Directors against whom claims for a misfeasance have been intimated often turn to limitation and set off in defence of a request for the repayment or restoration of the relevant sums or property.
Misfeasance and limitation
The remedy available to liquidators pursuant to s212 of the Insolvency Act 1986 where directors have misapplied or become accountable for the Company's money and/or are guilty of misfeasance and/or have breached their fiduciary duties to the company, is for such directors to repay, restore or account for the money or property or any part of it. s212 does not create a new cause of action, it simply allows a Liquidator to seek a contribution from the misfeasant director.
Such remedies sought by claims pursuant to s212 are subject to the Limitation Act 1980. The decision in Eurocruit Europe Limited [2007] EWHC 1433 (Ch) that the relevant limitation period (for a claim in which a monetary judgment was sought) was 6 years, and that it began to run not from the date of winding up (compare this to actions for antecedent transactions such as transactions at undervalue and preferences) but from the date that the damage was suffered by the company.
While a sound decision, this can cause problems for liquidators of companies where a misappropriation of the company's property is identified but the limitation period has expired before the office holder was appointed. This is particularly galling to creditors where the misappropriation of the company's property was for a director's own personal benefit.
However, s21 of the Limitation Act stipulates that there is no period of limitation where a beneficiary is claiming against a trustee for either fraudulent breach of trust by the trustee, or to recover from the trustee property or the proceeds of trust property in the possession of the trustee or converted to his use.
In the unanimous decision in Burnden Holdings (UK) Limited v Fielding [2018] UKSC 14, the Supreme Court has upheld the Court of Appeal's decision that s21 does apply in situations where directors have misappropriated a company's funds or property for their own use, and recognised that directors of companies are trustees of a company's property. While s21(1)(b) was primarily aimed at express trustees, the Court said that it applies to directors by analogy given they are in possession of trust property from the outset by virtue of being the fiduciary stewards of that property.
The Court also recognised that claims such as this are more likely to arise much later than six years after the relevant breach (and usually in insolvency as was the case here) due to the lack of transparency in the director/company relationship and the ability of the directors to delay the opportunity to bring such claims.
Accordingly, claims by liquidators in relation to equitable breaches of trust where company property is converted to the use of the directors, are not subject to a limitation period, which is welcome news to office holders and creditors in relation to misfeasance claims.
Misfeasance and set off
Often a director will be a creditor of an insolvent company. In such circumstances, to the extent that a liquidator seeks a repayment or restoration of company funds, the director will argue that set off should apply.
The decision in Manson v Smith [1997] 2 BCLC 16 reiterates a long held view that there is no set off available to a director between a debt due from the insolvent company to him and his liability to repay a sum ordered to be paid in misfeasance proceedings.
Set off applies where a creditor proves in the insolvency, and relates to mutual dealings, where the debt arises from an obligation prior to a creditor having notice of pending insolvency. Where set off is properly engaged, its application is mandatory.
In Manson v Smith, the director had been pursued for his authorisation of certain payments he caused the company to make prior to its insolvency. However, the company owed him significant sums on his loan account. The judgment in that case makes it clear that a misappropriation of funds belonging to a company by its directors does not amount to a dealing sufficient to engage insolvency set off (formerly in rule 4.90 of the Insolvency Rules 1986, now substantially replicated in r14.25 of the Insolvency Rules 2016).
Comment
Claims against directors for misappropriation of funds can often bring considerable benefit to insolvent estates. The recent Supreme Court decision in Burnden, and the long established principle relating to set off is helpful in continuing to allow such claims to be an avenue for realisations.
However, this remains a technical area and claims against directors and potential counterclaims are under the spotlight with the Global Corporate Limited v Hale appeal due to be heard at some stage this year. As always, seeking advice is essential for practitioners and directors.
