BVI: Privy Council Provides Guidance on Breach of Directors’ Duties

The Privy Council has provided important guidance on the fiduciary duties owed by directors of BVI companies and breach of those duties. This decision also offers a rare example of the Privy Council overturning concurrent findings of fact made by the two courts below.

In February 2021, the Judicial Committee of the Privy Council (Privy Council) handed down its decision in Byers and others v Chen Ningning [2021] UKPC 4. This decision is of significance to commercial practice in the BVI and provides welcome guidance to directors of BVI companies and to insolvency practitioners who might be faced with bringing proceedings for and on behalf of a company against former directors for breach of their duties whilst in office.

The Privy Council’s judgment also provides commentary on when it will be appropriate for an appellate court to intrude upon and reassess findings of facts made by lower courts. In this case the Privy Council overturned decisions of both the BVI High Court and the Eastern Caribbean Court of Appeal, a rare occurrence. 

Background

A BVI company called Pioneer Freight Futures (PFF) was incorporated for the purpose of trading forward freight agreements. The futures contracts that PFF entered into related to rates for the shipment of freight, which allow shipowners and traders to manage their future exposure to the volatility of freight rates and costs.

In October 2009, as a result of litigation that had taken place in London, PFF acknowledged that it was commercially insolvent. Shortly thereafter, in November 2009, PFF repaid a loan of US$13 million in three tranches to a company called Zenato Investments Limited (Zenato), which PFF had entered into in May 2009. In December 2009, a matter of weeks after the loan was repaid, PFF was caused to enter into liquidation at the hands of its sole director (Miss Chen). Mark Byers and Matthew Richardson of Grant Thornton were appointed as the joint liquidators of PFF (PFF Liquidators).

In 2014, after carrying out their investigations, the PFF Liquidators were in a position to make a proposed interim dividend to PFF’s creditors of 6%. Miss Chen would have been due to receive an interim dividend of US$5.4 million as a result of an assignment which had placed the debts of PFF to its parent company. The PFF Liquidators withheld payment of the interim dividend to Miss Chen on the basis that Miss Chen had wrongfully caused PFF to repay the US$13 million loan to Zenato.

The High Court Proceedings

Miss Chen made an application to the BVI High Court (BVI Court) seeking payment of the interim dividend which had been withheld by the PFF Liquidators. Shortly thereafter, the PFF Liquidators issued separate proceedings in the BVI Court against Miss Chen seeking the sum of US$13 million, together with interest. The liquidators’ claim was based on Miss Chen’s alleged breach of fiduciary duty as a de jure, de facto or shadow director of PFF, or someone whose role in the affairs of PFF justified the imposition of fiduciary duties and sought the restoration of an unfair preference (as a voidable transaction within the meaning of, respectively, sections 245 and 244 of the BVI Insolvency Act 2003).

It was common ground between the parties that Miss Chen had been PFF’s sole director until the end of May 2009. However, there was a dispute as to when Miss Chen had resigned her directorship and the extent of her involvement in effecting the repayment of the loan to Zenato (this was despite the fact that Miss Chen had been the sole signatory for PFF’s bank accounts when the relevant transfers were ordered / made via those accounts).

A 4 day trial took place before Bannister J in March 2015. A short judgment was handed down less than 2 weeks after the trial concluded. Bannister J dismissed the PFF Liquidators’ claims and expressed himself in “forthright and robust” terms (as described by the Privy Council in their judgment) when considering and addressing the claims brought by the PFF Liquidators.

The Appeal

The liquidators appealed the BVI Court’s decision. In January 2016, the Eastern Caribbean Court of Appeal (Court of Appeal) heard the appeal over a period of 2 days. The appeal judgment, which upheld the decision of the BVI Court, was handed down by the Court of Appeal in June 2018 (2.5 years later).

The Privy Council’s Decision

The Privy Council appeal was heard in June 2020 before a board comprising of Lord Kerr, Lord Briggs, Lady Arden, Lord Kitchin and Lord Leggatt. Judgment was given on 22 February 2021. In its judgment the Privy Council found that:

• The BVI Court and the Court of Appeal had been wrong to accept that Miss Chen had resigned her sole directorship in May 2009 (or at all). The Privy Council found that Bannister J’s findings of fact on this issue were not supported by any evidence, and as such, that the Judge had made an error of law. The Eastern Caribbean Court of Appeal had also failed to intervene and had therefore compounded that error.

• Having found that Miss Chen had not resigned from her directorship of PFF, and that by implication she had continued to owe fiduciary duties to PFF, the Privy Council then went on to assess whether the duties owed by Miss Chen to PFF had been breached. The Board was definitive on that question and found that Miss Chen had breached her fiduciary duties in allowing the repayment of the Zenato loan. Miss Chen, as the person who was the sole signatory of the company’s trading account, had a fiduciary duty to PFF to take all reasonable steps to prevent a payment being made from that account for an improper purpose. The Board re-stated well-worn principles in this respect, commenting that:

“[Miss Chen] could not evade [her fiduciary duties] to PFF and, through PFF, to its creditors, simply by delegating to an employee or a de facto director her authority to make payments from PFF’s account.”

“It has been held in a number of cases, correctly, in the Board’s opinion, that a director may not knowingly stand by idly and allow a company’s assets to be depleted improperly: see, for example, Walker v Stones [2001] QB 902, at 921D-E per Sir Christopher Slade; Neville v Krikorian [2006] EWCA Civ 943; [2007] 1 BCLC 1, paras 49-51 per Chadwick LJ; Lexi Holdings v Luqman [2007] EWHC 2652 (Ch), paras 201-205 per Briggs J (as he then was). To the contrary, a director who knows that a fellow director is acting in breach of duty or that an employee is misapplying the assets of the company must take reasonable steps to prevent those activities from occurring.”

With respect to the delay in the Court of Appeal delivering its judgment, the Board accepted that the delay had been excessive and that this therefore justified the careful consideration of the merits of the appeal by the Privy Council.

Conclusion

The decision of the Privy Council in Byers v Chen is a timely reminder of the duties which BVI directors owe to the companies to which they are appointed and the need for directors to take reasonable steps to prevent any breach of duty or misapplication of the company’s assets. Separately, this decision also offers judicial guidance and commentary as to the circumstances in which an aggrieved party can ask an appellate court to intervene in substance due to excessive delays in the usual processes of the court and the administration of justice.

The PFF Liquidators were represented by HFW (as Privy Council agents) and Lennox Paton, instructing Stephen Smith QC and Ben Griffiths of Erskine Chambers.

This article was co-authored by HFW and Lennox Paton. The HFW team which acted for the successful liquidators in this case included Rick Brown (Partner, London) and Scott Cruickshank (Partner, BVI), assisted by Joshua Prest (Associate, London).

For further information, please contact the authors of this article or your usual HFW contact(s).