Duomatic Principle and its application under the Indian company law

Very often, companies find it difficult to adhere to the various compliances especially related to shareholders meetings listed under the Companies Act, 2013.

In such circumstances, it is useful to refer to the “Duomatic principle” under English Company law. The principle essentially allows the shareholders to bypass the formality of passing a resolution and states that in case of unanimous consent rendered by all the shareholders of a company, such consent would bind the company to act within its capacity. This is especially relevant for small companies with the same individuals acting as directors and shareholders.

Although the principle has not seen wide application in India, it has been subjected to much deliberation by the English courts. This article looks into the jurisprudence in English jurisdiction and the manner in which it is being applied in India.

Duomatic principle in England

First established in the UK, the Duomatic principle has been the subject of multiple interpretations. Having no statutory recognition, the evolution of this principle is solely dependent on judicial intervention and interpretation.

The Duomatic principle has got its name after the famous Re Duomatic Limited (1969) case. However, it was the case of Aron Salomon v. A Salomon & Co Ltd. (reported in the year 1897), that discussed this principle for the first time. The case involved a claim against Mr. Salomon and the sale of his business to Salomon & Co. Ltd. The House of Lords observed that the ‘obligation of disclosure’ would be satisfied if all the intended shareholders were aware of the details of the transaction and if every single shareholder of the company had assented, the company would be bound by such a unanimous agreement.

The principle was later reiterated in the Re Duomatic Limited case where the salaries of the directors of a particular company were decided without a formal meeting. It was held: “where it can be shown that all the shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which the general meeting of the company could carry into effect, that assent is as binding as a resolution in a general meeting would be“.

Thus, the principle prescribes that the formality of passing a resolution can be waived in cases where all the shareholders have unanimously assented to a particular act / omission. The principle may be applied to various circumstances other than passing of shareholder resolutions such as validating alteration to the Articles of Association without convening a meeting (Cane v. Jones).

An essential condition for applying the principle is that there has to be actual deliberation among the shareholders on the matter (Rolfe v. Rolfe) and a clear demonstration of the unanimous assent on the part of the shareholders regarding the matter. Mere presence of a shareholder without clear consent or objection to the subject matter will be considered inappropriate for applying the principle (Schofield v. Schofield).

Application of the principle in India

The principle has been dealt by the Hon’ble Supreme Court of India in May 2022 in the case of Mahima Datla v. Dr. Renuka Datla. The facts of the case revolved around the letter of resignation by one of the directors, which was later withdrawn by the said director in the company’s board meeting. As such, the respondent did not protest the said withdrawal and hence the director continued participating in subsequent meetings. Subsequently, the respondent raised the issue of status of the resignation of director in a shareholders’ dispute. Applying the Duomatic principle, the Court held that since no dissent was noted from the side of the respondent with respect to accepting the director back on the board, the respondent has accepted the appellant as the director. Since there was no evidence of the respondent’s refusal to such withdrawal, it was deemed that such resignation was not accepted.

Even in situations where a special resolution is required, if the shareholders all agree to give effect to a particular cause of action with the requisite majority necessary for passing a special resolution, the Duomatic principle can be made applicable to such a case. This was seen in the case of Brilliant Bio Pharma Limited v. Brilliant Industries Limited (decided on 12 March 2013), where the company wanted to reduce its share capital. One of the statutory requirements for the reduction of share capital is that such reduction should be authorised by the Articles of Association of the company. In the present case, the Articles of Association empowered the company to do so, only by way of passing a special resolution. However, the reduction was carried out despite no such special resolution having been passed, as all the members were put on notice and the requisite majority for a special resolution as posited by Section 189 (2) of the Companies Act,1956 had approved the same.

Limitations

In the process of explaining the scope of Duomatic principle, the court laid down certain conditions for applying the said principle. In order to decide whether or not the Duomatic principle is to be applied, the court is required to look at the merits and reasons for such application. If the formalities were overlooked purely for the benefit of shareholders, the courts may apply the principle. However, if the same was done for the interests of third parties, the courts would be hesitant to apply the principle. The formalities can be relaxed only in cases where the interests of the shareholders are being taken into consideration.

Another serious limitation, which has been considered by English courts, is to apply the principle when a company is solvent. In case the company is insolvent, or on the verge of insolvency, such informality would not be allowed (SoSTI v. Doffman). The idea behind this is that in case a company loses its financial stability; the emerging creditors interest is required to be prioritised over shareholder’s interests (West Mercia Safetywear Ltd. v. Dodd).

The Bombay High Court in the case of Advansys (India) Private Limited and Others v. Ponds Investment Limited and Another (decided on 9 May 2014) refused to apply the Duomatic principle since the meeting in which the course of action was supposedly decided, did not have an agenda and there was no discussion/deliberation amongst the shareholders regarding the same. Therefore, any decision taken in the absence or contrary to the knowledge of shareholder cannot be accepted.

A final limitation for the applicability of the Duomatic principle is that the principle cannot be used to justify any unlawful acts under the Company law, as held by the Chancery Division in Finch (UK) plc v. Finch (reported in the year 2015) where the directors completely abrogated their duties under Company law. The court concluded that unlawful activities could not be validated by application of this principle. In India, the Supreme Court in said case of Mahima Datla reaffirmed that fraud is a clear exception for the application of the principle and can only be applied in bona fide or honest transactions.

Conclusion

The Duomatic principle allows the company to escape the procedural requirements of passing an ordinary or a special resolution in case all the shareholders give unanimous consent to a particular decision. Since the principle has no statutory recognition, the evolution of this principle is solely dependent on judicial interpretation and understanding. While the principle originated in the U.K., it now holds good in other countries including India.

The Duomatic principle gives precedence to the substantial compliance of the provisions of company law rather than taking a narrow approach towards such compliances. On one hand, this enables companies to conduct their operations with substantial compliance of law while foregoing the formalities. On the other hand, the principle ensures that shareholders cannot wriggle out of their obligations, which they have effectively consented to, on the grounds that no formal resolutions were passed. Given that several companies including start-ups and small companies fail to adhere with the formal compliances under the company law, the Duomatic principle may come to the rescue of such companies from the rigours of following complicated processes, assuming the decisions taken are unanimously agreed by all shareholders / investors and there is no fraud being committed by the company.

Authors: Souvik Ganguly and Renjith Nair 

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