Tonstate Group Ltd v Wojakovski

The court struck out parts of the first defendant's defence which relied on the Duomatic principle to ratify payments made by companies in the Tonstate Group to companies associated with the first defendant. The principal legal rule applied was that the Duomatic principle cannot be used to validate conduct which the company itself could not lawfully have undertaken, including payments procured to evade tax. The court accepted that Duomatic is subject to other recognised limitations (for example where a company is or is likely to become insolvent) but followed Auden McKenzie (Pharma Division) Ltd v Patel in holding that assent of all members cannot legalise transactions the company could not lawfully perform. The defendant's public policy argument was rejected and his submission that the sums might have been paid lawfully by other means was held to be irrelevant to the availability of Duomatic ratification. As a result the pleaded Duomatic defence was struck out.

The claimants are companies in the Tonstate Group and an individual shareholder who alleged that the first defendant, a former director, caused approximately 13.5 million to be paid to companies controlled by or associated with him (the "EW Extractions") in breach of fiduciary duty. The first defendant accepted that, absent Duomatic approval, those payments would be breaches of duty and contended that they were approved by all members such that the Duomatic principle operated to ratify them. There was also pleaded mirror litigation by the first defendant under section 994 of the Companies Act 2006.

The claimants applied at a case management conference for strike out of parts of the defendant's defence which relied on the Duomatic principle. The court framed the key issues as whether recognised limitations to the Duomatic principle applied: (i) insolvency (the court noted BTI 2014 LLC v Sequana S.A.), (ii) transactions ultra vires or for an improper purpose, and (iii) whether Duomatic can be invoked to ratify conduct which the company could not lawfully have carried out itself, in particular where payments were procured to disguise profits and evade taxation.

The judge reviewed authority including Madoff Securities International Ltd v Raven, Auden McKenzie (Pharma Division) Ltd v Patel, and historic authorities such as Re Duomatic Ltd. The court accepted that various limitations exist but concluded it was unnecessary to define precisely the scope of a dishonesty-based exception because, following Auden McKenzie, the Duomatic principle plainly cannot validate conduct which the company itself could not lawfully carry out. The first defendant's submission that the limitation depended on public policy or that equivalent lawful payments could have been made was rejected: the limitation is a matter of law and alternative lawful procedures would have been materially different. The claimants also sought equitable restitution including an account of profits and compensation; the court noted that the sums claimed would not be reduced simply because different lawful distributions might in theory have been possible.

Accordingly the court allowed the strike-out application and struck out the relevant paragraphs of the defence that relied on Duomatic ratification.

This first instance application to strike out was allowed. The court struck out the pleaded Duomatic defence because the Duomatic principle cannot ratify conduct that the company itself could not lawfully undertake (in this case payments procured to disguise profits and evade tax). Other submissions (including a public policy argument and the contention that equivalent lawful distributions could have been made) were rejected as irrelevant to that legal limitation.