No limitation defence for directors receiving assets in breach of trust
No limitation period
Prior to the decision in Burnden Holdings (UK) Limited v Fielding (2018), a director who had received assets in breach of trust could rely on a defence pursuant to the Limitation Act 1980. The decision of the Supreme Court in Burnden will now mean that claims against directors for acting in breach of trust are no longer subject to a limitation period, allowing those who deal with a director’s breach of duty to view a much wider time frame when considering the claim and the impact of the director’s actions.
The facts of Burnden
Mr and Mrs Fielding (“the Appellants”) were directors of Burnden Holdings Limited (“Burnden”), a holding company for various subsidiaries. The Appellants distributed in specie the sole share of one of the subsidiaries to another company for no value. They had significant control of the company in receipt of the share distribution. The share was later sold for £6m.
Burnden subsequently went into liquidation. The liquidators brought a claim against Mr and Mrs Fielding alleging that the transaction was unlawful and that they had acted in breach of their fiduciary duties to Burnden. They knew, the liquidators said, or ought to have known, that Burden was insolvent and therefore incapable of making the distribution. Also, the liquidators pointed out that the Appellants were recipients of the distribution as they used part of the proceeds of sale to purchase their own property.
The decision
The claim was issued against the Appellants more than six years after the distribution. They relied on s.21 (3) of the Limitation Act 1980 and argued that a claim cannot be brought after the expiration of six years from the date on which the cause of action accrued, i.e. the distribution.
At first instance, the Court agreed. However, Burnden successfully appealed to the Court of Appeal and argued that the limitation period did not apply pursuant to s.21 (1)(b) of the Limitation Act 1980 which states “no limitation period will apply to action brought against a trustee for recovery of trust property in the possession of the trustee or previously converted to his use.”
The Appellants appealed to the Supreme Court and stated that they had not directly received trust property, i.e. the share in the subsidiary, and that it had been distributed to another company. The Supreme Court did not agree and unanimously upheld the decision of the Court of Appeal, Lord Briggs confirming that “directors are to be treated as being in possession of trust property because they are fiduciary stewards of the company’s property”.
Impact on future claims against directors
The Judgment provides a welcome decision for shareholders and those involved with insolvent companies who can now look beyond the limitation period when dealing with directors in breach of fiduciary duties who have wrongfully received company property for their own use. Often, such issues will not come to light until much later, usually as a result of liquidation, and the Supreme Court has ensured that directors are not able to use the limitation defence as a shield to protect them against claims for their breach of duty.