The Duomatic principle and ostensible authority

The Privy Council recently handed down its key decision inCiban Management Corporation v Citco (BVI) Ltd [2020] UKPC 21.

The case involved a British Virgin Islands (BVI) company but is of interest to lawyers in the UK and other common law jurisdictions as it concerns the Duomatic  principle.

Duomatic

Under this principle, “the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company”.

The ruling confirms that the Duomatic  principle can apply to:

• • Cases of ostensible authority
  • Consent or authority granted by an ultimate beneficial owner (UBO) (or their agent)
  • Bind a company even where the UBO (or shareholder) does not consent to the specific action involved.

BVI law does not impose a lower standard of care on directors than English law. Directors of BVI companies need to understand and consider their duties under the BVI Business Companies Act 2004 (theAct) and common law, which are owed to the company.

Under the Act, disposals of more than 50 per cent of assets by value require formal shareholder approval. These requirements can be overlooked in practice (they can be modified in the constitutional documents); the case underscores the need to take advice from qualified BVI counsel. This decision suggests the sale of the sole asset of a single asset holding company will not necessarily qualify for a relevant exemption as in the usual course of business.

It remains best practice for parties and their lawyers to review a company’s constitutional documents to ensure corporate actions are properly approved.

Key lessons for corporate lawyers

There are several important lessons for corporate lawyers from the case:

• First, the idea that professional, or so-called ‘nominee’, directors are subject to a lower duty of care was emphatically rejected. Although these are common in the offshore world, and will perhaps be more common than ever in the light of economic substance requirements introduced in 2019, these should consider their obligations as carefully as any other director, and seek advice where appropriate. It is worth noting that BVI law permits a director to act in the best interests of a shareholder where the memorandum and articles of association expressly permit it, and some entities may wish to consider making amendments to their constitutional documents to allow this.
• The Privy Council extended the scope of Duomatic  to informal consent or authority given by the UBO rather than the actual shareholder. This was the case even where:
  • The UBO was unaware of –and did not consent to – the action, because he had set up a mode of operation on which the director reasonably relied (and it would be inequitable to deny that consent was given)
  • The UBO’s agent acted dishonestly (although the UBO might still have claims against his agent)

At the risk of stating the obvious, this makes clear that those who regularly deal with their company through an intermediary need to have absolute confidence in that intermediary will follow their instructions (and perhaps robust contractual protection). On the other hand, in some cases, this extension of the Duomatic principle may ‘save’ transactions and directors where appropriate formalities have not been followed – although we would caution against overreliance on this.

• The Privy Council expressed disapproval of two decisions at first instance, previously criticised by Harneys in British Virgin Islands Commercial Law (4th edn). It is now clear: (i) that director duties are owed to the company, and not directly owed to the UBO; and (ii) that just because a vehicle’s only purpose is to hold an asset, it does not necessarily follow that sale of that asset will be in “the usual or regular course” of its business.

It remains best practice for parties and their lawyers to review a company’s constitutional documents to ensure corporate actions are properly approved. In many jurisdictions, including the BVI, it is not unusual, particularly in joint ventures, for certain matters to require an additional or higher level of approval than would be the case.

This article was first published bySolicitors Journal on 17 December 2020, and is reproduced by kind permission.