England and Wales Court of Appeal (Civil Division) Decisions

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
		17 June 2016

Lord Justice David Richards:

1. 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.
2. 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.
3. For present purposes, the undisputed facts may be summarised as follows.
4. 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).
5. 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.
6. 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.
7. In October 2007, the following transactions were carried out, with a view to effecting that sale.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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".
17. 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).

18. 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".
19. 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".
20. 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 Vital to be made, there needed to be a revaluation of the shareholding. It appears that advice to that effect was given but the claimant maintains that the share was never in fact revalued.
21. The legality of distributions by companies to shareholders was at the relevant time governed by Part VIII of the Companies Act 1985. A distribution, meaning every description of distribution of a company's assets to its members, whether in cash or otherwise, could not be made except out of profits available for the purpose. Those profits were its accumulated, realised profits less its accumulated, realised losses. The amount of a distribution which could lawfully be made was determined by reference to the company's last annual accounts, that is to say those in respect of the last preceding accounting reference period in respect of which accounts had been prepared under the Act and laid before the company in general meeting.
22. In October 2007, the last relevant annual accounts of the company were those for the year ended 30 June 2006, which showed a deficit on the profit and loss account of £604,243. No distribution could therefore lawfully be made on the basis of those accounts.
23. In these circumstances, section 270(4) provided that a company could rely on "interim accounts", being those necessary to enable a reasonable judgment to be made as to profits, losses and so on.
24. The book value of the company's holding in Vital was £750,000. Section 276 provided that where a company made a distribution of a non-cash asset, and any part of the amount at which the asset was stated in the relevant accounts represented an unrealised profit, that profit was to be treated as a realised profit for the purposes of the lawfulness of the distribution. The book value of £750,000 represented the cost of the investment and did not therefore include any unrealised profit. It follows that in order to make a lawful distribution, interim accounts had to be prepared showing accumulated realised profits of at least that amount. In their defence, the defendants plead that interim accounts were indeed prepared on or about 20 September 2007, showing realised profits of £829,464, which were therefore sufficient to cover the book value of the holding in Vital before its revaluation.
25. The claimant does not accept that interim accounts were prepared or were considered by the directors.
26. As mentioned earlier, there does appear to have been concern that the book value of the holding in Vital should be increased to an estimate of its current value, for which purpose the defendants say that a sum of £10.48 million was agreed and reflected in the accounting records of the company. The company denies that any such revaluation was approved or effected by the directors. In their defence, the defendants plead that no such revaluation was required in order to make the distribution lawful. I am strongly inclined to the view that this is correct, but it is fair to note that the matter was not expressly put beyond doubt until the Companies Act 2006: see section 845.
27. In approaching this appeal, I reiterate that no challenge was made in the application before Judge Hodge QC to the sustainability of the pleaded claims, whether as a matter of fact or law. That would not prevent the court from striking out a claim if it was plainly unsustainable. That cannot be said in this case. The existence of interim accounts satisfying the requirements of the Act prior to the distribution and relied on by the directors for their decision to make the distribution raises issues of fact. The defendants did not apply for summary judgment in their favour on the basis that it was clearly shown that such interim accounts had been prepared. Nor did they apply for summary judgment on the basis that the pleaded case in relation to the revaluation was incapable as a matter of law of providing a basis for the claim.
28. In these circumstances, the appeal must proceed on the basis that there is an arguable case that an unlawful distribution of the share in Vital was made on 12 October 2007. Although taking the opportunity of pointing to suggested shortcomings in the claimant's case, Mr Chivers QC for the defendants accepted that this was so.
29. The first issue is to identify the date on which the company's cause of action against the defendants accrued. If the claim is for breach of duty in causing the claimant to make an unlawful distribution, the cause of action accrued with the making of the distribution on 12 October 2007. On behalf of the claimant, Mr Parker QC, who did not appear below, submitted that a cause of action arose against the defendants on their receipt of the share in Vital. The pleaded case, on which Mr Parker relied in his submissions, was that the defendants received the share in Vital when it was transferred to VHL on 15 October 2007. It is important to note at this point, and will be of central significance when considering section 21(1)(b) of the Limitation Act 1980, that the defendants never directly received or held the share in Vital. The share was transferred by way of distribution to BHUH on 12 October 2007 and then transferred by the liquidator of BHUH to VHL on 15 October 2007 pursuant to the reconstruction agreement made on that date. BHUH, like VHL, was a company controlled by the defendants and owned by them together with the other former shareholders of the claimant. In these circumstances, it is in my judgment clear that, if it is right to say that the defendants received the share in Vital at all, they did so on 12 October 2007 when it was transferred by way of distribution to BHUH. The subsequent transfer to VHL was no more than a re-arrangement of their existing indirect ownership of the share in Vital. Accordingly, I reject the submission that a cause of action accrued on 15 October 2007 and I am satisfied that the company's cause of action against the defendants accrued on 12 October 2007.
30. The time limits for actions in respect of trust property are governed by section 21 of the Limitation Act 1980 which 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.

