[View without highlighting]
[Printable RTF version]
[Buy ICLR report:  3 WLR 896]
[Buy ICLR report:  Ch 25]
[View ICLR summary:  WLR(D) 232]
||Neutral Citation Number:  EWCA Civ 186
||Case No: A3/2014/1965
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
 EWHC 866 (Ch)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||30 March 2017
B e f o r e :
LORD JUSTICE PATTEN
LORD JUSTICE KITCHIN
LORD JUSTICE BRIGGS
|| FIRST SUBSEA LIMITED
(FORMERLY BSW LIMITED)
||- and -
||(1) BALLTEC LIMITED
(2) ROBERT EMMETT
(4) RUSSELL BENSON
(5) ROGER BACON
David Cavender QC and Tamara Kagan (instructed by Oglethorpe, Sturton & Gillibrand) for the Appellants
Philip Marshall QC and Andrew Moran QC (instructed by Boodle Hatfield) for the Respondents
Hearing dates : 14 and 15 February 2017
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Lord Justice Patten :
- This appeal concerns the much-litigated provisions of s.21 of the Limitation Act 1980 and the extent to which they apply to a claim against the director of a company for breach of fiduciary duty.
- The second defendant, Mr Emmett, appeals against an order of Norris J. dated 7 May 2014 made after the trial on liability in this action. The judge held that Mr Emmett was liable (at the election of the claimant, First Subsea Limited) to account for or to pay damages for various breaches of fiduciary duty committed whilst he was a non-executive director of the claimant. He was also ordered to pay damages for conspiracy to injure by unlawful means; for inducing a breach of contract by one of his fellow directors; and for infringement of copyright. The unlawful means relied on for the purposes of the conspiracy claim include the breaches of fiduciary duty which are pleaded as causes of action in their own right but by paragraph 7 of the order the claimant is prevented from claiming both damages for conspiracy and compensation for breach of fiduciary duty in so far as the claims overlap. This appeal is limited to paragraph 2 of the order which contains the order for an account or compensation in respect of the breaches of fiduciary duty which the judge found proved. These consisted of the preparation of (and in one case the making of) bids for contracts in competition with the claimant through a new rival company (Balltec Limited) which Mr Emmett and his associates had formed for that purpose. In connection with the preparation of these bids, Mr Emmett had told one of the claimant's principal suppliers that the claimant company was effectively insolvent and had made use of confidential drawings and documents belonging to the claimant.
- All of the breaches of duty took place before December 2004 and therefore more than six years before the claim form was issued on 22 December 2010. They are therefore statute barred either under s.21(3) of the Limitation Act 1980 ("the 1980 Act") or by analogy with claims in contract and tort unless the claims fall within s.21(1) of the 1980 Act which disapplies any statutory period of limitation. Norris J. held that the breaches of duty were fraudulent within the meaning of s.21(1)(a) and did not therefore need to consider the application of s.21(1)(b). But he also rejected a claim that the breaches gave rise to a constructive trust in respect of the proceeds of the one successful contract tender so that there has been no successful claim to recover trust property or its proceeds still in the possession of a trustee. Mr Cavender QC for Mr Emmett contends that the judge was wrong to treat the breaches of fiduciary duty as fraudulent because no allegation of fraud was properly pleaded or advanced during the hearing. Mr Marshall QC for the claimant contests this but also relies on the recent decision of this Court in Burnden Holdings (UK) Ltd v Fielding & Anor  EWCA Civ 557;  1 WLR 39 as establishing that a claim for an account or equitable compensation which the judge did order is sufficient to bring the claim within s.21(1)(b).
- In summary, the issues we have to decide are:
(1) whether the relevant claims against Mr Emmett were an action to recover trust property or in respect of any breach of trust under s.21(3);
(2) if so, whether the judge was entitled to find that the breaches of trust were fraudulent within the meaning of s.21(1)(a);
(3) alternatively, whether paragraph 2 of the order relates to claims to recover trust property in the possession of the trustee or converted to his use within the meaning of s.21(1)(b); and
(4) if not within s.21, whether any limitation period applies to the claims, or any of them, by analogy under the provisions of s.36 of the 1980 Act?
- In order to elucidate the legal issues I need to provide a summary of the relevant facts, at least so far as they concern Mr Emmett. I emphasise that the judge's findings of facts are not themselves under challenge as part of this appeal.
- In 1983 Mr Emmett and a Mr Walmsley set up a business in partnership under the name BSW Design and Engineering. The business specialised in the design and supply of underwater tools and machinery for use in connection with the installation and maintenance of deep water pipes used, for example, in the oil industry. In 1994 the business was incorporated as BSW Limited ("BSW") which is the claimant in these proceedings under its changed name of First Subsea Limited. For convenience, I will refer to it as "BSW".
- In 2001 Mr Emmett and Mr Walmsley sold a 75.1 per cent interest in the business to Arnlea Limited which was owned and controlled by a Mr Suttie. He had been introduced to BSW through Mr Ian Brown who had worked as a project manager with various oil companies and had become an enthusiast for the technology used by BSW. Following the acquisition of its interest in BSW by Arnlea Limited, Mr Brown became the managing director of BSW and remained a director until 15 October 2004.
- Mr Brown and Mr Emmett embarked on a programme of product development which in its initial stages was very expensive. In September 2001 BSW had an operating profit of £220,000 which nine months later had turned into an operating loss of £378,000. The company had previously been debt-free but now had debts amounting to some £464,000. Mr Brown had also committed BSW to taking a 15-year lease of larger premises and then attempted to conceal this fact from Mr Suttie.
- This created obvious tensions between Mr Suttie and the management of BSW and in April 2003 Mr Brown was dismissed for gross misconduct. But he remained a director. In his place Mr Daniel Hatfield was appointed managing director. Mr Emmett actively considered re-purchasing Arnlea Limited's interest in BSW but a proposal for this on deferred terms was rejected by Mr Suttie in December 2003.
- By early 2004 Mr Emmett had formed the view that Mr Hatfield was hopeless as managing director and made his views known to other senior employees. As a result, he was told by Mr Suttie not to go into BSW's offices. There was also a dispute about the payment of interest on loan notes which led to Mr Emmett calling in the loan and to litigation between Arnlea Limited and Mr Emmett.
- A meeting with Mr Suttie was scheduled for 3 February 2004 but Mr Emmett refused to attend and signed off work until 16 February. He then went to the United States where he met up with Mr Brown. Whilst there (and unbeknown to Mr Suttie) they had meetings with potential co-venturers about possible future projects. On his return to the UK Mr Emmett was suspended by Mr Suttie and claimed to have been constructively dismissed.
- At a meeting on 3 March 2004 Mr Emmett raised complaints with Mr Suttie about Mr Hatfield's conduct (he had downloaded pornography on to a receptionist's computer at BSW's offices) and also repeated his wish to re-purchase BSW. They came to nothing. Mr Suttie carried out an investigation but in the end gave Mr Hatfield only a written warning. In the meantime relations between Mr Emmett and Mr Suttie had deteriorated to the point where senior staff were instructed not to allow Mr Emmett to speak to any staff members by telephone.
- Back in 2003 at a board meeting on 25 November there had been a discussion between Mr Emmett and Mr Suttie about the future business of BSW. One of the matters mentioned was the possibility of obtaining new work from a French company called Technip in connection with what has been called the Dalia Project and with work relating to the Kizomba oilfield. On 10 June 2004 Mr Emmett met with Mr Graham Halstead, the managing director of HB Halstead & Sons Limited, the company which carried out the engineering of BSW's products. He told him that BSW had incurred fairly substantial losses and was effectively insolvent. It would soon be out of business because its management was not competent. On 15 June Mr Emmett went to France and obtained the tender documentation from Technip for the Dalia Project.
