Next Generation Holdings Limited & Anor v Alec Finch & Anor [2026] EWCA Civ 1015

[2026] EWCA Civ 1015

Case No CA-2023-002391

IN THE COURT OF APPEAL (CIVIL DIVISION)

[2023] EWHC 2383 (Ch)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

BUSINESS LIST (ChD)

His Honour Judge Johns KC, sitting as a Judge of the High Court

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 31 July 2026

Before

LORD JUSTICE BEAN

(Vice-President of the Court of Appeal, Civil Division)

LORD JUSTICE PETER JACKSON

LORD JUSTICE SNOWDEN

Between

NEXT GENERATION HOLDINGS LIMITEDClaimants/

AMBON BROKERS LIMITEDRespondents

ALEC FINCHDefendants/

ROBERT ANDREW FINCHAppellants

The First Appellant appeared in person representing himself and the Second Appellant for in person

James Potts (instructed by Devonshires Solicitors LLP) (both acting pro bono) for Respondents

Hearing Hearing date: 12 May 2026

Approved Judgment

This judgment was handed down remotely at 10.30am on 31 July 2026 by circulation

to the parties or their representatives by e-mail and by release to the National Archives.

.............................

[1]This appeal is from a decision of HHJ Johns KC (sitting as a judge of the High Court) (“the Judge” and “the Judgment”). The Judgment followed a three-week trial of a claim by Next Generation Holdings Limited (“NGHL”) for fraudulent misrepresentation and breach of warranty in relation to its purchase of the majority of the shares in Ambon Brokers Limited (then called AFL Insurance Brokers Limited) (“AFL”) from the first appellant (“Alec Finch”) in September 2017.

[2]AFL also brought a claim for damages for breach of duty and unlawful means conspiracy against Alec Finch and his son, Bob Finch (together “the Finches”), who were directors of AFL. AFL alleged that prior to the share sale, the Finches had improperly caused AFL to use its clients’ money to pay AFL’s liabilities and expenses arising in its wholesale insurance broking business. It was alleged that the Finches conspired with AFL’s then chief financial officer, Keely Dalfen, to make false entries in AFL’s accounting records and client money calculations to cover up the misuse of client money and to present a false picture of AFL’s profitability and solvency to NGHL to induce it to acquire the shares in AFL.

[3]After acquiring the shares in AFL, but before discovering the fraud, NGHL made substantial capital investments into the company. The fraud was discovered in 2020, following which NGHL injected further capital and arranged for other money to be raised to enable AFL to repay the money previously misappropriated from the client money accounts. Parts of AFL’s business were then sold and the remainder entered a solvent wind down.

[4]The main issue at trial was whether the client money had been misused in the way alleged so as to create a deficit on the client money accounts, and whether the Finches knew of that. In his Judgment, the Judge found that there was a very significant deficit in the client money accounts of £3,510,000 as at the date of the share sale in 2017 and that this was due to fraud on the part of the Finches. In addition to finding that the Finches had deceived NGHL into acquiring the shares in AFL and had breached the warranties given on the share sale, the Judge also found that the Finches had dishonestly breached their duties as directors of AFL under section 172(1) of the Companies Act 2006 (“section 172(1)”) by causing AFL to misappropriate its clients’ money. The Judge found that this paid no proper regard to AFL’s relationships with insurers and brokers or to the desirability of maintaining a reputation for high standards of business conduct.

[5]The Judge awarded substantial damages to NGHL to compensate it for the capital contributions that it had made to AFL: he held that these were sums paid to fund a business that NGHL had been induced by fraud to buy. The Judge also awarded damages to AFL for a number of items. These included trading losses from 1 July 2014 until the date of the share sale in 2017, for which the Judge used the size of the client money deficit as a proxy. He also awarded a further £4,304,167 to compensate AFL for its trading losses based on its annual accounts from the date of the share sale to the termination of its business in 2021. Those figures for trading losses included £158,135 in respect of the costs of investigating the Finches’ wrongdoing. Against those amounts the Judge gave a credit in respect of the £2,847,038 realised from sale of parts of AFL’s business.

[6]The appeal relates to the damages awarded to AFL in respect of trading losses. For the reasons that follow, I consider that the Judge was wrong to hold that any trading losses were, as a matter of law, caused by the breaches of duty and unlawful acts that he found proven. However, on the basis of the Judge’s findings, the Finches’ breaches of duty and unlawful acts plainly did cause AFL loss, namely a liability to restore the £3,510,000 taken from the client money accounts in breach of trust prior to the share sale in 2017.

[7]I would allow the appeal to the extent of substituting damages or equitable compensation for that loss in place of the damages ordered by the Judge in respect of trading losses. After making adjustments for the investigation costs (which were directly attributable to the Finches’ wrongdoing), and the £2,847,038 received on sale of AFL’s business (which was not), on my computation, the net result is a reduction of £598,994 in the damages awarded to AFL.

