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The decision confirms that fiduciary liability attaches to those who act as fiduciaries in substance, even if their formal powers have lapsed, and that dishonest transfers after liquidation breach those duties.
The Supreme Court has allowed an appeal by the joint liquidators (the "Liquidators") of MBI International & Partners Inc (the "Company"), reinstating a substantial compensation award and clarifying the approach courts should take when assessing loss and causation in cases of misappropriation, especially where subsequent events affect the value of the property in question: Mitchell [2025] UKSC 43.
The judgment clarifies that anyone who assumes fiduciary powers can be held liable for breach of those duties, even without having formal authority. This liability extends to those who intermeddle with company assets, regardless of whether the wrongdoer personally receives the misappropriated property or channels it to another entity under their control.
The decision also confirms that equitable compensation aims to restore the value of misappropriated property, and that the date for valuing loss is not fixed by rigid rules. Instead, the courts will consider what is just and equitable in the circumstances, with regard to the substance and purpose of transactions. The Supreme Court further clarified that if a defaulting fiduciary is involved in, orchestrates, or benefits from subsequent events that destroy the value of the misappropriated property, they cannot rely on those events to avoid or reduce their liability for the original breach unless they can provide an innocent explanation. These principles reinforce the protections that equity affords to beneficiaries, principals and creditors.
Background
The Company was incorporated in the British Virgin Islands ("BVI") in 1990 and formed part of a wider corporate group ultimately controlled by a Sheikh. The subsequent sequence of transactions is complex, but broadly, in March 2009 the Company acquired 891,761 shares in JJW Inc ("the Shares"), a BVI company established with the aim of launching an IPO (the "March 2009 Transfers"). The Shares were purchased for nearly €89 million, to be paid "on demand" in a manner to be agreed. However, the IPO never took place, and the consideration was never paid.
In October 2011, the Company was wound up, which under BVI law removed the powers of the directors, and vested control of the Company's assets in the then liquidator, Ms Caulfield. Despite this, in February 2016 the Sheikh (who remained the sole shareholder and de jure director) transferred the Shares from the Company to JJW Guernsey for no consideration and without Ms Caulfield's knowledge (the "2016 Share Transfers").
In June 2017, Ms Caulfield applied for recognition of the BVI liquidation in the UK under the Cross-Border Insolvency Regulations. The application was granted, allowing her to seek relief from UK courts to protect the Company's assets. Shortly afterwards, the Shares were moved from JJW Guernsey to MBI International Holdings (which was also part of the corporate group ultimately controlled by the Sheikh). In July 2017, all of JJW Inc's assets and liabilities were transferred to JJW UK (the "2017 Asset and Liability Transfer"). It was common ground between the parties that this transfer rendered the Shares essentially worthless, as JJW Inc was left without any assets.
In response to these events, in 2019 Ms Caulfield brought proceedings against the Sheikh and JJW Guernsey pursuant to section 212 of the Insolvency Act 1986 ("IA"). Three claims were advanced: (i) that the 2016 Share Transfers were void; (ii) that the Sheikh, in bringing about the 2016 Share Transfers, had acted in breach of fiduciary duty or trust; and (iii) that JJW Guernsey was a knowing recipient of the Shares. Following this, the Liquidators were appointed, taking over from Ms Caulfield and continuing the legal action.
After a lengthy trial, Smith J found for the Liquidators on all claims. Equitable compensation of just over €67 million was awarded, being the value of the Shares that had been transferred through the 2016 Share Transfers, calculated using hindsight and common-sense (the judge had looked to JJW Inc's 2016 accounts and had calculated the pro rata proportion of its assets to be attributed to the Shares).
The Sheikh and JJW Guernsey appealed, arguing that: (i) the Sheikh had not been in breach of fiduciary duty; and (ii) equitable compensation should not have been ordered because (a) the 2017 Asset and Liability Transfer had denuded the Shares of any value and, (b) the Company had suffered no loss because the Shares were subject to unpaid vendor liens ("UVLs") (in favour of the companies from which the Company had purchased the Shares in March 2009) which exceeded the sum ordered as equitable compensation. The Court of Appeal upheld the finding of breach but allowed the appeal on quantum, holding that the substitutive approach to equitable compensation required the court to assess the existence of loss at the time of trial. By then, the Shares had become worthless because of the 2017 Asset and Liability Transfer. The Court of Appeal rejected the Sheikh's argument that the March 2009 Transfers gave rise to UVLs, however.