- By 23 June 2004 Mr Suttie was aware of rumours circulating about Mr Emmett and Mr Brown setting up another business. The judge found that the rumours were probably false but they had the effect of encouraging Mr Suttie to distance Mr Emmett and Mr Brown still further from the running of BSW. In late June they returned to the United States to discuss with a company called Edison Chouest Offshore Inc ("Chouest") whether some kind of joint venture might be feasible.
- Mr Brown was informed by Chouest on 14 July that it did not wish to proceed with a joint venture. By then Mr Emmett and Mr Brown had (on 2 July) submitted a tender for the Dalia Project. Mr Emmett knew that BSW was also bidding for the contract and so was in competition. On 20 July Mr Emmett resigned as a director of BSW and on 23 July Balltec was incorporated. Its first directors were Mr Emmett and Mr Halstead. Technip was informed that Balltec would be the bid vehicle for the Dalia Project. Prior to its incorporation a tender bid had also been made in Balltec's name on 19 July for work on the Kizomba oilfield. On 22 July Balltec tendered for work on Technip's Simian/Sapphire field.
- Of these bids only the third was successful. A contract was awarded to Balltec on 1 September 2004 for equipment to the value of £98,160. Neither BSW nor Balltec obtained any contracts in respect of their tenders for the Kizomba oilfield but BSW did obtain the contract for the Dalia Project at a reduced price. The judge found that due to Balltec's tender BSW was asked to review its quotation and that in order to secure the contract it had to lower its contract price from €1.345m to €1.050m.
- This action was commenced on 22 December 2010. The principal claim was for damages for conspiracy to injure by unlawful means although, as already mentioned, these included breaches of fiduciary duty and breaches of contract. These breaches of duty were also relied on as separate causes of action. BSW had already reached a compromise of all its claims against Mr Brown and he was not joined as a defendant.
- The judge found that the proposal to set up a competing business emerged by mid-May 2004 but did not become a settled plan until later. When Mr Emmett and Mr Brown visited Chouest at the end of June they were still actively exploring the possibility of a hostile takeover of BSW but the judge was satisfied that by the time Mr Emmett submitted the bid for the Dalia Project on 2 July there had been a combination in the form of an agreement to compete with BSW for the contract. By then Mr Emmett had been advised by his solicitors that he would be in breach of fiduciary duty to BSW if he continued as a director whilst operating in competition with the company.
- One of the problems faced by Mr Emmett was that under the articles of association of BSW his resignation as a director of BSW would trigger a sale of his shares to Arnlea Limited at a discounted price. This probably explains why, despite his solicitors' advice, he delayed his resignation until 20 July. But by then bids had been tendered for the Dalia Project and for work on the Kizomba oilfield. The tender for the Simian/Sapphire contract came two days later but had on the judge's finding been in preparation since at least June 2004.
- Norris J. therefore found [at 158] that Mr Emmett and Mr Brown had the requisite mental element of the tort of conspiracy to injure from the end of June 2004 and that the claim for conspiracy was made out if the means used were unlawful and were known to be unlawful by Mr Emmett and Mr Brown:
"158. My findings of fact on this part of the case (bearing in mind that I am at this stage assuming that the competitive means employed were unlawful) are:-
a) Mr Brown and Mr Emmett did not from the outset have a positive intention to harm BSW because they entertained the hope that they could buy Arnlea out and restore BSW to their ownership;
b) But in submitting the bids for the Dalia Project, the Kizomba oilfield and the Simian/Sapphire oilfield both Mr Emmett and Mr Brown knew and understood that by seeking to advance their own business in relation to those contracts they would by the very nature of things be "injuring" BSW (the loss to BSW being the obverse side of the coin from the gain to Balltec);
c) By July 2004 it was "a key plank" in Mr Emmett's and Mr Brown's strategy to "take out" BSW (as Mr Emmett acknowledged in the Manchester Proceedings and accepted in these), so that they knew and intended that their success should be at the direct cost of BSW. As Mr Emmett put it in an e-mail on 29 July 2004 to Technip in connection with the Dalia bid:-
"After 20 years of building BSW and earning an enviable reputation for delivering on promises I am greatly saddened to see the huge changes happening and to receive a rising tide of complaints from staff, suppliers and latterly customers … Experienced staff continue to depart BSW. They no longer have any design staff. A proud engineering company cannot exist without experienced and talented engineers."
d) Whilst they took extensive legal advice as to what it was lawful for them to do Mr Emmett and Mr Brown knew (i) from no later than 23 June 2004 that there was an issue about their obligations as shareholders and directors of BSW; (ii) from 1 July 2004 that they would be in breach of fiduciary duties as directors of BSW if they continued to hold a directorship whilst actually operating in competition with BSW; (iii) from 1 July 2004 that Mr Brown's then current activities in connection with seeking to secure business in competition with BSW were likely to amount to a breach of fiduciary duty as a director of BSW; (iv) from 5 July 2004 that being a director of BSW whilst competing in business presented potential problems; (v) from 8 July 2004 that entering into a competitive business whilst still a director of BSW would represent a clear breach of fiduciary duty; and having received that advice they did not inform their legal advisers of what in fact they had done or intended to do (submit bids to hold the position against the day when the new business actually started) so as to ensure that their conduct fell the right side of the line."
Breach of fiduciary duty
- The judge began his assessment of whether there had been a breach of fiduciary duty by setting out the statement of the duties of directors which was approved by this Court in Foster Bryant Surveying Ltd v Bryant  EWCA Civ 200 at :
"1. A director, while acting as such, has a fiduciary relationship with his Company. That is he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self-interest.
2. A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the Company, any property or business advantage either belonging to the Company or for which it has been negotiating, especially where the director or officer is a participant in the negotiations.
3. A director's power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the Company.
4. A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined the director is in general not under the continuing obligations which are the feature of the fiduciary relationship.
5. Acts done by the directors while the contract of employment subsists but which are preparatory to competition after it terminates are not necessarily in themselves a breach of the implied term as to loyalty and fidelity.
6. Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which is plainly in the public interest that they should be free to exploit it in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the 'stock in trade' of the knowledge he has acquired while a director, even including such things as business contacts and personal connections made as a result of his directorship.
7. A director is however precluded from acting in breach of the requirement at 2 above, even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the Company and where it was his position with the Company rather than a fresh initiative that led him to the opportunity which he later acquired.
8. In considering whether an act of a director breaches the preceding principle the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the Company and the circumstances under which the breach was terminated, that is whether by retirement or resignation or discharge.
9. The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity 'of the Company is that the opportunity is to be treated as if it were the property of the Company in relation to which the director had fiduciary duties. By seeking the exploit the opportunity after resignation he is appropriating to himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property.
10. It follows that a director will not be in breach of the principle set out as point 7 above where either the Company's hope of obtaining the contract was not a 'maturing business opportunity' and it was not pursuing further business orders nor where the director's resignation was not itself prompted or influenced by a wish to acquire the business for himself.
11. As regards breach of confidence, although while the contract of employment subsists a director or other employee may not use confidential information to the detriment of his employer, after it ceases the director/employee may compete and may use know-how acquired in the course of his employment (as distinct from trade secrets – although the distinction is sometimes difficult to apply in practice)."
- These principles are not in dispute but I will have to return to what is said in  in more detail when I come to consider the claimant's case on s.21(1)(b).
