In the case of Re BW Estates Ltd, the UK High Court considered the validity of a directors’ out of court appointment in circumstances where there was technically an inquorate directors’ board meeting.

It was held that the appointment was not invalid despite only one director being present at the meeting convened to put the company into administration in circumstances where a quorum of two was required pursuant to the company’s articles. In reaching its decision, the Court applied what is known as the Duomatic principle (arising from Re Duomatic Ltd [1969] 2 Ch. 365), the leading authority on the common law principle of the ability of shareholders to make decisions by way of informal unanimous consent.

Background

In order to place a company into administration using the out of court procedure under Paragraph 22(2) of Schedule B1 of the Insolvency Act 1986, the directors must resolve at a properly convened board meeting to put the company into administration. A record of this decision is required to be appended to the appointment documentation as evidence of the directors’ decision. A company’s articles of association will ordinarily detail the number of directors required to be present at a meeting of directors to render that meeting quorate.

Facts

75% of the shares in the company were held by W as beneficial owner but his son, R, was the registered owner of the shares. R was also the sole director of the company (and had been for the 4 years prior to the appointment since his father had resigned as a result of being disqualified as a director). The remaining 25% of the shares in the company were held by an offshore company (B) which had been dissolved in 1996. Whilst the documentation was inconclusive, it was believed that W also beneficially owned B.

In 2009, the sole director R placed the company into administration after he passed a resolution at a board meeting at which only he was present. The company’s articles stipulated that the requisite quorum for a meeting of directors was two.

The Applicants, who were creditors of the company, asserted that the directors’ meeting was inquorate and applied for a declaration that the administration appointment was invalid.

Decision

HHJ Purle QC held that the appointment of administrators was valid:

• given that (1) W was the beneficial owner and D the registered owner of 75% of the shares in the company and were in agreement regarding the appointment, (2) the remaining shareholder, B, had no locus to vote on the basis it had long since been dissolved, and (3) there had been a consistent course of conduct between D and W pursuant to which they had (as beneficial or registered owners of 75% of the shares) informally sanctioned the exercise of the directors’ powers by one director alone, that operated as an informal variation of the company’s articles which was sufficient to trigger the Duomatic principle;

• although all the shares in the company had voting rights, in considering whether the Duomatic principle could be applied here, the Court held that the shares that were incapable of being voted on (i.e. B’s shares) could be disregarded;

• the Applicants had previously instigated a separate challenge of the remuneration of the administrators which had failed. The Court held that previous challenge effectively amounted to an acquiescence and approval of the administrators’ appointment by the Applicants; see our previous blog article posted on 18 May 2015 – Administrators are not required to investigate directors’ motives for appointing them.

The decision is subject to an appeal which is due to be heard by February 2017 so watch this space!

Summary

The Duomatic principle is a flexible tool and can be used in appropriate circumstances to correct a failure to comply with technicalities such as quorum and/or formal variation of a company’s articles. However, it is important to note that each case will turn on its own facts and it remains best practice to ensure that quorum and authority to appoint administrators is properly considered well in advance of an appointment.

Additional note of caution – once a company has entered an insolvency procedure the Duomatic principle cannot be triggered to approve or ratify a transaction – See In the matter of Stakefield (Midlands) and others v Doffman and another