(2) Where a trustee who is also a beneficiary under the trust receives or retains trust property or its proceeds as his share on a distribution of trust property under the trust, his liability in any action brought by virtue of subsection (1)(b) above to recover that property or its proceeds after the expiration of the period of limitation prescribed by this Act for bringing an action to recover trust property shall be limited to the excess over his proper share.

This subsection only applies if the trustee acted honestly and reasonably in making the distribution

(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.

(4) No beneficiary as against whom there would be a good defence under this Act shall derive any greater or other benefit from a judgment or order obtained by any other beneficiary than he could have obtained if he had brought the action and this Act had been pleaded in defence."

31. The primary limitation period for a claim against the directors in respect of the distribution was six years and expired on, at the latest, 14 October 2013: section 21(3). This is subject to contrary provisions in the Limitation Act, and the claimant relies on three such provisions: section 21(1)(a), section 21(1)(b) and section 32(1)(b). Before Judge Hodge QC, the claimant did not rely on either sub-paragraph of section 21(1). Counsel then appearing for the claimant took the position that section 21(1) did not apply to claims against a director of a company. This was an erroneous view, as the defendants accept. Permission to amend the grounds of appeal so as to raise section 21(1) was granted in November 2015.
32. Section 21(1)(a) provides that no period of limitation prescribed by the Act applies to an action by a beneficiary under a trust "in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy". Mr Parker QC valiantly argued on behalf of the claimant that the case pleaded in the particulars of claim includes a claim of fraudulent breach of duty. I need only say that on both a casual and a close reading of the particulars of claim, no such allegation is made. A claim of fraudulent breach of duty must be clearly made and properly particularised, both of which are lacking in these particulars of claim.
33. Section 21(1)(b) provides that no period of limitation prescribed by the Act applies to an action by a beneficiary under a trust "to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use." The claimant submits that, through their ownership of shares in BHUH and subsequently in VHL, the defendants received trust property, being the share in Vital, and, when Mrs Fielding sold part of her shareholding in VHL to SSE, she to that extent converted the trust property to her use.
34. The principal point taken in opposition to reliance on section 21(1)(b) is that the trust property in question, the Vital share, was never received by the defendants. The share in Vital was transferred by way of distribution in specie from the company to BHUH and then from BHUH to VHL. It is not suggested by the claimant that the share in Vital was not beneficially as well as legally owned, first, by BHUH and, then, by VHL. The share was not held on trust by either of those companies for their shareholders and in particular not for the defendants. In those circumstances, for the purposes of section 21(1)(b), the share in Vital was never "in the possession of" the defendants nor was it ever "received by" the defendants. The defendants would accept, I think, that receipt by an agent or trustee on behalf of a director would amount to receipt by the director but in such a case the property would be beneficially owned by the director (subject to the company's claim).
35. A literal reading of section 21(1)(b) supports the submission made on behalf of the defendants. But it means that its effect can very easily be avoided by trustees who, whether knowingly or otherwise, transfer trust property in breach of trust for their own benefit. The use of companies to hold assets, where the beneficial ownership of the assets is vested in the company but the entire economic benefit is available for the shareholders, has of course been commonplace for many years. Where the receipt of trust assets in breach of trust is likely in many cases to be structured in this way, it would be surprising if section 21(1)(b) was intended to apply only to those cases which fell within its terms on a very literal reading.
36. So far as the researches of counsel go, there appears to be remarkably little authority or commentary on this point. The only authority is In re Pantone 485 Ltd, Miller v Bain [2002] 1 BCLC 266. The respondent Bain was a director of a number of connected companies, including Smarturgent and Pantone, both of which he indirectly controlled. The liquidator of both companies brought proceedings against Bain on a number of claims for breach of duty as a director, including that he had caused Smarturgent to spend a total of over £86,000 for the benefit of Pantone. It was argued on behalf of Bain that this claim was time-barred, but the liquidator relied on section 21(1)(b). The judge, Richard Field QC (later Field J), sitting as a deputy judge of the High Court, dealt with this submission as follows:

