Spring Law recently appeared before the UK Supreme Court in the case of Stevens v Hotel Portfolio II UK Limited (“HPII”).
In the court of first instance, Foxton J found Mr Ruhan had breached the “self-dealing rule” by failing to disclose his interest in the sale of HPII’s hotels to the Cambulo group which was owned and controlled by Mr Stevens as nominee for Mr Ruhan (unbeknownst to HPII at the time). This was a breach of Mr Ruhan’s fiduciary duty to avoid conflicts between his interests and his duties to HPII.
Mr Ruhan in further breach of his duties on sold the hotels, generating secret profits for Mr Ruhan in the sum of circa £102 million, and then dissipated those profits which were ultimately lost. Mr Stevens dishonestly assisted Mr Ruhan in acquiring the hotels, on selling them and dissipating the profits.
It was common ground that (1) at the point of self-dealing, HPII received market value for the hotels and (2) HPII was not in a position to exploit the hotels’ potential and generate the profit itself.
Foxton J held Mr Ruhan and Mr Stevens liable for an account of profits and for equitable compensation. Upon HPII’s election, Foxton J ordered Mr Ruhan to account for the profits of circa £102 million and Mr Stevens to pay equitable compensation in the same amount.
Mr Stevens appealed, and the Court of Appeal held that “there was a single and uninterrupted course of conduct which, taken as a whole, caused HPII no loss”. Therefore, Mr Stevens could not be held liable for equitable compensation and instead is only liable to account for the profits he personally received.
In the Supreme Court HPII argued (1) that the constructive trust over the profits was institutional (not remedial) and thus arose automatically at the moment the secret profits were received in breach of the fiduciary duty; and (2) if that constructive trust was not breached through dissipation, HPII would have had the profits. However, since dissipation occurred, preventing HPII from obtaining the profits, this meant HPII suffered a real quantifiable loss which it should be compensated for.
Mr Stevens asserted that the Court of Appeal was correct in finding that Mr Stevens should not be held liable for equitable compensation. Since, if the breaches are considered in the whole (i.e. as a single scheme) and if Mr Ruhan had not breached his directors duties at all, HPII would have suffered no loss as it would have been unable to generate the profits itself.
We now await the handing down of the Supreme Court’s judgment, which will likely have a significant impact on the law of dishonest assistance, equitable compensation, proprietary rights and constructive trusts.
Spring Law is a London based law firm specialising in complex disputes since 2002. James Russell, Callum Knight and Isabelle Johnstone of Spring Law were instructed by HPII and ably assisted by Counsel James Pickering KC and Samuel Hodge of Enterprise Chambers in the UK Supreme Court.
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