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Court condemns Director's Secret Profits
 Article 
Author
Fraser Mitchell
Date
01 June 2017

Court condemns Director's Secret Profits

Clegg v The Estate and Personal Representatives of Pache and others [2017] EWCA Civ 256 (11 May 2017) (Bailii).

The Court of Appeal has recently considered a claim against a company director who misapplied company property for his personal benefit.

Facts

Mr Nigel Clegg and Mr Andrew Pache were joint shareholders and co-directors of a steel trading firm, GAP Steel Trading Limited ("GAP"). Between 2004 and 2008 Mr Pache secretly carried on another steel trading business for his own benefit, Focusplay Limited ("Focusplay"). Around September 2007 Mr Clegg partially discovered Mr Pache's activities and objected but Mr Pache continued the business of Focusplay for his own benefit. Mr Pache died in October 2010.

Mr Clegg pursued claims against Focusplay and also against Mr Pache's estate and his widow, Mrs Pache, on the basis of knowing receipt and unjust enrichment.

At first instance, Bird HHJ found that Mr Pache had used Focusplay to conceal the existence of profits and ordered that an account be given for this between 2004 and 2009 in respect of certain transactions. Mr Clegg and Focusplay entered into a settlement agreement. The court found that the value of the settlement agreement should be deducted from the recoverable profits.

The court further reduced Mr Clegg's recovery by imposing a limitation of 50% upon the recovery of profits earned after September 2007. This was on the basis of Mr Clegg's partial discovery of Mr Pache's conduct.

Bird HHJ also rejected the claims against Mrs Pache, finding that she had no knowledge of the breach of fiduciary duty and that there was no basis for a claim for unjust enrichment.

Mr Clegg appealed the judgment.

On Appeal

Mr Clegg's appeal succeeded, in part, as follows:

  • There should be no reduction on grounds of contribution. Mr Clegg had protested against the misconduct and Mr Pache was found to be entirely responsible for the breaches of fiduciary duty. However, the court recognised that a contribution claim could succeed against a director who took no steps to prevent a misapplication of company property.
  • Mr Clegg's claim against Mrs Pache was allowed on appeal on the basis of unjust enrichment. It was not necessary to establish that she had notice of Mr Clegg's interest at the time she received funds.
  • The court held that the usual burden of proof was reversed so the account should not be limited to those transactions that Mr Clegg had proved a sufficient connection with a breach of fiduciary duty. Mr Pache had taken steps to conceal his conduct and the account should be taken on the basis that all profits during the relevant period were accountable, subject to any profits that Mr Pache could show were independently earned.
  • The court of first instance was correct that the settlement sum should be deducted from the amount recoverable. The appeal failed on this particular point.

Fraser Mitchell, an Associate in Mishcon de Reya LLP's Fraud Defence team, says:

"The decision here is based on longstanding legal principals but is a helpful reminder as to the remedies that may be available where a director has acted in breach of their fiduciary duties.

"It is worth highlighting - and should be of some comfort to claimants - that where an account of profits is ordered it is not necessary to build the account "brick by brick" by proving a sufficient connection with a breach of fiduciary duty on a transaction by transaction basis (paragraph 57, the judgment).

"In addition, the court also found that Mr Clegg was not liable for a contribution because he had in fact raised objections as to Mr Pache's conduct. However, prospective claimants should note that a contribution claim could succeed against a claimant who took no steps to prevent a misapplication of company property by its director.

"The judgment is also an important reminder that directors must at all times act in accordance with their statutory duties and common law fiduciary duties."