Ciban Management Corporation v Citco (BVI) Ltd and another (British Virgin Islands)

A company’s director does not breach the duty of reasonable care by relying on instructions conveyed through an intermediary where the company’s ultimate beneficial owner established that method of operation and the reliance remained objectively reasonable.

Unanimous informal shareholder assent may attribute to the company a representation by conduct which gives the intermediary ostensible authority. The principle can apply to the assent of an ultimate beneficial owner who takes all relevant decisions. An owner who deliberately remains hidden therefore bears the risk that the chosen intermediary will abuse that authority, even dishonestly. The company cannot transfer that risk to an innocent director through a negligence claim.

Spectacular Holdings Inc owned five parcels of land and had a single ultimate beneficial owner, Mr Byington. Its bearer shares were held for him by a lawyer. TCCL was its sole legal director and Citco BVI its registered agent. Mr Byington arranged for instructions to be conveyed through Mr Costa and approved four powers of attorney issued through that arrangement.

Without Mr Byington’s knowledge, Mr Costa instructed the respondents to issue a fifth power of attorney authorising the sale of all the land. The sale generated litigation and loss. Spectacular alleged that TCCL and Citco BVI negligently failed to verify Mr Costa’s authority and that TCCL failed to ensure compliance with section 80 of the International Business Companies Act 1984 (BVI).

Bannister J dismissed the claims. The Court of Appeal of the Eastern Caribbean Supreme Court dismissed the appeal on 13 February 2019. The central issue before the Board was whether either respondent breached its tortious duty of care by acting upon Mr Costa’s instructions.

1. Appeal dismissed. TCCL and Citco BVI did not breach their duties of care to Spectacular. Mr Byington had deliberately remained in the shadows and established a system under which Mr Costa conveyed instructions. That system had operated without objection for four earlier powers of attorney over two years. The law did not permit the risk of Mr Costa’s betrayal to be shifted to the respondents.

2. The alleged warning signs did not make reliance on Mr Costa unreasonable. The communications, payment arrangements and breadth of the fifth power of attorney were consistent with previous dealings. Given TCCL’s intended execution-only role, it was not reasonably required to scrutinise the proposed sale independently.

3. Ostensible authority was not confined to an agent’s conclusion of contracts. Spectacular, through Mr Byington’s repeated conduct, represented that Mr Costa could convey instructions for powers of attorney. Reliance upon that representation was objectively reasonable, consistently with East Asia Co Ltd v PT Satria Tirtatama Energindo [2019] UKPC 30.

4. The Duomatic principle attributes unanimous informal shareholder assent to the company where the matter could have been authorised formally. It extended in principle to a representation creating ostensible authority. Mr Byington’s conduct could therefore be attributed to Spectacular, notwithstanding his lack of actual consent to the fifth power of attorney.

5. The principle applied to Mr Byington as ultimate beneficial owner because he, rather than the bearer-share holder, took all decisions in the relevant transactions. The recognised qualifications did not prevent its application. Neither Mr Byington nor TCCL was dishonest in the relevant transaction, the company’s solvency and creditors were not jeopardised, and even dishonest misuse by Mr Costa fell within the risk created by the arrangements.

6. Section 80 of the International Business Companies Act 1984 (BVI) did not exclude informal unanimous assent. If TCCL reasonably understood Mr Costa to be conveying the sole owner’s instructions, no further formal resolution was required.

7. Citco BVI owed Spectacular a tortious duty of care in performing its limited registered-agent services, but did not breach it. It was not a de facto director because it did not purport to act as a director.

8. Obiter, and without full argument, the lower courts probably erred in treating the section 80 duty as owed to Mr Byington rather than Spectacular, in treating the sale as occurring in the company’s usual or regular business, and possibly in treating the fifth power of attorney as outside the section merely because it was not itself a disposition.

1. Privy Council: Appeal dismissed. The Board upheld the concurrent decisions that neither respondent breached its duty of care.
2. Court of Appeal of the Eastern Caribbean Supreme Court: On 13 February 2019, dismissed Spectacular’s appeal and upheld Bannister J. It also relied upon ostensible authority and held that the fifth power of attorney was not itself a disposition under section 80 of the International Business Companies Act 1984 (BVI).
3. Eastern Caribbean Supreme Court, High Court: On 27 November 2012, Bannister J dismissed the claims after a liability trial.