Accounting for Profits: When Might a Director Breach Their Fiduciary Duty?
Company directors are cautioned about the nature of their fiduciary duty to account for profits or risk breaching the so-called profit rule, following a landmark Supreme Court (SC) decision.
As fiduciaries, directors owe a duty of loyalty to the company itself. So what does this look like in practice? A director must act in good faith, honestly and in the company’s best interests. In the context of profits, a director must not make any unauthorised or secret profits from their role.
A director who does profit from their fiduciary position are required to account to the company for that profit (unless the company has given fully informed consent). This important case1 concerned the profit rule and whether it could be ‘relaxed’.
What’s the background?
The case involved a BVI-incorporated company (R) and an English LLP. Some of the appellants were directors of R but, in breach of their fiduciary duties, diverted a business opportunity elsewhere and exploited it for their own gain.
Those directors were ordered by the High Court to account for their profits to the company. The appeal court rejected their appeal.
At issue for the SC was whether the current test for requiring an account of profits should now include a requirement that the fiduciary could not have made the same profit in a way that avoided a breach of duty.
The SC justices unanimously rejected the appellants’ ‘invitation’ to alter the legal position – the arguments for it were anything but compelling.
The court made clear that the profit rule reflects the way that law and equity views the profits made by a fiduciary as belonging to the principal. From the moment the profits are made, they are held on trust for the principal and must be accounted for. It’s an inherent aspect of being a fiduciary and should not be undermined by introducing a new test.
Further, the key purpose behind the profit rule is to deter fiduciaries such as company directors from giving in to the “temptation to depart from their obligation of single-minded loyalty to their principal (for their own benefit)”.
The directors were in breach and have no option but to account for their profits.
What does this mean?
Directors, and others in a fiduciary relationship, must be clear as to the extent of their fiduciary duties to the company and the strict nature of those duties. The no profit rule is a fundamental part of what it means to act in good faith and loyalty to the principal.
If in doubt as to your duties, always take specialist legal advice from experienced corporate lawyers.
1Rukhadze & Ors v Recovery Partners GP Ltd [2025] UKSC 10
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