30 May 2018

Burnden Holdings (UK) Ltd v Fielding & Anor [2018] UKSC 14

In Burnden Holdings (UK) Ltd v Fielding & Anor, the UK Supreme Court considered the relevant limitation period in respect of a claim by a company (by its liquidator) against its directors for alleged breach of duties.

In particular, the UK Supreme Court unanimously held that company directors, as fiduciary stewards of property belonging to the company, are deemed to be in possession of that property from the outset. Accordingly, notwithstanding the fact that they have never had legal or beneficial ownership of the company’s property, these directors cannot rely on the statute of limitations when they are sued by their company.

Facts

The claimant, Burnden Holdings (UK) Limited (“Claimant”), was a holding company with a number of trading subsidiaries which included Vital Energi Utilities Ltd (“VEUL”), a combined heat and power business. The defendants, Mr and Mrs Fielding (“Defendants”), were directors and controlling shareholders of the Claimant.

On 4 October 2007, the Claimant’s shareholders exchanged their shares in the Claimant for shares in a new holding company for the group, BHU Holdings Ltd (“BHUHL”). On 12 October 2007, a distribution in specie of the Claimant’s shareholding in VEUL to BHUHL was effected following a resolution of the Claimant’s directors and a resolution of BHUHL as the sole member of the Claimant.

Soon afterwards, the shares in VEUL were transferred to another new holding company, Vital Holdings Limited (“VHL”). Mrs Fielding subsequently sold her shareholding in VHL, and the Claimant went into liquidation in December 2009.

On 15 October 2013, the Claimant, by its liquidator, issued proceedings against the Defendants, alleging that:

  1. the distribution in specie of the Claimant’s shareholding in VEUL to BHUHL was unlawful; and
  2. the Defendants breached their duties to the Claimant in making the distribution.

As the proceedings against the Defendants were commenced after the usual limitation period of six years, the question arose whether the Claimant could rely on section 21(1)(b) of the UK Limitation Act 1980 (“Act”). This provision, which is in pari materia with section 22(1)(b) of the Singapore Limitation Act, states that no period of limitation prescribed by the Act 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 use.

The Defendants sought summary judgment dismissing the claim on the ground that it was time-barred because more than six years had elapsed since the distribution, and they succeeded at first instance in the High Court. On appeal, the Court of Appeal set aside the High Court’s order, finding that time did not run against the Claimant by virtue of section 21(1)(b) of the Act. Dissatisfied, the Defendants appealed to the UK Supreme Court.

Decision of the UK Supreme Court

The appeal was unanimously dismissed by the UK Supreme Court. In particular, the Supreme Court held that section 21(1)(b) of the Act applies to trustees who are company directors, who are to be treated as being in possession of the trust property from the outset.

The UK Supreme Court observed that directors of a company who are assumed to have participated in the misappropriation of an asset of the company are to be regarded for all purposes connected with section 21 of the Act as trustees. This is because directors are entrusted with the stewardship of the company’s property and owe fiduciary duties to the company in respect of that stewardship. Correspondingly, the company is the beneficiary of the trust for all purposes connected with section 21 of the Act.

The Defendants, however, argued that the claim did not fall within section 21(1)(b) of the Act. This was because from the beginning to the end, the shareholding in VEUL had been legally and beneficially owned by a succession of corporate entities, namely the Claimant, then BHUHL, and ultimately VHL. The Defendants therefore submitted that whilst they had from time to time been shareholders and directors in those corporate entities, the shareholding in VEUL had never been in their possession, nor previously received by them and converted to their use.

The UK Supreme Court disagreed with the Defendants, opining that section 21(1)(b) of the Act was not inapplicable merely because the misappropriated property has remained legally and beneficially owned by corporate vehicles throughout, rather than becoming vested in law or in equity in the defaulting directors.

The UK Supreme Court observed that the purpose of section 21(1)(b) of the Act was to give trustees the benefit of the lapse of time when they had done nothing morally wrong or dishonest, even if they had done something legally or technically wrong. Section 21(1)(b) of the Act was not meant to give trustees protection where they would obtain a benefit from something they ought not to have.

In contrast to an express trustee, who might not from time to time be in possession or receipt of trust property, a company director is to be treated as being in possession of the trust property from the outset. It is precisely because the directors are the fiduciary stewards of the company’s property that they are trustees within the meaning of section 21 of the Act. By virtue of being the company’s fiduciary stewards, if misappropriation of the company’s property amounts to conversion of it to their own use, they will necessarily have previously received it.

On the assumption that the distribution was unlawful, the UK Supreme Court found that the Defendants had converted the company’s shareholding in VEUL when they procured or participated in the unlawful distribution of it to BHUHL. Conversion was established because, if the distribution was unlawful, the Defendants had taken the company’s property in defiance of the company’s rights of ownership of it. Conversion of the shareholding to the Defendants’ use was also established because the Defendants stood to derive an economic benefit from their positions as 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, they had been its fiduciary stewards from the outset.

The distribution therefore fell within the ambit of section 21(1)(b) of the Act.

Comment

After the UK Supreme Court’s decision in Burnden Holdings, company directors who breach their fiduciary duties will find that it is more difficult for them to rely on the statute of limitations to avoid recovery action. Interestingly, the UK Supreme Court also observed that a finding of fraud within the meaning of section 21(1)(a) of the Act may be possible if a defaulting trustee deliberately uses a corporate vehicle to avoid legal liability. In certain cases, the corporate veil may even be lifted.

Clearly, Burnden Holdings serves to emphasise that the courts will not hesitate to look behind the complex structures which directors and/or trustees may seek to use in order to shield themselves from liability for their misconduct. This is especially significant given that the UK Supreme Court noted that trustees tend to use corporate structures to hold trust assets instead of owning them directly.

Since Burnden Holdings has yet to be considered by the Singapore Court of Appeal, it remains an open question whether the Singapore courts will interpret section 22(1)(b) of the Singapore Limitation Act, which is in pari materia with the Act, in a similar manner. Nevertheless, the Singapore courts may be inclined to such an interpretation since directors, being fiduciaries, should be held to high standards of trust and probity such that commercial and financial institutions in Singapore can function efficiently and effectively. In this regard, the UK Supreme Court’s decision is a welcome development since company directors will less likely abuse the power entrusted to them as they are now aware that they cannot rely on the statute of limitations as a shield against their own wrongdoing.

 

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