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N2-12: Company law principles
ARTICLES OF ASSOCIATION
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A species of contract
"[71] The articles of association of a company are a species of contract between its members (Companies Act 1985 section 14, Companies Act 2006 section 33). They can be amended by agreement (Companies Act 2006, section 21). That agreement may be reached informally (Cane v Jones [1980] 1 WLR 1451)." (Re The Sherlock Holmes International Society Ltd [2016] EWHC 1076 (Ch), Mark Anderson QC)
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ULTRA VIRES/INVALID TRANSACTIONS
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Capacity/power governed by local law
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"[7] It will be immediately obvious that none of the parties involved in this débacle has anything to do with England and Wales. But the terms of the "swaps" contracts concluded between the Kommunes and Depfa contained English law and English jurisdiction clauses. The Kommunes invoked the jurisdiction clause in the agreements and brought proceedings in the Commercial Court for declarations of non-liability to Depfa on the "swaps" contracts, alleging that they had been concluded ultra vires the powers of the Kommunes by reason of the terms of section 50 of the 1992 Act, with the consequence that the contracts were void. Before the judge, it was common ground that the issue of the "capacity" or "power" of the Kommunes to conclude the "swaps" contracts in the light of the provisions of the 1992 Act, especially section 50, involved questions of Norwegian law, as well as English law. It was (and is) agreed that all questions of the actual authority of officers of the Kommunes to conclude the contracts are governed by Norwegian law." (Haugesund Kommune v. Depfa ACS Bank [2010] EWCA Civ 579)
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Broader meaning of capacity (to include power/ability to validly do something)
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"[47] So, I return to the question: in what sense must we interpret the word "capacity" in Dicey's Rule? Counsel have found no authorities in which there is any discussion of the meaning of the word for the purposes of the rule. None of the cases cited in the footnotes to Dicey assist on this point. It appears to be a novel issue. How the word "capacity" is interpreted for the purposes of the rule is, as Etherton LJ has stated in his judgment, ultimately a matter of policy. In my view it is important to remember the purpose of the rule, which is to determine which systems of laws will be used, under English conflicts rules, to decide whether a "corporation" has the ability to exercise the legal right to enter into a binding contract with a third party. If that accurately summarises the rule's purpose, then I think, following the approach of Auld LJ in the Macmillan case[47] that the concept of "capacity" has to be given a broader, "internationalist", meaning and must not be confined to the narrow definition accorded by domestic English law. In my view it should be interpreted as the legal ability of a corporation to exercise specific rights, in particular, the legal ability to enter a valid contract with a third party. So I agree with the approach of the judge; for the purposes of English conflicts of laws, a lack of substantive power to conclude a contract of a particular type is equivalent to a lack of "capacity", to use English terminology." (Haugesund Kommune v. Depfa ACS Bank [2010] EWCA Civ 579)
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- But the consequences of lack of capacity/power (e.g. validity of contract or restitution) may be governed by different law
"[8] Depfa counterclaimed, alleging that the "swaps" contracts were valid and enforceable. But if they were not, then Depfa claimed in restitution for the return of the sums advanced to the Kommunes. It is common ground that the restitution counterclaims are governed by English law.
...
[60] The fact that the judge also found, (as summarised at (7) of paragraph 55 above) that, in Norwegian law, even an invalid resolution may result in a contract that binds the Kommune and third parties, is irrelevant for the purposes of the Dicey rule, as Tomlinson J correctly stated in paragraphs 125 – 127 of the judgment. Once the issue of "capacity" has been decided according to the constitution of the corporation, then the consequence of the lack of "capacity" is something that is to be determined by the putative applicable law of the contract, that is English private law. The law of the place of the corporation is not involved at this stage, as (at least implicitly) the rule in Dicey makes plain and as Mr Pollock accepts, at least as I understood his argument. Indeed, if the private contract law of the place of the corporation were to be involved at this stage, then there would be no scope for the involvement of the putative applicable law of the contract. There is no dispute that, under English law, if a corporation lacks "capacity" then it cannot conclude a valid English law contract. This seems to be a result that is both logical and reasonable.
[61] It must follow, as Mr Pollock accepts, that once the judge ruled there was a lack of "capacity" then he was correct to conclude that the "swaps" contracts were invalid and void. Therefore I would dismiss WR's appeal on the "validity issue". In the light of this conclusion, it is unnecessary for me to consider the arguments on "authority" and I will not do so." (Haugesund Kommune v. Depfa ACS Bank [2010] EWCA Civ 579)
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Distinction between capacity and power​
"[7] It will be immediately obvious that none of the parties involved in this débacle has anything to do with England and Wales. But the terms of the "swaps" contracts concluded between the Kommunes and Depfa contained English law and English jurisdiction clauses. The Kommunes invoked the jurisdiction clause in the agreements and brought proceedings in the Commercial Court for declarations of non-liability to Depfa on the "swaps" contracts, alleging that they had been concluded ultra vires the powers of the Kommunes by reason of the terms of section 50 of the 1992 Act, with the consequence that the contracts were void. Before the judge, it was common ground that the issue of the "capacity" or "power" of the Kommunes to conclude the "swaps" contracts in the light of the provisions of the1992 Act, especially section 50, involved questions of Norwegian law, as well as English law. It was (and is) agreed that all questions of the actual authority of officers of the Kommunes to conclude the contracts are governed by Norwegian law." (Haugesund Kommune v. Depfa ACS Bank [2010] EWCA Civ 579)
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Lack of capacity in articles of association
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- Validity of act not called into question on ground of lack of capacity
"(1) The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution.
