UK: The Re Duomatic principle, ostensible authority and the consent of beneficial owners

The Judicial Committee of the Privy Council delivered its opinion today in Ciban Management Corporation v Citco (BVI) Ltd & Anor (British Virgin Islands) [2020] UKPC 21: see here or here (pdf). The Board found, amongst other things, that the principle of informal, unanimous shareholder consent - often referred to as the Re Duomatic principle - could operate to confer ostensible authority. This operated subject to recognised exceptions or qualifications: where there is dishonesty; where the shareholder had not consented to the relevant act; and where the transaction would jeopardise the company's solvency or cause loss to creditors.

The Board also referred to what it called a further "possible" qualification in the operation of the principle: where the consent is that of the beneficial owners rather than the registered shareholders. But it stated: "... the correct view is that, at least as here where the ultimate beneficial owner and not the registered shareholder is taking all the decisions in the relevant transactions, the Duomatic principle applies as regards the consent of (and authority given by) the ultimate beneficial owner" (para. [47]).

UK: JCPC opinion on apparent authority

The Judicial Committee of the Privy Council handed down its opinion last week in East Asia Company Ltd v PT Satria Tirtatama Energindo (Bermuda) [2019] UKPC 30: see here or here (pdf). A summary of the opinion is available here (pdf).

In a case concerning the principles of apparent authority, the Board upheld the decision of the Court of Appeal of Bermuda (here, pdf) that a director did not have the apparent authority to enter into a share sale agreement, contained within a heads of agreement document, on the company's behalf. Amongst the factors leading to this conclusion was the absence of reliance on any representations made by the company.

Of particular interest - and importance - is the discussion the Board provides, albeit obiter, about the extent to which a party can rely on apparent authority where they are "put on inquiry" as to the agent's authority (or lack thereof). In such cases, the Board accepted that in order to rely on the apparent authority of a director, the third party must have made the inquiries that a reasonable person would have made in all the circumstances in order to verify that director's authority. In adopting this test, the Board rejected the position adopted by Lord Neuberger in Akai Holdings Ltd v Kasikornbank Public Co Ltd [2010] HKCFA 64, [2011] 1 HKC 357, that reliance was permitted unless the third party knew of the agent's lack of authority, was dishonest or irrational, or reckless in his belief or turned a blind eye.

Update (18 July 2019) - a summary has been published by the ICLR: see here.

UK: Supreme Court decision on agency, constructive trusts and insolvency

The Supreme Court gave judgment earlier today in Bailey v Angove's PTY Ltd [2016] UKSC 47, on appeal from [2015] EWCA Civ 215. The court's opinion was delivered by Lord Sumption, with whom the other four justices agreed. A summary of the opinion is available here (pdf).

There were two issues before the court: when will the law regard the authority of an agent as irrevocable; and, does liability to account as a constructive trustee arise where money is received at a time when the recipient knows that imminent insolvency will prevent the performance of the corresponding obligation? With regard to the latter question, Lord Sumption held that no trust arose and declined to follow the authorities suggesting otherwise including Neste Oy v Lloyd’s Bank Plc [1983] 2 Lloyds Rep 658 and In re Japan Leasing Europe Plc [1999] BPIR 911. Lord Sumption stated (at paras. [26] and [28]):

It is inherent in the statutory scheme of distribution in an insolvency that apparently arbitrary results may follow from the adventitious timing of the commencement of the liquidation, especially in the case of deferred obligations. In principle, an advance payment to a company made before the commencement of the liquidation for an obligation performable afterwards will form part of the company’s estate, notwithstanding that its supervening insolvency means that the obligation will not be performed, at any rate in specie. The payer must prove in the liquidation for damages for the breach of contract. Likewise, a contractor providing goods or services on credit will have to prove in the liquidation for the price if the other party becomes insolvent before paying. The rule is the same for money received for his principal’s account by an agent who becomes insolvent before accounting for it, unless (contrary to the unchallenged finding of the judge in this case) the relations between the parties were such as to make the agent an express trustee of money in his hands. The money will form part of the agent’s insolvent estate, and the principal must prove in the liquidation. In the nature of things, these consequences involve a detriment for the payer, attributable to the timing of the company’s insolvency; and a windfall for the general creditors, since the estate available for distribution will be increased by the payment without being reduced by the cost of performance.