"43. The claim against Mr Bain is not that he transferred Smarturgent's money to himself but that he caused the company's money to be spent not for Smarturgent's benefit but for Pantone's. Mr Shaw submitted that the fact that the machine was acquired and the rentals paid for the benefit of Pantone, a company in which Mr Bain had an indirect controlling interest through his shareholding in AS2 meant that he was to be regarded as having received the trust property …

44. In my judgment, as a matter of basic principle where a fiduciary uses his beneficiary's money to confer a benefit on a company he controls he is denying the beneficiary's title to the money for his own purposes and this amounts to a conversion for his own use. The same is true where a fiduciary causes his beneficiary to incur a liability for the benefit of a company which the fiduciary controls. Since this is what the applicant is in substance alleging under the MOVP claim, I hold that this claim is within section 21(1)(b) of the Limitation Act and is therefore not statute barred."

37. Mr Chivers accepted that this passage was against his case but submitted that the judge was wrong. I consider that the judge was right in his construction of section 21(1)(b). The significance of control of a company is that it enables the controller to obtain, in a number of ways, the benefit of the assets of the company, or indeed the assets themselves or their proceeds of sale, provided that all statutory and other legal restrictions are observed. If section 21(1)(b) were construed to apply only to those cases where the trustee directly and personally acquires the trust property, its evident purpose would be much constrained and easily avoided. In my judgment, a construction which includes within its terms a transfer to a company directly or indirectly controlled by the trustee is within the meaning of this provision.
38. Mr Chivers also objected that an account of profits is not within section 21(1)(b). I am inclined to agree, but the remedies sought by the claimant include equitable compensation and that appears to me to be an appropriate remedy falling within section 21(1)(b), particularly where, as in the case of Mrs Fielding, the trustee's indirect interest in the trust asset has been converted to the use of the trustee.
39. It follows, in my judgment, that the claim in this action, so far as it relates to the indirect interests in the share in Vital received by the defendants, is one to which no limitation period applies by reason of section 21(1)(b).
40. Alternatively, the claimant relies on section 32(1)(b) which provides:

"… where in the case of any action for which a period of limitation is prescribed by this Act, either

(a) … ; or

(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or

(c) … ;

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

References in this sub-section to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent."

41. Section 32(2) expands the meaning of section 32(1)(b) as follows:

"For the purposes of sub-section (1) above deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty."

42. It was held by the House of Lords in Cave v Robinson Jarvis & Rolf [2003] 1 AC 384 that, for the purposes of section 32, a deliberate breach of duty requires the defendant to have known that he was committing a breach of duty.
43. Judge Hodge QC dealt with the claimant's reliance on section 32 in his judgment at [55]:

"That leaves the claimant's reliance upon section 32. There the difficulties that the claimant faces are that there are no facts sufficiently asserted to give rise, in my judgment, to any realistic prospect of relying upon either limb of section 32 of the 1980 Act. Given the knowledge and involvement on the part, in particular of the company's auditors, I fail to see how it can be asserted either (1) that there was any deliberate commission of a breach of duty on the part of the defendants; or (2) that there had been any deliberate concealment from the claimant company of facts relevant to the claimant's alleged right of action. I am afraid, from Mr Latimer's point of view, that I just do not see how the claimant company can begin to get home in relation to either of those matters. In view of the involvement of the accountants and solicitors, there is no realistic prospect of establishing either the deliberate commission of a breach of duty or the deliberate concealment of any fact relevant to the claimant's right of action."

