First Subsea Ltd v Balltec [2017] EWCA Civ 186

A company director prepared and submitted competitive bids for contracts through a rival company whilst still a director. The Court of Appeal held that his breaches of fiduciary duty were fraudulent within s.21(1)(a) Limitation Act 1980, meaning no limitation period applied. Directors are Class 1 fiduciaries and trustees for limitation purposes.

Facts

Mr Emmett was a non-executive director of First Subsea Limited (formerly BSW Limited), a company specialising in underwater tools and machinery for the oil industry. Following disputes with the majority shareholder, Mr Emmett formed a competing company, Balltec Limited, and while still a director of BSW, prepared and submitted competitive tender bids for contracts with Technip, knowing BSW was also bidding. He told a key supplier that BSW was effectively insolvent and used confidential company documents. All breaches occurred before December 2004, more than six years before proceedings were issued in December 2010.

Background to the Dispute

Mr Emmett had co-founded the business and sold a majority stake to Arnlea Limited in 2001. Disputes arose with the new majority shareholder, Mr Suttie, leading to Mr Emmett’s gradual exclusion from management. Despite this, Mr Emmett remained a director to retain leverage over his shareholding position.

Issues

The central issue was whether claims for breach of fiduciary duty were statute barred under the Limitation Act 1980, specifically:

• Whether the claims fell within s.21(3) as actions to recover trust property or in respect of breach of trust
• Whether s.21(1)(a) applied to disapply limitation on the basis of fraudulent breach of trust
• Whether s.21(1)(b) applied as a claim to recover trust property in the trustee’s possession

Judgment

The Court of Appeal dismissed the appeal, holding that s.21(1)(a) applied to Mr Emmett’s breaches of fiduciary duty.

Directors as Class 1 Fiduciaries

Lord Justice Patten, delivering the leading judgment, confirmed that directors are Class 1 fiduciaries (trustees) for limitation purposes, following Paragon Finance v DB Thakerar and Williams v Central Bank of Nigeria. He stated:

“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.”

Application of s.21(1)(a)

The Court held that once a fiduciary qualifies as a Class 1 trustee, any fraudulent breach of duty falls within s.21(1)(a), regardless of whether it involves misappropriation of company property:

“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.”

Finding of Fraud

The trial judge’s finding that Mr Emmett acted dishonestly was upheld. He committed breaches knowing they would injure BSW and intending that they should. The Court confirmed the allegations were adequately pleaded and put to Mr Emmett in cross-examination.

Implications

This case clarifies important principles regarding limitation periods for claims against company directors:

• Directors are Class 1 fiduciaries for limitation purposes under s.21 of the Limitation Act 1980
• Fraudulent breaches of fiduciary duty by directors fall within s.21(1)(a), meaning no limitation period applies
• The application of s.21(1)(a) does not require misappropriation of pre-existing company property
• The distinction between Class 1 and Class 2 constructive trusts remains fundamental for limitation purposes

The decision affirms Gwembe Valley v Koshy and provides important guidance on the interplay between directors’ fiduciary duties and limitation defences.

Verdict: Appeal dismissed. The Court of Appeal upheld the trial judge’s finding that Mr Emmett’s breaches of fiduciary duty were fraudulent within s.21(1)(a) of the Limitation Act 1980, meaning no statutory limitation period applied to the claims against him.

Source: First Subsea Ltd v Balltec [2017] EWCA Civ 186