News & Articles

Misappropriated company assets? The Limitation Act won’t help you.

by on

Burnden v Fielding [2018] UKSC 14

This is a significant Supreme Court decision clarifying the application of the Limitation Act 1980 where liquidators of a company are bringing claims against directors for misappropriation of company assets. In short, following this decision there is no limitation period for these types of claims.

Background

On 12 October 2007 the directors of Burnden made a transfer of its shareholding in a trading subsidiary to another company in which the directors also had an interest. In December 2009 Burnden entered into liquidation. Subsequently a claim was brought against the directors by Burnden, alleging a breach of their directors’ duties by effecting the transaction which, Burnden claimed, was unlawful. The claim was issued more than 6 years after the transaction date.

Limitation Act 1980

The question for the Supreme Court was whether Burnden’s claim was time-barred under the Limitation Act 1980 (“LA 1980”), or whether Section 21(1) of the LA 1980 applied, thereby extending the limitation period indefinitely.

Section 21(1) LA 1980 provides as follows (emphasis added):

  • No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action –
  • in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

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 ( Supreme Court decision On the assumed facts before the Supreme Court the directors had misappropriated Burnden’s property by causing an unlawful distribution of its asset. The Supreme Court reiterated the point that the protection offered by Section 21 LA 1980 is designed to give a trustee the benefit of the lapse of time in respect of a legal or technical wrong, but not to protect a trustee who would otherwise “come off with something he ought not to have, i.e., money of the trustee received by him and converted to his own use”.The LA 1980 protection is not intended to be offered to directors who 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.

Here, the court held that the directors had received the company’s property and converted that property to their own use, and thus would not be protected by the LA 1980.

It was irrelevant, the Supreme Court found, that Burnden’s property (the share) had moved between separate legal entities and had never been directly received by the directors. The directors were, as Lord Briggs phrased it, ‘fiduciary stewards’ of a company’s property and “directors are to be treated as being in possession of the trust property from the outset”

The directors of Burnden transferred its property i.e. the share, to a separate company over which they had control, meaning they would receive economic benefit from that transfer, effectively converting the share to their own use.

It is clear from this that decision that directors of companies, will be held to have ‘previously received’ company property for the purpose of Section 21(1)(b) LA 1980 simply by virtue of their directorship.

Comment

Prior to this decision, a director who had received assets in breach of trust could assert a limitation defence to escape liability. The position is now clarified. Where directors of a company misappropriate property or other assets by transferring them to another company, which they also control and thus benefit from, there will be no limitation period.

It seems that directors who have effected a transaction of this nature cannot hide behind the corporate veil and claim that they did not directly receive the company property.

This decision is of particular importance to liquidators who are charged with investigating a company’s affairs. Practically, this decision allows liquidators of a company a lengthier period within which to investigate the company’s affairs and consider a potential claim against a director for his/her actions.

Often it is not until a company has entered liquidation that directors’ wrongdoings come to light, which can be some years later. Therefore, this decision will be welcomed by those involved with insolvent companies as remedies against the directors, in cases such as this, will not be time-barred.