Iain Penman: Byres v Chen – why fiduciary duties may still apply after a director resigns
Iain Penman, senior associate at Brodies LLP, discusses fiduciary duties and why they may still apply after a director resigns.
Did you know that a director’s fiduciary duties can still apply, even after they have resigned? This was the situation in the recent case BVI case of Byres v Chen ) where a former director was found to have breached her duties, by authorising payments to a creditor, at a point when she knew the company could not avoid insolvency.
Whilst this case relates to BVI law, the courts detailed analysis of fiduciary duties and when they are owed means that it is instructive to those operating business in the UK.
The decision of the Privy Council centred around an allegation of misfeasance against Diane Chen, former director of Pioneer Freight Futures Ltd (PFF), and examined in what circumstances directors owe fiduciary duties.
PFF traded in forward freight agreements. Following a collapse in that market, PFF experienced financial difficulties and entered into a loan agreement with Zenato Investments Limited in May 2009.
PFF was subsequently involved in litigation with a competitor and, finding itself in a better-than-expected position, made repayments to Zenato in 2009. However, at that time, PFF was cashflow insolvent and a formal insolvency process was inevitable.
Following repayment to Zenato, PFF entered into liquidation. Some years later, the liquidators litigated against Ms Chen for breach of fiduciary duties as a de jure, de facto or shadow director and sought repayment of the funds paid to Zenato as an unfair preference.
At first instance, the judge recorded as common ground between the parties that a director who is aware their company cannot avoid insolvent liquidation, yet uses company money to pay a creditor, without proper reason for doing so, has misapplied company funds and is in breach of their fiduciary duty.
In considering the specific facts of the case, the judge also concluded that - at all times - following the litigation with Zenator, PFF was unable to pay its debts and insolvent liquidation was inevitable.
However, he ultimately found that Ms Chen was not in breach of her fiduciary duties, on the basis that she ceased to be a director in August 2009 and owed no fiduciary duties at the time of the Zenato payments. While Ms Chen knew of and did not object to the Zenato payments, she did not instruct or procure them to be made.
The matter was reconsidered at the Court of Appeal, which observed that while the payments to Zenato constituted an unfair preference, the court would not exercise its discretion to make an order against Ms Chen because she did not financially benefit from her actions.
The matter went to a final appeal in front of the Judicial Committee of the Privy Council, where the court concluded that Ms Chen did owe fiduciary duties to PFF at the time the payments were made to Zenato and her failure to intervene constituted a breach of her fiduciary duties.
In reaching this decision, the Privy Council considered five key questions:
- Did Ms Chen owe fiduciary duties to PFF in November 2009?
- Did she resign as a de jure director of PFF on or about 29 May 2009?
- Did she cease to be a de jure director of PFF in early August 2009?
- Did she owe fiduciary duties to PFF after the beginning of August 2009?
- Did Ms Chen breach her fiduciary duties?
Ms Chen was the only de jure director of PFF at the beginning of 2009. She remained so until the appointment of provisional liquidators. It was the liquidators’ case at trial that she remained a de jure director until at least November 2009 and was in that position when payments were made to Zenato. The liquidators also contended if she was not a de jure director, she was at least a de facto or shadow director of PFF.
Ms Chen argued that she resigned on 29 May 2009 via a letter, was not re-appointed at any other time and did not owe any fiduciary duties.
Notably, the BVI Companies Act 2004 provides that a company must have at least one director. If it does not, any person who manages, directors or supervises the business or its affairs is deemed to be a director for the purposes of that act.
There was confusion over whether attempts by Ms Chen to appoint another director had been effective and the Privy Council concluded that if there was no satisfactory evidence to suggest so, it would support the view that Ms Chen did not resign on 29 May 2009. They also concluded there was ample evidence that Ms Chen continued to act as a de jure director of PFF after 29 May 2009.
As part of considering the effect of Ms Chen’s purported resignation, the court looked at the Duomatic principal. As the sole shareholder of PFF was an entity controlled by Ms Chen; the Privy Council was satisfied that the consent of Ms Chen as beneficial owner of PFF was sufficient for the Duomaticprincipal to apply and that Ms Chen continued to be a de jure director after 29 May 2009.
Did Ms Chen cease to be a de jure director of PFF in early August 2009?
No, the court concluded that she continued to hold this role – and had fiduciary duties after this time. The evidence revealed that while Ms Chen might not have been involved in the day-to-day running of PFF after early August 2009, her instructions were sought on the forthcoming insolvency proceedings and PFF’s ongoing business concerns.
Once it became apparent that PFF was insolvent, it was the director’s duty to consider the interests of the creditors. The fact that Ms Chen was actively involved in decisions on the form and place of insolvency proceedings indicated that she was still a director.
Ms Chen continued to have sole signing rights on PFF’s bank accounts after May 2009 and in August 2009. Electronic banking transactions could only be made with her authorisation - again suggesting that she continued to direct PFF’s business affairs after August 2009.
Did Ms Chen have fiduciary duties to PFF after the beginning of August 2009?
In the circumstances of this case, the Privy Council considered that they could answer this question definitively. Their view was that Ms Chen continued to owe fiduciary duties to PFF after the beginning of August 2009 because she remained a de jure director.
Did Ms Chen breach her fiduciary duties?
The Privy Council concluded that, when authorising or making payments from PFF’s accounts, Ms Chen had a fiduciary duty to act honestly and in good faith in what she believed to be the best interests of PFF and its creditors. Once PFF became insolvent, she had a duty to act in a way that would further the interests of PFF’s creditors.
Those duties could not be evaded simply by delegating her authority to an employee or de facto director to make payments from PFF accounts.
Ms Chen had a fiduciary duty to PFF to take all reasonable steps to intervene, to prevent payment being made for an improper purpose, from a trading account of which she was sole signatory.
Ms Chen was, as the judge at first instance described, “ultimately the boss”. As such, the Privy Council was satisfied that her inaction amounted to a breach of her fiduciary duties to PFF.
This case highlights the importance of directors being aware of the circumstances in which they owe duties and ensuring they fully comply, otherwise they could find their conduct being reviewed and being ordered to make redress for the benefit of the company’s creditors. The Byres v Chen case serves as another reminder that resignation does not stop directors’ exposure to personal liability.