The case of Burnden Holdings (UK) Limited (in liquidation) v (1) Gary John Fielding (2) Sally Anne Fielding [2016] determined whether a claim in respect of breach of duty against two directors of Burnden Holdings (UK) Limited (Burnden) was time-barred. The alleged breach of duty was in connection with a distribution in specie. The Court of Appeal overturned the High Court’s decision and held that section 21 of the Limitation Act 1980 (LA 1980) applied so that the claim was not subject to the usual period of limitation. In his judgment, David Richards LJ reviewed the requirements for a distribution in specie to be made lawfully.
Facts
Mr and Mrs Fielding were directors and controlling shareholders of Burnden, a holding company with three subsidiaries, including Vital Energi Utilities Limited (V) which operated a combined heat and power business.
Around July 2007 Scottish & Southern Energy plc (SSE) offered to buy a 30% shareholding in V for £6 million. The 30% sale was effected by transferring V out of the group by (1) a share for share exchange on 4 October 2007 whereby Burnden’s shareholders exchanged their shares for shares in a new holding company (H2); (2) a distribution of Burnden’s share in V to H2 on 12 October 2007; and (3) a section 110 Insolvency Act 1986 reorganisation whereby the liquidator of H2 transferred the share in V to another company (H3) and the shares in Burnden to a new company (H4), in each case in exchange for new shares. The result was that the former shareholders of Burnden held shares in the same proportions in the two new holding companies, one of which was the new parent company of V.
On 19 October 2007, Mrs Fielding sold a 30% shareholding in H3 (the new parent company of V) to SSE for £6 million.
The substantive claim
In 2009 Burnden went into liquidation and subsequently proceedings were issued against the directors for breach of fiduciary duty or statutory duty in relation to the distribution on the basis that Burnden had insufficient distributable profits to implement the distribution in specie and, therefore, the statutory conditions for a lawful distribution were not satisfied.
The Fieldings entered into the transaction in breach of duty and/or did so without reasonably satisfying themselves as to the lawfulness of the transaction. It was alleged that the distribution was a substantial reason for Burnden going into administration less than twelve months later and into liquidation in December 2009. It was also alleged that the dividend in specie was for the benefit of the Fieldings and extracted a valuable asset without any benefit to Burnden. The Fieldings took a ‘maturing business opportunity’ of Burnden’s for themselves in the form of the 30% sale. Mr and Mrs Fielding were liable to give an account of profits caused by the breaches of duty or to pay equitable compensation or damages.
The proceedings were issued on 15 October 2013, which the parties accepted was more than six years after the distribution, being the transaction alleged to have caused loss.
Application for summary judgment
Mr & Mrs Fielding applied for summary judgment under CPR Part 24 on the basis that the claim was time-barred rather than on the basis of the substantive issue.
High Court decision
The High Court held that Burnden’s claim was time-barred and gave summary judgment in favour of the Fieldings under CPR Part 24. Burnden appealed.
Court of Appeal – arguments and decision
The Court of Appeal overturned the High Court’s decision holding that the claim was not time-barred due (primarily) to section 21(1)(b) of the LA 1980.
Limitation periods are governed by LA 1980 and section 21 deals with the time limits for actions in respect of trust property. Although the limitation period for a claim of this nature is normally six years, no limitation period applies to a claim by a beneficiary under a trust, being an action in respect of fraudulent breach of trust or recovering 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 (LA 1980 section 21(1)).
Arguments
Burnden argued that through their ownership of shares in the two parent companies of V, the Fieldings received trust property (the share in V) and when Mrs Fielding sold part of her shareholding in H3 to SSE, she converted the trust property to her use. The cause of action arose when the Fieldings ‘received’ the share in V.
The Fieldings argued that the share in V was never received by them, but was legally and beneficially owned by (ultimately) H3 and that the share in V was not held on trust. The share in V was therefore never in the possession of the Fieldings and was never ‘received by’ them.
Decision – no limitation period applied
The Court of Appeal accepted that a literal reading of section 21 supported the Fieldings’ argument. However, where the receipt of trust assets is structured in this way (i.e. through a company), it would, said David Richards LJ, be surprising if section 21 could so easily be avoided. Although the Fieldings had not directly received a share in V and therefore had not received trust property for their own use, their control over the company enabled them, as controlling shareholders, to obtain, in a number of ways, the benefit of the company’s assets or the assets themselves or their proceeds of sale, provided that all statutory and other legal restrictions were observed. “If section 21(1)(b) was construed to apply only to those cases where the trustee directly and personally acquires the trust property, its evident purpose would be much constrained and easily avoided”. A transfer to a company which was directly or indirectly controlled by trustees was within the meaning of the provision.
