High Court Clarifies Equitable Compensation Calculations in Breach of Fiduciary Duty Case

Citation: [2024] EWHC 252 (Ch)
Judgment on

Introduction

In the case of Aston Risk Management Ltd v Lee Jones & Ors [2024] EWHC 252 (Ch), the High Court dealt with the assessment of equitable compensation following a liability judgment for breach of fiduciary duty. The case provides insight into how the courts approach the quantification of damages in situations involving breach of trust and fiduciary duties, and the judgment offers a detailed application of multiple legal principles in calculating the appropriate remedies.

Key Facts

Aston Risk Management Ltd (ARM) brought a claim against Lee Jones and others for breach of fiduciary duty, specifically alleging that Jones caused the claimant’s affiliate enterprise, ASS, to transfer its business and undertaking to AMR, a competing entity, in violation of his duties. The High Court had previously determined liability, finding Jones in breach of his fiduciary duties, and this judgment pertains to the subsequent quantum trial. The quantification of damages considered payments to Neutrino and Cumulo, the value of the business and undertaking of ASS transferred to AMR, the loss of outstanding work in progress due to ASS, and costs and expenses of administration and liquidation of ASS.

Multiple legal principles underpin the judgment, including:

  • Equitable Compensation vs. Common Law Damages: The court reiterated that equitable compensation and common law damages are conceptually different, with the former not being bound by common law principles of causation and remoteness. Equitable compensation is assessed at the date of the trial with the benefit of hindsight on a common-sense view of causation.

  • ”But for” Test and Counterfactual Analysis: The measure of equitable compensation requires consideration of what would have occurred ‘but for’ the breach of fiduciary duty. The court needs to consider the ‘counterfactual’ or the likely scenario had the breach not occurred.

  • Causation: There must be a causal connection between the breach of duty and the loss sustained by the trust estate. The court considers whether the loss would have occurred if the wrongful transfer of assets had not taken place.

  • Loss of Business Value and Working Capital: The court adopted an income approach to assess the loss of business value, considering profitability and applying a multiplier based on one year’s net cash flows, with a discount reflecting risk and uncertainty.

  • Interest on Equitable Compensation: Awarded to compensate the plaintiff for the time value of money lost due to the defendant’s actions. The judgment determined interest rates for the sums awarded.

  • S.175 Companies Act 2006: Consideration was given to this section concerning the duty to avoid conflicts of interest, notably that the defendant’s liability under this section was not contingent on whether the company could have taken advantage of the property or opportunity.

Outcomes

The court awarded ARM equitable compensation against Lee Jones for several heads of claim:

  1. For the Neutrino invoices, the sum of £130,418.95 was awarded.
  2. For the payments to Cumulo, the sum of £33,900 was awarded.
  3. For the transfer of the Business and Undertaking to AMR, the sum of £1,235,285 was awarded.

Additionally, Neutrino is liable to ARM as constructive trustee for knowing receipt in the sum of £130,418.95. Interest on these sums was fixed at 1% above the base rate from the time of the breach.

The claim for the loss of outstanding work in progress due to ASS and the costs and expenses of administration and liquidation of ASS were dismissed, primarily due to the difficulties in establishing causation directly linked to the fiduciary breaches by Jones.

Conclusion

The Aston Risk Management Ltd v Lee Jones & Ors judgment meticulously applies equitable principles to ascertain the damages due for breaches of fiduciary duties. Importantly, it distinguishes between the measures of common law damages and equitable compensation, emphasizing the need for causation in the latter and applying a pragmatic approach to the calculation of loss. This case serves as a significant reference point for legal professionals regarding the nuances involved in the quantification of losses stemming from breaches of trust and fiduciary duties within UK company law.