Angelika Hellweger explains that there is no fixed rule that equitable compensation must be valued at the date of trial, and fiduciary duties may still be owed, even if there are no fiduciary powers.
The Supreme Court has clarified the legal principles relating to equitable compensation for breach of fiduciary duty, in the decision in Mitchell and another (Joint Liquidators of MBI International & Partners Inc (In Liquidation)) v Sheikh Mohamed Bin Issa Al Jaber [2025] UKSC 43
The decision demonstrates the Court’s dim view of those who act in breach of fiduciary duty, and shows that they are willing to invoke equity to impose suitable consequences for such a breach.
Brief background facts
Sheikh Mohamed Al Jaber (the Sheikh) is a former director of MBI International & Partners Inc (the Company). In October 2011 the Company was subject to a winding-up order.
On 8 March 2016, the JJW Inc (a subsidiary of the Company) amended its share register to enter another company, JJW Guernsey, as the owner of 891,761 shares in JJW Inc (the Shares).
The Shares had previously been owned by the Company. The transfer was effected pursuant to a written resolution passed by the Sheikh as the sole director of JJW Inc on the basis of share transfer forms purportedly signed for and on behalf of the Company in July 2010 by the Sheikh.
During this transfer, the Sheikh incorrectly held himself out as being a director of the Company (which he had in fact ceased to be following the winding up order).
Then on 23 June 2017, JJW Guernsey transferred the shares to MBI Holdings Inc, another company within the Sheikh’s group of companies. All of JJW Inc’s assets were then transferred to another company, JJW UK. The Sheikh contended that these transfers were part of process of restructuring the group of companies associated with him.
However, in the view of the Courts, the reason the Sheikh signed the share transfer forms (in his capacity as a director) was to protect the Shares from the claims of the Company’s creditors.
Decision at first instance
In May 2019, the liquidators began a claim seeking compensation for the transfer of the Shares.
The trial judge found that the Sheikh had in fact signed the share transfer forms in 2016 (not 2010) and had dishonestly caused the transfer of the Shares. He had, therefore, misappropriated the Company’s property in breach of his fiduciary duties.
The trial judge also found that JJW Guernsey was liable in knowing receipt. The trial judge ordered both to pay EUR 67.1 million, which was deemed to be the value of the Shares at the date of misappropriation in equitable compensation to the Company.
The Court of Appeal’s findings
The Court of Appeal upheld the trial judge’s finding that the Sheikh acted in breach of his fiduciary duties and that JJW Guernsey was liable in knowing receipt.
The interesting part of the Court of Appeal’s judgment is that it ordered that no equitable compensation was payable. The reasoning was that the Shares were now worthless and the liquidators had therefore suffered no loss.
Appeal to the Supreme Court
The liquidators appealed to the Supreme Court against the Court of Appeal’s finding regarding the equitable compensation.
The Sheikh and JJW Guernsey also appealed against the Court of Appeal’s conclusions regarding the Sheikh’s fiduciary duties and JJW Guernsey’s liability in knowing receipt.
Was the Sheikh was in breach of fiduciary duty in effecting the share transfers in 2016?
The Sheikh’s case was that he did not owe any fiduciary duty to the Company.
It was asserted that a person cannot owe fiduciary duties if he does not have fiduciary powers. The Sheikh had no such powers because his powers as a director of the Company had ceased to have effect on the commencement of the winding up pursuant to section 175 of the Insolvency Act 2003.
It was true that due to the winding up of the Company, the Sheikh was no longer a director. But equity still has a role to play in the existence of fiduciary duties.
Equity recognises the existence of fiduciary duties by looking at the relationship between the parties objectively. Equity seeks to ascertain whether the relationship involves trust and confidence.
The Sheikh pretended to be a director with authority to transfer the Shares. In signing the share transfer forms he purported to exercise the power of a director of the Company to transfer part of its assets. This meant that he assumed the duties that would attach to a lawfully appointed director. In doing so he became accountable as a fiduciary.
Equitable compensation
The trial judge quantified the Company’s loss, attributable to the Sheikh’s misappropriation of the Shares at €67,123,403.36. This was deemed to be the value of the Shares at the date of misappropriation. The Court of Appeal disagreed and reduced that quantification to zero, on the basis that, by the time of trial, the value of the Shares had been reduced to nil by the transfer in 2017.
The Supreme Court wrestled with these radically different outcomes. The discrepancy had resulted from a different application of the legal principles relating to the construction of counterfactuals, in deciding what would have happened but for the breach of fiduciary duty by the Sheikh in bringing about the transfers in 2016.
The Court of Appeal held that the substitutive approach to the quantification of equitable compensation required the Court to assess the loss at the date of trial. The liquidators had not proven they would have sold the Shares before the transfer in 2017, so the Company had suffered no loss as a result of the Sheikh’s breach of fiduciary duty. By the date of the trial, the Court of Appeal held, that the Shares had become worthless because of the transfer in 2017.
The Supreme Court disagreed with the Court of Appeal’s approach, and held that there is no fixed rule that equitable compensation must be valued at the date of trial. It is more flexible than that. The approach should consider what is just and equitable.
Here, the Company had suffered an immediate loss when the Shares were taken. The loss was caused in 2016. The 2017 transfer could be an intervening act that breaks the chain of causation. However, if it is the fiduciary that carried out the actions that purportedly broke the chain of causation, it is incumbent on the fiduciary to show that their actions were innocent. In this case, the Sheikh was significantly involved in the 2017 transfer of shares and those actions were not innocent.
The Supreme Court restored the trial judge’s order, demanding that the Sheikh pay compensation to the Company of €67,123,403.36.
Comment
A fiduciary cannot circumvent the consequences of their own wrongdoing. If they are personally involved in actions that destroy the value of shares or property that they have misappropriated, they cannot avoid compensation because there is no loss. Instead, the burden is on the fiduciary to provide an innocent explanation for their actions.
