Directors & Trustees’ Limitation Defence Fails
The Supreme Court ruled on 28 February that on an inter-company transaction, Directors & Trustees can’t rely on a standard six-year limitation defence.[i] The claim by company Liquidators against its Directors for alleged breach of statutory and fiduciary duties was originally struck out on a summary judgment application, as being past the standard six years 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, and the Defendants maintain their defence to the allegations as a whole.
This case concerned a claim by a company, Burnden Holdings which 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 the Companies Act 2006, including 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);
- declare interest in proposed transaction or arrangement (s177).
The Liquidator alleged that a distribution “in specie” (in its current form without converting it to cash) of the Claimant 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 claimant company did not have sufficient accumulated realised profits to make the distribution.
The claim against the Directors was issued on 15 October 2013. It was agreed between the parties that the proceedings were issued more than six years after the date of the distribution in specie on 12 October 2007. The Directors’ application for summary judgment striking out the claim was confined to the question of limitation.
- The Liquidator relied upon s.21(1)(b) of the Limitation Act 1980, (LA 1980), which provides that no standard six years or other period of limitation applied 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 LA 1980, s 32, 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, finding that section 21(1)(b) applies to trustees who are company directors, to be treated as being in possession of the trust property from the outset. For the purposes of section 21, the Defendant Directors are regarded as trustees, 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 section 21. Contrary to the Defendants’ submissions, section 21(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.
- Section 21 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. It is precisely because, under the typical constitution of an English company, the directors are the fiduciary stewards of the company’s property, that they are trustees within the meaning of section 21.
- 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, s 32 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, and because of the court’s decision about the meaning of section 21, 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 LA 1980, s 21(1)(b) regarding a beneficiary’s claim against a trustee applies. If it does, then there will be no limitation period for the purposes of the claim, and the claim can’t be struck out for delay.
- The effect of LA 1980, s 21(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’s 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, ensuring 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.
Paul Sykes is Levi Solicitors LLP Head of Disputes Management department. For further information regarding directors’ duties, company and trust disputes, contact email@example.com
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.