“62. There are arguments to be made both ways, as the continuing debate among scholars has shown, but absent fraud, which might give rise to other public policy considerations that are not present in this case, it would not in my opinion be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties.” “64. All agree that the basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law. Where there has been a breach of that duty, the basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have made by reason of the breach (and which ought therefore properly to be held on behalf of the beneficiary). Placing the beneficiary in the same position as he would have been in but for the breach may involve restoring the value of something lost by the breach or making good financial damage caused by the breach. But a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal. 65. The purpose of a restitutionary order is to replace a loss to the trust fund which the trustee has brought about. To say that there has been a loss to the trust fund in the present case of£2.5m by reason of the solicitors' conduct, when most of that sum would have been lost if the solicitors had applied the trust fund in the way that the bank had instructed them to do, is to adopt an artificial and unrealistic view of the facts. 66. I would reiterate Lord Browne-Wilkinson's statement, echoing McLachlin J's judgment in Canson 85 DLR (4th) 129 , about the object of an equitable monetary remedy for breach of trust, whether it be sub-classified as substitutive or reparative. As the beneficiary is entitled to have the trust properly administered, so he is entitled to have made good any loss suffered by reason of a breach of the duty. 67. A traditional trust will typically govern the ownership-management of property for a group of potential beneficiaries over a lengthy number of years. If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require him to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss which is being made good. By contrast, in Target Holdings the finance company was seeking to be put in a better position on the facts (as agreed or assumed for the purposes of the summary judgment claim) than if the solicitors had done as they ought to have done.”
“35. The use of the phrase “equitable compensation” in this context has attracted some controversy, principally because it has been suggested that it detracts from the basic purpose of the remedy to make good the deficit in the fund. In Libertarian Investments Ltd v Hall [2013] H.K.C.F.A. 93, a decision of the Final Court of Appeal of Hong Kong, Lord Millett said at [168] that the order was “not compensation for loss but restitutionary or restorative” but he accepted that the order is sometimes described as the payment of equitable compensation. While noting this point, it is said in Lewin on Trusts, 19th edn (London: Sweet & Maxwell, 2015), para.39-002 that the remedy is generally called equitable compensation. 36. The present appeal is concerned with equitable compensation in this sense. It is not a case concerned with compensation for loss caused by a breach of duties of skill and care. Nor is it a case involving a claim to profits made by Mr Patel and his sister. Although the relief claimed in the particulars of claim includes such further accounts and inquiries as shall be necessary, it is not necessary for the company to seek, first, an order for an account. Given the evidence and Mr Patel’s admissions, the company is entitled to seek, and there is no reason why the court should not proceed to order, payment of equitable compensation. As Lewin says at para.39-003: “Very often, however, claims for compensation for breach of trust are not brought by way of action for an account, but simply as a direct claim for such a monetary remedy, by way of equitable compensation or for the return of the missing trust property”
“49. While Target Holdings and AIB establish that equitable compensation in respect of unauthorised payments is not invariably for a sum equal to the payments, the decisions in those cases provide no further direct assistance to Mr Patel’s case. They are restricted to circumstances where the beneficiary obtained the full benefit for which it bargained or where, if the trustee had fully performed its obligations, the loss would have been less than the amount of the unauthorised payment made by the trustee. In each case, the reduced figure is the loss that flowed directly from the breach of trust. In the case of Mr Patel, not only were the hypothetical dividends not paid but there was no obligation on the company or its directors to pay any such dividends. There is no analogy with the decision in AIB.” “52. As already mentioned, the point is illustrated by Lord Browne-Wilkinson’s citation of Re Dawson, Decd. If the amount required to replace the misappropriated asset is less or more at the date of trial than it was at the date of misappropriation, either as a result of changes in value or (as in Target Holdings) the grant of security, it is that amount which will be awarded as compensation. This was extended in AIB to the limited extent discussed above.”
“The assumed facts are striking. Mr Pymont is right to say that the position of all parties would by now have been precisely the same as it was immediately after the payments were made. The company would not have the money and Mr Patel and his sister would have received the money (whether directly or through companies controlled by them). Moreover, as the only shareholders, Mr Patel and his sister were able at all material times to procure this result. No case of which counsel or the court are aware has raised facts as stark as these. While the decisions in Target Holdings and AIB do not directly assist Mr Patel for the reasons I have given, they do demonstrate a willingness on the part of the courts to develop the equitable remedies for breach of trust and breach of fiduciary duty and, where required to do what is practically just, to entertain some departure from the strict obligation of trustees and fiduciaries to restore the fund under their control. This potential for flexibility has been emphasised in many cases and commentaries, not least Target, AIB and Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd at [47].”
