Those familiar with the Duomatic principle, named after the decision in In re Duomatic Ltd.1 (Duomatic), will be aware that it is the principle of decision-making by shareholders by way of informal unanimous consent. In summary, if 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 a general meeting would be”.
In order for the Duomatic principle to apply, there are two requirements which need to be satisfied. Firstly, the consent of shareholders with a right to vote must be unanimous and secondly, the consent must be given by shareholders in full knowledge of what it is they are consenting to.
In a claim brought by the liquidators of the company, the case of Duomatic involved the payment of remuneration to two directors, at a time when they were the only directors and ordinary shareholders. The payments to the directors were not formally approved in a general meeting, as required under the Articles, but were approved informally by the directors themselves, who signed and approved the company accounts in the presence of the company’s auditor. The court decided that, although the payments were not formally approved in a general meeting, “the payments were in fact agreed to by persons who should properly agree to them, at the appropriate times2”. The court therefore regarded their consent as equivalent to a resolution of a general meeting of the company.
Although the company had a preference shareholder, the court came to the conclusion that he did not need to be informed of the payments. The court noted in this regard that as the preference shareholder had no right to attend or vote at a general meeting, “he could be in no worse position if the matter were dealt with informally by agreement between all shareholders having voting rights than he would be if the shareholders met together in a duly constituted general meeting3”.
The importance of documenting resolutions should always be kept in mind. Had the directors taken the formal step of holding a general meeting and passing a formal resolution to approve the payment, the position of the directors would have been secure and no one (in this case the liquidator) could have disputed their right to the payments.
Further, the Duomatic principle is not universal, although it has been invoked successfully in a number of cases; there are limits on its scope. For example, in situations where a formal resolution would be invalid, where there is evidence of fraud or the company acting ultra vires, or where the company is facing financial difficulties, the principle may not apply. Similarly, certain statutory provisions, which are there to protect creditors, are not capable of being waived under the principle.
1 In re Duomatic Ltd. [1969] 2 Ch 365, 373
2 In re Duomatic Ltd. [1969] 2 Ch 365, 369
3 In re Duomatic Ltd. [1969] 2 Ch 365, 373
