In a landmark decision, <span class="news-text_italic-underline">Lifestyle Equities CV v Ahmed [2024] UKSC 17</span>, the Supreme Court provided important clarification on the scope of an account of profits, confirming that a defendant can only be required to account for profits they have personally received through their wrongdoing. This decision marks a significant development in this area, particularly in cases involving accessory liability and joint liability for wrongful conduct.
The account of profits remedy is rooted in equity and is intended to deter wrongdoers from retaining ill-gotten gains. Unlike a compensation remedy, which seeks to make the victim whole by compensating for their losses, an account of profits seeks to strip the wrongdoer of any benefit derived from their misconduct. The remedy may be available in cases involving fiduciary breaches, intellectual property infringement and in rare cases of breach of contract, as seen in <span class="news-text_italic-underline">Attorney General v Blake [2001] 1 AC 268</span>.
In cases where a person is not directly responsible for wrongdoing but has dishonestly assisted or received profits from the wrongful act, the remedy of an account of profits can also apply. Previous cases, such as <span class="news-text_italic-underline">Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908</span>, clarified that dishonest assistants or those who knowingly receive ill-gotten profits could be held accountable. However, the extent of the profits they were required to account for remained uncertain, particularly in relation to whether they could be held liable for profits made by others involved in the wrongdoing.
The case of <span class="news-text_italic-underline">Lifestyle Equities v Ahmed</span> revolved around trademark infringement and passing off claims against two companies and their directors, the Ahmeds. The court had previously found the companies liable for infringement and the Ahmeds jointly and severally liable with the companies. Lifestyle sought an account of profits from the Ahmeds, arguing they should account for all the profits made by the companies as a result of the wrongful conduct.
However, the trial judge ruled that the Ahmeds could only be ordered to account for the profits they had personally received, which included a portion of their salaries and a loan made by one of the companies to Mr Ahmed. This decision was upheld by the Court of Appeal. Both sides then appealed to the Supreme Court, where the central issue was whether the Ahmeds could be required to account for the profits made by the companies.
The Supreme Court confirmed the trial judge's decision that the Ahmeds could only be required to account for profits personally received by them. The Court emphasised that the nature of the remedy of an account of profits is to disgorge the defendant’s personal gain, not to penalise them for profits made by others, such as the company they were involved with. As the court noted, ordering a defendant to account for someone else’s profits would amount to a penalty rather than disgorgement of gain.
In its judgment, the Supreme Court distinguished between personal profits and those made by a company in which the defendant has an interest. Simply having an interest in a company does not make the profits of that company the defendant's personal profits. The claimant must demonstrate that the profits flowed directly from the company to the defendant personally, such as through dividends or other forms of direct benefit.
The court also clarified that loans and salaries paid to the defendant by the company were not profits unless it could be shown that the loan was interest-free or at a below-market rate, or that the salary was a disguised form of profit extraction. In this case, the trial judge had not made any such findings regarding the loan or salaries and thus the Ahmeds could not be held liable for those amounts.
The Supreme Court's decision in <span class="news-text_italic-underline">Lifestyle Equities v Ahmed</span> provides vital clarification on the scope of the account of profits remedy. It reinforces the principle that defendants can only be required to account for profits they have personally received as a result of their wrongdoing, not for profits made by others involved in the misconduct. The judgment also highlights the need for clear evidence that profits have flowed directly to the defendant personally before they can be held liable for those profits. This decision is an important development in the law of equity, particularly in cases involving accessory liability and corporate structures, and offers valuable guidance on the application of the account of profits remedy moving forward.
