Privy Council confirms directors’ duties are still owed for insolvent companies

Byers & McDonald v Chen Ningning (British Virgin Islands) [2021] UKPC 4

Given the increased scrutiny surrounding New Zealand directors’ duties arising from the collapse of Mainzeal and Debut Homes, this article explores a recent success Grant Thornton has had before the Privy Council in pursuing a claim against a director for breaches of fiduciary duties owed.  It also provides some important insights for company directors about their responsibilities when it comes to asset management.

One of our British Virgin Islands (BVI) liquidation appointments resulted in the Privy Council overturning the decisions of the first and second instance courts. Pioneer Freight Futures Ltd (PFF) was a BVI company that traded in shipping contracts known as ‘forward freight agreements’. PFF was placed into liquidation late 2009 following the collapse of the freight market. As part of its judgment handed down in February this year, the Privy Council held that Ms Ningning Chen, the company director (and previously one of China’s richest women) breached her fiduciary duties by repaying a US$13 million loan to a creditor one month prior to the liquidation, and at a time when PFF was insolvent.

What makes this case so interesting?

There are four key components to this case that make it so compelling, and they serve as a warning to all directors about their duties owed.

The same rules apply here in New Zealand

The applicable provisions of the BVI legislation surrounding directors’ duties are essentially the same as New Zealand legislation; in fact, New Zealand companies legislation was heavily referred to when parts of the BVI Companies Act were drafted. 

Findings of fact and a major delay

The Privy Council will only interfere in the findings of fact made by lower courts on rare occasions. The BVI court of first instance found that Ms Chen had resigned as a director of the company and therefore did not owe fiduciary duties at the time the debt was repaid. However, after hearing submissions about the evidence presented to the lower courts, the Privy Council found that there was no evidence to show that Ms Chen had resigned as a director. The Privy Council stated that the errors made in these factual findings were of fundamental importance and it was therefore appropriate for the Privy Council to intervene and correct them. 

The Privy Council was also critical of the two and a half year delay by the Eastern Caribbean Court of Appeal to issue a decision; it also commented that it would have been better if the comments made by the first instance judge were expressed in a more moderate manner.

Directors’ duties for insolvent companies

Having established that Ms Chen continued in her capacity as a director, the Privy Council found that Ms Chen had a fiduciary duty to act honestly, in good faith and in what she believed to be in the best interests of the company. She also had a duty to act in the best interests of its creditors given the company was insolvent. Repaying the US$13 million loan was clearly not in the interest of all creditors because it favoured one creditor at the expense of others.    

Delegation of directors’ duties

The Privy Council stated that Ms Chen could not evade the duties she owed to PFF and its creditors by simply delegating to an employee or de facto director her authority to make payments from the company’s bank account. The Privy Council further commented that a director who knows that assets are being misapplied must take reasonable steps to prevent those activities from occurring. The repayment was undoubtedly improper, made at a time when the company was insolvent and without any proper reason, yet Ms Chen took no steps to prevent the misappropriation of the company’s funds. 

Naturally we could be accused of bias, but the right result was ultimately achieved in this case; and had these same facts been tried during a New Zealand liquidation, it is highly likely the same conclusion would have been reached: the director breached their fiduciary duties to the company by repaying and/or failing to prevent the repayment of one creditor in favour of others. A timely reminder for all directors to be vigilant in executing their duty of care.

The full Privy Council decision can be accessed here.

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