Directors, misappropriation and limitation: the shield won’t work

In a positive turn of events for insolvency practitioners, the Supreme Court last month upheld the Court of Appeal ruling in Burnden Holdings (UK) Limited v Fielding & Others [2018] UKSC 14 and, in doing so, established that where a director misappropriates company assets for his own benefit, there will be no limitation period for a claim brought to recover such assets. This is in stark contrast to the law on claims for breach of trust (which are not fraudulent), that must be issued within six years of the breach, pursuant to section 21(3) of the Limitation Act 1980 (“the Act”).

The appeal to the Supreme Court went to the construction of section 21(1)(b) of the Act, and additionally, to the meaning and application of section 32 of the Act: in both cases, in relation to what was assumed to have been an unlawful distribution in specie by the claimant company, Burnden Holdings (UK) Limited, of its shareholding in a trading subsidiary by the directors (including the two defendants), six years and three days before the issue of the claim form in the proceedings.

The liquidators, who brought the claim on behalf of the company, relied on section 21(1)(b) of the Act, which provides that no period of limitation applies to an action by a beneficiary to recover, from the trustee, property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use. As to section 32, it was the company’s position that questions relating to a postponed limitation period could not be determined on an application for summary judgment, as had been made by the defendants.

It was previously the defendants’ argument that a claim for an account of profits or equitable compensation did not fall within section 21(1)(b). This was rejected by the Court of Appeal and was not challenged on appeal to the Supreme Court. Instead, the defendants argued on appeal that the relevant trust property (namely, the shareholding in the subsidiary) was never in the possession of the defendants, but was in fact in the legal and beneficial ownership, and therefore possession, of a succession of corporate entities. The Supreme Court rejected this submission. It was held that section 21(1)(b) applied on the basis that the directors, as fiduciary stewards and so trustees of the company property, were considered to be in possession of the trust property from the outset (presumably, of their appointment).

By reference to established case law, the court confirmed that “it was common ground that, as directors of an English company who are assumed to have participated in a misappropriation of an asset of the company, the Defendants are to be regarded for all purposes connected with section 21 as trustees. This is because they are entrusted with the stewardship of the company’s property and owe fiduciary duties to the company in respect of that stewardship… By the same token, the company is the beneficiary of the trust for all purposes connected with section 21.”

Accordingly, it was held by unanimous agreement that where a director has misappropriated company property for his own benefit, section 21(1)(b) of the Act will apply; the defence of limitation is not available to the defaulting director. The Supreme Court’s interpretation of section 21 rendered any further consideration of section 32 otiose.

The decision will come as a welcome victory for insolvency practitioners who, very often, are appointed long after company assets have been misappropriated; and also to creditors and other stakeholders of the company, who are keen to ensure that remedies against directors are preserved. Conversely, the outcome will have wider implications on directors seeking to rely on the much employed defence of limitation; a concern that will no doubt be shared by trustees and D&O indemnity insurers alike.

If you would like to discuss the above in any more detail please feel free to contact Simeon Gilchrist and Sophia Bompas – Partner, or any member of our Restructuring & Insolvency Team.

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