The Judicial Committee of the Privy Council has ruled that the corporate director and the agent of a BVI-based holding company did not owe the company a duty of care to ensure that the beneficial owner’s business associate, who had previously given instructions regarding the affairs of the company on the beneficial owner’s behalf, was authorised to give instructions in relation to sales of the company’s assets: Ciban Management Corporation v Citco (BVI) Ltd & Anor [2020] UKPC 21.

In the course of its opinion, the Privy Council considered complex issues relating to an agent’s ostensible authority and the Duomatic principle, which provides that anything that the shareholders of a company can do by formal resolution in general meeting can instead be done informally (by a solvent company) if the shareholders unanimously agree. (For recent consideration of the principle by the English Court of Appeal, see Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146, considered here).

There had been some uncertainty about whether the principle requires the unanimous agreement of the shareholders whose names appear on the shareholder register or the company’s beneficial owners. In Ciban, the Privy Council held that it is the position of the beneficial owners which is relevant, at least where they have been taking all of the decisions in relation to the relevant transactions.

The Privy Council also held that the Duomatic principle applies to the grant of ostensible authority, just as it applies in cases of actual authority. In other words, a beneficial owner may give an agent ostensible authority on behalf of the company by informally assenting to the representations which imply that the agent is authorised – in this case, essentially, by way of the beneficial owner’s apparent desire to “remain out of the public eye” and the absence of objections to the agent’s previous exercise of authority.

The decision contains a clear message from the Privy Council that, where a company’s ultimate beneficial owner puts in place arrangements designed to hide their identity, they take on the risk of being betrayed by an agent who is being used to convey instructions to the company’s directors. While of course each case will turn on its own facts, a beneficial owner in such circumstances cannot count on being able to throw that risk onto the directors through an action for breach of the director’s duty of care.

Background

The proceedings were brought by a BVI company (Spectacular) against its registered agent (Citco) and its director (TCCL) alleging that they had acted in breach of duty by failing to ensure that instructions they were given to issue a power of attorney had been properly authorised by Spectacular’s beneficial owner. The facts are complex, but a brief summary is set out below.

In 1997 a Brazilian businessman, Mr Byington, asked his business associate, Mr Costa, to acquire two BVI shelf companies, one of which was Spectacular. The other shelf company acquired from Mr Byington a Brazilian business which he owned, in a way designed to give the impression that Mr Costa had become the beneficial owner of the business, whereas in fact Mr Byington retained beneficial ownership. Mr Byington then secured a judicial sale of certain property in Sao Paulo owned by the business, which was bought at auction by Spectacular. The shares in Spectacular were bearer shares, which were held on behalf of Mr Byington by a Florida attorney. In this way, Mr Byington succeeded in taking the Sao Paulo property out of the reach of the business’s creditors without anyone other than Mr Costa knowing he was the real purchaser of it.

Though Citco had requested that Mr Byington enter into a management agreement in relation to the affairs of Spectacular, he refused to do so as he did not wish anyone to find out that he was Spectacular’s beneficial owner.

Between 1997 and 1999, Mr Costa instructed Citco to issue four powers of attorney on behalf of Spectacular, which were formally issued on each occasion by TCCL as Spectacular’s director. Mr Costa’s instructions to Citco were on each occasion approved by Mr Byington, but there was no evidence that Citco had sought confirmation of Mr Byington’s approval.

In 2001, Mr Byington failed to make certain repayments that were due to Mr Costa under a loan agreement. Mr Costa instructed Citco to issue a fifth power of attorney on behalf of Spectacular in favour of a Brazilian lawyer authorising him to sell the Sao Paulo property. TCCL passed a resolution as Spectacular’s director and issued the power of attorney based on Mr Costa’s instructions. The Sao Paulo property was subsequently sold, at which point Mr Costa told Mr Byington what he had done.

Mr Byington took steps to revoke the power of attorney and eventually unwound the sale. He then caused Spectacular to commence proceedings in the BVI against Citco and TCCL, alleging that they had acted in breach of a duty of care by failing to ensure that Mr Costa had the authority to procure the grant of the power of attorney.

Decisions of the BVI courts

Both the High Court and Court of Appeal in the BVI dismissed Spectacular’s claim on the basis that neither Citco nor TCCL had breached any duty of care to Spectacular to check that Mr Costa was duly authorised to instruct them to issue the fifth power of attorney.

At first instance, it was held that Mr Byington had set up a system whereby he expected Citco, and TCCL, to rely on the instructions of Mr Costa. The judge did not accept that any of the alleged warning signs relied on by Spectacular should have raised suspicions concerning the instructions given by Mr Costa. Mr Byington had set up a system to ensure that his instructions, through Mr Costa, were given effect provided that they were not illegal or dishonest. TCCL’s duty of care as director was merely to ensure that what it was instructed to do was legal and valid – its role was one of execution only.