The Facts in outline

[8]The facts as found by the Judge are not in dispute on this appeal. The following summary is taken from the Judgment.

[9]AFL was a wholesale insurance broker authorised by the Financial Conduct Authority (“FCA”). It placed risks with insurers in the Lloyds market for retail brokers and then (generally) received the premium from the broker, deducted its own commission, and passed the resulting net premium onto the insurer.

[10]In accordance with its FCA authorisation, AFL was required to comply with Chapter 5 of the FCA’s Client Assets Sourcebook (“CASS 5”), which required, among other things, that client money be held on trust by AFL in client money accounts separately from the company’s own money. CASS 5 also required that client money calculations be carried out at least every 25 days, with any surplus being available to be paid out to AFL and any deficit required to be made good by a payment in by the company to the relevant client money account.

[11]AFL would receive cash into its client money accounts representing net premium plus AFL’s commission. It would earn commission only once a specific insurance risk was bound in a particular contract period. Only when both cash had been received and a specific risk had been bound could AFL deem its commission earned and so transfer the earned commission sums from AFL’s client money accounts into AFL’s own office account.

[12]Prior to September 2017, the Finches were directors of AFL and FCA approved persons for the purposes of the conduct of its business. Between August 2011 and September 2017, the Finches improperly caused money to be drawn from the client money accounts to meet AFL’s business expenses and trading losses. The Finches and Keely Dalfen caused false income accruals to be entered into the company’s accounting records to generate fictitious surpluses on the client money accounts to cover up such drawings.

[13]On the evidence, the Judge concluded that AFL was insolvent on both a balance sheet and cashflow basis from at least 30 June 2014. He also found that the false accruals at that time amounted to £700,000. The Judge further found that by September 2017 the deficit on the client money accounts had increased to £3,510,000.

[14]On 14 September 2017 Alec Finch sold 58% of the share capital in AFL to NGHL for £2,119,900. The Judge found that this sale was induced by fraudulent misrepresentations by the Finches, in particular in a spreadsheet shown to the chairman of NGHL in the course of negotiations, which was based on the false income accruals. The Judge also found that Alec Finch gave warranties under the sale and purchase agreement which he knew to be untrue, including as to the accuracy of AFL’s most recent audited accounts, its management accounts and that its business had been conducted in compliance with FCA rules.

[15]Following the purchase of the majority shareholding, NGHL appointed additional directors and new management of AFL. The Judge accepted Keely Dalfen’s evidence that the arrival of new management prompted her to stop making false accruals. The Judge also held that he could “safely exclude” any suggestion that any part of the deficit in the client money accounts was attributable to any conduct of the new management after the share sale.

[16]In ignorance of the fraud, AFL raised substantial new equity capital between 2018 and 2020 to fund an expansion of its business. NGHL invested £2,583,327.37 of that new capital. The fraud was discovered in April 2020 and was reported by the new management of AFL to the FCA. Between July and October 2020, AFL raised a further £3.64 million in shares and took a bank loan in order to repay the monies taken from the client money accounts. NGHL contributed £633,508.94 of this amount. AFL then entered a solvent wind-down process, leading to a sale of the main parts of its business.

The claims

[17]NGHL brought claims in fraudulent misrepresentation and breach of warranty against the Finches in relation to its acquisition of shares in AFL. AFL also brought claims against the Finches for dishonest breaches of their fiduciary duties as directors and unlawful means conspiracy.

[18]The particular breaches of duty alleged by AFL in its pleading were that the Finches had misapplied client monies held on trust, thus generating an obligation on AFL to repay the same; that they had “caused AFL to continue trading while insolvent”; that they had failed to ensure that AFL complied with the CASS 5 rules; that they had exposed AFL to the risk of regulatory sanctions; and that they had failed to report their own wrongdoing and concealed it from the company’s auditors and new management.

[19]For the analysis that follows, it is important to appreciate that there was no allegation that the underlying reason that AFL’s insurance business was loss-making was due to any breaches of duty by the Finches in relation to the commercial management of that business.

[20]AFL’s pleaded claim in conspiracy was that the Finches and Keely Dalfen combined together to injure it by unlawful means. The particulars of unlawful means included false accounting in relation to AFL’s statutory and client money accounts, together with the following:

“Withdrawing client money from AFL’s client trust accounts and paying it into AFL’s office accounts for use in AFL’s general cashflow, in breach of AFL’s fiduciary duties to its clients under the general law of trusts and fiduciary duties and/or in breach of CASS 5. … Causing AFL wrongfully to trade whilst insolvent contrary to section 214 of the Insolvency Act 1986 in that from the financial year 2014/2015 they knew or ought to have concluded that there was no reasonable prospect that AFL could avoid going into insolvent liquidation or insolvent administration, but for the new shareholder equity and capital raised [after the sale of shares to NGHL].”