The Liquidators and the Sheikh both appealed to the Supreme Court. Three issues fell to be determined: (1) whether the Sheikh owed and breached a fiduciary duty by making the dishonest transfer of the Company's Shares in 2016 after the winding up had removed his powers as a director under BVI company law; (2) whether the Company suffered no financial loss due to it acquiring the Shares subject to UVLs; and (3) if the Company did suffer financial loss, how to calculate the loss of value considering the value of the Shares was later destroyed.
Decision
The Supreme Court (Lords Hodge, Briggs, Sales, Stephens, and Richards) unanimously dismissed the Sheikh's appeal on the first and second issue, allowed the Liquidators' appeal on the third issue, and restored Smith J's compensation award. The court found that the Sheikh had breached his fiduciary duty to the Company, which caused the Company to suffer financial loss for which it could claim equitable compensation.
Issue 1: Breach of fiduciary duty
The Supreme Court first considered whether the Sheikh's actions made him a fiduciary of the Company. The Sheikh argued that a person could only be liable as a fiduciary if they were legally capable of discharging a fiduciary's powers: the Sheikh had no such powers as his powers as a director of the Company had ceased to have effect on the commencement of the Company's winding up, pursuant to section 175 of the IA. The Sheikh also argued that a "single indivisible act" (referring to the signing of the 2016 Share Transfers forms) cannot both create a fiduciary duty and be a breach of the same duty.
The Supreme Court found that the Sheikh's purporting to act as the Company's director and effecting the share transfers after liquidation was sufficient to render him liable as a fiduciary. The court clarified that liability for breach of fiduciary duty does not depend on the formal holding of office or title to property.
Fiduciary duties can arise ad hoc. Quoting Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, the Supreme Court stated that 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 Supreme Court further noted that Millett LJ had endorsed the statement that a fiduciary"is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to those duties that he is a fiduciary". Equity recognises the existence of fiduciary duties by analysing objectively the relationship between the parties to see if it involves a relationship of trust and confidence because a party has, or is treated as having, undertaken to act with loyalty.
Consequently, as recognised by the Court of Appeal in Soar v Ashwell [1893] 2 QB 390 in the context of trustees, where an individual takes on a role or exercises a power which, if exercised by a trustee or agent, would carry with it fiduciary obligations, the person's so acting will cause them to undertake fiduciary duties: "a man who assumes without excuse to be a trustee ought not to be in a better position than if he were what he pretends". In the context of directors, the court in Gibson v Barton (1875) LR 10 QB 329 noted that there:
"are many instances in which a person who de facto exercises an office cannot defend himself by saying, when he is called upon to bear liability in consequence of his wrong, 'I am not rightfully in the office, there is another man who may turn me out'...So, if a director were to set up in answer...that he was not a director, that he was illegally elected, the answer would be, 'You have acted as director, and were a director in your own wrong'."
The Supreme Court also noted that an intermeddler does not need to have title to or possess property to incur liability. It is sufficient that they have "exercised command or control" over it as stated in Soar v Ashwell. In this case, the Sheikh had pretended to be a director with authority to transfer the Shares from the Company to JJW Guernsey. The fact that the recipient of the misappropriated shares was a company under the Sheikh's control, rather than the Sheikh personally, was irrelevant to his liability in respect of that transaction.
The Supreme Court also affirmed that assuming fiduciary powers can make a person accountable as a fiduciary without involving any breach of fiduciary duty. However, there is no reason why the act through which fiduciary power was assumed cannot also be the act that amounts to a breach of the assumed fiduciary duty.
For the above reasons, the Supreme Court found that the Sheikh owed and had breached fiduciary duties to the Company. His appeal on this issue therefore failed.
Issue 2: Whether the Company suffered financial loss
The Supreme Court rejected the Sheikh's argument that the Company's shares were subject to UVLs arising from the March 2009 Transfers (as the purchase price was never paid), such that the Company suffered no financial loss as a result of the breach of fiduciary duty as the amount of the UVLs ($89 million) exceeded the award of equitable compensation (c.$67 million).
The Supreme Court noted that a lien arises by operation of law according to equitable principles, as it is usually just and fair that a vendor should have a lien over their property until the price for it has been paid. However, the leading modern authority of Barclays Bank Plc v Estates & Commercial Ltd [1997] 1 WLR 415, shows that UVLs can be excluded where there is a "clear and manifest inference" that the parties intended to do so.