The Eastern Caribbean Supreme Court (the final court of appeal in the BVI) upheld the first instance decision, adding that the doctrine of ostensible authority also protected Citco and TCCL. As a matter of law, the judge’s findings meant that Mr Costa had ostensible authority to give instructions on behalf of Mr Byington to issue the fifth power of attorney. This mode of operation was consistent with how instructions had been given on behalf of Mr Byington in relation to the first four powers of attorney.

Decision of the Privy Council

Spectacular appealed to the Privy Council, which upheld the decisions of the BVI courts.

In relation to TCCL’s duty of care and the ostensible authority of Mr Costa, the Privy Council emphasised the context in which Mr Byington, Mr Costa and Spectacular were operating. Mr Byington had wished to be kept out of the public eye. He had established a system whereby his instructions were being given to TCCL by Mr Costa. That system had been used to issue four previous powers of attorney, without any concerns being raised. Mr Byington expected TCCL to follow instructions given by Mr Costa – he was the point of contact on behalf of Mr Byington. In short, Mr Byington had accepted the risk that Mr Costa might one day betray him; this was not a risk to be borne by TCCL.

This conclusion was not affected by the alleged existence of warning signs in relation to Mr Costa’s instructions to issue the fifth power of attorney. From TCCL’s perspective, there was nothing unusual about the width of the powers granted under the fifth power of attorney nor the identity of the attorney (a Brazilian lawyer who had previously been trusted by Mr Byington).

It was objectively reasonable for TCCL to rely on the ostensible authority of Mr Costa because Mr Byington’s conduct since 1997 in relation to Mr Costa led TCCL to believe that Mr Costa had the authority of Mr Byington to give instructions. TCCL was aware that Mr Byington wished to remain in the shadows and that, since 1997, Mr Costa had had the actual authority of Mr Byington to give instructions, including in relation to powers of attorney. Mr Byington had not complained about any of the instructions given by Mr Costa in that time and nor had Spectacular.

However, it was not enough that Mr Byington had cloaked Mr Costa with ostensible authority to act on his own behalf, given that the alleged breach was of a duty to Spectacular. The Privy Council therefore turned to whether Mr Costa had ostensible authority to issue instructions on behalf of Spectacular: could the conduct of Mr Byington be attributed to Spectacular? To answer that question, the Privy Council applied the Duomatic principle.

It was not in dispute that, in relation to the first four powers of attorney, Spectacular was bound because Mr Costa had actual authority (via the agreement of its sole shareholder) to give instructions on behalf of Spectacular to TCCL. However, the application of the Duomatic principle in the context of ostensible authority was disputed.

The Privy Council held that, if actual authority on behalf of Spectacular could be conferred by informal unanimous shareholder consent, there was no reason why ostensible authority should be treated any differently. Mr Byington’s informal consent to the representation which Spectacular had by its conduct made in relation to Mr Costa’s authority was sufficient to bind Spectacular in relation to the fifth power of attorney.

The Privy Council rejected Spectacular’s argument that Mr Byington’s informal consent was not informed, as required by the Duomatic principle, because he was not aware of the giving of instructions in relation to the fifth power of attorney. Mr Byington was aware of the mode of operation of Spectacular and the representation by conduct which it had given and on which TCCL had reasonably relied.

Spectacular’s argument that the Duomatic principle should not be permitted to allow Mr Costa to commit a fraud against Spectacular or Mr Byington was also rejected. The Privy Council did not need to make findings in relation to Mr Costa’s honesty. Even if he were dishonest, the whole of Mr Byington’s set-up and the clothing of Mr Costa with ostensible authority indicated that Mr Byington had taken the risk on behalf of Spectacular, informally, that Mr Costa would use his apparent authority to give instructions on behalf of Spectacular for his own purposes, including potentially dishonest purposes. Where Spectacular, via Mr Byington’s informal conduct, led TCCL to rely on Mr Costa’s instructions, Spectacular could not now shift the risk of Mr Costa acting dishonestly from Spectacular to TCCL. The Privy Council noted that Mr Byington might have a separate claim against Mr Costa as a result of Mr Costa straying beyond his actual authority, but as regards the corporate affairs of Spectacular, Mr Byington was bound by the mode of operation which he had intentionally implemented.

The Privy Council also took the opportunity to clarify that the Duomatic principle can operate on the informal, unanimous consent of beneficial owners, not simply registered owners, of a company, at least where the beneficial owners are taking all of the decisions in the relevant transactions. Though this point was not in issue between the parties, so the Pricy Council’s clarification on this issue is obiter and in any event not binding precedent as a matter of English law, the Privy Council cited with approval English cases in which it had been assumed that the Duomatic principle could apply to beneficial owners, including the Court of Appeal’s decision in Dickinson v NAL Realisations referred to above.

As regards Citco’s alleged breach of its duty of care, the Privy Council found that its role was even more limited than that of TCCL. While Citco clearly owed a duty of care to Spectacular as a result of its provision of corporate agency services to Spectacular, it could not owe a duty to do more than TCCL (as Spectacular’s director) could reasonably be required to have done.

Andrew Cooke
Andrew Cooke
Senior associate
+44 20 7466 7566