No time limit in dishonesty

No time limit applied to a company's claim for an account of profits against their managing director who, acting dishonesty, made an unauthorised profit in breach of his fiduciary duty to the company.

The Court of Appeal so held in a reserved judgment substantially dismissing an appeal by the first defendant, Thomas Koshy, from Mr Justice Rimer in the Chancery Division (The Times December 10, 2001) that a claim brought against him by Gwembe Valley Development Co Ltd ("GVDC") for an account of profits was not statute-barred.

GVDC also appealed that part of Mr Justice Rimer's order limiting the scope of the account of profits and dismissing their claim for equitable compensation.

Outstanding costs appeals in the GVDC action and the conjoined action of DEG-Deutsche Investitions und Entwicklungsgesellschaft mbH v Koshy were adjourned for further argument and judgment.

Mr Koshy was the managing director of GVDC, which was involved in agricultural development in Zambia. Between 1986 and 1988 Mr Koshy procured GVDC to enter into loan transactions with another company, Lasco, without making proper disclosure to the other directors of GVDC or its shareholders of the existence and extent of his personal interest and that of his company, Lasco, in the transactions and the size of the profit which they would make out of them.

The judge found that the non-disclosure was dishonest and held, inter alia, that section 21(1) of the Limitation Act 1980 applied so that GVDC's claim was not out of time.

Section 21 of the 1980 Act provided: "(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..".

Mr Hugo Page, QC, for Mr Koshy, Mr Andrew Thompson for GVDC. Lord Justice Mummery, delivering the judgment of the court, said that recent cases had discussed the extent to which breaches of fiduciary duty were treated in the same way as actions for breach of trust and were subject to the same limitation periods, either by direct application of the statute or by analogous application of the statutory powers: see Paragon Finance Plc v DB Thakerar and Co ([1999] 1 All ER 400); Cia de Segurou Imperio v Heath (REBX) Ltd ([2001] I WLR 112) and J. J. Harrison v Harrison )[2002] BCLC 162).

In the light of those cases, the starting assumptions, when considering the application of the 1980 Act to claims against fiduciaries should be that a six-year limitation would apply under section 21(3) unless excluded by section 21(1)(a) or (b).

Mr Koshy had trustee-like responsibilities in the exercise of the powers of management of the property of GVDC and in dealing with the application of its property for the purposes, and in the interests, of the company and of all its members.

Accordingly, the claim for an account, if it was based on a failure in the exercise of those responsibilities was within section 21 and, in principle, was subject to the six-year time limit under section 21(3) unless excluded by either section 21(1)(a) or (b).

The claim against Mr Koshy concerned the personal liability of the fiduciary himself for breach of duty and GVDC's causes of action against him were based on equitable disabilities or the fiduciary duties to which he was subject as a director of GVDC.

As such, Mr Koshy was under a personal liability in equity to account to GVDC for unauthorised profits, either because he was disabled in equity from making an unauthorised personal profit out of the position occupied by him, or because he acted in dishonest breach of fiduciary duty by deliberately and secretly doing so. The profits made by him were treated as taken for and on behalf of GVDC, as the person to whom he owed the duty to account.

Accordingly, the trust imposed on Mr Koshy came not within section 21(1)(b), but within section 21(1)(a), if fraud was proved.

The judge, after hearing the evidence, was satisfied that the reason for Mr Koshy's non-disclosure was dishonest. That was a conclusion with which the court would not interfere.

Accordingly, no part of the claim against Mr Koshy for an account of profits for dishonest breach of fiduciary duty was statute-barred and he was liable to account to GVDC in respect of all profits made by him.

"The Times": 9 September 2003