Court of Appeal Judgment: First Subsea Ltd v Balltec Ltd and others  EWCA Civ 186
In First Subsea Ltd v Balltec Ltd and others  EWCA Civ 186 the Court of Appeal had to make a judgment on whether a director found to be in breach of fiduciary duty could rely on a limitation defence under the Limitation Act 1980.
E was the director and founder of First Subsea Ltd. Following the sale of a shareholding to another company for extra investment, E became dissatisfied with the new business arrangements when he started to be excluded from management decisions. As a result, E resigned as a director and set up a new company, Balltec Ltd, which made rival bids for contracts in competition with First Subsea Ltd. This resulted in First Subsea Ltd losing a contract to Balltec Ltd, and forcing it to lower its quoted price on another contract, therefore causing loss.
First Subsea Ltd subsequently brought claims against E for damages for conspiracy to injure by unlawful means, breach of fiduciary duty and fraud. It was held in the first instance that E had acted in breach of fiduciary duty in acting disloyally and using financial information to encourage a company which worked for First Subsea Ltd to work for Balltec Ltd instead in relation to various bids, and in the retention and misuse of confidential documents stored on E’s computer.
However, one significant point that arose in the case involved the timescale of events. E’s breach of fiduciary duty took place before December 2004, but the claim form was issued on 22 December 2010. As this was more than 6 years since the initial breach, this meant that the claims were statutorily time-barred under s.21(3) Limitation Act 1980, unless this was disapplied by s.21(1). This section provides that:
S.21(1) No period of limitation will 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.
E tried to argue that s.21(1) did not apply because the section was limited to cases where the fiduciary has misappropriated property vested in him or under his control, that he had not misappropriated or disposed of First Subsea’s property, and that no constructive trust had come into existence. However, the judge held that s.21(1)(a) did apply because E had acted knowing that his conduct would injure First Subsea Ltd, and this amounted to fraudulent conduct, and so E could not rely on the limitation defence.
E appealed the judge’s order for an account or compensation in respect of the breaches of fiduciary duty.
The Court of Appeal therefore had to determine whether s.21(1) applied to deprive E of the limitation defence. The court reiterated that there are two classes of constructive trustee:
- Class 1 is where a 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; and
- 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.
It was clarified that directors inevitably owe fiduciary duties to the company, and breach of those duties amount to a breach of trust. Therefore, a director is a fiduciary from the outset by virtue of his office, such that when he misappropriates property he will fall under class 1.
While E’s breach had not involved the misappropriation of company property, it was still considered a fraudulent breach of duty by the court, and therefore E’s appeal was dismissed. It was held that if the breaches of fiduciary duty by E as director were fraudulent, as found by the judge, then s.21(1)(a) operated to prevent time running under s.21(3), and therefore E could not make use of the limitation defence to avoid liability.
The Court of Appeal also confirmed that a director was a true trustee within the extended definition of s.38(1) Limitation Act 1980, and therefore s.21 was capable of application to claims which were made against a director for breach of fiduciary duty.
The decision in First Subsea Ltd v Balltec Ltd clarified the question of who is a trustee for the purposes of s.21(1) Limitation Act 1980. Now, when determining whether s.21 applies to deprive a person of the limitation defence, the focus should be on the identity of the person who committed the wrong, and not on the nature of the cause of action. It has been established that a director is a true trustee of a company’s assets, even though he does not own the assets himself. As a true trustee, if their breach is fraudulent under s.21(1), even if the director does not misappropriate company property, he will not be able to avoid liability by claiming the limitation defence.
This will therefore act as a notable reminder to directors to always comply with their fiduciary and statutory duties. It should be borne in mind by directors that while many of their duties have now been codified by Part 10 of the Companies Act 2006, the underlying common law and fiduciary principles of good faith and loyalty, the common law duty of reasonable skill and care, and the equitable duty of confidence are still relevant today in the interpretation and application of the statutory duties by the courts. Directors can clearly still be held liable for breach of fiduciary duties in their own right too, as demonstrated in this case. The courts will therefore still seriously consider and act on these equitable principles when passing judgment on breaches of trust and directors duties.
It does however remain to be seen if the reasoning set down in this case will be applied to future claims against other types of fiduciary who are considered to be true trustees of company assets, such as liquidators.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.