Duomatic Principle In Company Law Applicable Even In Indian Context: Supreme Court

The Supreme Court observed that Duomatic Principle that 'strict adherence to a statutory requirement may be dispensed with if it is demonstrated otherwise on facts, if the same is consented by all members' is applicable even in the Indian context.

The bench comprising Justices Vineet Saran and JK Maheshwari clarified that the said principle is only applicable in those cases wherein bona fide transactions are involved and that 'Fraud' is a clear exception.

Relevant facts are as follows: On 20.3.2013, late Dr. Vijay Kumar Datla, Dr. Renuka Datla and one G.V Rao were Directors of the Company Biological E. Ltd. On 06.04.2013, G.V Rao submitted his resignation letter which was later withdrawn on 09.04.2013. The letter seeking withdrawal of his resignation, which was placed in the meeting of the Board on 09.04.2013. In the resolution passed therein, there is no protest by Dr. Renuka Datla regarding attendance of Mr. G.V. Rao. Dr. Renuka Datla also participated in the Board Meetings dated 22.08.2013 and 25.09.2013, without any protest for continuation of Mr. G.V. Rao as its Director.

Dr. Datla approached the Company Law Board complaining that the holding of board meetings was illegal as an attempt was made to increase the number of members in the Company only to ensure that she doesn't have sufficient shareholding to maintain a petition under Sections 397 and 398 of the Companies Act, 195. This petition was dismissed by the Board. The High Court of Judicature at Hyderabad for the State of Telangana and Andhra Pradesh allowed the Company appeal filed by Dr. Datla and issued various directions.

One of the issues raised in the appeal before the Apex Court was whether Duomatic Principle can be invoked to state that the issue of resignation of the Director had lapsed and Mr. G.V. Rao continued to carry on as the Director in view of the acquiescence by Dr. Renuka Datla?

The court noted that the Duomatic Principle as derived from the decision In Re: Duomatic Ltd. and can be briefly stated as "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."  It also noted  that, in Salmon v. Salmon Co. Ltd., [1897] AC 22, ("Salmon's case")  it was held that "a company is bound in a matter intra vires by the unanimous agreement of its members". It said:

"The aforesaid Principle emanating from Salmon' Case (supra) has found its utility across various aspects of company law such as Duomatic Principle, Doctrine of Indoor Management, etc. This Principle having its origin in common law, is applicable even in the Indian context. ... It is, in this context, we must note that application of Duomatic Principle is only applicable in those cases wherein bona fide transactions are involved. Fraud is a clear exception to application of these principles, be it Duomatic Principle or Doctrine of Indoor Management"

"The thrust of the Duomatic Principle is that strict adherence to a statutory requirement may be dispensed with if it is demonstrated otherwise on facts, if the same is consented by all members."

The court noted that, in this case, there is overwhelming evidence to show that Dr. Datla had accepted Mr. G.V. Rao back into the Board and her conduct clearly shows that the resignation dated 06.04.2013 was clearly not accepted. It was therefore held that G.V. Rao never seized to be a Director of the Company in view of the acquiescence by Dr. Datla and he had withdrawn his resignation prior to its acceptance.

The High Court has clearly fallen into error by not considering the aspect of application of Duomatic Principle, the bench held.

Case details

Mahima Datla vs Renuka Datla | 2022 LiveLaw (SC) 479 | CA 2776 OF 2022 | 6 April 2022

Coram: Justices Vineet Saran and J K Maheshwari 

Counsel: Sr. Adv Shyam Divan, Sr. Adv P.S. Raman, Sr. Adv Abhishek Manu Singhvi, for appellants, Adv K. Sarada Devi for respondents

Headnotes

Duomatic Principle- Duomatic Principle applicable even in the Indian context -  Strict adherence to a statutory requirement may be dispensed with if it is demonstrated otherwise on facts, if the same is consented by all members - Principle is only applicable in those cases wherein bona fide transactions are involved - Fraud is a clear exception. (Para 26-29)

Companies Act, 2013 ; Section 196, Schedule V - No person shall be eligible to be a whole­time Director of a Company after attaining the age of 70 years unless such appointment is approved by a special resolution of the Company. (Para 35)

Companies Act, 1956 ; Section 397 - An order could be made on application made under sub­section (1), if the Court is of the opinion that (i) the Company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members, and; (ii) the facts would justify the making of a winding up order on the ground that it was just and equitable that the Company should be wound up, and; (iii) the winding up order would unfairly prejudice the Petitioners - An application for relief can be brought by any member who complain that the 25 affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members. The intention of the legislature is that majority shareholders who oppress the minority shareholders and conduct the affairs of the company prejudicial to public interest may invoke the jurisdiction of CLB. (Para 39)

Companies Act, 1956 ; Section 10­F - Re­appraisal of entire evidence by the High Court is not permissible - Has to restrict its determination to the purported questions of law arising from the order of CLB. [Referred to V.S Krishnan v. Westfort Hi­tech Hospital Ltd. (2008) 3 SCC 363 ] (Para 24)

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