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Directors’ fiduciary duties and the conversion of company property

The Supreme Court has recently held that directors who have caused company property to be transferred to another company under their control may be liable to restore the proceeds even after expiry of the six-year limitation period.

Mr and Mrs Fielding were directors and majority shareholders of Burnden Holdings (UK) Ltd ("BHUK"), a holding company with trading subsidiaries including Vital Energi Utilities Ltd ("Vital Energi").

In order to enable the sale of a minority stake in Vital Energi to a third party, the Fieldings exchanged their shares in BHUK for shares in a new holding company, BHU Holdings Ltd ("BHUH"); effected a distribution in specie of the sole issued share in Vital Energi from BHUK to BHUH; put BHUH into members’ voluntary liquidation; transferred the share in Vital Energi from BHUH to another new company, Vital Holdings Limited; and sold a 30% shareholding in Vital Holdings to Scottish & Southern Energy plc for £6 million.

BHUK subsequently went into liquidation, and after some time its liquidator brought a claim against the Fieldings. The allegations were that the distribution in specie was unlawful, because there were insufficient realised profits; that it was made in breach of the Fieldings’ fiduciary duties to BHUK; and that it was a distribution from which the Fieldings (as majority shareholders of BHUH) derived a substantial benefit.

The Fieldings made an application for summary judgment against the company on the grounds that the claim was brought more than six years after the distribution in specie was made. That application was granted by the High Court, but the High Court’s decision was overturned by the Court of Appeal. The Fieldings appealed to the Supreme Court.

The issue for the court was whether (assuming the distribution was unlawful) the six-year limitation period applied. The company argued that that it did not, on the grounds that s 21(1)(b) of the Limitation Act 1980 provides that no period of limitation applies 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, or previously received by the trustee and converted to his use’.

Dismissing the appeal, the court agreed with the company that limitation did not run: directors are to be regarded as trustees of a trust of which the company is the beneficiary; the Fieldings converted BHUK’s shareholding in Vital Energi when they procured its distribution to BHUH; they had previously received the shareholding because, as directors of BHUK, they had been its fiduciary stewards from the outset; and the conversion was to their use because they were majority shareholders in the company to which the distribution was made.

This case establishes that directors, in their capacity as trustees, may be deemed to have converted company property to their use even where that property has been legally and beneficially owned only by the company concerned and other corporate entities. Click here to read the case.

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