Strict application of Duomatic principle
18 / 10 / 2017
In the Winter 2017 edition of our In Counsel publication (please click here to read), we reported on the application of the Duomatic principle by the High Court in the case of Randhawa & Ors v Turpin & Anor, in particular whether, under the Duomatic principle, a company’s articles of association could effectively be amended by the holders of 75% of its share capital. The High Court which had applied a practical solution to a situation where one of the shareholders was dissolved, has now been overruled by the Court of Appeal.
Re-cap of the facts
An administrator was appointed for BW Estates Limited (BWEL) by BWEL’s sole de jure director, David Williams (D). At this time, D held 75% of BWEL’s share capital on trust for his father Robert Williams (R), with the remaining 25% being held by a dissolved Isle of Man registered company (IoM Co), of which R was understood to be the beneficial owner.
BWEL’s articles of association (the Articles) provided that the quorum for board meetings was two and that, where one director was in office, that director’s only power was to appoint another director.
The creditors of BWEL sought to challenge the administrator’s costs by claiming that the administrator’s appointment was invalid. Their argument was that, under the Articles, D as a sole director only had the power to appoint another director.
D defended this claim by asserting that the quorum provisions in the Articles had been effectively changed by a constant course of conduct where D, as the legal owner of 75% of BWEL’s share capital, and R, as the beneficial owner of that share capital, had allowed a sole director to exercise the powers usually afforded to a quorate board.
In considering the case, the High Court referred to the precedent of Re Duomatic Ltd , being the principle that, where it can be shown that all shareholders with a right to vote have informally agreed on a matter, such unanimous agreement is as binding as a resolution in general meeting would be (the Duomatic principle). In applying the Duomatic principle, the High Court held that the Articles had effectively been amended by the holders of 75% of BWEL’s share capital. In particular it was held that:
- the assent of IoM Co as the holder of the remaining 25% of the shares was not necessary as IoM Co was incapable of exercising those votes (by virtue of having been dissolved); and
- even if it were necessary to obtain the consent of IoM Co, the fact that R was the beneficial owner of IoM Co and had informally assented to the amendment to the Articles, was sufficient in itself to trigger the Duomatic
Court of Appeal decision
Single member companies
The Court of Appeal rejected the argument put forward by the administrators that BWEL had become a single member company upon IoM Co’s dissolution. When considering the quorum requirements of regulation 40 of Table A and the single member company provisions of the Companies Act 2006, the word “member” includes any member registered on the company’s registers, which in the case of a corporate whether it is subsisting, in an insolvency procedure or dissolved. As IoM Co remained on BWEL’s register, BWEL could not be properly regarded as a single member company.
The Court of Appeal applied a strict interpretation of the Duomatic principle and allowed the appeal against the High Court’s decision.
The Court found that the Duomatic principle requires the assent of all shareholders who have the right to attend and vote at a general meeting of the company and not just those shareholders who are available at the time. The Court held that the Duomatic principle could not apply “in a situation where one of the registered shareholders is a corporation which does not exist, because it requires the consent of all the registered shareholders” and, as a result of its dissolution, one of the shareholders was incapable of consenting.
As such, the Court held that the Articles had not been amended and that the appointment of the administrators was invalid.
Assent by beneficial owner
The Court of Appeal was also not willing to agree with the High Court’s ruling that the assent of R as the beneficial owner of its shareholding is sufficient to trigger the Duomatic principle. IoM Co was dissolved and therefore its property had passed to the Crown.
In his judgment Sir Geoffrey Vos, Chancellor of the High Court further stated “I would be reluctant to express any view on whether it would be sufficient in any event for Duomatic purposes to obtain the consent of the person ultimately entitled to the beneficial interest in a shareholding if there is nobody entitled in formal terms to agree on behalf of the registered shareholder.”
The Court of Appeal ruling is a strict black letter law view of the Duomatic principle. It continues to demonstrate the need to (1) keep clear records of decisions made by directors and shareholders (2) ensure that the Company’s registers are correctly maintained and regularly updated; and (3) that consideration be given to the validity of the decision making process where the decision may have significant implications – the administrators, for example, now find themselves in a very difficult position.
For further information please contact Charlotte Barker at email@example.com