MANU/UKWA/0079/1999

Equivalent Citation: [1999]EWCA Civ 669

England and Wales Court of Appeal (Civil Division)

No. QBENI 98/0832 CMSI

Decided On: 28.01.1999

ATLAS WRIGHT (EUROPE) LTD

Vs.
GEORGE PETER WRIGHT and ANN WRIGHT

Hon'ble Judges:
Kennedy, Aldous and Potter, JJ.

Counsels:
For Appellant/Petitioner/Plaintiff: A Stafford (Instructed by Messrs Eversheds, Manchester, M2
3DB)

For Respondents/Defendant: A Gourgey (Instructed by Messrs Wragge & Co., Birmingham, B3

2AS)

Citing Reference:

Discussed
8

Mentioned
1

JUDGMENT

Lord Justice Potter

INTRODUCTION

This appeal raises the interesting question whether a term in an agreement between a company
and one of its directors to which sub-section (1) of s.319 of the Companies Act 1985 applies but in
respect of which the requirements of sub-section (3) and sub-section (5) have not been complied

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

with, is necessarily rendered void by sub-section (6) to the extent that it contravenes the section,
or may in appropriate circumstances be rendered enforceable by application of the principle in
Re: Duomatic[1969] 2 Ch 365. The question arises on the plaintiffs' appeal from the judgment and
order of H.H. Judge Gibbs QC in the Birmingham Mercantile Court on 10th February 1998,
pursuant to the plaintiffs' application by summons dated 17th December 1997 applying that the
following questions of law be determined pursuant to Order 14A of the Rules of the Supreme
Court:

(a) Whether the provisions of section 319 of the Companies Act 1985 are applicable to the
Agreements as defined in paragraph 3 of the Statement of Claim;

(b) If so, whether on the facts set out in the Affidavits of George Peter Wright and John Peter
McGowan, the requirements of section 319(3) and (5) of the Companies Act 1985 have been
complied with;

(c) If not, whether notwithstanding such non-compliance, clause 1 of each of the Agreements is
valid and is of full effect.

The answers given to those questions in the judgment were (a) Yes; (b) No; (c) Yes. An order was
made accordingly, the defendants being ordered to pay the costs of the application and damages
to be assessed. The judge refused leave to appeal; such leave was subsequently granted by the
single Lord Justice on 9th June 1998.

THE BACKGROUND

The two Agreements, each dated 9th May 1988, to which it is not necessary to refer in detail, were
made in the following circumstances.

The defendant company, then known as Wright Air Conditioning Limited, was founded by the first
plaintiff in 1973 and carried on the business of design, manufacture and contracting of air-
conditioning systems. He was the chairman and managing director of the company and his wife
(the second plaintiff) was a director. Between them they owned the entire share capital of the
company. In March 1987 the entire share capital of the company was sold to Wheway PLC
("Wheway") and, in May 1987 service agreements were entered into between the company and
each of the plaintiffs, such agreements being terminable on 12 months' notice. The service
agreement with the first plaintiff made him managing director of the defendant at a remuneration of
40, 000 per annum together with an agreed bonus; the service agreement with the second plaintiff
made her a director of the defendant at an annual remuneration of 10, 000.

A year later the first plaintiff decided that he wished to retire and, on 9th May 1988 the Agreements
were made in substitution for the service agreements referred to and expressed to take effect the
following month. There were amicable discussions between Mr McGowan as chief executive of

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

Wheway and the first plaintiff to discuss his proposed retirement. Mr McGowan proposed that the
first plaintiff should enjoy a continuing non-executive relationship with the defendant for life at an
annual remuneration of 20, 000, the first plaintiff requesting that such remuneration be split equally
between himself and the second plaintiff on the basis that each should be appointed a consultant
to the defendant at a remuneration of 10, 000 per annum.

The recital of the Agreement with the first plaintiff read as follows:

"Whereas (1) the company has employed Mr Wright, Mr Wright has served the company as
chairman and managing director for some time past and such employment has been terminated
by notice expiring on 6th June 1988. (2) It has been mutually agreed between the parties hereto
with effect from 6th June 1988 the terms of Mr Wright's pension and his future engagement by the
company should be upon the terms hereon. Now it is hereby agreed as follows:

1. As from 6th June 1988 the company appoints Mr Wright as a consultant with the title of
president of the company and Mr Wright's engagements hereunder shall be for life, provided
always that Mr Wright may terminate his agreement after giving not less than six months' notice in
writing expiring at any time."

