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The Role of a Managing Director
The amount of power wielded by Managing Directors has been tested in a recent case, making it all the more important that directors put in place adequate legal agreements to deal with improper conduct on the part of both directors and shareholders.
In Smith v Butler & Anor  the Chairman (who was also the majority shareholder) sought a declaration that the Managing Director’s decision to suspend him as Chairman was invalid.
The Managing Director had purported to suspend the Chairman in his capacity as a director and to exclude him from the company’s premises, in order to conduct an investigation into the alleged fraudulent conduct of the Chairman, which he partly admitted.
The decision to do so was taken by the Managing Director alone. No board resolution had been passed authorising the suspension within the context of a quorate board meeting. It is significant that the company’s articles of association provided that for a board meeting to be quorate two directors needed to be present, one of whom was to be the Chairman.
The court held that the role and title of Managing Director does not in itself imbue a director with powers over and above any other director of the company, meaning the decision to suspend the Chairman had been unlawful. There was no evidence that the powers of the board had been delegated to the Managing Director, given that such a decision was not a commercial decision, or something that was in the ordinary day to day running of the business.
The powers of the Managing Director depended on the company’s articles of association, which contained provisions designed to protect the Chairman’s position as a director. This showed a clear intention which could not be negated by any implied delegated authority to the Managing Director. It was for the board - not the Managing Director - to suspend the Chairman, and no valid board resolution had been passed.
Whilst this case relates to unusual decisions in the context of running a business, it is a clear reminder as to the limits on the powers of individual directors who are not acting with the authority of the Board. It demonstrates that clear and precise parameters need to be put in place (via a shareholder agreement, the articles and directors’ service contracts) to define whether, and to what extent, any powers of the Board are delegated to individual directors and to regulate the extent of decision making powers.
In the absence of specific authority, the running of the company is for the Board. Individual directors should not assume that they automatically have the authority to make decisions which are not of a commercial nature, alone.
For more information or to find out how we can help, contact Head of Corporate, Keith Melling on 01772 904318 or Keith.Melling@napthens.co.uk. Alternatively, visit the Corporate Law page, or make an enquiry.