Directors’ Duties – Inaction is a breach of duty - Privy Council rules
In the recent case of Byers and others v Chen, the Privy Council examined the role of a director.
Miss Chen, who was a sole director of a BVI company named PFF, sought to appoint a replacement director and simultaneously resign by way of a letter (which was accepted by PFF in her role as its ultimate shareholder). PFF subsequently repaid a debt of US$13 million to a creditor and subsequently went into liquidation.
PFF’s liquidators pursued Miss Chen personally on the basis that PFF had entered into a voidable transaction. The liquidators lost in the Commercial Court and Court of Appeal and asked the Privy Council to decide whether Miss Chen had been a director at the relevant time.
Although the Board noted that it ought to intervene on a trial Judge’s factual conclusions only on rare occasions, it did decide to revisit the basis upon which the previous judgments were made and held that Miss Chen had been a de jure director when the payments were made.
The Board found that the trial Judge had erred in thinking that it was common ground that Miss Chen had resigned as a de jure director before payments to the creditor were in contemplation.
The Board held that there was no finding that Miss Chen’s “state of mind remained as it was” when she wrote the resignation letter and that she continued to be a de jure director on the facts.
Although Miss Chen had not been involved in the repayments, the Board held that a director who knows that a fellow director is acting in breach of a duty or an employee is misapplying a company’s assets must take reasonable steps to prevent those activities from occurring.
The Board rejected the liquidator’s additional arguments that the speed and concision of the trial Judge’s judgment ought to attract criticism.
Harneys represented the respondent and is grateful for the contribution of the late Lord Kerr to this judgment. A copy of the judgment can be found here.