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First Subsea Ltd (Formerly BSW Ltd) v Balltec Ltd and others [2017] EWCA Civ 186 - Oberon Kwok

This article was originally published in LexisNexis' ‘In brief’ series.

The Court of Appeal considered the application of s.21(1)(a) of the Limitation Act 1980 to a director who had breached his fiduciary duty to his company dishonestly but who had not misappropriated company property. It held that s.21(1)(a) applied notwithstanding that there was no misappropriation.

The court also reiterated the well-known and longstanding principles on alleging and proving fraud.

What should Dispute Resolution lawyers take note of?

There are 3 things to note.

First, DR lawyers should note the expansive approach of the courts in interpreting s.21(1)(a) of the Limitation Act where company directors are concerned. That provision will apply notwithstanding that a director has not misappropriated property belonging to his company.

Second, DR lawyers are also reminded of the need to distinctly allege and prove fraud. Proof that the action itself was deliberate is not enough; it must also be proved that the action was taken while knowing or being reckless of the consequences of the action.

Third, it is also important to ensure that fraud is clearly put to the defendant in cross-examination. It was enough in this case that it was put to the defendant that he acted knowing that what he was doing was wrong and contrary to his company’s interests, such that there was a proper basis for the first instance judge’s findings on fraud. Nevertheless, the need for this part of the appeal may well have been avoided if fraud had been more distinctly and forthrightly put to the defendant in cross-examination.

What was the case about?

E, a director of the the Claimant company (F), set up with other individuals a rival company in order to prepare and make bids for contracts in competition with F. The rival bids resulted in F losing one contract, and forced it to lower its quoted price for another, causing F to suffer loss. However, at no point did E misappropriate property belonging F.

E’s breaches of fiduciary duty took place before December 2004. The claim form was issued on 22 December 2010. The claim was therefore time-barred under s.21(3), unless the limitation period was disapplied by s.21(1).

S.21(1) provides that:

“No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) 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.”

The concept of ‘trust’ and trustee’ for these purposes include “constructive trusts… and to the duties incident to the office of a personal representative, and ‘trustee’ where the context admits, includes a personal representative…”: s.38(1), Trustee Act 1925 s.68(1)(17).

The first instance judge held that s.21(1)(a) applied, because E had acted knowingly or with reckless indifference to whether his conduct would injure F, which amounted to dishonesty and hence fraudulent conduct. The judge made an order for equitable compensation.

E appealed to the Court of Appeal.

What did the court decide?

The court reiterated that there are two classes of constructive trustee. Class 1 is where the defendant receives property under a transaction which both parties intended to create a trust and for the defendant to be a trustee from the outset, such that it is unconscionable for the defendant to assert his own beneficial interest over the property. If the defendant then appropriates that property for himself, it is a breach of constructive trust.

Class 2 is where the defendant has been party to a fraud, but was not a fiduciary in respect of the property at the time of the fraud. He is not in fact a ‘trustee’ properly so called. So, for example, someone who simply dishonestly assists in a breach of trust does not fall under s.21(1)(a) as he is not a true ‘trustee’.

Insofar as directors are concerned, they owe fiduciary duties to the company and breach of those duties amount to a breach of trust: s.38(1). A director is a fiduciary from the outset by virtue of his office, such that when he misappropriates property he falls under Class 1.

The remaining question was over a director who does not misappropriate company property, but nevertheless breaches his fiduciary duty and does so dishonestly. One example is the acquisition of secret profits from third parties. The director does not start off as a fiduciary of such property, because the property originates from a third party and not from the company itself. The director is therefore only a Class 2 trustee over the profits; thus, he is not a true ‘trustee’ and as such the property is not true ‘trust property’ under s.21(1)(b). However, the court held that, because the director is a Class 1 fiduciary and trustee in respect of the company from the outset, any breach of his duty towards the company remains a breach of trust, even if he has not misappropriated company property. S.21(1)(a) depends not on ‘trust property’, but on ‘breach of trust’. The latter phrase encompasses any breach of a director’s fiduciary duty towards the company, regardless of whether trust property has been misappropriated as part of the wrongdoing.

The court reiterated that, for a breach of trust to be fraudulent, it is not enough that the breach was deliberate. The breach must have been committed whilst knowing or being reckless that it would be injurious to the company. On the evidence, the first instance judge had sufficient evidence before him to hold that the breach was fraudulent.

For these reasons, the court held that, notwithstanding that E did not misappropriate company property, he had committed a fraudulent breach of trust towards his company under s.21(1)(a), which disapplied the limitation period.

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