Bingham J’s point of departure in Neste Oy was that the recipient of money may be liable to account for it as a constructive trustee if he cannot in good conscience assert his own beneficial interest in the money as against some other person of whose rights he is aware. As a general proposition this is plainly right. But it is not a sufficient statement of the test, because it begs the question what good conscience requires. Property rights are fixed and ascertainable rights. Whether they exist in a given case depends on settled principles, even in equity. Good conscience therefore involves more than a judgment of the relative moral merits of the parties. For that reason it seems to me, with respect, that Bingham J’s observation in Neste Oy that any reasonable and honest director would have returned the sixth payment upon its receipt begs the essential question whether he should have returned it. It cannot be a sufficient answer to that question to say that it would be “contrary to any ordinary notion of fairness” for the general creditors to benefit by the payment. Reasoning of this kind might be relevant to the existence of a remedial constructive trust, but not an institutional one. The observation of the editors of Bowstead and Reynolds and of Nicholas Warren QC in Japan Leasing that a proprietary claim should be recognised whenever the claim is “sufficiently strong and differentiable from other claims” to warrant giving it priority over other claims in an insolvency, seems to me to be open to the same objection."

A video recording of Lord Sumption, delivering the court's opinion, is available below (and also here should the embedded video not work):

Europe: Commission evaluation of the Commercial Agents Directive

The European Commission has begun its first general evaluation of the Commercial Agents Directive (86/653/EEC): see here.  A public consultation has been launched, the purpose of which is to seek information about the operation and future of the Directive (in particular its significance for SMEs and cross-border activities).

UK: Supreme Court judgment in FHR due next week

The Supreme Court will give judgment next week in FHR European Ventures LLP v Cedar Capital Partners LLC: see here. The principal issue before the court, to quote from its case summary, was this: does an agent who receives a secret commission hold the sum paid on constructive trust for his principal(s) giving rise to proprietary rights?

The appeal hearing took place last month before a panel of seven justices: Lord Neuberger, Lord Mance, Lord Sumption, Lord Carnwath, Lord Toulson, Lord Hodge and Lord Collins.

UK: England and Wales: no implied term requiring disclosure by bank

The ICLR has provided a summary of the recent High Court decision Torre Asset Funding Ltd and another v Royal Bank of Scotland plc [2013] EWHC 2670 (Ch): see here. The headnote reads: "A term was not to be implied into a mezzanine lending agreement that a bank, which had acted as agent for two special purpose vehicles (“SPVs”) when they participated as junior lenders in such structured lending to a property company which subsequently collapsed, was obliged to disclose to the SPVs material financial information in its possession as to the declining health of the company."

UK: England and Wales: company entitled to inspect former director's e-mails

The Court of Appeal gave judgment last Friday in Fairstar Heavy Transport NV v Adkins [2013] EWCA Civ 886. At issue was whether a company was entitled to an order requiring its former CEO to provide access to the content of e-mails (stored on his computer) relating to the company's business. At first instance the company argued that it had a proprietary claim to the content of the e-mails held by the former director. This argument failed: see [2012] EWHC 2952 (TCC). The Court of Appeal, citing the right of a principal to an inspection and copying remedy against a former agent, held that the judge ought to have made an order for inspection of the e-mails on the computer.

UK: England and Wales: anonymity order refused in LIBOR manipulation damages case

Yesterday, in Graiseley Properties Ltd v Barclays Bank Plc (Rev 1) [2013] EWHC 67 (Comm), the High Court refused to grant anonymity during the interlocutory stages of the case to individuals implicated in Barclays' manipulation of LIBOR. The case is widely reported as the first before the English courts in which a party is seeking damages in connection with the manipulation of LIBOR, the argument being based on a claim of fraudulent misrepresentation in respect of the independence of the LIBOR benchmark (for further information see [2012] EWHC 3093 (Comm)).

The trial judge concluded that to grant an anonymity order would be an affront to the principle of open justice and would potentially damage public confidence in the administration of justice. It is interesting to note that an argument linked to the company's separate legal personality was raised in the course of argument. Lord Pannick QC, acting on behalf of those seeking anonymity, drew a distinction between cases where those seeking anonymity were central to the case (and where the courts had refused to grant anonymity orders) and the present case where the individuals' involvement was argued to be incidental because the defendant was Barclays. This distinction was rejected by the trial judge: "I can see no principled reason for drawing that distinction and, in any event, in relation to the individuals who were involved in manipulating LIBOR, the point made is a somewhat doubtful one. Since a corporate entity can only act through its human agents, the identity of those agents is certainly an important aspect of the case" (at para. [36]).

