In Randhawa and Randhawa v Turpin and Hardy [2017] the Court of Appeal considered the comparatively simple question of whether the sole director of a company with articles that required two directors for a board meeting to be quorate, could validly appoint administrators under paragraph 22(2) of Schedule B1 to the Insolvency Act 1986 (paragraph 22(2)). The complicating feature was that, whilst 75% of the shares in the company were held by the sole director, the remaining 25% were registered in the name of a long-dissolved Manx company.

Background

BW Estates Limited (Company) had a sole director, D. R, D's father, who set up the Company with his wife in 1986, had resigned following a directors' disqualification order. It was alleged, however, that D generally acted on the instructions of R notwithstanding the disqualification. In September 2013, as sole director, D appointed joint administrators under paragraph 22(2), who were the respondents in the appeal. In December 2015, the Randhawas issued the application the subject of the appeal. The appellants challenged the validity of the joint administrators' appointment and argued that the sole director was not entitled to make the appointment, as there was no second director to make up a valid quorum and that the Duomatic principle could not apply because it required the consent of the two registered shareholders required for a quorum at a shareholders' meeting.

D held 75% of the Company's shares, the remaining 25% being registered in the name of Belvadere Investment Company Limited, an Isle of Man company which was dissolved in 1996. However, Belvadere was never removed from the register of members of the Company.

The Randhawas initially claimed under the Insolvency Rules for an order that the joint administrators' remuneration be disallowed or reduced and that they pay the costs of the application personally. This was on the basis that the administrators could not have made a proper statement that the purpose of the administration was likely to be achieved. The application was dismissed.

The beneficial interest in D's shares was owned by R and in June 2015, the appellants entered into a share purchase agreement to acquire R's beneficial interest in D's 75% holding from R's trustee in bankruptcy. It was probable that R was or had also been the beneficial owner of the remaining 25%.

The Company's articles (largely Table A) provided for a minimum of two directors, a quorum for directors' meetings of two and a quorum for general meetings of two. The articles also provided that if the number of directors is less than the number fixed as the quorum, the continuing directors or director may act only for the purpose of filling vacancies or of calling a general meeting.

High Court decision

The judge held that the administrators' appointment was valid on the basis that (a) the articles had been informally varied by the members' course of conduct, (b) the consent or acquiescence of D or R as the beneficial owner was sufficient to trigger the Duomatic principle and the requirement for a quorum of two for a shareholders' meeting could not prevent the operation of that principle. The articles did not enable a dissolved corporate shareholder to vote. Nobody could have voted Belvadere's shares, because (1) Belvadere did not exist and no one else was on the register in its place and (2) neither R nor the Crown (the 25 shares held by Belvadere would have passed to the Crown as bona vacantia) was a registered shareholder. But the requirement of unanimous consent was satisfied as R, as beneficial owner of 100% of the shares, had acquiesced in both the exercise of the board's powers by the sole director and in the appointments. The appellants appealed to the Court of Appeal.

The issues before the Court of Appeal included:

  1. Was the Company at the relevant time a single member company within CA 2006 s123? D would then make up a valid quorum of one for members' meetings as provided by CA 2006 s318(1).
  2. Does paragraph 22(2), which enables directors to appoint an administrator, confer a separate right, which does not require compliance with the articles?
  3. Was the judge right to conclude that the consent of either D or R and D was sufficient to engage the Duomatic principle?
  4. Was the judge right to hold that the articles had been informally varied by R and D's course of conduct?

The single member company issue

CA 2006 s123(2) provides that if the number of members of a limited company falls to one, …there shall upon the occurrence of that event be entered in the company's register of members, with the name and address of the sole member:

  • a statement that the company has only one member
  • the date on which the company became a company having only one member.

CA 2006 s318(1) provides that in the case of a company limited by shares or guarantee and having only one member, one qualifying person present at a meeting is a quorum.

The administrators argued in the Court of Appeal that a company may move in and out of being a single member company over its lifetime and that the death or dissolution of a member would be one event that could cause a company with two members to become a single member company. On the dissolution of Belvadere, the Company became a single member company and D became its single member. When D formed an inquorate board to appoint the administrators, the Duomatic principle operated to validate the appointment as the general meeting of a single member company would have been able to authorise its director to appoint administrators.