Following provisions for payment of the annual fee of 10, 000 and provision for certain expenses,
clause 4 provided that

"During the continuance of this agreement Mr Wright shall, unless prevented by ill health, give
such time, attention and abilities and attendance at business and social functions of the company
and such special assignments as shall be mutually agreed between Mr Wright and the company
as Mr Wright shall at his own absolute discretion think fit"

By a manuscript addition it was provided that the first plaintiff should not have the right to attend
unless invited. In his affidavit, Mr McGowan explained that the reason for the addition was that, as
founder of the defendant company, the first plaintiff was a powerful and influential figure within it
and that he (Mr McGowan) took the view that those who were to succeed him in management of
the defendant would need autonomy to run it as they saw fit without interference from the first
plaintiff.

A special resolution of the defendant company was passed on 6th June 1988 which authorised its
board to appoint any person "who is or has been a director to be president or vice-president and
determine the period for which that person is to hold office".

In his affidavit, Mr McGowan confirmed that the special resolution

"would have been prepared by Graham Pickering, the company secretary of WAC [i.e. the
defendant]. Wheway was the sole shareholder of WAC and I can confirm that in my capacity as

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

chief executive of Wheway I have the authority to ratify the agreement which had been reached
between the defendant and Mr and Mrs Wright and that I did so by signing the special resolution."

It was also Mr McGowan himself who signed the Agreements on the part of the defendant.

On 15th June 1988 the plaintiffs resigned from their positions as directors of the defendant. The
defendant remained in the ownership of Wheway for some seven years, during which the
defendant honoured the Agreements. On 2nd November 1995 the share capital of the defendant
was acquired by Atlas Wright Limited. Following the change of control of the defendant, its
directors came to the conclusion that the Agreements were not in its, or its shareholders' best
interests and, by letter dated 23rd December 1996, the defendant gave notice to terminate the
Agreements with effect from 31st January 1997. The defendant was advised that the Agreements
were void by reason of the provisions contained in section 319 and that is the sole defence which
it raised in the action commenced by the plaintiffs' writ dated 26th August 1997.

THE LAW

S.319 of the 1985 Act provides, so far as material, as follows:

(1) This section applies in respect of any term of an agreement whereby a director's employment
with a company of which he is a director or, where he is the director of a holding company, his
employment within the group is to continue, or maybe continued, otherwise than at the instance of
the company (whether under the original agreement or under a new agreement entered into in
pursuance of it), for a period of more than 5 years during which the employment -

(a) Cannot be terminated by the company by notice

[By virtue of subsection (7) the word "employment" includes employment under a contract for
services]

(3) A company shall not incorporate in an agreement such a term as is mentioned in subsection
(1), unless the term is first approved by a resolution of the company in general meeting and, in the
case of a director of a holding company, by a resolution of that company in general meeting ..

(5) A resolution of a company approving such a term as is mentioned in subsection (1) shall not be
passed at a general meeting of the company unless a written memorandum setting out the
proposed agreement incorporating the term is available for inspection by members of the company
both -

(a) At the company's registered office for not less than 15 days ending with the date of the
meeting; and

(b) At the meeting itself.

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

(6) A term incorporated in an agreement in contravention of this section is, to the extent that it
contravenes the section, void; and that agreement and in a case where subsection (2) applies, the
original agreements are deemed to contain a term entitling the company to terminate at any time
by the giving of reasonable notice.

It is not in dispute between the parties that s.319 prohibits the grant to directors of contracts for
more than five years (long term contracts) if that contract cannot be terminated by the company,
unless certain procedural steps are taken, in which event such long term contracts may be
granted. The particular procedural steps are in broad terms that

(i) The proposed agreement must be approved by resolution at a general meeting: sub-section (3)

(b) The proposed agreement must be available for inspection for fifteen days prior to that general
meeting: sub-section 5(a)

(c) The proposed agreement must be available for inspection at the general meeting itself: sub-
section 5(b).

Nor is it in dispute that such contracts are not rendered unlawful as a whole, the only sanction
provided for being that provided for in sub-section (6), namely that to the extent that any term of
the agreement contravenes s.319 it is void, a deemed provision for reasonable notice being
substituted.

In Re: Duomatic, payments were made by a company by way of remuneration to directors without
complying with the company's articles of association in that no resolution authorising the directors
to receive remuneration had ever been passed in a general meeting of the company or at all.
Buckley J held that where it could be shown that all the shareholders with the right to attend and
vote at a general meeting had assented to some matter which a general meeting of the company
could carry into effect, such assent was as binding as a resolution in general meeting and that,
since in that case the ordinary shareholders, who were the only shareholders with the right to
attend and vote at a general meeting had approved the accounts recording the respective
payments to the directors, those payments should not be disturbed.

