10 March 2022

Missed Understanding: BVI Court Holds Directors In Breach Of Their Duty To Act For A Proper Purpose

Green Elite's predominant purpose, was to compensate key employees of the business.
British Virgin Islands Corporate/Commercial Law
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On 17 January 2022, the BVI Commercial Court handed down judgment in Green Elite (In liquidation) v Fang Ankong et al, in which a claim for breach of directors' duties was brought by the liquidators of Green Elite against the former directors of that company. The Court held that the directors breached the requirement under section 121 of the BVI BCA to carry out their duties for a proper purpose with the result that they were liable in restitution for certain sale proceeds received by them.

Green Elite's predominant purpose (at the time of its creation), was to compensate key employees of the business. The business partners, in furtherance of that objective transferred an equal amount of the shares they each held in another company to Green Elite. Sometime after the transfer, a dispute arose as to whether the purpose of Green Elite subsisted following certain notable changes being made to its business. Notwithstanding the dispute, the First Defendant maintained that the understanding between the business partners was legally binding, and on this basis, proceeded to sell the shares held by Green Elite and distribute the sale proceeds to the key employees, who happened to be the other three directors of Green Elite.

As a result, the opposing shareholder, Delco, issued antecedent proceedings where it successfully appointed liquidators over Green Elite on the basis that it had lost its substratum and to investigate the circumstances surrounding the distribution of the sale proceeds. The liquidators then issued the current proceedings seeking tracing remedies to recoup the sale proceeds, claiming that the directors breached their duties to Green Elite and should account for the sale proceeds.

The Defendants argued that notwithstanding the changes to the business, there was a legally binding understanding that Green Elite's purpose was to compensate key employees and that this purpose did not change. As a result, the First Defendant argued that he acted properly in disposing of the shares and distributing the sale proceeds to the other directors, as the key employees.

The Court rejected the Defendants' case and found that the sale of the entirety of Green Elite's assets and the consequent distribution of the sale proceeds to the three company's directors did not meet the proper purpose test and were therefore liable to be aside. The Court held that it was the duty of the four directors to satisfy themselves that the payment of the monies to three of them was for a proper purpose pursuant to section 121 of the BVI BCA. The Court further opined that where a director receives company property, the burden of proof is on the director to justify the transfer and that any property received is to be treated as being held by the recipient on trust for the company. The finding of a breach of section 121 of the BVI BCA, therefore, meant that the company was entitled to trace the sale proceeds and the first fourth defendants were held to be jointly and severally liable to account for all the monies received from the sale proceeds.

Harneys acted for the successful Claimant.

This decision demonstrates that the BVI Court remains committed to giving effect to the protections available to shareholders under the BVI BCA and that directors must be careful to ensure that their duties are being carried out for a proper purpose. This decision is the Court's latest formulation and useful application of the proper purpose test.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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