Are your company registers and records up to date?
15 November 2017
Practice Area: Corporate - M&A
In the real world, formal shareholder resolutions do not always happen, and that is particularly common in smaller family owned businesses, and larger corporate groups where parent companies exercise influence over subsidiaries and the directors of those subsidiaries.
If transactions are called into question, for example because the business is sold, directors who cannot point to a resolution in the company’s books as evidencing the shareholders’ approval or ratification of their conduct, may seek to establish if they can rely on the Duomatic principle.
The Duomatic principle is the company law rule relating to the informal approval of decisions by unanimous shareholder consent. In the case of Re Duomatic Ltd  2 Ch 365, the leading modern authority in this area, the court held that in order for the Duomatic principle to apply:
- the consent of the shareholders to the relevant matter at hand must be unanimous; and
- the consent must be given by the shareholders in full knowledge of what they are consenting to.
On 1st August 2017 the Court of Appeal delivered judgement in the case of Randhawa and another v Turpin and another  EWCA Civ 1201, which considered the scope and applicability of the Duomatic principle.
The case considered a relatively straightforward question; whether the sole director of BW Estates Limited (the Company), whose articles required a minimum of two directors for a board meeting to be quorate, and two shareholders for general meetings to be quorate, could validly appoint administrators under the Insolvency Act 1986.
The applicants were creditors of the Company, which entered administration in 2013. The respondents were the joint administrators. 75% of the shares in the Company were held by the sole director, David Williams on bare trust for his father, Robert Williams. The remaining 25% were at all times registered in the name of a long-dissolved Isle of Man company, Belvadere Investment Company Limited (Belvadere).
David Williams became the sole director of the Company in 2009, when Robert Williams was disqualified from acting as a director, however Robert Williams continued to act as a de facto director.
At an informal meeting at which David and Robert Williams were both present, it was decided that the Company would be put into administration, and the sole director resolved to appoint the joint administrators at a board meeting at which he was the only director present, and the minutes of the meeting recorded that a quorum was present.
The creditors objected to the administration, arguing that the appointment of the administrators was invalid because the decision to make it had been taken at an inquorate board meeting. The administrators however argued that their appointment was valid under the Duomatic principle.
Court of Appeal’s narrow approach
Disagreeing with the High Court’s extension of the Duomatic Principle, the Court of Appeal held that the appointment of the administrators was invalid as the Company had never become a single-member company because Belvadere, the dissolved Isle of Man company, held 25% of its shares and was entitled to vote at its general meetings. It made no difference that Belvadere had been dissolved.
It was emphasised that the Companies Act 2006 is clear that a company’s members are the persons listed in its register of members. This is the case even if a natural person is deceased, or if a company is in an insolvency procedure or dissolved.
Therefore, the Duomatic principle could not apply here as Belvadere, being a member of the Company and entitled to vote at its general meetings, was incapable of giving its consent.
Belvadere’s property had passed to the Crown as bona vacantia, and the Crown had not consented to the appointment of the administrators.
For the same reasons, the High Court had been wrong to find that the articles of association had been informally varied by the conduct of Robert and David Williams. In the circumstances, this could have occurred only by applying the Duomatic principle, which requires that all of the registered shareholders consent. It therefore could not apply as Belvadere had not given its consent.
Company directors and shareholders need to be mindful that deceased or dissolved shareholders remain members of a company until the shareholder register is updated.
If a natural member is deceased, the company should contact his personal representatives, and if a corporate member is dissolved, the company should consider whether it should be restored to the register of companies so that it can transfer its shares.
This case emphasises that even in the most small and most informally run companies, it is essential to fully document and retain records of shareholder and board decisions to help prevent challenges by parties who may be negatively affected by those decisions. In addition, companies should update their registers as quickly as possible and periodically review their articles of association to make sure that they continue to reflect the company’s requirements.
How CMcD can assist
If you would like advice in respect of the Duomatic Principle and how you might seek to rely on it, or have any concerns regarding decisions or actions taken without formal written shareholder approval, please contact Zara Treacy at [email protected] or another member of our Corporate team.