Supreme Court considers limitation defence where directors have benefited from breach of fiduciary duty

The UK Supreme Court has recently considered section 21(3) of the Limitation Act 1980 which provides or a six-year limitation period for actions by a beneficiary to recover trust property or in respect of any breach of trust (other than where the claim is based upon a fraud or fraudulent breach of trust, or where the claim is to recover trust property held by a trustee, for which there is no limitation period).

In Burnden Holdings (UK) Limited v Fielding and another [2018] UKSC 14, the Supreme Court held that directors of companies are to be treated as being in possession of the property of their company. This means that in actions brought by companies against their directors in relation to the company's property, the directors will be unable to rely on the six year limitation period where they are in possession of the trust property or its proceeds or have converted the trust property. The Court also commented, in passing, in relation to the (very common) position where trustees hold assets through companies.

Background

The defendants, Mr and Mrs Fielding (the "Fieldings"), were directors and shareholders of the claimant, Burnden Holdings (UK) Limited ("Burnden"), a holding company for various business interests, including a combined heat and power business, Vital Energi Utilities Ltd ("Vital"). The Fieldings each held a third of the shares in Burnden (and therefore were controlling shareholders) with the remaining third owned by other directors and the trustee of an employee share scheme.

In October 2007 Scottish & Southern Energy ("SSE") offered to purchase 30% of the shares of Vital for £6m on the condition that Vital was separated from the other businesses held by Burnden.

To effect this separation:

• A new holding company was created, BHU Holdings Ltd ("BHUH").
• The shareholders in Burnden exchanged their shares in Burnden for identical shareholdings in BHUH, leaving BHUH as the sole shareholder of Burnden.
• BHUH and the directors of Burnden then approved a distribution in specie of Burnden's shareholding in Vital to BHUH (the "Distribution").
• The shareholders of BHUH put BHUH into members' voluntary liquidation.
• Pursuant to a reconstruction agreement, the liquidators of BHUH transferred the shares in Vital to a new company, Vital Holdings limited ("VHL"), and the shares in Burnden to another new company, Burnden Group Holdings Limited. Shares in both new companies were issued to the former shareholders of BHUH in proportion to their former shareholdings in BHUH.
• Mrs Fielding then sold her 30% stake in VHL to SSE for £6m.

By December 2009 Burnden had gone into liquidation. In 2013 the liquidators of Burnden brought claims against the Fieldings alleging that (a) the Distribution was unlawful, (b) the Fieldings' participation in the Distribution was a breach of their fiduciary duties to Burnden, and (c) the Fieldings had derived a substantial benefit from the Distribution.

The Fieldings applied for summary judgment on the basis that the liquidators' claims could not be brought because more than six years had passed since the Distribution, and therefore the claims were barred under the Limitation Act. It was accepted by all parties that for the purpose of the Limitation Act the Fieldings should be treated as trustees on the basis that they were directors, owing fiduciary duties to a company, who were alleged to have participated in the misappropriation of the assets of the company.

Section 21 Limitation Act

Section 21(3) of the Limitation Act 1980 provides a six year limitation period for actions by a beneficiary to recover trust property or in respect of any breach of trust. However, it does not apply to actions by a beneficiary in respect of any fraud or fraudulent breach of trust to which a trustee was party, or to any action to recover from the trustee trust property or the proceeds of trust property in the possession of a trustee (Section 21(1)(b)).

It was common ground that the six-year limitation period would prevent an action by the liquidators against the Fieldings unless one of the exceptions in section 21 applied (i.e. this was an action based upon fraud, or to recover trust property from a trustee).

The liquidators sought to rely upon the exception in section 21(1)(b) which excludes the six year limitation period in relation to actions by a beneficiary under a trust 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.

The Defendants argued that section 21(1)(b) could not apply as they had never been in possession of trust property (the shares in Vital) because the relevant shares had at all times been legally and beneficially owned (and therefore possessed) by a succession of holding companies: Burnden, BHUH and VHL.

The Supreme Court's conclusions

The Supreme Court rejected the Fieldings' argument. The Court held that directors are fiduciary stewards of their company's property and are therefore treated as being in possession of the company's property from the outset. Therefore the fact that misappropriated property has remained legally and beneficially owned by corporate vehicles rather than being vested in law or equity in directors does not mean that section 21(1)(b) cannot apply.

It was therefore clear that the Defendants had previously been in possession of the Vital shares as directors of Burnden. Furthermore, it was clear that they had converted the shares to their own use through the Distribution because they stood to derive economic benefit as majority shareholders in the company to which the Distribution was made. They therefore fell within the scope of the section 21(1)(b) and did not have the benefit of the six year limitation period in Section 21(3).

The Supreme Court noted that section 21(1)(b) was enacted to protect express trustees by giving them the benefit of the lapse of time where they had done something legally, but not morally wrong. Unlike directors (qua trustees of company property) express trustees could conceivably never be in possession of trust property (for example if the trust property was land in the possession of a tenant for life). In such circumstances they would be able to rely on the section 21 where they had neither acted dishonestly nor received possession of the trust property.

The Supreme Court also clarified that individual directors were in possession of company property even when they in reality lack practical control over the property (for example, because they were a minority on the board). The situation was analogous to that of a trustee of an express trust who is treated as in possession even though they hold title to the property jointly with other trustees.

Comment

This case clarifies the position in relation to the limitation period for claims against defaulting directors. It is also worth noting that the Supreme Court recognised that it is common for trustees to use corporate structures to hold assets rather than owning trust assets directly. Whilst there was no criticism of this structuring, it was also noted (obiter) that where a defaulting trustee had used a corporate vehicle deliberately to insulate itself from liability (after six-years) for breach of trust that would, in most cases, justify a finding of fraud for the purpose of the exception to the limitation periods in section 21(1)(a) and may additionally justify the lifting of the corporate veil.

The case therefore confirms that the English courts are unwilling to allow directors and trustees to use complex structures to seek to avoid their liabilities for wrongful actions.