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Certainty reigns: the importance of good governance

We are more than one year on from the landmark decision of Randhawa v Turpin, in which the Court of Appeal sought to limit the application of the Duomatic principle (a long-established common law principle which even pre-dates its title case Re Duomatic Ltd [1969] 2 Ch 365). In the Randhawa case, Tenet acted for Mr Gursharan Randhawa and Mr Sukhinder Randhawa (the “Randhawas”); creditors of BW Estates Limited (the “Company”). The judgment upheld principles of certainty, formality and strict compliance regarding the management of a company’s internal affairs. These are principles that underpin the concept of good governance which is something that Tenet advises on regularly.

Facts

The case arose from the appointment of administrators over the affairs of the Company. At the time of the appointment, David Williams was the Company’s sole director. His father, Robert Williams, was a disqualified director, but is understood to have still had conduct of the day to day business of the Company. Robert was the beneficial owner of 75% of the shares in the Company, which were registered in David’s name. Robert was also assumed to be the beneficial owner of the remaining 25% of the shares which were registered in the name of Belvadere Investment Company Limited (“Belvadere”), an Isle of Man company, that had since been dissolved (but not removed from the Company’s register of members).

At a board meeting in 2013, David, resolved to appoint Mr Andrew Turpin and Mr Matthew Hardy as joint administrators at which he was the only director present. Although Robert was not present, it was alleged that he was fully aware that BW Estates was being placed into administration and acquiesced to the process. The Company’s Articles of Association stipulated that a quorum for a board meeting was two, and that if the number of directors should fall below that number the continuing director may only act for the purpose of filling vacancies or calling a general meeting. The board minutes incorrectly recorded that a “quorum was present”. A quorum for a shareholders’ meeting was also two.

The Randhawas objected to the appointment of the joint administrators on the basis that the decision had been taken at an inquorate board meeting.

First instance decision

HHJ Purle QC concluded at first instance that the appointment of the Joint Administrators was valid because, from 2009 onwards, there was a consistent course of conduct under which Robert and David informally sanctioned the exercise of all the directors’ powers by one director alone, which operated as an informal variation of the Company’s Articles. He also held that the acquiescence of David as the registered holder or Robert as the beneficial owner of 75% of the Company’s shares was sufficient to trigger the Duomatic principle; 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, the absence of the formality of a general meeting will not render the decision invalid. The judge also said that the case brought by the Randhawas “smacks at best of an abuse of process”, because the argument that the appointment of administrators was invalid was previously open to them but not pursued.

Issues for the Court of Appeal’s consideration

The issues to be decided by the Court of Appeal were as follows:

  1. Was the Company properly to be regarded at the relevant time as a single member company so as to allow David to make up a valid quorum of one for members’ meetings?
  2. Should the judge have held that the sole director of the Company had the right to appoint the Joint Administrators under paragraph 22(2) of Schedule B1 of the Insolvency Act 1986 notwithstanding the quorum provisions as to directors’ meetings contained in the Articles?
  3. Was the judge right to hold that the Company’s Articles had been informally varied by a consistent course of conduct by Robert and David?
  4. Was the judge right to conclude that the consent of either David or Robert and David was sufficient in the circumstances of this case to engage the Duomatic principle?
  5. If not, were the Randhawas estopped from contending that the Joint Administrators had not been validly appointed either (a) by acquiescence, or (b) because it was an abuse of process to raise the matter only in this application?

Court of Appeal decision

After consideration of issue 1, the Court concluded that the Company never became a single member company as Belvadere remained on the register of members as holder of 25% of the shares despite the fact that it had since been dissolved.

Dismissing the Joint Administrators argument that paragraph 22(2) of Schedule B1 somehow overrides a company’s Articles, Sir Geoffrey Vos stated that “…there is nothing in Schedule B1 to suggest that either the company or the directors can act except in the manner set out in the articles of association under which the company was incorporated and by which the corporators agreed to be bound.

When considering issues 3 and 4 Sir Vos held at paragraph 85: “…David’s resolution was incurably invalid. It could not be rendered valid by the application of the Duomatic principle, which only applies, as I have said, where “all shareholders who have a right to attend and vote at a general meeting of the company” assent to the course proposed. In this case, Belvadere did not assent, and its assent cannot be inferred by looking to what those who may previously have had an interest in Belvadere may or may not have thought.” The Court also held that the judge was wrong in his finding that the Articles had been informally varied by a consistent course of conduct by Robert and David, on the basis that such variation could have only taken effect by the application of the Duomatic principle, which was ineffective for the reasons given above.

The Court was then required to consider issues of acquiescence and abuse of process. The Court held that the challenge made by the Randhawas in March 2015 was not inconsistent with their subsequent contention that the appointment of the Joint Administrators was itself invalid. The Court did not consider the Randhawas failure to raise the issue of the validity of appointment in earlier proceedings an abuse of process. The Court also disagreed with the judge at first instance that the Randhawas were estopped by acquiescence on the basis that they were not involved in the affairs of the Company when David passed the invalid resolution and cannot, therefore, be held to have acquiesced to such appointment.

What the decision means in practice

This decision highlights the importance of strict compliance with a company’s Articles when managing its affairs. The decision also restricts the application of the Duomatic principle to circumstances where all shareholders who have a right to attend and vote at a general meeting give their consent to a proposal, with the effect that where a registered shareholder no longer exists, the Duomatic principle cannot apply. The decision serves as a reminder that deceased or dissolved shareholders remain members of a company until the shareholder register is updated.

There are a number of good governance tips that we can take from the judgment, namely:

  • regularly reviewing Articles of Association to ensure compliance and relevance
  • keeping up to date company records, in particular, a company’s Register of Members
  • fully documenting shareholder and board decisions and keeping a record

The Randhawa judgment remains good law, with the Court following the strict interpretation of the Duomatic principle in the subsequent case of Ball (PV Solar Solutions Ltd) v Hughes and another [2017] EWHC 3228 (Ch) where directors were unable to rely on the Duomatic principle to defeat a challenge by a liquidator to a series of payments procured by the directors against their outstanding loan accounts (totaling £750,800), without documenting their formal consent as shareholders, and contrary to provisions within the company’s articles of association.

How Tenet can help

Since the ruling Tenet has been contacted about similar issues involving decisions that have been made at inquorate meetings – don’t get caught out. Often small business owners and directors are simply too busy to worry about documenting every decision and adhering to the small print, and as a result such businesses are particularly at risk from challenges due to inaccurate records or failure to document decisions. Tenet can advise companies on how to establish systems and structures that will ensure good governance and reduce the risk of future challenges.

Please contact Arun Chauhan if you would like to discuss this issue further.


+447392 311733


arun.chauhan@tenetlaw.co.uk

Published on October 26, 2018

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