UK: The Re Duomatic principle, ostensible authority and the consent of beneficial owners

The Judicial Committee of the Privy Council delivered its opinion today in Ciban Management Corporation v Citco (BVI) Ltd & Anor (British Virgin Islands) [2020] UKPC 21: see here or here (pdf). The Board found, amongst other things, that the principle of informal, unanimous shareholder consent - often referred to as the Re Duomatic principle - could operate to confer ostensible authority. This operated subject to recognised exceptions or qualifications: where there is dishonesty; where the shareholder had not consented to the relevant act; and where the transaction would jeopardise the company's solvency or cause loss to creditors.

The Board also referred to what it called a further "possible" qualification in the operation of the principle: where the consent is that of the beneficial owners rather than the registered shareholders. But it stated: "... the correct view is that, at least as here where the ultimate beneficial owner and not the registered shareholder is taking all the decisions in the relevant transactions, the Duomatic principle applies as regards the consent of (and authority given by) the ultimate beneficial owner" (para. [47]).

UK: England and Wales: The Re Duomatic principle | relieving a director of liability

Judgment was given yesterday by the Court of Appeal in Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146. The decision is noteworthy for two reasons.  First, the court held that section 1157 of the Companies Act 2006, which provides the court with the power to relieve a director from liability in "proceedings for negligence, default, breach of duty or breach of trust" is wide enough to include claims to enforce proprietary rights arising from the negligence, default, breach of duty or breach of trust.

Second, the court considered the Duomatic principle, which takes it name from Re Duomatic Ltd [1969] 2 Ch 365, and in which Buckley J said 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" (p. 373).  Lord Justice Newey assumed - as he did when a High Court judge in Rolfe v Bernard Samuel Rolfe Tulsesense Ltd [2010] EWHC 244 (Ch) - that the assent of the beneficial owner of a share could meet Duomatic requirements.

UK: England and Wales: fiduciary duties and shareholder acquiescence

The Court of Appeal gave judgment earlier today in Sharma v Sharma & Ors [2013] EWCA Civ 1287. At first instance it was held that a director of a dental company was not in breach of duty by acquiring certain dental practices for her own benefit rather than for the company. An appeal was made and unanimously dismissed by the Court of Appeal. Lord Justice Jackson (Floyd and McCombe LJJ concurring) found that the director's acquisition of the practices had taken place with the knowledge and acquiescence of the shareholders; she was not, therefore, liable for breach of the no-conflict rule (now found in section 175 of the Companies Act 2006). His Lordship's judgment is important because of what he says about consent, acquiescence and silence on the part of shareholders. He stated:

"When a court is considering what, if anything, can be inferred from a party's silence, the factual context is a matter of critical importance. If the surrounding circumstances are such that it would be unconscionable for a party to remain silent at the time and only raise his objections later, then I would have thought that assent can be inferred from silence" (para. [49]).

UK: England and Wales: Madoff liquidators fail in claims against former directors for breach of duties

The judgment of Mr Justice Popplewell in Madoff Securities International Ltd v Raven & Ors [2013] EWHC 3147 (Comm) was given last Friday. The case concerned claims brought by the liquidators of Madoff Securities International Ltd., a London based company, against its former directors. Bernard Madoff was, at the relevant times, the company's chief executive and chairman. He also held the great majority of the voting shares in the company. The liquidators claimed, in respect of several payments made by the company, that the former directors had breached their duties, in particular those now found in section 172 ("Duty to promote the success of the company") and section 174 ("Duty to exercise reasonable care, skill and diligence") of the Companies Act 2006.

All of the claims against the directors failed. This should not, however, be taken to mean that none of the directors were found to have breached their duties: the judge found that several directors had breached section 174 by failing to address their minds to the question whether certain payments were in the interests of the company (see para. [264]). However, they had a defence: the transactions in question had been ratified by the unanimous approval of the voting shareholders.