[21]The essence of AFL’s case on causation was that but for the Finches’ breaches of duty and/or conspiracy in misusing client money and concealing that misuse, AFL would have ceased trading by the end of June 2014. It was alleged that AFL would therefore not have incurred further trading losses after that date; that it would not have incurred the costs of borrowing and recapitalisation to enable it to repay the monies taken from the client money account over that period; that it would not have incurred the costs of investigating the Finches’ wrongdoing; and that it would not have been forced to run-off and sell parts of its business.

The Judgment

[22]In his Judgment, the Judge concentrated on the question of whether there had been a deficit on the client money accounts and who was responsible for that. As I have indicated, he found that there was a deficit on the client money accounts of £3,510,000 at the time of the share sale, and that there had been a fraud by the Finches. At paragraph 117 he explained, “117. … There were accruals made which had no proper basis. In case it is of relevance, I make clear that these were not honest overestimates. The Finches knew, as I find, they had no proper basis. In that regard, as well as there being in fact a lack of a proper basis, [Keely Dalfen] realised they were spurious, the Finches knew of the client money hole which these accruals were causing, the Finches were prepared to act dishonestly in relation to them (fraudulently misrepresenting by the spreadsheet that they were real and recent debts) … Those accruals did make it into the company accounts, distorting the stated income and the balance sheet of AFL. Indeed, that was part of the purpose of the Finches in making such accruals. As [Keely Dalfen] said and I accept (having accepted her evidence on other key issues), “This process of making larger and larger accruals was done, predominantly, to make it look like AFL was a profitable and successful business to potential buyers and investors, and disguise that it was, in actual fact, balance sheet insolvent and operating at a loss” … And the accruals were used to move money illegitimately to the office account, leaving a gaping hole in the client money account.”

Liability to NGHL in relation to the share sale

[23]On the basis of such findings, the Judge held the Finches liable to NGHL for fraudulent misrepresentation and breach of warranty in relation to the share sale. The Judge awarded damages to NGHL in the sum of £3,216,836.31, being the aggregate investment NGHL had made to recapitalise AFL after acquiring its shares. The claim by NGHL for damages for loss of the entirety of its purchase price of £2,119,900 on the basis that the shares in AFL were worthless when acquired was not determined at trial, but was adjourned for further directions for the determination of the value of the shares.

Liability to AFL for breach of duty

[24]The Judge also found that the Finches had breached their duties to AFL. At paragraph 123 of the Judgment, the Judge set out section 172(1), “(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(d) the impact of the company's operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.”

[25]At paragraphs 124-125, the Judge found that the use of client money to pay expenses and liabilities of AFL was a breach of the section 172(1) duty, “124. The wrongful taking of client money in order to fund company expenses must surely be a breach of this duty. As I will come on to find, it caused AFL to build up huge trading losses and can hardly be said to be a decision which had proper regard to fostering AFL’s relationships with the insurers and brokers it dealt with or to the desirability of AFL maintaining a reputation for high standards of conduct. 125. Given both [the Finches] knew that it was key for businesses such as those run by AFL to keep client money strictly separate, they cannot honestly have believed their actions were in the best interests of the company. If they gave it no thought so that an objective test is the appropriate one, an intelligent and honest director could not have considered such conduct as most likely to promote the success of AFL.”

Liability for unlawful means conspiracy

[26]The Judge also found the Finches liable in the tort of conspiracy. After setting out the requirements of an unlawful means conspiracy, he stated, at paragraph 128, “128. The Claimants have suffered loss and damage as a result of [the Finches’] unlawful actions. Further, I consider those actions were taken pursuant to a combination or agreement to injure them. The [Finches and Keely Dalfen] acted together in causing AFL to trade at a loss and giving a false picture to NGHL of AFL’s finances so as to bring about the share sale, knowing the inevitable consequences.” Causation and loss

[27]The Judge observed, at paragraph 131, that the question of what losses were recoverable by the claimants had received “only modest attention” at the trial. The Judge dealt with causation and loss in relation to AFL’s claims for breach of duty and conspiracy together. His reasoning was as follows, “149. The sum of £3,500,000 was … said to be a loss of AFL. I was unable to agree with that insofar as that sum was approached as the amount wrongly taken from the client money account and used by AFL. It seemed to me that money which had been taken wrongly by AFL and spent by AFL could not be regarded as a loss to AFL. It was instead a loss to those properly entitled to that money, being the insurance creditors.150. However, Mr Potts also relied on the figure as a proxy for trading losses to 14 September 2017.

151. That trading losses are, in principle, recoverable was accepted by [counsel] for the Finches. He accepted too that, if the Finches had complied with their duties as they should, including by reporting the use of client money to the FCA, then AFL would have ceased trading.

