Clear authority from all shareholders to effect a transaction is imperative, otherwise, the risk is it can be ‘undone’. The specialist commercial lawyers at Bahamas law firm Parris Whittaker are experienced in successfully advising commercial clients on their contractual duties and potential disputes.
A
noteworthy ruling1 from the UK’s Court of Appeal, which has
important persuasive authority on the courts in The Bahamas, upholds a strict
interpretation of a rule allowing informal shareholder approval of company
decisions.
The Court of Appeal stated that the Duomatic principle applies where all shareholders with the right to attend and vote at a general meeting assent to a matter, or all members of a group of shareholders approve. It is not enough that am individual would have approved the act if they had known of it.
The Duomatic principle is, put simply, a legal principle by which where the articles of a company require something to be approved
by a group of shareholders at a general meeting, that requirement can be
avoided if all members of the group (being aware of the facts) give their
approval by conduct – either before or after the event.
What’s the background?
In this case, a transfer of business premises took place to an
individual, a director of the company.
A key issue on appeal was whether the transfer of a property from the first respondent (a company) to the individual (D) was valid.
It was accepted that the property transfer had not in fact having been approved at a board meeting, but D argued nevertheless that it had been entered into with the unanimous approval of the company’s shareholders.
He said the Duomatic principle applied because:
he and his wife were the only members of the company Pension Scheme and had assented to the property transfer and that this sufficed for Duomatic purposes; and
D could on his own have represented the Pension Scheme at a meeting of the shareholders, and voted its shares, and that it followed that D’s support for the property transfer satisfied the requirements of the Duomatic principle.
D applied for relief and relied on section 1157 Companies Act 2006 on the basis that his breach as a director may be excused, where it appears to the court that the director has acted honestly and reasonably and “ought fairly to be excused”.
What did the court decide?
The court ordered D to restore the property to the company – 14 years on from the transfer.
The court found that it was “abundantly clear that [D’s wife] did
not give agreement to the transfer itself, and neither has it been
satisfactorily demonstrated that she delegated matters as regards the Pension
Scheme to her husband”. She couldn’t even
recall D mentioning the transfer to her – but even if she had, their membership of the
Pension Scheme did not enable them to satisfy the requirements of the Duomatic principle.
It made clear that section 1157 applies to claims for “negligence, default, breach of duty or breach of trust” which are proprietary in nature and there were no grounds for a narrow interpretation excluding relief.
However, relief was refused as it was not justified, with the effect that D was found to have held the property on trust for the company. He was ordered to transfer it back.
What does this mean?
Company directors must exercise great care when party to a
transaction (or other course of action) that has purportedly been authorised by
the shareholders. If there is a dispute as to whether or not authority was in
fact given, for example, under the Duomatic principle, the courts will
take a broad interpretation and a director could be ordered to return property
or otherwise undo a course of action taken.
How can we help?
We
advise and represent a wide range of corporate clients in relation to directors’
duties and company matters as well as in commercial disputes. If you have any
concerns, contact the expert company and commercial lawyers at ParrisWhittaker
for strategic advice and representation.
1Dickinson v NAL Realisations (Staffordshire)
Ltd [2019] EWCA CIV 2146
