The Court of Appeal has recently handed down its decision in Watson v Kea Investments Limited  EWCA Civ 1759. The case concerned a claim for breach of trust against a trustee who had wrongly applied monies invested for specific purposes. It was agreed between the parties that the trustee was liable to repay £43 million but there was a dispute as to the applicable interest that could be awarded, both as to the rate of interest and whether the interest should be simple or compound.
The Court of Appeal declined to interfere with the trial Judge’s exercise of discretion. However, as the case had been referred to the Court of Appeal to clarify the correct legal approach to the award of interest in claims for equitable compensation, the Court embarked on a detailed review of the history of the award of interest. The Court of Appeal’s deliberations are directly relevant to the award of interest in claims against directors for breach of fiduciary duty.
The Court noted that the courts’ awards of interest in equity “whilst proceeding from certain basics, have been astute to adapt to developments in contemporary economic conditions, in giving weight to the arguments presented to them by the parties”. The award of interest is in the Judge’s discretion and will depend on the specific facts of the case as well as the prevailing economic conditions.
Rate of interest
As a matter of principle, the decision to be made on the rate of interest will ordinarily vary between
- the cost to the company of borrowing money to replace the money or assets which have been lost as a result of the director’s breach of duty (the lower rate); and
- the loss of profit that the company could have made through investment of the misapplied money or assets, alternatively the value to the director of having had the benefit of the misapplied money or assets (the higher rate).
Whilst the starting point is the higher rate, in most claims against directors it will be difficult to show that the director has profited. However, a higher rate can be justified in cases of fraud. Watson v Kea was a situation that justified a higher rate because it concerned a large amount of money made available for investment. The Claimant did not need to borrow money to replace that which had been invested. On the limited evidence available the Judge concluded that the monies, if correctly invested, should have produced a return of 6.5%.
The lower (borrowing) rate will usually be expressed as a percentage above base rate. The percentage will depend on the facts of each case, but cases referred to in the Court of Appeal’s decision typically range between 1 – 3% above base rate. In practice, this is the likely to be the usual rate of interest applicable to claims against directors, in particular claims relating to unlawful dividends where the payments were the method by which the director was intending to be remunerated.
Simple or compound interest
The Court of Appeal noted that simple interest is the default position. Compound interest can be awarded where a director has applied company money or assets for his own benefit, and this is most likely to be in cases of fraud.
However, as a matter of practical guidance, obtaining an award of compound interest is likely to be more trouble than its worth, especially with low value claims, because of the difficulty of making the calculation.