Supreme Court clarifies burden of proof in equitable compensation claims

The UK Supreme Court has reinstated a €67 million award to the Krys Global liquidators in Mitchell & another v Sheikh Mohamed Bin Issa Al Jaber & others, confirming that a director who acts after a company’s liquidation can assume fiduciary duties and be held accountable for misappropriation. The Court clarified that there is no set time from which equitable compensation must be measured, and the burden is on the fiduciary to prove any events reducing that loss.

1. Mitchell and another v Sheikh Mohamed Bin Issa Al Jaber and others

The UK Supreme Court handed down its judgment this afternoon in the below case, in which the Insolvency and Reorganisation department at Clyde & Co has been acting for the successful liquidator appellants from Krys Global since 2017. In its passage through the Court of Appeal and Supreme Court, the case focussed on:

• the degree to which a person who purports to use the powers of a director of a company after its liquidation can be held accountable as a fiduciary for failing to act in its best interests; and
• the date on which equitable compensation should be measured against a defaulting fiduciary, the factors that the Court should take into account when assessing whether the fiduciary caused the loss, and the burden of proof in this regard. 

The Court of Appeal and Supreme Court also considered the equitable concept of an unpaid vendor's lien and whether such a lien arose in this case to defeat the liquidators' claims for compensation. The liquidators defeated this argument in both Courts. 

2. Assumption of a fiduciary duty

Perhaps unsurprisingly, neither the Court of Appeal nor the Supreme Court were persuaded that no fiduciary duty applied to a factual matrix where the director of the company in question was responsible for effecting the transfer away of its principal asset - being a shareholding -following the liquidation. As the company in question was incorporated in the BVI, under the relevant statutory provision, the director's powers, functions and duties ceased from the commencement of the liquidation (with some limited exceptions). 

Notwithstanding the statutory cessation of his duties, the Court of Appeal and subsequently the Supreme Court found that as the director had pretended to act with the authority to transfer the shareholding away from the company, he had assumed a fiduciary duty in that regard. In the Supreme Court, Lords Hodge, Briggs and Sales (with whom Lords Stephens and Richards agreed) confirmed that "[f]iduciary duties are...not confined to well established categories of relationship such as trustee and beneficiary, company director and company, principal and agent and solicitor and client. Fiduciary duties can arise ad hoc...equity recognises the existence of fiduciary duties by analysing objectively the relationship between the parties to ascertain whether it involves a relationship of trust and confidence...".

3. Date for measurement of equitable compensation and burden of proof

The Supreme Court rejected the analysis of the Court of Appeal, which had determined that the award of equitable compensation made by the trial judge for the loss of the transferred shares should be reduced from €67 million to zero. 

In summary, the Court of Appeal’s analysis was that the value of misappropriated trust property must be assessed at the date of trial in a claim for equitable compensation and that by the time of the trial in this case, the liquidators had accepted that the relevant shareholding had reduced in value to zero. The apparent diminution in value of the shares was caused by a transfer of the assets and liabilities in the relevant company (“Asset and Liability Transfer”) which was asserted to have occurred in written evidence served by the defaulting fiduciary during the trial. However, the detail of the transaction and its alleged effect on the value of the shares was not pleaded. 

Nevertheless, the Court of Appeal found that the liquidators could not establish that they would have been able to sell the shares prior to the Asset and Liability Transfer and so denied them equitable compensation.  The Supreme Court did not agree with the finding of the Court of Appeal and instead decided that:

• the question of the date for assessment of the value of a misappropriated asset “…is an open one, which requires consideration of what is just and equitable as between…the principal, such as a company and the fiduciary…”. There is therefore no “…fixed rule…” that the date for quantifying the value of the asset must be the trial date, although the Court will of course conduct its assessment of loss at the trial, with the full benefit of hindsight;
• where a fiduciary has misappropriated trust property and the beneficiary can prove that the property was valuable when misappropriated “…the beneficiary suffers an immediate loss of value…”;
• “…if the defaulting fiduciary wishes to rely upon a supervening event breaking the chain of causation between the breach and the beneficiary’s loss…the burden lies squarely upon the fiduciary to prove that supervening event and to show that it should be treated as having that impact on the…causative link between the breach of duty and the loss suffered…”;
• ”…looking at the decided cases, supervening events…appear unlikely to qualify…”  to break the chain of causation  between breach and loss “…if the…fiduciary had a hand in them, in the absence of a clear and convincing innocent explanation provided by the fiduciary."; and
• "[a] fiduciary, as steward of his principal's property or affairs, to whom he owes a duty of loyalty, has the responsibility to account for and explain what has happened in relation to them...".

In this case, the liquidators had not established that there was any conspiracy or other wrongdoing in effecting the Asset and Liability Transfer, although they were not able to cross examine the defendant fiduciary on it at trial, because he was too ill to attend. 

Nonetheless, the Supreme Court found that it was incumbent on the defaulting fiduciary if he wished to rely on the Asset and Liability Transfer as the reason for the diminution of the loss caused "...to prove that he played no significant part in, and derived no significant benefit - at the expense of the Company - from that transfer. This he made no attempt to do...", so there was no "...satisfactory explanation (or, really any explanation at all) for what was done."

There was "...amply sufficient evidence to disclose a case to answer..." that the fiduciary "...was more than just a bystander..." in relation to the Asset and Liability Transfer: he had triggered the process which led to it by serving a letter of demand, attended a key board meeting and stood to benefit from it. Consequently, the fiduciary was not able to discharge the burden of proof that rested with him and the Supreme Court restored the judgment of Joanna Smith J for €67 million.  

Here is the link to the judgement.