Green Elite: The Duomatic Principle, S.175 And Directors' Liability For Unauthorised Payments

• Law Firm: Conyers
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Shareholders
• Author: Mr Matthew Brown
• Published date: 31 January 2023

The Eastern Caribbean Court of Appeal recently handed down judgment in Fang Ankong and anr v Green Elite Limited (in Liquidation) BVIHCMAP2022/0013. The case addresses a number of important legal issues relating to the operation of the Duomatic principle¹, the meaning and effect of s.175 of the BVI Business Companies Act, 2004 (the "BCA"), and a BVI director's liability for unauthorised payments.

Below is a summary of the case and a list of the key points from the Court of Appeal's decision. A copy of that judgment is available here.

The Basic Facts

At its heart the case concerned payments (totalling c.HK$150 million) that had been made by a BVI company - Green Elite - to three of its directors, who were also employees of the company. The company subsequently went into liquidation and its liquidators alleged that those payments - which comprised the sale proceeds of assets previously owned by Green Elite - had been made by the directors in breach of their fiduciary duties.

Among other things, liquidators alleged that in making the relevant payments the directors had: (a) acted in breach of s.121 of the BCA (which imposes a duty on a BVI director to exercise his or her powers as director for a proper purpose and in compliance with the BCA and the company's M&As - "s.121"); and (b) failed to comply with the requirements of s.175 of the BCA (which they alleged also constituted a separate breach of s.121) ("s.175").

For the benefit of any non-BVI lawyers reading this, s.175 applies where there is a disposition by a BVI company of more than 50% in value of its assets which is not made in the usual or regular course of the business carried on by the company. It is intended to provide an important check on the directors' power to dispose of the company's assets, in that (among other things) it requires that the proposed disposal be authorised by a shareholders' resolution.

In Fang, the liquidators' allegations were defended on the basis that: (a) the relevant shareholders had authorised the payments in accordance with the Duomatic principle; and (b) s.175 did not apply to the payments, but if it did the directors had complied with its requirements.

The Decision of the BVI Commercial Court

At first instance ² Jack J found that the Duomatic principle did not apply, as the "understanding" relied upon by the directors (as allegedly authorising the relevant payments) had not been intended by the shareholders to be legally binding. In particular, Jack J found that...