The principle stated in Re: Duomatic was limited to the authorisation of and assent to acts by a
company which were intra vires the company and involved simply a failure to observe the
provisions of the articles of the company. However, the principle has been applied to a failure to
observe procedural requirements laid down by statute. In Re: Oxted Motor Company Ltd [1921] 3
KB 32, a decision of the Divisional Court on appeal from the County Court, it was held that it was
competent for the shareholders of a company acting together to waive the formalities required by
section 69 of the Companies (Consolidation) Act 1908 as to notice of intention to propose a
resolution for voluntarily winding up as an extraordinary resolution and that, as all the shareholders

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

of the company had met and passed the resolution to wind up the company, the resolution was
valid as an extraordinary resolution within section 182 and it was not open to a creditor to impeach
its validity.

In Re: Duomatic and Re: Oxted, the judgments of Buckley J and Lush J respectively placed
reliance upon the earlier decision of this court in In Re: Express Engineering Works Limited [1920]
1 Ch 466 as authority in support of the view that statutory requirements as to notice can be
waived. In that case all the shareholders of the company (there were only five) met as directors at
a board meeting and afterwards, in their capacity as shareholders, passed the resolution to issue
the debentures without any notice having been given for the calling of a general meeting of the
shareholders, as required by s.67 of the Companies (Consolidation) Act, 1908. When the
company was later wound up, the liquidator contended that the resolution to issue the debentures
was invalid because the requirements of the statute had not been complied with. The Court of
Appeal held that the requirements of the statute were intended for the protection of the
shareholders and that, if the resolution was in a matter intra vires the members of the company
and there was no fraud, the shareholders were able to waive all formalities as to notice, the
resolution passed being just as valid as if there had been the requisite notice. Warrington LJ said:

"It happened that these five directors were the only shareholders of the company and it is admitted
that the five, acting together as shareholders, could have issued these debentures. As directors
they could not, but as shareholders acting together they could have made the agreement in
question and it was competent to them to waive all formalities as regards notice of meetings, etc.
and to resolve themselves into a meeting of shareholders and unanimously pass the resolution in
question. Inasmuch as they could not in one capacity effectually do what was required but could
do it in another, it is to be assumed that as businessmen they would act in the capacity in which
they had power to act.. In my judgment they must be held to have acted as shareholders and not
as directors and the transaction must be treated as good as if every formality had been carried
out."

In Re: Oxted, Lush J observed:

"If that is true in the case of a resolution to issue debentures it seems to me that is equally true in
the case of a resolution to wind up a company voluntarily, such as the resolution in the present
case. It is said that in the case of an extraordinary resolution the Legislature has made it
imperative that the notice required by s.69 should be given in order to give an opportunity for the
shareholders to consider whether the resolution should be passed and that it is not competent to
waive that formality. I cannot see any reason why shareholders should not be able to do in that
case what they can do in any other case. In the absence of fraud I think that shareholders can
waive notice in this case just as freely as they could in In Re: Express Engineering Works ."

In Re: Duomatic, Buckley J observed:

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

"Mr Wright, for the liquidator, has contended that where there has been no formal meeting of the
company and reliance is placed upon the informal consent of the shareholders the cases indicate
that it is necessary to establish that all shareholders have consented it seems to me that if it had
occurred to Mr Elvins and Mr East, at the time when they were considering the accounts, to take
the formal step of constituting themselves a general meeting of the company and passing a formal
resolution approving the payment of directors' salaries, that it would have made the position of the
directors who received the remuneration, Mr Elvins and Mr Hanley, secure and nobody could
thereafter have disputed their right to retain their remuneration. The fact that they did not take that
formal step but that they nevertheless did apply their minds to the question of whether the
drawings .. should be approved seems to lead to the conclusion that I ought to regard their
consent as being tantamount to a resolution of a general meeting of the company. In other words,
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."

