Case Update: Director’s Breach of Fiduciary Duty Through Inaction

The Privy Council’s decision in Byers v Chen Ningning [2021] UKPC 4 reiterates certain key points of law on the director’s fiduciary duty to the company. 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 that from happening.

Summary of Decision and Significance

The company in this case was a company incorporated in the British Virgin Islands (BVI) and insolvent at the material period. Under common law, once a company is insolvent, the director’s fiduciary duties owed to the company must also include considering what is in the best interests of the creditors of the company.

Despite the company being insolvent, the director, Miss Chen, had allowed the chief operating officer to make substantial repayments to a single creditor.  The company was eventually wound up and the liquidators brought an action against Miss Chen claiming that she breached her fiduciary duties.

The case was appealed to the UK Privy Council, being the apex court for several Commonwealth territories including the BVI. The decision emphasised that Miss Chen could not stand idly by and allow for the wrong use of the company’s assets. Miss Chen’s inaction could also amount to a breach of her fiduciary duties owed to the company.

Background Facts

For this decision, I only focus on certain key background facts relevant to the issue of the director’s breach of fiduciary duty.

The company in question is Pioneer Freight Futures Ltd or PFF. PFF is a company incorporated in the British Virgin Islands.

During the material time in question, Miss Chen was the sole director of PFF and was the sole authorised signatory of PFF’s main account.

In September 2008, PFF began to experience severe financial difficulties.

In May 2009, PFF entered into a loan agreement with a company called Zenato. Zenato loaned sums totalling USD13 million to PFF.

By the end of October 2009, there was no doubt that PFF was now insolvent and Miss Chen was aware of this.

However, in November 2009, PFF repaid Zenato the loan amount of USD13 million. The repayments were carried out by PFF’s chief operating officer (COO). In practice, PFF’s banking transactions were conducted electronically by PFF’s staff without Miss Chen having to sign anything. However, Miss Chen was aware of the repayment made by PFF to Zenato.

In December 2009 onwards, PFF went into liquidation. The liquidators of PFF then brought a claim against Miss Chen claiming for, among others, that Miss Chen had breached her fiduciary duties owed to PFF.

Decision

First, the Privy Council reiterated that the general duties of a director are well known and codified. The duties include a duty to act honestly and in good faith and in what the director considers to be in the best interests of the company, and a duty to exercise his or her powers for a proper purpose.

Second, when making or authorising payments from PFF’s account, Miss Chen had a fiduciary duty to act in the best interests of PFF and, through PFF, as an insolvent company, in the best interests of PFF’s creditors. Similarly, she had a duty to exercise her powers as a director for proper purposes. That is to say, once PFF became insolvent, she had to exercise her powers for purposes which would further the interests of PFF’s creditors.

Third, Miss Chen could not evade these duties owed to PFF and, through PFF, duties owed to its creditors, by simply delegating to an employee her authority to make payments from PFF’s account. A director may not knowingly stand by idly and allow a company’s assets to be depleted improperly. 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.

Fourth, the Privy Council applied the principles to the facts of the case. Miss Chen was aware of the payments made out by the COO. The repayment of the whole of the Zenato loan was undoubtedly improper. This payment was made at a time when PFF was insolvent and without any proper reason. Yet, Miss Chen took no steps to prevent it. There was no doubt that if Miss Chen had intervened, the payments would not have been made. Therefore, Miss Chen’s inaction amounted to a breach of fiduciary duty to PFF.

Comments

This Privy Council decision, and where it refers to English law authorities, would be persuasive for Malaysian decisions as well. Malaysia law also recognises in common law that where a company is insolvent, the director’s fiduciary duty owed to the company must also be in the best interests of the creditors.

For example, see the High Court decision in CIMB Bank Bhd v Jaring Communications Sdn Bhd [2017] 4 CLJ 465 at [72]. Mohd Nazlan Ghazali JC (as he then was) emphasised that when a company is insolvent, the interests of the creditors are paramount. The director had acted in of his fiduciary duties, through the company, to the creditors of the company.

On a more general application, this decision serves as a stark reminder to directors that they cannot stand idly by and allow other directors or employees to misapply the assets of the company. Inaction can itself amount to a breach of the director’s fiduciary duties.

 

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