Rukhadze and others (Appellants) v Recovery Partners GP Ltd and another (Respondents) [2025] UKSC 10
In a law-defining ruling, a seven-member Supreme Court has reinforced a fundamental principle that affects everyone from company directors to trustees: if you exploit a position of trust for personal gain you must hand over the profits you make.
In this case, three trusted professionals, tasked with securing a valuable business opportunity for their companies, decided instead to pursue it for themselves. They were found to be in breach of their fiduciary duties and ordered to hand over USD 134 million in profits. On appeal to the Supreme Court, their argument was: the law that forces disloyal fiduciaries to surrender all profits to their principal is too harsh. Instead, they said, the law (known as "the profit rule") should incorporate a "but for" test, allowing them to keep the profits they would hypothetically have earned if they had not betrayed their principal's trust.
As this decision would have involved a radical departure from previous House of Lords authorities, the Supreme Court assembled an unusually large panel of seven judges to hear the appeal. The court unanimously dismissed the appeal, delivering four judgments giving different reasons for their conclusion. The majority view, shared by Lord Briggs, Lord Reed, Lord Hodge and Lord Richards, maintained that the duty to return profits gained from a position of trust is a cornerstone of fiduciary relationships and a duty in its own right. The Lords found that the current law does not require speculating about what might have happened in other scenarios and saw no convincing reason to change this long-standing rule.
The facts
Following the death of a wealthy Georgian businessman in February 2008, a lucrative opportunity emerged to help his family recover his assets scattered around the world. A group of professionals initially worked together through two companies – Salford Capital Partners Inc. (“SCPI”) and Revoker LLP (“Revoker”) – to develop those recovery services. However, relationships soured, and by May 2011, the three appellants broke away to pursue the business opportunity on their own. They formed a new company, secured a contract with the family in October 2012 and were eventually paid management fees and a large capital sum under that contract.
SCPI's successors sued the appellants for an account of profits, claiming that they betrayed their positions of trust. There was a split trial, of liability and quantum. On liability, the trial judge found that the individuals had breached their fiduciaries duties to SCPI and Revoker. On quantum, their profits were calculated at USD 179 million. The judge allowed them to keep 25% to reflect the work they performed, resulting in a judgment of USD 134 million plus interest.
The majority judgment
Following the majority view of the Supreme Court, led by Lord Briggs, the profit rule is founded on the fundamental principle that profits made by a fiduciary belong to its principal from the moment they are generated. These profits are held on trust for the principal, and fiduciaries must both disclose and return them. This obligation extends even after the fiduciary relationship ends if the profits somehow arose from that former relationship. Importantly, a fiduciary cannot escape liability by claiming they would have made the same profit without breaching their duty.
The Court rejected the appellants' arguments that the rule was outdated, unpredictable and excessively harsh, finding no compelling justification for change. The majority emphasised that the profit rule serves a critical purpose: deterring fiduciaries from yielding to the temptation of prioritising self-interest. Existing mechanisms, such as equitable allowance which reduces liability (in this case by 25%), were effective mitigation against excessive harshness.
The obligation to account is not merely a discretionary remedy for a breach but an inherent aspect of being a fiduciary, which does not depend on the demand for an account of profits by the principal or upon an order from the court. Introducing a "but for" test would fundamentally undermine this principle by treating it as a mere remedy.
Finally, the Court dismissed claims that the profit rule was inconsistent with modern business practices or that there was significant international or academic support for changing the law.
Concurring but separate opinions
There were three concurring, but separate opinions delivered by Lord Leggatt, Lord Burrows and Lady Rose:
- Lord Leggatt noted that the fundamental principle is that a fiduciary must not use any property, information or opportunity belonging to their principal for personal benefit or any unauthorised purpose. Such use is only made lawful where there is actual, not hypothetical, consent from the principal. He also departed from the majority view and concluded that a "but for" test is a prerequisite to liability – i.e. the profits must result from the defendant's breaches, and that was satisfied here.
- Lord Burrows noted that the obligation to account is a remedy responding to a wrong (a breach of fiduciary duty) and not itself a duty in its own right (which Lord Leggatt also noted in his judgment).
- Lady Rose addressed the appellants' complaint that the fiduciary obligations attached to their official positions did not align with the reality of the business relationships, especially considering that the corporate arrangements were adopted for tax reasons. Lady Rose rejected that argument noting that "[w]here people use corporate structures for their own convenience they are regarded by the law as having taken on the burdens of that choice as well as the benefits."
Analysis
By attempting to introduce a "but for" causation test, the appellants essentially sought to change the current law – a change that would have allowed those in positions of trust to retain profits arising from that position by imagining scenarios where they might have achieved the same financial gains without betraying their obligations. Such a change would have fundamentally undermined the deterrent effect of the profit rule, inviting creative post-hoc justifications and counterfactuals. The Supreme Court rejected this approach.
The effect of the Supreme Court's unanimous decision is to re-emphasise the strict and inviolable nature of the obligations fiduciaries are under when placed in a position of trust. It is crucial to bear these obligations in mind when structuring your business, including when doing so purely for tax purposes.
If you are concerned about how this ruling might affect you or your company, please contact the authors of this article.
