The Supreme Court held that, on the facts assumed for the appeal, two directors of Burnden Holdings could not have a claim against them summarily dismissed as outside the ordinary six-year limitation period. The claim concerned an allegedly unlawful distribution of the company’s share in a subsidiary to another company which they controlled. The directors were treated as having received that share through their stewardship of the company’s property and as having converted it to their own use, so that no limitation period applied under section 21(1)(b) of the Limitation Act 1980.
The time-limit dispute
Burnden Holdings (UK) Limited, later acting through its liquidator, sued two former directors, Mr and Mrs Fielding. It alleged that they had breached their duties by participating in an unlawful distribution of the company’s share in a trading subsidiary, Vital Energi Utilities Ltd. The directors sought summary judgment on the ground that the claim was statute-barred. Judge Hodge QC, sitting as a High Court judge, granted it. The Court of Appeal reversed that decision, and the directors appealed.
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The distribution took place on 12 October 2007, and the claim form was issued six years and three days later. Unless a special rule applied, section 21(3) of the Limitation Act 1980 gave the directors a six-year period, and the claim was too late. The Supreme Court decided the appeal on assumed facts. It did not decide whether the distribution was in fact unlawful.
The transactions assumed for the appeal
Before October 2007 Burnden was a holding company. Its subsidiaries included conservatory businesses and Vital, which carried on a combined heat and power business. Mr and Mrs Fielding were directors and the controlling shareholders. Three other executive directors also served. The Fieldings held the A and B ordinary shares in equal parts; the D ordinary shares were held by two of the other directors and the trustee of an employee share scheme.
In July 2007 Scottish & Southern Energy plc offered £6 million for a 30 per cent shareholding in Vital, subject to Vital being separated from the conservatory business. On 4 October 2007 the shareholders exchanged their Burnden shares for equivalent shares in a new holding company, BHU Holdings Ltd. On 12 October Burnden’s directors unanimously approved a distribution in specie of Burnden’s only share in Vital to BHU Holdings, which approved it as Burnden’s sole member. The transfer was registered that day.
On 15 October BHU Holdings entered members’ voluntary liquidation. Under reconstruction arrangements made under section 110 of the Insolvency Act 1986, its liquidator transferred the Vital share to Vital Holdings Ltd and the shares in Burnden to another new company. Former shareholders received mirroring holdings. On 19 October Mrs Fielding sold a 30 per cent shareholding in Vital Holdings to Scottish & Southern Energy for £6 million. Of that sum, £3 million was lent to Burnden. On Burnden’s case, the balance went towards an £8.3 million property bought by the Fieldings in May 2008.
Directors treated as trustees
The alleged unlawfulness was that Burnden lacked sufficient accumulated, realised profits to distribute the share. That allegation was firmly disputed, and its detail did not matter to the limitation issue. The Court assumed that the distribution was unlawful, that the Fieldings’ participation breached their fiduciary duties, and that they derived a substantial benefit because the recipient, BHU Holdings, was a company in which they were majority shareholders and directors.
It was common ground that directors assumed to have participated in misappropriating a company asset are trustees for section 21, and that the company is the beneficiary. They are entrusted with stewardship of the company’s property and owe fiduciary duties in respect of it. The appeal did not concern a breach which did not involve misapplication of company property.
Why no limitation period applied
Section 21(1)(b) disapplies any limitation period where a beneficiary sues to recover trust property, or its proceeds, in the trustee’s possession, or previously received by the trustee and converted to his use. After the Court of Appeal hearing, Burnden amended its claim to allege fraudulent breach of trust under section 21(1)(a). The Supreme Court nevertheless decided the section 21(1)(b) question. A separate objection, that a claim for equitable compensation fell outside that provision, had failed in the Court of Appeal and was not renewed.
Mr Chivers QC argued that the Vital share was never in the directors’ possession and was never received by them and converted to their use. It remained legally and beneficially owned by successive companies. Treating the directors as possessing it would, he said, lift the corporate veil contrary to Prest v Petrodel Resources Ltd. The Court of Appeal thought a purely literal reading would invite avoidance and construed the provision to cover a transfer in breach of trust to a company controlled by the defaulting trustee.
Lord Briggs, with whom Lord Kerr, Lord Sumption, Lord Carnwath and Lord Lloyd-Jones agreed, accepted that anti-avoidance was not necessary to the construction. Deliberate use of a company to distance a trustee from misappropriated property might justify lifting the veil and would in most cases support fraud under section 21(1)(a). Majority shareholding and a directorship also do not amount to possession of company property. Those points did not, however, make section 21(1)(b) inapplicable merely because the share stayed in corporate ownership.
Section 21 applies to company directors by analogy with express trustees. Directors are entrusted with stewardship of company assets, so for this purpose they have possession from the outset. If they subsequently convert an asset to their own use, the requirement that they previously received it is met. Merely failing to stop a third party dissipating property would raise a different question.
On the assumed facts, the Fieldings converted the share when they procured or participated in the unlawful distribution. An unlawful distribution took Burnden’s property in defiance of its ownership, and the conversion was to their own use because of the economic benefit available to them as majority shareholders in the recipient. Their prior receipt followed from their office as directors. Lord Briggs therefore dismissed the section 21 appeal, although his reasoning differed to some extent from the Court of Appeal’s.
Concealment left for trial
Section 32 can postpone limitation where a relevant fact has been deliberately concealed. Under section 32(2), a deliberate breach of duty committed in circumstances unlikely to be discovered for some time amounts to deliberate concealment of the facts involved. The Court of Appeal had also refused summary judgment on this issue because it was too fact-sensitive, and had in passing interpreted “some time”. The directors criticised that interpretation.
Lord Briggs declined to resolve it. He regarded the surrounding difficulties, including attribution in a corporate context, as unsuitable for a final view on this appeal. Fraud had now been pleaded, and section 21(1)(b) applied on the assumed facts, so summary judgment was unavailable anyway. Whatever section 32(2) means, the remaining issues required a trial.
Verdict: The Court unanimously dismissed the directors’ appeal. On the assumed facts section 21(1)(b) prevented a six-year limitation defence. Concealment under section 32 was unsuitable for summary judgment. Whether the distribution was unlawful and the directors were liable remained for trial.
Source: Burnden Holdings (UK) Limited v Fielding and another [2018] UKSC 14
