On 28 February 2018, the Supreme Court ruled on the proper construction of section 21(1)(b) of the Limitation Act 1980 (Act).
The issue arose in the context of a claim brought by Burnden Holdings (UK) Limited (in liquidation) (Burnden) against its former directors Gary and Sally Fielding. The parties are no strangers to litigation having all been defendants to the long-running litigation brought by Ultraframe (UK) Limited. The claim brought by Burnden relates to a distribution in specie of the shares of one of its former subsidiaries (Vital) which Burnden alleges was unlawful.
Burnden’s claim was struck out at first instance on grounds of limitation, it being asserted by Mr & Mrs Fielding that the claim had been issued more than 6 years after the distribution was made. At first instance, Burnden argued that the relevant period of limitation was postponed by section 32 of the Act but that was rejected by the judge.
On appeal, reliance was also placed on sections 21(1)(a) and 21(1)(b) of the Act. The Court of Appeal upheld Burnden’s appeal on section 21(1)(b) and section 32 of the Act but not section 21(1)(a) (on the basis they did not consider that fraud had been adequately pleaded). Mr & Mrs Fielding were given permission to appeal to the Supreme Court.
In a unanimous decision, the Supreme Court dismissed Mr and Mrs Fielding’s appeal. The judgment analyses in some detail the proper construction of section 21(1)(b) in respect of which there is remarkably little prior case law. Section 21(1)(b) provides that no period of limitation shall apply to an action by a beneficiary under a trust being an action “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 own use.”
It is well established law that company directors are to be regarded as trustees for the purposes of section 21 and the relevant company as the beneficiary. In this case, the relevant trust property was the share in Vital. Mr and Mrs Fielding asserted that Burnden could not rely on section 21(1)(b) because they had never been in possession of the Vital share nor had they previously received it and converted it to their own use. Rather, the share had always been in the ownership of various corporate entities (including Burnden) and whilst they had been directors and shareholders of those entities, reliance could only be placed on section 21(1)(b) if the corporate veils of those entities was lifted.
The Supreme Court referred to the purpose of section 21(1)(b) which was not to permit a trustee to come away with something he ought not to have. In relation to directors, they were to be treated as being “in possession” of company property from the outset on the basis they are fiduciary stewards of that property.
Accordingly, on the assumed facts of this case, Mr and Mrs Fielding converted Burnden’s shareholding in Vital when they procured or participated in the unlawful distribution of the share. The Vital share was converted to their own use because of the economic benefit they derived as shareholders in the company to which the shareholding was distributed. By the time of the conversion, the Vital share had previously been received by Mr and Mrs Fielding in their capacity as the fiduciary stewards of Burnden’s assets.
The judgment does not deal with section 32 in any detail but concludes that it involves fact sensitive issues which render it unsuitable for summary determination.
Louise Bell, Rachel Bennet and Preetha Gopalan of Enyo Law represented Burnden in the Supreme Court.