The Duomatic Principle: Unanimous Shareholder Agreement and its Legal Implications

Introduction

The Duomatic principle, derived from the decision in In re: Duomatic Ltd., says that ‘anything the members of a company can do by formal resolution in a general meeting, can also do it formally if all of them agree to it.’While expounding on this principle, Buckley J. held that “where it can be noticed that all shareholders who have right to vote at a general meeting and gives assent to some matter which a general meeting of the company could bring into effect, that assent will be called as a resolution in general meeting.”

[1] In the above-mentioned case, there were certain payments made to directors of a company even though none of the directors had contracts of service with the company, and no resolution had ever been passed that authorizes them to receive the payments. The company subsequently went into liquidation. where the liquidator made an application for the repayment of the money. The court then held that the payments were to be regarded as properly authorized asthey had been made with the full knowledge and consent of all the shareholders.

Duomatic principle in England

Interestingly, the Duomatic principle has no statutory recognition, and the evolution of this principle is only dependent on judicial intervention and interpretation. Although this principle was first established in the United Kingdom in re: Duomatic Ltd., it has been the subject of many interpretations in prior case laws.

It was first discussed in the case of Aron Salomon v. A Salomon & Co Ltd., which involved a claim against Mr. Salomon and the sale of his business to Salomon & Co. Ltd. The House of Lords observed that the ‘obligation of disclosure’ will be satisfied if all the intended shareholders were aware of the details of the transaction. Further, if every shareholder of the company agreed to the transaction, then the company would be bound by such a unanimous agreement.[2]

The Duomatic principle defines the process of passing a resolution that can get removed in cases where every shareholder has unanimously assented to one particular act. This principle applies to several cases other than the passing of shareholder resolutions; For example, validating the alteration to the articles of association without convening a meeting.[3]

Another important condition for the application of the principle is that there has to be clear deliberation with the shareholders on the matter,[4] and it gives the right explanation of the unanimous assent on the part of the shareholders concerning the matter. The presence of a shareholder without objection to the subject matter will be regarded as inappropriate for applying the principle.[5]

Application of the principle in India

In May 2022, the Supreme Court of India (“SC”)applied the Duomatic principle in the case of Mahima Datla v. Dr. Renuka Datla.In this case, one of the directors had given a letter of resignation, which was later withdrawn by the said director at the board meeting of the company. As the respondent in the case did not protest the withdrawal,the director continued participating in several meetings.

The SC applied the Duomatic principle and held that no dissent was recorded from the side of the respondent concerning accepting the director back on the board. As there was no evidence of the respondent’s refusal to such withdrawal, it was assumed that such resignation was not accepted.[6]

In a case where a special resolution is needed, if the shareholders agreed to give effect to a particular cause of action with the requisite majority necessary for passing a special resolution, the Duomatic principle can apply to such a case. This contention was made in the case of Brilliant Bio Pharma Limited v. Brilliant Industries, where the company wanted to reduce its capital share.

One of the statutory requirements that is to be noted is that for the reduction of share capital, such reduction should be authorized by the articles of association of the company.[7]In the instant case, the articles of association had empowered the company to perform such a task, only by way of passing a special resolution. However, the reduction was made despite no such special resolution having been passed, because all the members were given notice and the requisite majority for a special resolution as posited by Section 189(2) of the Companies Act, 1956 had approved the same.

Limitations

Despite the merits of the Duomatic principle, there have been some conditions laid down regarding its application in certain situations.The courts need to look at the merits and reasons of the case in order to decide whether or not the Duomatic principle is to be applied. When all these conditions look favourable, including to the benefit of the shareholders, the courts may apply the principle. The SC also reaffirmed that fraud is a clear exception for the application of the principle and can only be applied in bona fide transactions, in the Datlacase.

The Bombay High Court in the case ofAdvansys (India) Private Limited and Others v. Ponds Investment Limited and Another had refused to apply the Duomatic principle since the meeting in which the course of action was decided did not have an agenda, and their was no discussion among the shareholders concerning same. Therefore, any decision taken in the absence of the knowledge of shareholders cannot be accepted.[8]

The English courts have made another limitation, which is to apply the Duomatic principle when a company is a solvent. In case the company is insolvent, or is there any chance of insolvency, such informality will not be allowed.[9]The idea behind this concept is that in case a company loses its financial stability, the emerging creditors’ interest will be needed to be prioritized over shareholders interests.[10]

Furthermore, the Chancery Division in Finch (UK) plc v. Finchheld that the applicability of the Duomatic principle cannot be used to justify any unlawful acts under company law, where the directors completely abrogated their duties. The court held that illegal activities cannot be validated by the application of this principle.

Conclusion

The Duomatic principle gives precedence to the meaningful compliance of the rules of company law rather than taking a narrow approach towards such compliances. On the one hand, it enables the companies to perform their operations with the compliance of law while forgoing the formalities. On the other, the principle ensures that shareholders cannot avoid the obligations, to which they have consented, on grounds that no formal resolutions were passed.

In cases where different companies (including start-ups)fail to follow the formal compliances under company law, the Duomatic principle may come to the rescue of such companies from the rigors of following complicated processes. This is, of course, assuming the decisions taken are unanimously agreed upon by all the shareholders and there is no fraud being committed by the company.

[1]In Re Duomatic Limited,[1969] 2 Ch. 365

[2]Salomon v A Salomon and Co Ltd, [1897] AC 22.

[3]Cane v. Jones, [1980] 1 WLR 1451.

[4] Rolfe v. Rolfe, 125 Me. 81 (1925).

[5] Schofield v. Schofield, [2011] EWCA Civ 174.

[6]Mahima Datla v. Dr. Renuka Datla, Civil Appeal no 2776 of 2022.

[7]Brilliant Bio Pharma Limited v. Brilliant Industries, Company Petition No. 90; 91 of 2012.

[8] Advansys (India) Private Limited and Others v. Ponds Investment Limited and Another, Company Appeal No. 14 of 2013.

[9]Sosti v. Doffman, [2010] EWHC 3175 (Ch.).

[10]West Merica Safetywear Ltd. V. Dodd, [1988] BCLC 250.