152. For his part, Mr Potts accepted for AFL that there must be a sufficient connection between the wrongdoing and the particular trading losses claimed for them to be recoverable. There must be more than a mere “but for” nexus. This was by analogy to the wrongful trading cases, for which see Re Continental Assurance

[2007] 2 BCLC 287

at [378].

153. Pre-transaction trading losses for which the client money deficit is a proxy do, in my judgment, have a sufficient connection with the Finches’ wrongdoing to be recoverable as damages for breach of their director’s duties. The wrongdoing was the taking of client money to fund company expenses. The trading losses that built up were the direct product of that wrongdoing. … 158. What of the post-transaction trading losses? 159. [Counsel for the Finches] referred in closing to the post-transaction trading losses as the product of “separate commercial decisions”. But these too flowed, as I see it, from the Finches’ wrongdoing. AFL was not, on its true figures, a profitable company. But that was masked by the wrongful taking of client money. That AFL continued to trade and make losses after the share sale transaction, as well as before, was the product of the Finches’ wrongdoing. These were precisely the kind of losses that could be expected to flow until the breaches of duty were discovered and the company run down. The Finches have failed sufficiently to identify any unconnected factors such as the bad weather conditions, the consequences of which the judge sought to exclude from the payment to be made under s.214 of the Insolvency Act 1986, in Re Brian D Pierson (Contractors) Ltd

[2001] 1 BCLC 275

(referred to in Re Continental Assurance at [379]) to which the losses are more properly referable. 160. This is no mere ‘but for’ nexus. Put another way, the wrongdoing was a cause of the loss, not simply the occasion for it.”

AFL’s damages

[28]The Judge awarded damages to AFL in the total amount of £6,124,430.02. That amount was made up as follows: i) £2,810,000 trading losses from 30 June 2014 to the date of the share sale in September 2017. This was the difference between the size of the deficit on the client money accounts at the date of the share sale (£3,510,000) and the amount of false accruals up to 30 June 2014 (£700,000); ii) £2,663,513 trading losses from the date of the acquisition of shares by NGHL in September 2017 to 29 December 2018; iii) £1,640,654 net trading losses of AFL over the period from 2019 to 2021. This was a net figure, because the company made losses in 2019 and 2021, but in fact made significant profits from trading in 2020; iv) £406,660.63 interest paid by AFL on preference shares issued in August 2020; v) £28,739.73 cost of interest and an arrangement fee for a bank loan of £1 million to help remedy the client money deficit; and vi) £1,421,900.66 cost of the solvent run-off of AFL’s business that had not already been included in the trading losses for 2021 under (iii) above. The Judge proceeded on the basis that the £158,135 claimed by AFL in respect of the costs of investigating the Finches’ wrongdoing had been included in the figures for trading losses. He also gave credit against the damages of £2,847,038 realised on sale of AFL’s business (adjusted for writing off inter-company debts).

[29]The Judge determined that the amount awarded to NGHL overlapped with the amount that he had determined should be awarded to AFL. He therefore ordered that the Finches should pay the sum of £3,216,836.31 to AFL and NGHL jointly; and that the balance of £2,907,593.71 should be payable to AFL alone.

The appeal

[30]The Finches sought permission to appeal on a number of grounds. Newey LJ refused permission on all but one. The sole ground of appeal for which permission was granted was that the Judge had erred in holding that the trading losses of AFL were caused by the Finches’ fraud. The appeal thus relates to heads of loss and damage (i), (ii) and (iii) in paragraph 28 above, totalling £7,114,167.

[31]As Mr Potts emphasised, the appeal did not affect the damages awarded to NGHL. Mr Potts also pointed out that the sole ground of appeal left untouched the awards of damages to AFL in respect of items (iv) to (vi) in paragraph 28 above. He further contended that in the event that the appeal was successful on causation grounds, AFL would still be entitled to recover its investigation costs of £158,135 and should not have to give credit for the £2,847,038 realised from sale of its business. Analysis The breaches of duty and unlawful means

Analysis

[32]For reasons that I shall explain, before considering the question of causation, it is first necessary to identify with some precision the breaches of fiduciary duty that the Judge found had been committed by the Finches, and the unlawful means that were the essence of their tortious conspiracy.

[33]As to breach of fiduciary duty, as I have indicated above, this was not a case in which there was any suggestion that the Finches had breached their duties in relation to the commercial aspects of AFL’s insurance broking business that operated at a loss. It was also not a case in which the Judge found that the Finches had misappropriated or misapplied assets of AFL over which they had control as fiduciaries. Rather, as the Judge found in paragraph 124 of his Judgment, their breach of fiduciary duty was wrongly taking money belonging to AFL’s clients and using it to pay AFL’s trading expenses and liabilities.

