Director recovers money after colleague diverted funds

A director has succeeded in recovering money from the estate of a colleague who breached his legal duty by diverting funds and business opportunities to a rival company.

The case involved two directors, Nigel Clegg and Andrew Pache, who were joint shareholders in a company trading steel.

Clegg alleged that from 2004 until shortly before his death in 2010, Pache had carried on a steel trading business for his own benefit through a second company.

Clegg took legal action against Pache’s estate to recover the money and be compensated for the lost business opportunities. He also brought a claim based on unjust enrichment against Pache’s wife in respect of payments she received from her husband’s alternative company.

The judge accepted that Pache had breached his fiduciary duty, however, he was not satisfied that all the second company’s profits were attributable to that breach.

He directed that there be an account for profits by reference to a list of specific transactions identified by Clegg. He also limited Clegg’s recovery to 50% to reflect that from that time he was also in breach of fiduciary duty for failing to prevent Pache’s misconduct. Finally, he found there was no basis for any claim of unjust enrichment.

The Court of Appeal has overturned those decisions.

It held that all the second company’s profits during the relevant period should be accountable, subject to the exclusion of such transactions that could be shown to have been independently earned.

There was no basis for apportioning any blame to Clegg for failing to prevent Pache’s misconduct and so the recovery of missing money should not be limited to 50%

The court also ruled that the claim against the wife for unjust enrichment should not have been rejected.

Clegg’s appeals on all matters in the case were allowed.

Please contact Sarah Liddiard if you would like more information about the issues raised in this article or any matter relating to directors’ powers and duties.