44. The judge had at [52] drawn attention to a number of features which had at one stage inclined him to consider an adjournment to enable a reply to be served. Those features were as follows. First, a defence had only recently been filed and there had been no opportunity for the claimant to serve a reply identifying the way in which it advanced its case in reliance on section 32. Second, allegations of the kind raised by the claimant depended not simply on facts but also on inferences which could properly be drawn from the relevant facts, the surrounding circumstances and a view of the state of mind of the defendants as participants. Third, the overall burden of proof remained on the defendants as applicants to establish the negative proposition that the claimant had no real prospect of success and that there was no other reason for trial. Fourth, there would be a compelling reason for trial where there are circumstances that ought to be investigated, "such as reasons for scrutinising what appears, on its face, to have been a legitimate transaction, entered into with advice from reputable solicitors and accountants and auditors."
45. In my judgment, the judge was right to identify these factors as strongly militating against a summary dismissal of the claim. In their defence, the defendants rely on the preparation of interim accounts showing sufficient distributable profits for the purpose of the distribution in specie of the share in Vital and showing the revaluation of the share in Vital. They allege that the revaluation was considered by the directors at a meeting on 29 August 2007 and that the interim accounts were produced to and relied on by the directors at a meeting on 12 October 2007. If those facts could be shown to be established beyond any real argument to the contrary, they would entitle the defendants, on the present pleadings, to a summary dismissal of the claim. This would not be on the basis of any limitation period but on the basis that the distribution in specie was lawful and the claim against the defendants must accordingly fail.
46. The defendants did not however apply for summary judgment on this basis and they did not seek to establish that the claim was bound to fail, only that a defence of limitation was bound to succeed. When the judge said at [55] that in view of the involvement of the accountants and solicitors, there was no realistic prospect of establishing a deliberate commission of a breach of duty, he was in effect saying that there was no prospect of establishing any breach of duty at all or that the distribution of the share in Vital had been unlawful. The essence of the defendants' pleaded case is that the directors, with the benefit of advice, took the necessary steps to ensure that the distribution would be lawful. The claimant does not accept these steps were taken and this raises an issue of fact which cannot be determined on a summary application. The involvement of solicitors and accountants is relevant to the determination of that issue but it does not by itself establish that the directors in fact took the necessary steps.
47. For the purposes of his submissions to this court, Mr Chivers (who also did not appear below) proceeded on the assumption that there had been a deliberate breach of duty on the part of the defendants. I should of course stress that, if this action proceeds, the defendants deny any such allegation and will seek to establish the facts that show that there was no breach of duty on their part, still less a deliberate breach of duty.
48. Mr Chivers challenges that, assuming for present purposes there was the deliberate commission of a breach of duty by the defendants, such breach was unlikely to be discovered for some time and therefore submits that the postponed limitation period for which section 32 makes provision is not applicable to this case.
49. The first issue is to identify the individuals who, on behalf of the claimant company, might discover the wrongdoing so as to start time running. It is, in my view, clear that it cannot be the alleged wrongdoers themselves: see Jetivia SA v Bilta (UK) Ltd [2015] UKSC 23, [2015] 2 WLR 1168. It follows in the present case that knowledge by Mr and Mrs Fielding would not constitute knowledge by the company. There were three other directors of the company and it is not alleged that any of them were wrongdoers. It follows that discovery by one or more of them would constitute knowledge by the claimant company.
50. The defendants have produced a document which, they say, are minutes of a board meeting held on 12 October 2007, which record that management accounts for the month of August 2007 were produced, showing a revaluation of the share in Vital, and relied on as constituting interim accounts for the purposes of the Companies Act. Mr and Mrs Fielding and Mr Whitelock are recorded as being present, with Mr Kavanagh and Mr Beckett recorded as absent. Mr Beckett and Mr Kavanagh, and indeed Mr Whitelock, would know very soon that the distribution had occurred and there is no evidence that they raised any objection to it. Mr Chivers submitted that the inference must be that the steps necessary for a lawful distribution had taken place or, if they had not taken place, those directors would have soon known it.
51. The problem with these submissions is that they make assumptions about the detailed facts, when they have yet to be investigated. The court cannot at this stage conclude either that a revaluation was agreed on 29 August 2007 or that interim accounts were prepared and produced at a meeting on 12 October 2007 nor can the court reach any conclusion about the state of knowledge of the directors other than Mr and Mrs Fielding in relation to these matters. In support of their application for summary judgment, the only evidence adduced were witness statements of Mr Fielding. The defendants could have, but did not, adduce evidence from Mr Whitelock, Mr Kavanagh or Mr Beckett as to their state of knowledge at the relevant times.
52. Irrespective of that consideration, Mr Chivers submitted that the requirement of section 32(2) was not satisfied because it could not be said that the breach of duty was unlikely to be discovered "for some time". He pointed out that the directors other than Mr and Mrs Fielding, knowing that the distribution had in fact been made, would wish to be satisfied that the necessary prior steps had been taken to render it a lawful distribution. They were likely to satisfy themselves on this score within a very short time. It could not therefore be said that the breach of duty, if such occurred, was unlikely to be discovered "for some time".
53. It is important to remember in this context that a postponement of the limitation period for only two or three days is sufficient to defeat a defence that the claim was time-barred. In discussing the phrase "for some time" in JD Weatherspoon Plc v Van De Berg & Co Ltd [2007] EWHC 1044 (Ch), [2007] PNLR 28, Lewison J (as he then was) said at [40]:

