The High Court has considered whether the consent of the company’s 75% shareholder, where the other shareholder was dissolved, validated the act of a sole director acting outside the scope his authority appointing administrators out of court.[1]

The Facts

The company’s articles of association required a quorum of two directors for a board meeting and limited the powers of a sole director to convening a general meeting or appointing an additional director.

At the time of the administrators’ (T) appointment, and for the previous 4 year period following the disqualification of the other director, the company had a sole director (D). The decision to make the appointment was taken at a meeting at which D was the only director present.

D was the registered holder of 75% of the company’s share capital which he held as bare trustee for his father (R). R had been the second director of the company until his disqualification, but the Court found that he remained the effective controlling mind of the company.  The remaining 25% of the share capital was registered in the name of an Isle of Man company which had been dissolved in 1996.  The Court considered that R was probably also the beneficial owner of these shares too.

The applicants (A) were creditors of the company.  They objected to the administration and the related costs of T.  Having previously failed to obtain an order disallowing or reducing T’s remuneration (in proceedings in which A had not challenged the validity of T’s appointment), A now sought a declaration that T had not been validly appointed due to the inquorate board meeting at which the appointment was made.

The Duomatic Principle

Under the common law principle, widely known as the Duomatic principle[2], the informal agreement of all the shareholders to a matter which a general meeting of the company could carry into effect, is as binding as a resolution in general meeting would be.

The Decision

The Court dismissed A’s application on the basis that there had been an effective variation or departure from the company’s articles which sanctioned the exercise of the directors’ powers by one director alone which bound the company.  As a result, T’s appointment was valid.

On the facts, there was no doubt that R, as beneficial owner of 75% of the share capital agreed to D exercising all the powers of the company’s board alone and that he agreed to the appointment of T.

The Isle of Man company could not have voted or been entitled to vote (and there was no provision enabling a dissolved corporate shareholder to vote under the company’s articles).  However, if the Court had to go further and consider whether or not the beneficial owner of those shares would have had to consent, it would consider that the requirement of unanimous consent was satisfied because the Court found that R was the beneficial owner of these shares.

As R and D agreed with each other, it was unnecessary for the court to decide whether or not the Duomatic principle extended to beneficial ownership.  However the court did remark that where a bare trustee was bound to act in accordance with the beneficial owner’s directions, there is much to be said for the view that the wishes of the beneficial owner would count as the trustee and registered holder has no actual say in the matter.

Conclusion

The facts of the case are quite unique – the Court did not like the creditors challenging the administrators’ remuneration by the back door when the direct route had so far failed, and they had not raised the validity of the appointment before.

Of particular interest is the Court’s approach to the Duomatic principle in blessing otherwise invalid acts of directors where all of the company’s shares had voting rights but the Isle of Man company’s rights could not be exercised because it was dissolved.  The Court considered here that the dissolved company should be disregarded for Duomatic purposes and the unanimous consent of the remaining shareholders was sufficient.

The Court also left open the possibility that the consent of the beneficial owner in these circumstances would be sufficient and may be required. That would not have made any difference to this particular case but may have an impact on other similar cases.

We understand that this decision is subject to an appeal which is presently scheduled to be heard in February 2017.

This post was edited by Emily Drake. For more information, email blogs@gateleyplc.com

[1] Randhawa v Turpin and ors [2016] EWHC 2156 (Ch)

[2] In re Duomatic Ltd. [1969] 2 Ch. 365

 


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.