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.

Facts

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.

The father and son 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. On 10 September 2004 the company entered creditors’ voluntary liquidation. On 9 September 2010 the liquidators issued proceedings against all three directors to recover sums claimed to be owed by the father and son to the company. The case was heard before HHJ Behrens in the High Court in Leeds.  

Arguments

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 any director who has been guilty of any misfeasance or breach of duty in relation to the company.

The liquidators claimed 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 the father, 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, Mr Button argued that some of the loans had been extinguished by dividend, and others should have been treated as salary, thus making them irrecoverable. The judge found against Mr Button on both counts.  

However the judge then raised an issue of his own: the application was issued more than six years after the loans were made and therefore the claims may be statute barred. The judge observed that “the claim succeeds, but for the issue of limitation”.

In response the liquidators advanced an argument that all three directors were under a continuing duty to seek to recover the unlawful loans, relying on the judgment of HHJ Simon Brown QC in Re Mumtaz Properties Ltd1. Thus they argued that the limitation period did not begin until the date of liquidation (or shortly before that date for James Button, who resigned as director shortly before liquidation).  

Judgment

The judge rejected the liquidators’ argument on limitation and noted that HHJ Brown QC gave “no authority for his assertion”. 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 1986 gave rise to a new limitation period beginning when the liquidators were appointed. The judge held that it did not, citing the case of Re Eurocruit Europe Ltd2, which makes clear that section 212 is a procedural provision which does not give rise to a limitation period distinct from the company’s claim.

However, this 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 that 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 whilst they were directors  
  • Therefore Geoffrey and James Button could not rely on a six year limitation defence in respect of loans they themselves had individually received  
  • Therefore judgment was given against Geoffrey and James Button for the sums 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

Comment

The application was issued just within six years from 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. In fact 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, there are many fiduciaries who may be in a position to receive property in a potential breach of trust (directors, executors, partners, etc). This case is a reminder 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.