Limitation and alleged breaches of duty (Burnden Holdings (UK) Ltd (in liquidation) v Fielding)

In the case of Burnden Holdings (UK) Ltd v Fielding, the Court of Appeal had to determine the relevant limitation period in a claim in respect of alleged breach of duty by two directors. Marc Brown, barrister at St Philips Chambers, explains the background to the appeal and implications of the judgment.

Original news

Burnden Holdings (UK) Ltd (in liquidation) v Fielding and another [2016] EWCA Civ 557, [2016] All ER (D) 111 (Jun)

The Court of Appeal, Civil Division, in allowing a company’s appeal against a judge’s ruling that its claim for breach of fiduciary or statutory duty was time-barred, held that section 21(1)(b) of the Limitation Act 1980 (LA 1980), which provided that no period of limitation prescribed by LA 1980 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, included a transfer to a company directly or indirectly controlled by the trustee. Accordingly, no period of limitation applied to the present claim. Further, the availability of a postponed limitation period, such that those proceedings had been commenced in time, under LA 1980, s 32, could not be determined on an application for summary judgment.

What was the background to the appeal?

This case concerned a claim by a company in liquidation against some of its former directors for breach of fiduciary duty and breach of statutory duty under sections 171–173, 175 and 177 of the Companies Act 2006, alleging that a distribution in specie of the claimant company’s shareholding in another company on 12 October 2007 was unlawful and in breach of duty, including on the basis that the claimant did not have sufficient accumulated realised profits to make the distribution.

It was common ground that the claim form was issued more than six years after the date of the distribution in specie which occurred on 12 October 2007.

The defendants made an application for summary judgment in respect of the claim, based solely on the issue of limitation. While the defendants made clear that they considered the substance of the claim to be unsustainable, nonetheless no challenge was made to the sustainability of the pleaded claims in fact or law in the summary judgment application, and so the application and the appeal proceeded on the basis that there was an arguable case that an unlawful distribution was made on 12 October 2007.

At first instance, HHJ Hodge QC gave summary judgment against the claimant company and the claimant company then appealed.

What were the legal issues the Court of Appeal had to decide?

The court first had to determine the date on which the claimant’s cause of action accrued.

Then the court had to determine the relevant limitation period, bearing in mind the arguments based upon LA 1980, ss 21(1) and 32.

Ultimately the court had to determine whether the judge’s decision to give summary judgment in favour of the defendants was to be upheld.

What were the main legal arguments put forward?

Before the judge at first instance, the claimant had accepted that the primary limitation period was six years and had sought to rely upon LA 1980, s 32(1)(b). At first instance, the claimant took the position that LA 1980, s 21(1) did not apply to claims against a director of a company, which was an erroneous view, as accepted in the appeal by the defendants. As a result, in the appeal, the claimants sought to rely upon LA 1980, ss 21(1)(a), 21(1)(b) and 32(1)(b).

In respect of the accrual of the cause of action, the claimant asserted that the cause of action accrued when the distribution is specie was received by the ultimate recipient on 15 October 2007.

In respect of LA 1980, s 21(1)(a), the claimant argued that the case pleaded included a claim of fraudulent breach of duty, which would give rise to no limitation period.

In respect of LA 1980, s 21(1)(b), the claimant argued that because the defendants held the shares in the companies that acquired the distribution in specie, they received trust property—and to the extent that that shareholding in the acquiring company was transferred, this amounted to converting the trust property. On this point, the defendants argued that the trust property (the share that formed the distribution in specie) was never received by the defendants and it was not suggested that the share was ever held otherwise than legally by, and beneficially for, the recipient companies. The defendants therefore argued that the share was never in the possession of the defendants or received by the defendants for the purposes of LA 1980, s 21(1)(b).

The claimant also relied on LA 1980, s 32(1), on the basis that the breach of duty was deliberately concealed. In relation to this, the claimant relied upon LA 1980, s 32(1)(b) which provides that a deliberate concealment includes the deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time. At first instance, the judge had held that, given the involvement of the company’s auditors, he could not see how the claimant could possibly show a deliberate commission of a breach of duty or a deliberate concealment from the company. The judge had therefore held that there was no realistic prospect of the claimant establishing a deliberate commission of breach of duty or a deliberate concealment. On the appeal, the claimant proceeded on the assumption that there was a deliberate breach of duty and asserted that the breach was unlikely to be discovered for some time.

What did the Court of Appeal decide, and why?

On the issue of the accrual of the cause of action, the court held that, in respect of a claim for breach of duty in causing the claimant to make an unlawful distribution, the cause of action accrued with the making of the distribution on 12 October 2007. The court rejected the argument that the cause of action arose later on 15 October 2007.

The primary limitation period for a claim against the directors in respect of the distribution was six years pursuant to LA 1980, s 21(3).

In relation to the claimant’s argument under LA 1980, s 21(1)(a) that the claim included a claim of fraudulent breach of duty, the court dismissed this argument on the basis that ‘on both a casual and a close reading of the particulars of claim, no such allegation is made’.

In relation to LA 1980, s 21(1)(b), the court held that a literal reading of the section supported the submissions of the defendants. However, the court also held that the effect of this would be that the section could very easily be avoided by the use of companies to hold assets.

The Court of Appeal therefore followed and approved of the first instance decision in Re Pantone 485 Ltd Miller v Bain and others [2002] 1 BCLC 266, where the judge had held that, where a fiduciary uses their beneficiary’s money to confer a benefit on a company they control, they are denying the beneficiary’s title to the money for their own purposes and this amounts to a conversion for their own use. The court therefore held that LA 1980, s 21(1)(b) includes a transfer to a company directly or indirectly controlled by the trustee.

As a result, the claim relating the indirect interest in the share which was the subject of the distribution in specie was one to which there was no limitation period by virtue of LA 1980, s 21(1)(b).

In relation to LA 1980, s 32, the Court of Appeal held that the question of when the claimant could have discovered the breach with reasonable diligence could only be answered after a detailed examination of the events of October 2007 and the roles played by the various directors, including those who were not the defendants to the claim. The Court of Appeal therefore held that the issue under LA 1980, s 32 could not be determined on an application for summary judgment.

As a result, the Court of Appeal allowed the appeal, and overturned the ruling of summary judgment in favour of the defendants, on the grounds that no limitation period applied as a result of LA 1980, s 21(1)(b) and alternatively on the grounds that the argument under LA 1980, s 32 could not be determined on an application for summary judgment.

To what extent is the judgment helpful in clarifying the law in this area?

The court clarified that, when applying the limitation provisions of LA 1980, s 21(1)(b), the section must be interpreted and construed as including within its terms a transfer to a company directly or indirectly controlled by the trustee. This confirms that the section is wider in scope than a literal receipt of trust property by the fiduciary concerned.

What practical lessons can those advising take away from this case?

When considering limitation issues, it is important to assess whether LA 1980, s 21(1)(b) applies to the case in question. If it does, then there will be no limitation period for the purposes of the claim. This case confirms that the effect of this section cannot be avoided simply by the use of a corporate vehicle to receive the property concerned, and that LA 1980, s 21(1)(b) will be read as bringing within it a transfer to a company directly or indirectly controlled by the trustee. In this wider construction, the concept of control is key.

Interviewed by Alex Heshmaty.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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First published on LexisPSL Restructuring and Insolvency

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