Consent of beneficial owners under the Duomatic principle: Court of Appeal clarifies position

Satyam Enterprises Ltd v John Vincent Burton Jvb Seven Properties Ltd [2021] EWCA Civ 287

The Court of Appeal has recently confirmed that the Duomatic principle can apply where the ultimate beneficial owner, not the registered shareholder, makes the decisions in a transaction.

In 2019, the High Court dismissed a claim, brought by a company (Satyam) against its former sole director and shareholder (JB) and his connected company (JVB7). Satyam’s claim was based on the fact that JB had previously caused Satyam to transfer several properties to JVB7, allegedly at an undervalue and in breach of his duties as director.

In the first instance, Deputy District Judge Pickering held that as the properties were, both before and after the transfer, held on trust for a third party (VS), all that was transferred was the bare legal title and there had been no loss to Satyam. DDJ Pickering noted however, that if he was wrong, and VS was not at all material times the ultimate beneficial owner, then JB would have acted in breach of his duties.

Crucially however, the judge found that VS was the ultimate beneficial owner of the shares in Satyam and therefore it followed that the acts of which Satyam complain, were in fact expressly authorised and carried out at the direction of its sole beneficial shareholder (notwithstanding the purpose of the transfer was to manufacture a transaction with an artificially inflated price to fraudulently raise funds). DDJ Pickering found that the Duomatic principle therefore applied and JB had a complete defence to the breach of duty claim.

Satyam subsequently appealed on the basis that, among other things, DDJ Pickering was wrong to find that the Duomatic principle applied. Satyam advanced three separate submissions:

1. It was not possible for the shareholder of Satyam (whether that be JB as legal shareholder, or VS as beneficial owner) to ratify or authorise the transfer of the properties at an undervalue, as that would amount to an unlawful distribution of the company’s assets.
2. There was no relevant outward manifestation by JB or VS of the requisite intent to bring the Duomatic principle into play.
3. The transfer that was purportedly ratified was part of an intended fraud and therefore not capable of ratification.

Lord Justice Nugee dismissed the second and third submissions for challenging DDJ Pickering’s reliance on the Duomatic principle. However, he permitted the appeal on the basis of the first submission, insofar as DDJ Pickering had not properly explored and/or made findings of fact, as to whether the transfer amounted to an undervalue (despite the same being pleaded).

Lord Justice Nugee remarked that if the transaction was not at an undervalue, or even if at an undervalue was not an unlawful return of capital, the claim will fall to be dismissed.

Summary

This case follows the Privy Council ruling in Ciban Management Corp v Citco (BVI) Ltd [2020] UKPC 21 which held that where the ultimate beneficial owner (not necessarily the registered shareholder) makes the decisions in a transaction, the Duomatic principle applies to consent and/or authority, given by that ultimate beneficial owner.