Shareholder ratification of breaches of directors’ duties: The Duomatic principle and insolvency
In the recent decision of Re Mobigo Ltd (In Liquidation) [2022] EWHC 1349 (Ch), the English High Court considered whether a company’s directors could avail themselves of the Duomatic principle to defeat a claim brought against them by the company’s liquidator in respect of their pre-liquidation conduct. The Duomatic principle forms parts of the laws of the Cayman Islands, the British Virgin Islands, and Bermuda, and accordingly the decision will be of interest to stakeholders of companies incorporated in these jurisdictions. Further, the factual matrix involves alleged breaches of directors’ duties which will be very familiar to offshore practitioners and therefore makes this an interesting judgment for this readership to reflect on.
The Duomatic principle, which takes its name from the English decision in Re Duomatic Ltd [1969] 2 Ch. 365, is that where all of the shareholders of the company informally assent to some matter which a general meeting of the company could carry into effect, that informal assent is as binding as a resolution in general meeting would have been. Accordingly, an act of the company may be regarded as ratified even where the formalities for obtaining shareholder approval in the company’s constitutional documents have not been adhered to.
In Re Mobigo Ltd, the company’s liquidator brought proceedings against the directors in relation to their alleged breaches of duty to the company. The directors sought reverse summary judgment on the basis that the company’s sole shareholder had previously approved of the acts that the liquidator now sought to impugn and, so the directors argued, it was not open to the liquidator (on behalf of the company) to pursue the directors in relation to conduct that had been ratified under the Duomatic principle.
However, the Duomatic principle does not apply where the company is insolvent. This is because the interests of the company’s creditors become paramount to the interests of the shareholders. Directors have a duty to consider or act in the interests of the creditors when they know, or should know, that the company is or is likely to become insolvent.
Given that there were unresolved questions as to whether the company was solvent at the time that the shareholder purportedly assented to the actions of the directors, the Court refused the directors’ application for summary judgment. The Court went on to note that there were other reasons to doubt whether the Duomatic principle would assist the directors, including that it was not clear whether the shareholder had actually applied his mind to the question of whether to ratify the directors’ conduct.
