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Limitation periods for breach of fiduciary duties

It is common understanding that claims arising out of obligations pursuant to contracts and most statutes are subject to section 8 of the Limitation Act 1980 (LA 1980) and such claims cannot not be brought after expiration of six years from the date on which the right of action accrued, unless they fell within certain exemptions set out in specific statutes.

In the case of directors’ duties, the limitation periods will depend upon whether the duties that have been breached are equitable or tortious duties, whether there was an allegation of fraud and the remedies sought.  This short note discusses the recent case of First Subsea Ltd v Balltec Ltd and others [2017] EWCA Civ 186 and its effect on the availability of the limitation period defence to directors who fraudulently breach their fiduciary duty.

Trustee relationship

A director of the company owes a fiduciary duty towards the company. Companies Act 2006 codifies certain of those duties. This fiduciary relationship gives rise to a relationship of trust and confidence.  In the case of Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, the court made a clear distinction between two categories of constructive trustees:

  • “class 1 trustees” including real trustees who receive trust property by a transaction where both parties intended to create a trust; and
  • “class 2 trustees” where the defendant is implicated in fraud and is therefore liable to account as a constructive trustee by virtue of fraud.

Directors, by virtue of owing fiduciary duties, are classified as class 1 trustees.

Section 21 of LA 1980

According to section 21(3) of LA 1980, subject to other provisions of section 21, an action by a beneficiary to recover trust property or in respect of any breach of trust shall not be brought after the expiration of six years from the date on which the right of action accrued.  But, section 21(1) of LA 1980 sets out certain exemptions on the application of section 21(3) of LA 1980.

Section 21(1)(b) of the LA 1980 provides that no period of limitation shall apply to an action by a beneficiary under a trust being 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. Accordingly, a director who misappropriated company’s property or disposed of company’s property in breach of his fiduciary duties would not be able to rely on the limitation period defence.

Further, section 21(1)(a) provides that no period of limitation shall apply to an action by a beneficiary under a trust being an action to in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy.  Class 2 trustees would be caught by section 21(1)(a).  However, it was unclear as to whether section 21(1)(a) was engaged in the case of a class 1 trustee who commits fraud that does not involve misappropriation of property.  Did section 21(1)(a) only apply to class 2 trustees?

First Subsea

Recently, in March 2017, in the case of First Subsea the Court of Appeal unanimously held that section 21(1)(a) was engaged in cases where a class 1 trustee committed fraud and the breach did not involve misappropriation of property.

The case involved a director, Mr Emmett, of First Subsea who had breached his fiduciary duties to the company. Mr Emmett set up a rival company, Balltec Limited, to bid for a contract in competition with First Subsea. This was clearly in breach of Mr Emmett’s fiduciary duties owed to First Subsea. There was no misappropriation of property. Therefore, section 21(1)(b) of LA 1980 was not engaged. As this was not a case of constructive trust (i.e. not a class 2 trustee), the defendant argued that section 21(1)(a) was not engaged. However, Patten LJ reasoned as follows: “A director cannot be a class 1 fiduciary for the purposes of LA 1980 section 21(3) but not for the purposes of section 21(1) and for the same reason I do not see how it is possible to treat a director differently as between section 21(1)(a) and section 21(1)(b)”. It was therefore held that, as the director was involved in fraudulent breach of his fiduciary duties, section 21(1)(a) was engaged and that he could not rely on the limitation period defence.

In conclusion, there is now clear case law setting out that directors of a company who fraudulently breach their fiduciary duty will be unable to rely on the limitation period defence even though no misappropriation of company’s property is involved.