Factual and Procedural Background
The appeal arose after a three-week High Court trial concerning Company A’s claim for fraudulent misrepresentation and breach of warranty arising from its September 2017 purchase of a majority shareholding in Company B from Appellant 1, and Company B’s claims for breach of duty and unlawful means conspiracy against Appellant 1 and Appellant 2, who were directors of Company B. [Para 33][Para 34][Para 53]
Company B was a wholesale insurance broker subject to FCA client-money rules, and the Judge found that Appellant 1 and Appellant 2 improperly caused client money to be used to pay Company B’s liabilities and expenses, while false accounting concealed the misuse. [Para 43][Para 44][Para 45][Para 46]
The Judge found a client-money deficit of £3,510,000 at the time of the share sale, found that the fraud induced the sale, and held that Company B later received new capital, discovered the fraud in 2020, repaid the misappropriated money, and entered a solvent wind-down after selling parts of its business. [Para 36][Para 48][Para 49][Para 50][Para 51][Para 52]
At first instance, the Judge awarded substantial damages to Company A and Company B, including trading-loss damages to Company B, and the appeal challenged only the award for Company B’s trading losses. [Para 37][Para 102][Para 110][Para 112]
Legal Issues Presented
- Whether the Appellants’ fraud, breach of fiduciary duty, and conspiracy caused Company B’s trading losses, or only the direct loss created by the need to restore the misappropriated client money and investigate the wrongdoing. [Para 39][Para 140][Para 164]
- Whether the Judge erred by treating loss-making trading and insolvency as actionable wrongs, by analogy with wrongful trading under section 214 of the Insolvency Act 1986. [Para 120][Para 121][Para 132][Para 136][Para 173]
- Whether Company B should receive credit for the later sale proceeds of part of its business if trading-loss damages were not recoverable. [Para 171][Para 172][Para 180]
Arguments of the Parties
Appellants' Arguments
- The Appellants’ sole permitted ground was that the Judge erred in holding that Company B’s trading losses were caused by the fraud. [Para 112]
Respondents' Arguments
- Respondents’ counsel argued that, if the causation challenge succeeded, Company B would still be entitled to recover investigation costs and should not have to give credit for the later sale proceeds of its business. [Para 113]
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Continental Assurance [2007] 2 BCLC 287 |
Trading-loss recovery requires more than a mere “but for” link in the wrongful-trading setting. |
The Judge relied on it by analogy, and Lord Justice Snowden cited it when explaining that a sufficient causal connection is required before trading losses can be recovered. [Para 95][Para 99] |
| Secretary of State v Gash [1997] 1 WLR 407 |
Directors do not have a general duty to ensure their company does not trade while insolvent or at a loss. |
The court used it to show that section 172(1) did not impose the broad duty the Judge may have assumed. [Para 122][Para 123] |
| BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2024] AC 211 |
When insolvency is known or imminent, directors must have regard to creditors’ interests, but there is still no automatic duty to stop trading. |
The court relied on it to reject any proposition that trading while insolvent is itself the wrong complained of. [Para 126][Para 127][Para 129][Para 132][Para 136] |
| Re Cheyne Finance plc (No.2) [2008] Bus LR 1562 |
Used in Sequana to explain the concept of commercial insolvency. |
The court mentioned it only as part of the insolvency explanation in Sequana. [Para 128] |
| Banque Bruxelles Lambert v Eagle Star Insurance / South Australia Asset Management Corp v York Montague [1997] AC 191 |
Liability is limited to the kind of loss the duty was meant to guard against; “but for” causation alone is not enough. |
The court used SAAMCO as the main causation framework for why trading losses were outside the scope of the duty breached here. [Para 141][Para 143][Para 144] |
| Hughes-Holland v BPE Solicitors [2018] AC 599 |
The law distinguishes between mere factual causation and legal responsibility for loss. |
The court relied on it to support the proposition that legal causation limits recovery to losses attributable to the wrongdoing. [Para 146][Para 149][Para 150] |
| Stapley v Gypsum Mines Ltd [1953] AC 663 |
Illustrates the distinction between philosophical causation and legal responsibility. |