The judgment contains much interesting dicta, in particular with regard to directors' duties and board decision making. To quote from the judgment (paras. [190] to [192]):

It is legitimate, and often necessary, for there to be division and delegation of responsibility for particular aspects of the management of a company. Nevertheless each individual director owes inescapable personal responsibilities. He owes duties to the company to inform himself of the company's affairs and join with his fellow directors in supervising them. It is therefore a breach of duty for a director to allow himself to be dominated, bamboozled or manipulated by a dominant fellow director where such involves a total abrogation of this responsibility ... In fulfilling this personal fiduciary responsibility, a director is entitled to rely upon the judgment, information and advice of a fellow director whose integrity skill and competence he has no reason to suspect ... Moreover, corporate management often requires the exercise of judgement on which opinions may legitimately differ, and requires some give and take. A board of directors may reach a decision as to the commercial wisdom of a particular transaction by a majority. A minority director is not thereby in breach of his duty, or obliged to resign and to refuse to be party to the implementation of the decision. Part of his duty as a director acting in the interests of the company is to listen to the views of his fellow directors and to take account of them. He may legitimately defer to those views where he is persuaded that his fellow directors' views are advanced in what they perceive to be the best interests of the company, even if he is not himself persuaded. A director is not in breach of his core duty to act in what he considers in good faith to be the interests of a company merely because if left to himself he would do things differently."

UK: England and Wales: the Re Duomatic principle in the Court of Appeal

A copy of the Court of Appeal judgment Schofield v Schofield [2011] EWCA Civ 154, handed down last month, has been published on BAILII: see here. The Court of Appeal considered the application of the so-called Re Duomatic principle, which takes its name from Re Duomatic Ltd. [1969] 2 Ch 365, in which Buckley J. stated (p. 373): "[W]here 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".

In Schofield the Court of Appeal held that the Re Duomatic principle did not apply in order to treat as valid and effective a meeting at which a director (and holder of 0.1% of he company's shares) was removed from office. There was, the court held, no unqualified, objective agreement by this director qua shareholder with regard to the validity of the meeting.

UK: Scotland: Court of Session considers Re Duomatic principle and directors' entitlement to remuneration

The Court of Session, Inner House, delivered its opinion in Tayplan Ltd v Smith [2011] CSIH 8 last week. The court was required to consider the legal principles regarding directors' entitlement to remuneration and the operation of the so-called Re Duomatic principle. With regard to the latter, Lord Brodie, delivering the opinion of the court, observed (para. [28]):

... if in fact all of the shareholders agree to a particular proposal which is honest and within the powers of the company it should be regarded as having been agreed to, even although assent is not signified by a formal vote in general meeting and even if assent is given by different parties at different times. But there must have been a proposal of which all parties were aware and it must have been agreed to".

UK: England and Wales: the Duomatic principle and the company's financial circumstances

Judgment was given yesterday in Secretary of State for Business, Innovation and Skills v Doffman [2010] EWHC 3175 (Ch): see here.  The case concerned an application for the disqualification of several directors brought by the Secretary of State under Section 6 of the Company Directors Disqualification Act (1986). In this regard the trial judge was required to consider the operation of the so-called Re Duomatic principle, which takes its name from Re Duomatic Ltd. [1969] 2 Ch 365, in which Buckley J. stated (at p. 373): "[W]here 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". With regard to the Re Duomatic principle, the trial judge in Doffmann observed (paras. [44] and [45]):

... a company's financial circumstances may preclude the application of the Duomatic principle. While the interests of a company are normally identified with those of its members, the interests of creditors can become relevant if a company has financial difficulties ... It has been said that the interests of creditors can "intrude" (and the application of the Duomatic principle can, accordingly, be barred) even when a company may not strictly be insolvent".

UK: England and Wales: the Duomatic principle

Judgment was given yesterday in Rolfe v Rolfe [2010] EWHC 244 (Ch), a case concerning the operation of the so-called Re Duomatic principle. This principle takes it name from the decision of Buckley J. in Re Duomatic Ltd. [1969] 2 Ch 365, in which his Lordship stated (p. 373):

[W]here 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".

In Rolfe several arguments were advanced with regard to the Re Duomatic principle, in response to which the trial judge observed (paras. [40] to [43]):

... in my judgment if an individual who holds some shares for himself and other shares as a trustee or executor has expressed assent, he is not to be taken to have given that assent in respect of the shares held as a trustee or executor if he did not intend or purport to be making a decision in relation to those shares ...

... I do not accept that a shareholder's mere internal decision can of itself constitute assent for Duomatic purposes ... for a mere internal decision, unaccompanied by outward manifestation or acquiescence, to be enough would, as it seems to me, give rise to unacceptable uncertainty and, potentially, provide opportunities for abuse ... In my judgment, there must be material from which an observer could discern or (as in the case of acquiescence) infer assent. The law applies an objective test in other contexts: for example, when determining whether a contract has been formed. An objective approach must, I think, also have a role with the Duomatic principle ...

... I am willing to assume, without deciding, that the assent of the beneficial owners of a share will meet Duomatic requirements ... Whether or not, however, the assent of all the beneficial owners of a share will suffice, I do not think that the assent of just one of a number of such owners normally will".