"The other ingredient needed to bring section 32(2) into play is that the breach is committed in circumstances where it is unlikely to be discovered "for some time". Although the quoted phrase is imprecise, it seems to me that the implicit contrast that it is setting up is one between a breach of duty that would be immediately discovered (eg the infliction of a physical injury) and one that would not."

54. Although Mr Chivers suggested that this passage was wrong, it seems to me that Lewison J was correct in the contrast he drew between a breach of duty which would be discovered immediately and one which would not be discovered for some time. Necessarily on this basis, "some time" could be a very short period, for example a period of a few days. The test propounded by Lewison J later in the same paragraph is: when could the claimant have discovered the breach with reasonable diligence? In my judgment, that question can be answered only after a detailed examination of the evidence relating to the events of October 2007 and the roles played by the various directors. It is simply not possible to determine these issues on an application for summary judgment.
55. Accordingly, I would allow the appeal on the grounds, first, that no period of limitation applies to the claim by reason of section 21(1)(b) and, alternatively, that the availability of a postponed limitation period, such that these proceedings were commenced in time under section 32, cannot be determined on an application for summary judgment.
56. Before leaving this appeal, I should say that the proceedings should from now on be focussed on the determinative issue, that is, whether the distribution in specie of the share in Vital was lawful. If the other members of the court agree, I would direct that the claimant takes steps as soon as possible to fix a case management conference for the purpose of giving directions for the future conduct of these proceedings.

Lord Justice Tomlinson

57. I agree.

Lady Justice Arden

58. I also agree.

 
Appendix

34. By reason of the matters set out above, the First and/or Second Defendants are in breach of fiduciary duty or in breach of statutory duty of a fiduciary nature. In particular:

34.1 in breach of their duty only to exercise powers for the purposes for which they were given, the First and/or Second Defendants exercised the power to propose the dividend in specie (insofar as it was lawfully exercised at all) for their own benefit and without any or any adequate purpose as far as the Claimant was concerned.

34.2 in breach of their duty to promote the success of the company, the First and/or Second Defendants proposed the dividend in specie which:

34.2.1 was made without sufficient accumulated, realised profits as required by section 263 of the Companies Act 1985 and was, therefore, unlawful; and/or

34.2.2 conferred a benefit on Vital Holdings Limited and, ultimately, on themselves without any benefit or any adequate benefit to the Claimant. The transaction set out above harmed the Claimant by extracting from the Claimant a valuable asset for free and was a substantial reason for its failure less than 12 months later;

34.3 in breach of their duty to exercise independent judgment the First and/or Second Defendants entered into the transaction set out above:

34.3.1 which was unlawful for the reasons set out above; and/or

34.3.2 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; and/or

34.3.3 did so for their own benefit rather than that of the Claimant. No independent exercise of judgment could reasonably have concluded that the transaction was in the interests of the Claimant;

34.4 in breach of their duty to avoid conflicts of interest, the First and/or Second Defendants:

34.4.1 as set out above, conferred a benefit on Vital Holdings Limited and, ultimately, on themselves without any benefit or any adequate benefit to the Claimant. The transaction harmed the Claimant by extracting a valuable asset for free and was a substantial reason for the Claimant's failure less than 12 months later; and/or

34.4.2 took a maturing business opportunity of the Claimant for themselves in the form of the sale of 30% of the issued share capital in Vital to Scottish and Southern Energy;

34.4.3 made a secret profit for themselves by transferring the issued share capital in Vital to a company which they control, Vital Holdings Limited, and/or then selling 30% of that shareholding to Scottish & Southern Energy for £6.3m;

34.5 as far as the Claimant is able to determine, the First and/or Second Defendants breached their duty to declare the nature and extent of their interest in the proposed transaction or arrangement and, in fact, made no such declaration in the present case. In doing so, the First and/or Second Defendants made a secret profit for themselves by transferring the issued share capital in Vital to a company which they control, Vital Holdings Limited, and/or then selling 30% of that shareholding to Scottish & Southern Energy for £6.3m.