Tonstate Group Ltd & Ors v Wojakovski & Ors

The Duomatic principle cannot ratify conduct which the company itself could not lawfully undertake. This limitation applies as a matter of law and does not depend on a discretionary public-policy assessment. It is irrelevant that the company could have made different, lawful payments to the same recipient. The court must examine the transaction actually undertaken, including its purpose and method. Where unlawful payments are made in breach of fiduciary duty, the possibility of a lawful alternative does not eliminate the company’s loss or provide a defence to an account of the sums paid away.

The claimants brought proceedings against Edward Wojakovski and others concerning approximately £13.5 million allegedly extracted from companies in the Tonstate Group in breach of fiduciary duty. Mr Wojakovski accepted that the payments lacked a legitimate business purpose and were made for the unlawful purpose of defrauding the revenue, but relied on the agreement of all shareholders and the Duomatic principle.

The claimants applied to strike out that part of his defence. The central issue was whether unanimous informal shareholder approval could ratify payments which the company could not lawfully make itself.

1. The application was allowed and the relevant parts of the defence were struck out.

2. The court accepted that the Duomatic principle has limits. It does not apply to a transaction which the company itself could not lawfully undertake. The court followed Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWHC 1257 (Comm), where the same conclusion was reached in relation to dishonest payments falsely described as research and development expenditure and made to evade tax.

3. The limitation operates as a matter of law. It is not dependent on a discretionary public-policy assessment. The fact that a director might later have been able to put matters right with the revenue did not affect the issue.

4. The court rejected the argument that the payments fell outside the limitation because equivalent sums could have been paid lawfully as remuneration or by a lawful distribution of capital. The payments actually made were materially different transactions requiring different procedures. A lawful alternative therefore could not ratify the unlawful transaction.

5. The possibility that some payments could lawfully have been made also did not reduce the relevant loss for the purposes advanced. If the unlawful payments had not been made, the company would still have retained the money. The claim for an account of the sums paid away was consequently unaffected.