Trust your limitations: Time limits for bringing proceedings for breach of fiduciary obligations

Articles, Procedure + Litigation

In the recent decision of Lewis Securities Ltd (in liquidation) v Carter [2018] NSWCA 118 (Lewis Securities) the NSW Court of Appeal provided some useful insight into the limitation period that applies to actions arising from breaches of fiduciary duties by a company director and whether the limitation period was analogous to actions for statutory breach of duty by a director.

Statutory time limits for breach of duty

Chapter 2D of the Corporations Act 2001 (Cth) (Act) contains the statutory duties directors of companies must comply with when exercising their powers as directors. Actions against directors for breach of their statutory duty usually arise where the director has:

  1. failed to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person in their position would exercise (see section 180 of the Act); and/or
  2.  not exercised their powers in good faith and in the interest of the company (see section 181 of the Act); and/or
  3. used his or her position to gain an advantage for themselves or someone else and have caused the company detriment (see section 182 of the Act); and/or
  4. used information obtained by reasons of his or her position as a director to gain an advantage for themselves or someone else and have caused the company detriment (see section 183 of the Act).

The above provisions create civil obligations, a breach of which can lead to the Court making declarations in respect of the breach (see section 1317E of the Act) and making orders that the director pay the company compensation for the damage suffered as a result of the breach (see section 1317H of the Act).

Pursuant to section 1317K of the Act, an application for declarations and orders relating to a breach by a director of his/her statutory duties must be commenced no later than 6 years after the contravention.

Where a third party is knowingly involved in the breach, a claim can be made against that individual pursuant to the accessorial liability provisions in section 79 of the Act.

Limitation periods for breaches of fiduciary duty

In Lewis Securities, the wife of a director of a company pleaded in her defence that a claim for knowingly assisting her husband in a dishonest and fraudulent design in breach of his duties as a director of the company (i.e. a claim pursuant to the second limb of Barnes v Addy (1874) LR 9 Ch App 244), was statute barred by application of an analogy between sections 14 and 23 of the Limitation Act 1969 (NSW) (LA) and section 1317K of the Act. The breaches of duty that gave rise to the claim against the wife went beyond those found in the Act (i.e. they were breaches of fiduciary duties owed to the company).

In rejecting the wife’s ‘limitation defence’, the Court drew attention to section 47 of the LA, which provides:

(1) An action on a cause of action:

(a) in respect of fraud or a fraudulent breach of trust, against a person who is, while a trustee, a party or privy to the fraud or the breach of trust or against the person’s successor,

(c) to recover trust property, or property into which trust property can be traced, against a trustee or against any other person,

is not maintainable by a trustee of the trust or by a beneficiary under the trust or by a person claiming through a beneficiary under the trust if brought after the expiration of the only or later to expire of such of the following limitation periods as are applicable:

(e) a limitation period of twelve years running from the date on which the plaintiff or a person through whom the plaintiff claims first discovers or may with reasonable diligence discover the facts giving rise to the cause of action and that the cause of action has accrued, and

(f) the limitation period for the cause of action fixed by or under any provision of this Act other than this section.’ (our emphasis).

In this respect, the Court outlined that the definition of ‘trust’ in section 11 of the LA is a broad one and includes:

“…express implied and constructive trusts, whether or not the trustee has a beneficial interest in the trust property, and whether or not the trust arises only by reason of a transaction impeached…”  (our emphasis).

The claim against the wife:

  1. Involved a fraudulent breach of duty (the husband director’s diversion of company property);
  2. A constructive trust over the diverted property was created invoking the parameters of section 47 of the LA; and
  3. The claim against the wife for knowingly assisting in the breach is an ancillary claim deriving from the fraudulent and dishonest breach of duty by her director husband.

The Court acknowledged that a claim for breach of a directors’ fiduciary duties (and corresponding claims for accessorial liability) were sufficiently analogous to a breach of statutory duty and the limitation period under the Act applied. However, where an element of fraud was present (like a dishonest and fraudulent design), the claim will not be barred by analogy.

Take away

The decision serves as a timely reminder of the distinction between the two limitation periods in respect of statutory and fiduciary duties under the Act and the LA.

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