Article written by Barri Mendelsohn, Jenny Wilcock, Cassandra Ditzel and Daniel Jones

Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146

Company decision-making was under the spotlight in December 2019, when the UK’s Court of Appeal was asked to consider the “Duomatic principle” (taken from the 1969 case Duomatic Ltd, Re [1969] 2 Ch. 365) which gave credence to informal shareholder approvals in certain circumstances. Based on the principle, a transfer of property can be valid even if the correct procedures under a company’s articles of association have not been followed, provided that all shareholders provide their unanimous approval, so that, if a general meeting had been convened, approval by all shareholders would have been binding as a resolution.

The Court of Appeal, finding against Mr. Dickinson, highlighted the fact that whilst the Duomatic principle can be a useful fallback option for approving corporate transactions, it is not without its limitations and it is not wise to invoke it to authorise a transaction rather than more formal means.  In particular, its application will be restricted in cases where trust or pension schemes are shareholders of a company.

The importance of properly documenting and adhering to a company’s articles of association and corporate procedures set out under the Companies Act 2006 (the “2006 Act”) cannot be understated.  If a decision is significant, it should be formally approved at a meeting (or written resolution should the articles of association permit it), especially if the decision could raise a potential conflict of interest or concerns the transfer of a non-cash asset. If the board of directors in this case had properly complied with the company’s articles of association and all directors were involved in the decision making, it is likely that the Court of Appeal would have found in their favour.

Whilst we know it is not always practically possible to do so, best practice would be to seek shareholder approval in order to avoid any risk of someone claiming a director breached his or her fiduciary duties and remove any doubt that the decision has been made invalidly.

 

Facts

Mr. Dickinson was managing director and owned 50.6% of the shares in NAL Realisations (Staffordshire) Ltd (“NAL”) (an aluminium smelting company). A further 39.2% were held by the trustees of a settlement and 10.2% were owned by the trustees of a pension scheme (Mr. Dickinson and his wife were the only members of the pension scheme, however there were further beneficiaries under the scheme as sums were paid to dependents).

In September 2005, ownership of NAL’s factory was transferred to Mr. Dickinson at an undervalue, without a physical meeting of the directors taking place (the “Property Transfer”).  Mr. Dickinson then leased the factory back to NAL.  When NAL entered administration in 2012 and subsequently liquidation in 2013, Mr. Dickinson brought proceedings before the UK’s High Court, seeking to recover the sums owed to him under this arrangement (amongst other transactions which are not considered here).

In the proceedings, the liquidators challenged the Property Transfer, stating that proper procedures under the company’s articles of association had not been followed.  The High Court agreed with the liquidators and found that the Property Transfer was void as it had been made without authority.

 

Judgment

Mr. Dickinson appealed the decision, but it was upheld by the Court of Appeal.  On the facts of the case, it was held that the professional trustee overseeing the pension scheme (as shareholder) had not approved the Property Transfer.  The Court of Appeal found that there could be no question of the Duomatic principle applying unless all parties with a beneficial interest in the shares had approved the relevant matter (it was not enough for the shareholders to merely know about the matter).  One beneficiary could not compel trustees to take a particular course (Butt v Kelson [1952] Ch. 197).

If the sale of the property had been considered at a general meeting of shareholders, Mr. Dickinson would not have been able to use his pension scheme vote without authority from the trustees as a body, which he did not have.  Further, the fact that Mr. Dickinson had authorised the Property Transfer without the approval of all the beneficiaries under the pension scheme (namely the dependents who received some benefit under the scheme) meant that the Duomatic principle could not be relied on.

The Court of Appeal’s strict interpretation of the Duomatic principle led to the director being ordered to restore the property to NAL.