The Supreme Court ruled on 28 February that on an inter-company transaction, directors and trustees can’t rely on a standard six-year limitation defence. The court had previously struck out the claim by company liquidators against its directors for alleged breach of statutory and fiduciary duties on a summary judgment application, as being past the six year deadline.
The Supreme Court’s decision rejecting that and other lines of defence has wider implications including for directors, trustees and D&O indemnity insurers regarding the way that transfer of company assets are dealt with.
The decision was based on preliminary points of law of general importance. The defendants maintain their defence to the allegations as a whole.
This case concerned a claim by a company, Burnden Holdings. The company went in to administration in October 2008 and liquidation in 2009. The claim was against some of its former directors for breach of fiduciary and statutory duty under Companies Act 2006. The claim included allegations that the directors failed to:
- act in accordance with the company’s constitution and use their powers for the purpose for which they are conferred (s171);
- exercise independent judgment (s173);
- avoid conflicts of interest and conflicts of duty (s175); and
- declare interest in proposed transaction or arrangement (s177).
The liquidator alleged that a distribution “in specie” (i.e. in its current form without converting it to cash) of the company’s shareholding in a subsidiary company on 12 October 2007 was unlawful and in breach of duty. The directors were previously majority shareholders. The liquidator contended that the company did not have sufficient accumulated realised profits to make the distribution.
The claimant issued the claim against the directors on 15 October 2013. The parties agreed that the proceedings were issued more than six years after the date of the distribution. The directors’ application for summary judgment striking out the claim was confined to the question of limitation.
The liquidator relied upon s21(1)(b) Limitation Act 1980 (LA 1980). This provides that no period of limitation applies (whether a standard six years or otherwise) to an action by a beneficiary under a trust to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee.
The liquidator argued that this included a transfer to a company directly or indirectly controlled by the trustee. As such, no period of limitation applied to the present claim. The liquidator also claimed that questions relating to the availability of a postponed limitation period, such that those proceedings had been commenced in time, under s32 LA 1980, on the basis that the breach of duty was deliberately concealed, could not be determined on an application for summary judgment. The liquidator’s case was that the company’s claim was analogous to an action by a beneficiary under a trust where a beneficiary can recover trust property or trust proceeds from a trustee which has been converted to the trustees’ benefit. These types of claim can’t be barred for being “out of time”.
The Supreme Court unanimously agreed, dismissing the appeal. It found that s21(1)(b) applies to trustees who are company directors, to be treated as being in possession of the trust property from the outset. Therefore, for the purposes of s21, the defendant directors are regarded as trustees. This is because they are entrusted with the stewardship of the company’s property and owe fiduciary duties to the company in respect of that stewardship. The company is regarded as the beneficiary of the trust under s21.
Contrary to the defendants’ submissions, s21(1)(b) does not become inapplicable merely because the misappropriated property has remained legally and beneficially owned by corporate vehicles, rather than having become vested in law or in equity in the defaulting directors. S21 is primarily aimed at express trustees and is applicable to company directors by a process of analogy. An express trustee might or might not from time to time be in possession or receipt of the trust property. By contrast, in the context of company property, directors are to be treated as being in possession of the trust property from the outset.
Under the typical constitution of an English company, the directors are the fiduciary stewards of the company’s property. It is precisely because of this that they are trustees within the meaning of s21. If their misappropriation of the company’s property amounts to a conversion of it to their own use, they will necessarily have previously received it, by virtue of being the fiduciary stewards of it as directors. On the assumed facts of the present case, the defendants converted the company’s shareholding in the subsidiary when they procured or participated in its subsequent unlawful distribution. By the time of that conversion the defendants had previously received the property because, as directors of the claimant, they had been its fiduciary stewards from the outset.
Regarding the LA 1980, s32 argument, in-depth analysis of the issue would take the court into a minefield of difficulties. It was not necessary to decide this point because of a recent amendment to the claim pleading fraud. Further, because of the court’s decision about the meaning of s21, meaning the issue is unsuitable for summary judgment.
- Where a company claims against a director that the director has wrongfully or in breach of their fiduciary duties transferred the company’s property for their own benefit, no limitation defence will apply.
- When considering limitation issues, it is important to assess whether s21(1)(b), regarding a beneficiary’s claim against a trustee applies. If it does, then there will be no limitation period, and the claim can’t be struck out for delay.
- The effect of s21(1)(b) can’t be avoided simply by using a corporate vehicle to receive the assets involved. The section includes a transfer to a company directly or indirectly controlled by the trustee.
- Directors of a company are treated as having previously received all of the company’s assets, where they benefit from the transaction complained of and the assets are treated as having been converted to their benefit.
- Regarding D&O indemnity insurance, this will be impacted where there is now no time limitation on claiming against directors regarding disposal of company assets.
- On disposing of company assets, additional due diligence is required. This is to ensure that there is no breach of directors’ statutory or fiduciary duties; to protect against future scrutiny from creditors seeking to reverse disposals; claw back company property or claim damages.