The UK Supreme Court decision in Burnden Holdings (UK) Limited v Fielding: potential implications for directors in some corporate reorganisations

If a transaction by a company amounts to an "unlawful distribution", and the company subsequently goes into liquidation, will an action for recovery of the benefits of that distribution, brought against the directors who authorised the transaction, be statute-barred if it is commenced by the liquidator of the company more than 6 years after the distribution was made?

This was the issue before the UK Supreme Court (UKSC) in Burnden Holdings (UK) Limited v Fielding and another¹ delivered on 28 February 2018. The case involved an alleged unlawful distribution by Burnden Holdings (UK) Limited (Burnden) of Burnden's shareholding in a trading subsidiary, Vital Energi Utilities Limited (Vital). The distribution had been implemented more than 6 years before proceedings were issued against some of the former directors of Burnden by the liquidator of that company, for alleged breach of their statutory and fiduciary duties under English law.

The basis of the liquidator's claim against the directors was that a distribution made by Burnden of its shareholding in Vital, the trading subsidiary, to a newly formed holding company of Burnden controlled by the directors, as part of a group reorganisation was an "unlawful distribution" under English law, because Burnden did not have sufficient accumulated realised profits to enable the distribution of its shareholding in Vital to be lawfully made.

The directors of Burnden argued that the claim was statute-barred, but based on assumed facts, the UKSC agreed with the Court of Appeal that a provision of the UK Limitation Act 1980, correctly interpreted, meant that no period of limitation was to apply to the claim. The UKSC further ruled that, for the purposes of that provision in the Limitation Act, directors of a company are to be regarded as trustees of company property, and their company is to be regarded as the beneficiary of the trust, for all purposes connected with that provision. 

Background

The claim arose out of a restructuring of a group of companies controlled by two of the directors, Mr. and Mrs. Fielding, which involved a distribution by Burnden in 2007 of its shareholding in Vital, one of its trading subsidiaries, to a new holding company of the group, also controlled by Mr. and Mrs. Fielding.  Approximately 2 years after the transaction, Burnden went into liquidation, and the liquidator who subsequently brought the claim was appointed 3 years after that. The liquidator alleged that the distribution of Burnden's shareholding in Vital was unlawful, because Burnden did not have sufficient accumulated, realised profits to enable the distribution of its shareholding in Vital to be lawfully made, in compliance with English law.

The ultimate objective of the restructuring appears to have been to facilitate the later sale to a third party for £6 million of a stake in another company, also controlled by one of the directors, that subsequently acquired the shares in Vital. It was alleged that part of the proceeds of that sale were put towards the purchase of a property by the Fieldings in 2008.

It was argued on behalf of the directors that the claim was statute-barred because it was brought more than 6 years after the date of the alleged unlawful distribution of the shareholding. However, the UKSC held that the relevant statutory provision, Section 21(1)(b) of the UK Limitation Act 1980, applied and had the effect of disapplying the normal limitation period, because the action was in effect an action by a beneficiary (i.e. Burnden) under a trust to recover from the trustee (in this case, the two directors of Burnden against whom the claim was made) trust property or the proceeds of trust property in the possession of those directors or previously received by them and converted to their use.

The UKSC based this decision on the principle that directors of a company are entrusted with the stewardship of the company's property, and owe fiduciary duties to the company in respect of that stewardship, and so are to be regarded, for the purposes of Section 21 of the Limitation Act, as trustees. The Court held that the defendant directors converted the shareholding of Burnden in the trading subsidiary to their own use, when they procured or participated in the alleged unlawful distribution of it to the new holding company which they controlled.

Comment

Decisions of the UKSC (and indeed the UK Court of Appeal) are generally regarded as persuasive, in proceedings before the higher Irish courts, where there is a scarcity of Irish authority directly on the point in issue.  As far as the principle of treating, where appropriate, the directors of an Irish company as trustees of the company's assets is concerned, the Irish Courts have long been of the same view as that held by the English Courts, i.e. that, in consequence of the fiduciary character of their duties, the directors of a limited company will be treated as if they are trustees of assets of the company which are in their hands or under their control, and that if they misapply them, they will commit a breach of trust (see e.g. the decision of the Blayney J. in the Supreme Court in Re Fredericks Inns² approving the principles set out in the judgment of Buckley LJ in Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2)).³  

What is particularly noteworthy about the decision in the Burnden case is the fact that the UKSC made it very clear that, where Section 21(1)(b) of the UK Limitation Act 1980 applies to the facts of the case, that provision operates to deprive directors of an English company, who have been involved in what was (on the assumed facts) an unlawful distribution, of a "limitation defence" to a claim brought against them by the liquidator of their company which would otherwise be statute-barred.

Section 44(b) of the Irish Statute of Limitations 1957 (as amended) is in similar (though not identical) terms to Section 21(1)(b) of the UK Limitation Act 1980. Group reorganisations involving the disposal of assets of a company to members of the company (and other companies within the same group) are as commonplace here as they are in the UK, and similar rules prohibiting the making by Irish limited companies of unlawful distributions to members of the company must also be complied with.

The Burnden decision therefore raises the interesting question of whether, if similar circumstances were to arise here, an Irish court might be persuaded that, as with the position under the UK Limitation Act, no period of limitation fixed by the 1957 statute should apply to an action brought by a liquidator of an Irish limited company against its former directors for the recovery of trust property (e.g. shares or other assets owned by the company) or the proceeds thereof which were transferred in circumstances amounting to an unlawful distribution in breach of the distribution rules set out in Chapter 7 of Part 3 of the Companies Act 2014.

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