LexisLibrary and LexisPSL
Sign up for a free trial today and get full access for a weekTrial
Under the Duomatic principle, also known as the unanimous consent rule, the courts may uphold unanimous decisions of shareholders, which do not comply with the detailed procedural requirements in their articles or in companies legislation. A number of recent cases have considered the exact parameters of the principle, and in doing so have highlighted the fact that it has its limits. In particular, the February 2012 decision of the High Court in Bonham-Carter v Situ Ventures Ltd indicates that it cannot be used to rescue a resolution to remove a director under s 168 of the Companies Act 2006 (the ‘Act'), which does not comply with the formalities in s 169.
In Re Duomatic Ltd  2 Ch 365 at 373, Buckley J observed that ‘where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be'. This principle, which is preserved by s 281(4) of the Act, is fundamentally wide in scope. For example, it allows shareholders to dispense not only with requirements in the articles, but also with requirements set out in statute (Re Oxted Motor Co Ltd  3 KB 32; Re Express Engineering Works Ltd  1 Ch 466), and applies even where the shareholders' assent takes the form of acquiescence in a course of action rather than express approval . In Schofield v Schofield  EWCA Civ 154, the Court of Appeal was invited to conclude that a shareholder had agreed to a general meeting being held without the requisite notice, and to hold that therefore, in accordance with the Duomatic principle, the meeting had been validly convened. In the course of declining this invitation, Etherton LJ noted that the assent of the shareholder in question ‘could be express or by implication, verbal or by conduct, given at the time or later’. See also Hussain v Wycombe Islamic Mission and Mosque Trust Ltd  EWHC 971 (Ch). It is not, however, without its limits.
Limits of the principle
In Secretary of State for Business, Innovation and Skills v Doffman, Re Stakefield (Midlands) Ltd  EWHC 3175 (Ch), the High Court identified three limits to the scope of the principle that were potentially relevant on the facts. According to Newey J:
â— The principle applies only if the shareholders had actually addressed their minds to the relevant matter.
As was noted last year in Tayplan Ltd v Smith  CSIH 8, a Scottish case, the Duomatic principle ‘goes to the reality of the situation ... there must have been a proposal of which all parties were aware and it must have been agreed to'. (See also Bonham-Carter v Situ Ventures Ltd  EWHC 230 (Ch), where it was held that the filing at Companies House of TM01 forms in respect of certain directors in the mistaken belief that they had resigned did not amount to a decision to remove those directors.) The courts will need to be persuaded that, on an objective analysis, the shareholders' agreement was real and unqualified. (Schofield v Schofield  EWCA Civ 154; Rolfe v Rolfe  EWHC 244 (Ch).)
â— The principle does not apply to an unlawful distribution.
This appears to be part of a wider limit preventing the principle from being used to circumvent restrictions and obligations imposed on companies by the general law (Re Frontsouth (Witham) Ltd  EWHC 1668 (Ch)). If, for example, a formal resolution at a general meeting cannot remedy a failure to comply with the Act's provisions on accounting, the informal agreement of the shareholders under the Duomatic principle should not be able to do so either.
â— The principle does not apply where the interests of creditors intrude as a result of the company's poor financial situation.
What Newey J seemed to have in mind here was the specific scenario in which shareholders seek to approve a breach of duty by the directors in circumstances where, because of the company's financial situation, the directors were required to have regard to the interests of creditors. In such a situation, the shareholders may not be able to approve the breach, whether they seek to do so through a formal decision or otherwise.
Another limit to the Duomatic principle is that it does not apply where requirements imposed in relation to the making of a particular decision are designed wholly or partly to protect the interests of parties other than the shareholders who are seeking to waive them (Re Duomatic Ltd  2 Ch 365; Atlas Wright (Europe) Ltd v Wright  BCC 163). In the recent case of Bonham-Carter v Situ Ventures Ltd  EWHC 230 (Ch), it was argued before the High Court that an informal decision supposedly taken by a sole shareholder to remove two directors should be as effective as a formal ordinary resolution in accordance with the statutory procedure in s 168 of the Act. In the event, the argument fell at the first hurdle, when the court concluded that the shareholder had not taken any such decision. However, the court took the opportunity to consider whether, in theory, shareholders are competent to waive compliance with s 169, which gives directors the right to protest against their proposed removal. Its view on this point, though obiter, was unequivocal: s 169 was designed, at least in part, to protect directors, and therefore shareholders are not competent to waive compliance with its provisions. As a result, the Duomatic principle would not apply. On the basis of the court's analysis in Situ Ventures, a decision by a sole shareholder in accordance with s 357 of the Act (records of decisions by sole member) cannot be used to remove a director under s 168 either. This point is explored in an article on Company Law Online entitled ‘Shareholder decisions - the limits of the Duomatic principle and section 357'.
Shareholders in some SMEs, especially those that are essentially partnerships in corporate form, may feel that the Companies Act 2006 places too many restrictions on their freedom to run their business as they please. The price they pay for limited liability, however, is that they are subject to a company law regime that is designed to balance their interests against the interests of creditors and others.
It is right that the law has developed to allow shareholders to take decisions informally in certain circumstances. The Duomatic principle can be justified on both pragmatic grounds and policy grounds. As to the former, the reality is that many small companies do not have regular access to legal advice, and conduct their affairs largely on an informal basis. As to the latter, there is considerable force in the argument that, as long as they are acting unanimously, the owners of a business should not have to pay undue attention to procedural requirements concerning the manner in which they take decisions. It is also right that the principle should have its limits. Advisers to smaller companies may want to use the recent decisions in this area, especially the High Court's observations in Situ Ventures, to draw those limits to their clients' attention, and urge them to abide by the Act's formal decision-making procedures whenever possible.
The only book available that deals exclusively with such companies
"This is an indispensable aid to the busy company secretary. The text is clear, the precedents...