IP Briefing: Decision of the Court of Appeal in the case of Re BW Estates Limited

The Factual Background

BW Estates Ltd entered Administration in September 2013, following an out of court appointment by the sole director of the company, David Williams (DW). 75% of the company’s shares were held by DW on trust for his father Robert Williams (RW), with the remaining 25% being held by Belvadere Investment Company Ltd (a dissolved company), with RW thought to be the beneficial owner. It was not disputed that RW had informally agreed to the administrators’ appointment, however the company’s articles provided that a quorum for a board meeting was two directors.

The validity of the administrators’ appointment was challenged on the basis that the decision to appoint was made at an inquorate board meeting. The administrators argued that their appointment was valid under the Duomatic principle. (This is a concept which derives from a case of the same name and effectively allows shareholders to make a unanimous informal decision which is binding in the same way as a general resolution of the company would be.)

The Decision of the High Court

The High Court held that the appointment of the administrators was valid in accordance with the Duomatic principle. They found that Belvadere’s 25% shareholding could be disregarded because the company was dissolved (but that in any event, RW, as beneficial owner of Belvadere’s shareholding, had consented to the appointment of the administrators). The court held that the Duomatic principle’s requirement of unanimous shareholder consent was met because DW and RW (as holder and beneficial owner, respectively, of the remaining 75% shareholding) had assented to the decision to appoint administrators. The court further determined that the actings of DW and RW in sanctioning DW’s exercise of all directors’ powers since 2009, meant that the articles had been varied and the quorum for a board meeting was no longer two. The approach taken by the High Court was flexible in nature which appears to have stemmed, at least in part, from the judge’s view that the action was an abuse of process (having been brought subsequent to a challenge to the Administrators’ remuneration). The creditors appealed to the Court of Appeal.

The Decision

The Court of Appeal overturned the decision of the High Court, adopting a significantly narrower approach and disagreeing with the High Court on a number of key points. Firstly, the Court of Appeal found that BW had never become a single member company because even if a company owning shares is dissolved or subject to an insolvency procedure, it remains a registered member. Clearly Belvadere was incapable of consenting as a result of its dissolution, however it was held that in order for the Duomatic principle to apply, all registered shareholders must consent not simply those that are available to do so. This is a strict interpretation of the legislation which could cause practical problems in that dissolved companies would presumably require to be restored to the register in order to have their shares transferred.

The Court of Appeal further noted that the fact that RW may have been the beneficial owner of the Belvadere shares was irrelevant because the property of the company would have passed to the crown as bona vacantia (and the crown had not consented to the appointment). Unfortunately, the court declined to offer a view on whether the assent of a beneficial owner is generally sufficient to invoke the Duomatic principle. The court also found that the articles of association could not have been informally varied without agreement of Belvadere. As a result of these findings, the court found that the administrators had not been validly appointed to the company. For completeness, it should be noted that a further argument advanced by the administrators that the provisions of Sch. B1 to the Insolvency Act 1986 overrode the quorum requirement in the articles, was rejected by the Court of Appeal.

Advice for Insolvency Practitioners

This is a very important case for IPs to bear in mind. Not only does it provide appellate authority on the extent of the Duomatic principle and the importance of dealing with any shares held by an insolvent company prior to dissolution, but it highlights important duties placed upon administrators. This case makes it clear that administrators should, either before or immediately after their appointment, check the articles of association of the company to which they are appointed (and the board resolution appointing them) with a view to ensuring that their appointment is in fact valid.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk) or Sheana Campbell (smc@bbmsolicitors.co.uk). This briefing note is current as at 24 October 2017 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).