In two decisions from the British Virgin Islands, Fang Ankong and ors v Green Elite Limited[1] and Arrowcrest Ltd v JSC VTB Bank[2], the Eastern Caribbean Court of Appeal clarifies the application of the Duomatic principle, a doctrine which has long been applied in the British Virgin Islands.
The Duomatic principle, which derives it name from the 1969 English decision, Re Duomatic Ltd[3], recognises that the unanimous assent of shareholders of a solvent company in respect of an intra vires matter may bind the company, notwithstanding that the approval did not comply with the strict formalities of the company’s articles.
The principle has been long applied in the British Virgin Islands. Most recently, it was considered by the Privy Council on an appeal from the British Virgin Islands in Ciban Management Corporation v Citco (BVI) Ltd [2020] UKPC 21. In that case, it was alleged that the defendants had breached their duty of care by issuing a power of attorney which resulted in the unauthorised sale of the company’s sole asset. In issuing the power of attorney, the defendants had relied on the instructions of a Mr Costa who had been held out by the ultimate beneficial owner as having authority to give instructions on matters concerning the company and had previously given instructions to issue four other powers of attorney. The Court held that the Duomatic principle applied so that the company was bound by the informal consent of the ultimate beneficial owner to the representation by conduct that Mr Costa had authority to instruct the defendants to issue the fifth power of attorney. Having set up a mode of operation on which the defendants reasonably relied, the ultimate beneficial owner was estopped from denying that he consented to giving authority to Mr Costa.
From that decision, the following key principles can be distilled:
(1) The Duomatic principle applies to ostensible authority
(2) The relevant consent may be by way of conduct
(3) The consent of the ultimate beneficial owner can bind the company just as the consent of the registered shareholder.
(4) The principle does not apply where the relevant consent involves dishonesty or illegality.
The limits of that principle are, however, apparent from two recent decisions of the Court of Appeal in which the principle was found not to apply.
FANG ANKONG V GREEN ELITE
In Fang Ankong, the issue was whether the directors of a BVI company, Green Elite Limited (Green Elite) had lawfully paid the proceeds of the sale of the company’s sole asset to three employees (the Three Employees). The appellants sought to justify the payments by reference to the Duomatic principle, contending that there had been an informal “understanding” between the shareholders in 2008 that the funds would be used to pay employees at some point in the future for their service in respect of an IPO.
Green Elite was formed in 2010 as a result of a joint venture between the first appellant, Mr Fang, acting through a BVI company, which held 50% of the shares in Green Elite, and Delco Participation BV, the other 50% shareholder. Green Elite’s sole purpose was to effect an employee share benefit scheme to reward the Three Employees for their services on listing the joint venture’s business. When Green Elite’s sole asset was later sold in 2014, the proceeds were paid by the buyer into the bank account of Mr Fang who, after holding them for a year, caused the funds to be paid out in 3 tranches to the Three Employees. The other joint venture partners were not told of this disposition nor was there any directors meeting held or formal resolution passed to approve the payment.
The Court of Appeal upheld the decision of the judge at first instance that there was no Duomatic assent. The Court held that although characterized by informality, for the Duomatic principle to apply, it must be objectively established that the shareholders were aware that their actual assent was being sought to the particular matter and that they had applied their minds to the issue of assent. The assent must be unequivocal and, in this case, it was held that there was no evidence that the “understanding” arrived at by the shareholders in 2008 was intended, without more, to legally bind the company. The “understanding” envisaged further discussions on fundamental aspects of the scheme and there was no evidence that the shareholders had reached an unequivocal agreement in that regard.
ARROWCREST LTD V JSC VTB BANK
In Arrowcrest, Sergey Taruta (Mr Taruta) owned 100% of the shares in Arrowcrest Ltd (Arrowcrest), a Cypriot company, which in turn owned 100% of the shares in Enard Investments Limited (Enard), a BVI company. JSC VTB Bank (VTB Bank) applied to the Court in the BVI for recognition of a Russian judgment which VTB Bank had obtained against Mr Taruta and to enforce that judgment by way of a receivership order over the shares in Enard.
The judge at first instance, finding that 100% of the shares in Enard were legally and beneficially owned by Arrowcrest and that 100% of the shares in Arrowcrest were owned by Mr Taruta, made the receivership order. The judge’s reasoning was that as sole shareholder of Arrowcrest, Mr Taruta exercised Duomatic control over Arrowcrest to direct how the shares in Enard could be voted and that the appointment of the receivers was technically an appointment over the power held by Mr Taruta under the Duomatic principle.
Arrowcrest’s application before the judge to set aside the receivership order was refused. On appeal, the Court held that:
(i) The Duomatic principle does not give shareholders a free-standing power over or control over a company or its assets. A shareholder, whether or not he is the sole shareholder, has no right to dispose of the assets of the company for his benefit or the benefit of others.
(ii) The Duomatic principle cannot be relied upon to empower the shareholders to do something that would be ultra vires the company.
(iii) The Duomatic principle does not give rise to a power over which receivers could be appointed. It is not a power at all.
(iv) The judge’s ruling offended the sacrosanct principle that a company has separate legal personality from its shareholders and directors. The shares in Enard were legally and beneficially owned by Arrowcrest, not Mr Taruta, and were not available for equitable execution against Mr Taruta.
(v) The Duomatic principle did not apply because there was no decision of Arrowcrest or Enard which Mr Taruta was ratifying.
COMMENT
The Duomatic principle is a valuable rule of company law, which (in appropriate circumstances) will step in to treat as valid, steps unanimously authorised by the shareholders (and it seems, the beneficial owners) of a solvent company where there has been a failure to act in accordance with its Articles. These recent decisions of the Court of Appeal are, however, a timely reminder that the principle cannot be taken too far. In particular:
- In cases where an informal understanding between shareholders is being alleged, an unequivocal agreement must be objectively established in order for that assent to bind the company.
- Although a sole shareholder may have power to direct the way in which the shares in a company are voted, the Duomatic principle could not be relied upon to empower him to deal with or dispose of the assets of the company.
- The Duomatic principle is not a power (of the type recognized in Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Limited [2011] UKPC 17) over which receivers can be appointed.
For further information, please contact:
Andrew Jowett, Partner, Appleby
ajowett@applebyglobal.com