- A major issue before the judge was whether the scope of a director's duties towards the company would be reduced by his exclusion from its management and his participation in its affairs. Mr Emmett relied on the steps taken by Mr Suttie to exclude him from any regular attendance at the company's premises and from involvement in the running of its business as being effective to relieve him of his duty of loyalty to the company. Mr Cavender submitted to the judge that a director's duties did not exist in the abstract but were given substance by the duties which he was required to perform. Since Mr Emmett had been excluded from discharging any of his functions as director, there was nothing in respect of which he was bound to act faithfully.
- In the event it was not necessary for the judge to explore the limits of this argument bearing in mind that a director always has it within his power to resign and may be obliged to do so if he cannot properly perform his duties to the company. The judge found:
"201. Mr Emmett chose to remain a director for as long as it suited his purpose to retain a shareholding as a lever to assist a buyout and to avoid a compulsory transfer. A consequence of that choice was that in my judgment Mr Emmett's fiduciary duties had not been reduced to vanishing point. But they fell to be discharged (a) so far as positive (i.e. requiring action) only in relation to what BSW was, to Mr Emmett's knowledge, actually requiring or expecting him to do; and (b) so far as negative (i.e. requiring Mr Emmett not to act in a particular way) only in relation to what BSW was, according to what Mr Emmett knew or must be taken to have known, doing or intending to do. If Mr Emmett was to do something for BSW then he had to do it in a loyal and faithful way: if BSW was doing something, then Mr Emmett had to conduct himself in a loyal and faithful way as regards his own actions in the light of what BSW was doing."
- In the light of this finding which is not challenged on this appeal, the argument based on exclusion falls away. The judge found that Mr Emmett was not in breach of fiduciary duty in seeking to establish a competing business until after 2 July 2004. He held that no firm decision had been taken until 16 July because until then Mr Emmett's preference had been to buy back control of BSW. His only act of disloyalty during that period was the occasion when he told Mr Halstead that BSW was effectively insolvent. But the preparation and submission of the bids for the three contracts were, he held, different:
"209. Again, at the very end (by which I mean the beginning of July) Mr Emmett was forced to make a choice. He chose to promote his personal interests over loyalty to BSW. He chose to put in a competing bid for the Dalia Project even though he knew or must be taken to have known that BSW would be bidding for it. In the same circumstances he chose to prepare and submit bids for the Kizomba oilfield (of which there is in fact no specific complaint in the pleadings) and for the Simian/Sapphire project. In each case he knew or must be taken to have known of BSW's intended actions and his duty of loyalty to BSW required him to refrain from interfering. Those were in this case breaches of fiduciary duty.
212. As to the allegation that Mr Emmett was in breach of fiduciary duty in contacting Mr Fulton of Technip, if this is a reference to contact made on 19 July 2004 in relation to receptacles for the Kizomba oilfield then I find and hold that this was a breach of fiduciary duty. Mr Emmett knew that BSW was supplying Technip in relation to the Kizomba oilfield because that had been discussed at the November 2003 board meeting and had arisen more recently in connection with Mr Brown's queries on the 2003 financial statements. It is true that the precise work then discussed was not identical to the receptacles that Balltec was offering to supply in July 2004: but in my judgment that is immaterial. What is important is that BSW was supplying subsea equipment to Technip for the Kizomba oilfield, was the existing supplier and (as Mr Emmett must have known) was almost certain to bid for further supply. His obligation of loyalty required him not to advance Balltec's interest whilst still a director of BSW. He was a day early."
- It therefore followed that a limited number of the allegations of breach of fiduciary duty had been made out and to that extent BSW succeeded on its claim for unlawful means conspiracy in relation to those matters. Norris J. also found unlawful means to have been established in relation to various breaches of contract and the inducement of breaches of contract by Mr Emmett but those findings are not relevant to the issues on this appeal.
Injury and remedies
- As mentioned earlier, Balltec obtained only one of the three contracts for which it tendered in competition with BSW. But the judge accepted BSW's evidence that the competition for the Dalia Project contract resulted in it being told that it had to match Balltec's price. A contract was eventually agreed at a price of €1.050m compared with BSW's original quoted price of €1.345m. The judge found that the bids for the Kizomba and the Simian/Sapphire contracts had probably also caused damage to BSW by reducing the chance of it securing the work for itself. He therefore ordered Mr Emmett to account or to pay damages to BSW for his established breaches of fiduciary duty but declined to find that he was liable to account for Balltec's receipt of the profits from the Simian/Sapphire contract as a constructive trustee. The references to damage in paragraph 2 of the judge's order can be read as meaning equitable compensation.
- In the final part of his judgment Norris J. addressed the limitation issues which form the subject of this appeal. In order to avoid the claims for breach of fiduciary duty being treated as statute barred by analogy to claims in contract or tort BSW accepted that it had either to bring the claims within s.21(1) of the 1980 Act or be able to rely on the postponement of the commencement of any limitation period under the provisions of s.32(1)(b). The judge found that BSW was aware in September 2004 that Mr Emmett and Mr Brown were in competition through their new company and had been told in August 2004 that it had lost the Simian/Sapphire contract to Balltec. Accordingly he held that it could with reasonable diligence have discovered the breaches of fiduciary duty in time to plead them as causes of action before the expiry of the presumptive limitation period in December 2010. There is no appeal against this part of his judgment on limitation. The sole issue for us is whether s.21(1) applies.
- Section 21 of the 1980 Act provides:
"(1) No period of limitation prescribed by this Act shall 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.
(3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued.
For the purposes of this subsection, the right of action shall not be treated as having accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession."
- "Trust" and "trustee" have the same meanings as in the Trustee Act 1925: see s.38(1). This incorporates the definition in s.68(17) of the Trustee Act 1925 which provides that:
"the expressions 'trust' and 'trustee' extend to implied and constructive trusts … and to the duties incident to the office of a personal representative, and 'trustee' where the context admits, includes a personal representative …"
- More generally s.36(1) of the 1980 Act provides:
"(1) The following time limits under this Act, that is to say—
(a) the time limit under section 2 for actions founded on tort;
(aa) the time limit under section 4A for actions for libel or slander, or for slander of title, slander of goods or other malicious falsehood;
(b) the time limit under section 5 for actions founded on simple contract;
(c) the time limit under section 7 for actions to enforce awards where the submission is not by an instrument under seal;
(d) the time limit under section 8 for actions on a specialty;
(e) the time limit under section 9 for actions to recover a sum recoverable by virtue of any enactment; and
(f) the time limit under section 24 for actions to enforce a judgment;
shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any such time limit may be applied by the court by analogy in like manner as the corresponding time limit under any enactment repealed by the Limitation Act 1939 was applied before 1st July 1940."
- The judge rejected BSW's submission that the case fell within s.21(1)(b) on the ground that there had been no wrongful dealing by Mr Emmett with pre-existing assets of BSW. He was not persuaded that any advances in the technology used by BSW and then Balltec could be attributed to Mr Emmett in the period prior to his resignation as a director or could therefore give rise to a constructive trust insofar as they generated profits for Balltec. The claim was run at trial as one for damages for conspiracy or alternatively breach of fiduciary duty in respect of the damage caused to BSW by the competitive tenders for the three Technip contracts. There was therefore no proprietary claim in relation to the property of BSW:
"472. So far as s.21(1)(b) is relied upon, that provision is concerned with wrongful dealing with pre-existing assets that had been entrusted to the fiduciary, as where a director abuses the power of disposition which he has over company property. This, however, (in one alternative) is a claim to an account of profits which came into existence by reason of the breach of fiduciary duty itself and in respective of which Mr Emmett is to be treated as if he were a trustee."
