Asia (Other)

Duomatic-Principle

The English Court of Appeal in Satyam Enterprises Ltd v Burton [2021] EWCA Civ 287 has recently followed the Privy Council’s decision in Ciban Management Corporation v Citco (BVI) Ltd [2020] UKPC 21, confirming the applicability of the Duomatic principle to beneficial owners and in situations involving ostensible authority.

Ciban Management Corporation v Citco (BVI) Ltd

The Duomatic principle is a principle derived from English case law whereby a company’s shareholders can informally give approval through unanimous consent, rather than abiding by the strict formalities.

In the case of Ciban, the ultimate beneficial owner of Spectacular Holdings Inc. (the Company), Mr Byington, structured the Company in a way so that there were no ostensible links to him. Mr Costa, a friend and business partner of Mr Byington, was authorized to give instructions to the registered agent, Citco (BVI) Ltd (Citco) and the sole director, Tortola Corporation Company Ltd (TCCL). With Mr Byington’s consent, four powers of attorney (POAs) authorizing Mr Delollo, a Brazilian lawyer, to carry out specific acts approved by Mr Byington were executed by TCCL on instructions from Mr Costa.

When Mr Byington and Mr Costa’s relationship deteriorated, Mr Costa instructed TCCL to execute a fifth, much broader POA authorizing Mr Delollo to sell the properties, which were the Company’s only assets. Citco and TCCL cooperated since they were used to acting on Mr Costa’s instructions. Mr Byington was unaware of the fifth POA until Mr Costa told him, after the sale had taken place.

The Company commenced proceedings against TCCL and Citco in the British Virgin Islands (BVI) for breach of tortious and fiduciary duties for granting the POA, which had not been approved by the beneficial owner and had not secured formal shareholder approval, which was required for a disposal of over 50% of the Company’s assets.

The BVI Commercial Court held that Citco owed no duty of care in tort to the Company and there had been no breach of a duty of care to Mr Byington. The arrangement meant that he expected Citco to rely on Mr Costa’s instructions, and because TCCL’s role was one of execution only TCCL had not breached its duty.

The Eastern Caribbean Court of Appeal upheld this decision, adding that the doctrine of ostensible authority was applicable given that Mr Costa’s instructions to Citco and TCCL appeared to be acting on the authority of Mr Byington, which provided a further reason why the Company’s claims against them failed.

The Privy Council noted that in order to decide whether TCCL had breached its duty of care owed to the Company, the key issue was whether the conduct of Mr Byington could be attributed to the Company, and that was where the Duomatic principle came in.

With the first four POAs, Mr Costa had actual authority to give instructions to TCCL (and Citco), but only ostensible authority with the fifth POA, since Mr Byington did not consent by giving Mr Costa actual authority. The Privy Council held that if actual authority could be conferred informally by unanimous shareholder consent (i.e., the Duomatic principle), there was no reason why the same should not apply to ostensible authority. Therefore, the Privy Council found that Mr Costa did have the authority to instruct TCCL in relation to the fifth POA, binding the Company, meaning that TCCL was not in breach of its duty of care.

Satyam Enterprises Ltd v Burton & Anor

Following the Privy Council decision in Ciban, the recent English Court of Appeal case of Satyam again reaffirmed the principles of ostensible authority and the Duomatic principle.

The Satyam case involved four properties bought in May 2012 by Mr Sharma, which on completion he arranged to be acquired a company formerly known as JVB Five Properties Ltd (JVB5). Mr Burton was the sole director and shareholder of JVB5. In October that year, Mr Burton transferred the properties to JVB Seven Properties Ltd (JVB7), of which he was also sole director and shareholder. JVB5 alleged that Mr Burton acted in breach of his fiduciary duties by transferring properties out of JVB5 at an undervalue.

Mr Burton denied the transfers were at an undervalue and asserted that he held all the issued share capital in JVB5 and JVB7 on trust for Mr Sharma and that the transfer had been carried out at his direction. On the basis that the transfer was expressly authorized by JVB5’s sole beneficial owner, he argued that the Duomatic principle applied. The first instance judge agreed.

JVB5 appealed, arguing that the Duomatic principle should not have applied because the transaction amounted to an unlawful distribution of assets and so could not be ratified by the shareholder of JVB5. The Court of Appeal found there was no relevant dishonesty involved, applied Ciban and held that the Duomatic principle applied. Although the Duomatic principle required consent to be more than simply private thoughts, this was not an issue as Mr Sharma had sent an email expressly confirming his agreement to Mr Burton transferring the properties.

However, on the point about returning capital to shareholders, the Court of Appeal held that the Duomatic principle did not allow shareholders to authorize informally what they have no power to do formally. The case was therefore remitted to the High Court to be listed for a case management conference at which suitable directions could be given on the question of evidence about whether the transaction amounted to an unlawful distribution.

Key Takeaways

The Duomatic principle applies to ultimate beneficial owners, provided that they are taking all the decisions in the relevant transactions and that the transaction is lawful and honest. Decisions from both the Privy Council, the highest level of the judiciary, and the recent English Court of Appeal judgment, clearly reaffirm this principle.

With regards to the doctrine of ostensible authority, the courts will show little sympathy to ultimate beneficial owners who plan to retain control from the shadows when such arrangements backfire, and as the Ciban and Satyam cases have demonstrated, the Duomatic principle will apply even in situations of ostensible authority.


If you require advice on any of the issues raised in this briefing, please contact the authors below.

 

Jeremy Lightfoot

Jeremy Lightfoot
jeremy.lightfoot@careyolsen.com
+852 3628 9016

Xia Li

Xia Li
xia.li@careyolsen.com
+852 3628 9009

Monique Hansen

Monique Hansen
monique.hansen@careyolsen.com
+852 3628 9004

Carey Olsen

Carey Olsen

https://careyolsen.com

*This article is the IHC Magazine’s off-shore update for April 2021 issue. Click here to read the full magazine

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