The doctrine that the unanimous consent of all shareholders who have a right to attend and vote at
a general meeting of the company can override formal (including statutory) requirements in
relation to the passing of resolutions at such meetings (for convenience called the Re: Duomatic
principle) has been developed and applied in a number of reported decisions other than those
from which I have quoted above: see for instance the authorities cited at paragraph 7.417 of the
current edition of Palmer's Company Law as well, no doubt, as in many unreported cases. They
are largely decisions at first instance. However, the Court of Appeal recognised that statutory
requirements as to notice might be waived in the Express Engineering Works case (see also Re:
Horsley & Weight Limited [1982] Ch 442 per Buckley LJ at 454) and it has not been argued before
us that the Re: Duomatic principle is in any respect in error. The argument has centred upon the
question of whether the particular statutory language of s.319 is such as to exclude or render
inappropriate the application of the Re: Duomatic principle.

THE JUDGMENT

Before the judge, it was argued for the defendant that the principle in Re: Duomatic should not
be applied so as to save the "for life" provision in the plaintiffs' contracts, in particular because the
express provision in subsection (6) of s.319, when coupled with subsections (3) and (5), amounted
to peremptory language in respect of which there was no room for waiver or the application of the
Re: Duomatic principle. In answering the third question before him in the affirmative, the judge
stated as follows:

"In this case all the parties, or more accurately the only party affected by the questioned
transaction, that is to say Wheway Limited, did give its consent and indeed was instrumental in
negotiating and reaching the decision to enter the agreement itself. It clearly through Mr McGowan
had as much time (indeed far more time) to consider the terms of the agreement it was entering

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

into as is provided by subsection (5) of section 319, that it to say fifteen days and it is clear, not
surprisingly, that Mr McGowan was well aware of the terms of the agreement that he himself was
negotiating ...

It is not in dispute, indeed it cannot be, that he could simply have constituted himself a one man
general meeting on behalf of his principal, namely the company and approved the course to be
taken by signing a resolution on a piece of paper permitting himself to enter into the agreement in
fact, he did not. What he did was on the actual authority of Wheway Limited to enter into the
agreement and that, I think, brings me back to the facts of the case of Duomatic

I find that the facts deposed to by Mr McGowan demonstrate that what he did was tantamount to
the holding of a general meeting of the defendant at which Wheway Plc was present as the sole
shareholder and should take effect as such. I hold that the important distinction here is not
between the forcefulness or otherwise of the wording in the relevant statutory provisions. I
acknowledge of course the need to look carefully at the wording of the statutory provisions in order
to interpret them, but here and in this situation the proper approach is that submitted by Mr
Gourgey. That is, to ask first: was the act of the company in this case the act of the company in
entering into the contract, intra vires i.e. within the company's powers? And if so, was there a real
consent given by all those who would have been empowered to have given or withheld consent if
a formal general meeting had been convened?

The answer to both those questions, as I find, is yes. Therefore in my judgment the principle in
the Duomatic case is the one which should prevail in determining this summons."

THE CONTENTIONS OF THE PARTIES

Before this court Mr Stafford conceded that, if the provisions of s.319 were limited to the
procedural safeguards laid down in subsections (3) and (5), with no express statutory
consequence or 'sanction' attached, then the principle in Re: Duomatic would be available to
save a long term contract of the type in this case. However, he submitted that the express
provision in subsection (6) that a term incorporated in an agreement in contravention of s.319 is, to
the extent that it contravenes the section, void and that in lieu it must be deemed to contain a
provision for reasonable notice, puts the matter beyond the reach of the principle in Re:
Duomatic . He argued as follows:

1. The judge, having found non-compliance with s.319 in the strict sense, was wrong to have
regard to the Re:Duomatic principle at all. The wording of s.319 (3) and (5) as to the formalities
required are clear and the sanction provided in sub-section (6) is similarly clear; there is thus no
room for application of that principle so as to circumvent the sanction/statutory consequence
provided for.

2. That being so, there was no room for the 2-stage approach adopted by the judge, namely to

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

restrict the Re: Duomatic test to the formalities laid down by sub-section (3) and (5) so as to
emasculate s.319 by ignoring the sanction in sub-section (6)

3. In making this submission, Mr Stafford distinguished this case from the earlier authorities on the
basis that none of them concerned statutory provisions to which a specific sanction was attached.

Mr Gourgey, on the other hand, submitted that the approach of the judge was correct. The
substance of his submissions may be summarised as follows.

(1) It is plain that the provisions in s.319 as to the formalities required in respect of long term
contracts are concerned solely with the necessity for notice to and approval by, the shareholders
in general meeting and are provisions designed for the benefit and protection of the shareholders.
(see Re: Duomatic and Re: Oxted; c.f. Precision Dippings Limited -v- Precision Dippings
Marketing Limited [1986] 1 Ch 447 in which this court refused to treat a contravention of s.43(3)(c)
of the Companies Act 1980, a provision designed for the protection of creditors, as "a mere
procedural matter which can be waived or dispensed with by the members entitled to vote" under
the principle in Re: Duomatic - per Dillon LJ at 457A-C).

