A recent Court of Appeal decision has considered whether the Duomatic principle of unanimous informal shareholder consent can be invoked where one of the shareholders is a company which has been dissolved.
Background:
Under the Duomatic principle the informal consent or acceptance of all the voting members of a company can bind the company as if the members had passed a formal shareholders' resolution. Earlier cases, including most recently The Sherlock Holmes International Society Ltd v. Aidiniantz [2016] EWHC 1076 (Ch), confirm that it is possible for a company's articles to be amended informally in this way.
Facts:
Administrators of a company were appointed by a decision of a sole director (DW). However, the company's articles stipulated a quorum of two for a board meeting. They also stated that a sole director could only call a general meeting or appoint another director. The administrators' appointment was therefore, on the face of matters, invalid.
The quorum for a shareholders' meeting was also two. DW was the registered holder of a 75 per cent shareholding in the company, although he held those shares for his father (RW). The other 25% of the shares were registered in the name of an Isle of Man company. This had been dissolved many years previously, although it was likely that RW was also the beneficial owner of these shares.
After the administration, the applicants had obtained legal title to the 75 per cent shareholding in the company that DW held for RW. The applicants tried to claim that the administrators had not been validly appointed.
At first instance the High Court had rejected the claim. It found that, under the Duomatic principle, there had been an effective variation of or departure from the company's articles. This had allowed the exercise of all the directors' powers by one director alone.
Decision:
Overturning the High Court decision, the Court of Appeal held that the Duomatic principle generally cannot apply where one of the registered shareholders is a corporation which no longer exists. This is because the dissolved company is incapable of consenting and the Duomatic principle requires the consent of all the registered shareholders. The Court of Appeal therefore rejected the High Court's view that, as the 25 per cent shareholder no longer existed and no-one capable of voting had been entered on the register in place of the dissolved company, the acquiescence of the 75 per cent shareholder alone ought to be enough to trigger the application of Duomatic.
The Court of Appeal also rejected the High Court's argument that, if it was necessary to find unanimous consent, that requirement was satisfied by RW, as beneficial owner, consenting to the exercise of the board's powers by the sole director. His consent could not be relevant in these circumstances where the registered shareholder had been dissolved and its assets passed to the Crown. The court was, however, reluctant to express any further view on whether it would be sufficient to obtain the consent of the person ultimately entitled to the shares if there was nobody entitled in formal terms to agree on behalf of the registered shareholder.
Comment:
In its approach to the dissolved company shareholder, the court has, not surprisingly, taken a stricter approach than the High Court on the Duomatic requirement for consent or acceptance of all the voting members of a company. However, the judgment leaves open the question of how far, in other circumstances, it may be possible to rely on the consent or acceptance of a beneficial rather than registered owner of shares.
In a point not argued before the High Court, the Court of Appeal also noted that only a company with one registered member is a single member company for the purposes of the Companies Act 2006. In this case, the dissolved shareholder had remained on the company's register of members, so it was not possible to regard the company as a single member company even though one of its two shareholders had been dissolved.
Randhawa & Ors v. Turpin & Anor [2017] EWCA Civ 1201
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