[34]The Judge was less clear about precisely what unlawful conduct was the basis for his finding of unlawful means conspiracy as regards AFL. However, I think it is implicit from his reference in paragraph 128 of his Judgment to his earlier findings, that the unlawful means were causing AFL to misappropriate client money in breach of trust and the use of false accounting to conceal that.

[35]Those findings were entirely understandable. However, the Judge’s remarks in paragraphs 124 and 128 suggest that he might have thought that the Finches’ conduct in “caus[ing] AFL to build up huge trading losses” and “causing AFL to trade at a loss” were also either a breach of duty under section 172(1) or unlawful means for the purposes of the conspiracy claim. If so, that would have been wrong. That is because, for reasons that I shall explain below, directors do not, without more, owe fiduciary duties not to cause their company to trade at a loss. Nor, without more, do they owe fiduciary duties not to cause or allow their company to trade whilst insolvent. Moreover, contrary to the pleaded allegation of unlawful means referred to in paragraph 20 above, it is not unlawful for directors to cause or permit their company to trade in the circumstances described in section 214 of the Insolvency Act 1986 (“section 214”). Section 214 simply sets out the conditions under which a court may, if the company goes into insolvent liquidation or insolvent administration (which AFL did not), make an order requiring the directors to contribute to its assets.

[36]The point that the law does not generally impose upon directors a duty to ensure that their company does not trade while insolvent or at a loss was made very clearly by Chadwick J in the context of an application to disqualify a director on the grounds of unfitness. In Secretary of State v Gash

[1997] 1 WLR 407

at 414D-F, he observed, “The companies legislation does not impose on directors a statutory duty to ensure that their company does not trade while insolvent; nor does that legislation impose an obligation to ensure that the company does not trade at a loss. Those propositions need only to be stated to be recognised as self-evident. Directors may properly take the view that it is in the interests of the company and of its creditors that, although insolvent, the company should continue to trade out of its difficulties. They may properly take the view that it is in the interests of the company and its creditors that some loss-making trade should be accepted in anticipation of future profitability. They are not to be criticised if they give effect to such views, properly held. But the legislation imposes on directors the risk that trading while insolvent may lead to personal liability. Section 214 imposes that liability where the director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation.”

[37]Following the codification of directors’ duties in 2006, the same point was made in the judgments of the majority of the Supreme Court in BTI 2014 LLC v Sequana SA

[2022] UKSC 25

[2024] AC 211

(“Sequana”). In that case, the majority of the Supreme Court (Lord Briggs, with whom Lord Kitchen and Lord Hodge agreed, and Lord Reed agreed in substantial part) took the view that the duties of a director to promote the success of the company as set out in section 172 are modified once the director knows or ought to know that the company is insolvent or that insolvency is imminent. From that time, when making his decisions as to how to promote the interests of the company, the director must have regard to the interests of the general body of creditors in addition to those of the general body of shareholders. If there is a conflict between them, those interests should be weighed in the balance against each other having regard to the financial state of the company; and when an insolvent liquidation or insolvent administration is inevitable, the interests of creditors must be treated as paramount.

[38]At no stage in their reasoning in Sequana did the members of the Supreme Court suggest that a director has any duty to ensure that their company does not trade while insolvent or at a loss. So, for example, at paragraph 120, Lord Briggs referred to the definitions of insolvency in the Insolvency Act 1986 and explained why trading while insolvent would not necessarily be disadvantageous to creditors or members, “120. Insolvency takes two forms. Either may exist without the other. The first is usually called balance sheet insolvency, where the value of the company’s assets is exceeded by the value of its liabilities: see section 123(2) of the 1986 Act. The second is what is generally known as commercial insolvency, where the company is unable to pay its debts as they fall due: see section 123(1)(e) of the 1986 Act and [Re Cheyne Finance plc (No.2) [2008] Bus LR 1562]. For present purposes what matters is that neither will necessarily be permanent, nor fatal to the long-term success of the company, although of course either may be, and commercial insolvency often is. A company may experience short-term commercial insolvency due to a temporary adverse balance between the liquidity of its assets and the maturity of its debts. Many start-up companies are balance sheet insolvent before a new invention or business product is sufficiently developed to be brought to market so as to generate revenue or goodwill value, and yet the company later becomes spectacularly successful, and its shareholders become millionaires. In both cases the directors may perceive that there is a reasonable prospect that the company will be able to trade out of insolvency, for the benefit of both creditors and shareholders, a perception often labelled as seeing light at the end of the tunnel.”

[39]Lord Hodge made a comment to similar effect at paragraph 238, “238. In many cases when a company is bordering on insolvency, an obligation to consider the interests of a company's creditors and balance them against the interests of the shareholders will involve directors in making a commercial judgment about the benefits and risks of a transaction or course of action which may not readily be impugned. A reasonable decision by directors to attempt to rescue a company’s business in the interests of both its members and its creditors would not in my view involve a breach of the common law duty.”

