Analysis
This appeal arose from an application by the defendants for summary judgment, dismissing the claim on the ground that it was statute-barred. The claim was for (and was for the purposes of the application assumed to have been) an unlawful distribution by the claimant company six years and three days before the issue of the claim form. Although, by the time of the hearing but after permission had been given to appeal, the claimant had amended its claim to include an allegation of fraud, so that there could not be summary judgment, the court considered the issue as to the meaning of s23(1)(b) of the Limitation Act 1980 (the 1980 Act) to be of sufficient importance to proceed with the appeal.
Facts
H and W were together the controlling shareholders and were directors of the claimant company (C). C had a number of trading subsidiaries, including V, which carried on a combined heat and power business. Another company, S, offered to purchase a 30% shareholding in V for £6m, conditional on its being completely separated from other businesses carried on by C. This was achieved with the following transactions:
- a) The shareholders in C, including H and W, exchanged their shares for equivalent holdings in a new holding company, BH;
- b) A week later a distribution in specie of C’s holding in V was approved by a unanimous resolution of its directors and a written resolution of BH and effected by a transfer of the only issued share in V by C to BH;
- c) On the same day,
- – BH went into members’ voluntary liquidation, following a special resolution by its members and a statutory declaration of solvency by its directors, including H and W;
- – reconstruction agreements were made under Insolvency Act 1986, s.110 and, pursuant to those agreements:
- • the liquidator of BH transferred the share in V to a new company, VH, and the shares in C to a new company, BG; and
- • VH and BG issued shares to the former shareholders in BH, precisely mirroring what their holdings had been in C;
- d) A few days later, W sold a 30% shareholding in VH to S for £6m.
Around a year later, C went into administration and after that into liquidation.
C brought a claim against H and W, alleging that the distribution of its share in V to BH was unlawful and that H and W had breached their duties to C in making the distribution. For the purposes of the summary judgment application it was to be assumed that the distribution was unlawful, the defendants’ participation in it amounted to a breach of their fiduciary duties to C and, because the distribution was made to a company, BH, in which they were majority shareholders and directors, the distribution was one from which they derived a substantial benefit.
Argument
Under s21(1)(b) of the 1980 Act, no 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, or previously received by the trustee and converted to his use”. It was common ground that (a) the defendants were to be regarded as trustees for all purposes connected with s21 of the 1980 Act, (b) C was the beneficiary of the trust for all such purposes and (c) that, unless s21 applied, the defendants had the benefit of the six-year limitation period under s21(3), the relevant breach of duty having arisen more than six years before the issue of the proceedings.
It was argued on behalf of the defendants that the share in V, which was the relevant trust property, was never in the possession of the defendants nor previously received by them and converted to their use; and that the share was at all relevant times in the legal and beneficial ownership and, therefore, the possession of a series of companies—C, then BH and later VH, where it remained.
Held
C had amended its claim so there could be no summary judgment. The court did, however, deal with the issues that had been argued.
The starting point in construing s21(1)(b) of the 1980 Act was to look to its purpose, which was to give a trustee the benefit of a lapse of time after he had committed some technical breach of his duty but had done nothing morally wrong or dishonest. It was not intended to protect him in circumstances where the breach left him with something he ought not to have, such as property of the trust received by him and converted to his own use (dictum of Kekewich J in In re Timmis [1902] 1 Ch 176, at 186 followed). In the context of a company’s property, as the directors were typically the fiduciary stewards of it, they were trustees within s21 and, as such, to be treated as being in possession of the trust property.
On the assumed facts, the defendants had taken C’s property in defiance of its rights or ownership of it and, because of the economic benefit that accrued to them as majority shareholders of BH, they had converted that property to their own use. They did not have the benefit of s21(1)(b) of the 1980 Act.
There had also been an application for summary judgment under section 32 of the 1980 Act, on the ground that there was a deliberate concealment of the facts involved in the breach of duty. It was held that this issue was too fact sensitive to be suitable for summary judgment.
JUDGMENT LORD BRIGGS: (WITH WHOM LORD KERR, LORD SUMPTION, LORD CARNWATH AND LORD LLOYD-JONES AGREE) [1] This appeal raises a well-formulated issue as to the construction of s21 of the Limitation Act 1980, and a rather more diffuse question as to the meaning and application of s32 of the Act, in both cases in relation …Continue reading "Burnden Holdings (UK) Ltd v Fielding & anr [2018] WTLR 379"