BVI Directors: Important Judicial Guidance on Powers

Harneys (Jonathan Addo led by Jonathan Crow QC) recently represented the successful Appellant Independent Asset Management Company Ltd, the investment manager and controlling shareholder of the Respondent de-registered fund company, Swiss Forfaiting Ltd in a significant ruling for BVI fund and corporate governance professionals.

In its November ruling in the matter, the BVI Court of Appeal specifically considered whether a fresh issuance of shares by directors which altered the balance of voting power between the shareholders was done for a proper purpose.

The rationale behind the proper purpose ‘rule’ is that directors should not issue shares in a manner that could affect the balance of power between groups of shareholders in the company or to create new majorities. This is exactly what happened in this case: the directors created a new majority by the July Issuance, and it does not matter for the proper purpose rule whether the old or the new majority did not have a proprietary interest in the Fund.

The basic rule is that the directors’ purpose, however noble, should not be used to affect the balance of power in the company. If it is used in this way, it is an improper use of the power and is liable to be set aside. However altruistic those motives and reasons may have been “[t]hat is not, in itself, enough.” The Court applied the leading case of Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 82 and section(s) 121 and 184B of the British Virgin Islands Business Companies Act 2004.

Particularly where there is a power struggle between different groups of shareholders, as happened in this case, the directors should not issue additional shares in such a way as to affect the balance of power in the company (or fund) to influence in any way the outcome of shareholders’ resolutions, even if this results in additional capital or other benefits for the company.

This restriction is not written into the company’s articles and it is for this reason that the law (equity) imposes on the directors the additional requirement that the shares must be issued for a proper purpose. If the directors issue shares for an improper purpose, the issue is liable to be set aside. The fiduciary obligation to issue shares for a proper purpose was incorporated in section 121 of the Business Companies Act: protected and enforced through s.184B.

The fiduciary duty that is impressed on the directors to issue shares for a proper purpose is not minimised in any way if the shares that are being issued do not have a proprietary interest in the company and are not being issued for the purpose of raising capital.

This ruling has implications for all corporate and funds clients including directors and appointed officers.