Limits to the “Duomatic principle”

24th September 2015

The “Duomatic principle” (called after the case of the same name) provides that where it can be shown that all shareholders having the 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 can in some cases obviate the requirement to hold a general meeting to pass a resolution – so long as all the shareholders agree to that resolution.

However, it is not carte blanche to ride roughshod over the Companies Act requirements, as a recent case demonstrates.

In Henry v Finch [1] the respondents, a husband and wife, were the sole directors and shareholders of a company that had gone into liquidation and the liquidators were challenging a number of transactions the company had entered into. In particular, the Finches had removed properties from the company, crediting the corresponding mortgages to the company, via the directors’ loan account and had redeemed 875,000 shares that had been allotted to Mr Finch, crediting Mr Finch’s director’s loan account with £875,000. The liquidators attacked these transactions as a preference under section 239 of the Insolvency Act 1986 and/or an unlawful distribution under the Companies Act.

The High Court held that the removal of the properties and the redemption of the shares constituted both a preference and an unlawful distribution. The evidence showed that the company did not have sufficient net profits available for distribution rendering the transactions unlawful. In giving judgment, the Court considered that various technical breaches of the Companies Act were cured by the application of the Duomatic principle. However, the Court made clear that the principle could not apply to an unlawful distribution or to the situation where the company was insolvent or in financial difficulties such that its creditors were at risk.

The position is that if a formal members’ resolution would itself not have been valid, for example, because it is a fraud or otherwise unlawful, then the Duomatic principle will not apply. In particular, the statutory provisions governing distributions – the rationale of which is to protect creditors – are not capable of being waived under the Duomatic principle.

The position in respect of share buybacks is less clear-cut. There is authority to the effect that the statutory provisions governing a share buyback are not merely procedural and for the benefit of current members (and therefore cannot be waived under the Duomatic principle) but there is also authority to the effect that the Duomatic principle could rectify the failure to display the share buyback agreement at the company’s registered office for 15 days before a general meeting as required under the Companies Act.

WM comment: It is never good practice to rely on the Duomatic principle. Its application is limited and any consent must be unanimous and given by the shareholders in full knowledge of what they are consenting to – which may be difficult to prove. It should be regarded as a lifeboat if something has gone wrong and not as an excuse for non-compliance with company law requirements.

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[1] [2015] All ER (D) 96