Burnden Holdings (UK) Ltd (In Liquidation) v Fielding (2016)
A judge had erred in granting summary judgment to the directors of a company in liquidation in respect of a claim for breach of their fiduciary duty, on the basis that the claim was time-barred. No limitation period applied to the claim by reason of the Limitation Act 1980 s.21(1)(b) and, alternatively, the availability of a postponed limitation period, such that the proceedings had been started in time under s.32, could not be determined on an application for summary judgment.
A company in liquidation appealed against a decision that its claim against the respondent directors for breach of fiduciary or statutory duty was time-barred.
The directors were also controlling shareholders of the company, which was a holding company. A subsidiary company (V) operated in the energy sector. In July 2007, an energy company offered to buy a shareholding in V. On 4 October 2007, the company's shareholders exchanged their shares for shares in a new holding company. On 12 October, the directors approved a distribution of the shareholding in V to the new holding company. On 15 October, the new holding company went into members' voluntary liquidation. Further to reconstruction agreements made on the same day under the Insolvency Act 1986 s.110, the liquidator of the new holding company transferred the share in V to a new holding company and the shares in the appellant company to a further new holding company. Those two new holding companies issued shares to the former shareholders, mirroring their shareholdings in the appellant company. On 19 October, the second respondent director sold a 30% shareholding in the first new holding company to the energy company for £6 million. A year later, the appellant company went into administration and then into liquidation. A liquidator was appointed and the claim against the directors was issued on 15 October 2013. It was not disputed that the claim had been issued more than six years after the date of the distribution. The directors' application for summary judgment was confined to the question of limitation.
(1) The date on which the cause of action accrued had to be identified. The company argued that a cause of action arose on the directors' receipt of the share in V, on 15 October. The directors had never directly received or held the share, it was transferred by way of distribution to the new holding company on 12 October, and then transferred by the liquidator to the second new holding company on 15 October pursuant to the reconstruction agreement. If the directors had received the share in V, they did so on 12 October, the subsequent transfer being no more than a rearrangement of the existing ownership. The cause of action therefore accrued on 12 October 2007 (see paras 15-16, 27-29 of judgment).
(2) The time limits for actions in respect of trust property were governed by the Limitation Act 1980 s.21. The primary limitation period for a claim in respect of the distribution was six years. No claim of fraudulent breach of duty had been clearly made or properly particularised, so s.21(1)(a) was not applicable. With regard to s.21(1)(b), the company contended that the directors had received trust property, being the share in V, and had converted that trust property to their own use. The directors argued that they had never received the share in V for the purposes of s.21(1)(b). However, the significance of control of a company was that it enabled the controller to obtain the benefit of the company's assets, the assets themselves, or their proceeds of sale, provided that all statutory and other legal restrictions were observed. If s.21(1)(b) were construed to apply only to those cases where the trustee directly and personally acquired trust property, its evident purpose would be much constrained and easily avoided. A construction which included a transfer to a company directly or indirectly controlled by the trustee was within the meaning of the provision. An account of profits did not come within s.21(1)(b), but equitable compensation did, particularly where the trustee's indirect interest in the trust assets had been converted to the trustee's use. It followed that, insofar as the claim related to the indirect interests in the share in V received by the directors, it was one to which no limitation period applied by reason of s.21(1)(b), Miller v Bain (Director's Breach of Duty)  1 B.C.L.C. 266 applied (paras 30-39).
(3) Alternatively, the appellant company relied on s.32(1)(b). The judge said that there was no realistic prospect of establishing a deliberate breach of duty, but was in effect saying that there was no prospect of establishing any breach of duty or that the distribution had been unlawful. The essence of the directors' case was that they had taken the necessary steps to ensure that the distribution would be lawful. The appellant company did not accept that those steps were taken, which raised an issue of fact that could not be determined on a summary application. The directors further argued that, even assuming that there had been a deliberate breach of duty, it could not be said that the breach was unlikely to be discovered "for some time" for the purposes of s.32(2). However, a postponement of the limitation period for only two to three days was sufficient to defeat a defence that the claim was time-barred. There was a contrast between a breach of duty which would be discovered immediately and one which would not be discovered for some time. "Some time" could be a very short period, for example a period of a few days. The question of when the appellant company could have discovered the breach with reasonable diligence could be answered only after a detailed examination of the evidence relating to the events of October 2007, JD Wetherspoon Plc v Van De Berg & Co Ltd  EWHC 1044 (Ch),  P.N.L.R. 28 applied (paras 40-55).