[40]At paragraphs 121-122, Lord Briggs also observed that the wrongful trading provisions of section 214 do not impose any direct duty upon a director to cause the company to cease trading when it was insolvent. Instead, the section gives the court power to require a contribution to be made to the assets of an insolvent company if the director fails to take all steps to minimise loss to creditors he ought to take once he knows or ought to conclude that a formal insolvency is inevitable, “121. Section 214 of the 1986 Act creates, or at least implicitly recognises, an obligation on directors to treat creditors’ interests as paramount when, but only when, in colloquial parlance, there is no light at the end of the tunnel… 122. This statutory obligation is not to be understood simply as the recognition of a common law creditor duty. First, literally speaking, section 214 merely confers a discretionary power on the court to require a director to make a contribution to the assets of the company in the stated circumstances, while conferring a defence to such a liability if the director took every step he ought to have taken to minimise the loss to creditors. Secondly, the statutory liability is not to account or to make equitable compensation for loss caused by an assumed breach of fiduciary duty, but to make such contribution to the assets of the company as the court thinks fit.”

[41]Lord Briggs returned to these themes later in his judgment at paragraph 174, reiterating that directors were under no automatic duty to prevent their company continuing to trade while insolvent, albeit that they might incur liability for wrongful trading under section 214 if loss-making trading continued when insolvent liquidation or insolvent administration was inevitable, “174. If the fact of insolvency always and immediately rendered the interests of creditors paramount, then directors would be likely to decide, or to be advised for their own protection, to cause the company immediately to cease trading, because that course would usually minimise the risk of further loss to creditors, whereas continued trading with a view to a return to solvency might increase that risk. It would in my view be wrong for the common law to impose that fetter on the directors’ business judgment. Section 214 is framed in terms which point to a very different parliamentary intention, because it permits directors to cause a company to continue to trade whilst insolvent, for as long as they reasonably discern light at the end of the tunnel.”

[42]In the instant case, as I have indicated, there was no pleaded allegation or finding by the Judge to the effect that the Finches breached their duty under section 172(1) by failing to give appropriate consideration to the interests of the general body of AFL’s creditors in the sense discussed in Sequana. Indeed, the essence of the fraud found by the Judge was that until the share sale in 2017, the Finches ensured that AFL’s trade creditors and expenses were paid – albeit using money belonging to its clients.

Causation and loss

[43]I therefore turn to the issue of causation and loss. As indicated above, the Judge found that Finches’ wrongdoing towards AFL was to cause it to act in breach of trust by misappropriating money belonging to its clients prior to the date of the share sale in 2017; and covering up such misappropriation by false accounting. However, at paragraph 152, the Judge adopted AFL’s suggested approach to causation based on an analogy with wrongful trading cases. In my view, this led the Judge into error in applying the relevant causation principles to this case, because he adopted too broad a brush in relation to the losses claimed and did not focus on the necessary relationship between the breaches of duty and the trading losses claimed.

[44]The principles of causation in tort were explored by Lord Hoffmann in his famous speech in relation to claims in negligence in Banque Bruxelles Lambert v Eagle Star Insurance

[1997] AC 191

(also known as South Australia Asset Management Corp v York Montague) (“SAAMCO”). He explained, at pages 211H – 212C that for a claim in tort, contract or breach of statutory duty, a claimant must show that the defendant owed him a duty to protect him from the kind of loss that he had suffered: in other words, that the losses suffered were within the scope of the duty owed.

[45]Lord Hoffmann then discussed the extent of a defendant’s liability and the rules on causation. He explained, at pages 212G – 213D, “There is no reason in principle why the law should not penalise wrongful conduct by shifting on to the wrongdoer the whole risk of consequences which would not have happened but for the wrongful act. Hart and Honoré, in Causation in the Law, 2nd ed. (1985), p. 120, say that it would, for example, be perfectly intelligible to have a rule by which an unlicensed driver was responsible for all the consequences of his having driven, even if they were unconnected with his not having a licence. One might adopt such a rule in the interests of deterring unlicensed driving. But that is not the normal rule… Rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.” (my emphasis) (my emphasis)

[46]Lord Sumption (who had been one of the counsel in SAAMCO twenty years earlier) also considered this principle in Hughes-Holland v BPE Solicitors

[2018] AC 599

(“Hughes-Holland”) when analysing the decision in SAAMCO. Lord Sumption stated, at paragraph 20, “20. “Courts of law”, said Lord Asquith of Bishopstone in Stapley v Gypsum Mines Ltd