The Court of Appeal held that the cause of action accrued on 12 October 2007, being the date of the distribution in specie. The subsequent transfer to H3 on 15 October 2007 by means of the section 110 reorganisation was no more than a “re-arrangement” of the Fieldings’ existing indirect ownership.
No limitation period applied by reason of section 21(1)(b) of LA 1980. An alternative argument by Burnden that the limitation period was postponed pursuant to section 32 of the LA 1980, due to the deliberate concealment of the relevant facts, could not be determined on an application for summary judgment. The appeal was allowed so that the substantive proceedings could continue.
Requirements for a distribution
In his judgment, David Richards LJ briefly sets out the requirements for a lawful distribution in specie, being a dividend that is satisfied in assets other than cash. Burnden’s substantive claim was that the statutory requirements for a distribution in specie, then set out in the Companies Act 1985, were not satisfied.
“Distribution” is (now) defined in Part 23 of the Companies Act 2006 (CA 2006) as "every description of distribution of a company's assets to its members, whether in cash or otherwise..." (section 829(1) CA 2006).
A company proposing to make a distribution must:
- only make a distribution out of ‘profits available for the purpose’, which are its ‘accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.’ (section 830 CA 2006); and
- determine whether this requirement can be complied with by reference to ‘relevant accounts’ (section 836 CA 2006). If there are no relevant accounts the distribution is unlawful.
Relevant accounts are individual rather than group accounts and are:
- the company’s most recent annual accounts (section 836(2) CA 2006) prepared in accordance with CA 2006; or
- interim accounts, if the most recent annual accounts disclose insufficient distributable profit. Interim accounts must enable a reasonable judgement to be made of the company’s profits, losses, assets and liabilities, in addition to details of the company’s share capital and reserves (section 838 CA 2006); or
- initial accounts with similar requirements where the distribution occurs during the first accounting reference period (section 836(2) CA 2006).
In relation to a distribution in specie:
- the amount of a distribution in specie is the book value of the non-cash asset provided that the company has sufficient distributable profits for the distribution. If there is consideration which is not less than the book value, the amount of the distribution is zero otherwise it’s the amount by which the book value exceeds any consideration (section 845 CA 2006). This provision settled previous uncertainty as to how the amount of such a distribution should be determined (see Aveling Barford Ltd v Perion [1989]); and
- where any part of the amount at which a non-cash asset is stated in the relevant accounts represents an unrealised profit, that profit is treated as a realised profit for the purposes of determining the lawfulness of the distribution (section 846 CA 2006).
The substantive claim – whether the distribution in specie was lawful
Burnden argued that there had not been sufficient accumulated, realised profits and that the distribution was consequently unlawful.
In his judgment, David Richards LJ said:
- although the relevant issues of fact could not be determined on a summary application, if the distribution was lawful, he was unable to see how any of the claims could be maintained;
- the book value of the share in V was £750,000, which was the cost of the investment and did not therefore include any unrealised profit. The last annual accounts showed a deficit on the profit and loss account of £604,243 meaning no distribution could be made on the basis of those accounts. In order for the distribution to be lawful, interim accounts needed to be prepared showing accumulated, realised profits of at least £750,000. The Fieldings claimed that interim accounts were prepared in September 2007 showing realised profits of £829,464, sufficient, therefore, to cover the book value of the share in V prior to its revaluation;
- Burnden had received advice that in order for the distribution in specie to be lawful the share in V needed to be revalued, but he agreed with the Fieldings that no such revaluation was required for the distribution to be lawful – the point had subsequently been put beyond doubt by section 845 CA 2006; and
- if it could be established that, as the Fieldings also claimed, interim accounts were produced to and relied on by the directors at a meeting in October 2007, which reflected the revaluation of the share in V, the Fieldings would be entitled to a summary dismissal of the claim. This was not on the basis of any limitation period but on the basis that the distribution in specie was lawful. However, the Fieldings had not applied for summary judgment on that basis.
Further legal constraints
David Richards LJ referred in his judgment to the common law restraints on the making of distributions to or at the direction of shareholders. In particular, a distribution which renders a company insolvent will constitute an unlawful return of capital: see again Aveling Barford Ltd v Perion [1989]. Further, if the directors know or should have known that following a distribution the company would be insolvent or of dubious solvency, they are under a duty to have regard to the interests of creditors and a failure to do so will constitute a breach of duty.
Comment
The case is interesting for the Court of Appeal’s interpretation of section 21(1)(b) of LA 1980 where property is received by a company for the benefit of controlling shareholders. The judgment of David Richards LJ is also a useful example of the practical application of the statutory provisions relating to distributions in specie and the difficulties which can arise in demonstrating compliance.
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