“397. So what does the alleged misfeasance consist of? In the particulars of claim the main allegation was the same as that relating to wrongful trading. It was that Continental's systems of books and records were so inadequate that it was impossible at any particular time to ascertain whether the company was solvent or not. It was said to have been misfeasance on the part of the directors to allow Continental to carry on business with such defective systems.” 405. Moreover, there is another independent reason which would also lead to the same conclusion. This brings me to the matter of causation. If a claimant has suffered some kind of loss and wishes to obtain judgment recovering it on the ground of a breach of duty by a defendant, the claimant has to establish that the defendant's breach of duty caused the loss. In this case the loss alleged by the liquidators is that the actual 1992 liquidation resulted in Continental having a greater deficiency than it would have had if it had gone into liquidation in 1991 instead. In my judgment, that result, if it happened at all, was not caused by the directors having failed in earlier years to ensure that Continental adopted better accounting policies than those which it did adopt. It may be true that, if the directors had caused Continental to have better accounting policies, the loss which the liquidators are complaining about would not have happened, but that would only be sufficient if the courts adopted a ‘but for’ test of causation. 406. The courts do not adopt a ‘but for’ test of causation. I agree with counsel for the respondents that this is clearly laid down, in a similar context, by the decision of the Court of Appeal in Galoo Ltd v Bright Grahame Murray[1995] 1 All ER 16 . The plaintiffs' case was that a company's auditors, negligently and in breach of duty, 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 such an unsatisfactory financial condition that it would have ceased trading immediately. In fact, given the negligently prepared accounts, the company carried on trading and sustained losses in doing so. It sought to recover the losses from the auditors. The Court of Appeal held that the alleged breach of duty did not cause the losses. The losses were trading losses, and were not caused by the auditors' negligence. The losses could only be regarded as having been so caused on the basis of a ‘but for’ test of causation, but that was not the test which English law applied. The auditors' breach of duty did not cause the trading losses. Rather, as Glidewell LJ put it, it ‘gave the opportunity’ to the company to incur them. I take the Lord Justice's words to be equivalent to saying that the auditors' alleged breach of duty meant only that the company did not cease to be exposed to the risk of incurring trading losses. 407. In my view, if, contrary to my opinion, the directors were in breach of their duties to Continental in respects concerned with its accounting policies, there would be an obvious parallel with the circumstances in the Galoo case. If the increase in net deficiency which the liquidators rely on existed it would have been caused by such matters as adverse trading results of Continental's insurance business in the period from July 1991 to March 1992 or heavy expenditure incurred by the liquidators on such matters as bringing legal proceedings over the attempt by AC Milan and Continental's reinsurers to keep the reinsurance moneys out of the liquidators' clutches. Those matters were not in any sense caused by the accounting policies, good or bad, which Continental applied in determining whether it was insolvent or not at19 July 1991 . The decision of the directors, based on those accounting policies, that Continental was solvent and could trade on left Continental exposed to the risk of suffering losses of the type which the liquidators allege, but it did not cause those losses. 408. Mr Atherton refers me to Sasea Finance Ltd v KPMG[2000] 1 All ER 676 , in which Galoo was distinguished. In my opinion, however, the present case is clearly comparable with Galoo, not with Sasea. The loss being sued about in Sasea was one of the types of loss against which the duty alleged to have been infringed by the auditors was intended to provide protection. In this case, in so far as the directors of Continental had a duty to the company in connection with the selection and application of accounting principles, it was not one of the purposes of that duty that it would protect Continental against losses from, for example, adverse trading conditions or legal costs incurred because of manoeuvres concocted between a policy-holder and a reinsurer. 409. Mr Atherton also refers me to British Racing Drivers’ Club Ltd v Hextall Erskine & Co[1997] 1 BCLC 197 , another case in which Galoo was distinguished . It shows that there can be sets of facts which are close to the borderline drawn in Galoo between something which is a cause of a loss and something which merely creates the opportunity for the loss to be suffered. In the present case, however, I do not consider that the facts are near the borderline. They are very clearly analogous to the facts in Galoo. 410. If it mattered I would hold that another reason why these misfeasance claims by the liquidators' fail is that, even if the directors were in breach of their duties to Continental in the way which the liquidators allege, the breach was not a cause of the loss which the liquidators seek to recover in reliance on it.”
