Snapshot: Supreme Court Holds No Attribution Where Director's "Secret" Profits In Issue

• Published date: 29 November 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Directors and Officers, Trials & Appeals & Compensation
• Law Firm: Ogier
• Author: Christopher Levers and Jordan Constable

The United Kingdom's Supreme Court has recently delivered helpful guidance on the principles to be applied when dealing with attribution of knowledge between a company and its wrongdoing directors; particularly in the context of breaches of duty by directors in exploiting corporate opportunities belonging to the company to receive secret profits.

It is well settled that, where an agent makes a secret profit by virtue of a principal-agent relationship, the profit is automatically held on constructive trust for the principal. In the corporate context, a director who has breached a fiduciary duty, and received secret profit, will hold that profit on constructive trust for the company.

However, the question before the Supreme Court was whether directors are able to deny a company's proprietary claim to the secret profits on the basis that their unlawful conduct should be attributed to the company in circumstances where the company did not suffer loss but would instead stand to receive a windfall. In other words, would it be appropriate for a company to profit from its directors' illegality while denying attribution of that illegality?

The Supreme Court reaffirmed the well-known principles set out in Jetivia SA v Bilta [2015] UKSC 23 (and applied in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50) that a director who profited from his own breach of duty cannot attribute his knowledge to a company and rely on an illegality defence, even where the company was involved in the fraud or illegality arising from the director's breach of fiduciary duty.

It went on to find that, properly applied, there was nothing in Bilta to suggest that it would be appropriate to create an exception to the normal rule simply because the company itself did not suffer a loss as a result of the director's...