The Supreme Court[1] has clarified that where a director wrongfully transfers company assets away to another company he owns or is director of, there will be no time limit for a claim to recover those misappropriated assets.

For insolvency practitioners, sometimes appointed a long time after the wrongdoing in question, this is welcome clarification that directors cannot hide behind this particular defence where they, indirectly through corporate structures, have benefited at the expense of the company and its creditors.

Background

This decision is one in a long-running dispute between a liquidator and the company’s former directors and shareholders. For this decision, the Supreme Court had to assume the other facts the liquidator had set out were the true picture.

The story here is:

  • Burnden Holdings was a holding company whose controlling shareholders were Mr and Mrs Fielding.
  • Burnden Holdings owned several trading subsidiaries, which operated in two distinct areas, heat and power and conservatory construction.
  • A third party wanted to buy a 30% stake in the heat/power subsidiary company, Vital Energi. The condition included that the subsidiary would be separated from the conservatory construction business.
  • In basic summary, through a hive-up:

o    A new holding company was inserted above Burnden Holdings (shareholding mirrored original Burnden Holdings’ shareholding)

o    Burnden Holdings made a distribution of its shares in Vital Energi

o    Through a reconstruction agreement under the Insolvency Act, the shares in Vital Energi ended up being owned by another holding company (shareholding mirrored original Burnden Holdings’ shareholding)

o    Mrs Fielding sold a 30% stake in the new holding company to the third party for £6m. She loaned half the sum to Burnden Holdings and spent the rest for her own purposes.

  • Nearly a year later, Burnden Holdings, and the conservatory construction subsidiaries entered administration, and the liquidator was appointed over Burnden Holdings the following year.
  • The liquidator challenged the distribution of the shares in Vital Energi by Burnden Holdings on the basis it was unlawful and was a breach of trust by Mr and Mrs Fielding, as directors.
  • The liquidator issued the claim 6 years and 3 days after the distribution.

The Limitation Issue

Unless this claim could come within one of the exceptions in the Limitation Act 1980, both sides agreed the liquidator’s claim would be out of time. Claims for a breach of trust (which is not fraudulent) must be started within 6 years.

The liquidator depended on the Court’s interpretation of section 21(1)(b):

“No period of limitation… shall apply to an action… to recover from the trustee 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”

Here:

“trustee” = directors

“trust property” = shares in Vital Energi (owned originally by Burnden Holdings)

It’s obvious that where a company director transfers company property to himself in breach of duty, this section will apply. For example, a director transfers a £250k property to himself and pays nothing to the company. This section will mean that no time limit applies to an action by an administrator or liquidator or the company to recover the property (or its value) for the company and its creditors.

The problem the Court had to consider was that the shareholding in Vital Energi had always been in the legal and beneficial ownership of a succession of corporate entities (and not their ultimate shareholders – Mr and Mrs Fielding). Shareholders and companies are separate entities, and the law does not like treating a company’s assets as belonging to its shareholders. Could the misfeasant directors escape liability because of the passage of time simply because they did not ever directly own the shares in Vital Energi?

The Decision

The Court of Appeal had already recognised that on a literal reading of the law, the liquidator had a problem. However – David Richards LJ, a leading insolvency judge had said that “such an interpretation would be a recipe for avoidance by [directors] because, in the modern world, it is commonplace for companies to be used to hold assets, where the .. ownership is vested in the company, but the entire economic benefit is available for the shareholders”.

The Supreme Court also started with their analysis of the section by looking at its purpose. They held the purpose of the section was not to protect trustees/directors who have benefited from something they should not have done. The section was to give trustees/directors the benefit of a time lapse where they might have done something legally wrong, but not morally wrong or dishonest. They considered the distribution was a “conversion to [their] use” because of the economic benefit which the directors stood to derive from being the majority shareholders in the company to which the distribution was made. They held the directors “had previously received the property because, as directors of [Burnden Holdings], they had been its … stewards from the outset”.

In an earlier case[2], the court held that this section also applied to the situation where a director, in breach of duty, transferred property to a second company he was also a director (but not shareholder like this case) of. The Supreme Court has supported this view through this judgment.

[1] Burnden Holdings (UK) Limited v Fielding [2018] UKSC 14

[2] Re Pantone 485 Limited; Miller v Bain [2002] 1 BCLC 266

 


Leave a Reply

Your email address will not be published. Required fields are marked *

10 + five =

This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.