Agents, Risk and the Duomatic Principle
Companies and directors would do well to note a recent Privy Council decision involving issues around a director’s duty of care; and the Duomatic principle.
The Duomatic principle is, essentially, the principle that anything the members of a solvent company can do by formal resolution in a general meeting, they can also do informally if they all assent to it. It can bind a company even in situations where an ultimate beneficial owner does not consent to the action involved.
To distil a complex case to its basics, the company concerned was set up on behalf of the ultimate beneficial owner (UBO) by a friend, with the shares being held by a Florida lawyer. The sole purpose of the company was to hold the assets which comprised five parcels of land. A service provider in the British Virgin Islands was registered as agent and it also provided a professional a director.
Unfortunately, a dispute between the friend and the UBO over money arose and the professional director executed a power of attorney, on the friend’s instructions, granting power to a Brazilian lawyer to sell the assets.
It was alleged that there was a breach of duty of care owed to the company; and that the ‘friend’ had deceived the UBO. One of the issues was whether the Duomatic principle can be applied to ostensible authority.
The Privy Council ruling
The PC ruled that in setting up the initial arrangement, the UBO had accepted the risk of being betrayed by an agent.
As far as breach of duty and the Duomatic principle was concerned, the PC decided that the friend’s ostensible authority to represent the UBO could bind the company (it noted that over the course of two years the UBO had given him actual authority to give instructions).
It said: “If actual authority can be conferred informally by unanimous shareholder consent the same should apply to ostensible authority”. So here, the UBO’s informal consent to the representation by conduct meant that there would be no need to go through the formality of a company resolution ratifying the sale.
What does this mean?
The ultimate beneficial owner who sets up a corporate vehicle using the services of agents/service providers does so with the attendant risks of decisions being made that bind the company. As in this case, it may include decisions that amount to a form of betrayal – such a decision will still be treated as a decision of the company under the Duomatic principle, even if the decision was taken by an agent using their ostensible authority by reason of conduct.
It is important for directors to review their company’s articles of association so they can be sure proper approval is given to decisions made and actions taken. Particular care must be taken where agents are given authority to make decisions on behalf of the company.
1Ciban Management Corporation (Appellant) v Citco (BVI) Ltd and another (Respondents) (British Virgin Islands) Case ID: JCPC 2019/009