This article was originally published on Thomson Reuters Practical Law.

In March, the Court of Appeal delivered its decision in First Subsea Ltd v Balltec Ltd and others, clarifying the ambit of section 21 of the Limitation Act 1980 in relation to directors. This blog looks at some of the practical implications and lessons for litigators.

Section 21, Limitation Act 1980

By means of background, section 21 concerns time limits for actions in respect of trust property. Specifically, section 21(1)(a) provides that no period of limitation shall apply to an action by a beneficiary under a trust, being an action in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy. Section 21(1)(b) provides that no period of limitation shall apply to an action by a beneficiary under a trust, being an action to recover from the trustee:

  • Trust property.
  • The proceeds of trust property in the possession of the trustee.
  • The proceeds of trust property previously received by the trustee and converted to his or her use.

The lower court’s application of section 21

The lower court found that Mr Emmett, a director of the claimant company, BSW, had breached his fiduciary duties to the company. Section 21(1)(b) was not engaged; he had not been dealing with trust property because he had not been wrongfully dealing with pre-existing assets of BSW. However, section 21(1)(a) was engaged because of the fraudulent breach of fiduciary duty. As a result, the six year limitation period did not apply.

This case brings welcome clarification to the application of section 21 regarding the following:

  • Practically, when we can use section 21(1)(a).
  • The inter-relation of section 21(1)(a) and section 21(1)(b).
  • The requirements for such a finding in terms of the pleadings and arguments before the court.

The appeal

The Court of Appeal analysed and considered Gwembe Valley Development Co Ltd v Koshy (No 3). It affirmed that section 21(1)(a) applies not only to cases arising from real trusts, but, because of the fraud element, it also applies to cases where the fiduciary is liable to account as if they were a trustee. In other words, section 21(1)(a) applies to a director who has fraudulently breached their fiduciary duty without misusing or misappropriating company property which existed during the relevant period of the directorship.

Class 1 v Class 2

The Court of Appeal reiterated that, when considering section 21(1)(a), there is a distinction between classes of constructive trustee. Referring to Paragon Finance Plc v D. B. Thakerar & Co, the court highlighted the distinction between:

  • “Class 1 trustees”: the constructive trustee really is a trustee, who does not receive the trust property in their own right but by a transaction where both parties intend to create a trust from the outset.
  • “Class 2 trustees”: the defendant is implicated in a fraud and is therefore liable to account as a constructive trustee by virtue of that fraud.

A director owes fiduciary duties as a class 1 constructive trustee.

The previous uncertainty that surrounded this area arose from the fact that a class 1 trustee could clearly fall within the application of section 21(1)(a), but a person who merely became a class 2 trustee by virtue of their fraud or wrongdoing was not a trustee at the time of the alleged breach. Consequently, they did not come within section 21.

What then, of the class 1 trustee director who commits a fraudulent breach of duty that does not involve the misappropriation of trustee property, but is a fraudulent breach of duty which would give rise to a constructive trust of the class 2 kind if committed by anyone other than a class 1 fiduciary? The questions are either:

  • Does the nature of the breach create a class 2 trust, meaning that section 21(1)(a) is inapplicable?
  • Does the fact that it is committed by someone who is already a class 1 trustee render section 21(1)(a) applicable?

Status of the trustee

Williams v Central Bank of Nigeria held that a section 21(1)(a) trustee did not include a party who was only liable to account by reason of their dishonest assistance in a breach of trust. This was as held in Paragon. Of course, this is different to the position outlined in Gwembe, which the Court of Appeal has now affirmed. However, the distinction relates to the status of the trustee at the time of the breach. When dealing with a director, as in Gwembe, the individual is a trustee owing fiduciary duties at the date of the alleged breach.

The Court of Appeal considered that the confusion appeared to have arisen from a footnote in the judgment of Halton International Inc and another v Guernroy Ltd, which opined that Gwembe may be better explained on grounds of fraudulent concealment, rather than section 21(1)(a). However, the Court of Appeal was clear that Gwembe was rightly decided, and provided a concise explanation of this view at paragraph 57 of the judgment.

The position is hopefully now settled for litigators: when dealing with directors, they are class 1 fiduciaries in respect of the company and its assets at the time of the breach of duty (they are not strangers to the company). As a result, a breach of this duty remains a breach within section 21, even if it does not involve misappropriation of company property.

Fraud and dishonesty

On section 21(1)(b), First Subsea and Burden Holdings (UK) Ltd v Fielding and another taken together neatly clarify the overall application of section 21.

First Subsea dealt with the appellant’s criticism that fraud had not been adequately pleaded, put to the witness or argued in closing submissions. This ground of appeal was dismissed; therefore, litigators can take some comfort from paragraphs 64 to 69 of the judgment, regarding what is required in cases concerning section 21. The judge found that a plea of conspiracy to injure the company by deliberate breach of fiduciary duty was sufficient for conspiracy to injure. That was fraudulent.

Further, the court was satisfied that it was fairly put to Mr Emmett that he was acting contrary to the interests of the company, and that he knew that what he was doing was wrong. The court concluded that there was sufficient evidence of fraud and dishonesty.

Concluding thoughts

It follows that litigators can rely on the above, but the Court of Appeal did reiterate the need for fraud to be distinctly alleged and proved. As a result, as clear a pleading as possible is always recommended, and guidance should be taken from paragraphs 64 and 65 of the judgment.