“Their Lordships were clearly not considering a situation whereby a company borrows money to fund a turnaround plan, the trading company in the group trades thereafter for another 10 months or 7 months respectively.”
“In one sense it is true that, “but for” the acquisition of the Aylesford Hotel, Mrs Harrison would not have mortgaged her home and she would not have subsequently suffered the loss of her equity in it. The Recorder held that there was no breach of duty of care by Alsters to Mrs Harrison in relation to the acquisition of the hotel. There is no appeal on that point. Further, it was never alleged that there was any breach of fiduciary duty by Alsters to Mrs Harrison in connection with the acquisition of the hotel. The fiduciary duties which have been held to have been breached were solely in connection with the bridging loan. What loss has Mrs Harrison suffered as a result of breach of fiduciary duty in connection with the bridging loan? It is asserted by Mr Bannister QC, on Mrs Harrison's behalf, that she has suffered substantial loss as a result of that breach of duty. She could not have acquired Aylesford hotel without Alsters' bridging loan; Alsters were in breach of fiduciary duty in making that loan; they are liable for the loss of her equity in her home, even if that was unforeseeable even if another firm of solicitors would have advised Mrs Harrison to take up Alsters' offer of assistance. That argument is flawed by the fallacy identified by Lord Hoffmann in the South Australia case, i.e. not starting from the correct point. The correct starting point is to identify the relevant cause of action, i.e. the relevant wrong. That involves identifying the scope of the duty breached and the purpose of the rule imposing the duty. In Banque Bruxelles, for example, Lord Hoffmann drew a distinction, in the context of a negligent valuation, between a duty to provide information for the purpose of enabling someone else to make a decision on a course of action and, on the other hand, a duty to advise someone as to what course of action he should take. The extent of liability for loss suffered would not be the same in each case. A wrongdoer is only liable for the consequences of his being wrong and not for all the consequences of a course of action. In the present case, there was no fiduciary duty on Alsters to abstain from lending money to Mrs Harrison in all circumstances or to prevent her from completing the purchase of Aylesford Hotel in accordance with the contract to purchase. Alsters' duty was to make full disclosure of material facts relevant to the bridging loan to enable her to make a fully informed decision about it. They were in breach of that duty; but, as found by the judge, the probabilities are that Mrs Harrison would still have entered into the bridging loan, even if that breach of duty had not occurred, because she was intent on completing the purchase of the Aylesford Hotel, whatever independent legal advice she received. The loss which she suffered did not flow from that breach of fiduciary duty. It flowed from her own decision to take the risk involved in mortgaging her own home to finance her son's restaurant business at the hotel. Alsters were not under a duty to decline to act for Mrs Harrison on the purchase or to stop her from going ahead with the purchase, if that is what she wanted to do. In brief, the loss of the equity in 13, Warwick Place was not a result of Alsters' breach of fiduciary duty in relation to the bridging loan which enabled Mrs Harrison to complete the contract for the acquisition of the Aylesford Hotel. It would be contrary to common sense and fairness to put upon Alsters the whole risk of the purchase transaction on the basis that they had failed to make full disclosure in a related loan transaction, when disclosure would not have affected the client's decision to proceed with the purchase. Mrs Harrison's position would have been the same even if there had been no breach of duty.”
“(3) The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him— (a) to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or (b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.”
