Halton International Inc & Anor v Guernroy Ltd

The exemption from limitation for recovery of trust property applies only where the defendant had a pre-existing trust or trustee-like responsibility for the specific property sought. It does not apply where a constructive trust arises solely from the impugned transaction.

A fiduciary relationship concerning property used to obtain another asset is insufficient. The later asset must itself have been held under the pre-existing responsibility. The distinction rests on deemed possession, rather than culpability: a trustee’s possession is treated from the outset as the beneficiary’s possession. A fiduciary’s liability to account for an unauthorised profit does not by itself satisfy that requirement.

The appellants were shareholders in an airline. They had granted Guernroy Ltd extensive voting powers under an agreement intended to facilitate the raising of finance. Guernroy subsequently used those powers during an issue of new shares which substantially diluted the appellants’ holdings and increased its own holding.

The appellants alleged that Guernroy had breached a fiduciary obligation and held a proportion of the newly issued shares on constructive trust for them. Patten J rejected the existence of the alleged duty and also held that the claim was brought outside the six-year limitation period.

Permission proceedings confined the present appeal to limitation. The Court of Appeal therefore assumed the appellants’ substantive case at its strongest. The issue was whether the claim fell within the exemption for recovery of trust property under section 21(1)(b) of the Limitation Act 1980.

1. Appeal dismissed unanimously. Even assuming that Guernroy owed the alleged fiduciary duty and that the voting rights were held subject to a pre-existing trust-like responsibility, the claim did not fall within section 21(1)(b) of the Limitation Act 1980.

2. The statutory exemption rests on deemed possession, not on the defendant’s culpability. It applies where the trustee’s possession of specific property was taken from the outset for the beneficiaries and is therefore treated as their possession. A constructive trust arising directly from the unlawful transaction is outside that rationale. The distinction explained in Paragon Finance plc v DB Thakerar & Co [1999] 1 AER 400 was applied.

3. The voting rights were not the property which the appellants sought to recover. At most, they were part of the means by which Guernroy acquired the new shares. The exemption requires a pre-existing trust or trustee-like responsibility for the specific existing property sought, not merely for a means of obtaining that property in the future.

4. The newly issued shares came into existence only through the transaction challenged by the appellants. Any constructive trust over them therefore arose only because of that transaction and belonged to class 2. The existence of a pre-existing fiduciary relationship concerning the voting powers did not convert the claim into a class 1 trust claim.

5. Keech v Sandford (1726) Sel.Cas Ch. 61 did not provide a sufficient analogy. A renewed lease may be treated as an accretion or graft upon the original term because of the special nature of leasehold renewal rights. No comparable proprietary connection existed between the voting rights and the newly issued shares.

6. The general equitable rule prohibiting a fiduciary from making an unauthorised profit does not determine whether the resulting constructive trust is within section 21(1)(b). The ordinary limitation period accordingly applied and the claim was time-barred.

• Court of Appeal (Civil Division): The appeal on limitation was dismissed unanimously. The court held that the alleged constructive trust was outside section 21(1)(b) of the Limitation Act 1980.
• High Court, Patten J: The judge rejected the alleged fiduciary duty and held in the alternative that the proceedings were time-barred. No neutral or report-series citation is stated.
• Permission to appeal: Chadwick LJ considered some substantive grounds arguable but regarded the limitation ground as fatal. The renewed appeal was consequently confined to limitation.