The Supreme Court's recent decision in Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10 has provided welcome clarification and consolidation of the law on fiduciary duties, specifically, the 'no profit' rule. This rule provides that a fiduciary must account to their principal for any profits made by them from their role. It is open for the principal to give fully informed consent to the fiduciary retaining those profits. The intention of the rule is to deter fiduciaries from exploiting their position and departing from their duty to act in the best interests of their principals.
In this article, we consider the key implications of the ruling for D&O insurers and their insureds.
Case facts
The dispute arose following the death of a Georgian billionaire in 2008.
The Claimant companies (respondents in the Supreme Court decision) were engaged by the billionaire's family to provide world-wide asset recovery services in respect of the deceased's various, often hidden, assets. This included, on occasion, resisting the claims of governments and other authorities to such assets. The Defendants (appellants) originally held senior positions of responsibility within the Claimant entities – roles which were fiduciary in nature.
After an acrimonious deterioration in relations, the Claimants ceased to work for the family of the billionaire. However, the Defendants secretly proceeded to divert the aforementioned asset recovery services opportunity away from the Claimants with a view to profiting from it themselves. The Defendants were ultimately appointed in place of the Claimants using a new corporate structure and, as a consequence, received profits of USD 179 million for the asset-recovery services they provided. The Claimants had not been informed and had not provided their consent.
The Claimants subsequently brought a claim alleging breach of fiduciary duty, on the basis that the Defendants had taken advantage of the business opportunity they had previously been working on for the Claimants and had consequently made considerable profits. An account for such profits was demanded on the basis of the 'no profit' rule.
The Defendants argued that this was an outdated and draconian remedy and that they should only be required to account for the difference between: (a) the profits they had actually earned; and (b) the profits they would hypothetically have earned, had they not breached their fiduciary duties. If accepted by the Courts, the Defendants' proposed approach would, in effect, introduce a new 'but for' causation test when considering the 'no profit' rule. In other words, a claimant would need to show that a director could not have made the profit, but for their breach of duty. Such an approach would constitute a considerable relaxation of the 'no profit' principle.
The High Court and the Court of Appeal held the Defendants had committed breaches of fiduciary duty and were liable to account to the Claimants for their profits (less an equitable allowance to acknowledge the Directors' skill in generating the profits), and that 'but for' considerations did not apply.
Decision
The Supreme Court followed the Court of Appeal, unanimously refusing the Defendants' proposals to dilute the 'no profit' rule and its intended deterrent effect.
It confirmed that any benefit obtained by a fiduciary that derives from their position is held on constructive trust to the principal, unless the principal had given their fully informed consent for the fiduciary to retain it. The rule is one of strict liability, and 'but for' considerations are irrelevant. The director's liability does not depend on whether the director would have made a profit anyway (even had they had not committed a breach), whether the company would or could have made the profit itself, whether the company would hypothetically have consented (had it been asked) or indeed whether the company has suffered any loss.
The Court also confirmed that the duty to account outlives the fiduciary relationship itself. Resignation from the company does not allow the director to make and retain unauthorised profits.
The Court noted that whilst the 'no profit' rule is centuries-old and may result in harsh outcomes, it is not, as suggested by the Defendants, out-dated or unnecessarily severe. Rather, the principle is both vital and highly relevant to contemporary corporate practices. Most importantly, the 'no profit' rule exists as both a remedy and a deterrent, seeking to discourage fiduciaries from getting into positions where they may be tempted to place their personal interests above their duties to their principal.
Implications for D&Os and their insurers
Whilst this decision reaffirms a historic principle and does not impose any new burdens on directors and officers, it emerges in a context of increased scrutiny of director conduct, both as a result of legislative / regulatory changes and an uptick in shareholder activism.
The decision may, therefore, encourage or add impetus to claims against directors for breach of duty, not least because of the low threshold afforded by the strict liability nature of the 'no profit' rule. Any director profits, even if obtained in good faith or in reliance on a director's 'sweat equity', will form a firm foundation for such claims (or may be used to support other allegations).
Insurers may therefore see an increase in the frequency of claims, which may in themselves be more challenging and more expensive to defend and settle due to the strict liability standard. Whilst D&O policies generally include conduct exclusions (excluding claims where D&Os have obtained a profit or advantage to which they were not legally entitled, as well as for dishonest and fraudulent conduct), such exclusions are usually 'outcome based' (i.e. dependent on a final adjudication / ruling), with insurers liable for defence costs in the interim.
We anticipate that complex coverage disputes may develop around insured capacity, including whether the director was acting in his capacity as a fiduciary at the time he obtained the relevant profit. In addition, disputes may arise as to the nature of the loss itself. An account of profits is different to compensation for loss or damages; the former is an equitable remedy arising as soon as the profit has been made and, moreover, one which the individual director has (allegedly) had the benefit of.
The Rukhadze decision therefore confirms that fiduciary duties remain as strictly upheld as ever, and directors will find no leniency in the courts should they fall foul of them.
