INTRODUCTION
In the business world, relationships are built on trust. Whether one is a company director, agent, partner or trustee, the law imposes strict standards of conduct to ensure that such trust is not abused.
Recently, the UK Supreme Court delivered an important judgment in Recovery Partners GP Ltd and another v Rukhadze and others [2025] UKSC 10; [2026] 1 All ER 189 (“Recovery Partners”), reaffirming the strict approach taken by equity towards fiduciaries who profit from their position without their principal’s fully informed consent.
WHO ARE FIDUCIARIES AND WHAT IS “SINGLE-MINDED LOYALTY”?
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.
The distinguishing obligation of a fiduciary is the obligation of single-minded loyalty to his principal. This means that a fiduciary must act in good faith; must not make a profit out of his trust; must not place himself in a position where his duty and his interest may conflict; and must not act for his own benefit, or the benefit of a third person, without the informed consent of his principal.
As explained in Bristol and West Building Society v Mothew [1998] Ch 1, these are the defining characteristics of fiduciary obligations.
The purpose of these duties is practical. Human nature being what it is, the law seeks to deter fiduciaries from being tempted to prefer their own interests over those whom they are bound to protect.
Examples of fiduciaries include company directors, trustees, agents, solicitors, partners and, depending on the circumstances, senior employees.
WHAT IS AN ACCOUNT OF PROFITS?
A breach of fiduciary duty gives rise to remedies which differ from the usual remedies available for breaches of contract or tortious duties. One such remedy is an account of profits.
The duty to account for profits is usually called the “profit rule”. It is an obligation imposed by equity on fiduciaries as an inherent aspect of their undertaking of single-minded loyalty to their principals.
Where a fiduciary makes an unauthorised profit from, out of, or otherwise sufficiently connected with the fiduciary relationship, equity may require the fiduciary to account for that profit to the principal.
This is not merely about compensating the principal for loss. The focus is on the fiduciary’s profit. Equity treats unauthorised profits made from the fiduciary relationship as belonging in equity to the principal from the moment they are received, through a constructive trust.
The strictness of the rule is designed to deter fiduciaries from placing themselves in a position where their interest and duty may conflict. However, the Court may grant an equitable allowance to compensate the fiduciary, in an appropriate case, for the work, skill and risk involved in generating the profits.
THE DECISION IN RECOVERY PARTNERS
In Recovery Partners, three individuals in senior fiduciary roles pursued, for themselves, a highly lucrative asset-recovery opportunity which had been developed while they were acting for SCPI and Revoker.
They later resigned and entered into arrangements to provide the recovery services through a newly formed corporate structure. The profits were substantial. The accountable net profits were assessed at approximately US$179 million, although the Court allowed a 25% equitable allowance for their work and skill.
When the claimants sued for an account of profits, the defendants argued that the Court should apply a common law “but-for” causation test. In essence, they argued that they should not be required to account for the profits because they would have made the same profits anyway, even if they had not breached their fiduciary duties.
The UK Supreme Court rejected that argument.
NO “BUT-FOR” CAUSATION TEST
The UK Supreme Court held that the fiduciary duty to account for profits is not subject to a common law “but-for” test of causation.
The duty is to account for profits made from, out of, or otherwise sufficiently connected with the fiduciary relationship. There must be a link between the fiduciary relationship and the profit, but the Court will not ask whether the fiduciary might have made the same profit in a hypothetical world where no breach occurred.
In the language of the Court, such “what if” counterfactuals are illegitimate and irrelevant speculation. A fiduciary cannot defend his retention of a profit by saying that he would have made it anyway, or that the principal would have consented if asked.
The liability to account also does not depend on fraud, absence of good faith, or proof that the principal suffered loss. The liability arises from the mere fact that an unauthorised profit has been made in circumstances sufficiently connected with the fiduciary relationship.
KEY LESSONS FROM THE CASE
First, fiduciary obligations may outlast resignation. A fiduciary cannot avoid liability simply by resigning and then exploiting a maturing business opportunity which came to him through his fiduciary position.
Second, consent matters. If a fiduciary wishes to pursue a personal opportunity which overlaps with his fiduciary duties, the safe course is full and frank disclosure and the fully informed consent of the principal.
Third, the law is not concerned with whether the fiduciary could have made the same profit anyway. Equity does not permit a fiduciary to rely on hypothetical excuses to retain unauthorised profits.
Fourth, an account of profits is concerned with disgorgement of profit, not compensation for loss. This explains why the principal does not need to prove that it suffered loss before seeking an account.
CONCLUSION
The decision in Recovery Partners is a powerful reminder that fiduciary loyalty is not a loose commercial expectation. It is a strict equitable obligation.
Where a person undertakes to act for another in circumstances of trust and confidence, equity requires that person to put the principal’s interests before his own. If the fiduciary makes an unauthorised profit from that position, the law will not readily allow him to keep it.
In short, fiduciaries cannot rely on “but-for” arguments to justify keeping profits made from their position of trust. Equity remains uncompromising when it comes to single-minded loyalty.
Disclaimer: This article is for general information only and does not constitute legal advice or legal opinion. It should not be relied upon as a substitute for specific legal advice. No person should act (or refrain from acting) based on this article without obtaining advice on the specific facts and circumstances. Halim Hong & Quek does not accept responsibility or liability for any loss or damage arising from reliance on this article. Halim Hong & Quek reserves the right to update, amend or withdraw this article at any time. All rights reserved.
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About the authors
Siva Kumar Kanagasabai
Senior Partner
Head of Dispute Resolution Practice Group
Halim Hong & Quek
kumar@hhq.com.my
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Henry Teh Hen Li
Pupil-in-Chambers
Dispute Resolution
Halim Hong & Quek
henry.teh@hhq.com.my