(2) The principle in Re: Duomatic applies where (as in this case) it is intra vires the company to
enter into a transaction with the consent of its shareholders given in general meeting and where
(as here) those shareholders have (without holding the meeting) all assented to the transaction in
advance or at the time of entering into it.

(3) The principle operates on the basis that the assent is tantamount to a resolution or, put
another way, that the shareholders have by their assent waived the need for compliance with
procedural requirements which are for their benefit. It is also an illustration of the principle of
company law that all the corporators of a company acting together may do anything which is intra
vires the company: see Cane -v- Jones MANU/UKCH/0022/1979 : [1981] 1 All ER 533 at 537c-
538a.

(4) Whichever way it is put, the question as to the form and the substance of the shareholders'
assent falls to be considered as at the time the agreement is entered into. That question is
whether, notwithstanding the failure strictly to comply with procedural requirements designed to
ensure the informed approval or agreement of the shareholders prior to the transaction, those
procedures should be treated as effectively complied with, on the basis that such informed
approval or agreement has demonstrably been given by other equivalent means.

(5) That being so and the Re: Duomatic principle being well established prior to the Companies
Act 1985 when the provisions contained in s.319 were first enacted, sub-section (6), when
referring to "contravention of the section" should not be read so as to oust the principle in Re:
Duomatic, which is appropriate for general application in respect of shareholder protection
procedures such as those provided for in sub-sections (3) and (5).

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

DISCUSSION

S.319 of the 1985 Act derives from s.47 and s.63(1) of the Companies Act 1980, a White Paper on
"The Conduct of Company Directors" (1977) Command 7037 having recommended that directors'
service contracts for longer than 5 years should be approved by the company in general meeting.
The purpose of s.319 is to ensure that a company should not be bound by an obligation to employ
a director for more than 5 years unless its members have considered and approved the relevant
term. Subsequent Committees have recommended the reduction of the term of 5 years to a lesser
term and that issue is currently the subject of consultation pursuant to the Joint Consultation Paper
(No 153) of the English and Scottish Law Commissions entitled "Company Directors: Regulating
Conflicts of Interests and Formulating a Scheme of Duties". Nonetheless, the provisions relevant
to this case remain simply those set out in s.319.

That deserves emphasis because the agreements in this case were made in 1988 i.e. prior to
certain amendments to the 1985 Act (now sections 381A, 381B and 381C) in respect of private
company resolutions which were introduced by the Companies Act 1989.

Those amendments have recently been the subject of consideration by Lindsay J in Re: RW Peak
(Kings Lynn) Limited [1998] I BCLC 193, which decision came to our attention only after final
submissions by counsel and upon which we invited further written submissions. In the light of
certain observations made in that case about the interrelationship of the Re: Duomatic principle
and the provisions for written resolutions introduced by sections 381A-C, I shall refer to those
provisions at this point, despite the fact that they are not directly relevant to this case.

S.381A provides:

"(1) Anything which in the case of a private company may be done -

(a) by resolution of the company in general meeting ..

may be done, without a meeting and without any previous notice being required, by resolution in
writing signed by or on behalf of all the members of the company who at the date of the resolution
would be entitled to attend and vote at such meeting.

..

(7) in relation to certain descriptions of resolution under this section the procedural requirements
of this Act have effect with the adaptations specified in Part II of .. [Schedule 15A] .. ."

Paragraph 7 of Schedule 15A provides in relation to section 319 that:

"In relation to a written resolution approving any such term as is mentioned in section 319(1)

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

(director's contract of employment for more than five years), section 319(5) (documents to be
available at company's registered office and at meeting) does not apply, but the documents
referred to in that provision must be supplied to each relevant member at or before the time at
which the resolution is supplied to him for signature."

S.381B provides that a copy of any relevant resolution proposed to be agreed to in accordance
with section 381A shall be sent to the company's auditors and that the written resolution shall not
have effect unless the auditors have notified the company that in their opinion the resolution either
does not concern them as auditors or does so concern them, but need not be considered by the
company in general meeting, or if the auditors fail to give any notice to such effect within 7 days.
[N.B. A new section 381B was substituted, effective as from 6 th June 1996, by the Deregulation
(Resolutions of Private Companies) Order 1996: S.I. 1996 No 1471, regulation 3]

S.381C provides that s.381A and s.381B shall have effect notwithstanding any provision of the
company's memorandum or articles and that:

"(2) Nothing in those sections affects any enactment or rule of law as to-

(a) things done otherwise than by passing a resolution, . or

(b) cases in which a resolution is treated as having been passed, or a person is precluded from
alleging that a resolution has not been duly passed."