- As that passage indicates, the judge did, however, treat Mr Emmett as a trustee for the purposes of s.21(1) which required him to consider whether the case could be brought within s.21(1)(a):
"473. So far as s.21 (1)(a) is concerned although judges at first instance have (in the light of comments made by Carnwarth LJ in Halton International  EWCA Civ 801) expressed the view that this provision too should be confined to cases arising from real trusts, they have also held that as a matter of precedent they are bound by the actual decision in Gwembe Valley (supra) which assumes that s.21(1)(a) applies also to cases where the fiduciary is liable to account as if he was a trustee because of the presence of fraud (see J D Wetherspoon v Van den Berg  EWHC 1077 (Ch) and Kleanthous v Paphitis  EWHC 2287). I shall not depart from that view (although I doubt that this aspect of the decision in Gwembe Valley can survive the majority reasoning in Williams v Central Bank of Nigeria  UKSC 10, published when this judgment was in draft and not the subject of submissions).
474. On that footing the question is whether Mr Emmett's breach of fiduciary duty was fraudulent i.e. dishonest. That his breaches of fiduciary duty were "dishonest" was not put in terms to Mr Emmett: nor was it the subject of argument in closing. But if in this context "dishonesty" connotes at the minimum an intention on the part of the fiduciary to pursue a particular course of action knowing or being recklessly indifferent to whether that action will injure the interests of those to whom the fiduciary duties are owed (see McGee "Limitation Periods" 6th ed para 14.004) then the logical outcome of my earlier findings and holdings is that Mr Emmett was dishonest. He committed his breaches of duty knowing that they would injure BSW and intending that they should. BSW may therefore rely on s.21(1)(a) as extending the limitation period in relation to its claims against Mr Emmett for breach of fiduciary duty."
- The controversy to which the judge is referring in  concerns the application of s.21(1)(a) to the liability of a director for a fraudulent breach of fiduciary duty which does not involve the misuse or misappropriation of company property which existed during the relevant period of his directorship. In order to understand how this point arises I need to step a few paces back in terms of the authorities.
- In Paragon Finance Plc v D. B. Thakerar & Co  1 AER 400 the Court of Appeal took the timely step of reminding claimants seeking compensation for breach of fiduciary duty in cases of fraud that the choice of that cause of action did not operate as a convenient by-pass of the normal limitation period of six years. As Millett LJ explained in his judgment at (page 409), the extension of the definition of trust and trustee for the purposes of s.21 so as to include a constructive trustee did not bring within the ambit of s.21 fraudulent breaches of duty by a fiduciary where the constructive trust arose only by virtue of their fraud:
"A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well known examples of such a constructive trust are McCormick v Grogan (1869) 4 App.Cas. 82 (a case of a secret trust) and Rochefoucald v Boustead  1 Ch. 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan  Ch. 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.
The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be "liable to account as constructive trustee." Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions "constructive trust" and "constructive trustee" are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are "nothing more than a formula for equitable relief": Selangor United Rubber Estates Ltd. v Cradock  1 WLR 1555 at p. 1582 per Ungoed-Thomas J."
- The second of the two classes of case described in this quotation is where the defendant is not a fiduciary at the time of the fraud and the constructive trust, if it arises at all, is simply, as Millett LJ explains, no more than a formula for equitable relief. But the same reasoning is capable of applying to existing fiduciaries such as agents who do not hold trust property but who commit a fraud which gives rise to the imposition of a constructive trust. A good example of such a case is the recent decision of the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC  UKSC 45 where it was held that an agent who receives a bribe or secret commission in his capacity as an agent holds the proceeds on constructive trust for his principal. The Supreme Court rejected the argument that a trust should only be imposed where the payment arose out of an opportunity which came to the agent as a result of his fiduciary position. In such a case the payment or other benefit can be regarded as part of or at least derived from the property of the principal which equity therefore recognises and protects by the grant of a proprietary remedy. The Supreme Court has instead adopted a wider principle advocated by a number of critics including Lord Millett that any benefit which results from a breach of fiduciary duty to the principal is held on trust for him. In such circumstances, the agent cannot rely on his own breach of duty in order to claim the benefit for himself. He will be assumed to have acted in accordance with his duty and to have acquired the benefit for his principal. Lord Neuberger said:
"35. The respondents' formulation of the Rule has the merit of simplicity: any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal. On the other hand, the appellant's position is more likely to result in uncertainty. Thus, there is more than one way in which one can identify the possible exceptions to the normal rule, which results in a bribe or commission being excluded from the Rule – see the differences between Professor Goode and Professor Worthington described in paras 10 and 32 above, and the other variations there described. Clarity and simplicity are highly desirable qualities in the law. Subtle distinctions are sometimes inevitable, but in the present case, as mentioned above, there is no plainly right answer, and, accordingly, in the absence of any other good reason, it would seem right to opt for the simple answer.
A further advantage of the respondents' position is that it aligns the circumstances in which an agent is obliged to account for any benefit received in breach of his fiduciary duty and those in which his principal can claim the beneficial ownership of the benefit. Sir George Jessel MR in Pearson's Case at p 341 referred in a passage cited above to the agent in such a case having "to account either for the value … or … for the thing itself …". The expression equitable accounting can encompass both proprietary and non-proprietary claims. However, if equity considers that in all cases where an agent acquires a benefit in breach of his fiduciary duty to his principal, he must account for that benefit to his principal, it could be said to be somewhat inconsistent for equity also to hold that only in some such cases could the principal claim the benefit as his own property. The observation of Lord Russell in Regal (Hastings) quoted in para 6 above, and those of Jonathan Parker LJ in Bhullar quoted in para 14 above would seem to apply equally to the question of whether a principal should have a proprietary interest in a bribe or secret commission as to the question of whether he should be entitled to an account in respect thereof."
- The consequence of this is that a constructive trust will be imposed on fiduciaries in such cases regardless of whether it is possible to treat the benefit or payment received by the agent as derived from property in which the principal had a pre-existing interest. This is consistent with cases like Phipps v Boardman  2 AC 46 and the decision in Bhullar v Bhullar  2 BCLC 241 referred to by Lord Neuberger where Jonathan Parker LJ said (at para 28):
"[W]here a fiduciary has exploited a commercial opportunity for his own benefit, the relevant question, in my judgment, is not whether the party to whom the duty is owed (the company, in the instant case) had some kind of beneficial interest in the opportunity: in my judgment that would be too formalistic and restrictive an approach. Rather, the question is simply whether the fiduciary's exploitation of the opportunity is such as to attract the application of the rule."
- The Trustee Act 1888 enabled a trustee to rely on any period of limitation that would have been available to him had he not been a trustee except when the claim was founded on fraud or a fraudulent breach of trust by the trustee or was to recover trust property or the proceeds still retained by the trustee: see s.8(1). "Trustee" was defined by s.1(3) as including an executor or administrator or a trustee "whose trust arises by construction or implication of law".
- Before 1888 express trustees were accountable without limitation of time on the basis that their possession of the trust assets was for and on behalf of the beneficiaries so that time could never run against the trustee: see s.25(2) of the Supreme Court of Judicature Act 1873, and Hovenden v Lord Annesley (1806) 2 Sch & Lef 607 at pages 633-4.