[1953] AC 663

, 687, “must accept the fact that the philosophic doctrine of causation and the juridical doctrine of responsibility for the consequences of a negligent act diverge”. What Lord Asquith meant by the philosophic doctrine of causation, as he went on to explain, was the proposition that any event that would have not have occurred but for the act of the defendant must be regarded as the consequence of that act. In the law of damages, this has never been enough. It is generally a necessary condition for the recovery of a loss that it would not have been suffered but for the breach of duty. But it is not always a sufficient condition. The reason, as Lord Asquith pointed out, is that the law is concerned with assigning responsibility for the consequences of the breach, and a defendant is not necessarily responsible in law for everything that follows from his act, even if it is wrongful. A variety of legal concepts serves to limit the matters for which a wrongdoer is legally responsible. Thus the law distinguishes between a mere precondition or occasion for a loss and an act which gives rise to a liability to make it good by way of damages: Galoo Ltd v Bright Grahame Murray

[1994] 1 WLR 1360

. Effective or substantial causation is a familiar example of a legal filter which serves to eliminate certain losses from the scope of a defendant's responsibility. It is an aspect of legal causation. So too is the rule that the defendant cannot be held liable for losses that the claimant could reasonably have been expected to avoid: Koch Marine Inc v D’Amica Societa di Navigazione ARL (The Elena D’Amico)

[1980] 1 Lloyds Rep 75

. But the relevant filters are not limited to those which can be analysed in terms of causation. Ultimately, all of them depend on a developed judicial instinct about the nature or extent of the duty which the wrongdoer has broken.”

[47]Galoo v Bright Grahame Murray

[1994] 1 WLR 1360

(“Galoo”), to which Lord Sumption referred, is of some relevance to the instant case. The plaintiff company’s case was that its auditors negligently prepared accounts which did not accurately reflect the company’s true financial position. If the accounts had been properly prepared, they would have shown that the company was in an unsatisfactory financial condition and would have ceased trading immediately. In fact, the company carried on trading and sustained losses which it sought to recover from the auditors. The Court of Appeal held that the trading losses could be regarded as having been caused by the negligence of the auditors on the basis of a “but for” test of causation; but that was not the test which English law applied. Rather, as Glidewell LJ put it, the auditors’ negligence merely “gave the opportunity” to the company to incur the trading losses: in law it did not cause them.

[48]Although the comments in SAAMCO, Hughes-Holland and Galoo were made in the context of claims in negligence, I see no reason why the same approach should not apply to the tort of unlawful means conspiracy. There is also no indication to the contrary in any of the leading cases or commentaries: see e.g. British Midland Tool v Midland International

[2003] 2 BCLC 523

at [88]; McGregor on Damages (22nd ed) at 49-023 et seq; and Burrows, Remedies for Torts, Breach of Contract and Equitable Wrongs (4th ed) at page 230.

[49]A structurally similar, though not identical, approach is applied to claims for equitable compensation for breaches of fiduciary duty which do not involve a misapplication of the trust property. The basic principles were explored in AIB Group v Mark Redler & Co

[2015] AC 1503

. Lord Toulson and Lord Reed (with whom the other members of the Supreme Court agreed) each conducted a review of the relevant authorities including, in particular, the (dissenting) judgment of McLachlin J in Canson Enterprises Ltd v Boughton & Co

[1991] 3 SCR 534

; 85 DLR (4th) 129 and Lord Browne-Wilkinson’s speech in Target Holdings v Redferns

[1996] AC 421

. Lord Reed concluded his analysis as follows:

“135. The measure of compensation should … normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties. The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken control of the property, and was unrelated to the defendants’ earlier breach of fiduciary duty. 136. It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of what has been lost as a result of a breach of duty. At that level of generality, it has the same aim as most awards of damages for tort or breach of contract. Equally, since the concept of loss necessarily involves the concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows “directly” from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty was owed), there are some structural similarities between the assessment of equitable compensation and the assessment of common law damages.”

[50]Overall, therefore, where equitable compensation is sought for breach of fiduciary duty not involving a misapplication of trust property, the court must apply a causation analysis (but not a foreseeability analysis) and ask itself whether the loss claimed flowed directly from the breach and was attributable to it. That will inevitably involve consideration of the nature of the breach which occurred and its connection with the postulated consequence.

This case

[51]Applying these principles to the instant case, it is important to recall there was no suggestion that the Finches had committed any breaches of duty in the commercial management of AFL’s business. They also did not misapply AFL’s assets at any time. When AFL’s insurance broking business gave rise to “trading losses” (i.e. liabilities and expenses that it could not meet from income or other current assets generated by its business) or “trading profits” (i.e. where the income exceeded the liabilities and expenses), those were the direct result of the transactions undertaken with clients and other counterparties. Such profits or losses were not the direct consequence of any wrongdoing by the Finches. The Finches’ wrongdoing was to conspire to misappropriate client money to pay AFL’s liabilities and expenses if they could not be met from AFL’s own resources.

