Katrina Lumsdaine

The Supreme Court’s decision was on the interpretation of the English Limitation Act 1980, however, the decision may have an impact on prescriptive periods and company directors in Scotland.

Background

The defendants were directors and controlling shareholders of the claimant company which was the holding company of a trading subsidiary. The liquidators of the claimant company brought a claim alleging that the defendants made an unlawful distribution of the entire share capital in the trading subsidiary out of the claimant company. Whether or not this transfer was, in fact, unlawful is a matter to be determined at an evidential hearing following the appeal.

The claim was brought six years and three days after the relevant act which was the focus of the claim. This amounted to three days after the expiry of the English limitation period. The first instance court had held the claim was therefore time-barred.

The claimant appealed, arguing that the six-year limitation period did not apply because section 21(1)(b) of the 1980 Act states that no period of limitation shall apply to:

“an action by a beneficiary under a trust … 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 Court of Appeal allowed the appeal, holding that the limitation period did not run on the basis of section 21(1)(b). The claimant then appealed to the Supreme Court.

Supreme Court’s decision
The decision of the Supreme Court is interesting in the manner in which it dealt with section 21(1)(b) of the 1980 Act. It held that although this section was primarily directed towards trustees, it was applicable, by analogy, to company directors.

Furthermore, the court held that the purpose of the section was to prevent trustees from pleading limitation where they had obtained an unauthorised benefit from a trust. In addition to this, it was made clear that the section did not become inapplicable merely because the misappropriated property had remained legally and beneficially owned by corporate vehicles rather than being vested in (and thus held in trust by) company directors.

Implications for Scotland
The 1980 Act and the English principles of limitation obviously do not apply in Scotland. However, this decision may raise some interesting implications for prescription which operates by virtue of the Prescription and Limitation (Scotland) Act 1973.

Schedule 3 to the 1973 Act lists a number of rights which cannot prescribe. Paragraph (e)(iii) of that Schedule includes:

“any obligation of a trustee to make furthcoming to any person entitled thereto any trust property, or the proceeds of any such property, in the possession of the trustee, or to make good the value of any such property previously received by the trustee and appropriated to his own use” shall be imprescriptible.

The comparisons with section 21(1)(b) of the 1980 Act are clear. The Supreme Court decision could be more relevant than first thought. Schedule 3, paragraph (e)(iii) may also be applicable to directors of companies, despite expressly referring to ‘trustees’.

Furthermore, on that basis, it would mean that a prescription defence would be of only limited use for directors faced with claims for misappropriating company property from aggrieved shareholders or liquidators.

This decision may be of particular importance for insolvency practitioners faced with claims which are, on the face of it, prescribed. Following this decision by the Supreme Court, the expiry of the five years may not necessarily mean that they have lost their right of action against the director(s).

Katrina Lumsdaine is a partner at Anderson Strathern