The Profit Rule explained

When must a company director account for profits made out of their position as a fiduciary?

The Supreme Court was recently invited, in the case of Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, to consider whether the so-called “Profit Rule” ought to be limited to situations where a fiduciary has made a profit, as a consequence of a breach of duty and which would not have otherwise been achieved.

The Profit Rule is an equitable principle which provides that if a fiduciary makes a profit from their position as a fiduciary, then they must account for that profit unless they have the fully informed consent of their principal to retain that profit.

The Supreme Court was asked by the appellants to change the Profit Rule so that fiduciaries would be entitled to retain profits not caused by a breach of duty or which the principal would, if asked, have allowed them to retain.

The Supreme Court upheld the Profit Rule and concluded that there was no basis for a change in the law.

Who is a fiduciary?

A fiduciary is anyone that is required to act in the best interests of another person and in doing so, put that person’s interests above their own.

This includes a company director, whose fiduciary duties are owed to the company, and a trustee, whose fiduciary duties are owed to the beneficiaries of the trust.

What fiduciary duties are owed by a company director?

Company directors have fiduciary duties to act honestly, diligently and in the best interests of the company.

This includes the duty to promote the success of the company, act within their powers, avoid conflicts of interest, exercise independent judgement, use reasonable care and skill, and not accept unauthorised benefits from third parties.

Rukhadze and others v Recovery Partners GP Ltd and another [2025] case overview

The respondents to the appeal were a BVI incorporated company and an English limited liability partnership. The appellants had previously been engaged by the respondents as directors and as such, were fiduciaries. In breach of duty, the appellants were alleged to have diverted a business opportunity away from the respondent and exploited it for their own financial gain.

The High Court ordered the appellants to account for (i.e. pay across) the profits made by them. The appellants failed in an appeal to the Court of Appeal and subsequently appealed to the Supreme Court.

The issue to be decided by the Supreme Court was whether the Profit Rule should be altered to introduce a ‘but for’ requirement: i.e. “could the same profit have been made but for the breach duty?” If that question could be answered in the affirmative, then on the appellants’ case the fiduciary ought to be entitled to retain the profits made.

This argument would have involved the Supreme Court deciding to depart from two earlier decisions of its predecessor, the House of Lords.

Judgment

The appeal was heard by a panel of seven judges, who unanimously dismissed the appeal, albeit four different judgments were handed down setting out their reasons for maintaining the Profit Rule.

Judgment of Lord Briggs

Lord Briggs delivered the leading judgment. His Lordship explained that the Profit Rule reflected how English law regarded profits made by a fiduciary. Those profits belonged to the principal and the fiduciary was under a positive obligation to account for those profits. A fiduciary is not permitted to retain that profit for their own benefit.

Even if a fiduciary makes a profit following the fiduciary relationship having come to an end, they must still account to their principal if those profits were made as a consequence of that relationship. Whether or not that is in fact the case will inevitably be a matter for evidence.

Lord Briggs found that a fiduciary could not seek to evade liability by arguing that they would have made the profit even if they had not committed a breach of fiduciary duty.

Lord Briggs held that:

The essential purposes of the [Profit Rule] is to deter fiduciaries from giving in to the human temptation to depart from their obligation of single-minded loyalty to their principal (for their own benefit). The obligation to account is a duty imposed by equity as an inherent aspect of being a fiduciary. It is not necessarily (though often is) triggered by a separate breach of duty, and it is certainly not a discretionary remedy for such a breach, dependent on a demand from the principal or an order of the court (though it often has a remedial effect). Nor it is comparable to an award of damages. The comparison to equitable compensation (which does employ a ‘but for’ test) is similarly unhelpful: an account of profits is not about compensation for loss.

Lord Briggs considered that the introduction of a ‘but for’ test would undermine the basic purpose of the duty: i.e. the absolute obligation to account for profits. The law of equity already allows the court to give credit for the time, work and skill expended in achieving the profits made and this was considered by Lord Briggs to be sufficient protection against any potential unfairness.

Judgment of Lord Leggatt

Lord Leggatt considered the reference to the Profit Rule to be misleading and said that the “true rule” is that a fiduciary “must not use any property or information or opportunity belonging to the principal for the fiduciary’s own benefit.”

Where a fiduciary does so, they must compensate the principal for any loss caused, or account for any profits made, as a result of that breach. Lord Leggat considered that the ‘but for’ test was inherent in the requirement to show a causal link between the breach of duty and the recoverable loss or profit.

Key points to be taken from the judgment

The judgment of the Supreme Court is important for a number of reasons:

1. The judgment is an important reminder that English law expects fiduciaries to adhere to and comply with their fiduciary duties and it will not assist those in breach of their duties to retain profits derived from that breach.
2. The duty to account is inherent in being a fiduciary and is not merely a remedy to compensate a party for any losses incurred. As Lord Briggs noted in his judgment: “It is in my view of particular importance in the present context to note that the fiduciary duty to account for profits is a rule governing the conduct of fiduciaries which exists in its own right.” The duty of account is therefore not dependent on there being a breach of duty (although it often will be), but arises as a consequence of the failure to obtain the full informed consent of the principal.
3. It confirms that it is not a defence to a claim for an account to argue that the fiduciary would have made those profits even if they had not acted in breach of their duties. The court is not required to engage in counterfactuals.
4. It reinforces the importance of obtaining informed consent.

This judgment is a timely reminder to company directors, and others with fiduciary duties, of the importance of complying with their duties and in particular, the need to ensure that they do not allow their own interests to come into conflict with the interests of the company.

How Morr & Co can help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Dispute Resolution team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.