BVI Court of Appeal Clarifies Duties Owed by Directors to Creditors

The Court of Appeal provided authoritative guidance on the application of the rule in West Mercia, which deals with the duties owed by directors to creditors where the company is (or could become) insolvent and a director’s liability to compensate creditors for losses resulting from breach of that duty.

In June 2025, the Eastern Caribbean Court of Appeal (Court of Appeal) delivered a landmark judgment in the long-running BVI litigation Byers & Richardson (as Joint Liquidators of Pioneer Freight Futures Company Limited) v Chen Ningning (BVIHCMAP2024/0009) (PFF Litigation), a case which has traversed the BVI Commercial Court, the Court of Appeal, and the Judicial Committee of the Privy Council (Privy Council). You can read our article analysing the Privy Council’s decision, which concerns breach of duties owed by BVI directors, here.

This article explores the legal and practical implications of the Court of Appeal’s decision and its broader significance for directors, creditors and liquidators of BVI companies and in other common law jurisdictions.

Background

The respondent, Chen Ningning, was the sole director and beneficial owner of Pioneer Freight Futures Company Limited (PFF), a BVI company. In 2009, PFF received a US$13 million loan from Zenato Investments Ltd (Zenato). By 23 October 2009, PFF was commercially insolvent. Nevertheless, between 3 and 27 November 2009, PFF repaid the loan, in full, to Zenato by way of three instalments (Zenato Payments). All of the Zenato Payments were paid out of the same bank account. Ms Chen was the sole signatory of that account.

The joint liquidators of PFF, Mark Byers and Matthew Richardson (PFF Liquidators), filed proceedings at the BVI High Court (Court) alleging that Ms Chen had breached fiduciary duties owed to the company and its creditors by failing to prevent the Zenato Payments, which were made at a time when PFF was insolvent and on the brink of liquidation, from being made.

The PFF Litigation has a complex procedural history. At first instance, the Court found that Ms Chen had ceased to be a director before the Zenato Payments were made and, as a result, Ms Chen owed no fiduciary duties to PFF.

This finding was upheld by the Court of Appeal but overturned by the Privy Council. The Privy Council held that Ms Chen was a legally appointed director when the Zenato Payments were made and had breached her fiduciary duties to PFF, and to its creditors, by failing to stop the Zenato Payments being made in circumstances where the company was insolvent.

The Privy Council sent the case back to the Court to determine what, if any, sums Ms Chen should pay to PFF in respect of her breach of duty. The PFF Liquidators then sought an order requiring Ms Chen to payment US$13 million plus interest to PFF. The Court dismissed the PFF Liquidators’ claim, holding that the payments were “balance sheet neutral” and did not cause any loss to PFF which should be compensated. The PFF Liquidators appealed that decision.

The Court of Appeal’s decision

The judgments delivered by the Court and the Court of Appeal drew heavily on the decision of the English Court of Appeal in West Mercia Safetywear Ltd (in liquidation) v Dodd [1988] BCLC 250, which established that, upon a company’s insolvency or imminent insolvency, directors have a duty under E&W law to consider the interests of the company’s creditors and may be held liable for losses to creditors resulting from a breach of that duty. Although the decision in West Mercia is not binding on the BVI Courts, it is a persuasive common law authority in the BVI.

The Court of Appeal was asked to consider whether a director who breaches the rule in West Mercia can be liable to compensate the company where the decision or transaction in question is “balance sheet neutral” (i.e., the company’s liabilities are reduced by the same amount as its assets so the net effect is that the company suffers no loss).

The Court of Appeal decided that the trial judge had made a mistake. It confirmed that, once a company is insolvent or bordering on insolvency, directors must act in the interests of the company’s creditors. This fiduciary duty is not merely procedural; it has substantive consequences. The Court of Appeal held that the depletion of assets available for distribution to creditors constitutes a loss to the company, even if the transaction does not affect the company’s net asset position.

The Court of Appeal rejected the narrow interpretation of the rule in West Mercia applied by the trial judge, which required the company in question to suffer a demonstrable net loss and held, instead, that the loss suffered by the company’s creditors should be treated as a loss suffered by the company for the purposes of equitable compensation. This approach is in line with the UK Supreme Court’s reasoning in BTI 2014 LLC v Sequana SA [2024] AC 211, where Lord Reed and Lady Arden endorsed the view that the fiduciary duty owed by directors to creditors is a modification of the general duty to act in the company’s best interests.

However, in Byers v Chen the Court of Appeal went further when applying this principle and concluded that once insolvency is inevitable, the company’s interests are effectively synonymous with those of its creditors and that any loss suffered by the creditors due to breach of this duty is loss suffered by the company.

The question of whether Ms Chen personally gained anything (e.g. money or an enhanced reputation) from the Zenato Payments was a key factor in these proceedings. The trial judge’s view was that Ms Chen should not be held responsible because she did not benefit from the Zenato Payments. The Court of Appeal disagreed. It does not matter whether a director benefits from their breach of duty. What matters is whether the director authorised or allowed a payment that unfairly favoured one creditor over others. That, alone, is sufficient to be held responsible under BVI law.

The Court of Appeal ordered Ms Chen to repay US$13 million to PFF, with interest at 5% per year from 29 November 2009. However, it applied the “West Mercia Proviso,” which allows the director to be subrogated to the position of the creditor whose debt was repaid. In practical terms, this means that Ms Chen will be entitled to dividends out from PFF’s liquidation estate that would have been payable to Zenato had the Zenato Payments not been made in 2009. This nuanced remedy ensures that the company’s liquidation estate is restored for the benefit of all creditors and that directors are held accountable for their breach of duty but, at the same time, avoids the company being unjustly enriched at the expense of the director.

Commentary

The Court of Appeal’s decision in Byers v Chen is a significant legal development. It is likely to be persuasive before the courts of England & Wales and in other common law jurisdictions with similar insolvency regimes, such as Australia, Hong Kong and Singapore, so its impact will be felt in the BVI and beyond.

The decision in Byers v Chen provides welcome clarification of the scope of directors’ duties in the context of insolvency and has far-reaching implications for directors.

It will also provide comfort to creditors, lenders and investors, given that it reinforces the principle that, once insolvency looms, directors become stewards of a company’s assets for the benefit of its creditors.

This important decision ensures that directors will be held accountable should their actions prejudice creditors of insolvent BVI companies, turning the Court’s focus from the question of whether the director personally benefitted from their breach of duty to the impact of the transaction on the company’s creditors.

The Court of Appeal’s decision also confirms that balance sheet neutrality is not a defence to a claim for breach of the fiduciary duty established by West Mercia and that the BVI Court will grant equitable remedies to restore the company’s liquidation estate, even where statutory remedies are unavailable (such as the remedies available under the BVI Insolvency Act 2003).

The Court of Appeal’s decision is a significant victory for the PFF Liquidators, who are represented by HFW, instructing Tom Smith KC and Ben Griffiths of South Square Chambers, London. However, that is not the end of this long-running litigation: Ms Chen has been granted conditional leave to appeal to the Privy Council. If the appeal proceeds, the Privy Council will have further opportunity to analyse the scope of directors’ duties and the remedies available when those duties are breached. Until then, the Court of Appeal’s judgment is a leading authority in this critical area of insolvency law.

Contact Us

Our team of expert BVI lawyers remain at the forefront of litigation shaping the future of insolvency law in the BVI and beyond and we are delighted to have secured this outcome for our clients, the PFF Liquidators, and PFF’s creditors.

If you wish to discuss this article, or other questions of BVI law, please contact the authors of this article or your usual HFW contact(s).