Duomatic Principle In The Context Of Directors With Reference To Applicable Case Laws

I. INTRODUCTION

Duomatic Principle is related to informal approval of shareholders or directors which practically acts as a resolution passed at the General meeting or Board meeting as the case may be. When all shareholders of a company eligible to vote in a general meeting unanimously agree to anything to which a decision can be taken in the general meeting of the company, their agreement is as good as resolution passed at the general meeting of the company by majority of the shareholders. Basically, if all the shareholders/directors are in unanimous agreement on some issue, they can waive the formalities such as requirement of notice of the general meeting etc. as required by the articles of associate or the legislature. In Saloman v. Saloman, Lord Davey stated that ‘the company is bound in a matter intra vires by the unanimous agreement of its members‘.[1] The same principle was further followed in case of Re Express Engineering[2], where 5 directors of a company agreeing unanimously over an issue of liquidation in a director’s meeting was considered as a general meeting resolution and hence enforceable although they were precluded from forming such opinion in the capacity of director but they were also only shareholders of the same company. In Re Duomatic Ltd, same principle was upheld and it started to be known as Duomatic Principle. In all these cases, only unanimous opinion of shareholders was placed equivalent to resolution passed at the general meeting of the company, however, the position was unclear as to application of same principle in case of unanimous opinion of the directors. In Runciman v Walter Runciman plc[3], it was held by the court that an extension to the director’s team by unanimous agreement between all the directors of the company is as good as a resolution passed by majority of the directors in the board’s meeting.

II. LIMITATIONS OF DUOMATIC PRINCIPLE

If the resolution is unlawful, fraud or criminal in nature, then duomatic principle cannot cure it from being so.[4] The actual address of the minds of the shareholders for the agreement could have been shown either expressly or by their conduct.[5] There must be some proposal to which all shareholders must be aware and should understand it in rightful sense and then they must agree to the same.[6] If some provisions has been designed to protect interest of the persons other than shareholders, then waiving of the procedure by application of duomatic principle might not be allowed. The sole shareholder was not allowed to remove director without notice because the provision is partly for giving director time to make his representation and requesting or lobbying for non-removal.[7] Single shareholder-cum-director cannot rectify its statutory wrong committed in position of the director by applying duomatic principle.[8] In Indian case of Brilliant Bio Pharma Ltd. v. Brilliant Industries[9], decision of reduction of share capital by the company was validated though no formal resolution was passed to such effect but all the shareholders agree. However, it was mentioned in this case that the court while validating any decision of the shareholders by applying duomatic principle, needs to check that the provision of the procedural law which has been bypassed was meant to protect shareholders only and the procedure is able to bind minority of the group by the decision of the majority.[10]

III. DUOMATIC PRINCIPLE IN CONTEXT OF DIRECTORS & INDIAN CASE LAWS

In India, Duomatic Principle has been cited in a number of cases and hence stands as a law. However, not straightforwardly but in a way, section 117 of the Companies Act, 2013[11] has incorporated duomatic principle in legislature’s act. In section 117 (3)(b), resolutions agreed by all shareholders of the company has been placed in similar position with resolutions under section 117 (3)(a) passed by majority and full procedure which in a way, approves passing off resolution by unanimous agreement. It is also pertinent to note here that unlike UK, unanimous approval of an issue which could have been approved by special majority need to be necessarily filed with registrar within time period equal to 30 days after passing of the resolution. Therefore, unlike simple resolutions, if a special resolution is being claimed to be passed by application of duomatic principle, it cannot be rectified later. There has been many cases on this issue in various high courts and Supreme Court as well and has been discussed below:

In Re Parikh Engineering and Body Building Co. Ltd.[12], all directors of the company unanimously decided that company’s office of Bihar is to be shifted to West Bengal amending Article 2 of the Memorandum of the company. However, consent of shareholders was to be taken in order to amend the memorandum of the company and 21 days prior notice was to be sent to them. It was held that application of duomatic principle or unanimous resolution cannot waive the procedure which cannot be at all waived by the board of directors.