It is thus clear from the terms of s.381C(2), as amended, that the more informal procedure for
written resolutions introduced in respect of private companies, as applied to a resolution approving
a director's long term contract of employment (see Schedule 15A, paragraph 7), is not intended to
affect the operation of the Re: Duomatic principle.

In considering the contentions of the parties in this case, it is pertinent first to observe that the
wording of section 319(6) is not felicitously drafted, in the sense that the reference to a term
incorporated in an agreement "in contravention of this section " plainly (or at any rate principally)
contemplates breach of the procedures laid down by sub-sections (3) and (5), whereas the later
words "to the extent that it contravenes the section " appear to be directed to the extent to which
the period of the contract provided for exceeds the five years specified in sub-section (1).
Assuming that reading to be correct, however, sub-section (6), is on the face of it, unequivocal that
"contravention" of the procedural provisions renders the term of employment void to the extent that
it exceeds 5 years.

In this connection it is also to be noted that sub-section (5) provides in mandatory terms that a
resolution approving a long term agreement "shall not be passed" unless a written memorandum
setting out the agreement is available for inspection for 15 days prior to the meeting, as well as at
the meeting itself. This appears to be the only occasion where the 1985 Act uses a phrase of

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

specific prohibition against the passing of a resolution unless a formality has been complied with,
as opposed to simply setting out the formalities required for the type of resolution in question.

In the Joint Law Commission Consultation Paper No 153, in the course of discussing the written
resolution procedure permitted by s.381A in respect of a s.319 agreement, the following
observation appears in note 251 on p.115:

"A company probably cannot approve the term by means of informal unanimous consent, even if
members see a subsection (5) memorandum before giving consent."

The reason for this observation is not stated; however, the note cites the decision in Re: RW Peak
to which I have already referred.

In that case, a written agreement was made between one of the only two shareholders and
directors of a private company for sale of his shares to the company, the agreement being signed
for and on behalf of the company by the other shareholder and director. When, much later, the
director who had signed for the company was killed in a car accident, the shareholder who had
sold his shares issued an originating notice of motion for an order pursuant to s.359 of the
Companies Act 1985 that the company's register of members be rectified by insertion of his name
as the holder of the shares. The grounds were that the agreement was void for failure to comply
with the provisions of Part V Chapter 7 of the 1985 Act (Purchase by a company of its own shares)
because the company was not authorised to purchase its own shares by its articles (as required
by s.162) and no special resolution had been proposed or passed authorising the sale contract
before it was entered into (as required by s.164(1) and (2)); nor had a copy of the contract been
available for inspection by the members for at least 15 days preceding any meeting at which the
resolution was passed as required by s.164(6)). The company argued, relying on Re: Duomatic
and Cane -v- Jones, that the formalities required by the Act did not have to be strictly complied
with because the shareholders had unanimously assented to the transaction. It also argued that
the court was concerned with a transaction which could have been executed lawfully if adequate
steps had been taken and that the provisions of s.162 and s.164 were exclusively for the benefit of
the members who thus could waive them.

In the course of his judgment, Lindsay J said at 201a-e:

"It is far from clear to me just how far formalities required by statute as apparent pre-conditions of
the efficacy of company arrangements can or cannot in general be brushed aside by reference to
Re: Duomatic as formalities overlooked by oversight and curable by assent. For example in Re:
Express Engineering Works Limited [1920] 1 Ch 466 at 471, a passage which Buckley J relied
upon in Re: Duomatic, Younger LJ had said:

'In my opinion the true view is that if you have all the shareholders present, then all the
requirements in connection with a meeting of the company are observed and every competent

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

resolution passed for which no further formality is required by statute becomes binding on the
company.' (My emphasis.)

I shall accordingly leave the subject of a more general view of the tensions between the
requirements stipulated by Parliament on the one hand and the Re: Duomatic principle on the
other to be decided in some case in which such a general view is necessary. It is not, I think,
necessary here, as there are, as I shall explain, particular provisions of the 1985 Act which, in my
judgment, suggest that on the facts of this particular case and in this particular area, namely the
detailed requirements of s.164, the Re: Duomatic principle, if applied would represent such an
anomaly that it ought not to be available to override a want of compliance with the statutory
provisions."

