The Supreme Court on limitation in trustee cases

Limitation in trustee claims can be complex. On 28 February 2018 the Supreme Court published its judgment in Burnden Holdings (UK) Limited v Fielding. We look at the effect of this decision.

Limitation period for breach of trust

In summary, section 21 of the Limitation Act 1980 provides that generally the limitation period for breach of trust is six years from the date of breach.

There are however some exceptions to this rule, such as if there has been a fraudulent breach of trust by the trustee, or if the action is by a beneficiary to recover trust property or the proceeds of trust property from the trustee. It is this latter exception which was considered by the Supreme Court and which is covered here. For more general information on limitation in trustee claims, see our previous briefing.

Background to Burden

In Burden the defendant directors sought summary judgment on the basis that the claim against them was issued more than six years from the alleged breach of trust. At first instance summary judgment was granted, but was overturned by the Court of Appeal. The defendants then appealed to the Supreme Court.

The facts

The claimant company was a holding company with a number of trading subsidiaries, including Vital Energi Utilities (Vital). Mr and Mrs Fielding, the defendants, were the directors and controlling shareholders of the claimant.

In July 2007 Scottish and Southern Energy plc (SSE) offered to purchase a 30 per cent shareholding in Vital for £6 million.

Various transactions were carried out to facilitate the sale to SSE. This included: 

• The distribution of Vital’s shares, which was approved by the defendants in their capacity as directors of the claimant. 
• The liquidation of the old holding company.
• The creation of a new one which was also owned by the defendants and to which the shares in Vital were transferred.

The transaction culminated with Mrs Fielding selling her 30 per cent shareholding in the new holding company (and so Vital) to SSE for £6 million.

The claimant and its other subsidiaries failed a year or so later.

For the purpose of the summary application, it was assumed that the distribution of the claimant’s shares in Vital was unlawful, and that the defendant directors had acted in breach of their fiduciary duties.

Section 21(1)(b)

Section 21(1)(b) of the Limitation Act 1980 states:
“No period of limitation prescribed by this 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 possession of the trustee, or previously received by the trustee and converted to his use.”

It was accepted that directors are to be regarded as trustees because they are trusted with company property and owe fiduciary duties to the company. Similarly the company is the beneficiary of the trust.

It was also common ground that unless an exception to the usual limitation period applied, such as section 21(1)(b), the claim was time-barred.

Section 21(1)(b) concerns actions to recover trust property or proceeds from trust property from the trustee. The defendants argued that the shares in Vital had at all times been held by companies of which they were shareholders. Consequently the shares had never been in their possession, or received by them, or converted to their use, so section 21(1)(b) was of no application. It was submitted that to hold otherwise was inappropriate since it ignored the fundamental company law principle that a company was a separate legal entity. Further, this was not an exceptional case where it was appropriate to “lift the corporate veil” and attribute the company’s actions to the directors/shareholders.

The Supreme Court’s decision

Like the Court of Appeal before it, the Supreme Court considered that the starting point should be the purpose of section 21. This was not to protect the trustee where “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”.

Directors are to be treated as in possession of trust property from the outset, as they are the stewards of company property. If they have misappropriated company property then the company can bring an action against the director, by which time the property may or may not still be in the director’s possession. If the property is not in the director’s possession, but the property was converted to the director’s own use, the director will necessarily have previously received it by virtue of being the fiduciary steward of it as director. Any argument that section 21(1)(b) does not apply, because the director never received the property, will fail.

Applying this to the facts of the case, it was found that the defendant directors had converted the claimant’s shareholding in Vital by unlawfully distributing it to another company. It was a conversion because it was the taking of the claimant’s property for the directors’ own economic benefit.

There was also an appeal in relation to section 32 of the Limitation Act 1980 which concerns deliberate concealment. However, the Supreme Court declined to analyse this “potential minefield”.

Conclusion

This case is a further reminder that limitation in trustee claims can be difficult and that where limitation may be an issue, it may therefore be prudent to seek advice to ensure that a potential defence is not lost.