The case of Burnden Holdings (UK) Limited -v- Fielding  UKSC 14 shows why it is essential to get thorough legal advice upon the restructuring of a company to ensure compliance with all fiduciary duties that directors have to the company, especially where directors (as shareholders in the company) stand to benefit personally from the restructuring.
On the assumed facts before the Supreme Court in this case, it appears that the creditors of the claimant (which fell into administration and then liquidation) suffered a substantial transaction at undervalue in the divestment of an asset. The directors personally benefitted in the divestment. The Supreme Court held this was a breach of trust and ruled that there was no limitation period for the company (as beneficiary of the trust) from bringing a recovery action against its directors (as trustees). This is because the directors were deemed ‘fiduciary stewards’ of the assets of the company. In reaching this decision, the Supreme Court applied section 21(1)(b) of the Limitation Act 1980, which allows beneficiaries to bring actions against trustees who convert trust assets for their own benefit without a time limit.
Section 21(1)(b) of the Limitation Act 1980:
No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action 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 facts of the case are slightly convoluted and were described in the Supreme Court as the ‘assumed facts’. The claimant owned shares in a number of companies in the conservatory and heating sectors. The defendants were directors and shareholders in the clamant. An offer of £6 million was received in 2007 from a third party for 30% of the shares in the heating company, Vital, on the condition that Vital was divested from the other companies.
To achieve this, the defendants set up a new holding company, BHUH (with identical shareholdings to those in the claimant), and transferred their own shares to BHUH. The defendants then procured the claimant’s distribution in specie of its shares in Vital to BHUH also: at this point BHUH was the sole shareholder in both the claimant and Vital. BHUH then went into a (solvent) members voluntary liquidation and transferred the shareholdings in the claimant and Vital to new companies in which the shareholdings again mirrored the original shareholdings.
Shortly after, one of the defendants sold her 30% shareholding in Vital’s parent company for £6million. Of that sum, £3million was loaned to the claimant and the balance was put towards the purchase of a property for the benefit of one of the defendants for £8.3million in May 2008. The claimant and its conservatory sector subsidiaries entered administration in October 2008 and moved into liquidation in December 2009. It should be emphasised that the trust asset in question (the shareholding in Vital) never came into direct ownership of the defendants.
Proceedings were issued on behalf of the claimant by the liquidator against the directors over 6 years after the distribution in specie of the shares in Vital. The defendants initially succeeded in seeking a bar to proceedings on the basis of limitation. The claimant then argued that limitation was not an issue because of section 21(1)(b) of the Limitation Act 1980.
Notwithstanding, the Supreme Court started by confirming that directors are to be regarded as trustees for the purposes of section 21 of the Limitation Act, as they are in stewardship of the company’s assets, and that the company has the status of beneficiary. The Supreme Court then applied a purposive interpretation to section 21(1) (b), noting the decision in Re Timmis, Nixon -v- Smith  1 Ch 176 which considered its predecessor by stating it ‘was not intended to protect him [a trustee] where…he would come off with something he ought not to have’. The Supreme Court held that the claimant’s shares in Vital were converted to the directors when the directors procured or participated in the unlawful distribution of the shares to BHUH. This was the taking of the shares in defiance of the claimant’s rights of ownership, and it was conversion because the directors stood to derive the economic benefit from that, as they had a beneficial interest in BHUH. The Supreme Court held that the defendants had previously received the shares because, as directors of the claimant, they had been the company’s fiduciary stewards from the outset.
Whilst the facts of the this case are somewhat convoluted, the principle is clear, directors, as fiduciary stewards of the company cannot convert the company’s assets to their own benefit and where they do, there will be no limitation bar to the company (or its administrators/liquidators) from recovery.