Burnden Holdings (UK) Limited v. Fielding and another

United Kingdom

28.02.2018

Civil

A trustee is entitled to the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest

Present appeal raises a well-formulated issue as to the construction of Section 21 of the Limitation Act 1980, and a rather more diffuse question as to the meaning and application of Section 32 of the Act, in both cases in relation to what is assumed to have been an unlawful distribution in specie by the Claimant company of its shareholding in a trading subsidiary by the directors of the Claimant (including the two Defendants), six years and three days before the issue of the claim form in these proceedings.

The Defendants sought summary judgment dismissing the claim on the ground that, it was statute-barred, and succeeded at first instance, before HHJ Hodge QC, sitting as a judge of the High Court. The Court of Appeal held, first, that time did not run against the Claimant company because of section 21(1)(b) of the Act and that, in any event, there was a triable issue as to whether, within the meaning of Section 32 of the Act, there had been deliberate concealment of the facts involved in the breach of duty constituted by the unlawful distribution.

It is 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 of the Act 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 of the Act.

The starting point in the construction of Section 21(1)(b) of the Act is to pay due regard to its purpose. This was laid down, in relation to its predecessor, in In re Timmis, Nixon v Smith that, “The intention of the statute was to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the statute, he would come off with something he ought not to have, ie, money of the trust received by him and converted to his own use.

Section 21 of the Act is primarily aimed at express trustees, and applicable to company directors by what may fairly be described as a process of analogy. An express trustee, such as a trustee of a strict settlement, might or might not from time to time, or indeed at all, be in possession or receipt of the trust property. The property might consist of land in the possession of a tenant for life.

By contrast, in the context of company property, directors are to be treated as being in possession of the trust property from the outset. It is precisely because, under the typical constitution of an English company, the directors are the fiduciary stewards of the company’s property that they are trustees within the meaning of Section 21 of the Act at all. If they have misappropriated the property before action is brought by the company (the beneficiary for this purpose) to recover it they may or may not by that time still be in possession of it. But if their misappropriation of the company’s property amounts to a conversion of it to their own use, they will still necessarily have previously received it, by virtue of being the fiduciary stewards of it as directors.

It may well be that, in relation to trustees who are company directors, the requirement in Section 21(1)(b) of the Act that the property be previously received by them before its conversion adds little or nothing to the conditions for the dis-application of any limitation period which would otherwise have operated in their favour. But that requirement is not otiose in relation to trustees generally, for the reason already given. Thus, for example, the trustee of a strict settlement who had, without dishonesty, committed a breach of trust by neglecting to exercise available powers to prevent dissipation of the trust property by the tenant for life, would not be deprived of the benefit of the trustee’s six year limitation period by virtue of Section 21(1)(b) of the Act. He would neither be in possession of the trust property, nor would he ever have received it nor, incidentally, would he have converted it to his own use.

In the present case, the Defendant directors converted the company’s shareholding in Vital, when they procured or participated in the unlawful distribution of it to BHUH. It was a conversion because, if the distribution was unlawful, it was a taking of the company’s property in defiance of the company’s rights of ownership of it. It was a conversion of the shareholding to their own use because of the economic benefit which they stood to derive from being the majority shareholders in the company to which the distribution was made. By the time of that conversion the Defendants had previously received the property because, as directors of the Claimant company, they had been its fiduciary stewards from the outset.

There cannot be summary judgment in favour of the Defendants in this case, both because of the recent plea of fraud and because of this Court’s decision about the meaning of Section 21 of the Act. Whatever the correct interpretation of Section 32(2) of the Act, there would still be fact-intensive issues calling for a trial. The appeal in relation to Section 32 of the Act should be dismissed because the issue is unsuitable for summary judgment. Court express no view one way or the other on the correctness or otherwise of the interpretation of Section 32(2) of the Act adopted en passant by the Court of Appeal.

Tags : Fraud Summary judgment Suitability

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