Burnden Holdings (UK) Ltd v Fielding & Anor (2018)
The court construed the Limitation Act 1980 s.21(1)(b), which provided that no limitation period was applicable to actions by a beneficiary under a trust to recover trust property in the possession of the trustee or previously received by him and converted to his use. The mere fact that misappropriated trust property had remained legally and beneficially owned by corporate vehicles throughout the misappropriation, rather than becoming vested in law or equity in the defaulting directors, did not mean that s.21(1)(b) was inapplicable.
The defendants to a claim concerning a transfer of shares appealed against the Court of Appeal's construction of the Limitation Act 1980 s.21(1)(b).
The defendants were the former directors and controlling shareholders of the claimant holding company. The claimant operated various trading subsidiaries. In October 2007, a number of share transfers took place between the claimant, its subsidiaries, and a new holding company of which the defendants were also the majority shareholders. In particular, the claimant's shareholding in a subsidiary (V) was transferred to the new holding company. The claimant then went into liquidation. Just over six years later, the liquidator issued proceedings against the defendants for the unlawful distribution in specie of the claimant's shareholding in V. His case was that the defendants had received trust property belonging to the claimant, and had converted it to their own use. He sought an account of profits or equitable compensation. The defendants were granted summary judgment on the ground that the liquidator's claim was statute-barred. The Court of Appeal set aside summary judgment on the basis that, under s.21(1)(b) of the Act, no limitation period applied to the claim. It rejected an argument that the relevant trust property, namely the claimant's shareholding in V, had never been in the defendants' possession or converted to their use. It ruled that it was common for companies to have the beneficial ownership of an asset, where the entire economic benefit was available for the shareholders, and that, in order to achieve its purpose, s.21(1)(b) had to be construed as including within its terms a transfer (in breach of trust) to a company directly or indirectly controlled by the defaulting trustee. It was common ground that, as directors of an English company who were assumed to have participated in a misappropriation of the company's asset, the defendants were to be regarded as trustees, because they had been entrusted with the stewardship of the claimant's property and owed the claimant a fiduciary duty. It was assumed, for the purposes of the hearing, that there had been an unlawful distribution by the defendants, although that fact remained contested in the main proceedings.
The sole issue was whether the defendants were precluded by the operation of s.21(1)(b) from relying on the six-year limitation period in s.21(3).
Scope and application of s.21(1)(b) - The deliberate use of a corporate vehicle to distance a defaulting trustee from the receipt or possession of misappropriated trust property would often justify a finding of fraud within the meaning of s.21(1)(a) of the Act. However, the mere fact that misappropriated trust property had remained legally and beneficially owned by corporate vehicles throughout the misappropriation, rather than becoming vested in law or equity in the defaulting directors, did not mean that s.21(1)(b) was inapplicable. The starting point in the construction of s.21(1)(b) was to pay due regard to its purpose, namely that it gave a trustee the benefit of the lapse of time where he had done something legally or technically wrong, but nothing morally wrong or dishonest. The provision had not been intended to enable a trustee to gain something that he should never have had, Timmis, Re  1 Ch. 176 approved and JJ Harrison (Properties) Ltd v Harrison  EWCA Civ 1467 applied. Section 21 as a whole was primarily aimed at express trustees and was applicable to company directors by analogy. Express trustees might not necessarily be in possession or receipt of the trust property; directors, by contrast, were to be treated as being in possession of it from the outset by virtue of being the fiduciary stewards of it (see paras 16-19 of judgment).
Did s.21(1)(b) apply to instant case? Yes. The defendants converted the claimant's shareholding in V when they procured, or participated in, the unlawful distribution of it to the new holding company. It was a conversion because, assuming the distribution was unlawful, it was a taking of the claimant's property in defiance of the claimant's ownership rights. It was a conversion to their own use because of the economic benefit which they stood to derive from being the majority shareholders in the recipient company. By the time of the conversion, the defendants had previously received the property because, as directors in the claimant, they had been its fiduciary stewards from the outset (para.22).
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