Limitation in the Recovery of Trust Property

 In Trusts

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Limitation in the Recovery of Trust PropertyBurnden Holdings (UK) Limited (Respondent) v Fielding and another (Appellants) [2018] UKSC 14

Introduction

Despite the corporate insolvency origins of this decision, it has far reaching implications for any private client practitioner. As noted in paragraph 35 of the Court of Appeal’s decision, “The use of companies to hold assets, where the beneficial ownership of the assets is vested in the company but the entire economic benefit is available for the shareholders, has of course been commonplace for many years.” There are many reasons for utilising such structures which are outside the scope of this article. However, this decision is very important for its interpretation of section 21(1)(b) of the Limitation Act 1980 which concerns the absence of a limitation period when recovering trust property (or its proceeds) from a defaulting trustee.

The Salient Facts

The Claimant was a holding company with a number of subsidiaries – K2, Cestcon and Vital. The directors of the Claimant were at all material times, the Defendants. On 4 October 2007, the shareholders of the Claimant exchanged their shares in the Claimant for shares in a new holding company BUHU. On 12 October 2017, the directors of the Claimant unanimously approved a distribution-in-specie of the Claimant’s shareholding in Vital to BHUH. Following a number of other transactions, in December 2009 the Claimant went into liquidation.

The liquidator issued a claim against the Defendant directors arguing that the distribution-in-specie of the Claimant’s shareholding in Vital to BHUH was unlawful in that statutory procedure was not followed and it was made in breach of fiduciary duty and/or breach of various statutory duties under the Companies Act 2006. The Defendants applied for summary judgment on the basis the claim was issued more than six years after the distribution on 12 October 2007. At first instance, the limitation argument was successful. However, the Court of Appeal held that section 21(1)(b) of the Limitation Act 1980 applied not only where the trustee directly and personally acquired the trust property but also where trust property was transferred to a company directly or indirectly controlled by the trustee. Therefore, no limitation period was applicable. The Defendants appealed to the Supreme Court primarily arguing the relevant trust property (the shareholding in Vital) was never in the possession of the Defendants, or previously received by them and converted to their use.

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The Law

21.— Time limit for actions in respect of trust property.

  • No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—
    • in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
    • 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.
  • Where a trustee who is also a beneficiary under the trust receives or retains trust property or its proceeds as his share on a distribution of trust property under the trust, his liability in any action brought by virtue of subsection (1)(b) above to recover that property or its proceeds after the expiration of the period of limitation prescribed by this Act for bringing an action to recover trust property shall be limited to the excess over his proper share.

This subsection only applies if the trustee acted honestly and reasonably in making the distribution

  • Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.

For the purposes of this subsection, the right of action shall not be treated as having accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession. […]

The Decision

Whilst the Supreme Court declined to express a final view on the “potential minefield” of section 32, it unanimously dismissed the appeal, finding that, for all purposes connected with section 21, directors of English companies are treated as trustees and the company treated as the beneficiary [¶11]. The Court considered that, on the assumed facts, the Defendant directors had converted the Claimant company’s shareholding in Vital when they procured or participated in the unlawful distribution of it to BHUH; it was conversion because, if the distribution was unlawful, it was taking the Claimant company’s property – the shareholding in Vital – in defiance of the Claimant’s rights of ownership in it [¶21], and the directors would have received it by virtue of being the fiduciary stewards of the trust property as directors [¶19]. In passing, the Supreme Court noted that the Court of Appeal held that an equitable compensation claim could also fall within section 21(1)(b) and this was not challenged on appeal [¶13].

Practical Points

The decision has two main implications moving forward: First, it offers greater protection for beneficiary-stakeholder in such trust structures. This is particularly important because the nature of the trustee-beneficiary relationship means that claims are harder to discover and come at a considerable cost risk. Second, the absence of a limitation period in cases falling within section 21(1)(b) will lead to greater uncertainty from the perspective of a retiring trustee and this will often be an important factor to consider as part of any retirement agreement.

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