HPII’s director secretly bought company hotels, made £102m profit held on constructive trust for HPII, then dissipated it. Stevens dishonestly assisted both the profit-making and dissipation. The Supreme Court held Stevens liable to compensate HPII for the lost trust property despite the profit-making causing HPII no original loss.
Background
Hotel Portfolio II UK Ltd (‘HPII’) owned a portfolio of London hotels. Mr Ruhan, a director of HPII and therefore its fiduciary, covertly purchased three hotels from HPII through a nominee company, Cambulo Madeira, which was ostensibly controlled by Mr Stevens but in reality acted as Mr Ruhan’s nominee. HPII received the full market value of £125m for the hotels. Cambulo Madeira subsequently resold the hotels at enormous profit. Mr Ruhan’s share of the profits amounted to approximately £102.26m. It was accepted that HPII would not itself have exploited the development opportunity and suffered no loss from the original sale. However, as the profits were made in breach of fiduciary duty, they were held on institutional constructive trust for HPII from the moment of receipt. Mr Ruhan then dissipated the entirety of these profits on speculative overseas projects, rendering them untraceable. Mr Stevens dishonestly assisted Mr Ruhan in both the making and the dissipation of the profits.
The Issue(s)
The Supreme Court identified three principal issues:
- Whether equitable compensation can be ordered for loss caused by breach of a constructive trust of unauthorised profits;
- Whether the dissipation of the dividend caused HPII a compensable loss, given that the trust fund itself arose from an earlier breach of fiduciary duty that caused HPII no loss; and
- Whether Mr Stevens could invoke equitable set-off, setting the gain to HPII represented by the constructive trust against the loss caused by dissipation, on the basis that both arose from connected breaches.
The Parties’ Arguments
HPII’s Case
HPII argued that from the moment Mr Ruhan received the profits, they belonged beneficially to HPII under an institutional constructive trust. The dissipation of trust assets was a separate breach of trust causing a real and quantifiable loss — the destruction of HPII’s proprietary interest. Mr Stevens, as a dishonest assistant in the dissipation, was jointly liable with Mr Ruhan to compensate for that loss. The earlier breach of fiduciary duty in making the profit was irrelevant to the assessment of loss caused by the later, distinct breach of dissipating it.
Mr Stevens’ Case
Mr Stevens advanced three main arguments. First, that the constructive trust was in substance merely a remedy for the earlier breach of fiduciary duty, such that its breach could not be assessed in isolation. Second, applying the Target Holdings but-for test, HPII suffered no loss because but for all breaches, the profit would never have been made. Third, invoking the equitable set-off exception to the no set-off principle, the gain to HPII from the constructive trust should be set off against the loss from dissipation, as they were connected transactions within a single fraudulent scheme.
The Court’s Reasoning
The constructive trust is a ‘real’ trust, not merely a remedy
Lord Briggs, delivering the majority judgment, rejected the premise that the constructive trust was merely a remedy for the earlier breach. Drawing on Keech v Sandford (1726), FHR European Ventures LLP v Mankarious [2014] UKSC 45, and Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10, his Lordship held that the constructive trust was institutional and free-standing:
once established, the constructive trust of the profits is a free-standing ‘real’ trust in its own right, and not merely a way of conferring additional proprietary remedies upon the beneficiary, beyond the personal remedies of account or compensation for loss.
Accordingly, breach of the constructive trust gave rise to the usual personal remedies, including equitable compensation for loss caused by dissipation.
Compensatory liability for breach of constructive trust of profits
Lord Briggs held it would be extraordinary and contrary to basic equitable principle for the dissipation of a fund held on constructive trust to give rise to no remedy by way of equitable compensation:
The very concept of dissipation means that there is neither the fund nor any traceable proceeds of it to which a proprietary remedy can usefully attach. And the dissipation thereby causes a loss to the beneficiary which will generally be at least equivalent in value to the property dissipated, since the beneficiary was its beneficial owner.
The dissipation caused HPII a real loss
Applying the Target Holdings but-for test, Lord Briggs held that the correct counterfactual was that Mr Ruhan performed his duty under the constructive trust, not that the profit was never made:
The counterfactual is that Mr Ruhan performed his duty under the constructive trust and preserved HPII’s beneficial interest in it, not that there was no profit and no constructive trust, and therefore nothing for HPII to lose.
If one assumed away the earlier breach of fiduciary duty for the but-for analysis, one would simultaneously assume away the constructive trust itself — eliminating both the duty breached and the property lost. This, Lord Briggs held, was akin to using the but-for test to throw out the baby with the bath water. Nothing in Target Holdings or AIB v Redler required aggregation of multiple breaches in this manner.
The Novoship principle does not protect Mr Stevens
The Novoship principle — that a dishonest assistant is not liable to disgorge the trustee’s profits — was held inapplicable to loss caused by dissipation. Lord Briggs distinguished between two separate breaches: making the profit and dissipating trust property. The assistant’s liability for the latter was for loss caused, not for disgorgement of profits not received:
There is no reason why the fact that the Novoship principle may insulate him from a liability to make good the trustee’s account arising from the making of the profit should also insulate him from liability for the loss caused by the dissipation.
No equitable set-off available
Lord Briggs conducted a comprehensive review of the no set-off principle — from Adye v Feuilleteau (1783) and Dimes v Scott (1827) through to Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515. He reformulated the principle as follows:
The general principle applied by equity where gains and losses are made and incurred for the trust estate by a series of breaches of trust is that one breach may not be set off against the other… But the court may recognise an exception where the application of the no set-off rule would, usually because of a particular type of connection between the breaches concerned, produce a clearly inequitable result.
On the facts, the connecting factors between the breaches were dishonesty and greed — not the type of connection that could render the no set-off principle inequitable. Moreover, allowing set-off would entirely defeat the purpose of the constructive trust, enabling a dishonest assistant to escape liability altogether:
If set-off of the gain represented by the profit is allowed against the loss caused by its dissipation, then the purpose of the constructive trust will have been entirely defeated by the combination of the dissipation and the set-off.
The Dissent
Lord Burrows dissented, reasoning that there was a single dishonest scheme which, taken as a whole, caused HPII no overall loss. He considered it artificial to separate the making and dissipation of profits and held that equitable compensation against the dishonest assister would effectively circumvent the Novoship principle by a backdoor route, making the assister liable for profits he did not make. Lord Burrows also raised concerns about double recovery and the election between account of profits and equitable compensation.
Practical Significance
This decision is of considerable importance in several respects. It confirms that an institutional constructive trust of unauthorised profits is a ‘real’ trust giving rise to the full range of personal remedies for breach, including equitable compensation for dissipation of trust property. It establishes that the Target Holdings but-for test does not require aggregation of an earlier breach of fiduciary duty with a later breach of constructive trust for the purpose of assessing loss. It clarifies the scope of the Novoship principle, confirming it does not shield dishonest assistants from compensatory liability for loss caused by dissipation merely because the trust fund originated from unauthorised profits. It provides an authoritative modern restatement of the equitable no set-off principle and the narrow circumstances in which exceptions may apply. The decision reinforces the rigorous enforcement of fiduciary obligations and ensures that those who assist in the destruction of trust property cannot exploit their own prior dishonesty to escape liability.
Verdict: The Supreme Court allowed HPII’s appeal by a majority of 4 to 1 (Lord Burrows dissenting) and restored the order of the trial judge, holding Mr Stevens liable to compensate HPII for the loss of the dividend of approximately £95m caused by his dishonest assistance in the dissipation of the constructive trust fund.
