Earlier this year, the UK Supreme Court in Rukhadze & others v Recovery Partners & another [2025] UKSC 10 reaffirmed the strict equitable principles governing fiduciaries' duties to account for profits. The case addressed whether English law should adopt a "but-for" causation test - allowing fiduciaries to retain profits if they could show those profits would have been earned anyway without breaching their duties - or maintain the traditional approach that excludes such counterfactual defences. The Court's decision preserves the long-standing rule that fiduciaries must account for all profits made by reason of their position, unless the principal has given fully informed consent, and confirms that any significant reform in this area should be left to Parliament.
What is a fiduciary?
Very generally, a fiduciary is someone who has undertaken to act for or on behalf of another in circumstances giving rise to a relationship of trust and confidence. This includes a trustee to their beneficiaries, an agent to their principal, a partner to their co-partners, a solicitor to their client and a director to the company. The core duty of a fiduciary is that they will act with "single-minded loyalty" towards their principal (or other person in the fiduciary relationship): the fiduciary must avoid conflicts of interest with their fiduciary duties and must account to the principal for any profits which they make from the fiduciary relationship (unless the principal has otherwise given fully informed consent). The duty to account for profits can outlast the termination of the fiduciary relationship.
Further, as noted at the start of the Supreme Court judgment:
...one thing has been clear: the former fiduciary is not allowed to defend his retention of the profit for himself by saying that he would have made it anyway, even if he had not committed a breach of fiduciary duty. Thus he may not say that, if asked, the principal or beneficiary would have consented, or that he could, for example by resigning earlier than he did, have made the same profit with no breach of duty. In this context, equity has invariably regarded these types of "what if" counterfactuals as illegitimate and irrelevant speculation, at least in the courts of England and Wales.
The fiduciaries in this case sought to challenge this principle before the Supreme Court.
Background
The dispute centred on a lucrative asset-recovery project undertaken for the family of the late Georgian billionaire businessman Arkadi Patarkatsishvili (known as, Badri).
Whilst in senior positions at Salford Capital Partners Inc (SCPI) and Revoker LLP (Revoker), Irakli Rukhadze (director of SCPI), Igor Alexeev (partner of Revoker, who came across the business opportunity from SCPI) and Ben Marson (a solicitor employed by Revoker), obtained detailed, confidential information about the opportunity to locate, recover and defend claims to Badri's scattered assets (the Recovery Services). The court found that the business opportunity to perform the Recovery Services belonged to SCPI. Revoker was formed (in agreement with the family) as part of the corporate structure within which the Recovery Services were to be provided.
Following a falling out with the individual who owned and managed SCPI, Rukhadze, Alexeev and Marson resigned and decided between them to seek a contract with the family to perform the Recovery Services in place of SCPI and Revoker. Prior to leaving, they had taken preparatory steps to that end and disparaged SCPI and its owner to the family. Following their resignation, they continued to provide Recovery Services at the family's request on an ad hoc basis. They formed a new structure (Hunnewell), entered into an agreement with the family, and from 2012 to 2018 earned annual management fees and a success payment, with accountable net profits totalling US $179 million.
High Court and Court of Appeal decisions
Recovery Partners GP Limited and Revoker (successors to SCPI's original entitlement to the business opportunity to provide the Recovery Services (the Respondents)) sued Rukhadze, Alexeev, Marson, Hunnewell and other corporate members of Hunnewell (the Appellants) for an account of the profits from the payments received from the family.
At a split trial Cockerill J held:
- Phase 1 (liability) – each individual appellant owed fiduciary duties to SCPI and Revoker and committed breaches, in particular by (i) disloyalty by disparaging SCPI and its owner to Badri's family; and (ii) resigning in bad faith to appropriate a "maturing business opportunity" belonging to SCPI.
- Phase 2 (quantum) – the Appellants made accountable net profits derived from the Recovery Services (net US $179 million). After granting a 25% equitable allowance for the Appellants' work and skill in providing the Recovery Services and securing an agreement with the family, US $134 million plus interest was awarded to the Respondents.
The Court of Appeal dismissed the Appellants' appeal.
Grounds of appeal to the Supreme Court
A panel of seven justices (Lords Reed, Hodge, Briggs, Leggatt, Burrows, Richards and Lady Rose) were convened to hear the appeal because the Appellants invited the Court to depart from two House of Lords decisions, Regal (Hastings) Ltd v Gulliver and Boardman v Phipps. For the purpose of this article, we focus on the majority judgment.
The Appellants' case for changing the law can be summarised as follows:
- The current basis for the imposition of the "remedy of an account of profits" (as described by the Appellants) is said to be "draconian" and disproportionate in modern commercial contexts; it is unfair to honest fiduciaries who pursue a post-termination business, having invested their time, skill and assets into it.
- Courts should be free to construct counterfactuals – eg, the fiduciary could have resigned earlier or obtained consent – using modern and forensic tools available.
