Supreme Court: duty to account: asset management implications

1. Introduction

In Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, the Supreme Court was asked to change English law governing a fiduciary's duty to account to its principal for unauthorised profits arising from the fiduciary's position.

Specifically, the Supreme Court was asked to overturn House of Lords precedent in order to allow fiduciaries to raise counterfactual / causation type defences to claims for breach of the duty to account. Such counterfactual arguments might include that: (i) the profit would have been made regardless of the breach; (ii) the principal would have consented to retention of the profit (had consent been sought); and (iii) the principal could not have made the profit themselves.

The Supreme Court rejected the appeal and in so doing reinforced the breadth of a fiduciary's duty to account.

In this article we consider the decision and its relevance with particular reference to asset managers and investment funds.

2. Fiduciaries and the duty to account for profits

Fiduciary duties arise where there is a relationship of trust and confidence. In an asset management context fiduciary duties can be owed in a variety of different situations, for example: between the manager and the fund; within the manager (e.g. between partners in a manager established as a partnership); between investors investing by way of partnership; between GP and LP; between directors and the fund; and, at a portfolio level, between directors and portfolio companies. Partly for structural reasons, circumstances in which a fiduciary duty exists between the manager and a fund investor are relatively rare.

In modern asset management it is also common for fiduciary duties that would otherwise be owed to be contracted out of or altered by contract. For example, managers are contractually permitted to perform similar functions for other investment vehicles and prospectuses and IMAs will make express provision for the management of conflicts of interest.

Where there is a relationship of trust and confidence giving rise to a duty, the fiduciary has a duty not to make an unauthorised profit arising out of, or that is sufficiently connected with, the fiduciary relationship; a fiduciary must account to the principal for unauthorised profit, even if the profit was obtained after the fiduciary relationship ended. So, for example, a manager cannot lend fund securities out for a fee and keep that fee.

Subject to the contractual position, the types of situation where fiduciary claims might arise, might include, for example,  where a partner in a manager entity departs to set up a new venture having not complied with duties owed to its principal governing exclusivity and / or conflicts. Another example might be a partner who receives a business opportunity in a Firm A capacity but moves to Firm B to take advantage of that opportunity.

3. Defences and equitable allowance

It is a defence to any claim for the fiduciary to show that they obtained the fully informed consent of the principal to retain the relevant profit.

It has long been established (by House of Lords authority) that it is no defence for the fiduciary to point to the principles of factual causation to retain some or all of the profits, for example by saying that the principal would have consented (had consent been sought) or that the fiduciary would have made the profit regardless of the breach of duty.  In a contractual claim context, where showing causation is an essential element of the claim, there exists a "but for" test: "but for" the contractual breach, would the damage have occurred. If the answer is "yes the damage, or part of it, would have happened anyway," then the claim, of that part of it, will fail.

In a fiduciary context, the "but for" test has not applied. The most that the fiduciary might be entitled to is an "equitable allowance" for the time and effort expended in obtaining the unauthorised profit which otherwise has to be returned to the principal.

The usual battle ground for claims of this type concern the extent to which relevant profits have arisen out of, or are sufficiently connected with, the fiduciary relationship or whether appropriate consent was obtained. Each is a fact sensitive question but a sufficiently close connection has been found where unauthorised profits were made from an opportunity that the fiduciary discovered through their role and where an opportunity was facilitated by information obtained through their role.

Fully informed consent means that the principal has been given full and frank disclosure of all material facts that would otherwise give rise to a breach of duty before giving its consent.

So the only way to be safe, for a fiduciary, is the combination of full disclosure and informed consent.

The Rukhadze case involved a challenge to whether that should continue to be the case; should a fiduciary be required to account for profits where it would have made those profits in a counterfactual scenario where there had been no breach of duty?

4. Facts and procedural history

The appellants in the case were appointed to provide asset recovery services to the family of a deceased Georgian businessman. Three individuals sought to design and provide the services in question through the respondent entities to which the very valuable business opportunity in question arose. Through circumstances found to have involved breaches of fiduciary duty, the services in question came to be provided via a different entity and structure.

The respondent entities sued successfully and the defendants (who were the appellants before the Supreme Court) were ordered to account for the unauthorised profits minus a 25% equitable allowance for having undertaken all the work inherent in providing thew services in question.

The Court of Appeal dismissed the appellants' appeal on other grounds, and the issue that came to the Supreme Court was whether, in a modern context, English law in respect of the remedy  for breach of fiduciary duty, permitting or requiring an account of damages, needed to be updated. Only the Supreme Court could overturn the English law precedent that governed that issue, and the Supreme Court did agree to hear the appeal.

5. Appeal to the Supreme Court

Before the Supreme Court, the appellants argued that they would still have made the relevant profit from the recovery services even if they had complied with their fiduciary duties and that a change to the law was justifiable including on the following bases:

(i) the current rule regarding the duty to account is draconian and serves an objective that is no longer proportionate in modern society, in which fiduciary relationships arise with greater frequency;

(ii) injustice is better cured for by incorporating a "but for" test in respect of any profits rather than the equitable allowance principle (so allowing counterfactual arguments to be raised);

(iii) other equitable remedies (in particular equitable compensation) have been recently improved by the insertion of common law principles of causation;

(iv) English law is lagging behind other common law jurisdictions on this issue; and

(v) academic criticism of the duty to account should, in a modern context, be given more weight.

The Supreme Court unanimously rejected the appeal. Detailed reasons were given by four judges (of which Lord Briggs gave the leading judgment, with which three others agreed) for rejecting the appeal, including on all the points above. In doing so the Supreme Court concluded that English law did not lag behind other common law jurisdictions (e.g. Singapore and Australia) on this point and that the foreign judgments cited failed to support the appellants' case and / or were aimed at the proposition that there should be a causative link between the fiduciary's position and the profit made.

There was some disagreement between the judges on whether the duty to account for profits was just a remedy or was both a remedy and freestanding duty (in which case no other breach of fiduciary duty would need to be identified and shown to benefit from the remedy). For the purpose of this judgment that was ultimately academic, but the point remains open for debate.  

Implications

This Supreme Court's decision affirms the position that a fiduciary cannot defend retention of unauthorised profits by raising counterfactual arguments such as (i) that they would have made the profits anyway, even if they hadn't committed a breach; (ii) that the principal would have consented to the profits; or (iii) that the principal would not have been able to make the profit themselves.

This underscores the breadth of a fiduciary's duty to account for profits and the fact that the only defence to a claim for breach of such a duty is to obtain fully informed principal consent to retain the relevant profits. We can therefore expect that the main battle ground for claims of this type is likely to remain (i) whether any profits were sufficiently closely connected to the fiduciary relationship, a point that will turn on factual evidence; or (ii) whether adequate consent was obtained.

It remains the case therefore that where a claim for breach of fiduciary duty arises, the financial consequences of a successful claim can go well beyond the damages that might arise through breach of contract or negligence. The incentives therefore for claimants to look to articulate claims on the basis of breach of fiduciary duty remain, including in the alternative. Also, it remains the case that where the same facts and circumstances give rise to claims in both contract and or breach of fiduciary duty, the financial compensation analysis may well be different depending on whether the claim for breach of fiduciary duty is successful.