(2) This section has effect subject to section 42 (companies that are charities)." (CA 2006, s.39)
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"[37] A further problem with this complaint about transferring asserts at an undervalue is that the restriction comes from the Company's articles. This is therefore within the scope of section 39 of the Companies Act 2006, which provides that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution. The Company's constitution includes its articles. Although a breach of the constitution may cause the Company difficulties with the Regulator, and may give further grounds for the developing dispute with Mr Fothergill, it does not in itself invalidate the SLA or the Settlement Agreement and therefore has no impact on the petition debt. A separate complaint by the Company that the arrangements with the Petitioner amounted to a breach of the Company's memorandum of association encounters the same difficulty." (TCPC Management Limited v. Windrush Alliance UK Community Interest Company [2024] EWHC 683 (Ch), Judge Parfitt)
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- Acts of charitable companies can be challenged due to lack of capacity subject to certain exceptions
"(1) Sections 39 and 40 (company's capacity and power of directors to bind company) do not apply to the acts of a company that is a charity except in favour of a person who—
(a) does not know at the time the act is done that the company is a charity, or
(b) gives full consideration in money or money's worth in relation to the act in question and does not know (as the case may be)—
(i) that the act is not permitted by the company's constitution, or
(ii) that the act is beyond the powers of the directors." (CA 2006, s.42)
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Burden on person asserting person knew company was charity/act not permitted is on person asserting
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"(3) In any proceedings arising out of subsection (1) or (2) the burden of proving—
(a) that a person knew that the company was a charity, or
(b) that a person knew that an act was not permitted by the company's constitution or was beyond the powers of the directors,
lies on the person asserting that fact." (CA 2006, s.42)
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Subsequent acquisition of property by purchaser without notice
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"(2) Where a company that is a charity purports to transfer or grant an interest in property, the fact that (as the case may be)—
(a) the act was not permitted by the company's constitution, or
(b) the directors in connection with the act exceeded any limitation on their powers under the company's constitution,
does not affect the title of a person who subsequently acquires the property or any interest in it for full consideration without actual notice of any such circumstances affecting the validity of the company's act." (CA 2006, s.42)
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Statutory restrictions​
- Transaction in breach of statutory restrictions void
"[103] If that were so, it may turn out that shares in Herald were not redeemed in accordance with CLCI. Attention can be confined to those who redeemed only some of their shares and remain members of Herald as they are the only persons affected by the liquidator’s proposal, and I proceed on that basis. Despite the concession in DD Growth, the House of Lords has held that a purchase of shares by a company which is not authorised by the Companies Acts is unlawful and ultra vires: Trevor v Whitworth (1887) 12 App Cas 409. I therefore proceed on the basis that a redemption which purports to take place in a manner not authorised by the CLCI would be unlawful and void. As the House of Lords explained in that case, capital can only be returned to a member of the company if that return is authorised by the Companies Acts. The House held that a transaction for that purpose in breach of the Companies Act 1862 was unenforceable. Share premium is treated as capital in the CLCI." (Pearson v. Primeo Fund [2020] UKPC 3, Lady Arden)
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Restitutionary claim for money paid under ultra vires transaction
"[87] My conclusion is that the majority of the House of Lords in WLG did depart from the decision in Sinclair v Brougham that a lender under a borrowing contact that is void because ultra vires the borrower, cannot recover the sum lent in a restitutionary claim at law. As a result of the decision of the majority of the House of Lords in WLG such a claim can be advanced. It is, of course, not a claim based on any implied contract or promise and it does not indirectly enforce an ultra vires contract, for the reasons given by Lord Goff at page 688G-H of WLG. Moreover, I respectfully agree with him that any such restitutionary claim must be subject, where appropriate, to any available restitutionary defences, including any that can legitimately be based on public policy. If I am correct then Sinclair v Brougham can "fade into history" as Lord Goff hoped it would." (Haugesund Kommune v. Depfa ACS Bank [2010] EWCA Civ 579)
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- Public policy defence where restitution would be contrary to policy of law breached
"[93] This principle has been confirmed in the recent decisions of the House of Lords in Dimond v Lovell[99] and Wilson v First County Trust Ltd (No 2).[100] Thus where a consumer credit agreement has been improperly executed in contravention of the consumer credit regulations and the statute or regulations provide that the debtor does not have to repay in consequence because the debt is unenforceable, the creditor cannot recover the money in restitution. To permit such a claim would be inconsistent with the intent of Parliament, which sets the public policy in the statutory provisions. As both Lord Nicholls and Lord Hope emphasised in the First County Trust case, the question is: what did the statute intend? If it is clear that the statute intended that the creditor should not recover money advanced, then the court cannot attempt to override or outflank the statutory provision by substituting a common law remedy such as restitution. The application of that rule, which is undoubtedly a public policy rule, must depend on the construction of the relevant statutory provisions. Thus, in Wilson v First County Trust Ltd (No 2), Lord Hope said that it would be ".. inconsistent with the statute to provide [First County Trust] with a common law remedy [of restitution] to redress the enrichment which Mrs Wilson [the borrower] received at [First County's] expense"." (Haugesund Kommune v. Depfa ACS Bank [2010] EWCA Civ 579)
