is a decision of the Judicial Committee of the Privy Council on appeal from the British Virgin Islands relating to directors' duties and the legal rule known as the Duomatic principle.

The Privy Council dismissed the appeal, upholding the decisions of the judge at first instance and the Court of Appeal. They held that where the beneficial owner of a company set up a structure whereby the director of a company was to take instructions form a third party, and that third party subsequently acted in an unauthorised fashion, the company's director and registered agent did not breach any duties by acting in good faith on the instructions received in the usual way. In so doing the Privy Council made some important clarifications and extensions to the Duomatic principle. They also made some important legal clarifications in relation to directors' duties and the role of the registered agent, as well as expressing views on the proper application of certain statutory provisions.

Facts

The Privy Council adopted the statement of facts as found by the Court of Appeal below:

Mr Byington was a Brazilian businessman. He carried on business through a company called Gravacôes Electricas SA ("GEL"), and he had loaned US$3m to GEL in order to keep it afloat. But by 1997 GEL was failing. Mr Byington was concerned about his US$3m, and he persuaded his longstanding friend and associate, Mr Costa, to assist him. They acquired two British Virgin Islands companies through Citco, a corporate services provider. Citco also arranged for one of their service companies, Tortola Corporation Company Ltd ("TCCL"), to act as director. The trial judge, Bannister J, found as a fact that Mr Byington had refused to sign any documents because he did not want anyone to find out, or even to be able to find out, that he owned Spectacular.Ciban v Citco, para 14.

Mr Byington then purported to sell the shares in GEL to the first of the two companies which appeared to the world to be controlled by Mr Costa. "But the sale was a sham, for after its completion, unbeknownst to Mr Byington’s creditors, GEL in fact remained in Mr Byington’s beneficial ownership."Ciban v Citco, para 11. Then, to get the valuable assets out, Mr Byington sued GEL for his $3m and secured a judicial sale of five of the six parcels of land which GEL owned. A public auction was held and the second company (Spectacular Holdings Inc, called "Spectacular" in the judgment), was the successful bidder. But Spectacular was beneficially owned by Mr Byington throughout, and it purchased the properties for R$2.75m. "In this way Mr Byington succeeded in taking the Property out of the reach of GEL’s creditors without anyone other than Mr Costa knowing that he had been the real purchaser of it."Ciban v Citco, para 12. In relation to the judicial sale of the property and at various times subsequently, Spectacular issued powers of attorney authorizing Brazilian lawyers to take steps on behalf of the company. Mr Costa communicated the instructions to issue these powers of attorney to Citco and TCCL. Each time, his instructions were followed without question and the power of attorney was issued by TCCL as director on behalf of Spectacular.

By early 2000 Mr Byington was facing financial difficulties. He had borrowed US$85,000 from Mr Costa, and failed to repay that loan within the timeframe they had agreed. Mr Costa also appears to have been owed salary arrears. Despite reaching a settlement agreement, these debts remained unpaid and Mr Costa repeatedly complained to Mr Byington.Ciban v Citco, para 16. Then, on 14 August 2001, without telling Mr Byington, Mr Costa sent an email to Citco containing the text of a draft power of attorney which he asked Spectacular to grant so as to authorise Mr Delollo (a Brazilian lawyer) to sell the property owned by Spectacular. Mr Costa sent the email from his personal email address and gave his home telephone number, but otherwise it was similar to previous instructions. The next day, TCCL passed a resolution providing for the issue of that fifth power of attorney and executed it. A copy of it was sent to Mr Costa. Mr Costa caused the invoice for Citco and TCCL's fees to be settled on 23 August 2001 by a transfer from his son's bank account in Oxford. On 20–21 November 2001 Mr Costa asked Citco to produce further documents in connection with the proposed sale, which it did.Ciban v Citco, para 17.

On 14 December 2001 Spectacular entered a contract for the sale of the property at a price of R$1.15m with Mr Thomas Law as purchaser under the power of attorney. On that day Mr Costa also wrote to Mr Byington telling him for the first time what he had done, and giving a breakdown of the sums he said Mr Byington owed him. Mr Byington was not pleased, and his response made clear that he had not authorised the grant of the fifth power of attorney and was entirely unaware of the sale until then. He caused the fifth power of attorney, together with all the earlier powers of attorney, to be revoked. On 21 December 2001 he commenced proceedings in Brazil seeking to repudiate the sale agreement with the purchaser, Mr Law. This dispute was eventually settled by an agreement under which Spectacular retained the property in return for a payment to Mr Law of R$1.6m.

On 14 December 2007 Spectacular issued proceedings against Citco and TCCL. In summary, it alleged that TCCL had acted in breach of its tortious (and fiduciary) duty of care as a director in failing to ensure that Mr Costa had the authority to procure the grant of the fifth power of attorney and to try and sell the property, and that Citco had acted in breach of its tortious (and fiduciary) duty of care as a registered agent in failing to do the same and in supplying further documents for the sale. Spectacular also claimed that TCCL had acted in breach of a duty of care in relation to section 80 of the International Business Companies Act (now section 175 of the BVI Business Companies Act).That section broadly provides: "... any sale, transfer ... or other disposition ... of more than 50% of the assets of a company incorporated under this Act ... if not made in the usual or regular course of the business carried on by the company, shall be made as follows - (a) The proposed sale, transfer, lease, exchange or other disposition must be approved by the directors; (b) Upon approval of the proposed sale, transfer, lease exchange or other disposition, the directors must submit the proposal to the members for it to be authorized by a resolution of members …"Ciban v Citco, para 3. The losses claimed by Spectacular included the moneys paid to Mr Law to settle the Brazilian proceedings; legal fees incurred by Spectacular in relation to the proceedings; and rent lost while title to the Property was disputed during those proceedings.

In June 2012 there was a statutory merger between Ciban Management Corp and Spectacular, and Ciban replaced Spectacular as the claimant in the proceedings.International Business Companies Act 1984, section 78(3). A trial limited to the issue of liability took place. On 27 November 2012 Bannister J gave judgment dismissing the claims. On 1 November 2018 (after a long delay attributed to loss of the court's file for the case), an appeal was heard by the Court of Appeal. On 13 February 2019 the Court of Appeal of the Eastern Caribbean Supreme Court gave judgment dismissing the appeal.

The judgment

The unanimous decision of the Privy Council was handed down by Lord Burrows. After reviewing the facts, the Privy Council considered the central allegation made on behalf of the appellants, namely that Citco and TCCL had ignored "red flags" in relation to the instructions from Mr Costa in relation to the fifth and final power of attorney which was used in the attempt to sell the property. However, the Privy Council accepted the view of the judge at first instance that Mr Byington expected TCCL (and Citco) to follow the instructions of Mr Costa. They endorsed the first instance judgment that Mr Byington "remained in the shadows while Mr Costa communicated his instructions and was the point of contact". In so doing, the Privy Council agreed with the trial judge that Mr Byington "accepted the risk that Mr Costa might one day betray him".

"Red flags"

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:Ciban v Citco, para 27–28. 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. 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. 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).

Duomatic principle

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 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 2 AC 500 at 506 in relation to how the Duomatic principle fits within the general rules on attribution in respect of a company.

Ostensible authority point

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".Ciban v Citco, para 38.

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.

Actual knowledge