A recent High Court case involving unlawful loans to directors illustrates the potential pitfalls involved in calculating limitation periods and the circumstances in which the usual six-year statutory limitation period will not apply to a recovery claim against a fiduciary.
Broadside Colours and Chemicals Ltd was a family firm supplying dyes to the textile trade. The directors were Geoffrey Button, his wife Catherine Button, and their son James Button. Only the father and son were shareholders. They were both remunerated by way of loans from the company, drawn down throughout the year, which were then extinguished by dividend at the end of each financial year.
In July 2004 James Button resigned as a director. In September 2004 the company entered creditors' voluntary liquidation. In September 2010 (one day prior to the six-year anniversary of the company entering liquidation) the liquidators issued proceedings against all three directors to recover sums which, it was claimed, were owed to the company by the father and son.
The liquidators' application was made under Section 212 of the Insolvency Act, which in essence provides that liquidators may apply to the court for a summary remedy (eg, an order for repayment) against a director who has been guilty of misfeasance or breach of duty in relation to the company.
The liquidators claimed that a breach of duty had arisen under Section 330 of the Companies Act 1985, by which a company is prohibited from making a loan to a director. The liquidators also relied on Section 341 of the Companies Act, which states that:
"Where an arrangement or transaction is made by a company for a director… that director… and any other director of the company who authorised the transaction or arrangement … is liable… (jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement."
Only Geoffrey Button filed a defence. He represented himself at the hearing. The loans were clearly in breach of Section 330 and it was accepted that all three directors had approved the loans when made. However, Geoffrey Button argued that some of the loans had been extinguished by dividend, while others should have been treated as salary, thus making them irrecoverable. The judge found against him on both counts.
However, the judge then raised an issue of his own: the application had been issued more than six years after the loans had been made and therefore the claims might be statute barred. The judge observed that "the claim succeeds, but for the issue of limitation".
In response, the liquidators argued that all three directors were under a continuing duty to seek to recover the unlawful loans, relying on the case of Re Mumtaz Properties Ltd.(1) Thus, they argued that the limitation period did not begin until the date of liquidation (or shortly before that date in James Button's case, as he had resigned as director shortly before liquidation).
The judge rejected the liquidators' argument on limitation and noted that the judgment in Re Mumtaz contained no authority for the assertion of a continuing duty. In the judge's view, the relevant obligation was to indemnify the company against the unlawful loans, not to seek to recover them, and this was not a continuing obligation.
The judge also considered whether an application under Section 212 of the Insolvency Act gives rise to a new limitation period, beginning when the liquidators are appointed. He held that it does not, citing Re Eurocruit Europe Ltd,(2) which makes clear that Section 212 is a procedural provision that does not give rise to a limitation period distinct from the company's claim. However, this finding did not lead to a complete failure of the liquidators' application. The judge's reasoning on the issue of limitation was as follows:
- Each of the three respondents was a fiduciary.
- In general, a six-year limitation period applies to claims against fiduciaries, either by direct application of the Limitation Act 1980 or by analogy with the act.
- However, the six-year period does not apply where the claim is in reality a claim to recover trust property - for example, where a director has obtained property from the company in breach of trust.
- Geoffrey and James Button had obtained money from the company in breach of trust because they had received unlawful loans while they were directors.
- Therefore, Geoffrey and James Button could not rely on a six-year limitation defence in respect of loans that each of them had individually received.
- Therefore, judgment was given against Geoffrey and James Button for the sums that each of them owed to the company.
- However, all three respondents would be able to rely on a limitation defence for sums they had not received. This meant that Geoffrey and James Button were not jointly and severally liable for each other's debts, and the claim against Catherine Button failed entirely.
The application was issued just within six years of the date on which the company entered into liquidation. The liquidators or their advisers appear to have assumed that any causes of action open to the liquidators would not accrue until the date of liquidation. However, the company itself had a cause of action in respect of the unlawful loans well before this date. The liquidators inherited this cause of action with the clock already running. The case is a reminder for liquidators and their advisers that possible causes of action and related limitation periods must be considered promptly on liquidation.
Furthermore, many fiduciaries may be in a position to receive property in a potential breach of trust (eg, directors, executors and partners). This case demonstrates that the normal limitation period will not apply to such fiduciaries where a claim is made for the recovery of property received in breach of trust.
For further information on this topic please contact Benjamin Roe at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000) or email
([email protected]).
Endnotes
(1) Re Mumtaz Properties Ltd, (unreported), August 3 2010, High Court (Ch Div), Leeds District Registry.
(2) Re Eurocruit Europe Ltd (in liquidation) [2007] EWHC 1433 (Ch).