26 April 2021

Steering steady: Navigating directors’ fiduciary duties in insolvency

In the recent case of Byers and others v Chen Nanning [2021] UKPC 4, the UK Privy Council examined the duties of a director in relation to an insolvent British Virgin Islands (BVI) company. Liquidators of Pioneer Freight Futures Ltd (PFF), an insolvent company incorporated in the BVI, brought a claim against Ms Chen, who was a director of the company, for breach of fiduciary duties.

Ms Chen was a director and the ultimate beneficial owner of PFF, via its parent company. PFF had been experiencing financial difficulties since 2008. In May 2009, PFF borrowed US$13 million from Zenato Investments Ltd (Zenato), a company belonging to a business acquaintance of Ms Chen. PFF repaid Zenato the US$13 million loan in full with interest in November 2009 (Zenato Payments). At the time of making the Zenato Payments, PFF was insolvent. On 17 December, PFF applied for the appointment of joint provisional liquidators (which later became liquidators) in the BVI on grounds of insolvency. The liquidators subsequently brought proceedings against Ms Chen for breach of a director’s fiduciary duties for making the Zenato Payments.

A Directors' Duties

The liquidators commenced proceedings in the BVI High Court, claiming Ms Chen breached her duties as a de jure, de facto or shadow director of PFF, or as someone whose role in the affairs of PFF justified the imposition of fiduciary duties. The liquidators also sought an order against Ms Chen on the basis that the Zenato Payments constituted an unfair preference and a voidable transaction under §§.244 and 245 of the Insolvency Act 2003.

After failing to prevail both at first instance and in the Court of Appeal, the board of five judges of the UK Privy Council (the Board) eventually found in favour of the liquidators.

While Ms Chen claimed she was no longer a director of PFF in November 2009 and relied on her letter of resignation dated 29 May 2009 addressed to the board of directors of PFF, there was insufficient evidence the letter was properly delivered to the company. Ms Chen also argued that, as the ultimate beneficial owner of the group of companies to which PFF belonged, she had accepted the delivery of the resignation letter on behalf of PFF by virtue of the Duomatic principle, which allows shareholders (or the ultimate beneficial owners making decisions) to informally approve a company’s actions without needing a formal general meeting. The Board accepted the Duomatic principle, but did not accept Ms Chen’s argument, given that she appeared to act in the same way as before in relation to the business and affairs of PFF, even after her purported resignation.

The Board held that Ms Chen remained a de jure director. It also clarified that a mere purported lack of involvement in the day-to-day management of the company was not enough to demonstrate her resignation. Further, under §.109 of the BVI Business Companies Act 2004, a BVI company must have at least one director, and since there was not sufficient evidence that another director was appointed following Ms Chen’s purported resignation, this gave further support to the conclusion that Ms Chen did not resign.

Breach of Fiduciary Duties and Insolvency of a Company

Once a company is insolvent, the director’s duty is to act honestly, in good faith and in the best interests of creditors of the company. Following this principle, the Board found that the Zenato Payments had been made without justification and so were improper.

Although Ms Chen did not personally arrange the Zenato Payments, she had a fiduciary duty to prevent such payments knowing PFF was insolvent. By delegating to someone else the ability to make payments and by failing to take any action to prevent the improper payments, Ms Chen authorised and caused those payments to be made. The Board found Ms Chen liable for breach of fiduciary duties, since she was “ultimately the boss.” As for unfair preference and voidable trans-actions under §.244 and 245 of the Insolvency Act 2003, this did not need to be considered further as a parallel remedy, in light of the conclusion already reached regarding breach of fiduciary duties.

Significance of the Decision

This UK Privy Council decision is significant because it highlights the importance of a director’s duties, particularly once a BVI company is insolvent. Directors must be aware of their duty to act in the interests of creditors. Given the frequently complex factual circumstances and legal nuances, directors should consider seeking legal advice when navigating the tricky waters of their fiduciary duties of directors.

 

An original version of this article was first published in In-House Community Magazine, April 2021

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