Sir Geoffrey Vos C, giving the judgment of a unanimous Court of Appeal, reviewed the authorities as to the meaning of 'member' and said that the meaning of 'member' is primarily a matter of construction of the relevant statute and the company's constitution. The word 'member' in regulation 40 of Table A (Proceedings at General Meetings) and in the relevant sections of CA 2006 includes any member registered on the company's register, whether alive or dead and, if corporate, whether subsisting, in an insolvency procedure or dissolved. That was clear from each of s112(2) which provides that 'Every other person … whose name is entered in its register of members, is a member …'; s113 providing for what is to be recorded in the register of members; s114 providing that the register must be kept available for inspection; s127 providing that the register is prima facie evidence of any matters in it; and from s123 itself.

The term 'a limited company … with only one member' in section 123(1) must therefore be referring to a limited company with only one registered member. Although a person must exist to be registered as a member and there is prima facie no person in existence in the case of a deceased or dissolved member, it is more appropriate to construe the term 'member' as encompassing the member's successor in title than to deem the company transformed into a single member company.

The Company never became a single member company, because Belvadere remained on the register of members as the holder of 25% of the shares. Although the Company's register did not reflect the actual ownership of the 25% shareholding, that did not transform the Company into a single member company.

Did paragraph 22(2) require compliance with the articles?

The joint administrators argued that paragraph 22(2) created a right to appoint administrators notwithstanding the quorum provisions in the Articles and on that basis the appointment was valid.

Sir Geoffrey Vos C disagreed. There is nothing in Schedule B1 to suggest that the directors can act otherwise than in the manner set out in the articles. The articles provide for the manner in which the directors can validly act; they do not restrict the directors from acting under paragraph 22 or any other statutory provision, so authorities which held to be ineffective provisions in articles which restrict the exercise of a statutory right, were not applicable to this situation. The administrators' argument failed.

Applicabilty of Duomatic principle

Buckley J said in Re Duomatic [1969]: 'I proceed upon the basis that 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, that assent is as binding as a resolution in general meeting would be'.

Those who must assent are 'all shareholders who have a right to attend and vote at a general meeting of the company', not those shareholders that may be available. Belvadere, as a registered member of the Company, was neither notified of the proposal to appoint an administrator nor had it assented to it. Sir Geoffrey Vos C said that it was hard to see how the Duomatic principle was applicable unless, as the High Court effectively held, Belvadere's assent could either be dispensed with or provided by R.

The Duomatic principle simply could not apply in a situation where one of the registered shareholders is a corporation which does not exist, because it requires the consent of all the registered shareholders and one of them is incapable of consenting. Sir Geoffrey Vos C said that Duomatic is a valuable principle, but it would be wrong to assume that it must always be capable of applying. Belvadere's membership of the company could not be ignored because it was dissolved. Even if R owned Belvadere, his consent could not have been relevant. The property of Belvadere had passed to the Crown as bona vacantia. It was not suggested, nor could it have been, that the Crown consented to the course that D adopted.

Conclusion

D's resolution was incurably invalid and could not be rendered valid by the Duomatic principle, which only applies where all shareholders who have a right to attend and vote at a general meeting assent to the course proposed. 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.

Informal variation of the articles by a consistent course of conduct by R and D

The same problem arises in relation to whether D and R's conduct informally varied the articles so as to allow D to exercise the powers of the board alone. Such a variation can only have taken effect by the application of the Duomatic principle, but, again, Belvadere never consented to the supposed variation, actually or putatively.

The High Court was wrong both to hold that the articles had been informally varied by a consistent course of conduct and to hold that either D alone or R and D together could validly approve a resolution to appoint the joint administrators under the Duomatic principle.

For the reasons outlined above, the Court of Appeal held that the appointment of the joint administrators was invalid and allowed the appeal.

Comment

This decision, although based on the particular facts of the case, illuminates the meaning of 'member' in the legislation and is helpful in clarifying the requirements for the application of the Duomatic principle to such a situation. Also, the case is a reminder of the need to consider whether the articles of association of a company need to be amended to reflect changes in how a company is actually operating.