Compensation for directors' breach of duties: how to quantify?
The Supreme Court has recently provided clarity on how to quantify awards of equitable compensation following dissipation of an asset in breach of duty by a director, the value of which is subsequently reduced.
Background facts
The liquidators of MBI International & Partners Inc (in liquidation) brought a claim against MBI’s director and another of the director’s companies (JJW Guernsey). The facts giving rise to the claim were that MBI owned shares in yet another of the director’s companies (JJW Inc), and the director caused MBI to transfer those shares to JJW Guernsey for no consideration.
A year after the transfer, the shares became worthless because of further actions taken by the director.
The claim at first instance
The court had no trouble in finding that the transfer of the shares was a breach of duty in that the director had transferred MBI’s property to (effectively) himself.
In terms of calculating the quantum of the equitable compensation it would award, the court at first instance took the view that the starting point was to use the date of the transfer of the shares to calculate the value of the shares. On the facts of this case, the court found that at the time of transfer the shares had a value of €67m and that accordingly this was the loss which flowed from the breach of duty.
In relation to the (agreed) fact that the shares later became worthless, the court held that if the director wanted to rely on that later event as breaking the chain of causation, it was for the director to prove that this event was an event which he himself did not cause, and he failed to do this.
The appeal
The director appealed on the basis that the quantification was incorrect. The Court of Appeal agreed and reduced the compensation to £nil. This was on the basis that, in its view, loss had to be assessed at the date of trial, i.e., by which time the shares were worthless. As such the court held that MBI had suffered no loss because of the breach of duty.
The Supreme Court decision
The Supreme Court unanimously allowed the appeal and restored the trial judge’s award.
On the question of the amount of compensation, the court held that there is no fixed rule that equitable compensation must be valued at the date of trial. Instead, courts must choose a date to assess loss by reference simply to “what is just and equitable”.
The judgment reminds parties that the options available to assessing equitable compensation are either ‘reparative compensation’ or ‘substitutive compensation’. The former involves calculating a monetary equivalent to reflect loss suffered, and the latter involves calculating a monetary equivalent to the value of an asset lost.
The breach of duty in this case was the misappropriation of an asset of MBI (the shares), and so the substitutive basis was the appropriate basis. The loss suffered was that of the asset being transferred, and that loss occurred on the date of transfer.
As for what happened to the value of the asset thereafter, the court agreed with the trial judge that if the director wanted to rely on the shares later becoming worthless as breaking the chain of causation, he had to demonstrate that he himself did not have a hand in those later events, which was not the case here.
The court therefore restored the trial judge’s award of €67m.
Summary
This case is an important decision for breach of duty claims. It re-asserts that equitable compensation for misappropriation aims for restoration and places a heavy burden on the defaulting director as fiduciary to prove that any intervening events were not caused by him such that a court would find there to have been “no loss”. Where the director has misappropriated a non-cash asset a careful review of the circumstances that followed the breach of duty will be required.
Alexandra Withers - Associate Director (North East)
alexandra@manolete-partners.com / 07413 242320
An insolvency case law update prepared by Alexandra Withers, Associate Director for the IPA December 2025 Newsletter.
Manolete Partners Plc is an investment business focused on dispute finance. It is not a law firm and does not provide legal advice. The information provided in this article is correct at the time of publication.