UK: England and Wales: agency - acting for competing principals

The Court of Appeal gave judgment last Friday in Rossetti Marketing Ltd & Anor v Diamond Sofa Company Ltd [2012] EWCA Civ 1021. The case contains, amongst other things, some interesting discussion regarding the circumstances in which an agent may act for competing principals (at paras. [22], [23] and [27], per Lord Neuberger MR):

An agent can act for two principals with conflicting interests in two types of case. The first is, as already indicated, where both principals agree. In such a case, it is for the agent to show that the principal not merely consented, but that the consent was given on a fully informed basis – i.e. that the agent had made full disclosure to the principal – see per Tuckey LJ in Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351, para 35 ... The second type of case where an agent can act for competing principals is where, as in Kelly [1993] AC 205, the principal must have appreciated that the nature of the agent's business (in that case a residential estate agent) is 'to act for numerous principals'. More generally, I agree ... that, particularly as 'estate agents are only imperfectly agents and are known to act for many principals', it is highly questionable whether the reasoning in Kelly [1993] AC 205 should be extended to other cases of agency, at least in the absence of clear evidence to support such an extension".

UK: trustees, delegation and ostensible authority

The Judicial Committee of the Privy Council gave its opinion last week in Kelly v Fraser (Jamaicas) [2012] UKPC 25. The court held that the trustees of a pension fund were bound by representations made by a senior officer of a company to which administrative functions had been delegated. Judgment was given by Lord Sumption, in the course of which he stated (at para. [15], emphasis in the original):

An agent cannot be said to have authority solely on the basis that he has held himself out as having it. It is, however, perfectly possible for the proper authorities of a company (or, for that matter, any other principal) to organise its affairs in such a way that subordinates who would not have authority to approve a transaction are nevertheless held out by those authorities as the persons who are to communicate to outsiders the fact that it has been approved by those who are authorised to approve it or that some particular agent has been duly authorised to approve it. These are representations which, if made by some one held out by the company to make representations of that kind, may give rise to an estoppel".

Singapore: the duty to maintain a system of internal accounting control

The Court of Appeal gave judgment in Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd [2011] SGCA 22 earlier this month: see here. This is an important decision on the law of agency, with much analysis of the English Court of Appeal's decision First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194, The Independent, 19 April 1993. Section 199(2A) of Singapore's Companies Act was briefly considered; this provision requires public companies (and their subsidiaries) to maintain a system of internal accounting control in order, amongst other things, to safeguard assets and ensure that transactions are properly authorised. The court held that no common law duty arose under Section 199(2A) and that it had been enacted "to safeguard the assets of a company and, hence, was enacted for the company's benefit, and not for the benefit of any third party who might deal with the company's officers and employees" (para. [98]).

Hong Kong: Court of Final Appeal considers apparent authority of executive chairman and chief executive

The Hong Kong Court of Final Appeal has considered, in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd. (FACV No. 9 of 2010), whether a company's executive chairman and chief executive (Mr Ting) had the apparent authority to enter various transactions with a bank: see here. The court's judgment was delivered earlier this month; Lord Neugerger of Abbotsbury, sitting as a non-permenant judge of the court, delivered the only reasoned opinion with which the other judges agreed.

Lord Neuberger stated that the bank would be able to rely on Mr Ting’s apparent authority (if he had such authority) unless its belief in this regard was dishonest or irrational (which included turning a blind eye and being reckless). His Lordship found that Mr Ting did not have apparent authority in respect of the transactions, although he noted noted that Mr Ting would, as executive chairman and chief executive, possess "a large measure of apparent authority - indeed, no doubt he would have had a large measure of actual authority" (para. [81]). Significant in this regard was Lord Neuberger's finding that the bank was irrational in its belief that Mr Ting had authority, not least because of the "peculiar" nature of the transactions, which benefited another company sharing the same parent as the company and under which the company gained a substantial liability.

