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Directors, betrayal and authority - The Privy Council considers directors’ duties and an extension of the Duomatic principle

In a very colourful case, the Privy Council recently examined the duty of care owed by directors of a company, in circumstances where its ultimate owner had been betrayed by his agent and caused the Company to be stripped of its entire asset holding.

The Privy Council found that the structuring put in place was such that the directors had not breached their duty to the Company despite their involvement in the sale. Further, that the Duomatic principle could reach through ostensible authority and bind the Company.

Background

The beneficial owner of the Company (the UBO) had set up a complex structure to mask his ownership. The Company’s sole asset, São Paulo real estate, had been settled into the Company following a contrived enforcement and auction designed to place it beyond the creditors of the UBO. The UBO hid his ownership by a layer of bearer shares (then lawful) and relayed instructions to a corporate director via a series of powers of attorney granted to his trusted confidante (his Agent).

The UBO subsequently fell out with his Agent. The Agent, acting without the UBO’s knowledge, instructed the director to issue a fresh power of attorney. The power of attorney was broader than previous ones granted and enabled the Agent to sell the sole asset of the Company.

On realising the loss, the UBO replaced the board and the Company turned on its former director. It claimed that the director had breached its duties, having failed to spot red flags, such as the use of different email addresses and the breadth of the new power of attorney. Further, proper due diligence on the sale had not been carried out. Had the director taken notice of the circumstances of the sale and adhered to the statutory requirement to consult shareholders over disposals of more than 50% of a Company’s asset value, then the sale would never have proceeded.

No Breach of duty

The Privy Council upheld the decision of the two lower Courts and found that there had not been a breach of duty by the directors. The circumstances and structuring put in place by the UBO were such that the acts of the Agent would not have objectively aroused suspicion.

Duomatic and Ostensible Authority

The Law lords went on to consider whether or not the Duomatic principle (the informal approval of a Company’s actions by its shareholders) could apply in cases of ostensible authority.

First, applying Duomatic, it was found that the Company could be bound by the informal consent of its sole UBO (as well as that of its legal shareholder). As such it follows that, had the Agent had the UBO’s actual authority, the Company would be similarly bound. The Privy Council could find no good reason not to extend the principle to an Agent acting under ostensible authority. The Company was bound by the UBO’s informal consent and his representation by conduct that the Agent had authority to instruct the directors.

Conclusion

Despite being set against an unhelpful factual background, the Privy Council found that that there had been no breach of duty by the directors. The UBO had been “hoist by his own petard” and the manner in which he had structured the Company meant that he was at risk of betrayal from his Agent. That was not a risk that he should be allowed to throw back at the directors by instigating a claim by the Company.

The Harneys team successfully appeared with Steven Thompson QC for the directors in the Commercial Court, Court of Appeal and Privy Council.

For further information please contact Jeremy Child (UK), Phillip Kite (UK), Andrew Thorp (BVI), Ian Mann, Vicky Lord (Asia).

The judgment can be found here.

Directors, betrayal and authority - The Privy Council considers directors’ duties and an extension of the Duomatic principle

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