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DIVIDENDS
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- Declaration of final dividend creates immediate debt
"[37] Further, it is clear that in the case of a final dividend, the declaration of a dividend by the company in general meeting gives rise to a debt payable by the company to shareholders." ​(HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- Interim dividend usually does not create debt prior to payment
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"[22] In Lagunas Nitrate Company Ltd v Schroeder and Co and Schmidt (1901) 85 LT 122, the directors resolved to pay an interim dividend. Shortly afterwards, in light of pending litigation, the directors resolved to postpone payment of the interim dividend. Joyce J noted that Lindley on Company Law and Buckley on the Companies Acts stated that “where a dividend is declared it becomes a debt due from the company to the shareholders”. However, he distinguished the declaration of a dividend and a resolution for payment of an interim dividend. He held that prior to payment of an interim dividend, the company was not obliged to pay it. The directors could reconsider whether it ought to be paid at all." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- Interim dividend usually does create debt once paid to one shareholder
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"[39]...We see no reason to distinguish between final dividends and interim dividends at the stage where the directors have not only resolved to pay a dividend but have also made payment to some but not all of the shareholders. If a shareholder is not paid their share of an interim dividend then a debt arises at the time the other shareholders are paid. That must follow from the principle that shares of the same class confer the same rights and impose the same liabilities." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- Subject to agreement to the contrary
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"[72] Overall, we consider that the FTT did not err in failing to specify what amendment was being made to the articles. The FTT specified the amendment at [100] and [101] of the Decision. Further, the FTT was entitled to find that the members intended to informally amend the articles even though they did not have the articles in mind when agreeing the terms on which the interim dividend would be paid." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- Or subject to binding waiver by the shareholder
"[86] The parties’ arguments on waiver before the FTT focussed on whether there was consideration for such a waiver. [The taxpayer] submitted that the waiver agreement occurred before NG was paid his dividend and therefore before any debt could have arisen. The waiver was supported by consideration in that the directors of Regis agreed to pay an interim dividend and PG agreed to waive his right to enforce payment.
...
[94] We are satisfied that the FTT was right to find that the agreement it had identified did not fall within the principle of Foakes v Beer. That is because PG’s waiver of the right to enforce the debt was agreed before the directors resolved to pay the interim dividend. In those circumstances, we do not accept Mr Bradley’s submission that there was no consideration. PG agreed to waive his right to enforce payment of a dividend until after 5 April 2016 if Regis agreed to pay the interim dividend. At the time of that agreement there was no enforceable debt. It is not the case of an existing creditor agreeing to give up an entitlement to be paid without receiving anything in return.
[95] [HMRC] also submitted that the FTT was not entitled to find on the facts that there was any such agreement. He relied on the same arguments as in relation to whether there was an agreement to amend the articles for the purposes of Ground 2. Namely, that there could be no agreement to waive enforcement of a debt where the directors were simply following advice premised on an understanding that the interim dividend could be paid to NG without a debt becoming due and payable to PG. The facts were more consistent with a shared misunderstanding as to the existence of a debt than with an agreement to waive a debt.
[96] For the same reasons as set out under Ground 2, we consider that the FTT was entitled to find and did find at [114] that there was an agreement by PG to waive his right to enforce the debt. We can see no basis on which to interfere with that finding." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- Actual shareholders entitled to whole dividend declared even if paid to another who is not a member (not ultra vires)
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"[150] Considering the accounts and returns for all years, the entries and other evidence point towards the Appellant being the sole owner of the share(s) and that he was aware of that.
...
[154] There is a difference in the treatment of improperly paid dividends dependent upon the position of the recipient. Section 847 Companies Act 2006 provides that a recipient member who knows or has reasonable grounds to believe that a distribution or part of it is unlawful is liable to repay it or that part of it to the company. Here however Ms Hamilton was not a member.
[155] HMRC argue that the dividend paid by the company was not unlawful because the dividend was not in excess of retained profits or distributable reserves. They assert that the Appellant being the sole shareholder was entitled to the whole of the dividend declared, irrespective of how he chose to divide it. Because the Appellant was entitled to the whole of the dividend, the distributions to Ms Hamilton remained his income and a charge to tax arose under s 385 ITTOIA 2005 because it was made to the person to whom the distribution is “treated” as made, or “entitled” to the distribution. Where the distribution belongs to someone other than the recipient, that other person is chargeable to tax.