UK: Scotland: Companies Act 2006 - directors' duties and board ratification considered in the Outer House

Sitting in the Court of Session (Outer House), Lord Hodge gave his opinion in Eastford Ltd v Gillespie & Anor [2009] CSOH 119 last week. Of interest - in England as well as Scotland - will be his discussion of directors' duties under the Companies Act (2006) and the principles governing board ratification of directors' unauthorised acts. Lord Hodge observed (paras. [7] to [10]):

It is well established at common law that, unless a company's constitution otherwise provides, a board of directors can, within a reasonable time, ratify the acts of a director or directors who, when they acted, had no authority to bind the company ... The statutory statement of the general duties of directors in Chapter 2 of Part 10 of the Companies Act 2006 has not superseded that line of authority. Section 171 provides that a director of a company must act in accordance with the company's constitution. That might, taken by itself, suggest that an unauthorised act could not be ratified. But it is clear on examining the statutory statement of the general duties of directors that that statement does not prevent a company by a resolution of its board from ratifying the acts of a director which were unauthorised but were within the power of the board.

One must look to the purpose of the statutory statement which is revealed in the 2006 Act. Subsections (3) and (4) of section 170 set out the relationship between the general duties which are stated in the Act and the pre-existing common law rules and equitable principles on which they are based. Subsection (3) provides:

'The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director'.

Thus the statutory statements replace such of the common law rules as have been subjected to statutory formulation. But sub-section (4) provides:

'The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties'.

This subsection seeks to address the challenge which the Law Commissions and the Company Law Review had identified, namely of avoiding the danger that a statutory statement of general duties would make the law inflexible and incapable of development by judges to deal with changing commercial circumstances. Parliament has directed the courts not only to treat the general duties in the same way as the pre-existing rules and principles but also to have regard to the continued development of the non-statutory law in relation to the duties of other fiduciaries when interpreting and applying the statutory statements. The interpretation of the statements will therefore be able to evolve. The statutory statement of the general duties of directors is intended to make those duties more accessible to commercial people. I see nothing in the statutory provisions, including section 180(5) (which provides that, subject to specified exceptions, the general duties have effect notwithstanding any rule of law), which suggests that Parliament intended to alter the pre-existing rules on ratification by a board of a director's unauthorised acts.

I am supported in my opinion by Lord Glennie in West Coast Capital (Lios) Ltd Petr [2008] CSOH 72, (at para 21) in which he expressed the view that section 171 of the 2006 Act did little more than set out the pre-existing law on the subject. I also derive some support from leading company law textbooks such as Gore-Browne on Companies (at para 15[8A]) and Palmer's Company Law, which (at para 8.2309) suggests that older cases remain relevant to the interpretation of the statutory duties 'since the codified duties are generally formulated in a way that quite faithfully reflects the older case law'. The statutory formulations do not, by a side wind, alter the law of agency or prevent ratification of the unauthorised acts of a director".

UK: England and Wales: company vicariously liable for director's harassment of a debtor

Yesterday, in S & D Property Investments Ltd v Nisbet [2009] EWHC 1726 (Ch), the trial judge held a company vicariously liable for harassment under the Protection from Harassment Act (1997) in respect of violent threats made by a director to a debtor. The trial judge stated (at paras. [119] and [122]):

The House of Lords held in Majrowski that an employer could be vicariously liable for the harassment of its employee. It was not disputed in the present case that [the company] could be vicariously liable for the harassment of [the director] if he acted as the company's agent and within the scope of his authority.

I conclude that [the director] was the agent of [the company] for the purpose of taking steps to recover the debt. Plainly, it was left to his judgment as to how this should be done. His harassment of [the debtor] was part and parcel of his attempts to do just that. Accordingly, I find that his harassment was within the scope of his actual authority. [The company] is vicariously liable for his tort".

USA: New York: Parmalat, Deloitte and vicarious liability

The United States District Court for the Southern District of New York has given its opinion in Re Parmalat Securities Litigation. The case concerned the claim that Deloitte Touche Tohmatsu (DTT), a Swiss verein with headquarters in New York, was vicariously liable for the actions of Deloitte Italy, Parmalat's auditor. DTT sought summary judgment dismissing the claim: the trial judge declined and observed (p. 19):

In all the circumstances, the totality of the evidence – including evidence concerning the structure and internal relationships of Deloitte generally, DTT’s authority over the professional practices of the member firms, and DTT’s exercise of that authority in connection with the Parmalat engagement – raises a genuine issue of material fact as to whether Deloitte Italy was an agent of DTT with respect to the Parmalat engagement".

For background information, click here.