Factual and Procedural Background
This judgment follows a principal judgment handed down on 11 June 2024 addressing all issues of liability, causation, and quantum except one: the quantum of equitable compensation recoverable for breaches by two directors in respect of a modified statutory duty (the "Sequana duty") and any set-off or contribution claims between them. A Tomlin Order was made on 21 June 2024 compromising claims against one director, who did not participate in the resumed trial on 24 and 25 June 2024. Claims against another director were severed earlier and applications relating to those claims were listed but proceeded in his absence. After submissions from the parties, judgment was reserved on the quantum of the Trading Misfeasance Claim. On 25 June 2024, ex tempore judgment was given striking out the defence of the absent director and ordering summary judgment against him, including a contribution order. This reserved judgment sets out the quantum of equitable compensation for which two directors are liable in relation to the Trading Misfeasance Claim, with directions regarding notification to the absent director about his rights to apply for rehearing or appeal.
Legal Issues Presented
- What is the appropriate quantum of equitable compensation recoverable for breaches of the modified "Sequana duty" by the directors in relation to the Trading Misfeasance Claim?
- Whether the measure of compensation should be assessed by reference to the total increase in net deficiency (IND) of the companies or limited to losses arising from a single transaction or venture.
- Whether the directors are jointly and severally liable or whether liability may be apportioned under statutory discretion.
- The scope and application of causation principles and the scope of the directors' duties in assessing recoverable losses.
Arguments of the Parties
Appellants' Arguments (Joint Liquidators)
- A "but for" causation test applies, and the prima facie loss caused by misfeasance trading is the increase in the net deficiency (IND) of the companies.
- Where multiple directors have caused the same loss by breach of fiduciary duty, their liability is joint and several.
- The measure of compensation should be assessed by reference to the total IND at relevant knowledge dates.
- Compensation is not limited to losses arising from a single transaction or venture but may cover losses from continued trading enabled by breaches.
- Credit should be given for settlement sums paid by third parties related to the claims.
Respondents' Arguments (Directors)
- Liability for the entire IND requires proof that the breach caused that loss; the Joint Liquidators have not pleaded or proved how the breach caused the total IND.
- Liability for breach of the Sequana duty should be limited to the single transaction or venture which the directors authorised.
- Finding liability for the entire IND could have wider consequences, encouraging liquidators to bring claims under one statutory provision rather than another with different knowledge requirements.
- Discretion under the statute should be exercised to apportion or limit liability rather than impose joint and several liability.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Target Holdings Ltd v Redferns [1996] AC 421 |
Principles of equitable compensation for breach of fiduciary duty; compensation aims to restore loss caused by breach, not to penalize or provide windfall gains. |
Applied to confirm that compensation is to put the company in the position it would have been but for the breach, with causation assessed on a common sense basis and no requirement for sole causation. |
| AIB Group (UK) plc v Mark Redler & Co [2015] AC 1503 |
Clarification of equitable compensation principles; compensation is assessed with hindsight; no need to prove remoteness or further causal nexus once causation established. |
Applied to support the proposition that once causation is established, compensation is assessed without remoteness considerations. |
| Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWCA Civ 2291 |
Equitable compensation can be awarded directly without an account; courts may consider hypothetical scenarios in limited circumstances. |
Used to illustrate the nature of equitable compensation and the flexibility of the remedy in breach of fiduciary duty cases. |
| Re Continental Assurance Co of London Ltd (No 4) [2007] BCLC 287 |
Limits on causation in misfeasance claims; breach must be an effective cause, not merely occasion, of loss; courts do not apply a strict "but for" test in this context. |
Distinguished and applied to require that breaches be effective causes of loss, not just occasions, guiding the court's causation analysis. |
| Galoo Ltd v Bright Grahame Murray [1995] 1 All ER 16 |
Auditors' breach did not cause trading losses; losses were not caused by breach but were trading losses incurred with opportunity given by breach. |
Applied as authority for limiting recovery where breach only gave opportunity for losses but did not cause them. |
| Swindle v Harrison [1997] 4 All ER 705 |
Scope of duty analysis for breach of fiduciary duty and causation; loss must flow from breach within the scope of the duty. |
Adopted to apply scope of duty principles to equitable compensation in breach of director’s duties. |
| Re Englefield Colliery Co (1878) 8 Ch D 388; Re Exchange Banking Co (1882) 21 Ch D 519; Re Duckwari plc [1999] Ch 253 |
