Advisor's breach of duty & fraud

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Advisor's breach of duty & fraud

A fraudulent financial adviser breached his duty to our client. Our client, a limited company, invested in high-value commercial properties. Our client discovered the financial adviser was dishonestly managing their company books, bank accounts, and records. The company needed to take immediate action.

How we resolved the issue

We were instructed by the company, and:

  • Collated the evidence to support the breach of contract claim.
  • Using that evidence, secured an interim injunction protecting the value in our client’s claim.
  • Won the case, which entitled the company to all property obtained by the adviser through his breach.

Our results

The financial adviser, a sole trader, extracted unauthorised funds from our client’s company. He alleged he was entitled to excess remuneration: a director of the company had purportedly agreed to his salary increase. We successfully took action against the sole trader. We showed:

  • The sole trader breached the express terms of his contract;
  • Or, if we did not show an express breach:
    • The financial adviser owed our client a fiduciary duty;
  • The alleged salary increase had not been exercised in accordance with the terms of the contract.

Unauthorised extraction of funds

Consequently, any funds extracted from our client’s company in excess of the agreed remuneration should be, and were, held on resulting trust for our client’s company, together with any assets obtained.

Our client acquired a property business, and recouped the funds the adviser took in the form of shares.

Events leading up to the court case

In 2009, our client hired the adviser to manage their company’s books, prepare accounts and prepare financial projections. We drafted the contract. The contract provided a fixed remuneration that could only be varied if agreed in writing. A non-compete clause prevented the adviser working for other property companies.

In late 2014, the majority company shareholder got divorced. The company accounts were disclosed to determine the shareholder’s income. It transpired the financial adviser had taken about £5,000.00 excess remuneration every month since his appointment. The adviser used the funds to finance a personal property venture.

Case tactics

We did not immediately terminate the contract, even though the adviser had breached the non-compete clause. Instead, we collated as much evidence as possible. Then we waited for the next payment to leave the account. Without notice, we took High Court action, claiming:

  • A freezing injunction to prevent the adviser depleting his assets,
    • Notably the shares held in his competing business.

Securing an immediate injunction

We showed a good case. The High Court granted the injunction. We proceeded to claim, because of the adviser’s breach of duty, that his property business be held on resulting trust for our client’s company. This was on the basis that the adviser’s new business was incorporated and managed using our client’s funds, a direct financial contribution giving rise to a resulting trust.

The adviser resisted. He claimed a director of our client’s company had verbally agreed the excess remuneration. Therefore the breach was only for the non-complete clause. If true, this would only entitle our client to terminate the contract and claim damages.

The High Court’s decision

The High Court held that the:

  • Adviser had breached the express terms of the contract by:
    • Extracting cash from the company in excess of the agreed remuneration,
    • Acting in competition,
  • Adviser had a fiduciary duty to the company to account for finances, therefore
    • He had to account to the company for the assets obtained,
  • Contract was clear, remuneration could only be varied if in writing.

Summary of results

Therefore, our client was able to reclaim the cash extracted in the form of the adviser’s shares held in the limited company incorporated by the adviser. Accordingly, all property obtained through the adviser’s breach belonged to the company.

John Deane heads the commercial team at Gannons. John deals with a variety of contentious matters relating to contract termination and the consequences. Please do not hesitate to get in touch if you wish to discuss an issue.