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Fiduciary duties and remedies: a cautionary tale

Thu 13 Jul 2017

Clegg v The Estate and Personal Representatives of Pache and others [2017] EWCA Civ 256

The Court of Appeal recently had the opportunity to consider fiduciary duties, which apply to company directors and certain other senior employees. While the Court did not state any new principle, the case of Clegg serves as a strong reminder of the gravity of these duties, and the power of the remedies available for their breach. In this case, the claimant sought an account of the profits his business partner accrued in breach of the fiduciary duty not to profit from his position at the company’s expense, extending to a sum in the hundreds of thousands of pounds which would not be recoverable on ordinary contractual principles.

Facts

Mr Clegg and Mr Pache were joint shareholders and co-directors of a steel trading company. However, until their company’s insolvent administration in 2008, Mr Pache diverted funds and business opportunities from the company to a competing company in which he had a secret interest. Mr Clegg became aware of this and confronted Mr Pache in 2007, but he nevertheless continued. Mr Pache passed away in 2010, and Mr Clegg brought claims against his estate, his wife - who had received approximately £50,000 from the competing venture – and the competing company itself, the last of which were settled.

Decision

The decision contains a number of key points of significance in the main judgment, given by Briggs LJ.

Normally, it is for the claimant to prove the sum claimed, either in terms of loss or profit, when bringing a claim. However, Briggs LJ cited a long-standing principle that where a defendant in breach of duty has made it difficult or impossible for a claimant to produce the relevant evidence, he must run the risk of adverse findings. In these circumstances, this meant that the burden of proof was reversed, and the competing venture’s profits were all included unless proved to be unrelated to Messrs Clegg and Pache’s business. This was notwithstanding the death of Mr Pache, who would have been the person best placed to justify any exclusions.

Secondly, the defendant suggested that from the moment when Mr Clegg became aware of the wrongdoing, he became partly responsible for it. Briggs LJ disagreed. Mr Clegg had protested at Mr Pache’s behaviour, and was told to mind his business and ignored. Furthermore, it was noted that Mr Pache ‘both personally committed and received all the benefit from all the relevant breaches of duty’.

Lastly, the extent of the remedies available following a breach of fiduciary duty was further illustrated by Briggs LJ’s findings on the claim against Mr Pache’s wife. She had received money from the competing company which was carried on in breach of the duty, and had provided nothing in return. Accordingly, Mr Clegg could retrieve the money she had received from this, regardless of whether she was aware of his right to it, as none of the defences applied.

Impact

The decision offers a salutary reminder of the potentially serious consequences of a breach of fiduciary duties. Company directors and other fiduciaries must always be wary of ‘feathering their own nests’ at the expense of the company, though essentially ‘innocent’ directors will not necessarily be held responsible for their peers’ wrongdoing even if they were aware of it. From the opposite viewpoint, fiduciary duties can offer companies strong protection against the wrongdoing of directors and certain senior employees, and, with advice, can be combined with other tools, such as post-termination restrictions, to good effect.

For more information on this article please contact the Employment Team.