Directors held to be trustees of company property
08 March 2018
The Supreme Court has held that directors should be treated as being in possession of company property from the time of their appointment because, as fiduciary stewards they are trustees of trust property within the meaning of section 21(1)(b) of the Limitation Act 1890 (“the Act”).
In Burnden Holdings (UK) Limited v Fielding and Another  UKSC 14 the Court was asked to construe section 21(1)(b) of the Act and determined that a claim by the company against the directors was not subject to the normal 6-year limitation period within which legal proceedings had to be commenced.
The assumed facts in the case were that the company, Burnden Holdings (UK) Limited (“Burnden”), owned the entire shareholding of three subsidiary companies and that Mr and Mrs Fielding were both directors and shareholders of Burnden. Through various arrangements, Burnden’s shareholding in one of the subsidiaries (Vital Energi Utilities Limited (“Vital”)) was distributed to a new holding company, BHU Holdings Limited (“BHUH”) of which Mr and Mrs Fielding were the majority shareholders (having acquired shares in BHUH in exchange for their shares in Burnden).
The shareholding in Vital was sold for £6m and of that sum, £3m was used to purchase a property by Mr and Mrs Fielding.
The Liquidator of Burnden claimed that the distribution of the shareholding in Vital by Burnden to BHUH was unlawful and that Mr and Mrs Fielding had breached their duties to Burnden.
Legal proceedings were issued against Mr and Mrs Fielding but on a date which was 6 years and 3 days after the date of the alleged distribution of the shareholding in Vital. Mr and Mrs Fielding claimed that the proceedings had been commenced outside the 6 year limitation period and sought summary judgment on their limitation defence.
Burnden argued that no limitation period prescribed by the Act should apply to the claim because of section 21(1)(b) of the Act. It was argued that the claim by the company against former directors was an action by a beneficiary under a trust (the company being the beneficiary). The claim made was to recover from trustees (the trustees being Mr and Mrs Fielding as directors) trust property or the proceeds of trust property in the possession of, or previously received by, the trustees and converted to their use.
The Supreme Court held that, on the assumed facts of the case, Mr and Mrs Fielding should be considered as being in possession of the property of Burnden from the outset. The court considered that even as minority directors, they were stewards of Burnden’s property and as shareholders in BHUH to which the shareholding in Vital had been distributed, they stood to derive benefit from the distribution and had converted Burnden’s shareholding in Vital to their own use.
The result of the decision is that company directors who benefit from arrangements involving company property are deprived of a limitation defence. Additionally, the door may have been opened for arrangements to come under much greater scrutiny by those that take control of the affairs of the company after the directors have left. It will be interesting to see if these factors impact on the availability or cost of Directors and Officers insurance.