“20 The IND between17 April 2015 and25 April 2016 arises as a result of four principal events and two lesser events as follows. Principal events resulting in IND Property 21 The principal diminution in the property assets available to creditors on appointment of the administrators arose because on26 June 2015 BHSL pledged the Oxford Street property as security for ACE II. 22 On8 September 2015 , BHSL subsequently pledged the Oxford Street property as security for the Grovepoint Facility. The Oxford Street property was sold on31 March 2016 with the majority of proceeds being used to discharge part of the liability under the Grovepoint Facility. 23 The encumbrance of Oxford Street and other properties, in effect to raise funds to support trading losses and eventual sale resulted in them ultimately being unavailable to unsecured creditors as at25 April 2016 and hence the IND. 24 In determining the value of the property assets as at17 April 2015 , I have relied upon the Expert Report of Victoria Seal dated29 March 2023 , who has estimated the market value of the property portfolio. Ms Seal’s analysis states that there was no change in the market value of the properties encumbered and subsequently sold between17 April 2015 and25 April 2016 . Pension liabilities 25 I set out in paragraphs 17.15 to 17.19 my comments regarding the assessment of the Pension Deficits in the Orderly Wind Down Scenario and how I am presenting these as a range of values using the values calculated by Mr Scott. Inter-company creditors (£52 million increase) 26 The inter-company creditors are analysed as follows in tabs 1.6.3, 1.6.4 and 1.6.5 of each spreadsheet model and arise principally as a result of the accumulation of rental payments owed by BHSL to BHSPL, Davenbush and Carmen. 27 As noted in section 7 of my Report, trading losses within the Group were running at circa£7 million per month. Those losses had historically been absorbed/supported by Taveta with whom a significant inter-company debt had built at a similar rate over the preceding five years. 28 In calculating the increase in inter-company creditors, I have relied upon the JD Edwards records at each Alternative Date for Wrongful Trading and25 April 2016 . Net increase in other liabilities (£39 million ) 29 Net increase in other liabilities consists of increases in amounts owed to: (a) trade creditors (i.e., trade suppliers of stock for re-sale, and other establishment expenses such as utilities (increase of£23 million ). (b) amounts owed to HMRC (increase of£14 million ). (c) deficits arising from amounts owed in excess of fixed charges (£15 million ); and (d) change in the amount owed to Taveta in relation to the remaining balance of£40 million of the£256 million intercompany debt which had accrued to Taveta prior to the acquisition by RAL (£5 million ). 30 These amounts are netted against changes in asset values consisting of: (a) recoveries of balances escrowed against letters of credit; (b) movements in cash assets; and (c) increase in book debts. 31 I have derived each of the amounts set out in paragraphs 29 and 30 from analysis of the JD Edwards accounting records and management accounts.”
“In the remainder of this section, I explain differences in my and Mr Shaw’s assessments as regards: (1) treatment of events as at the26 June 2015 Knowledge Date; (2) treatment of events as at the8 September 2015 Knowledge Date; (3) property; (4) secured debt: charges against ACE II; (5) secured debt: the balance of the Gordon Brothers loan as at25 April 2016 ; (6) landlord, trade and other creditors: double-counting of external loans; (7) landlord, trade and other creditors: error in assessing BHSL’s retail accrual balance as at26 August 2015 ; (8) landlord, trade and other creditors: exclusion of ‘Duty’ balance as at25 April 2016 ; (9) landlord, trade and other creditors: estimation of book value of trade and other creditors as at the Knowledge Dates; (10) landlord, trade and other creditors: capital contribution liabilities; (11) landlord, trade and other creditors: landlord claims; (12) landlord, trade and other creditors: proportion of book value claimed; (13) cash: cash at bank at Knowledge Dates up to13 July 2015 ; (14) cash: cash at bank as at26 August 2015 and8 September 2015 ; (15) stock: effect of seasonality; (17) intercompany debt: BHSL’s debt to BHSPL; (18) intercompany debt: measurement of BHSPL’s intercompany debt; (19) intercompany debt: claims arising from settlement of secured debt; (20) intercompany debt: Carmen’s debt to BHSL; (21) unsecured debt: identification of the book values of the Companies’ VAT liabilities as at the Knowledge Dates; (22) unsecured debt: BHSPL’s VAT dividend to HMRC; (23) unsecured debt: debt position with RAL (including the Lady Green loan); (24) unsecured debt: Arcadia Loan balance as at the Knowledge Dates; (25) other assets:£ 3.1 million receivable in Mr Shaw’s calculations; and (26) the Section 75 deficits of the Schemes.”
“In my view, prior to the time when liquidation becomes inevitable and section 214 becomes engaged, the creditor duty is a duty to consider creditors’ interests, to give them appropriate weight, and to balance them against shareholders’ interests where they may conflict. Circumstances may require the directors to treat shareholders’ interests as subordinate to those of the creditors. This is implicit both in the recognition in section 172(3) that the general duty in section 172(1) is “subject to” the creditor duty, and in the recognition that, in some circumstances, the directors must “act in the interests of creditors”
“309. Had the Respondents not breached their duties as set out in these Points of Claim, they would have caused the Companies to cease trading on the Cessation Date. In the premises set out above, the entirety of the Companies’ trading after the Respondents should have ceased trading was misfeasant. Had the Respondents not breached their duties in that way, then the Companies and their respective unsecured creditors would not have suffered the IND particularised at Paragraphs 302C to 302E above, or alternatively such sum as the court thinks just upon consideration of expert evidence, and subject to the caps identified in those Paragraphs.”