- The argument that the new and expanded definition of trustee in s.1(3) had the effect of abolishing for limitation purposes the distinction between the two classes of constructive trustee identified by Millett LJ in the passage quoted earlier was rejected by two decisions of the Privy Council concerning s.47 of the (Ontario) Limitations Act 1914 which contains a similar definition of trustee to that in s.1(3) of the 1888 Act: see Taylor v Davies  AC 636; Clarkson v Davies  AC 100. The defendant in Taylor v Davies was a member of the committee of inspection of an insolvent firm whose assets had been assigned for the benefit of creditors. He was accepted to be a fiduciary in relation to the exercise of his powers of inspection but he did not hold the property of the insolvent. The question arose whether a claim made against him for the knowing receipt of assets held in trust by the assignee was subject to a period of limitation. The Privy Council held that the claim was statute barred. In relation to the definition of a 'trustee' as including a constructive trustee, Viscount Cave (at page 653) said:
"The expressions 'trust property' and 'retained by the trustee' properly apply, not to a case where a person having taken possession of property on his own behalf, is liable to be declared a trustee by the Court; but rather to a case where he originally took possession upon trust for or on behalf of others. In other words, they refer to cases where a trust arose before the occurrence of the transaction impeached and not to cases where it arises only by reason of that transaction. The exception no doubt applies, not only to an express trustee named in the instrument of trust, but also to those persons who under the rules explained in Soar v Ashwell and other cases are to be treated as being in a like position; but in their Lordships' opinion it does not apply to a mere constructive trustee of the character described in the judgment of Sir William Grant."
- In his judgment in Paragon, Millett LJ applied the reasoning in these cases to s.1(3) of the 1888 Act and went on to explain why he considered that the provisions of s.19 of the Limitation Act 1939 (now re-enacted as s.21 of the 1980 Act) had preserved the distinction between the two classes of constructive trustee referred to earlier. Two of the reasons he gave are particularly relevant to what we have to consider:
"(1) If the 1939 Act was intended to abrogate the former distinction between the two kinds of constructive trust, it is difficult to see how it achieved its object. It can hardly have done so by merely by adopting the definitions of 'trust' and 'trustee' in the Trustee Act 1925, since these are not materially different from those in the 1888 Act. If anything the use of the definitions in the 1925 Act points in the opposite direction, for that Act is concerned exclusively with the powers and duties of trustees properly so called. It is not concerned with persons whose trusteeship is merely a formula for giving restitutionary relief. Such persons have no trust powers or duties; they cannot invest, sell or deal with the trust property; they cannot retire or appoint new trustees; they have no trust property in their possession or under their control, since they became accountable as constructive trustees only by parting with the trust property. They are in reality neither trustees nor fiduciaries, but merely wrongdoers.
(9) Although the 1939 and 1980 Acts are perhaps not wholly consistent in this respect, any principled system of limitation should be based on the cause of action and not the remedy. There is a case for treating fraudulent breach of trust differently from other frauds, but only if what is involved really is a breach of trust. There is no case for distinguishing between an action for damages for fraud at common law and its counterpart in equity based on the same facts merely because equity employs the formula of constructive trust to justify the exercise of the equitable jurisdiction."
These passages recognise that the gateway to s.21 is the definition of 'trust' and 'trustee' in s.38(1). The protection afforded to beneficiaries depends upon the status of the defendant at the time he commits the breach complained of. This is a question of statutory construction to which Taylor v Davies provided an answer which has now been adopted in relation to s.21 of the 1980 Act.
- The decision in Paragon is of course binding on us on that point but it has in any event since been affirmed by the decision of the Supreme Court in Williams v Central Bank of Nigeria  UKSC 10 which held that a "trustee" in s.21(1)(a) did not include a party who was only liable to account by reason of his dishonest assistance in a breach of trust. In Peconic Industrial Development Ltd v Lau Kwok Fai  WTLR 999, a decision of the Hong Kong Court of Final Appeal, Lord Hoffmann had reached the same conclusion in relation to s.2 of the Hong Kong Trustee Ordinance which defines 'trust' and 'trustee' in the same terms:
" The language of s 20, like most of the Ordinance, is taken word for word from the UK Limitation Act 1939. It was obviously intended to have the same meaning. One therefore has to ask whether Danny Lau would have been a constructive trustee within the meaning of the corresponding section of the 1939 Act (s 19). On a literal reading he would, because a stranger to a trust who dishonestly assists in its breach is traditionally described as a constructive trustee. For the purposes of limitation, however, there are two kinds of constructive trustees. The distinction between them has been explained by judges on numerous occasions, from Sir William Grant in Beckford v Wade (1805) 17 Ves Jun 87 at 95–96 to Mr Richard Sheldon QC (sitting as a deputy High Court judge) in Cattley v Pollard  EWHC 3130 (Ch) at –, (2006) 10 ITELR 1 at –,  Ch 353. First, there are persons who, without any express trust, have assumed fiduciary obligations in relation to the trust property; for example as purchaser on behalf of another, trustee de son tort, company director or agent holding the property for a trustee. I shall call them fiduciaries. They are treated in the same way as express trustees and no limitation period applies to their fraudulent breaches of trust. Then there are strangers to the trust who have not assumed any prior fiduciary liability but make themselves liable by dishonest acts of interference. I shall call them non-fiduciaries. They are also called constructive trustees but this, as Ungoed-Thomas J said in Selangor United Rubber Estates Ltd v Cradock (a bankrupt) (No 3)  2 All ER 1073 at 1097,  1 WLR 1555 at 1582 is a fiction: 'nothing more than a formula for equitable relief'. They are not constructive trustees within the meaning of the law of limitation."
- The Supreme Court adopted this reasoning in Williams. Lord Sumption (at ) said:
"It is clear that Lord Selborne LC regarded as a constructive trustee any person who was not an express trustee but might be made liable in equity to account for the trust assets as if he was. The problem is that in this all-embracing sense the phrase "constructive trust" refers to two different things to which very different legal considerations apply. The first comprises persons who have lawfully assumed fiduciary obligations in relation to trust property, but without a formal appointment. They may be trustees de son tort, who without having been properly appointed, assume to act in the administration of the trusts as if they had been; or trustees under trusts implied from the common intention to be inferred from the conduct of the parties, but never formally created as such. These people can conveniently be called de facto trustees. They intended to act as trustees, if only as a matter of objective construction of their acts. They are true trustees, and if the assets are not applied in accordance with the trust, equity will enforce the obligations that they have assumed by virtue of their status exactly as if they had been appointed by deed. Others, such as company directors, are by virtue of their status fiduciaries with very similar obligations. In its second meaning, the phrase "constructive trustee" refers to something else. It comprises persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by the trustee, or they have received trust assets knowing that the transfer to them was a breach of trust. In either case, they may be required by equity to account as if they were trustees or fiduciaries, although they are not. These can conveniently be called cases of ancillary liability. The intervention of equity in such cases does not reflect any pre-existing obligation but comes about solely because of the misapplication of the assets. It is purely remedial. The distinction between these two categories is not just a matter of the chronology of events leading to liability. It is fundamental. In the words of Millett LJ in Paragon Finance plc v DB Thakerar & Co  1 All ER 400, 413, it is "the distinction between an institutional trust and a remedial formula—between a trust and a catch-phrase"."
