Contentious insolvency update

The Supreme Court has today ruled that section 21(1)(b) of the Limitation Act 1980 (“LA 1980”)^_[1] applies to trustees who are company directors, who are to be treated as being in possession of trust property of a company from the outset.

The facts in the case of Burnden Holdings (UK) Limited (Respondent) v Fielding and another (Appellants) [2018] UKSC 14 are as follows:

1. Prior to 4 October 2007, Mr and Mrs Fielding were directors and controlling shareholders of Burnden Holdings (UK) Limited (“the Company”). The Company was the holding company of a number of trading subsidiaries which included Vital Energi Utilities Ltd (“Vital”).
2. On 4 October 2007, the shares of the Company were exchanged for shares in a new holding company, BHU Holdings Ltd (“BHUH”).
3. On 12 October 2007, the Company effected a distribution in specie of its shareholding in Vital to BHUH. Subsequently, the shareholding in Vital was transferred to another new holding company. Mrs Fielding then sold her shareholding in the new holding company, with the Company entering into liquidation.
4. Following more than 6 years from the distribution of its shareholding, on 12 October 2007 (and therefore outside of the six-year limitation period prescribed by section 21(3) LA 1980) ^[2], the Company (then in liquidation) issued a claim against Mr and Mrs Fielding for the unlawful distribution of the Company’s shareholding in Vital. As a result, Mr and Mrs Fielding applied for summary judgment on the basis that the claim was time barred. The High Court granted summary judgment in favour of Mr and Mrs Fielding on the basis that the claim was time-barred.
5. Following an appeal launched by the Company, the Court of Appeal set aside the order for summary judgment on the basis that the limitation period did not run against the Company, because section 21(1)(b) of the LA 1980 applied. The matter was then appealed by Mr and Mrs Fielding.

The Supreme Court dismissed Mr and Mrs Fieldings’ appeal on the following basis

1. Mr and Mrs Fielding are regarded as trustees for the purposes of section 21 LA 1980 as they are entrusted with the stewardship of the Company’s property and owe fiduciary duties to the Company in respect of that stewardship. The Company is regarded as the beneficiary of the trust under section 21 LA 1980.
2. Section 21(1)(b) LA 1980 does not become inapplicable because the misappropriated property has remained legally and beneficially owned by corporate vehicles.
3. The purpose of section 21(1)(b) LA 1980 is not to protect a trustee where he would come off with something he ought not to have.
4. Section 21 LA 1980 is applicable to company directors by a process of analogy. Directors are to be treated as being in possession of the trust from the outset as they are fiduciary stewards of the Company’s property. If directors’ misappropriation of Company property amounts to a conversion of it to their own use, they will necessarily have previously received it, by virtue of being the fiduciary stewards of it as directors.
5. In this case, Mr and Mrs Fielding converted the Company’s shareholding in Vital when the Company effected the unlawful distribution of it to BHUH. Before the conversion, Mr and Mrs Fielding had already received the property because they had been the Company’s fiduciary stewards from the outset.

This case is of particular importance for office holders who may have claims against directors who have retained sums of monies that are due to a company, including amongst other things claims for repayment of director’s loan accounts, unlawful dividends and other payments. There is no limitation date that will stop an office holder seeking to recover sums of money held on trust by company directors. This will not apply, however, to other forms of misfeasance actions in respect of which the limitation period is 6 years from the act or omission complained of.