From: Robert Stevens <robert.stevens@law.ox.ac.uk>
Sent: 14 January 2020 13:44
To: Hoggard, Nicholas <Nicholas.Hoggard@lawcommission.gov.uk>; obligations@uwo.ca
Subject: Re: Auden McKenzie Ltd v Patel - EWCA on equitable compensation

 

Dear all

 

I offer this by way of amuse esprit, or something to chew on over lunch, it being an appeal against summary judgment rather than a conclusive determination of law. With apologies for straying into equity. Nonetheless, an interesting question raised by the Court of Appeal in late December concerning the availability of equitable compensation. A director/shareholder, in breach of fiduciary duty, caused his company to make unlawful payments to him, but would, in the alternative, have caused it to make lawful payments of at least the same amount. What is the value of the loss? To what extent does any loss resulting from unlawful payments stand to be reduced or eliminated by reference to hypothetical lawful payments?

 

This was an appeal by Mr Patel (defendant) against summary judgment in favour of Auden McKenzie (Pharma Division) Ltd (claimant). The appeal was allowed (albeit with a healthy dose of scepticism that the defence would succeed at trial).

 

Auden McKenzie (Pharma Division) Ltd v Amit Patel [2019] EWCA Civ 2291

 

Summary as follows (for those interested).

 

Facts

Patel and his sister were sole directors and sole shareholders of the claimant company. Between 2009-2014, Patel raised sham invoices against the company to the value of c.£13.8m. He did this to extract funds from the company in a way that would evade tax. It was Patel’s assertion (and, being app for summary judgment, assumed to be true) that, had the payments not been made pursuant to sham invoices, “they would in any event have been paid by [the company] to the defendants at their instruction as properly paid dividends or bonus or other remuneration”.

 

The entire share capital was sold in 2015 (the details not relevant for these purposes) to the second and then third claimants. Mr Patel and HMRC reached a full and final settlement for the tax liabilities in respect the unlawful payments, such that the claimant company had no liability to HMRC.

 

The claimants claimed damages/equitable compensation for breach of fiduciary duties (the unlawful payments).

 

Discussion

Of course the normal position would be that, where a director causes a company to make unauthorised payments for which the company receives no value, the director is liable to the company to pay compensation in equal amounts [58]. The appellant’s position was that the claim had been one for damages or equitable compensation (a personal remedy, of course), the purpose of which is to put the parties in the position they would now be in if the unlawful payments had not been made. The appellant’s argument was therefore: “If there had been no breach of duty, the [company] would now be in precisely the same position. The very same sums would have been paid by the [company] to the very same people… There is nothing to ‘compensate’ it for.”[25]

 

David Richards LJ cited Lord Browne-Wilkinson in Target Holdings v Redferns [1996] AC 421, 437: the quantum of compensation is not fixed at the date of breach, but at the date of judgment, i.e. “the figure then necessary to put the trust estate or the beneficiary back into the position it would have been in had there been no breach” [emphasis added]. This, of course, says nothing in particular about hypothetical intervening events. Clearly it is not enough merely to say that funds dissipated in one way would, absent breach, have been dissipated in an alternative honest way, and that therefore there is no loss: having been misappropriated, the funds are no longer available to a company to make payments as it sees fit (to other shareholders, if they existed, or to charities, etc) [53]. There is also some force in the claimant’s argument that, the hypothetical payments being lawful, the company would not be in the same position as it now finds itself because those lawful payments do not constitute loss.

 

However, the CA was clearly persuaded that it was at least arguable that, in order to do practical justice, it would be wrong to ignore hypothetical events that were entirely within Patel’s power to bring about [60]. The counterfactual was not so improbable as to be disregarded for the purposes of summary judgment. And, on these facts, it was relevant that the same sums would have been paid to the very same people. In allowing the appeal, David Richards LJ noted the “potential for flexibility” in departing from the obligation of fiduciaries to restore the fund under their control, citing Target Holdings, AIB Group (UK) plc v Mark Redler & Co and Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd. Patel’s defence was therefore not unsustainable as a matter of law.

 

Anyway, this may be of greater or lesser interest to members, but an interesting problem that seemed well argued by counsel and clearly worthy of further consideration.

 

Best

Nick

 

Dr Nicholas Hoggard | Law Commission
Lawyer

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