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Directors may not rely on limitation as a defence, the Supreme Court holds

Directors may not be able to rely on limitation as a defence to some misfeasance claims, following the Supreme Court's decision in Burnden Holdings (UK) Ltd v Fielding [2018] UKSC 14.

Where directors have obtained an economic benefit from an unlawful distribution they are not entitled to rely on the lapse of time as a defence to any claim brought by the company, held the Supreme Court. 

This will be welcome news for insolvency practitioners (IPs) currently investigating and pursuing actions against directors.  It follows in the footsteps of the Court of Appeal's 2017 decision confirming that a director who has committed a fraudulent breach of trust will also not be able to raise a limitation defence (First Subsea Ltd v Balltec Ltd [2017] EWCA Civ 186). 

IPs should be aware that there is not an automatic prohibition on bringing claims against directors where events took place more than six years ago.

Facts

This case arises from an application for summary judgment and strike out brought by the directors of a company.  The application was made in relation to a claim alleging that the directors had made an unlawful distribution.  The claim was brought by the company in liquidation (acting by its liquidators). 

The distribution in question was the transfer of the entire issued share capital in one of the company's subsidiaries to a new holding company as part of a corporate demerger.  For the purposes of this summary judgment application it was assumed that the transfer was an unlawful distribution in specie (for assets other than cash).  Whether or not the distribution in specie was in fact unlawful is a matter that is yet to be determined in associated proceedings.

The claim form in the unlawful distribution claim was issued 6 years and 3 days after the date on which the directors claimed the transfer had taken place.  The defendants sought summary judgment dismissing the claim on the grounds that it was statute barred.  Ordinarily, an action to recover trust property or in respect of breach of trust (which would include an unlawful distribution claim) must be brought within 6 years. 

The directors succeeded at first instance.  The company appealed and the Court of Appeal set aside the decision, holding that no limitation period applied to the claim.  The directors appealed to the Supreme Court.

The law

The appeal centred around the interpretation of section 21 of the Limitation Act 1980.  This Act sets out the timescales within which various applications may be issued.  Section 21 deals with the time limit for actions in respect of trust property.  Section 21(1) states that:

No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use.

While section 21 primarily deals with express trustees it applies by analogy to directors, who owe fiduciary duties to the company.  So, in this case the trustees for the purposes of section 21 were the directors and the trust property was the share in the subsidiary.  Unless one of these exceptions was available, the six year limitation period would apply to the claim.

The directors' position

Counsel for the directors argued that the share in the subsidiary had never been in their possession and had never been previously received by them and converted to their use.  Rather, the share had been owned throughout the process by a series of corporate entities.  To hold that the directors had been in possession of the share would be to ignore the separate legal personality of the companies.

The decision

The court dismissed the appeal, and held that no limitation period applied to the claim as a result of section 21(1)(b) Limitation Act 1980 for the following reasons:

  • The purpose of section 21 is to give a trustee the benefit of the lapse of time for legal or technical errors, but not to protect them where they have come off with something they ought not to have.
  • In the context of company property, directors are to be treated as being in possession of it from the outset.  They are the "fiduciary stewards" of the company's property.
  • On the assumed facts of the case the property was converted by the directors when the shareholding was transferred to the new holding company.
  • This was a conversion of the shareholding to the directors' own use because of the economic benefit which they stood to derive from being the majority shareholders in the company to which the distribution was made.

The court had been asked to consider another section of the Limitation Act 1980.  It held that this part of the application was not suitable for summary judgment and dismissed it.

The impact of the decision for Insolvency Practitioners

This decision will be welcomed by IPs investigating claims against directors.  The Supreme Court decision in Burnden v Fielding confirms that the circumstances when directors may rely upon limitation as a defence to misfeasance claims are limited.  It is also authority for the proposition that directors should be treated as being in possession of company property in their fiduciary capacity.

In 2017 the Court of Appeal confirmed that a director who has committed a fraudulent breach of trust will also not be able to rely upon a limitation defence.  Accordingly, IPs will need to bear in mind that the lapse of time may not automatically prevent them from bringing a claim against a director.

If you are an IP dealing with an actual or potential claim against a director and would like further advice please contact a member of the Restructuring and Insolvency team.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

 

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