[156] We agree HMRC’s analysis that the dividend was lawful. In those circumstances the Appellant must be treated as entitled to the entirety of the dividend declared. Mr Marre argues that the purported distributions to Ms Hamilton were void: they were not “distributions” to anyone at all and cannot be taxed as such. We do not agree with that analysis as of course there is a difference between a lawfully declared dividend and a purported distribution of part to a non-member. The dividend declared by the company was not void. Any division of that dividend or purported distribution to Ms Hamilton triggered s 385 ITTOIA 2005." (Raine v. HMRC [2016] UKFTT 448 (TC), Judge Connell)
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Ultra vires dividend
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- Not income if held on constructive trust
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"Failure to comply with these requirements will mean that the distribution is unlawful (section 836(4)). Conversely, if for example directors correctly prepare interim accounts as above, a dividend paid on the basis of those accounts will be lawful, even if the annual accounts prepared later show an insufficient figure of distributable profits. The consequences of an unlawful distribution are considered below under ‘Ultra vires and illegal dividends’. The shareholders cannot agree to waive the requirements of the Act (see Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] 1 Ch 447).
...
Section 847 provides that a recipient member who knows or has reasonable grounds to believe that a distribution or part of it is unlawful is liable to repay it or that part of it to the company.
No such liability exists in respect of a member who is an innocent recipient. The immunity of an innocent recipient shareholder is illustrated in Re Denham & Co [1883] 25 Ch D 752 and Moxham v Grant [1990] 1 QB 88. This principle relates mainly to the liability of a shareholder in a quoted company, who cannot be expected to have detailed knowledge of the day to day running of the company, but simply receives a reward for holding shares by way of dividend. When dealing with private companies controlled by directors who are shareholders, such a member ought to know the status of the dividend and it is expected that section 847 will apply in the majority of such cases.
Where a dividend is paid and it is unlawful in whole or in part and the recipient knew or had reasonable grounds to believe that it was unlawful then that shareholder holds the dividend (or part) as constructive trustee in accordance with the principles stated by Dillon L J in Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] 1 Ch at page 457. Such a dividend (or part) is void for the purposes of both the Income Tax charge on distributions under ITTOIA05/S383 and the long abolished ACT charge under ICTA88/S14. The company has not made a distribution as a matter of company law, and so the dividend does not form part of the recipient’s income for tax purposes. The company has not parted with title to the sum that it purported to distribute, which as a consequence remains part of its assets under a constructive trust (see also Ridge Securities Ltd v CIR (1964) 44TC373). Where the company concerned is a close company, it is regarded as having made a loan to the shareholder by virtue of CTA10/S455(1), thereby triggering a charge under CTA10/S455(2). Relief would however be available under CTA10/S458 where the dividend is repaid to the company. That repayment might be by cash or cheque, or by a suitable entry in the loan account.
A shareholder who had no knowledge of the illegality of the dividend and no reasonable grounds on which so to believe is not a constructive trustee and does not have to repay the sum, which will constitute a distribution under CTA10/S1000 (1) B. If such a shareholder then repaid the company (although not liable to do so) this is simply a voluntary assignment or transfer of the shareholder’s own income so that it does not affect the tax position. However, in practice it is desirable to consider all such cases on their particular facts and merits." (CTM15205)
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DIRECTOR'S DUTIES
Wrong-doing or knowledge of director cannot be attributed to company as defence to claim brought by company
"[7] So far as attribution is concerned, it appears to me that what Lord Sumption says in his paras 65-78 and 82-97 is effectively the same in its effect to what Lords Toulson and Hodge say in their paras 182-209. Both judgments reach the conclusion which may, I think be stated in the following proposition. Where a company has been the victim of wrong-doing by its directors, or of which its directors had notice, then the wrong-doing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company's liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrong-doing, even where the directors were the only directors and shareholders of the company, and even though the wrong-doing or knowledge of the directors may be attributed to the company in many other types of proceedings." (Jetivia SA v. Bilta (UK) Limited (in liquidation) [2015] UKSC 23)
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"[47]...The fact that section 39 abolishes the ultra vires doctrine as between the company and third parties does not relieve the directors from liability to the company for their breach of duty or wrongdoing merely because, qua members, they agreed with the course which was taken. Not only is that liability of the directors expressly preserved by section 40(5) but Bilta in the Supreme Court makes it clear that knowledge of the breach of duty and wrongdoing by a director is not to be attributed to the company, even if the director is the sole shareholder or member." (Ceredigion Recycling & Furniture Team v. Pope [2022] EWCA Civ 22)
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DUOMATIC PRINCIPLE
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General statement: all relevant shareholders consent without formal compliance with company articles
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'[31] The Duomatic principle is, in short, the principle that anything the members of a company can do by formal resolution in a general meeting, they can also do informally if all of them assent to it. See generally Palmer’s Company Law, 25th ed (2020), paras 7.434-7.449; and P Watts, “Informal unanimous assent of beneficial shareholders” (2006) 122 LQR 15. The principle derives its name from In re Duomatic Ltd [1969] 2 Ch 365, in which it was encapsulated by Buckley J, at 373, as follows:
“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.” (Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, Lord Burrows)