- The "but-for" causation test should replace the principle of equitable allowance, which represents an uncertain and unpredictable concept.
- Introducing a common-law causation test would modernise and align with modern equitable compensation cases (Target Holdings, AIB v Redler).
- Other common-law jurisdictions have moved in that direction.
- Academic criticism of the remedy of an account of profits ought to be given more weight than it has previously.
The Supreme Court: appeal dismissed
All seven justices rejected the invitation to change the law but were divided on analysis. Lord Briggs gave the majority judgment, which was agreed by Lords Reed, Hodge and Richards. We have summarised their reasoning:
The profit rule is a primary duty, not merely a discretionary remedy
Equity treats profits made by reason of and in the course of the fiduciary relationship as held on constructive trust for the principal from the moment of receipt. An order for an account simply enforces that duty; it is not appropriate to impose a but-for test that would "strike at the essence of the duty itself." The purpose of the profit rule is to deter fiduciaries from undertaking conflicting activity in the first place. The court rejected the suggestion that the current law should be regarded as outdated in modern business:
Fiduciary duties have been an important part of what makes business distinguishable from an uncontrolled free for all for as long as there have been company directors, commercial agents, partnerships and legal services supplied by solicitors. The fact that such relationships have increased in line with the enormous expansion of business and financial services only serves to underline the importance of encouraging the making of business relationships involving single-minded loyalty, and the reinforcement of those relationships provided by long established law.
No room for "but-for" counterfactuals
The reason why counterfactual speculation has not been permitted in equity in relation to an account of profits has "nothing at all to do with forensic difficulty". Nothing significant has changed in terms of the court's ability to undertake a counterfactual analysis.
A but-for test should not replace the principle of equitable allowance which is, "a discretionary way of alleviating the potential injustice of transferring to a beneficiary the whole of the fruit of a fiduciary's hard work and skill". In the Supreme Court's opinion, the equitable allowance is a better mechanism for ensuring justice as between the parties than a blanket application of a but-for test. The Court referred back to the deterrent effect of the profit rule if the fiduciary understands that he will have to account for all profits made, subject to the judge's discretion to make an equitable allowance, which can be uncertain.
In this case, the Respondents were refused permission to appeal the equitable allowance of 25% awarded to the Appellants.
Equitable compensation analogy rejected
The development of the law in equitable compensation cases to include consideration of counterfactuals and the use of a but-for test involved no departure from previous House of Lords or Supreme Court authority. However, the two areas are "like chalk and cheese", as equitable compensation is about compensation for loss, which is irrelevant to an account of profits (a primary duty), as explained.
Comparative law and academic views not compelling
Overseas jurisprudence largely confirms a need for a link between duty and profit but does not establish a but-for test. Nor is there an academic consensus that reform is required.
Concurring judgments
Lord Leggatt accepted that a "but-for" analysis should apply to determine what loss or profit resulted from the breach but concluded that even on that test the appellants would still be liable: absent breach they would have earned none of the profits. Lord Burrows accepted the Appellants' position that an account of profits is a "remedy for wrong" but found no justification to depart from the current law. Lady Rose emphasised that any reform should come from Parliament, not judicial innovation, particularly in light of the statutory codification of directors' duties in the Companies Act 2006.
Key points for fiduciaries and principals
- Know your responsibilities. Fiduciaries must ensure they understand the nature of the responsibilities they are taking on when accepting the appointment as director, trustee, etc. Ignorance of the duties entailed will not excuse any breach of them.
- No "would-have-done-it-anyway" defence. A fiduciary cannot keep profits by showing that, in a hypothetical world, the principal would have consented or the profits would have been earned without breach.
- Constructive trust arises instantly. Profits made by reason of the fiduciary position belong in equity to the principal from the moment they are received.
- Consent must be sought in advance. Fully informed consent remains the only sure path for a fiduciary wishing to pursue an overlapping opportunity.
- Equitable allowances are exceptional. Courts may credit work, skill and the putting at risk of the fiduciary's own capital, but only where justice plainly requires it.
- Deterrence remains central. The Supreme Court underlined the "inflexible" nature of the profit rule as a deterrent measure.
- Principals enjoy strategic choice. Where a breach occurs, they may elect between compensation for loss or an account of profits – whichever is more advantageous.
- Law reform lies with Parliament. The Court indicated that any change in the law should be undertaken by Parliament, not the judiciary.
For further information on the issues raised in this article, contact Fraser Mitchell, Partner.
The essential purpose of the rule that a fiduciary must not without his principal's consent keep for himself a profit from his position as such, and the related rule that a fiduciary must avoid placing himself in a position where his interest and his duty may conflict (usually called the conflict rule), is to protect or deter those who have undertaken an obligation of single-minded loyalty to someone else from being tempted by human frailty to fall short of that obligation.