- Having then referred to the decisions in Taylor v Davies and Clarkson v Davies in relation to the meaning of 'trust' and 'trustee in the Limitation Act 1980, Lord Sumption reached the same conclusion on construction as in Paragon and Peconic:
"28. The above analysis of section 21 of the Limitation Act 1980 has now been accepted by the English courts at every level below this court. The turning point was the decision of the Court of Appeal in Paragon Finance plc v DB Thakerar & Co  1 All ER 400, which is notable mainly for an extended obiter dictum of Millett LJ on the distinction, for limitation purposes, between a liability for breach of a true trust and an ancillary liability. I have already quoted freely from this valuable and characteristically trenchant judgment, which among other things draws attention to the importance of the decisions in Beckford v Wade 17 Ves 87 and Taylor v Davies. There is a briefer dictum to the same effect by Lord Millett, as he had by then become, in Dubai Aluminium Co Ltd v Salaam  2 AC 366, 404. In Cattley v Pollard  Ch 353, Richard Sheldon QC sitting as a deputy judge of the High Court, after an impressive review of a substantial body of case law and academic literature, held that section 21(1)(a) of the Limitation Act 1980 applied only to express and de facto trustees and not to persons liable only by virtue of their dishonest assistance in a breach of trust. In JJ Harrison (Properties) Ltd v Harrison  1 BCLC 162, and again in Gwembe Valley Development Co Ltd v Koshy (No 3)  1 BCLC 131, the Court of Appeal adopted the analysis of Millett LJ and applied it to a case of knowing receipt of the assets of a company. It was held in both cases that no period of limitation applied, but only because the defendant was a director and as such to be treated as a true trustee. It is clear from the court's reasoning that the limitation position would have been different if he had not been. In Halton International Inc v Guernroy Ltd  WTLR 1241, the Court of Appeal adopted the same reasoning and held that section 21(1) applied only to claims against express or de facto trustees, and not to claims against constructive trustees whose liability came into being as a result of the transaction impeached. In Peconic Industrial Development Ltd v Lau Kwok Fai  5 HKC 135, the Court of Final Appeal of Hong Kong held that the relevant provision of the Hong Kong Ordinance, which was in the same terms as section 19(1) of the English Limitation Act 1939, did not apply to a person liable to account as a constructive trustee on the footing of dishonest assistance. Lord Hoffmann NPJ, delivering the leading judgment, declined to follow the dicta of the Court of Appeal in Soar v Ashwell, which he regarded as wrong in principle and unsupported by authority. He was also unimpressed by the submission that this put a dishonest assister in a better position than an innocent or merely negligent trustee, at para 24:
"The principle is not that the limitation defence is denied to people who were dishonest. It plainly applies to claims based on ordinary common law fraud. The principle is that the limitation period is denied to fiduciaries. But dishonest assisters are not fiduciaries."
- A defining characteristic of constructive or de facto trustees within the first class in Paragon is that (as with all trustees) they should be in lawful possession of trust property. In Paragon Millett LJ did not attempt any exhaustive summary of all the various types of fiduciary that might fall within this class nor was he concerned to deal with the position of directors. But in JJ Harrison (Properties) Ltd v Harrison  EWCA Civ 1467 their status as class 1 fiduciaries was confirmed by this Court in a case where a director purchased land belonging to the company without disclosing to the board that it had potential development value. When this was ultimately realised and the land was sold by the director for a significant profit the company took proceedings on the grounds that the director had allowed his personal interest to conflict with those of the company and was in breach of the equitable rule against self-dealing. The judge held that the transaction was liable to be set aside and that the director must account for the profits he had made. He appealed on the ground, inter alia, that the claim was statute barred.
- Chadwick LJ said
"25. I start with four propositions which may be regarded as beyond argument: (i) that a company incorporated under the Companies Acts is not trustee of its own property; it is both legal and beneficial owner of that property; (ii) that the property of a company so incorporated cannot lawfully be disposed of other than in accordance with the provisions of its memorandum and articles of association; (iii) that the powers to dispose of the company's property, conferred upon the directors by the articles of association, must be exercised by the directors for the purposes, and in the interests, of the company; and (iv) that, in that sense, the directors owe fiduciary duties to the company in relation to those powers and a breach of those duties is treated as a breach of trust. If authority for those propositions is required it can be found in Re Lands Allotment Co  1 Ch 616 – see the judgments of Lindley LJ, at p. 631, and Kay LJ, at p. 638 – Cook v Deeks  AC 555 – see the advice of the Privy Council delivered by Lord Buckmaster LC at p. 564 – and Belmont Finance Corp Ltd v Williams Furniture Ltd (No. 2)  1 All ER 393 – see the judgment of Buckley LJ (with whom the other members of the court agreed), at p. 405c–f.
27. It follows, also, from the principle that directors who dispose of the company's property in breach of their fiduciary duties are treated as having committed a breach of trust that, a director who is, himself, the recipient of the property holds it upon a trust for the company. He, also, is described as a constructive trustee. But, as Millett LJ explained in Paragon Finance plc v Thakerar & Co  1 All ER 400, at pp. 408g–409g, his trusteeship is different in character from that of the stranger. He falls into the category of persons who, in the words of Millett LJ (at  1 All ER 400, 408j) … 'though not strictly trustees, were in an analogous position and who abused the trust and confidence reposed in them to obtain their principal's property for themselves.'
29. There is no doubt that Millett LJ regarded it as beyond dispute that a director who obtained the company's property for himself by misuse of the powers with which he had been entrusted as a director was a constructive trustee within the first category. He referred to 'directors and other fiduciaries' in that context – at  1 All ER 400, 408h–j. There is also no doubt, if I may say so, that he was correct to do so – see Re Sharpe; Masonic and General Life Assurance Co v Sharpe  1 Ch 154, at p. 172, Soar v Ashwell  2 QB 390, at p. 398. The reason is that a director, on appointment to that office, assumes the duties of a trustee in relation to the company's property. If, thereafter, he takes possession of that property, his possession 'is coloured from the first by the trust and confidence by means of which he obtained it'. His obligations as a trustee in relation to that property do not arise out of the transaction by which he obtained it for himself. The true analysis is that his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him. The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations. He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed."
- The position is said to be less clear when the director's breach of duty does not involve the misappropriation of company property but is a fraudulent breach of duty which, if committed by anyone but a class 1 fiduciary, would give rise to a constructive trust of the class 2 kind. Mr Cavender's argument is that s.21 has no application to the second type of case even where the fraudulent breach is that of a class 1 fiduciary. It is limited to cases where the fiduciary misappropriates or misuses property already vested in him or under his control. The focus of s.21 is on the nature of the cause of action rather than on the identity of the person who commits the wrong. So in the present case Mr Emmett, although a director, has not appropriated or disposed of company property under his control. His breaches of duty have been ones of disloyalty making him accountable for the loss caused to BSW. But no constructive trust has come into existence and, even if it had done, it would have been of the class 2 kind, i.e. part of equity's response to the claim for relief.
- This is the point referred to by Norris J. in  of his judgment by reference to various first instance decisions. The controversy centres on the decision of this Court in Gwembe Valley Development Co Ltd v Koshy (No 3)  EWCA Civ 1048. This was a case in which the managing director of a joint venture company in Zambia (Gwembe) arranged finance for the company in $US through another company which he controlled and was able in the process to make a very large undisclosed profit on currency transactions for his own benefit. The joint venture company failed and its receiver subsequently sued the director (Mr Koshy) on behalf of the company for an account of profits or equitable compensation for breach of fiduciary duty. A declaration was also sought that Mr Koshy was liable as constructive trustee for all of Gwembe's money which he received. The trial judge held that Mr Koshy was not liable as a constructive trustee and dismissed the claim for equitable compensation for dishonest breach of fiduciary duty on the ground that no loss has been proved. But he held that Mr Koshy was liable to account for the profits on the basis that he had acted dishonestly in using his position as managing director to profit at the expense of the company. The judge rejected an argument that the claim for an account was statute barred.
