- in United States
- within Corporate/Commercial Law, Environment and Coronavirus (COVID-19) topic(s)
The decision confirms that the Duomatic principle requires clear and unanimous agreement by relevant shareholders not just generalised understandings.
The Judicial Committee of the Privy Council has dismissed an appeal seeking to exonerate a director of a BVI company from liability for breaches of his fiduciary duties in connection with his distribution of company assets to himself and connected parties: Fang Ankong v Green Elite Ltd (Virgin Islands) [2025] UKPC 47.
The appellant director, Mr Fang, sought to argue that his actions had been the subject of valid assent by the BVI company's shareholders such that no liability could arise. His argument relied on the well-trodden Re Duomatic principle, stemming from the case of Re Duomatic Ltd [1969] 2 Ch 365, which permits a company's shareholders acting unanimously to take any decision informally that they would otherwise have had to take formally.
Dismissing the appeal, the Privy Council did not accept that, on the facts, there had been any agreement by the shareholders to the actions taken by Mr Fang. Central to that outcome was the trial judge's finding that, while the shareholders had agreed that the company would be used to provide an employee share benefit scheme, the mechanics of how that scheme would work had crucially been left for future agreement between the shareholders. As such, even if Mr Fang genuinely believed he was acting properly in seeking to implement the employee share benefit scheme, he did not in fact have authority to transfer the company's assets for his personal benefit, and nor did the shareholders give their informal consent for him to do so.
The decision underlines, first, that where directors transfer company assets to themselves or connected parties, the onus lies squarely on them to prove authority or ratification. Genuine belief in entitlement to act is not sufficient where authority is absent. The case therefore reinforces the practical necessity, especially in closely held vehicles and joint ventures, of obtaining and documenting shareholder approval before implementing distributions, particularly where potential conflicts are present. Second, that generalised shareholder understandings or statements of purpose will not suffice to authorise specific dispositions of corporate assets. The Re Duomatic principle operates as the functional equivalent of a resolution and therefore demands identifiable assent by all shareholders (who are entitled to vote) to the particular act. Where essential parameters are deferred for future agreement and never settled, directors cannot fill in the gaps unilaterally.
As this is a Privy Council decision, it is not strictly binding on the English courts. However, it will be regarded by the English courts as having great weight and persuasive value. While the decision deals with fiduciary duties of company directors under BVI law (including under the BVI Business Companies Act 2004), the principles discussed in the decision are, for all intents and purposes, the same under the laws of England and Wales.
Background
The dispute arose from a joint venture beginning in 1999, between Mr Fang (a scrap metal businessman based in the People's Republic of China) and two Dutch partners. In 2008, they decided to float the business on the Hong Kong Stock Exchange through a Cayman Islands-incorporated vehicle, CT. CT's shares were held equally by Delco (a Dutch company controlled by the Dutch partners) and HWH (a BVI company controlled by Mr Fang).
In 2010, a new company, Green Elite, was incorporated in the BVI as a vehicle for an intended employee incentive scheme linked to the shares in CT. Green Elite's two equal shareholders were Delco and HWH. The intended beneficiaries of the scheme were three key employees (two of whom were Mr Fang's family members). The directors of Green Elite were Mr Fang and the three intended beneficiaries.
Green Elite held 6% of CT's issued share capital at the time of CT's IPO in 2010. Between 2010 and 2014, CT paid dividends totalling approximately HK$8.7 million which Green Elite transferred to its directors and HWH. In April 2014, Green Elite sold its CT shares for HK$150 million. The price was paid, without any Green Elite board approval or notification to Delco, to Mr Fang's personal account. Mr Fang subsequently distributed those proceeds to the three intended scheme beneficiaries between 2015 and 2017. In 2018 Green Elite was wound up following a petition by Delco who had been seeking payment of its share of the dividends and sale proceeds.
Acting by its liquidators, Green Elite sued its former directors for breach of fiduciary duties and HWH for knowing receipt.
At first instance, the BVI High Court (Jack J) found that Mr Fang and the other directors had acted in breach of their fiduciary duties by diverting the company's assets to themselves and others without proper authority. The judge rejected arguments that the distributions were authorised by any agreement between the shareholders or by Green Elite's "sole purpose" to effect an employee share benefit scheme. The BVI Court of Appeal upheld this decision, and Mr Fang and HWH appealed to the Privy Council.
The Decision
The Privy Council (Lord Briggs, Lord Sales, Lord Hamblen, Lord Burrows and Lord Richards) upheld the lower decisions.
The appeal before the Privy Council focused on two linked questions:
- Whether the directors' handling of the proceeds and dividends were unauthorised and in breach of fiduciary duty; and
- If so, whether those actions were nevertheless validated by unanimous shareholder assent under Re Duomatic, on the basis that the shareholders had agreed that Green Elite's "sole purpose" was to implement an employee share scheme at the discretion of Mr Fang.
In answering the first question, the Board reaffirmed the established principle that directors may not transfer company assets to themselves or others without proper authority to do so. Citing Lindley LJ in Re George Newman [1895] 1 Ch 674, the Privy Council described this principle as the "basic tenet" applicable to directors as much as to other fiduciaries with possession or control over the assets of their principal or beneficiary. In the Board's view, this was self-evidently a case in which that basic principle applied.
The appellants had argued that Green Elite's sole purpose was to deliver an employee share benefit scheme for the three key employees, so that any actions which advanced that purpose were in effect authorised. The Privy Council rejected this argument. Implementation of that purpose had yet to be agreed between the shareholders, including the price to be paid for the shares by the beneficiaries and the length of the lock-up period that was envisaged. These terms could not be treated as separate from the scheme's general purpose, and the directors did not have the authority to decide those terms unilaterally.
On the second question, the Privy Council rejected Mr Fang's argument relying on Re Duomatic that his actions had been informally authorised by unanimous consent of Green Elite's shareholders. The Re Duomatic principle requires that all shareholders who would have been entitled to vote on the matter, were it put to a meeting as a resolution, must have given their express or implied consent to the precise act undertaken by the directors.
The Privy Council found that, while there was consensus that Green Elite would serve as a vehicle for an employee share benefit scheme, all other matters regarding the scheme (including precisely how to reward the employees) were to be agreed at a later date, but ultimately they were never agreed. Consequently, there was no agreement on the critical details that might otherwise have authorised the directors to distribute the proceeds or the dividends as they had done. Accordingly, the Privy Council found that there was no Re Duomatic approval of the steps that had been taken and, as such, the appeal was dismissed on that basis as well.
In reaching this conclusion the Privy Council also considered the appellants' argument that the first instance judge had improperly equated the requirements for unanimous shareholder consent with the requirements for the formation of a contract. As the Privy Council observed, the judge had in some places in his judgment referred to whether the parties had intended to create legal relations and whether their understanding was "legally binding". On this, the Privy Council agreed that the judge had erred in his use of these expressions. Nevertheless, the Board was satisfied that what the judge had in mind was whether the shareholders had intended to bind themselves legally as if they had passed a formal resolution. The judge was not, however, suggesting that there needed to be a contract for Re Duomatic purposes. As the Board explained, provided it can be shown that shareholders have all assented to a particular matter, their assent will take effect as if it were a resolution passed at a general meeting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