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"[45] The principle is often applied so as to authorise what would otherwise be a breach of duty by the directors or to regularise transactions which are challenged on the basis that directors have not been properly appointed or meetings have not been properly conducted. Duomatic itself involved a challenge to payments made to directors on the basis that the payments had not been properly authorised by a resolution of members in accordance with Companies Act requirements." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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"[122] Although the principle has been characterised in somewhat different ways in different cases, I do not consider that that is because its nature or extent is in doubt or the subject of debate. The difference in language is attributable to the fact that the principle will have been expressed by reference to the particular facts of the case. The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways or at different times, does not matter." (EIC Services Ltd v Phipps [2003] EWHC 1507, Neuberger J)
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Only acts that would have been intra vires
"...I think it an inevitable inference from the circumstances of the case that every member of the company assented to the purchase, and the company is bound in a matter intra vires by the unanimous agreement of its members..." (Salomon v. Salomon [1897] AC 22 at 57)
- Awareness of action/proposed action does not necessarily amount to assent
"[133] If a director of a company informs shareholders of an intended action (or a past action) on the part of the directors, in circumstances in which neither the directors nor the shareholders are aware that the consent of the shareholders is required to that action, I do not think it is right, at least without more, to conclude that the shareholders have assented to that action for Duomatic purposes. As a matter of both ordinary language and legal concept, it does not seem to me that, in such circumstances, it could be said that the shareholders have "assent[ed]" to that action. The shareholders have simply been told about the action or intended action, on the basis that it is something which can be, and has been or will be, left to the directors to decide on, and no question of "assent" arises.
...
[140] It is next necessary to consider whether this conclusion should be reconsidered as a result of the 16 shareholders accepting the certificates for their respective bonus shares (probably in early January 2000), and subsequently exchanging their bonus shares for shares in the Guernsey Company (in about April 2000). In my judgment, those facts cannot alter my conclusion, in so far as it is based on contract or waiver. I do not see how it can be said that there was "assent" sufficient to satisfy the Duomatic principle, given that such assent requires "knowledge". At the time of the acceptance of the bonus shares and their exchange for shares in the Guernsey Company, it would appear that none of the 16 shareholders, and indeed none of the three directors, was aware of the need for the Company to seek assent, or for the shareholders to give their assent, or as to the irregularity of the issue of the bonus shares because of the absence of any resolution at a general meeting. Estoppel was touched on by Mr Chivers, but it was not pleaded or developed in argument. Such an allegation would have to be carefully pleaded and considered, before it could be relied on." (EIC Services Ltd v Phipps [2003] EWHC 1507, Neuberger J)
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Assent
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- Assent inferred from objection not being taken when it would be expected to be
"[138] That case [In re Bailey, Hay & Co. Ltd [1971] 1 WLR 1357] appears to me distinguishable from the present. Each of the shareholders in Bailey, Hay knew that the decision to appoint a liquidator was to be voted on by the shareholders at a general meeting, and each of them attended the meeting personally or through a representative. By attending the meeting and not raising the point that the notice was one day short, and by standing by while the liquidator was appointed, the three non-voting shareholders probably lost their right to take the point – see In re British Sugar Refining Co. (1857) 3 K&J 408. Further, if a shareholder attends a meeting at which he knows that shareholders' assent is being sought, and the assent is then apparently obtained at that meeting, and matters then proceed on the basis that such assent has been given, without any objection on his part, it is easy to see how it could be concluded that he cannot challenge the view that the assent has been given. It is quite another matter where the shareholder is wholly unaware that his, or any other shareholder's, assent is necessary, and, indeed, that such assent is not even being sought." (EIC Services Ltd v Phipps [2003] EWHC 1507, Neuberger J)
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Ratification after the event
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- Must be by current shareholders
"[144] The ratification in the forms returned by 15 of the 16 shareholders in 2003, and the Ratifications returned by the 33 shareholders in 2002, were executed long after they had ceased to be shareholders in the Company: all their shares had been acquired in April 2000 by the Guernsey Company. Accordingly, as Mr Mabb contends, it appears to me that none of the persons who executed the forms in 2003 or the Ratifications in 2002 had standing to change the constitutional position of the Company. It would be the Guernsey Company, by then the holder of all the shares in the Company, who would have to approve or waive the failure to obtain the approval at a general meeting to the issue of the bonus shares." (EIC Services Ltd v Phipps [2003] EWHC 1507, Neuberger J)
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Agreement must be objectively established
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"[32] What all the authorities show is that the Appellant must establish an agreement by Lee to treat the meeting as valid and effective, notwithstanding the lack of the required period of notice. Lee's agreement could be express or by implication, verbal or by conduct, given at the time or later, but nothing short of unqualified agreement, objectively established, will suffice. The need for an objective assessment was well put by Newey J in the recent case of Rolfe v Rolfe [2010] EWHC 244 (Ch) at [41], as follows:
"... I do not accept that a shareholder's mere internal decision can of itself constitute assent for Duomatic purposes. I was not referred to any authority in which it had been decided that a mere internal decision would suffice. Further, for a mere internal decision, unaccompanied by outward manifestation or acquiescence, to be enough would, as it seems to me, give rise to unacceptable uncertainty and, potentially, provide opportunities for abuse. A company may change hands or enter into an insolvency procedure; in either event, it is desirable that past decisions should be objectively verifiable. In my judgment, there must be material from which an observer could discern or (as in the case of acquiescence) infer assent. The law applies an objective test in other contexts: for example, when determining whether a contract has been formed. An objective approach must, I think, also have a role with the Duomatic principle."