- On appeal the Court of Appeal held that Mr Koshy was entitled to the benefit of s.21(3), either directly or by analogy, subject to the provisions of s.21(1). In giving the judgment of the Court, Mummery LJ said that s.21(1)(b) had no application because the action was not one to recover trust property in the possession of Mr Koshy as a trustee. It did, however, include what was or fell to be treated by analogy as an action for fraud or a fraudulent breach of trust within s.21(1)(a).
- Throughout the judgment the working assumption is that the provisions of s.21 of the 1980 Act apply either directly or by analogy to a fiduciary such as a director so that there is no need to distinguish between the two possible routes to liability when considering the scope of s.21(1). It is not necessary to explore that hypothesis for the purposes of this appeal because nothing really turns on it. But it seems to me, in the light of the decisions in Paragon and Williams, that there is no need to resort to the application of the statutory provisions by analogy under s.36(1) when one is dealing with a class 1 fiduciary such as a director. The effect of those decisions is that a director is a 'trustee' within the extended definition contained in s.38(1) and s.21 is therefore directly applicable to claims which are made against a director for breaches of his fiduciary duties. The issue is whether a different situation obtains when the breach of duty does not involve the misappropriation of trust property which was the position in Gwembe.
- After quoting from the judgment in Millett LJ in Paragon, Mummery LJ said:
"90. For limitation purposes the two classes of trust and/or fiduciary duty are treated differently. The first class of case arising from the breach of a pre-existing duty is, or is treated by analogy as, an action by a beneficiary for breach of trust failing within section 21(1) of the 1980 Act. This means that there is no limitation period for the cases failing within section 21(1)(a) or (b)); but that there is a six year limitation period for cases failing within s 21(3).
91. In the second class of case s 21 would not apply, but a limitation defence to a claim might be available by analogy with common law claims, such as tort (for example, deceit) or breach of contract, even though the liability is exclusively equitable, as may be the case with breaches of fiduciary duty in the absence of a contract."
- The conclusions in  are supported by the decision of this Court in Cia de Seguros Imperio v Heath (REBX) Ltd and others  1 WLR 112 that in the case of breach of fiduciary duty by an underwriter the relevant analogy was with a claim for breach of contract.
- The claim against Mr Koshy did not fall within s.21(1)(b) because although a director of Gwembe (and therefore a class 1 fiduciary) he had not, on the judge's findings, misappropriated part of its property. Like the agent in FHR European Ventures, he had made a secret profit at the expense of the company for which he was accountable but the payments made by Gwembe to Mr Koshy's company as part of the financing arrangements were contractual and were not induced by fraud.
- Therefore the only constructive trust imposed by equity in respect of the secret profit would be of the class 2 variety stemming from the breach of duty. Mr Koshy had not received any pre-existing company property. Mummery LJ deals with this point in -:
" If that is the correct analysis, then it is clear in our view that any trust imposed on Mr Koshy is a class 2 trust, within Millett LJ's classification. We agree with the judge that liability to account for unauthorised profits may arise within a wide spectrum of factual situations. However, that does not alter the analysis under s 21(1)(a) and (b), each of which must be applied in accordance with its own terms. We disagree, respectfully, with the judge in treating dishonesty as a factor taking the case from class 2 to class 1, for the purposes of para (b). Nor do we think that is the effect of the passage from Chadwick LJ's judgment in Harrison's case quoted by the judge ( 1 BCLC 478 at ). As the judge recognised, in that case the director transferred to himself property which had previously belonged to the company, and in relation to which he had 'trustee-like responsibilities' before the transaction in question. By contrast, Mr Koshy's liability to account for undisclosed profits, and any constructive trust imposed on those profits, do not depend on any pre-existing responsibility for any property of the company. They arose directly out of the transaction which gave rise to those profits, and the circumstances in which it was made. The fact that Mr Koshy was in a pre-existing fiduciary relationship with the company was not enough, by itself, to bring the case within class 1, any more than it was in Taylor v Davies.
 Accordingly, in our view, GVDC's case cannot be bought within s 21(1)(b). It stands or falls on s 21(1)(a), and that depends on establishing fraud. In saying this we have not ignored s 32. That depends on a finding of fraud or deliberate concealment (see s 32(1), quoted at  above). In this case, the alleged fraud is the deliberate concealment of the secret profit. If that case is not established, it is difficult to see how the facts can be brought within either limb of s 32. If it is, no extension under s 32 is needed."
- The Court of Appeal was satisfied that the breach of fiduciary duty by Mr Koshy in relation to the making of the secret profit was on the facts a fraudulent one so as to fall within s.21(1)(a). The criticism, however, of this decision is that a breach of duty not involving the misappropriation of trust property (i.e. a case involving a class 2 type of constructive trust) cannot fall within s.21(1)(a) either. This seems to be based on a footnote to the judgment of Carnwath LJ in the subsequent Court of Appeal decision in Halton International Inc & Anor v Guernroy Ltd  EWCA Civ 801 to the effect that:
"I should note that, although the judgment in Gwembe (to which I was a party) proceeded on the premise that fraud was sufficient to bring the case within section 21(1)(a)) (para ), the ultimate decision may be better explained by reference to the alternative ground of fraudulent concealment: s 32."
- I do not find the suggested attribution of the decision to s.32 easy to follow in the light of what is said in  of the Court's judgment quoted above. But, for present purposes, that does not matter. Halton concerned the exercise of voting powers under an agreement between the shareholders in an airline. The defendant had been appointed to act as the attorney for the shareholders under the agreement for the purpose of negotiating a new franchise for the airline. He used the voting powers so as to increase the issued share capital of the company and to allocate the shares in a way which substantially diluted the claimants' shareholdings. His actions were alleged to constitute breaches of fiduciary duty which had enabled the defendant to profit at the expense of the other shareholders for whom he acted. Fraud was not alleged but the claimants sought the transfer of a proportion of the newly issues shares on the basis that they were held on a constructive trust. The Court of Appeal held that the claim was statute barred because any trust which existed in respect of the new shares was of the class 2 type. It arose solely as a consequence of the alleged breaches of fiduciary duty. The defendant was not therefore a trustee within the meaning of s.21 and s.21(1)(b) had no application.
- Halton is therefore a conventional application of s.21 as construed in Paragon. In Williams both Halton and Gwembe were referred to by Lord Sumption in his judgment without comment or criticism and in my view Gwembe was rightly decided. The application of s.21 depends on whether the action is one by a beneficiary to recover trust property or in respect of any breach of trust. Trust has the extended definition in s.68(17) of the Trustee Act and can therefore include a constructive trust. The purpose of what is now s.21(3) is to impose a six-year limitation period on claims in respect of express or de facto trusts falling within class 1 unless either s.21(1)(a) or s.21(1)(b) applies. Although differently ordered, s.21 therefore replicates the changes introduced by the 1888 Trustee Act. The two situations covered by s.21(1) are explicable, as mentioned earlier, by reference to the principle that the trustee takes possession of the trust assets on behalf of the beneficiary (s.21(1)(b)) and by equity's established reluctance to limit the liability of a fraudulent trustee (s.21(1)(a)).
- The definition of 'trust' and 'trustee' contained in s.38(1) of the 1980 Act applies to those terms wherever they appear in s.21 and requires them to be given a consistent interpretation. It follows that if a defendant is a trustee of a trust for the purposes of s.21(3) he is also one for the purposes of s.21(1). A director who is treated as a trustee of the property of the company for the purposes of s.21 may therefore rely on s.21(3) as a defence to any claim to recover trust property or for breach of trust unless the trust property remains in his possession (or has been converted to his use) or his breach of trust was fraudulent.
