First Subsea Ltd v Balltec Ltd & Ors

A company director is a trustee within the extended meaning of Limitation Act 1980, section 21, by virtue of the director’s status and fiduciary responsibilities concerning company property. That status applies consistently across section 21.

Accordingly, section 21(1)(a) prevents time running for any fraudulent breach of the director’s fiduciary duties. The breach need not involve misappropriation of pre-existing company property. A deliberate breach alone is insufficient: fraud requires dishonesty or an absence of good faith, which may include recklessness as to the consequences.

Fraud must be distinctly alleged and proved. The pleading need not use the words fraud or dishonesty if the pleaded facts clearly and unequivocally raise dishonesty and the allegation is fairly put to the defendant.

The claimant company obtained judgment against a former non-executive director for breaches of fiduciary duty arising from the preparation and submission of competing contract bids while he remained in office. The High Court ordered an account or equitable compensation and held that the claims were not time-barred because the breaches were fraudulent for the purposes of section 21(1)(a) of the Limitation Act 1980: [2014] EWHC 866 (Ch).

The breaches occurred more than six years before proceedings began. The director appealed only against the order concerning fiduciary liability. The principal questions were whether section 21 governed the claims, whether the director’s breaches were fraudulent within section 21(1)(a), and whether fraud had been adequately pleaded and put at trial. Alternative questions under sections 21(1)(b) and 36 arose only if the section 21(1)(a) ground failed.

1. Appeal dismissed. A director is a class 1 fiduciary and a trustee within the extended definition in sections 21 and 38(1) of the Limitation Act 1980. That status arises from the office held and the resulting responsibilities concerning company property. It does not change according to the particular kind of fiduciary breach committed.

2. The expressions “trust” and “trustee” must have a consistent meaning throughout section 21. A director who is a trustee for section 21(3) is therefore also a trustee for section 21(1). Any breach of the director’s fiduciary duties towards the company is a breach of trust within section 21, even when it involves disloyalty causing loss rather than the misappropriation of pre-existing company property. If that breach is fraudulent, section 21(1)(a) prevents the six-year period in section 21(3) from running. Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA Civ 1048 was rightly decided.

3. Section 21(1)(b) addresses trust property or its proceeds in the trustee’s possession or converted to the trustee’s use. It does not apply merely because a fiduciary breach produces a secret profit or other benefit over which equity imposes a class 2 constructive trust. In that situation the director’s duties derive from the pre-existing office, while the remedial constructive trust over the benefit arises only from the breach. That distinction does not prevent section 21(1)(a) from applying to a fraudulent breach of the director’s pre-existing fiduciary duties.

4. A breach is not fraudulent merely because it is deliberate. Fraud requires dishonesty or an absence of good faith and may include recklessness concerning the consequences. The judge was entitled to find dishonesty because the director knowingly and intentionally pursued competing bids which would injure the company.

5. Fraud must be distinctly alleged and proved, but no particular formula is indispensable. The pleaded conspiracy, deliberate fiduciary breaches and acts of concealment clearly raised dishonesty. The relevant facts were also fairly put in cross-examination. The judge could therefore find a fraudulent breach within section 21(1)(a), notwithstanding the limited treatment of that issue in closing submissions.

6. It was unnecessary to determine whether the claim also fell within section 21(1)(b), or whether section 36 would permit an analogous limitation period if section 21 did not apply. Kitchin and Briggs LJJ agreed with Patten LJ.

1. Court of Appeal (Civil Division): The director’s appeal was dismissed. The court upheld the ruling that section 21(1)(a) of the Limitation Act 1980 prevented the fiduciary claims from being time-barred: [2017] EWCA Civ 186.
2. High Court, Chancery Division: Norris J held the director liable to account or pay equitable compensation for established breaches of fiduciary duty. He held that the breaches were fraudulent within section 21(1)(a), although he rejected the proprietary constructive-trust claim concerning the proceeds of the successful tender: [2014] EWHC 866 (Ch).