Chapter 7 Directors' Duties - alastairhudson.com

The principle in the case law
The principle in essence
As considered above, the principle in s.175 is predicated on the case law which has come
before it. The earliest decision of the House of Lords in this context is that in Keech v
Sandford 93 which held that a fiduciary may not take unauthorized profits from his office. 94
The basis for this principle is said to be that the fiduciary may not permit conflicts between
his personal capacity and his fiduciary capacity. 95 The proper approach to the nature of the
company‟s rights when a fiduciary acquires an unauthorised profit is set out by Rimer J in
Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (No 3) 96 and by Lawrence
Collins J in CMS Dolphin Ltd v. Simonet. 97 The company‟s rights have always been generally
described by the courts on the basis that the fiduciary is “liable to account” for the
unauthorised profit. The question then is: what is meant by this obligation to account? The
answer is that the principal right of the company (or beneficiary under a trust or principal in
an agency arrangement) is to have the fiduciary‟s personal profit held on constructive trust
(and in turn any property acquired with that profit 98 ). If there is no property which can be
separately identified as being held on trust (for example, because the profits have all been
dissipated), then the director owes a personal obligation to the company to account in money
or money‟s worth for the amount of the profits. Rimer J has explained this doctrine accurately
in Sinclair Investment Holdings SA v Versailles Trade Finance Ltd (No 3) 99 in the following
terms:
“… any identifiable assets acquired by fiduciaries in breach of their fiduciary duty
are, and can be declared to be, held upon constructive trust for the principal 100
(Boardman v Phipps, 101 AG Hong Kong v Reid, 102 Daraydan Holdings Ltd v
Solland 103 ) … There will in practice often be no identifiable property which can be
declared by the court to be held upon such a constructive trust, in which case no
declaration will be made and the principal may at most be entitled to a personal
remedy in the nature of an account of profits. In Boardman‟s case the court made a
declaration that the shares that had been acquired by the fiduciaries were held on
constructive trust (a proprietary remedy), and directed an account of the profits that
had come into their hands from those shares (a personal remedy). Boardman‟s case
can be said to have been a hard case as regards the fiduciaries, whose integrity and
93 (1726) 2 Eq Cas Abr 741.
94 This principle is discussed in detail in Alastair Hudson, Equity & Trusts (6e, Routledge-Cavendish, 2009),
section 12.5, p.535-564.
95 Boardman v Phipps [1967] 2 AC 47.
96 [2007] EWHC 915, 10 ITELR 58.
97 [2001] 2 BCLC 704.
98 As is suggested by Attorney-General for Hong Kong v Reid [1994] AC 324 and Westdeutsche Landesbank v
Islington [1996] AC 669.
99 [2007] EWHC 915, 10 ITELR 58.
100 In the context of company law, the “principal” is the company further to s.170 of the Companies Act 2006.
101 [1967] 2 AC 47.
102 [1994] AC 324.
103 [2005] Ch 1.
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