Lindsay J went on to hold that the Re: Duomatic principle could not operate to cure the failure to
comply with s.164(2) because (a) s.164(2) required the terms of the agreement to be approved by
a special resolution of shareholders before the agreement was entered into and it was not
sufficient for the purposes of compliance if such resolution was passed simultaneously with or
subsequent to the company entering into the agreement; (b) no special resolution was passed in
accordance with s.164(2); (c) the only evidence of assent to the transaction by the shareholders
was (at best) the signature of the agreement on behalf of the company and (d) there was no
evidence of approval in advance of the execution of the agreement. It is to be noted that he did not
place any separate weight upon the requirement as to advance availability of the contract
contained in s.164(6). He said at 203c-d:

"I cannot think that Parliament can be taken to have countenanced an application of the Re:
Duomatic principle such that a transaction, even less formal than a written resolution under
s.381A and which would have been ineffective as such, would become effective merely by reason
of the further assent of the remaining shareholder, Ronald, a person excluded by statute from
having his votes on the subject counted had there been a vote (s.164(5)) and whose signature of
approval was rendered unnecessary to any written resolution had there been one .. A transaction
otherwise ineffective, had s.381 been deployed in a corresponding way, would, were that so, have
become effective upon the decision of the very person whom the statute requires not to have a
voice in its favour. So anomalous would that be in the circumstances that, rather than my ruling on
the applicability of the Re: Duomatic principle more generally, I reject its applicability to cure this
particular transaction."

Lindsay J additionally founded his decision upon the policy considerations underlying Chapter VII
of the Act which he held extended further than the protection of the interests of the shareholders
and led him to conclude, at 205(d)-(f):

"In the circumstances it is not possible, in my view, to regard the provisions of ss 162 and 164
which ensure that time is afforded for a measured and informed consideration by members of the
wisdom or propriety of any proposed purchase, as merely procedural and for the benefit only of

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

current members. I notice that details of any such share purchases have to be delivered to the
Registrar of Companies for registration and that the contract for the purchase has to be kept at the
Registry Office for ten years from its completion and has to be open to inspection by members, a
term which in context, plainly includes persons whether or not they were members at the time of
the transaction (see 169(1), (4) and (5)).

Accordingly, even were I satisfied, which I am not, that the course here adopted is properly to be
taken to have represented a deliberate waiver by both members of the right to insist upon due
performance of the statutory requirements, I would, even so, be unable to regard that course as
including an effective dispensation of those statutory requirements."

It does not seem to me that the decision in Re: RW Peak itself affords support for the tentative
view stated by the Law Commission in Note 251 referred to above. The decision of Lindsay J
recognised that the Re: Duomatic principle operates so as effectively to treat a company as
having passed an appropriate resolution at the date and time at which all the shareholders assent
to the transaction. On the facts of Re: RW Peak, the Re: Duomatic principle would have had the
effect of treating the shareholders as having passed the requisite resolution at the precise moment
that the company entered into the agreement. This was insufficient for the purposes of s.164(2)
which requires the shareholders' approval in advance (c.f. the position in the instant case where
the evidence clearly showed that the sole shareholder of the company, namely Wheway, approved
the terms of the agreement before they were executed). The furthest that the decision in Re: RW
Peak goes is to hold that the Re: Duomatic principle cannot render effective what would have
been ineffective if the written resolution procedure had been followed. It did not suggest that the
Re: Duomatic principle might not render effective a transaction which would have been effective
if the written resolution had been followed and the judge expressly left open the question of the
extent to which the Re: Duomatic principle could be used to dispense with formalities other than
those relating to the passing of a resolution, such as the need for members to see a memorandum
in advance of or at the meeting.

I do not consider that the reasoning in Re: RW Peak applies to the requirements of s.319 or the
facts of the instant case. Approaching the matter as one of principle and free from any
jurisprudence arising as a result of provisions of the Companies Act introduced at a date later than
the Agreements in this case, I consider that the submissions of Mr Gourgey for the plaintiffs are to
be preferred.

