Burnden Holdings (UK) Ltd ((in Liquidation)) (Appellant/Claimant) v Gary John Fielding and Another (Respondents/Defendants)
| Jurisdiction | England & Wales |
| Judge | Lord Justice David Richards,Lord Justice Tomlinson,Lady Justice Arden |
| Judgment Date | 17 June 2016 |
| Neutral Citation | [2016] EWCA Civ 557 |
| Court | Court of Appeal (Civil Division) |
| Date | 17 June 2016 |
| Docket Number | Case No: A2/2014/4014 |
[2016] EWCA Civ 557
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LIVERPOOL DISTRICT REGISTRY
HIS HONOUR JUDGE HODGE QC
3LV30284
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Tomlinson
and
Lord Justice David Richards
Case No: A2/2014/4014
Christopher Parker QC (instructed by Olswang LLP) for the Appellant
David Chivers QC and Matthew Parfitt (instructed by Addleshaw Goddard LLP) for the Respondents
Hearing dates: 16 and 17 March 2016
Approved Judgment
The issue on this appeal is whether a claim in respect of alleged breach of duty by two directors of the claimant company is time-barred. HH Judge Hodge QC, sitting as a Judge of the High Court, held that it was and, on the application of the defendants, gave summary judgment against the claimant company under CPR Part 24. The claimant appeals with permission granted by Floyd LJ.
The application for summary judgment was confined to the question of limitation. There was no direct challenge to the pleaded causes of action or the assertions of law contained in the particulars of claim, although the defendants have made clear that they consider them to be wholly or largely unsustainable.
For present purposes, the undisputed facts may be summarised as follows.
At all material times before October 2007, the claimant company was a holding company with a number of trading subsidiaries. The subsidiaries operated in two business areas, the supply and construction of conservatories and a combined heat and power business. Two trading subsidiaries in the conservatory business are referred to in the particulars of claim, K2 Conservatory Systems Limited (K2) and Cestcon Conservatories Limited (Cestcon). The combined heat and power business was carried on by Vital Energi Utilities Limited (Vital).
The directors of the claimant company were at all material times the defendants, Mr and Mrs Fielding, and three other executive directors, Mr Beckett, Mr Whitelock and Mr Kavanagh. The issued share capital of the claimant comprised three classes of shares: 50,000 A ordinary shares, 50,000 B ordinary shares, and 50,000 D ordinary shares. The A and B ordinary shares were held by Mr and Mrs Fielding in equal parts, while the D ordinary shares were held by Mr Beckett, Mr Whitelock and The Burnden Group Trustee Limited (TBGT), the trustee of an employee share scheme. The controlling shareholders were Mr and Mrs Fielding.
In or about July 2007, Scottish & Southern Energy plc (SSE) offered to purchase a 30% shareholding in Vital for £6 million, subject to a significant number of conditions.
In October 2007, the following transactions were carried out, with a view to effecting that sale.
On 4 October 2007, the shareholders of the claimant exchanged their shares for shares in a new holding company for the group, BHU Holdings Ltd (BHUH), with the shareholdings in that company precisely mirroring the former shareholdings in the claimant.
On 12 October 2007, a distribution in specie of the claimant's shareholding in Vital was approved by a unanimous resolution of the directors of the claimant and by a resolution in writing of BHUH as the sole member of the claimant. The distribution was effected on 12 October 2007, with the transfer of the only issued share in Vital from the company to BHUH being registered in the register of members of Vital on that day. Although it is pleaded in the particulars of claim that Vital was a subsidiary of the claimant until 15 October 2007, it is accepted by the claimant for present purposes that the share in Vital was distributed in specie on 12 October 2007.
On 15 October 2007, BHUH went into members' voluntary liquidation. A special resolution to that effect was passed on that day by the members of BHUH, and the directors of BHUH made a statutory declaration as to its solvency. Also on 15 October 2007, pursuant to reconstruction agreements made on that day under section 110 of the Insolvency Act 1986, the liquidator of BHUH transferred the share in Vital to a new company, Vital Holdings Limited (VHL) and the shares in the claimant to a new company, Burnden Group Holdings Limited (BGHL). The two new holding companies issued shares to the former shareholders in BHUH, again precisely mirroring their shareholdings in BHUH and, previously, in the claimant.
