Who can I sue? Knowing assistants to a breach of fiduciary duty

Look to third-party knowing assistants for recovery if you have a claim for breach of fiduciary duty

In Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43 (Ancient Order of Foresters), the High Court examined whether people who assist in a breach of fiduciary duty are also liable for the loss caused by the breach. In this case, an account of profits was available as an equitable remedy. An account of profits is a very attractive remedy as it is not limited by principles that apply to other claims for damages and usually results in larger recoveries.

This case offers useful insight for companies, directors, liquidators and other applicants seeking additional sources to recover from in a breach of fiduciary duty claim. Identifying third parties who acted as knowing assistants (and their insurers) may reduce the risk of obtaining a judgment that isn’t worth the paper it’s printed on.

What is a breach of fiduciary duty?

A fiduciary duty refers to the equitable obligation that one party (the fiduciary) owes another (the principal) because of the nature of their relationship. A fiduciary has an obligation to act in the interests of the principal. Most relevantly, directors (and depending on the circumstances, some senior employees) owe fiduciary duties to their companies.

A fiduciary duty requires “absolute and disinterested loyalty”. This duty can be broken down into two overlapping obligations:

1. the “no conflict rule”, requiring the fiduciary to act in their principal’s interests rather than their own personal interests; and
2. the “no profit rule”, requiring the fiduciary to account for any benefit or gain obtained by their position, which ought to have belonged to their principal.

What is a knowing assistant?

A third party may be liable for a breach of fiduciary duty if they are a knowing assistant (Barnes v Addy (1874) LR 9 Ch App 244) (Barnes v Addy).

In Farah Constructions Pty Limited v Say-Dee Pty Limited, the High Court recognised four categories of knowledge that are sufficient to make a person knowing for the purposes of the rule in Barnes v Addy; these categories are:

• actual knowledge;
• wilfully shutting one’s eyes to the obvious;
• wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and
• knowledge of circumstances which would indicate the facts to an honest and reasonable man.

If one of these states of knowledge is satisfied, the third party may also be liable for the breach of fiduciary duty, provided that they have also assisted in the breach of fiduciary duty. Whether a party has assisted will be a question of fact in each case; but generally, a person will have assisted in a breach of fiduciary duty when:

1. but for the action or inaction of that person, the breach would not have occurred; or
2. the party has facilitated a breach of fiduciary duty that would have occurred in any event.

What is an account of profits?

When a breach of fiduciary duty occurs, the Court can order the equitable remedy of an account of profits. An account of profits is a personal order against the defendant to pay the plaintiff (claimant) the monetary value of the benefit, gain or profit they have received as a result of the breach. Under an account of profits, knowing assistants could be liable to provide an account of profits that is the total capital value of an ongoing business, as was the case in Ancient Order of Foresters.

What happened in Ancient Order of Foresters?

In Ancient Order of Foresters, the knowing assistant, a company (Ancient Order of Foresters in Victoria Friendly Society Ltd) (Foresters), was ordered by the High Court to disgorge the total capital value of the business acquired in breach of fiduciary duty, in total $14 million. Whilst the claim arose between two employees and their former employer, Foresters was liable as a knowing assistant.

Background

• Lifeplan Australia Friendly Society Ltd (Lifeplan) was a fund manager and supplier of investment products, including funeral bonds
• Funeral Plan Management Pty Ltd (FPM) was a wholly owned subsidiary of Lifeplan and promoted, marketed and distributed Lifeplan’s funeral products
• Woff and Corby were two employees of Lifeplan who held management positions at FPM
• Foresters was also involved in selling funeral products, including funeral bonds, but its market share was significantly smaller and less profitable than Lifeplan
• In 2010, Woff and Corby approached Foresters with a 5-year plan to divert Lifeplan’s funeral business to Foresters by providing confidential information and business records. The plan involved Foresters employing Woff and Corby and entering into a market agreement with the employees’ newly incorporated company, Funeral Planning Australia Pty Ltd (FPA). FPA would provide promotional and marketing services to Foresters in connection with the sale of funeral bonds
• Once this plan was implemented, Foresters’ profit increased enormously, whilst Lifeplan suffered an almost identical loss of profit over the same period

The primary judgment of the lower Court

In 2016, Lifeplan brought a claim in the Federal Court against Woff, Corby and Foresters. The Court found that Woff and Corby had breached fiduciary duties in a dishonest and fraudulent manner and ordered an account of profits in equity against the employees, quantified by the remuneration earned by each of them during their employment with Foresters. Whilst the Court found that Foresters had knowingly assisted with some of Woff and Corby’s fiduciary breaches, no account of profits was ordered.

The judgment on Appeal

Lifeplan and FPM appealed to the Full Federal Court in 2017 on the grounds that Foresters should account for the profits generated by knowingly assisting Woff and Corby’s breaches of fiduciary duties. The Full Federal Court found that an account of profits should be ordered, calculated as the net present value of the funeral bond contracts entered during the five-year plan, totalling $6 million.

The judgment in the High Court

Foresters appealed to the High Court of Australia in 2018 on the grounds that the Full Federal Court had made factual errors in concluding that their assistance in the fiduciary breaches had led to their business profiting. Lifeplan and FPM cross-appealed, arguing that the account of profits should constitute the entire capital value of the new business, totalling $14 million.

In their decision, the High Court considered both the causative and quantifying principles that apply to an account of profits in a breach of fiduciary duty claim. The majority held that there must be a causative link where the benefit or gain to the employee would not have been obtained “but for” the breach. Once causation is established, the onus is on the defendant to show that they should not disgorge the full profit that they have received as a benefit of the breach.

The Court found in favour of Lifeplan and FPM, especially in circumstances where the breach was dishonest and fraudulent, and Foresters was held liable for $14 million.

How might the case affect knowing assistants?

Businesses seeking to take advantage of an employee breach of fiduciary duty should be warned that Australian law will not countenance knowing assistance in such a breach. The High Court’s decision in Ancient Order of Foresters demonstrates that knowing assistants of a dishonest and fraudulent breach of fiduciary duty may be ordered to disgorge the entire capital value of any business benefiting from a breach of fiduciary duty.

How might the case affect plaintiffs?

Claimants seeking to bring an action against an employee or entity should keep this case in mind when considering recoverability. Third parties who satisfy the definition of a knowing assistant and who have profited from the breach could increase the prospects of recoverability.