[33] It is perfectly plain that objectively there never was unqualified agreement by Lee to the validity of the meeting or the Company's business which was purportedly transacted during the course of it." (Schofield v. Schofield [2011] EWCA Civ 154, Etherton LJ)
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- Discussions may be sufficient
"[52] That statement of principle was endorsed by the Court of Appeal in Schofield v Schofield [2011] EWCA Civ 154 at [32]. It was made in the course of rejecting a submission by counsel recorded at [37] that in the context of the Duomatic principle, it was sufficient to establish a shareholder’s assent or approval to a course of action if the shareholder had decided in their own mind on the course of action without any outward manifestation.
[53] The statement of principle does not take HMRC’s case on this appeal any further. We are not concerned with a situation where there was no outward manifestation of the agreed course of action. On the contrary, the FTT relied upon the discussions and agreements between PG, NG and others to support its finding that there had been an informal amendment of the articles. The real question is as to the extent of the discussions and whether the FTT was entitled to find that there was an informal agreement to amend the articles." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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Unqualified agreement
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- Conditional/without prejudice agreement not sufficient
"Lee's participation at the meeting was, therefore, conditional. His position throughout was that the meeting had not been properly called, but, if and insofar as (contrary to his stated position) it was a valid meeting, he responded to the various proposals suggested by Mr Berry in the way that he did. That was not an agreement by Lee, as shareholder, to treat the meeting and the resolutions passed at the meeting as valid and effective. There was no objective agreement by him within the Duomatic principle." (Schofield v. Schofield [2011] EWCA Civ 154, Etherton LJ)
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Authority from those acting on behalf of others
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- Ostensible authority to give consent on behalf of shareholder(s) sufficient
"[42] In the present case, it might be suggested that the single shareholder (Mr Byington) was not aware of, and therefore could not have consented to, Mr Costa’s giving instructions for the fifth POA. However, Mr Byington had set up a mode of operation on which Citco BVI and TCCL reasonably relied. The very concept of ostensible authority means that Mr Byington should not be allowed to deny that he consented to the giving of authority to Mr Costa. By operating as he did, so as to keep his connection with Spectacular out of the picture, he was taking the risk that Mr Costa might betray him." (Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, Lord Burrows)
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- Even if ostensible agent acting dishonestly
"[46] However, as a matter of principle the Duomatic principle would have applied on these facts even if Mr Costa had dishonestly pocketed the money from the sale without regarding it as discharging a debt owed to him. This is because the whole of Mr Byington’s set-up - and the clothing of Mr Costa with ostensible authority - was taking the risk on behalf of the company, albeit informally, that Mr Costa would use that apparent authority for his own purposes, including dishonest purposes. In a situation where Mr Byington, and through his (informal) conduct, Spectacular, led TCCL reasonably to rely on Mr Costa in relation to the fifth POA, Spectacular cannot now be allowed to pursue TCCL in a claim for negligence to reverse the very risk that it was running." (Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, Lord Burrows)
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- Applies where the ultimate beneficial owner (who is not the shareholder) is taking all the decisions
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"[47] A further possible qualification of the Duomatic principle is that, in some cases, doubts have been expressed as to whether the principle applies where it is the beneficial owners, rather than the registered shareholders, who consent. See, eg, Palmer’s Company Law, 25th ed (2020), para 7.439. But the correct view is that, at least as here where the ultimate beneficial owner and not the registered shareholder is taking all the decisions in the relevant transactions, the Duomatic principle applies as regards the consent of (and authority given by) the ultimate beneficial owner. This is supported, as a matter of principle, by Mann J’s judgment in Shahar v Tsitsekkos [2004] EWHC 2659 (Ch), para 67; and by Newey LJ’s judgment in Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146; [2020] 1 WLR 1122, para 20, in which, while not deciding the point, he stated that he was willing to assume (in the same way as he had done as Newey J in In re Tulsesense Ltd; Rolfe v Rolfe [2010] EWHC 244 (Ch); [2010] 2 BCLC 525, para 42) that “the assent of the beneficial owners of a share can meet Duomatic requirements.” Certainly the appellant in this case did not seek to argue that, in relation to the Duomatic principle, any distinction should be drawn between Mr Byington, as ultimate beneficial owner, and Mr Stollman, his lawyer, who held the bearer shares." (Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, Lord Burrows)
