Misappropriation of company assets - directors found to be akin to a trustee

Background

This claim was brought by the liquidators of Burnden Holdings (UK) Limited ("Claimant") against two of its former directors ("Defendants") outside of the 6 year limitation period set out in section 21(3) of the Limitation Act 1980 (the "Act") for the alleged unlawful transfer of the Claimant's shareholding in a subsidiary company and the consequent breach of statutory and fiduciary duties.

The Defendants applied for summary judgment on the basis that the claim was time barred, and it was granted by the High Court. The order was then set aside by the Court of Appeal on the basis that the limitation period did not run against the Claimant under s.21(1)(b) of the Act, which provides that no limitation period applies to an action by a beneficiary  seeking to recover 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.

Additionally, the Court of Appeal held that there was a triable issue as to whether s.32 of the Act applied. S.32 provides that where any relevant fact has been deliberately concealed by the Defendant, the period of limitation does not begin to run until the claimant has or could have discovered the concealment.

The Defendant appealed this decision in the Supreme Court.

The Appeal

On 28 February 2018 the Supreme Court unanimously held that whilst s.21(1)(b) of the Act was primarily aimed at express trustees it also applied to directors of a company who are assumed to have participated in the misappropriation of an asset of the company. This is because they are entrusted with the stewardship of the company's property and owe fiduciary duties to the company in respect thereof.  

So, for the purposes of s.21(1)(b), a director is to be regarded as a trustee where property is received by a company for the benefit of controlling shareholders. The claim against the Defendants was, therefore, not time barred.

In respect of s.32 of the Act the Court declined to reach any final decision on this as the case was no longer suitable for summary judgment due to the decision reached on s.21, and a recent plea of fraud.

Significance

By allowing the case to proceed and dismissing the Defendants' application for summary judgment, despite proceedings having been issued outside of the six year limitation period under s.21(1)(b) of the Act, the Court has recognised that these types of claims are likely to arise after any limitation period due to the lack of transparency in the director/company relationship. Company directors will be treated as being in receipt or possession of company property for the purposes of s.21(1)(b), even where a director has no actual control of the company's property. It therefore provides an opportunity for liquidators and creditors to pursue company directors for equitable breaches of duty, having removed the frequently utilised limitation defence.

The case is likely to also have an impact on directors and trustees liability insurance, as more attention may now be paid to the way in which the transfer of company assets is dealt with. Insurers are likely to scrutinise their decision making process, which may lead to consequent invalidation of insurance cover.

For further information please contact Alice Daniels or James Frampton.