully defaulted in the performance of his fiduciary obligation to acquire the third tranche of shares on behalf of the plaintiff, having fraudulently extracted funds from the trust fund (at  to .
- 5) Where a fiduciary has committed a breach of some fiduciary duty it may be important to ascertain what impact that breach has had on any trust property. It is possible to distinguish three categories of breach with particular reference to the impact on the trust estate: (1) breaches leading directly to loss or damage to the trust property, (2) breaches involving an element of infidelity or disloyalty which engages the fiduciary’s conscience and (3) breaches involving a lack of appropriate care and skill. Breaches of the second kind do not involve loss or damage to property and breaches of the third kind neither that nor infidelity or disloyalty (at ).
- 6) In every case for equitable compensation there must be shown to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable. However the rules on causation are of varying strictness depending on the type of duty and breach in question. Breaches in the third category merely provide a setting for a duty which is indistinguishable from a common law duty of care albeit arising in a fiduciary context; the common law rules as to causation, foreseeability and remoteness generally apply to such claims. In cases in the first category strict rules of causation apply requiring the trustee to restore to the trust fund what he has caused it to lose as a result of his breach of trust. Causation is established on a ‘but for’ basis without the constraints of the common law causation rules on remoteness and foreseeability, the loss need not be reasonably foreseeable at the time of the breach and there is only a limited duty to mitigate. In cases in the second category common law rules on foreseeability and remoteness are similarly inapplicable (at , ,  to ).
- 7) Equitable compensation rests on the premise that the basic duty of a trustee or fiduciary who has misappropriated assets or otherwise caused loss or damage to the trust estate in breach of his duty is to restore the lost property to the trust. Where restoration in specie is not possible, the court may order equitable compensation in place of restoration. Where the breach consists of a wilful failure by the fiduciary to carry out his fiduciary duty, his omission causing loss to the trust estate, he is liable to account on a wilful default basis. The trustee is required to restore the financial position of the trust fund to what it would have been if the trustee had not been guilty of wilful default, with the effect that the trustee must pay fresh money into the account. The trustee’s liability is essentially to compensate the trust for the consequential losses that follow from the trustee’s breach. Consequently the court is entitled to assess compensation with the full benefit of hindsight. Loss is assessed at the time of judgment and the court is entitled to take into account any post-breach changes affecting the value of the lost trust property. However the equitable compensation is limited to the loss flowing from the trustee’s acts in relation to the interest he undertook to protect (at  to  and  to ).
- 8) The defendant’s breach of duty had clearly caused loss to the trust estate, both because he extracted funds for his own unauthorised purposes and because of his wilful default in the purchase of the third tranche of shares. The court could take into account the fact that if there had been no wilful default, the shares would have been acquired, the plaintiff would have been able to offer the entire parcel to the third party and that some of the shares would have been taken up at the third party’s offer price. The appropriate order was for the defendant to pay equitable compensation on a wilful default basis with a view to placing the trust estate in the position which it would have occupied if he had duly performed his duty of acquiring the third tranche of shares (at ).
- 9) In assessing the proper measure of equitable compensation, a fiduciary is precluded from setting up a case inconsistent with the obligations of his fiduciary position. In this case, the defendant was bound as a fiduciary to use the funds to acquire the third tranche of shares. Having withdrawn funds for that purpose and having claimed these were used to acquire the shares at a certain cost, he was now precluded from setting up a case inconsistent with his having carried out his obligation. The court was entitled to treat him as if he had indeed purchased the shares at the cost claimed. The court assumed that the plaintiff would have put up the shares for sale to the third party at the offer price and that a proportion of those would have been so sold, yielding a profit for the trust. That profit constituted the first element of equitable compensation properly payable by the defendant (at  and ).
- 10) Where a plaintiff provides evidence of loss flowing from the relevant breach of duty, the onus lies on a defaulting fiduciary to disprove the apparent causal connection between the breach of duty and the loss apparently flowing therefrom. Accordingly, it was not enough for the defendant to say that there was no evidence that it would have been possible to acquire the shares. It was up to him to show that no purchase was possible (at  and ).
- 11) With regards to the remaining shares, the court faced evidential difficulties in ascertaining their realisable value for the purposes of equitable compensation which would almost certainly involve guesswork. Since those evidential difficulties formed part of the consequences flowing from the defendant’s original wrongdoing, the court would take a robust approach, relying on the presumption against wrongdoers, onus of proof and resolving doubtful questions against the party whose actions had made an accurate determination so problematic and make an immediate award, calculating the loss to the trust fund in respect of the remaining shares using the traded price per share on the day judgment was delivered (of which the plaintiff had provided evidence) (at  to ).
- 12) An order for the taking of an account and an award of equitable compensation are not inconsistent remedies requiring a plaintiff to make an election between the two (at ).
- 13) Interest on the award to the date of judgment would be simple not compound interest; there was no ground for ordering compound interest on equitable compensation. Compound interest is normally only ordered where the award is in lieu of an account of profits improperly made by the trustee (at ).
- 14) Obiter: where a breach causes no loss to the trust estate but in the fiduciary making a profit, equity will not allow such a fiduciary to retain such a profit but will require him to account for it imposing a constructive trust. The fiduciary will not be made to account for more than he actually received (at ).