Factual summary
Hotel Portfolio II UK Ltd (HPII) owned a portfolio of London hotels. In 2005, HPII sold these hotels at market value to a company, Cambulo Madeira, controlled by Mr Stevens, who was acting as a nominee for Mr Ruhan, a director of HPII. Mr Ruhan failed to disclose his interest in the transaction, breaching his fiduciary duties. Subsequently, Cambulo Madeira resold the hotels for a significant profit (after the hotels had been developed), with Mr Ruhan receiving a £95 million dividend. Mr Ruhan, with the dishonest assistance of Mr Stevens, dissipated the entire dividend on speculative overseas projects, rendering it unrecoverable.
HPII subsequently discovered the dissipation and sought to recover the lost funds from both Mr Ruhan and Mr Stevens. The trial judge found that Mr Ruhan had received the dividend as an unauthorised profit in breach of his fiduciary duties, and the profits were, as a matter of law, held on constructive trust for HPII. The Court further found that Mr Stevens had dishonestly assisted Mr Ruhan in his breach of trust. Mr Ruhan was ordered to account for the dividend, and Mr Stephens was ordered to pay compensation, which included the £95 million, for HPII’s loss of the dividend.
The Court of Appeal overturned the decision regarding Mr Stevens, holding that HPII had suffered no loss as a result of the dissipation because it would not have made the profits itself. As HPII had suffered no compensable loss as a result of Mr Ruhan’s actions, Mr Stevens could not be liable as a dishonest assistant.
The Supreme Court
HPII appealed to the Supreme Court. The issue on appeal was whether a person who dishonestly assists a constructive trustee in dissipating the trust fund is liable to compensate the beneficiary for the consequential loss of its proprietary interest in the fund in circumstances where:
(i) The fund held on constructive trust consisted of unauthorised profit previously made by the trustee in breach of fiduciary duty to the same beneficiary; and
(ii) The dishonest assistant also dishonestly assisted the trustee in making the profit in the first place.
Nature of constructive trusts and beneficiary rights
It was argued by Mr Stevens that the constructive trust of the dividend was just equity’s remedy for Mr Ruhan’s breach of fiduciary duty, and that any subsequent breach of that trust could not be viewed in isolation from the breach that gave rise to the unauthorised profits in the first place. However, the Supreme Court held that was not the case. A constructive trust arising from unauthorised profits made in breach of fiduciary duty is an institutional trust.
Like any other trust, a constructive trust of unauthorised profits gave rise to an immediate proprietary interest in favour of the beneficiary in the fund representing those profits. The fact that a constructive trust can loosely be seen as one of equity’s remedies for breach of trust did not alter his analysis.
Application of the “but-for” test
It was argued by Mr Stevens that any loss ought to be assessed on a “but-for” basis, which required a comparison between the beneficiary as a result of the breach with the position in which it would have been if the trustee had performed its duty. In the present case, Mr Stevens argued that HPII suffered no loss, as it would not have gained the dividend had Mr Ruhan performed his duty. In effect, the argument advanced by Mr Stevens sought to aggregate the two breaches (the making of the profit and its subsequent dissipation) for the purpose of showing that no loss had been suffered in a “but-for” analysis.
However, the Court held that if the breaches of fiduciary duty were to be aggregated in the manner proposed by Mr Stevens, it would deprive the beneficiaries of constructive trusts of any remedy for the loss of their beneficial interest. Constructive trusts provide an important means of resource for compensation for loss caused by the dissipation of trust assets – against both trustees and dishonest assistants – but only if “the breach consisting of the making of the profit is not airbrushed out of the counterfactual by being aggregated with the breach consisting of its dissipation” [para 59]. Further, if Mr Stevens’ analysis of the application of the “but-for” test was correct, it would require the Court to assume in the counterfactual that the breach of trust, and therefore the creation of a constructive trust, never took place when considering what loss arose from the dissipation of the trust assets, which would be clearly wrong.
The Court concluded, therefore, that the correct application of the “but-for” test was that Mr Stevens’ dishonest assistance of Mr Ruhan caused HPII to lose its beneficial interest in the dividend, regardless of the fact that the dividend itself was the result of an earlier breach of trust in making a profit in the first place.
Liability for dishonest assistance in dissipation
Mr Stevens sought to argue that, as a general principle of English law, a dishonest assistant is not liable to account for profits that he did not make. It follows, therefore, that if he was not liable in respect of Mr Ruhan’s profits, he cannot be held jointly liable to compensate the beneficiary for the loss caused by the dissipation of those profits.
The Court held that Mr Stevens’ analysis was wrong. The breach consisting of making the profit was separate and distinct from the breach consisting of the dissipation of property subject to a constructive trust. The latter breach was not about making an unauthorised profit; rather, it concerned dissipating or destroying trust property. The Court held that there was no general rule or principle that a person who dishonestly assists the constructive trustee in the dissipation is only liable for that which he received, simply because the property in question represented an unauthorised profit.
The Court concluded, therefore, that Mr Stevens was jointly liable with Mr Ruhan for the loss suffered by HPII.
Equitable set-off and connected breaches
The Supreme Court rejected the argument that gains and losses from connected breaches of trust can always be set off against each other. The general principle was that gains and losses in a series of breaches of trust cannot be set off against one another, the effect of which is that the beneficiary is entitled to the gains, but the trustee must bear the losses. The position may be different in relation to cases that concerned a single breach of trust leading to connected gains and losses, but that was not the case here.
In this case, the Supreme Court held that allowing the set-off of the gain represented by the profit against the loss caused by the dissipation would defeat the purpose of the constructive trust. Mr Stevens’ argument that it would be unjust to refuse a set-off because the profits represented a pure windfall for HPII, such that the dissipation of those profits was not a loss, was rejected. The purpose of a constructive trust was to confer ownership of the profit upon the beneficiary; it followed that there was no reason why the dissipation of profits owned by the beneficiary did not cause the beneficiary a loss.
Significance of the decision
The Supreme Court judgment provides important clarification of the role and status of constructive trusts. In particular, it clarifies that constructive trusts are institutional trusts and will be treated the same as any other institutional trust.
In addition, the decision removes the ability of dishonest assistants to seek to evade liability by pointing to the origins of the trust property or arguing that gains made by the beneficiary ought to be set off by losses from connected breaches. This is an important clarification and reaffirms that beneficiaries’ proprietary rights under constructive trusts are robust, and cannot be evaded simply because, in the grand scheme of things, the beneficiary may be better off. It also reflects that equity is strict in compelling the discharge of fiduciary obligations.
For clients, the ruling highlights the usefulness of constructive trusts and the remedies available to victims of breaches of fiduciary duty and dishonest assistance. More generally, it is a reminder that those with fiduciary obligations understand the importance of those obligations and the liabilities that may arise if they are breached.
In-depth 2025-247