On 19 October 2007, Mrs Fielding sold a 30% shareholding in VHL to SSE for £6 million. Of that sum, £3 million was lent to the claimant and the balance was, according to the claimant's case, put towards the purchase of a property for £8.3 million by Mr and Mrs Fielding in May 2008.
Subsequently, on 2 October 2008, the claimant, K2 and Cestcon went into administration. In December 2009, the claimant went into liquidation and the present liquidator was appointed in December 2012.
The present proceedings were issued on 15 October 2013, and the particulars of claim were served on 12 February 2014. It is common ground that the claim form was issued more than six years after 12 October 2007.
It is alleged in the particulars of claim that Mr and Mrs Fielding acted in breach of fiduciary duty or in breach of statutory duty under sections 171–173, 175 and 177 of the Companies Act 2006 in relation to the transactions set out above. It should be noted that, while sections 171–173 came into force on 1 October 2007, sections 175 and 177 did not come into force until 1 October 2008, but as those provisions effectively codified the existing legal and equitable duties of directors, this has no significant impact on the claim.
The allegations of breach of duty are contained in paragraph 34 of the particulars of claim, which I set out in full in the appendix to this judgment. Although the only issue arising on this appeal is one of limitation, it has to be said that the pleaded case is in some respects difficult to follow. So far as the claimant is concerned, the transaction which is alleged to have caused it loss, and to have led to profits for the defendants, was the distribution in specie of the share in Vital. If that distribution was lawful in all respects, I am unable to see how any of the other pleaded claims, such as the alleged lack of benefit to the claimant, the alleged lack of consideration, the allegation that the transaction was not in the interests of the claimant, the alleged diversion of a maturing business opportunity, the making of an alleged secret profit and the alleged failure to declare an interest in the transaction can be maintained.
However, it is clearly pleaded that the distribution was unlawful. If that is established, the various claims to which I have just referred are unnecessary. Paragraph 34.2.1 alleges that the distribution "was made without sufficient accumulated, realised profits as required by section 263 of the Companies Act 1985 and was, therefore, unlawful". It is alleged in paragraph 34.3 that in breach of duty the defendants entered into the transaction "which was unlawful for the reasons set out above" and/or "did so without reasonably satisfying themselves as to the lawfulness of the transaction and, in particular, as to the adequacy of the accumulated, realised profits figure on which the lawfulness of the transaction depended".
The allegations made in the earlier paragraphs of the particulars of claim, on which the allegations of breach of duty contained in paragraph 34 are based, include an allegation that:
"… the Claimant did not have adequate profits (meaning accumulated, realised profits) for the purposes of making a distribution, ie declaring a dividend in specie. In the circumstances, such a distribution could not be made lawfully within the terms of section 263 of the Companies Act 1985 which was the provision then in force" (paragraph 21).
There is therefore a clear allegation that the statutory conditions for a lawful distribution were not satisfied. There are further legal restraints, derived from case law, on the making of distributions to or at the direction of shareholders. In particular, a distribution which renders a company insolvent will constitute an unlawful return of capital: see Aveling Barford Ltd v Perion [1989] BCLC 626. Further, if the directors know or should have known that following a distribution the company would be insolvent or of dubious solvency, they are under a duty to have regard to the interests of creditors and a failure to do so will constitute a breach of duty. The particulars of claim contain no clear pleading of any breach of duty arising out of these common law restraints. In particular, they do not contain any allegation that the directors knew or ought to have known in October 2007 that the effect of the distribution would be to render the claimant insolvent or of dubious solvency. The furthest that the particulars go is to allege in paragraph 34.2.2 that the distribution "was a substantial reason for [the claimant's] failure less than 12 months later".
It is pleaded in the particulars of claim that, by reason of the alleged breaches of duty, Mr and Mrs Fielding "are liable to give an account of profits caused by the breaches of duty set out above or to pay equitable compensation or damages".
As regards the allegation of an unlawful distribution, the principal focus in the particulars of claim is on a revaluation, which the defendants say took place but which the claimant denies, of the claimant's share in Vital. It appears to have been the understanding of the directors and the claimant company's advisors that, in order for a lawful distribution in specie of the claimant's shareholding in...
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