Hotel Portfolio Ii Uk Ltd ((in Liquidation)) and Another v Stevens

Held, allowing the appeal (Lord Burrows JSC dissenting), (1) that a constructive trust of unauthorised profits was not merely equity’s remedy for the breach of trust constituted by the making of the unauthorised profit, but was a real free-standing trust in its own right which gave rise to an immediate proprietary interest of the beneficiary in the fund representing those profits from the moment of their receipt by the trustee; that, therefore, a dissipation by the trustee of a fund held on a constructive trust of unauthorised profits was itself a breach of trust which rendered the trustee liable to compensate the beneficiary for the loss caused by such dissipation; that, further, a person who dishonestly assisted a trustee in the dissipation of such a fund would be jointly liable with the trustee to compensate the beneficiary for such loss; and that, in particular, since the breach constituted by the dissipation of the fund (which was about dissipating or destroying trust property) was separate and distinct from the breach constituted by the making of the unauthorised profit, a dishonest assistant in the dissipation would not be insulated from liability by the principle that a dishonest assistant was only liable to disgorge profits that he himself had made; and that, accordingly, in the present case the second defendant was liable to compensate the claimants for any loss caused by the dissipation of the unauthorised profits (post, paras 24, 28–29, 31, 35, 37–38, 40–42, 100, 101).

Dicta of Lord Neuberger of Abbotsbury PSC in FHR European Ventures LLP v Cedar Capital Partners LLC [2015] AC 250, paras 7–8, SC(E) applied.

Papamichael v National Westminster Bank plc [2002] 2 All ER (Comm) 60, Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) and Novoship (UK) Ltd v Mikhaylyuk [2015] QB 499, CA, Recovery Partners GP Ltd v Rukhadze [2025] 2 WLR 529, SC(E) considered.

(2) That, where a trustee dissipated a fund held on a constructive trust of unauthorised profits, the loss caused by the breach of trust consisting of the dissipation, in respect of which equitable compensation was to be made, was assessed by asking what would have been the beneficiary’s position “but for” the breach of trust consisting of the dissipation; that, thus, the necessary counterfactual required attention to be given to the terms of the trust which had been breached in order to ascertain what would have been the consequences of the observance of those terms “but for” the breach; that, therefore, the appropriate counterfactual in the present case was the position that the first claimant would have been in if, once the unauthorised profits had been made, the first defendant had performed his duty under the trust and preserved rather than dissipated the fund constituted by those profits, not the position that the first claimant would have been in if the unauthorised profits had never been made; and that, accordingly, the loss caused by the dissipation of the unauthorised profits in the present case was equal to the entire value of the fund (post, paras 43, 51, 52, 54–55, 62, 100).

Target Holdings Ltd v Redferns [1996] AC 421, HL(E) and AIB Group (UK) plc v Mark Redler & Co [2015] AC 1503, SC(E) applied.

(3) That the general principle applied by equity where gains and losses were made and incurred for the trust estate by a series of breaches of trust was that one breach could not be set off against the other, with the consequence that the beneficiary was entitled to the gains but the trustee had to bear the losses; that, however, the court might recognise an exception where the application of the no set-off principle would, usually because of a particular type of connection between the breaches concerned, produce a clearly inequitable result; that since the no set-off principle was there to serve a purpose of equity, the burden would be on a person seeking to demonstrate an inequitable result to demonstrate that the underlying purpose of the principle was outweighed by other weightier considerations of an equitable nature; that, in the present case, to allow a set-off would undermine the integrity and effect of the constructive trust, in particular by enabling the dishonest assistant to escape scot-free from having to compensate the beneficiary for the loss caused by the dissipation of the fund, whereas to refuse a set-off would mean that those responsible for the dissipation of the profits would be personally liable for the loss of the beneficiary’s proprietary interest in the trust property and the purpose of the constructive trust of the profits would have been achieved, at least to the extent of the personal resources of those responsible for the dissipation; and that, accordingly, the no set-off principle would be applied and the judge’s order that the second defendant pay equitable compensation in the amount of the £102m profit would be restored (post, paras 63, 82, 88, 91, 95, 99–101).

Bartlett v Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] Ch 515 applied.

Decision of the Court of Appeal sub nom Hotel Portfolio II UK Ltd v Ruhan [2023] EWCA Civ 1120; [2024] Bus LR 160; [2024] 2 All ER 903 reversed.