Duomatic principle did not apply because trustee shareholder was absent

Out-Law Legal Update | 22 Jan 2020 | 3:32 pm | 3 min. read

The Court of Appeal has said that a company's transfer of property to a director shareholder was not binding because not all shareholders were represented at the meeting where the decision was taken.

The director said that the transfer should have been allowed under the Duomatic principle, which may validate resolutions of a board despite non-compliance with the relevant corporate procedures and company articles.

The case arose because the board of the company had not considered and approved the transfer of the property in line with formal corporate procedures. The director sought to rely on the Duomatic principle, but this was not allowed because the trustee of a pension scheme which owned shares had not agreed to the property transfer.

The invalidity of the transfer of the property demonstrates the importance of properly documenting and adhering to a company's articles and corporate procedures. If the board had properly complied with the company's articles, then the transfer would likely have been valid.

This case also highlights that although the Duomatic principle can be a useful fall back method of approving corporate transactions, it does have its limitations. This decision shows that the application of the principle will be restricted in cases where trusts or pension schemes are shareholders of a company.

NAL Realisations (Staffordshire) Ltd was an aluminium smelting company operated by Henry Dickinson. Dickinson said that no formal board meetings were ever held and minutes and formal resolutions were only signed when it was required by lawyers. This lack of regular formal corporate procedures allowed the liquidators of the company to successfully challenge a transfer of freehold property to Dickinson by the company and also a transaction involving a share buy-back. In relation to the freeholder property transfer the court considered the application of the Duomatic principle in circumstances where a pension scheme is a shareholder.

Dickinson owned approximately 50% of the shares in NAL Realisations. The remaining shares were owned by a discretionary trust, of which Dickinson was a trustee, and a small self-administered pension scheme. The pension scheme had a professional trustee alongside Dickinson and his wife Judith Dickinson, who were also trustees. The board of NAL Realisations was made up of Dickinson, his wife and Robert Williamson.

In September 2005 the factory owned by NAL Realisations was transferred to Dickinson. No physical board meeting took place but minutes were produced approving the sale. The minutes recorded that Henry and Judith Dickinson resolved that the property should be transferred. The property was transferred for below market value.

In 2013 liquidators were appointed to NAL Realisations and they challenged the transfer, claiming that it was invalid. The High Court decided that the transfer had been made without proper authority, as the company's articles had not been properly followed. Henry and Judith Dickinson appealed this decision primarily on the basis that the Duomatic principle should have been applied by the High Court, thereby validating the transfer of the property.

The Duomatic principle arose from the decision in Re Duomatic Ltd [1969] 2 Ch 365. The principle provides that where 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 could carry into effect, then that assent is binding as a resolution in general meeting.

Effectively, the principle allows for non-compliance with company articles and other corporate procedures if all the shareholders were aware of the relevant facts, and either approved a particular resolution, or conduct themselves as to make it inequitable for them to deny they have given their approval.

The Court of Appeal rejected the Dickinsons' appeal and decided that the principle should not apply in this case.

The Dickinsons argued that they effectively owned the whole company, given that Dickinson owned half the shares personally and the other half of the shares were owned by the discretionary trust, administered by him and Judith Dickinson for their benefit, and by their pension scheme. The board minutes indicate that the Dickinsons approved the transaction and therefore, they had clearly assented to it.

However, the stumbling block for the Dickinsons was that the pension scheme had a professional trustee who acted as a trustee of the pension scheme. There was no evidence that the professional trustee knew about the transaction and consented to it, which meant that the Duomatic principle did not apply as one of the shareholders had not assented to the transaction.

The Dickinsons argued that they were the beneficiaries of the pension scheme and would, therefore, have been able to direct the trustee, and they were the only individuals that stood to benefit from the pension scheme. They argued that the Duomatic principle should still apply as the beneficiaries had consented to and approved the transfer.

The Court of Appeal did not accept this argument, pointing out that the pension scheme also made provision for the dependents of the Dickinsons being beneficiaries in certain circumstances, and these beneficiaries had not consented to the transfer.

Co-authored by Sebastian Jensen, a restructuring expert at Pinsent Masons, the law firm behind Out-Law.