Directors' resignations, distressed companies and Duomatic

Quick read

Here, we focus on one aspect of Byers v Chen: the claim of liquidators of a BVI-incorporated company (the Company) against its director, Miss Chen (C) for breach of her fiduciary duties. The Privy Council held that despite handing in a resignation letter, C remained as a director and owed fiduciary duties to the Company. She could not just "stand by idly and allow a company’s assets to be depleted improperly".

Background

At all material times, C was the ultimate beneficiary of the Company.
On 29 May 2009, C, being the sole director of the Company, sought to appoint a replacement director and simultaneously resign by way of a letter.
In October 2009, the Company lost an action brought against it in the London High Court. On the last day of the trial, the Company conceded that it was commercially insolvent.
Shortly after, the Company repaid a debt to a company owned and controlled by a business acquaintance of C (the Repayment).
The liquidators began proceedings against C in the BVI High Court, claiming that she breached her fiduciary duties as director of the Company for causing and procuring the Repayment.
The BVI High Court decided in favour of C and the Eastern Caribbean Court of Appeal agreed with the trial judge and dismissed the appeal. The liquidators subsequently appealed to the Privy Council.

Did C actually resign?

Under the Company's articles of association, written notice of resignation by a director "has effect from the date the notice is received by the Company at the office of its registered agent…". C sought to rely on her letter dated 29 May 2009 to show that she resigned with effect from that date. However, the letter was not received by the Company's registered agent.

C argued that by application of the Duomatic principle, the resignation had been received by the Company, acting through her in her capacity as the Company's ultimate beneficiary. Under the principle, where it can be shown that all shareholders having a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution passed in a general meeting

The application of the Duomatic principle meant that as soon as C had written the letter, the Company had received it. Her resignation was therefore effective once she had written the letter.

Judgment

The Privy Council "ha(d) no doubt that application of this principle [did] not produce the outcome for which [C] contend(ed)". The Council found that:

"[C] originally intended (the letter) to have effect as from 29 May 2009" but "may have had second thoughts", as evidenced by the fact she "continued to act in relation to the business and affairs of (the Company) after 29 May 2009 in just the same way as she had before that date".
In an ironic twist for C, by applying the Duomatic principle, she – in her capacity as the ultimate beneficiary of the Company – had agreed to withdraw her own resignation.

Why did the Privy Council find that C had "continued to act in relation to the business and affairs of (the Company)"?

The Privy Council considered that:

There was clear evidence that (the Company's) staff continued to behave as if C remained as a director until well after 29 May 2009.
There was an affidavit from a partner of the Company's solicitors' firm. The partner considered that C was the key decision-maker in relation to the Company.
It was not clear if anyone was appointed as a director in place of C (despite her letter).
There was evidence that C had "expressed her preferences as to (the insolvency) process and venue, down to the budget for lawyers’ fees. She agreed to underwrite the appointment of Grant Thornton as administrators/liquidators…".
C continued to have sole signing rights on the Company's bank account.
Even though the COO of the Company had made the Repayment, C was still responsible for this and her failure to prevent the funds from being transferred was a breach of her fiduciary duties.
The Privy Council remarked that "a lack of involvement by [C] in the day to day management of (the Company)'s business after the beginning of August 2009 could provide little evidential support for the conclusion that she had resigned as a de jure director" and the deciding factor was that if "there (was) no evidence that [C] ceased to be a de jure director at or around the beginning of August 2009, there was at least some evidence that she did not".

Key takeaways

C continued to owe fiduciary duties to the Company to act honestly and in good faith in what she believed to be the best interests of the Company, and as the Company was insolvent, in the best interests of the Company's creditors.
Even if another employee was the one responsible for the Repayment, C was still aware of these payments and had a fiduciary duty to the Company to take all reasonable steps to intervene to prevent a payment being made from a trading account of which she was sole signatory for an improper purpose.

This decision will be of particular interest to sole directors and to smaller companies who may have more informal management arrangements. C's tendering of a pro forma resignation proved ineffective in the eyes of the Court, because she continued to direct the affairs of the Company.

The case is also a timely reminder for directors of financially stressed companies, who should keep abreast of their continuing fiduciary duties and consider the interests of the company’s creditors, once the insolvent administration of the company becomes inevitable.