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Duomatic principle throws shareholder consent under spotlight
The Duomatic principle is a long-established common law principle of company law. It allows shareholders of a company to consent to a matter informally, without the need for attending and voting at a general meeting. The consent must be unanimous and be given in full knowledge of the matter in order to be binding in the same way as a resolution passed at a general meeting. The Duomatic principle was the subject of a recent Court of Appeal decision.
In Randhawa and another v Turpin and another (2017), the Randhawas were creditors of BW Estates Limited (Company) in which Mr David Williams (DW) held 75% of the shares on bare trust for his father, Mr Robert Williams (RW). The remaining 25% was held by Belvadere Investment Company Limited (Belvadere), which was dissolved in 1996.
The Company’s articles of association (Articles) stated that the quorum for board meetings was two directors and the quorum for general meetings was two shareholders. However, DW had been acting as the sole director of the Company since 2009 when RW was disqualified as a director.
At an informal meeting, it was decided that the Company would be put into administration and DW resolved to appoint administrators at a board meeting. The Randhawas claimed that the appointment of the administrators was invalid because the decision had been made at an inquorate board meeting. The administrators argued that their appointment was valid under the Duomatic principle.
The High Court held that:
- the quorum in the Articles had been informally amended on the basis that DW had been allowed to run the Company as a sole director
- the assent of Belvadere was not necessary as it was incapable of exercising its voting shares having been dissolved
- even if consent was required, the Duomatic principle had been triggered by the fact that RW was likely to be the beneficial owner of all the shares in the Company and had assented to the Articles being amended.
The Randhawas appealed and the decision was overturned by the Court of Appeal for the following reasons:
- Belvadere remained a member of the Company (being listed on the register of members) and that membership could not be disregarded.
- The Duomatic principle requires the consent of all the shareholders notwithstanding the fact that Belvadere was a dissolved company and was therefore incapable of consenting.
- Even if it could be shown that RW beneficially owned the shares in Belvadere, his consent would be meaningless because Belvadere’s assets had been transferred to the Crown and the Crown had not consented.
Frustratingly, the judgment did not comment on whether the Duomatic principle will apply when a company’s beneficial owners assent where there is nobody formally entitled to agree on behalf of the registered shareholder.
However, the case is a reminder of the importance of keeping the register of members up-to-date as the Duomatic principle requires unanimous consent of all the voting shareholders on the register of members, irrespective of whether or not they are capable of voting.
Sophie Martyn is a solicitor in our corporate & commercial team. With a background in science and data, she is naturally analytical and methodical in her approach. She has general corporate and commercial experience, with a particular interest in advising LLPs and start-up companies. Having previously worked in-house, Sophie is business-minded and makes sure she understands the commercial context in which she is providing legal advice to any individual client.