Ciban Management Corporation v Citco (BVI) Ltd

Lord Burrows first dealt with the "red flags" issue, that TCCL and Citco knew or ought to have known that Mr Costa was acting in an unauthorised fashion. In particular they relied upon the fact that he sent the e-mail from his personal account, that he asked for the invoice to be sent to him personally, and that he settled it out of his son's bank account. However, the Privy Council agreed with the trial judge that none of these things should have been expected to put the respondents on notice of anything untoward. In particular they stressed:[11]

1. Citco and TCCL were aware - for example, from the refusal of Mr Byington to sign the management agreement in November 1997 - that Mr Byington wished to remain "in the shadows" albeit that he was the ultimate beneficial owner.
2. Over the course of two years, dealing with the four previous powers of attorney, Mr Byington had given Mr Costa actual authority to give instructions.
3. Mr Byington had not previously raised any complaints over those two years about the first four powers of attorney (and neither had Spectacular nor the US attorney holding the shares).

Lord Burrows indicated that it was thus reasonable for TCCL to rely on Mr Costa having ostensible authority to act on behalf of Mr Byington. But TCCL, as director, owed its duties to the company. Thus it was necessary to show that Mr Costa also had ostensible authority to act on behalf of the company (not just its beneficial owner). Accordingly, the Privy Council had to consider to what extent the tacit authority of Mr Byington constituted authorisation on behalf of Spectacular.

The Privy Council then gave detailed consideration to the area of law known as the Duomatic principle. They noted that under the 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" (citing Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258). The respondents argued that under the principle, the consent of Mr Byington should be treated as the consent of the company. He also cited the speech of Lord Hoffman in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506 in relation to how the Duomatic principle fits within the general rules on attribution in respect of a company.

However, in previous cases relating to the Duomatic rule, the rule had normally been used to validate the express authority of an agent. In this case Mr Costa did not have express authority - he was acting under ostensible authority (or implied authority). There was no case asserting that implied authority could be approved in this manner by the shareholder. Lord Burrows swept this objection aside: "If actual authority can be conferred informally by unanimous shareholder consent the same should apply to ostensible authority".[12]

Lord Burrows then noted that there were a number of limitations on the application of the Duomatic principle. Some of those limitations (principally, the requirement of solvency) were not relevant. But others were.

One of the cornerstones of the Duomatic principle is that the shareholder must know what it is that they are consenting to. In this case Mr Byington was completely unaware. However, Lord Burrows noted that it was wider than simple knowledge. He cited with approval the comments of Neuberger J in EIC Services Ltd v Phipps [2003] EWHC 1507 (Ch): "where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, 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." Lord Burrows felt that, even in the absence of express knowledge, it would be inequitable for Mr Byington to deny he had given approval: "Mr Byington should not be allowed to deny that he consented to the giving of authority to Mr Costa. By operating as he did, so as to keep his connection with Spectacular out of the picture, he was taking the risk that Mr Costa might betray him."[13]

The Privy Council noted that dishonesty is normally a bar to the application of the principle. It was alleged by Mr Byington that Mr Costa was dishonest in his actions, and that the court should not allow an agent to defraud the company. The appellants argued "it would be a 'remarkable extension' to the Duomatic principle to apply it to apparent authority so as to allow an agent to commit a fraud against the company and its members."[14] But Lord Burrows disagreed with that analysis. He noted "neither Mr Byington nor TCCL was acting dishonestly in relation to that [power of attorney]. Put another way, the Duomatic principle would not be permitting the ultimate beneficial owner or the director to commit a fraud against the company."[15] In other words, dishonesty on the part of an agent would not be relevant to the application of the principle - only the dishonesty of an "insider" like a director or shareholder. He also noted that the respondents rejected the allegation of dishonesty - Mr Costa was only trying to secure what was owed to him, and was turning over the surplus proceeds of sale to the company. The Privy Council did not make a finding in relation to that response.

The appellants argued that Mr Byington was not in fact the shareholder (although he was the ultimate beneficial owner). Legal title to the shares was vested in a US attorney who held the shares on behalf of Mr Byington. And only the legal holder has title to vote the shares. However, Lord Burrows referred to various cases where it was accepted that, in appropriate cases, the approval of the beneficial owner could be treated as the approval of the shareholders. In particular he cited Shahar v Tsitsekkos [2004] EWHC 2659 (Ch), Rolfe v Rolfe [2010] EWHC 244 (Ch) and Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA 2146.[16]

Accordingly, in relation to the issues around the Duomatic principle, Lord Burrows held:

The conclusion to be reached is that the Duomatic principle did apply here. By reason of that principle, the ostensible authority conferred by Mr Byington counts as ostensible authority conferred by Spectacular. Spectacular cannot be allowed to deny that it authorised Mr Costa to give the instructions to TCCL.[17]

The Privy Council chose to briefly address certain other issues which had been argued in relation to the appeal.

The appellants had argued that Citco, as registered agent, was subject to a wide array of duties. Lord Burrows did not accept this. He noted the role of the registered agent was limited to various services. "Those services included providing ongoing company administration and could embrace accurately passing on relevant information and instructions from Mr Byington (as ultimate beneficial owner) to TCCL as director of the company. But those services were very limited", and nothing on the facts amounted to any breach of any duty of care in relation to those limited services by Citco. He also rejected the argument that Citco was a de facto director of the company.[18]

The Privy Council indicated that it disagreed with the courts below when they indicated that the duty under section 80 of the International Business Companies Act (to seek shareholder consent) was a duty owed to the shareholder directly rather than a duty to the company.[19] Lord Burrows also rejected the view expressed by the courts below that the grant of the power of attorney itself was not caught by the section 80 - the granting of the power of attorney was part and parcel of the sale of land process, and ought to have been approved.[19]

The Privy Council also affirmed that the Duomatic principle generally applied to the giving of consent under section 80.[20]

Finally, Lord Burrows rejected the view expressed by the courts below in relation to section 80 that, if a company was a single-purpose vehicle, then the sale of its only asset was necessarily "in the usual or regular course of the business carried on by the company".[19] But he did not expand upon this point.

Finally, Lord Burrows expressly rejected the contention that directors' duties under British Virgin Islands law imposes a lower standard of care on directors than is applicable under English law.[21]

Lastly he noted that "it has not been necessary for the Board to consider the propriety of that course of action" by Mr Byington setting up the structure in the way that he did. He accepted that there may be separate claims to be heard against Mr Costa, but he rejected the suggestion that the risk of Mr Costa's behaviour could be thrown onto the directors by acting in the way that he did. In such cases the courts would treat "the ultimate beneficial owner - Mr Byington in this case - as having been hoist by his own petard".[21]