Duomatic principle explained

"[W]here the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval."
EIC Services Ltd v Phipps. 2003. EWHC. 1507. Ch., per Neuberger J

The Duomatic principle is a principle of English company law relating to the informal approval of actions by a company's shareholders (and, potentially, directors).^[1] The principle is named after one of the earlier judicial decisions in which it was recognised: Re Duomatic Ltd [1969] 2 Ch 365, although in that case Buckley J was approving an older statement of the law from the decisions in In re Express Engineering [1920] 1 Ch 466 and Parker and Cooper Ltd v Reading [1926] Ch 975. It origins lie in the obiter dictum comments of Lord Davey in Salomon v Salomon & Co Ltd where he stated that 'the company is bound in a matter intra vires by the unanimous agreement of its members'.^[2]

The principle will apply even if the articles of association specifies a particular procedure in relation to the subject matter of the decision.^[3]

It has been noted that although the principle is normally referred to as the Duomatic principle, the actual rule predates that case by several decades.^[4]

Notes and References

1. Web site: What is the 'Duomatic Principle' & Why is it important?. Jordans. 9 July 2016.
2. Salomon v Salomon & Co Ltd [1897] AC 22, 57
3. Web site: Application of the Duomatic principle. Practical Law. 9 July 2016.
4. 1969
5. at paragraph 122
6. at [41]
7. Book: Sarah Worthington QC. Sealy & Worthington's Text, Cases & Materials in Company Law. . 11th . 2016 . 9780198722052 . 217 . Curiously, the Duomatic case has received greater recognition than it probably deserves, that practising lawyers now commonly refer to the rule established by Express Engineering and later cases (all cited in Duomatic) as the Duomatic Principle, overlooking the fact that the principle had been established many decades earlier.}}

   Re Duomatic

   The decision in Re Duomatic concerned whether certain payments made to directors of a company were valid even though none of the directors had contracts of service with the company, and no resolution had ever been passed authorising them to receive the payments. The company went into liquidation and the liquidator made an application for repayment of the money. The court held that the payments were to be regarded as properly authorised because they had been made with the full knowledge and consent of all the shareholders. Buckley J explained:^[4]

   The broad principle has never been seriously questioned by the courts since. In EIC Services Ltd v Phipps . 2003 . EWHC . 1507 . Ch. Neuberger J stated:^[5]

   Requirements

   The application of the Duomatic principle contains two core requirements:

   • The consent of shareholders must be unanimous.
   • The shareholders must consent with full knowledge of what it is they are consenting to.

   Furthermore, subsequent cases indicate that there must be some outward manifestation of the consent, either in the form of a document, a statement or by conduct. A mere "internal decision" on the part of the shareholders is not sufficient by itself. In Rolfe v Rolfe . 2010 . EWHC . 244 . Ch. Newey J stated:^[6]

   Expansion

   In subsequent cases courts have expanded the general principle to also apply to a wider array of situations.

   • In Ciban Management Corporation v Citco (BVI) Ltd. 2020. UKPC. 31. it was affirmed that the principle applied to the ostensible authority of persons as well as to express authority.
   • In Shahar v Tsitsekkos. EWHC. 2004. Ch. 2659. it was held that the consent of the beneficial owner of any shares would be sufficient if the trustee can be compelled to vote in accordance with the beneficial owner's wishes. But in Rolfe v Rolfe. 2010. EWHC. Ch. 244. it was clarified that where shares were held for more than one beneficial owner as joint owners, the assent of only one of the joint owners would not be sufficient.
   • In Runciman v Walter Runciman plc [1992] BCLC 1084 at 1092 and Base Metal Trading v Shamurin. 2004. EWCA. Civ. 1316. it was held that informal and unanimous consent of the board of directors is also effective as a resolution passed at a duly convened meeting. Prior to those cases there was doubt as to whether the principle would apply to directors because of their fiduciary duties to the company might preclude informal assent.
   • The principle has also been extended beyond company law to include committees of clubs which are unincorporated associations, see Speechley v Allott. 2014. EWCA. Civ. 230. .

   Footnotes

   ]

   .