Common law principle that trustees/directors liable jointly and severally for breach causing loss; liability to restore loss incurred. |
Accepted as settled law supporting joint and several liability of directors for breaches causing loss. |
| Various Solicitors v Giambrone & Law [2018] PNLR 2 |
Application of scope of duty principles to equitable compensation claims against solicitors. |
Supported the application of scope of duty principles in assessing compensation for breach of fiduciary duty. |
| West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 |
Measure of compensation limited to loss arising from a single transaction. |
Considered in argument but distinguished on facts as it involved a single transaction and no continued trading. |
| Re Simmons Box (Diamonds) Ltd [2002] BCC 82 |
Requirement to plead and prove causation; insufficient causal link leads to dismissal of claim. |
Referenced to highlight causation requirement and limitations on recovery. |
| British Racing Drivers' Club Ltd v Hextall Erskine & Co [1997] 1 BCLC 197 |
Distinction between cause of loss and occasion for loss; borderline cases in causation analysis. |
Used to illustrate causation analysis but facts here were clearly analogous to Galoo. |
| Re Centralcrest Engineering Ltd [2000] BCC 727 |
Compensation for total loss incurred during period of unauthorized trading. |
Referred to in support of awarding compensation by reference to total loss during trading. |
| Brooks v Armstrong [2016] BPIR 272; [2017] BCC 99 |
Concurrent awards under S.212 and S.214; procedural context for claims. |
Referenced to illustrate the possibility of overlapping claims and measures of compensation. |
| Sequana (no full citation) |
Nature and scope of the "Sequana duty" of directors to consider creditors' interests prior to insolvency and measure of compensation. |
Central to the case; court interpreted and applied the duty and its scope to the facts. |
| Manchester Building Society v Grant Thornton LLP [2022] AC 783 |
Common law principles on scope of duty and causation. |
Not applied due to lack of argument but noted as relevant authority. |
Court's Reasoning and Analysis
The court began by adopting the factual and legal findings from the principal judgment, confirming breaches of statutory duties by the directors including improper purpose in entering into financial arrangements and failure to consider creditors' interests. The court applied established principles of equitable compensation, notably from Target Holdings and AIB Group, emphasizing that compensation aims to restore loss caused by breach and is assessed with hindsight without requiring sole causation.
The court rejected the submission that compensation should be limited to losses arising from a single transaction, finding that losses resulting from continued trading enabled by breaches fall within the scope of the directors' duty and are recoverable. The scope of duty analysis, informed by Swindle v Harrison and other authorities, was applied to ensure that only losses within the risk the directors undertook to guard against are compensable.
The court analyzed causation carefully, distinguishing between losses caused by breaches and losses merely occasioned by them. It found that the breaches were an effective cause of the total increase in net deficiency (IND), particularly losses related to property assets and trading liabilities, but excluded the pension deficit increase due to lack of causal connection.
The court accepted the agreed total IND figures for relevant knowledge dates and found no reason to depart from the usual measure of compensation by reference to the total IND, subject to agreed credits. It also considered alternative measures based on individual components of the IND and the single transaction basis, providing alternative awards accordingly.
Regarding liability, the court reaffirmed the settled common law principle that directors are jointly and severally liable for breaches causing loss. It declined to exercise discretion under the statute to apportion or limit liability, emphasizing the serious breaches and conduct of the directors.
The court also directed the Joint Liquidators to give credit for settlement sums paid by third parties related to the claims.
Holding and Implications
The court held that the two directors are jointly and severally liable to pay equitable compensation to the companies in the amount of £110,230,000, calculated by reference to the total increase in net deficiency between 26 June 2015 and 25 April 2016, less the pension deficit increase and credits for settlement sums.
Alternatively, the court provided lower compensation figures based on individual IND components or a single transaction basis, should the primary measure be found inappropriate on appeal.
The court declined to apportion liability or limit the award under statutory discretion, underscoring the gravity of the breaches and their effective causation of losses.
The decision directly affects the parties by imposing substantial financial liability on the directors and clarifies the application of equitable compensation principles in the context of breaches of directors' duties related to trading misfeasance and the Sequana duty. No new precedent was explicitly established beyond the application and clarification of existing principles.