Court Of Appeal Upholds Strict Interpretation Of The 'Duomatic' Principle, Which Allows Informal Shareholder Approval Of Company Decisions

In a recent decision, the Court of Appeal reconfirmed that the Duomatic principle can only apply where all shareholders have approved the relevant act of the company. It is not enough that a relevant individual would have approved the act had they known about it: Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA CIV 2146.

The strict application of the Duomatic principle in this case led to a property transaction entered into by the company with one of its directors being avoided and the director being ordered to restore the property to the company.

The director sought to rely on s.1157 of the Companies Act 2006 (the “Act”), under which a director's breach may be excused where it appears to the court that the director has acted honestly and reasonably and ought fairly to be excused. While the court confirmed that s.1157 could relieve a director from a proprietary liability, it was not appropriate for the court to vary the first instance judge's decision that the director should not be excused.

The decision will serve as a reminder to company directors that, particularly in transactions to which both they and the company are party, the directors may face questions not only about compliance with their duties, but also about their ability to bind the company if proper procedures are not followed. Transactions entered into without authority can be unwound many years after they occurred (here, the Court of Appeal gave judgment 14 years after the relevant transaction), including where the company subsequently enters an insolvency process, and even if there was no issue as to the company's solvency at the time of the transaction.

Natasha Johnson and Andrew Cooke, a partner and senior associate in our contentious restructuring and insolvency team, consider the decision below.

Background

Mr Dickinson was the majority shareholder of NAL Realisations (Staffordshire) Ltd (the “Company”). The second largest shareholder was a discretionary trust on behalf of which Mr Dickinson had authority to act. The final shareholder was a pension scheme, of which Mr Dickinson was one of the trustees alongside his wife and a professional trustee. Mr and Mrs Dickinson were the only current members of the scheme.

In 2005, the Company sold its foundry premises to Mr Dickinson.

Five years later, the Company bought back almost all of its shares, with the purchase contract providing that the nominal value of the shares would be paid to the shareholders upon...