Ciban Management Corp v Citco (BVI) Ltd [2020] UKPC 21: The risks of remaining in the shadows

August 6, 2020

By Katherine Traynor

Overview

On 30 July 2020 the Privy Council gave judgment in Ciban Management Corp v Citco (BVI) Ltd [2020] UKPC 21, upholding the decision of the British Virgin Islands Commercial Court and Eastern Caribbean Court of Appeal. Here the Privy Council considered the limits of the Duomatic principle, against the background of an offshore company, where the ultimate beneficial owner was not a registered shareholder but sought to keep control over the company through nominee directors and agents. Further, the Privy Council considered whether the Duomatic principle applied to bind a company, and its ultimate beneficial owner, who had conferred by his conduct, ostensible authority on an agent.

Factual Background

A somewhat convoluted background can be shortly summarised as follows.

Mr B, a Brazilian businessman, was the beneficial owner of a BVI company, Spectacular Holdings Inc (“Spectacular”) which owned certain property.  Mr B’s beneficial ownership was derived from his ownership of the whole of the issued share capital of Spectacular which comprised bearer shares and which he held via his US Attorney.

Spectacular had a sole corporate director, T Limited which was accustomed to receiving instructions, not from Mr B direct, but indirectly from Mr B’s close friend and associate, Mr C.  In that respect, Mr C had historically been authorised to provide instructions to T Limited.

The purpose and effect of these arrangements was to ensure that there was no visible connection between Mr B and Spectacular.

Consistent with these arrangements, and with the actual authority of Mr B, over a two-year period, Mr C gave instructions to T Limited to appoint attorneys on behalf of Spectacular under the terms of Powers of Attorney so as to allow those attorneys to conduct business on behalf of Spectacular.

Mr C and Mr B fell out over money owed by Mr B to Mr C.  In order to obtain payment, and without the knowledge or agreement of Mr B, Mr C gave instructions to T Limited to appoint an attorney on behalf of Spectacular under the terms of a Power of Attorney to sell the property owned by Spectacular.  That attorney was appointed on behalf of Spectacular, he sold the property and accounted to Mr C for the proceeds of sale.  Mr C took what he was owed and accounted to Mr B for the balance of the proceeds of sale.

Spectacular, now visibly acting on the instructions of Mr B, sued T Limited for breach of duty in tort and in equity for the losses it alleged it had suffered in consequence of the appointment of the attorney and the sale of the property.  In broad outline, the central allegation against T Limited was that, in appointing the attorney and allowing the attorney to complete the sale of the property, T Limited had failed in its duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

At first instance the claim was dismissed and some 6 years later (apparently owing to the loss of the Court file) that dismissal was upheld by the BVI Court of Appeal.

The matter then came before the Privy Council and on 30 July 2020, Lord Burrows giving the judgment of the Privy Council, advised the Crown that the appeal should be dismissed.

As an aside, the judgment would appear to be the first appeal in which Lord Burrows has given the lead or sole judgment following his elevation to the Supreme Court at the beginning of June 2020.

Issues before the Privy Council

The Privy Council was concerned with three principle issues, namely:

1. Breach of duty and allocation of risk (“the Allocation Issue”);
2. Did Mr C have ostensible authority to bind Spectacular (“the Ostensible Authority Issue”);
3. If the answer to the Ostensible Authority Issue was yes, did that afford T Limited an absolute defence to Spectacular’s breach of duty claim under the Duomatic Principle (“the Duomatic Issue”).

Each issue is addressed briefly below.

The Allocation Issue

At first instance and in the Court of Appeal, the question of breach of duty was approached from an allocation of risk perspective and both asked the question of whether Mr B, who had remained in the shadows while Mr C communicated his instructions and was the point of contact for T Limited, should be entitled to “shift the risk” to T Limited that Mr C “might one day betray him”.  Unsurprisingly, the answer to that question in both Courts was no and that answer was upheld by the Privy Council.  In essence, Mr B having chosen to take the risk of betrayal was stuck with that risk and he could not thereafter ignore that risk and attribute blame to T Limited, particularly where T Limited was no more than a nominee director operating on an execution only basis.

The Ostensible Authority Issue

Ostensible authority is concerned with holding someone out as having authority to act on your behalf in circumstances where they, in fact, have no such authority.  Typically, that holding out is by way of representation and, typically, that representation is by way of conduct rather than words.

In the present case, that equated to the question of whether Mr B had held out Mr C to T Limited as having authority to instruct T Limited to cause Spectacular to execute the final Power of Attorney pursuant to which the property was thereafter sold.