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Solvent company
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- Company must be solvent at time of assent/ratification
"[36] There is also a helpful reference to where the Duomatic principle fits within the general rules on attribution in respect of a company in Lord Hoffmann’s well-known analysis, giving the advice of the Privy Council, in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506:
“The company’s primary rules of attribution will generally be found in its constitution, typically the articles of association, and will say things such as ‘for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company’ or ‘the decisions of the board in managing the company’s business shall be the decisions of the company’. There are also primary rules of attribution which are not expressly stated in the articles but implied by company law, such as
‘the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company’: see Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258.”" (Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, Lord Burrows)
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- Transaction must not jeopardise solvency/cause loss to creditors
"[40]...One recognised qualification - that the transaction must not jeopardise the company’s solvency or cause loss to its creditors - does not arise on these facts..." (Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, Lord Burrows)
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Dishonest transactions
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- Transaction must be intra vires and honest
[43] The second recognised qualification is that the Duomatic principle cannot be used where there is relevant dishonesty. For example, in Bowthorpe Holdings Ltd v Hills [2002] EWHC 2331 (Ch), [2003] 1 BCLC 226, Sir Andrew Morritt V-C said the following at para 50:
“… the transaction must be bona fide or honest. This, in my view, is demonstrated by the qualification of Viscount Haldane in AG for Canada v Standard Trust [1911] AC 498, 505 that ‘the case was not ... a cloak under which a conspiracy to defraud was concealed’, by Younger LJ in In re Express Engineering Works [1920] 1 Ch 466, 471 that ‘no fraud is alleged in respect of this transaction’, and by Lawton LJ in Multinational Gas v Multinational Services [1983] Ch 258, 268 that the members must act in good faith. Thus, in In re Duomatic Ltd [1969] 2 Ch 365, 372 Buckley J cited with approval the view of Astbury J in Parker and Cooper Ltd v Reading [1926] Ch 975, 984 that the transaction must be both intra vires and honest.”..." (Ciban Management Corpn v Citco (BVI) Ltd [2020] UKPC 21, Lord Burrows)
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Informal amendment of articles of association
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- May be inferred from conduct
"[71] The articles of association of a company are a species of contract between its members (Companies Act 1985 section 14, Companies Act 2006 section 33). They can be amended by agreement (Companies Act 2006, section 21). That agreement may be reached informally (Cane v Jones [1980] 1 WLR 1451).
[72] Agreements can be inferred from conduct (Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195; Modahl v British Athletic Federation [2002] 1 WLR 1192), and there is no reason in principle why that cannot apply to an agreement to amend the constitution of a company (as in Re Home Treat Ltd [1991] BCC 165). Moreover the conduct from which agreement may be inferred may include acquiescence in circumstances where the members knew that their assent was being sought or where there was some reason why conscience demanded that they object sooner rather than later (Sharma v Sharma [2014] BCC 73). However conduct may be ambiguous. A court should not infer an agreement from conduct where such an agreement is only one of several equal possibilities. Where conduct alone is relied upon, that conduct must lead to the conclusion that on the balance of probabilities the members intended to amend the articles and, further, intended to make the particular amendment contended for." (Re The Sherlock Holmes International Society Ltd [2016] EWHC 1076 (Ch), Mark Anderson QC)
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- Need not necessarily have in mind the terms of the articles and intend to disapply or amend them
"[58] In our view, that conclusion [in Tulsesense] was very much fact specific. Newey J was not seeking to lay down any principle that for Duomatic to be engaged the shareholders must understand the terms of the existing articles and the amendment they are informally making to those articles. On the facts, the conduct of the parties was not such that it could be inferred that they were intending to amend article 95."
(HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- Shareholders may not even realise an amendment would be required
"[66] We agree with [the taxpayer] that the fact the members did not reference the articles of association in their agreement is irrelevant on the present facts. Indeed, it is notable that even now the parties do not agree on the effect of article 104, so it is hardly surprising that no consideration was given to an amendment of article 104 at the time of the interim dividend. The fact that members of Regis had not given any thought to the articles does not undermine the FTT’s conclusions. It is clear from EIC Services Ltd that the Duomatic principle is a principle designed to apply to ordinary shareholders, not trained lawyers. That is also clear from Sharma v Sharma [2013] EWCA Civ 1287 which the FTT referenced at [100] of the Decision." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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But may need more than a belief based on advice
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"[75] The FTT recorded at [24], PG’s acceptance that he would not be able to enforce payment of his share of the dividend in the 2015-16 tax year. We consider that this is an important finding. It is not simply recording that PG was accepting advice that he would not be entitled to enforce payment. If that was the case, there would have been no need for the explanation in the following sentence where the FTT says “However, the appellant was content to take the risk…”. On our reading, the FTT’s reference to PG’s acceptance was intended as a finding that there was an agreement that PG would not enforce payment." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- May be an amendment to cater for a one off event or a lasting change
"[76] In my judgment, when Mr Aidiniantz and Grace allowed Ms Riley to be appointed in 2004, the obvious inference is that they intended that Ms Riley be thenceforth qualified to be a director, and likewise Ms Decoteau in 2005 and Mr Riley in 2011. I do not think it a credible explanation that they intended a one-off exception to the membership requirement for each appointment on an ad hoc basis, so that a further amendment would be necessary to appoint the same person again in the future. Whilst it is in theory possible to amend the articles to cater for a one-off event, the more natural amendment is one which changes the rules for the future as well. The family were on good terms and there was no reason to think that if Mr Riley was suitable in 2011, he would not be suitable in the future as well. A bystander seeing Mr Riley appointed in 2011, with knowledge of the appointment of Ms Riley in 2004 and Ms Decoteau in 2005, and with knowledge of the original articles, would conclude that the articles had been amended to allow Mr Riley to be qualified to serve as a director." (Re The Sherlock Holmes International Society Ltd [2016] EWHC 1076 (Ch), Mark Anderson QC)
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- Informal amendment of articles regarding entitlement to share dividends equally
"[46] ​In the present case, the question addressed by the FTT was whether the shareholders, comprising PG, NG and Mr Bell as one of the trustees of the Settlement, had informally agreed that the articles be amended to permit an interim dividend to be paid to NG without at the same time incurring an enforceable debt to PG for his share of the interim dividend. It was not suggested that the articles could not in principle be amended in order to make such provision so as to bind all the members and Regis.
...
[82] We agree with [the taxpayer]. The FTT had the benefit of hearing the oral evidence and considering the documentary evidence. It found that there was an agreement that PG would not be able to enforce payment of the dividend in 2015-16. We can see no basis on which to interfere with that finding." ​​(HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
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- Cannot be relied on to remove a restriction
"[49] Accordingly, as I have said, once it is recognised that this “essential point” is a bad one, that left the first defendant only with the other argument, that the arrangements made by the first and second defendants as members to transfer the property to the SIPPs could be treated as having the same effect as a unanimous vote of members at an EGM to amend the Memorandum to remove the restriction. Popplewell LJ did deal expressly with this argument in refusing permission to appeal, holding (i) that the judge was right to hold, relying on Imperial Hydropathic Hotel Company Blackpool v Hampson (1882) 23 Ch. D 1, that arrangements could not be treated as an agreement to alter the Memorandum; and (ii) that, in any event, such an amendment would be prohibited by section 62 of the 2006 Act for a company limited by guarantee without “limited” in its name, such as the claimant. As Andrews LJ recognised, the judge's reasons for rejecting that argument and Popplewell LJ's reasons for refusing permission to appeal in respect of it, are unimpeachable." (Ceredigion Recycling and Furniture Team v. Pope [2022] EWCA Civ 22)
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Assent/ratification of breach of director's duty
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- Consent or acquiescence may suffice
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"[52] Let me now draw the threads together. I must apply the following principles in resolving the issues in the present appeal. In this summary "statutory duty" means the statutory duty imposed by section 175 of the 2006 Act.
i) A company director is in breach of his fiduciary or statutory duty if he exploits for his personal gain (a) opportunities which come to his attention through his role as director or (b) any other opportunities which he could and should exploit for the benefit of the company.
ii) If the shareholders with full knowledge of the relevant facts consent to the director exploiting those opportunities for his own personal gain, then that conduct is not a breach of the fiduciary or statutory duty.
iii) If the shareholders with full knowledge of the relevant facts acquiesce in the director's proposed conduct, then that may constitute consent. However, consent cannot be inferred from silence unless:
a) the shareholders know that their consent is required, or
b) the circumstances are such that it would be unconscionable for the shareholders to remain silent at the time and object after the event.
iv) For the purposes of propositions (ii) and (iii) full knowledge of the relevant facts does not entail an understanding of their legal incidents. In other words the shareholders need not appreciate that the proposed action would be characterised as a breach of fiduciary or statutory duty." (Sharma v. Sharma [2013] EWCA Civ 1287, Jackson LJ)
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- Director must have disclosed all relevant facts to shareholders
"[47] These principles are also applicable when the question is whether the shareholders of a company have authorised a director to do that which would otherwise be a breach of fiduciary duty. In such a situation, however, the court is scrupulous to ensure that the director has made full disclosure of all relevant facts to the shareholders: see Gwembe Valley Development Co Ltd (in receivership) v Koshy (No 3) [2003] EWCA Civ 1048 at [64]-[66]; [2004] 1 BCLC 131. Although the shareholders must be made aware of the relevant facts, it is not necessary that they understand the legal characterisation of those facts, namely that they would constitute a breach of fiduciary duty: see Knight v Frost [1999] BCC 819 at 828." (Sharma v. Sharma [2013] EWCA Civ 1287, Jackson LJ)
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