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Supreme Court: use of corporate vehicles did not avoid limitation exception

Out-Law Legal Update | 23 Mar 2018 | 9:56 am | 2 min. read

LEGAL UPDATE: Company directors were said to be responsible for assets despite their use of corporate vehicles, the Supreme Court has ruled (12-page / 157KB PDF). The ruling means that a six year limitation period stopping liquidators taking legal action against the directors does not apply. This case will impact future misfeasance actions. Director and officer indemnity insurers should take note of this decision as it confirms that the English courts are unwilling to accept the six-year limitation defence for actions against directors following the disposal of company assets in breach of fiduciary duty for economic gain.

A Mr and Mrs Fielding were directors and controlling shareholders of Burnden Holdings (UK), Ltd which had subsidiaries carrying out combined heat and power business and the supply of conservatories.

In 2007 Burnden transferred its share of combined heat and power subsidiary Vital Energi Utilities Ltd to a third party company in which the Fieldings also had an interest. The transfer took the form of a distribution "in specie" i.e. a distribution paid using a non-cash asset. The Fieldings and other directors approved the distribution. The third party company then transferred its interest in Vital to another company, and Mrs Fielding sold her interest in that company for £6 million.

In December 2009, Burnden went into liquidation.

In 2013, the liquidators of Burnden brought claims against the Fieldings for misfeasance alleging that the distribution was unlawful and that the Fieldings had breached their fiduciary duties as directors of Burnden in making the distribution.

The High Court granted the Fieldings summary judgment because the claim had been brought more than six years after the event, meaning it was statute-barred under the Limitation Act 1980.

The liquidators appealed. For the purposes of summary judgment and subsequent appeals it was assumed that the distribution was unlawful so the limitation issue could be dealt with, although the point is "hotly contested" in the main case.

The Court of Appeal ruled in favour of the liquidators because section 21(1)(b) of the Limitation Act says that a limitation period does not apply to an action by a beneficiary to recover trust property in the possession of the trustee, or previously received by a trustee and which has been converted for the trustees' own use. It is common ground that a director is a trustee and that a company is a beneficiary for the purposes of section 21.

The Fieldings appealed to the Supreme Court which dismissed their appeal.

Section 21(1)(b) requires two elements: that the trust property is in the possession of the trustee or previously received by the trustee, and conversion of that property for the trustees own use.

The Fieldings said they had never been in possession of the shares in Vital, which they argued were held by the various holding companies at all times. The Supreme Court disagreed. It said that directors are "fiduciary stewards" of a company's property and they are to be treated as being in possession of a company's property from the outset. The Fieldings were in possession of the shares in Vital as directors of Burnden.

In relation to conversion, by transferring the shares to the third party company in which they held a majority share for their own economic benefit, which was assumed for the purposes of the hearing, they had converted the shares in Vital. The Supreme Court said that s21(1)(b) did, therefore, apply and the Fieldings would not be able to rely upon the six-year limitation defence.

The Court of Appeal had said that there was a further triable issue in relation to section 32 of the Limitation Act, that there had been a deliberate concealment by the Fieldings of a relevant fact related to the alleged unlawful distribution and that the period of limitation, therefore, started at the point the liquidators of Burnden discovered the concealment. The Fieldings also applied to the Supreme Court on this point, however, the Supreme Court declined to decide on the issue.

Sarah Jennings is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com