Here, the March 2009 Transfers were part of a broader restructuring aimed at facilitating an IPO, with the expectation that the Company would use the returns from the sale of the Shares in the IPO to pay for the transfers. The court found that this arrangement was fundamentally inconsistent with the existence of a lien, since any encumbrance would have prevented the Company from selling the Shares freely in the IPO, thereby thwarting the purpose and rationale for the March 2009 Transfers.
The Supreme Court concluded that since equitable principles applied, the question of whether a lien was excluded was not limited to what was written in the contract. The circumstances surrounding the transaction, including the structure and purpose of the transaction and the conduct of the parties, were also key. In this case, the evidence of joint intention to exclude a UVL was "particularly strong and compelling": the Sheikh controlled both sides of the agreements and gave clear and specific evidence about the rationale behind the transactions during the trial. Smith J was therefore entitled to find that the parties intended to exclude any UVL.
Issue 3: Calculating the loss of value in the Shares
The Supreme Court first noted that, in many cases where there is an issue as to the value to be attributed to misappropriated property, the courts have regarded it as just and equitable to value the property as at the date of trial. Consequently, if the property has appreciated in value since the misappropriation, the defaulting fiduciary will be chargeable with that increase, whereas if it has declined in value due to matters having nothing to do with the conduct of the defaulting fiduciary, they will generally not be chargeable for that diminution of value. The Supreme Court went on to note, however, that there is no fixed or inflexible rule that equitable compensation be assessed at the date of trial. Instead, the question of which date is appropriate for valuation purposes requires consideration of what is just and equitable between a company and its fiduciary.
The Supreme Court went on to note that where a fiduciary misappropriates property, and the principal can prove that the property had value when misappropriated, the principal suffers an immediate loss equal to the value of the property at the time of the breach. If the defaulting fiduciary wishes to rely upon a supervening actual or counterfactual event as breaking the chain of causation between the breach and the loss, the burden of proof "lies squarely upon the fiduciary" (this being a firmly established principle in the law of equitable compensation for breach of fiduciary duty).
Where the defaulting fiduciary plays some part in the subsequent event, absent a clear and convincing innocent explanation, that is unlikely to qualify as breaking the chain of causation or as being fit for inclusion in a "but for" counterfactual analysis (and in fact counsel could think of no case in which a supervening event had qualified for inclusion in the legal causation analysis where the defaulting fiduciary had been actively involved in the event). On the other hand, it was easy to see why a supervening event in which the defaulting fiduciary had no hand at all should be taken into account in diminishing or extinguishing the loss attributable to the breach on a "but for" counterfactual analysis. In that case, the risk of the harm happening is properly and fairly to be allocated to the principal; whereas, where the fiduciary has a hand in the supervening event, it is "by no means clear" that the risk of harm caused by the event should be fairly allocated to the principal. The court illustrated this principle as follows:
"If the trustee misappropriated [a valuable painting held on trust] (in the sense of claiming it as his own beneficially), but left it hanging in the gallery, which was later burned down, no one would doubt that... the trustee's arrogation of ownership of the painting caused the beneficiary no loss... But if the trustee had removed the painting to his own home, which had later been burned down, equally plainly the trustee could not have prayed in aid the fire. The fair allocation of the risk of destruction by fire would have fallen upon the trustee, because his action in moving the painting had created its exposure to the risk of the fire which later occurred, even though he had no part at all in the fire itself."
It was therefore necessary for the Supreme Court to consider evidence concerning the Sheikh's role in the 2017 Asset and Liability Transfer. If, for example, the Sheikh had been a "prime mover" in the transaction, he could not, in the Supreme Court's view, have prayed it in aid as a subsequent event that diminished or extinguished the loss caused to the Company by the 2016 Share Transfers. To find otherwise would have amounted to saying that if the Sheikh had not destroyed the value of the Shares to the Company in 2016, he would in any event have succeeded in destroying that value a year later. Using the above analogy of the painting held on trust, the Sheikh "would have actually lit the fire which destroyed it".
The Supreme Court concluded that there was "amply sufficient evidence" to disclose a case to answer that the Sheikh was more than just a bystander in relation to the 2017 Asset and Liability Transfer: he initiated the process, attended a key board meeting, and stood to benefit from the outcome. Consequently, the Supreme Court concluded that the Sheikh's involvement in the 2017 Asset and Liability Transfer meant he could not rely on it to avoid liability.
The Supreme Court therefore allowed the Liquidators' appeal on this issue, and restored Smith J's compensation order of just over €67 million.
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