It was cited within Hughes-Holland and relied on as part of the broader causation analysis. [Para 147][Para 149] |
| Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 |
An auditor’s negligence may “give the opportunity” for losses without legally causing them. |
The court treated it as closely analogous: Company B’s trading losses were not directly caused by the Appellants’ wrongdoing. [Para 152][Para 153][Para 168] |
| Koch Marine Inc v D'Amica Societa di Navigazione ARL (The Elena D'Amico) [1980] 1 Lloyds Rep 75 |
A claimant cannot recover losses that could reasonably have been avoided. |
The case was cited in Hughes-Holland as one of the legal filters limiting recovery. [Para 150][Para 151] |
| British Midland Tool v Midland International [2003] 2 BCLC 523 |
Supports applying SAAMCO-style limits to unlawful means conspiracy claims. |
The court cited it to confirm there was no reason not to apply the same approach here. [Para 154] |
| AIB Group v Mark Redler & Co [2015] AC 1503 |
Equitable compensation for breach of fiduciary duty generally requires loss to flow directly from the breach. |
The court used it to frame the causation test for equitable compensation where trust property was not itself the subject of the breach. [Para 157][Para 158][Para 159][Para 161] |
| Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 |
Later third-party wrongdoing may break the causal chain for equitable compensation. |
The court cited it through AIB as part of the directness analysis. [Para 157][Para 158] |
| Target Holdings v Redferns [1996] AC 421 |
Equitable compensation is compensatory, but the loss must be caused by the breach. |
The court cited it through AIB as part of the modern approach to breach-of-trust compensation. [Para 157][Para 158][Para 159] |
| Caffrey v Darby |
Illustrates a breach that enables a later third-party default causing trust loss. |
The court used it, via AIB, as a contrast case to show when loss flows directly from a breach. [Para 158] |
| Mitchell v Al Jaber [2026] AC 758 |
Misappropriation of trust property creates a direct liability to restore the trust fund. |
The court relied on it to identify the recoverable direct loss: the liability to restore the £3.51 million client-money deficit. [Para 164] |
| Re Brian D Pierson (Contractors) Ltd [2001] 1 BCLC 275 |
Illustrated, in a wrongful-trading context, the exclusion of unrelated factors such as bad weather. |
The court mentioned it only to show why wrongful-trading reasoning did not fit this case. [Para 99][Para 174] |
Court's Reasoning and Analysis
The court first identified the true wrong as the Appellants’ misuse of client money and false accounting, not any general duty to prevent the company trading at a loss or while insolvent. [Para 116][Para 117][Para 118][Para 119]
It held that neither section 172(1) nor section 214 of the Insolvency Act 1986 imposed the broad duty assumed by the Judge, and that company directors may, in appropriate circumstances, continue trading even when insolvent. [Para 120][Para 121][Para 122][Para 123][Para 126][Para 132][Para 136]
Applying SAAMCO, Hughes-Holland, Galoo, and the equitable-compensation cases, the court said that the question was not whether the trading losses would have happened “but for” the wrongdoing, but whether those losses flowed directly from the specific breach. [Para 140][Para 141][Para 144][Para 149][Para 150][Para 152][Para 157][Para 158][Para 161]
The court concluded that Company B’s pre- and post-2017 trading losses arose from its underlying insurance business, not directly from the Appellants’ fraud; the wrongdoing instead directly caused the obligation to restore the misappropriated client money. [Para 163][Para 164][Para 165][Para 167][Para 168]
It also held that the investigation costs were directly attributable to the wrongdoing, but the later sale of parts of Company B’s business did not flow directly from the breaches and therefore did not require credit. [Para 170][Para 171][Para 172]
Holding and Implications
Appeal allowed in part. The court replaced the trading-loss award with damages or equitable compensation for the direct loss caused by the misappropriation of client money, together with investigation costs, and held that no credit should be given for the later business-sale proceeds. [Para 176][Para 178][Para 179][Para 180]
The practical result was a reduction of £598,994 in the damages awarded to Company B, with Company A’s award unaffected. [Para 113][Para 180]