The Privy Council’s answer to that question was, yes, Mr B had held out Mr C as having such authority.  Their reasons were essentially twofold, namely: (1) the communication of Mr C’s authority in relation to each of the earlier Powers of Attorney by Mr B via Mr C was a representation by conduct that Mr C had a continuing authority to give instructions in relation to the execution of Powers of Attorney even if in fact he did not have actual authority in relation to the final Power of Attorney and (2) there was nothing in the surrounding circumstances or in the behaviour of Mr B to negate that continuing representation by conduct.  That is not a surprising outcome given the choice made by Mr B to operate in the shadows and to conduct his business through his friend and associate, Mr C.

The Privy Council also addressed the issue of reliance, reiterating the principle recently applied in East Asia Co Limited v PT Satria Tirtatama Enegindo [2019] UKPC 30 that the test for whether a representee is entitled to rely upon ostensible authority is the objective test of reasonableness (and that it is insufficient to show that the representee has not acted recklessly or irrationally).  Again, unsurprisingly, the Privy Council upheld the earlier finding of reasonable reliance by T Limited.

The Duomatic Issue

Relying upon the ostensible authority with which Mr C was clothed in relation to the final Power of Attorney and the sale of the property, T Limited advanced the defence (successfully at first instance and on appeal) that as the acts in respect of which complaint was being made were authorised by Mr B as the ultimate beneficial owner of Spectacular, the Duomatic principle applied and provided T Limited with an absolute defence to Spectacular’s claim.

By way of reminder, the Duomatic principle was articulated in Re Duomatic 1969 2 Ch 365 at 373 per Buckley J, in the following terms:

‘…where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.’

More specifically, T Limited relied upon the majority decision of the Court of Appeal in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services [1983] Ch 258 and, specifically, the dicta of Lawton LJ (at 268 to 269) and Dillon LJ (at 289 to 290) to the effect that a company that has acted at the direction and with the approval of the totality of its shareholders and that act proves to be a folly, cannot as a matter of law thereafter complain about what it has done at its shareholders’ behest – i.e., as a matter of law, there is no scope thereafter for it to seek to attribute blame to its directors.

The majority decision of the Court of Appeal was approved by the Privy Council, who then went on to consider whether any of the usual exceptions to the Duomatic principle applied so as to negate T Limited’s entitlement to rely upon it as a defence to Spectacular’s claim.  Three possible exceptions were identified, namely (1) shareholder consent, (2) dishonesty, and (3) a distinction between a beneficial owner and shareholder.

As to (1) (shareholder consent), the argument advanced by Spectacular was how could Mr B have given his consent in circumstances where he had no knowledge of the instructions given by Mr C for the final Power of Attorney or in relation to the sale of the property.  The answer to that argument lies in the ostensible authority with which Mr C had been clothed and the dictum of Neuberger J (as he then was) in EIC Services v Phipps [2004] 2 BCLC 589 at 122:

‘The essence of the Duomatic principle, as I see it, is that [certain formalities] can be avoided if all members of the group [being the persons entitled to vote on the particular matter], being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter.’

As the Privy Council observed, whilst Mr B may not have had actual knowledge, the very concept of ostensible authority means that Mr B could not be allowed to deny that he consented to the giving of authority to Mr C by Spectacular.  Moreover, it matters not whether that consent is characterised as arising in estoppel, waiver, or in some other way.  Mr B is treated as fixed with having given such consent.

As to (2) (dishonesty), Spectacular sought to argue that Mr C’s dishonesty somehow vitiated Mr B’s consent to the Power of Attorney being granted and the sale of the property being made.  That argument was given short shrift on the footing that no factual finding of dishonesty had been made at first instance or in the Court of Appeal and, even if such a finding had been made, Mr B was the author of his own misfortune (he had been “hoist by his own petard”).  Like the claim for breach of duty, Mr B had set up Spectacular so as to allow him to remain in the shadows and, having taken the risk of suffering loss at the hands of Mr C’s dishonesty, he could not thereafter reverse the very risk that he had chosen to run.

As to (3) (distinction between beneficial owner and shareholder), the argument advanced by Spectacular was, in effect, that the consent of Mr B’s US Attorney, who held the bearer shares, was needed and the consent of Mr B as ultimate beneficial owner did not suffice.  Unsurprisingly, that argument did not succeed either, with the Privy Council approving the dictum of in Newey J in Re Tulsesense Limited; Rolfe v Rolfe [2010] EWHC 244 Ch, at para 42, that “the assent of the beneficial owners of a share can meet Duomatic requirements.”

Conclusion

Strictly, in upholding the finding at first instance of no breach of duty, the Privy Council disposed of Spectacular’s appeal, and all that followed is obiter.  Nonetheless, this wide-ranging judgment on the Duomatic principle from the Privy Council is likely to gain traction in and be relied upon by the Courts of England and Wales at first instance and beyond.