Duomatic Principle

[Mr. M. GOVINDARAJAN]

In ‘Salmon v. Salmon Co. Limited’- (1897) AC 22, it was held that a company is bound in a matter intra vires by the unanimous agreement of its members.  The said principle has found its utility across various aspects of company law such as Duomatic Principle, Doctrine of Indoor Management, etc.   This Principle having its origin in common law is applicable even in the Indian context.

The Duomatic principle is a principle derived from English case law whereby a company's shareholders can informally give approval through unanimous consent, rather than abiding by the strict formalities.   The principle is named after one of the earlier judicial decisions in which it was recognized: Re Duomatic Ltd [1969] 2 Ch 365, in which   it was held 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 of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.   In this case 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 authorizing them to receive the payments. The company went into liquidation and the liquidator made an application for repayment of the money. The court held that the payments were to be regarded as properly authorized because they had been made with the full knowledge and consent of all the shareholders.

Application

The application of Duomatic Principle is only applicable in those cases wherein bona fide transactions are involved.   Fraud is a clear exception to application of these principles.  In ‘Bowthrow Holdings Limited v. Hills’ – [2002] EWHC 2331 (Ch) it was held in respect of duomatic principles shall apply only in respect of the following-

• The transaction must be bona fide or honest.
• No conspiracy to defraud was concealed.
• Members must be act in good faith.
• The transaction must be both intra vires and honest.

Requirements

The thrust of the Duomatic Principle is that strict adherence to a statutory requirement may be dispensed with if it is demonstrated otherwise on facts, if the same is consented by all members.

The Duomatic Principle can be briefly stated as “anything the members of a company can do by formal resolution in a general meeting, they can also do informally, if all of them assent to it.

Therefore, it is clear that the application of the Duomatic principle contains two core requirements-

• The consent of shareholders must be unanimous.
• The shareholders must consent with full knowledge of what it is they are consenting to.

Case laws

In ‘Rolfe v. Rolfe’ – [2010] EWHC 244 the Judge stated -  I do not accept that a shareholder's mere internal decision can of itself constitute assent for Duomatic purposes. I was not referred to any authority in which it had been decided that a mere internal decision would suffice. Further, for a mere internal decision, unaccompanied by outward manifestation or acquiescence, to be enough would, as it seems to me, give rise to unacceptable uncertainty and, potentially, provide opportunities for abuse. A company may change hands or enter into an insolvency procedure; in either event, it is desirable that past decisions should be objectively verifiable. In my judgment, there must be material from which an observer could discern or (as in the case of acquiescence) infer assent. The law applies an objective test in other contexts: for example, when determining whether a contract has been formed. An objective approach must, I think, also have a role with the Duomatic principle.

In MAHIMA DATLA PURNIMA MANTENA AND INDIRA PUSAPATI VERSUS DR. RENUKA DATLA & ORS. - 2022 (5) TMI 928 - SUPREME COURT one G.A. Narasimha established a company known as Biological E. Limited in 1953.  Dr. Vijayakumar Datla , father of the appellant, was inducted  in the company on 01.05.1972.  During 1998 the appellant Mahima Datla joined the company as Management Trainee.  She was promoted as Senior Vice President.  Dr. Vijayakumar Datla bequeathed his entire shareholdings in the company (81%) to the appellant by will.  Dr. Vijayakumar Datla died leaving three daughters and one son.

One Shri G.V. Rao, one of the Directors resigned on 06.04.2013 and later on he withdrew it.  On 09.04.2013 Dr. Indira P. Raju, son of Dr. Vijayakumar Datla was inducted as the Director of the Company in the place of Dr. Vijayakumar Datla.  The entire shares held by Dr. Vijayakumar were transferred to the appellant.  The appellant and her sister Purnima Manthena were appointed as additional directors.  Later the appellant was appointed as Managing Director and Purnima and Dr. Indira were appointed as Directors in the Annual General Meeting held on 18.12.2013. 

The respondent No.1 has alleged that she neither received the notice nor any agenda of the meeting.  She contended that the Board meeting was illegal since it was an attempt to increase the number of members only to ensure that she didn’t have sufficient shareholding to maintain an application under section 397 and section 398 of the Act.  She also contended that in the earlier Board meetings she raised her objections but the same were not duly recorded.

The respondent No. 1 filed a civil suit challenging the illegal transmission of shares to the appellant and prayed the Court to declare that she was the absolute owner of all shares in the Will.  She also filed a company petition before the Company Law Board in which she sought to restrain the conduct of Annual General Meeting to be held on 18.12.2013.  The same was rejected by the Company Law Board.  She challenged the said order before High Court which also dismissed the same with the direction to complete the company petition before the Company Law Board.  She withdrew the company petition but filed another company petition.  The Company Law Board held that the company is earning profit and it could not be said that the affairs of the company is conducted in a manner prejudicial to the interests of the shareholders.

Aggrieved against the order of Company Law Board, the respondent No. 1 filed appeal before the High Court.  The High Court allowed the appeal.  Against the order of High Court the appellant filed the present appeal before the Supreme Court.   The Supreme Court observed that the High Court conducted an elaborate factual analysis which is against the provisions of law.  The Supreme Court first considered the question whether the resignation of G.V. Rao is valid or not. The Supreme Court observed that G.V. Rao resigned on 06.04.2013 but has withdrawn the same on 09.04.2013.  The same was placed in the Board meeting held on 09.04.2013.  There is no protest regarding this from respondent No.1.   Further the respondent No.1 welcomed the appointment of Managing Director and other Directors including G.V. Rao and there are numerous letters in which the appointment of G.V. Rao was acknowledged.  In the subsequent Board meetings the respondent No. 1 attended and raised no protest against G.V. Rao.

The Supreme Court observed that the thrust of the Duomatic Principle is that strict adherence to a statutory requirement may be dispensed with if it is demonstrated otherwise on facts, if the same is consented by all members. In this case at hand, there is overwhelming evidence to show that respondent No. 1 had accepted Mr. G.V. Rao back into the Board and her conduct clearly shows that the resignation dated 06.04.2013 was clearly not accepted.   In this context, the appellants herein have invoked the Duomatic Principle to state that the issue of resignation of the Director had lapsed and Mr. G.V. Rao continued to carry on as the Director in view of the acquiescence by the respondent No. 1.

The next question considered by the Supreme Court as to whether the Board meetings conducted on 09.04.2013, 10.04.2013 and 11.04.2013 is valid or not.  The said meetings were ratified in the 60th AGM which was called on 18.12.2013.  The Supreme Court held that the High Court was erred in not accepting the ratification done in the AGM.  The Supreme Court set aside the order of High Court and restored the order of Company Law Board.

Conclusion

The Duomatic principle applies to ultimate beneficial owners, provided that they are taking all the decisions in the relevant transactions and that the transaction is lawful and honest. Decisions from both the Privy Council, the highest level of the judiciary, and the recent English Court of Appeal judgment, clearly reaffirm this principle.   With regards to the doctrine of ostensible authority, the courts will show little sympathy to ultimate beneficial owners who plan to retain control from the shadows when such arrangements backfire, and as the Ciban and Satyam cases have demonstrated, the Duomatic principle will apply even in situations of ostensible authority.

The principle has also been extended beyond company law to include committees of clubs which are unincorporated associations.  .