2 BVI Cases Explore Scope Of Proper Purpose Test

Section 121 of the British Virgin Islands Business Companies Act requires that a director "exercise his powers as a director for a proper purpose ..." In this provision, the act has codified the "proper purpose test," the rule of equity which long predates the act, which requires that a fiduciary entrusted with a power must exercise that power only for the purpose for which it was conferred and not for any other purpose.

This is the same rule which is now embodied in section 171(b) of the English Companies Act 2006. A BVI company is materially the same in its structure as an English limited company: particularly with regard to the division of powers between the board of directors and the shareholders. The BVI courts therefore have a body of English caselaw on which to draw in interpreting and applying section 121. However, in a series of cases decided over the past 18 months, the BVI courts have been developing a local jurisprudence which builds on the English authorities and provides clear guidance as to how the proper purpose test will be applied to the actions of directors of a BVI company.

This article was first published by Law360.

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Rosalind NicholsonPartnerT +1 284 852 2237rosalind.nicholson@walkersglobal.com