Key Takeaways

Floreat Investment Management Ltd v Churchill [2023] EWCA Civ 440

The judgment serves as a reminder to investment managers, advisers, and those acting on their behalf of:

  • The risks involved in dealing with funds other than in accordance with the strict requirements of the governing contractual arrangements.
  • The importance of setting out in the investment management agreements or other documents the limits on the duties they will owe to the funds that they manage.


On 25 April 2023, the English Court of Appeal reversed a decision of the High Court that found three senior former employees of an investment adviser to an investment fund liable for dishonest assistance (amongst other things) for diverting a sum of US$1.1 million due to the fund to themselves. The appellants successfully argued that the diversion of the funds into their own accounts was merely a 'contractual shortcut', which simplified the flow of the funds but nonetheless achieved the same end result – namely their receipt of a fee to which they were entitled.

The Court also noted that the contractual language in this case limited the extent to which the investment manager or its delegates owed fiduciary duties to the Fund.


In a structure that will be familiar to many involved in the industry, an investment manager (the "Manager") to a Cayman Islands-domiciled fund (the "Fund") had delegated the performance of its investment management services to an investment adviser (the "Adviser"). The Manager’s sole shareholder and executive director ("Mr Otaibi") was also a director of the Fund. The Fund's objective was to create a portfolio generating a net income sufficient to support a target five percent per annum preference dividend payable to shareholders. Under the Fund’s offering memorandum (and the investment management agreement between the Fund and the Manager), any excess profit over that target was to be paid to the Manager in lieu of any other management or performance fee.

The Fund made a loan of US$22 million, which was repaid early together with a fee of US$2.2 million (due and payable on the early termination of the loan facility) (the "Early Termination Fee"). The Fund’s offering memorandum expressly contemplated that a fee may be payable on the early repayment of a loan, and provided that any such fee would "be added to the Fund’s cash reserves…". However, Mr Otaibi, on behalf of the Manager, agreed to split the Early Termination Fee on a 50:50 basis with three senior former employees of the Adviser (the "Appellants"), and the US$2.2 million fee was duly allocated in this way without ever having been paid over to the Fund.

The Manager subsequently commenced proceedings against the Appellants, as the assignee of the Fund’s claim to the Early Termination Fee. At first instance, Mr Justice Knowles held that the Appellants were liable to repay the US$1.1 million on the grounds of: (i) breach of fiduciary duties; (ii) dishonest assistance in a breach of fiduciary duty by the Manager; (iii) conspiracy to injure by unlawful means; (iv) knowing receipt; and (v) an equitable proprietary claim to the diverted sum as the diversion had been procured by fraud. This ruling was made on the basis that: (a) Mr Otaibi did not have authority on behalf of the Fund to make the agreement to deal with the Early Termination Fee in this way; (b) the Appellants knew that Mr Otaibi did not have such authority; and (c) the conduct of the Appellants was accordingly dishonest.


In considering the Appellants' subjective knowledge and belief, the Court of Appeal agreed with the High Court judge that the Appellants knew the Early Termination Fee was payable to the Fund and the Fund had not agreed to its diversion. However, the Court of Appeal considered that this was only "part of what they believed"; the Appellants also knew that because the Fund was profitable (with sufficient monies to pay the five percent preference dividend), it had no right to retain the Early Termination Fee. Rather, the Fund was obliged to pay the money onwards to the Manager which, in turn, acting by Mr Otaibi had agreed that it should be divided between Mr Otaibi and the Appellants. Accordingly, giving judgment on behalf of the Court, Lord Justice Stephen Males held that the diversion of money could properly be regarded as a “contractual shortcut”.

The Court of Appeal then proceeded to consider whether the Appellants had acted dishonestly, ultimately concluding that whilst their conduct "may have been ill-advised … it was not dishonest". The Court of Appeal noted that it is settled law that the test of dishonesty in this context was an objective one – i.e. the question was whether the conduct was dishonest by "the standards of ordinary decent people" and required a "serious lapse" from those standards. In this case, the Fund had not lost out (as it was merely a conduit for the payment of the money to the Manager), nor was the Manager a victim (as it had agreed to the diversion with the full knowledge and consent of Mr Otaibi, its 100 percent shareholder and sole executive director); therefore it could not be said that the Appellants, objectively speaking, had acted dishonestly.

On concluding that the trial judge had erred in finding the Appellants to have been dishonest, the various causes of action asserted by the Manager fell away without the need for further consideration. The Court of Appeal did, however, expound some important closing remarks in relation to the trial judge’s finding of breach of fiduciary duties; noting that "the contractual structure put in place was careful to circumscribe the fiduciary duties which might otherwise have arisen". In circumstances where the investment management agreement between the Manager and the Fund carefully restricted the fiduciary duties assumed by the Manager, the Court of Appeal considered that there was no scope to conclude that the Adviser – which had no direct contractual relationship with the Fund, but rather was a delegate of the Manager under the investment management agreement – assumed any wider duties.


The case serves as a warning to anyone who might be considering directing investment funds in ways other than in accordance with the strict requirements of the relevant contractual documentation, even if they believe this is merely a "short cut". In this instance, the Appellants were ultimately vindicated on the basis that, determined objectively, their conduct was not dishonest; but they succeeded only following an appeal and after years of protracted litigation. On a slightly different set of facts, another investment manager or adviser might not be so fortunate.

The Court of Appeal also expressly recognised that fiduciary duties owed by an investment manager or adviser to a fund can be effectively limited by the terms of the investment management agreement. In this instance, the Manager had "carefully limited" its equitable duties in its contractual arrangements with the Fund. Had it not done so, the Court of Appeal may well have arrived at a different conclusion in relation to the Appellants’ liability to repay the diverted sum, even in the absence of dishonesty.