The Supreme Court ruled on certain limitation issues regarding a misfeasance claim against the directors of Burnden Holdings (UK) Limited. Burnden was a holding company with several trading subsidiaries. Mr and Mrs Fielding (the "Defendants") were its directors and controlling shareholders. One of Burnden's subsidiaries was a company called Vital Energi Utilities Ltd ("Vital").
On 4 October 2007 the Defendants exchanged their shares in Burnden for shares in a new holding company, BHU Holdings Ltd ("BHU") and approved the distribution of the shareholding in Vital to BHU. This shareholding in Vital was later transferred to another new holding company ("VHL") before Mrs Fielding later sold her shareholding in VHL and Burnden went into Liquidation.
On 15 October 2013, the Liquidator issued proceedings for the unlawful distribution of the shareholding in Vital on the basis that the Defendants were trustees and the trust property was the shares in Vital. The Defendants argued that this was outside of the six year limitation period in respect of an action for breach of trust under section 21(3) of the Limitation Act 1980. The Defendants applied for summary judgment on the basis that the claim was time barred. The High Court granted the application.
The Court of Appeal set aside the order for summary judgment on the basis that the limitation period of six years did not apply because section 21(1)(b) provides that there is no limitation period for an action by a beneficiary (in this case Burnden) to recover trust property from a trustee which had been converted to the trustee's use. The Court of Appeal decided that there was an issue as to whether section 32 applied, which provides that if the Defendants concealed a relevant fact, the period of limitation does not begin to run until the Claimant discovers the concealment. The Defendants appealed to the Supreme Court on the application of section 21(1)(b) and section 32 to their position.
The Supreme Court dismissed the appeal and agreed that section 21(1)(b) applied. The Court did not express a final view on section 32.
The Defendants argued that the allegedly misappropriated property remained the property of corporate entities, as the shares were at all times owned by holding companies and never held by the Defendants themselves. The Court found that the Defendants were trustees for the purposes of section 21(1)(b) and Burnden was the beneficiary of the trust, as the Defendants owed fiduciary duties to Burnden and were custodians of its property.
The Supreme Court found that the purpose of section 21(1)(b) was to enable trustees who may have done something legally wrong, but not dishonestly or morally wrong, the benefit of time lapse. However the purpose was not to allow trustees protection where they would benefit from something they ought not have. The conversion to the Defendants' use of trust property was found to be the distribution of the Claimant's shares in Vital to BHU as the Defendants stood to gain an economic benefit by virtue of being the majority shareholders in BHU. The distribution was therefore caught by section 21(1)(b).
The Supreme Court declined to decide on the issue of section 32, as the decision on section 21(1)(b) made the case unsuitable for summary judgment and analysing section 32 in depth would "take the court into a potential minefield of difficulties".
This case is welcome news for office holders pursuing misfeasance actions against directors. It is now settled law that when a director moves company assets to another company in which he is involved, it will be far more difficult to raise limitation as a potential defence (if applicable). For further comment of the implications of this decision in relation to misfeasance actions, please see Katie Farmer's article.