In P. V. Damodara Reddi and Anr v. Indian National Agencies Ltd[13], duomatic principle was used against shareholders. In this case, the company has 6 shareholders and all 6 shareholders were directors. There was one provision in the memorandum of the company that shares of the company are in control of the directors and can be allotted to existing shareholders only. If they are to be allotted to outsiders, it shall be done after passing resolution in the general meeting of the company. Two outsiders applied for the shares of the company and were allotted in a meeting of directors where five directors out of 6 directors were present. These two new shareholders also later joined the 6th shareholder in one of the meeting. Later, shares of the two new shareholders were cancelled by saying that these shares were allotted in a meeting of directors who do not have power to allot shares. The court held that all 6 shareholders-cum-directors were in agreement to allot shares to them and this can be seen by their subsequent actions and it is illegal to cancel their shares.

In case of Charles Joseph v. Kyauktaga Grant Co. Ltd[14], The Company had 2shareholders and 1 different director. The director’s period of 1 year of appointment was over before he made an agreement on behalf of the company to take loan from the plaintiff. When plaintiff claimed the returns, they pleaded that a person making contract was not director of the company and hence cannot bind company into an agreement. The Court however held that both 2 shareholders themselves sent him to make the contract which shows that there was unanimous agreement between them to either re-appoint him or at-least appoint him temporarily for the purpose of the contract though not mentioned anywhere and thereby applying the duomatic principle, he cannot be validly assumed as serving director for that time and agreement was a valid agreement.

IV. CONCLUSION

Duomatic Principle saves small companies from unnecessary procedures such as need to give prior notice, then need to show acceptance of more than 95 percent shareholders if notice has been given for less days than the requirement of the act, calling general meeting, director meeting or extraordinary meeting etc. However, the cases which are exception to this rule also mandates that procedure is essentially needs to be followed in certain cases where only shareholders’ interests were not protected or where shareholders or directors in a way try to commit fraud on the real intent of the principle. As shown further in many cases, the same principle has also been used against the shareholders or directors. The shareholders cannot be given independence to choose whether unanimous agreement principle should be applied or not, according to their interests and will.  In public companies of more than hundreds of shareholders, it is practically impossible to obtain such an acceptance and therefore, the act has made requirement of 95 percent majority at many places which is practical replica of this principle only. The allowance as to rectify its decisions later by showing unanimous resolution is conceptually bad as it is something being done later to save company’s liability and cannot exist with the real intent of the principle. As compared above in the project, the principle has been indirectly incorporated in Indian Companies Act, 2013 and being widely used by the small companies.


[1] Saloman v. Saloman, [1896] UKHL 1.

[2] [1920] 1 Ch 466.

[3] [1992] BCLC 1084.

[4] Walker Morris LLP, (2015) Limits to the Duomatic Principle, available at http://www.lexology.com/library/detail.aspx?g=3b8551c9-635c-4616-b41f-f2db92c0bbf7

[5] Tayplan Ltd v. Smith, [2001] CSIH 8.

[6] Ibid.

[7] Bonham-Carter v. Situ Ventures Ltd, [2012] EWHC 230 (Ch).

[8] Goldtrail Travel Ltd v. Aydin and others, [2014] EWHC 1587 (Ch).

[9] [2013] 180 CompCas 168 (AP).

[10] Ibid.

[11] S.117(3)(a): special resolutions;
S.117(3)(b): resolutions which have been agreed to by all the members of a company, but which, if not so agreed to, would not have been effective for their purpose unless they had been passed as special resolutions;
Resolutions passed and resolutions agreed unanimously has been given similar meaning.

[12] MANU/BH/0111/1974.

[13] AIR 1946 Mad 35.

[14] AIR 1934 Rangoon 76.

Leave a Reply

Your email address will not be published. Required fields are marked *