Factual background
Pioneer Freight Futures Ltd (“PFF”), under the sole directorship of Ms Chen Ningning, received a US$13 million loan from Zenato Investments Ltd. By 23 October 2009, PFF was commercially insolvent, yet it repaid the loan in three instalments in November 2009 (the “Zenato Payments”). Ms. Chen, as the only authorised signatory on the relevant bank account, in effect, facilitated these payments. The joint liquidators of PFF then brought proceedings against her, alleging that she breached her fiduciary duties by authorising or failing to prevent the repayments while the company was insolvent. The case reached the Privy Council, which ruled in 2021 that Ms. Chen remained a de jure director at the time and had breached her fiduciary duties by not intervening.[2]
Following the Privy Council’s decision, the matter was remitted to the BVI High Court to determine whether, and in what quantum, Ms. Chen should be held liable. There was a breach but did this give rise to the ability to recover money from her? The liquidators sought repayment of the US$13 million plus interest. In a 2024 judgment,[3] the BVI High Court dismissed the claim, finding that the payments were balance sheet neutral and caused no net loss to PFF. The judge also rejected the application of equitable remedies, noting that Ms Chen did not personally benefit from the payments. The liquidators appealed, raising two main issues:
- Whether the judge erred in concluding that PFF was not entitled to an order for payment by the respondent for breach of the rule in West Mercia (as described below).
- Whether the judge was correct in concluding that the question of whether the respondent had obtained a benefit from the Zenato Payments was a pre-condition for the application of the rule in West Mercia.
Rule in West Mercia
The rule from West Mercia Safetywear Ltd v Dodd[4] established that when a company is insolvent or on the verge of insolvency, directors must take into account the interests of creditors when making decisions. While directors should typically act solely in the interests of shareholders as a whole, this duty shifts as the company’s financial position deteriorates, in recognition of the fact that creditors effectively become the key stakeholders in the company after a certain point. The decision in West Mercia also recognises that where a payment is made by the company at or nearing insolvency, failing to consider creditors’ interests, an appropriate remedy may include the repayment of the sums improperly paid.
This principle was recently clarified by the UK Supreme Court in BTI v Sequana,[5] which confirmed that the duty arises when directors know, or ought reasonably to know, that the company is insolvent or bordering insolvency, or that an insolvent liquidation or (in England) administration is probable. As the likelihood of insolvency increases, so too does the weight that must be given to creditors’ interests, eventually becoming paramount if insolvency becomes inevitable. Directors who fail to adjust their approach accordingly risk breaching their duties and may be held personally liable, particularly where transactions prejudice creditors.
Balance sheet neutral
When a preferential payment is made (essentially one creditor is preferred to others), it does not alter the company’s overall net asset position, as the reduction in liabilities is matched by an equivalent outflow of cash or assets. In accounting terms, the transaction is balance sheet neutral, there is no impact on the company’s equity or solvency position from a purely numerical standpoint.
However, where a company is insolvent or insolvency is imminent, any loss suffered by the general body of creditors is treated as a loss to the company itself for the purposes of assessing a breach of the rule in West Mercia. Accordingly, “loss” may be viewed as the amount that would have been available for distribution to all the general creditors in a liquidation but for the preferential payment made in breach of the directors’ duty and that “loss to the creditors resulting from the breach of the rule in West Mercia is to be regarded as a loss to the company for the purposes of the principle of equitable compensation”.[6] Put simply, in an insolvent situation, care should be taken to seek to preserve the value of the company’s assets to allow for a distribution to creditors pari passu, that is on a proportionate basis, and not to pay away those assets to selected creditors on a preferential basis.
Parallel common law regime
The BVI Court of Appeal in Byers also confirmed that the existence of statutory insolvency regimes does not undermine the availability of a common law remedy for breach of the rule in West Mercia. The suggestion that recognising a common law remedy creates a parallel insolvency regime is misplaced. It is the rule in West Mercia itself that gives rise to this framework, and its validity has been reaffirmed by the UK Supreme Court in Sequana and is firmly now part of BVI law. As Lord Reed noted, once the duty to consider creditors’ interests is accepted, it naturally follows that courts must address the consequences of breach, including the forms of relief available. The rule in West Mercia therefore exists alongside the more prescriptive statutory regime for voidable transactions found in Part VIII of the BVI Insolvency Act (and equivalent legislation elsewhere).
Findings
The BVI Court of Appeal allowed the appeal, overturning the trial judge’s decision and ordering Ms. Chen to pay US$13 million plus interest to PFF. This amount reflects the loss caused by Ms Chen’s breach of the rule in West Mercia, specifically through the Zenato Payments, which funds should have been available to the general body of creditors. The court directed that PFF’s debt be notionally increased by this amount for the purpose of asset distribution, with any dividend attributable to the increase to be recouped by the respondent rather than paid to PFF. Costs of the appeal and the proceedings below were also awarded to the appellants.
The judgment reaffirmed that once a company is insolvent or nearing insolvency, directors’ fiduciary duties extend to include consideration of the interests of creditors. It clarified that the loss to creditors resulting from a breach of this duty is to be treated as a loss to the company itself, regardless of whether the transaction was balance sheet neutral. The trial judge erred in rejecting this principle and in refusing to apply the equitable remedy recognised in West Mercia, which has since been endorsed by the UK Supreme Court in Sequana. The court also confirmed that the presence or absence of personal benefit to the director is not a prerequisite for applying the rule, and that the company suffers a pecuniary loss equivalent to the financial harm caused to its creditors.
Takeaways
This case serves as a clear reminder that directors must take into account the interests of creditors when a company is insolvent or approaching insolvency. As succinctly summarised by Ventose JA in Byers, drawing on Lord Leggatt’s observations in Stanford International Bank Ltd (in liquidation) v HSBC Bank plc: [7] “at some (imprecise) point on a path that leads to a company going into insolvent liquidation, the nature of its legal personality changes, such that, from then on, any disposition of the company’s assets is treated as a loss to the company even if it discharges a liability and so leaves the company’s net assets unchanged.”
The BVI Court of Appeal confirmed that:
- a breach of the rule in West Mercia, such as making preferential payments, can result in personal liability even if the transaction does not affect the company’s net asset position;
- the loss suffered by creditors is treated as a loss to the company, and repayment of the amount improperly paid is an appropriate remedy; and
- directors do not need to personally benefit from the breach for liability to arise.
The equitable remedy recognised in West Mercia remains applicable in the BVI and has been reaffirmed by the UK Supreme Court in Sequana, strengthening its role in protecting creditor interests during financial distress.
In a landscape where there is an increasing focus on the conduct of directors, those managing a company in financial distress would be well advised to seek advice from qualified professional advisers before taking any steps to transfer or dispose of company assets.
[1] Mark Byers et Al v Chen Ningning (also known as Diana Chen) [2025] ECSC J0620-3 (“Byers”).
[2] Byers v Chen Ningning [2021] UKPC 4, [2021] 3 LRC 434.
[3] Byers & Anr v Ningning BVIHCM 430 of 2009 (11Feb24).
[4] [1988] BCLC 250.
[5] BTI 2014 LLC (Appellant) v Sequana SA and others (Respondents) [2022] UKSC 25 (“BTI v Sequana”).
[6] Byers, [87].
[7] Stanford International Bank Ltd (in liquidation) v HSBC Bank plc [2023] AC 761, [4].
