Scrutiny faced by directors of companies for possible breaches of their fiduciary duties has been further clarified by the Privy Council in a case[1] involving actions of a director leading up to the insolvency of the company.
Key takeaways regarding duties are:
- Ultimate responsibility for the actions of a company rests with the directors.
The Privy Council dealt with the following questions regarding the actions of the director in question, Ms. Ningning Chen (Ms Chen), co-incidentally one of the Peoples’ Republic’s richest women.
- When does a director’s duties to a company end where insolvency (voluntary or otherwise) is in the mix?
- In an insolvency scenario, in whose interest should a director be acting?
Case facts to give some context to the issues …
The matter involved a payment made on a shipping contract referred to as a “freight forwarding agreement” (FFA) entered into by Pioneer Freight Forward Limited (PFF) a BVI company, at a time when PFF was trading insolvent.
PFF had, under the FFA, and under the authority of Ms Chen, although not directly by her, paid the amount of USD13m to a creditor. The Privy Council found this payment to have favoured one creditor over another. The Privy Council rationalised that until PFF was formally in liquidation, and thereafter by implication until the authority over the bank accounts had been transferred to the appointed liquidators, Ms Chen had a fiduciary duty to act honestly, in good faith, and in what she believed to be in the best interests of PFF. Specifically, she had a duty to the creditors of PFF given that PFF was trading insolvent and then after being placed in liquidation, was insolvent. A director cannot prefer one creditor over another which is what she was shown to have done by making the payment.
The Privy Council also found that Ms Chen could not avoid duties she owed to PFF and its creditors by relying on the fact that she had delegated authority to an employee – the so-called “Novac Djokovic defence”. A director who “knows that assets are being misapplied must take reasonable steps to prevent those activities from occurring”. A positive duty to act is clear in the circumstances.
The payment was undoubtedly improper, made at a time when the PFF was trading insolvent and without any proper reason, yet Ms Chen took no steps to prevent the misappropriation of PFF’s funds.
The rulings will have a profound impact throughout the “English” common law countries, as binding or persuasive precedent, in major countries such as Canada, New Zealand, Hong Kong, Singapore and Australia, as well as throughout the UK overseas territories and dependencies.
Where Marbury provides corporate secretarial services to clients, we are also able to offer a full suite of corporate governance services including independent resident and offshore directorships. Please contact your usual Marbury advisor or info@marburys.com for more information.
[1] Byers & McDonald v Chen Ningning (British Virgin Islands) [2021] UKPC 4
Disclaimer
This updater has been prepared for clients and professional associates of Marbury. The information and expressions of opinion contained are not intended to be a comprehensive study or to provide legal advice. Readers are advised to seek specific advice concerning individual situations. For more information, please contact your usual Marbury advisor or info@marburys.com.