- The provisions of s.21(1)(b) in respect of the property of the company have no application to cases like Gwembe where there is no misappropriation or receipt of pre-existing company property but only a breach of duty which gives rise to a constructive trust over (for example) the secret profit. This is because in such cases the director is not a trustee virtute officii in respect of the profit. He has no proprietary relationship with what he acquires other than as the recipient of the proceeds of his breach of duty. He is not therefore in the terms of s.21(1)(b) in possession of trust property. But he is at all times a class 1 fiduciary and trustee in respect of the company and its assets so that a breach of his duty towards the company remains a breach of trust within the meaning of s.21 even if it does not involve the misappropriation of company property. He is not in the same position as a stranger to the company or the trust (as in Paragon) who only becomes a trustee in the limited sense of being required to account for the profits of his fraud on a proprietary basis through the medium of a class 2 constructive trust.
- One can test this by considering the position of express trustees. In their case s.21 operates by giving them the benefit of a six-year limitation period except in the cases where s.21(1) applies. That has been the position since 1888. No-one has ever suggested that the only breaches of trust covered by what is now s.21(3) are those involving the misappropriation of trust property. A claim by a beneficiary against the trustee in respect of trust property wrongly transferred to a third party will be subject to the six-year limitation period in s.21(3) unless made fraudulently. Similarly breaches by trustees involving the investment of trust property on insufficient security; a failure to accumulate income as directed by the trust deed and the failure to deduct tax from annuities have all been held to be covered by what is now s.21(3): see Re Bowden (1890) 45 Ch D 444; How v Earl Winterton  2 Ch 626; and Re Sharp  1 Ch 793.
- If therefore s.21(3) applies to any breach of trust by an express trustee then the same must be true for s.21(1)(a) where it refers to any fraud or fraudulent breach of trust. The only factor which distinguishes the situations covered by the two sub-sections is the fraud involved in the breach of trust. Otherwise the content and scope of the two sub-sections are the same. The language used is identical.
- It seems to me to follow from this that if a director is a trustee for the purposes of s.21 then the phrase 'breach of trust' must encompass any breach of his fiduciary duties as such a director towards the company. If he causes loss to the company as in this case he is accountable in precisely the same way as a trustee would be for any loss caused by his breach of duty to the trust. The director cannot be a class 1 fiduciary for the purposes of s.21(3) but not for the purposes of s.21(1) and for the same reason I do not see how it is possible to treat a director differently as between s.21(1)(a) and s.21(1)(b) depending on the nature of the breach which he commits. The criticism of the decision in Gwembe proceeds on the premise that Mr Koshy was not liable under s.21(1)(b) because the only trust property he obtained was not company property but a secret profit subject to a constructive trust. Therefore, so the argument goes, it would be wrong in principle for the same breach to attract the provisions of s.21(1)(a). But that seems to me to confuse what the two sub-sections are dealing with. Mr Koshy was only ever a trustee of the secret profit by virtue of the constructive trust imposed as a result of his fraud. But he was not in breach of that trust. The class 2 constructive trust, as Lord Hoffmann explained in Paragon, imposed no duties on him nor did it make him a fiduciary. He was a fiduciary by reason of his office as director and the fraud which he committed was a breach of those duties; not of the class 2 constructive trust.
- Paragon and Williams (and the authorities on which they are based) are concerned with identifying the class of fiduciaries who fall within the definition of 'trustee' in s.38(1). This, as I mentioned earlier, is a question of status which is determined by the nature of the office which they lawfully hold and the power over the trust property which that gives them. A defendant fiduciary cannot move from class 2 to class 1 or vice versa dependent on the type of breach of duty which he commits. Once he is a class 1 fiduciary and therefore a trustee within the meaning of s.38(1), it seems to me that he must be that for all Limitation Act purposes under s.21. Therefore if the breaches of fiduciary duty by Mr Emmett as director were fraudulent as found by the judge then s.21(1)(a) operates to prevent time running under s.21(3).
Fraudulent breach of trust
- For a breach of trust to be fraudulent it is not enough to show that it was deliberate. There must also be an absence of honesty or good faith. This can include being reckless as to the consequences of the action complained of. The judge's finding was that Mr Emmett was dishonest because he committed his breaches of duty towards the company knowing that they would injure BSW and intending that they should. There is no appeal against those findings of fact as such but Mr Cavender submits that no case of fraudulent breach of trust was pleaded or advanced against Mr Emmett at trial so that the judge was not entitled to find that s.21(1)(a) applied.
- The general rule is that fraud must be distinctly alleged and proved. In Armitage v Nurse  Ch 241 Millett LJ emphasised the need for clarity in pleading fraud. An allegation that the trustee knew or ought to have known something is not an unequivocal allegation of knowledge sufficient to support a finding of dishonesty and is consistent with a claim in negligence: see Bristol and West Building Society v Mothew  Ch 1 at page 7H. In Belmont Finance Corporation Ltd v Williams Furniture Ltd  Ch 250 Buckley LJ said:
"An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word 'fraud' or the word 'dishonesty' must be necessarily used…The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity."
- So far as the pleadings are concerned, the only place where a fraudulent breach of trust for the purposes of s.21(1)(a) is expressly addressed is in paragraph 9 of the claimant's reply which is BSW's response to the defence that the claims for conspiracy and breach of fiduciary duty are statute barred. There it is stated that the claimant will contend that Mr Emmett "was in fraudulent breach of his duties to First Subsea within the meaning of section 21(1) by reason of the acts of concealment referred to above".
- These references include the allegations in the particulars of claim that Mr Emmett concealed the involvement of Mr Brown in Balltec; held meetings with Technip in March 2004 to solicit business for Balltec whilst still a director of BSW; and held discussions with Technip in July 2004 in preparation for a tender for the Simian/Sapphire contract in the knowledge that BSW would be in competition for the contract. But Mr Marshall makes the wider point that the particulars of claim included a plea of conspiracy to injure by deliberate breaches of fiduciary duty which, as indicated, the judge found proved. Mr Cavender accepts that the claim based on conspiracy to injure by breach of fiduciary duty has been adequately pleaded. In my view there is nothing in the pleading point.
- The other aspect of this ground of appeal is whether a case of fraud or dishonesty was properly put to Mr Emmett in cross-examination. Mr Marshall took us to various passages in the transcripts of Mr Emmett's evidence in which the allegations of conspiracy and breach of fiduciary duty were explored. I do not propose to quote from them in this judgment. I am satisfied from what I have read that it was fairly put to Mr Emmett that he was aware that he was acting contrary to the interests of BSW and that he knew that what he was doing was wrong. The judge in my view had evidence from which he could properly decide whether the breaches of duty alleged against Mr Emmett were dishonest and therefore fraudulent.
- Mr Cavender also relied upon the relative absence of any argument in the parties' closing submissions about fraudulent breach of trust. The judge himself in  of his judgment said that the issue was not really argued. But the only question is whether the judge was entitled to make a finding that the breaches of duty were fraudulent for the purposes of s.21(1)(a) and in my opinion he was. The relevant facts had been identified and pleaded and were put to Mr Emmett in cross-examination. The finding was open to the judge on the evidence which he heard.
- In these circumstances, it is not necessary to consider Mr Marshall's alternative argument based on Burnden Holdings (UK) Ltd v Fielding & Anor that the claim could have been brought within s.21(1)(b) or what the position would be if the claims were not within s.21 so that s.36 applies.
- For the reasons I have given I would dismiss Mr Emmett's appeal.
Lord Justice Kitchin :
- I agree.
Lord Justice Briggs :
- I also agree.
Copyright Policy |
Donate to BAILII