DIRECTORS TAKE NOTE: SUPREME COURT REAFFIRMS THE LAW ON SECRET PROFITS
The UK Supreme Court’s recent decision in Rukhadze v Recovery Partners GP Ltd (2025) is relevant to directors and all other persons owing fiduciary duties. The central issue focused on the consequences of falling foul of the rule against secret profits.
The requirement to account for secret profits
Where a fiduciary (such as a director or trustee) makes a profit by reason of their position, this amounts to a breach of duty and they must pay back to their principal (i.e., the company or beneficiary) the money they earned. An exception arises where the principal has given their fully informed consent to the fiduciary keeping the profits for themselves. This is known as the account of profit rule, the secret profit rule or simply the ‘profit rule’.
English law treats profits made from the fiduciary relationship as held on a constructive trust for the principal from the time when the fiduciary acquires them. The profit rule was established by the House of Lords in the cases of Regal (Hastings) Ltd v Gulliver (1967) and Boardman v Phipps (1967), and the scope of the rule is wide.
For example, it survives termination of the fiduciary relationship and applies even where the principal would have consented to the profit being made and retained, had they been asked to provide such consent. Likewise, a fiduciary who resigns (for example, a director) still will be liable to account for any profit made by virtue of their position after resigning. The rule, therefore, has considerable reach.
Jul-Sep 2025 issue
Norton Rose Fulbright LLP