Case Digest No. 8 · Company and fiduciary disputes
Fiduciaries and the profit rule
Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10
The Supreme Court declined to introduce a counterfactual “but for” defence to the fiduciary profit rule and retained the established approach to an account of profits.
Supreme Court
[2025] UKSC 10
April 2025
Decision at a glance
The question, answer and consequence.
- Legal question
- The central issue was fiduciaries and the profit rule.
- Court's answer
- The Supreme Court declined to introduce a counterfactual “but for” defence to the fiduciary profit rule and retained the established approach to an account of profits.
- Practical consequence
- The Supreme Court reaffirmed the strict character of the fiduciary profit rule and the limited scope for introducing causation-based exceptions. It is central to advice about opportunities, profits and remedies arising from fiduciary relationships.
Factual background
The Respondent is a company incorporated in the British Virgin Islands (to which the claims of another such company have also been assigned) and an English LLP. The Appellants worked for the Respondents, holding positions of responsibility such that they owed fiduciary duties to the Respondents. In breach of those duties, the Appellants diverted a business opportunity away from the Respondents and exploited it for themselves. Following a claim in the
Issue
The central issue was fiduciaries and the profit rule.
Procedural history and reasoning
, the Appellants were, in accordance with the profit rule, ordered to pay to the Respondents the profits made from the business opportunity. The Appellants appealed, unsuccessfully, to the Court of Appeal. [2025] UKSC 10 KEY TAKEAWAYS: In respect of the test for requiring an account of profits, the court does not and should not concern itself with what might have happened in a hypothetical “but for” situation. 1. The question to ask is “did the profit owe its existence to a significant extent to the application by the fiduciary of property, information or some other advantage which he enjoyed as a result of his fiduciary which the conflict duty required him to avoid altogether” (Lord Briggs at paragraph 36). 2. There is no justifiable reason to depart from the long-established principles in this area of law. 3. The introduction of a “but for” test would undermine the essential purpose of the profit rule by treating it as a mere remedy and thus watering down its disincentivising effect. 4.
The existing scope for an equitable allowance to be afforded mitigates any excessive harshness. 5. ‘PROFIT RULE’ Fiduciaries, such as trustees or company directors, owe a duty of loyalty to their beneficiary/ principal. One of the ways in which this duty of loyalty manifests itself is in a requirement that, if the fiduciary makes a profit out of their position as a fiduciary, they are bound to account for that profit to their principal (unless the principal has given fully informed consent. Profits made from the fiduciary relationship are treated by equity as held upon constructive trust for the principal from the moment of their receipt by the fiduciary. The duty exists in its own right and is not just a remedy. SUPREME COURT JUDGMENT The Supreme Court UNANIMOUSLY DISMISSED the appeal and declined the Appellants’ invitation to change this aspect of the law. LORD BRIGGS - MAJORITY JUDGMENT (WITH WHOM LORDS REED, HODGE AND RICHARDS AGREED) NATURE OF THE OBLIGATION The obligation to account is a duty imposed by equity.
It is not necessarily (though it often is) triggered by a separate breach of duty and it is certainly not a mere discretionary remedy for such a breach, dependent on a demand from the principal or an order of court (though it often has a remedial effect). An account of profits is not comparable to an award of damage nor equitable compensation (which does employ a ‘but for’ test) as it is not about compensation for loss. PURPOSE OF THE OBLIGATION The essential purpose of the profit rule is to deter fiduciaries from giving into the human temptation to depart from their obligation of single-minded loyalty to their principal (for their own benefit). Thus, the introduction of a ‘but for’ test would undermine the essence of the duty, by treating it as a mere remedy for a separate breach, and water down the chief disincentive - the inevitable nature of the obligation to account for profits - for fiduciaries who might otherwise be tempted to be disloyal.
Decision and key points
The Supreme Court declined to introduce a counterfactual “but for” defence to the fiduciary profit rule and retained the established approach to an account of profits.
- In respect of the test for requiring an account of profits, the court does not and should not concern itself with what might have happened in a hypothetical “but for” situation.
- The question to ask is “did the profit owe its existence to a significant extent to the application by the fiduciary of property, information or some other advantage which he enjoyed as a result of his fiduciary which the conflict duty required him to avoid altogether” (Lord Briggs at paragraph 36).
- There is no justifiable reason to depart from the long-established principles in this area of law.
Why this decision matters
The Supreme Court reaffirmed the strict character of the fiduciary profit rule and the limited scope for introducing causation-based exceptions. It is central to advice about opportunities, profits and remedies arising from fiduciary relationships.
Particularly relevant to: Companies, partners, fiduciaries, investors and commercial litigation teams.
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