Hidden owners, ostensible authority and the Duomatic principle
The Duomatic principle can apply to ostensible authority as well as actual authority, according to the Privy Council in Ciban Management Corporation v Citco (BVI) Ltd & Anor (British Virgin Islands)  UKPC 21.
A company's director and registered agent were not in breach of their tortious duties of care to the company, where they were acting on the instructions of an agent who had ostensible authority.
A BVI company called Ciban Management Corporation (Ciban) was the claimant and appellant before the Privy Council, though at the time of the events which gave rise to the proceedings the relevant company was called Spectacular Holdings Inc (Spectacular) (Ciban and Spectacular having merged in 2012 and the former having taken over the proceedings from the latter). Citco (BVI) Ltd (Citco) was Spectacular's registered agent and Tortola Corporation Company (Tortola) was its corporate director.
An individual, B, was the beneficial owner of Spectacular having purchased it from C. B did not want his identity to be public knowledge and so had arranged his holding in Spectacular to be held, through bearer shares, by a lawyer on his behalf. B conducted Spectacular's business through C who in turn gave instructions to Citco and Tortola to issue powers of attorney in favour of various lawyers to act on Spectacular's behalf.
In 2001, certain sums fell due from B to C (i) under a loan agreement and (ii) in respect of salary. To pay these sums and without B's knowledge, C instructed Citco to issue a new power of attorney authorising the sale of Spectacular's property. C informed B of his actions only after the property was sold.
There were apparently various 'red flags' in respect of the way in which the instructions were given by C (for example, that C had asked for the invoice for the power of attorney be sent to him; that his email about the power of attorney came from his personal account; that his son paid that invoice) but these were ignored by Citco and Tortola.
B revoked the power of attorney and unwound the sale, and brought proceedings in the BVI through Spectacular against Citco and Tortola alleging that both entities were in breach of their tortious duties of care as agent and director respectively owed to Spectacular because they failed to check whether C had authority to instruct them to issue the new power of attorney.
The case reached the Privy Council where Spectacular appealed on two grounds:
- Whether Tortola had breached its duty of care in failing to take heed of the red flags.
- Whether C had ostensible authority to act on Spectacular's behalf under the Duomatic principle.
What is the Duomatic principle?
If members of a company can do something via formal resolution at a general meeting, they can also do that thing informally, if all of them agree(1).
The Privy Council dismissed Spectacular's appeal on both counts.
It was reasonable, in context and given the pattern of dealings to date (in which powers of attorney had been authorised by B but Tortola had been instructed by C), for Tortola to accept instructions from C. B evidently expected the Tortola to follow C's instructions even though he had never issued a document to that effect. It was for B to bear the risk that C would disobey him or breach his trust. As to the red flags, it was held that there was nothing particularly unusual about them in the context of the pattern of behaviour to date. Objectively, Tortola had little reason to believe anything was amiss.
As to authority, Tortola could reasonably have expected that C had authority, because of the context described above: to date, Tortola had been expected to take instructions from C; B evidently wished to remain 'in the shadows'; and B had never raised any complaints about C's giving of instructions before. Accordingly, Tortola could reasonably assume that C had B's ostensible authority to act.
The claimant and appellant was Spectacular, however – not B. The Privy Council therefore had to ask: did C have ostensible authority from B to act on Spectacular's behalf (recalling that B was the only shareholder of Spectacular)? It is here that the Duomatic principle becomes relevant.
Spectacular would have been bound had B actually consented to C's giving of instructions in relation to the relevant power of attorney (and it was not disputed that he had done so – and so Spectacular could be bound – in relation to the previous powers of attorney). B had clearly not given actual authority in relation to the relevant power of attorney. However, the Privy Council decided that C had ostensible authority. The question then became whether the Duomatic principle could apply to ostensible authority. The Privy Council explored two recognised qualifications to the principle:
- The principle cannot apply where the shareholder/s have not consented to the underlying act. In this case, there was an argument that B had not consented to the issuance of the relevant power of attorney. However, the Privy Council rejected this on the basis that – as set out above – B's pattern of conduct meant he could not deny that authority had been given to C. Betrayal by C was a risk he was evidently prepared to take.
- The principle cannot apply where there is relevant dishonesty. The Privy Council rejected this as well, on the basis that nothing about the sale or the power of attorney was inherently dishonest or allowed any fraud to be committed. In any event, the Privy Council found that the "whole of [B's] set up – and the clothing of [C] with ostensible authority - was taking the risk on behalf of the company, albeit informally, that [C] would use that apparent authority for his own purposes, including dishonest purposes."
Accordingly, the Duomatic principle did apply and so the ostensible authority conferred by B was counted as ostensible authority conferred by Spectacular.
The case helpfully clarifies that the Duomatic principle can apply to ostensible authority as well as actual authority. It also provides an interesting insight in circumstances where arrangements cloaking the beneficial owner/s of in particular offshore companies are relatively common. Part of the Privy Council's decision making rested on the fact that owners who seek to disguise themselves in this manner take the risk of being disobeyed by the people or entities they instruct, and the beneficial owners should not be allowed to transfer that risk to others. In those circumstances, their only recourse is to sue the rogue agent.
(1) In re Duomatic Ltd  2 Ch 365