[52]On that basis I cannot see how it can be said that AFL’s trading losses prior to the share sale in 2017 flowed directly from the Finches’ breaches of duty. It was the other way around: the trading losses occurred independently in the course of AFL’s business. It was the manner in which the Finches responded to those trading losses that was wrongful. The Finches’ breaches of duty in misappropriating client money had the direct consequence that AFL became liable in equity as a trustee to restore the trust fund at its own expense by repaying the monies that had been misappropriated: see Mitchell v Al Jaber

[2026] AC 758

at paragraph 93. That liability to repair the “hole” of £3,510,000 in the client money accounts was a loss to AFL that was directly caused by the Finches’ breaches of duty. The Judge should have held the Finches liable to AFL for causing that direct loss, rather than using the hole in the client money account as an indirect “proxy” for trading losses.

[53]After the share sale in 2017 there was no further misappropriation of client monies. AFL used its own monies (including those subscribed by shareholders) to discharge the expenses and liabilities incurred in its trading; and for at least one of the subsequent years (2020), AFL traded at a profit rather than a loss. The Finches’ wrongdoing during this period was to continue to conceal the earlier misappropriation of client funds and the deficit in the client money accounts.

[54]I consider that the losses or profits from AFL’s trading after 2017 were not attributable to the earlier breaches of duty. The misappropriation of client money had occurred by the time of the share sale, and the company was then placed under new management. The continued concealment of the earlier misappropriation of client money was a further breach of duty by the Finches, but that concealment merely provided the opportunity for subsequent losses and profits to be made in AFL’s underlying insurance business, because the company continued to trade rather than being shut down. Those losses and profits resulted from the way the company conducted its underlying business, but they were not the direct result of the concealment or attributable to it. In that respect the case has considerable similarities to the reasoning of Glidewell LJ in Galoo, referred to with approval by Lord Sumption in Hughes-Holland.

[55]The only exception to that conclusion relates to AFL’s costs of investigating the deficit in the client money accounts, which the Judge presumed were included in the figures for post-2017 trading. Those investigation costs were plainly caused by and directly attributable to the Finches’ breaches of duty in misapplying client money and covering that up by false accounting. Those investigation costs should be recoverable.

[56]Further, whether or not AFL’s sale of parts of its business in 2021 would have occurred “but for” the Finches’ wrongdoing several years earlier, in my judgment that sale did not flow directly from, and was not attributable to, the earlier wrongdoing. No credit therefore needs to be given by AFL for the amount it received on such sale against its compensation or damages. Nor, for completeness, is it relevant that AFL’s shareholders chose to invest and raise money to enable AFL to meet its liability to restore the client money accounts, rather than simply let AFL fall into an insolvency process.

[57]Instead of adopting the approach that I have outlined above, the Judge based his decision on damages on an analogy to the principles of causation used in wrongful trading cases under section 214. The difficulty with that approach is that, as I have explained, section 214 does not impose any duty on a director: nor does it make his conduct unlawful in a way that could be relied upon in the tort of conspiracy.

[58]The essence of the “wrongful” conduct in the paradigm case under section 214 is that a director causes the company to carry on loss-making trading after he knows or ought to know that an insolvent liquidation or insolvent administration of the company is inevitable, but without taking steps to protect the general body of creditors from that trading. In such a case, it is easy to see that any increased deficiency as regards the general body of creditors resulting from the continued trading should be regarded as attributable to the very conduct which section 214 is designed to address and so be the foundation for any order that the court might make.

[59]But that was not what occurred in the instant case. AFL did not go into an insolvency process; it did not (and could not) pursue a wrongful trading claim; the Finches did not breach their duties merely by causing AFL to trade at a loss or while insolvent; and the Judge made no findings that the Finches had breached their duties at any time by failing to consider the interests of the general body of creditors in the manner discussed in Sequana. In short, the Finches’ wrongdoing was of a very different and more specific nature in relation to misuse of assets belonging to clients, and as a consequence the type of losses for which they should be held liable must be correspondingly limited.

Conclusion

[60]I therefore consider that the appeal must be allowed in so far as the Judge ordered damages to compensate AFL for its trading losses. As a matter of law, such trading losses were not caused by the breaches of duty and unlawful acts that he found proven.

[61]However, on the basis of the Judge’s findings, the Finches’ breaches of duty and unlawful acts in relation to the client money accounts did directly cause losses to AFL, namely a liability to restore the £3,510,000 taken from the client money accounts in breach of trust prior to the share sale in 2017, together with the costs of £158,135 of investigating the wrongdoing that had occurred in that regard.

[62]I would therefore allow the appeal to the extent of substituting damages or equitable compensation in the sum of £3,668,135 in place of the £7,114,167 ordered to be paid to AFL in respect of trading losses. However, for the reasons I have explained, AFL should not be required to give credit for the £2,847,038 received on sale of its business. On my computation, the net result is a reduction of £598,994 in the damages awarded to AFL, resulting in a total of £5,525,436.02.

[63]I agree.

[64]I also agree. _________________