In my view, as stated by Oliver J in Re: New Cedos Engineering Co Limited [1994] 1 BCLC 797 at
814:

". The ratio of Buckley J's decision is where that which has been done informally could but for an
oversight, have been done formally and was assented to by 100% of those who could have
participated in the formal act if one had been carried out, then it would be idle to insist upon
formality as a pre-condition to the validity of the act which all those competent to effect it had

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

agreed should be effected. But, as I see it, this necessarily rests upon the postulate that the
persons assenting were, in fact, competent to effect the act to which they have assented. There is
nothing whatever in the decision which justifies, much less compels, the conclusion that if they
were not competent to do it formally at a meeting, they could do it informally without a meeting."

While, as Lindsay J observed, the various authorities decided upon the Re: Duomatic principle
do not make clear just how far formalities required by statute as apparent pre-conditions for the
efficacy of the company arrangements can be ignored as formalities overlooked by oversight and
curable by assent, it seems to me appropriate to approach that question on the basis of a
consideration of the purpose and underlying rationale of the particular formality in question. Thus,
it was logical in the case of Re: RW Peak not to apply the Re: Duomatic principle when it would
have undermined the clear statutory purpose of s.164(2) and 164(5), as well as the broader policy
considerations of Chapter VII of the 1985 Act.

In this case it is plain that real consent was given by the sole shareholder of the company for an
act which was intra vires the company's powers. Further, it does not seem to me to be plain that
there is any statutory purpose underlying the provisions of s.319(3) and (5) beyond the benefit and
protection of the shareholders of the company (nor has Mr Stafford so argued). The underlying
intention appears to me no more nor less than to require unequivocal approval of the shareholders
(sub-section (3)) to a long term contract in respect of which there has been proper opportunity for
the shareholders to consider the terms of the agreement approved (sub-section (5)). The
requirement of sub-section (3), taken alone, is unarguably amenable to the principle in Re:
Duomatic . While sub-section (5) sets out the formality required as a pre-condition to the passing
of the resolution contemplated in sub-section (3) it seems to me no more than a "back up"
formality in the nature of a notice provision designed to ensure the opportunity for fully informed
consent by the shareholders. It is thus amenable to waiver by the class for whose protection it is
designed, in circumstances where it is clear that that there was in fact fully informed consent in
respect of an agreement known to the sole shareholder for longer than the fifteen-day period
provided for in sub-section (5).

I note the observation in Palmer's Company Law at paragraph 7.417 to the effect that:

"It may be unwise to rely on the [Re: Duomatic] principle for any resolution which is part of an
authorisation process under the Act or, perhaps, even for any special or elective resolution, since
those must be registered with the Registrar."

In relation to the caveat in respect of any resolution passed as an authorisation process under the
Act, a footnote cites by way of example s.95 (Disapplication of pre-emption rights),
s.155(Relaxation of s.151 for private companies in respect of financial assistance for acquisition of
its own shares), ss.164, 165, 167, 173 (i.e. Chapter VII Provisions), 319 and 337 (Funding of
director's expenditure on duty to company). While for purposes of exposition it may be convenient
to classify such diverse provisions under the rubric "authorisation process", that is not an exercise

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan

undertaken, or a description embodied, in the Act. Nor does it seem to me one obviously
appropriate for the purpose of determining whether to apply the principle in Re: Duomatic . In my
view each such provision requires to be examined on its merits against the criterion of underlying
purpose. As already stated, in relation to s.164 and the decision in Re: RW Peak, there may well
be good reasons for refusing to apply the Re: Duomatic doctrine to a particular provision when its
underlying purpose is examined and in this appeal I seek to express no view upon the applicability
of the doctrine in the case of any of the sections identified by Palmer save s.319. In the case of
s.319, however, the underlying purpose appears to me to be limited as I have described

So far as the particular wording of s.319 is concerned, no decisive emphasis or importance

attaches in my view to the use of the words "shall not be passed" in sub-section (5), in the sense
that the availability for inspection of the written memorandum is thereby rendered a procedural
requirement which cannot be regarded as open to waiver under the Re: Duomatic principle. It
seems to me that the particular form of words used is no more than an incident of the style of
drafting adopted, given that sub-section (4), which sets out the situation in which no approval by a
resolution in general meeting is required, is interposed so as to separate the formalities laid down
in sub-section (3) and sub-section (5), whereas the requirement in sub-section (5) could equally
well have been included in sub-section (3), framed simply as an additional "unless" requirement.

CONCLUSION

I consider that the judge was correct when he answered the third question before him in the
affirmative and I would dismiss this appeal.

LORD JUSTICE ALDOUS: I agree.

LORD JUSTICE KENNEDY: I also agree.

Crown Copyright

2020-09-17 Source: www.bdlex.com Md. Nazrul Islam Khan