A managing director should not assume that he has more powers than his co-directors unless the company’s articles permit it and the board has specifically delegated certain authority to him.
In the recent High Court case of Smith v Butler, a managing director tried to suspend the chairman of the company. There was no board resolution. He considered that, as managing director, he had implied authority to do that. The court disagreed.
The facts in more detail
Mr Smith, the chairman and majority shareholder of the company, CH Limited (CH), was allegedly involved in cheque and credit card fraud against CH. At the beginning of a board meeting, Mr Butler, the managing director (MD) and minority shareholder, purported to suspend Smith as chairman, in his capacity as employee of the company. There was no board resolution authorising the MD to do that. In the MD’s employment contract with the company, there were no express provisions whereby any of the powers of the board were delegated to him.
Smith instituted proceedings against Butler and CH. He claimed that Butler had no authority, without a valid board resolution, to suspend him. Butler contended that he had implied authority as MD to do that.
Butler instructed lawyers to act on behalf of the company in defending Smith’s action, again without a board resolution authorising him.
The usual position under a company’s articles of association is that the directors are in general authorised to exercise all the powers of the company; and they may also delegate certain of their powers to an MD.
“Directors” here means the directors collectively; that is, the board of directors, making decisions at a duly convened board meeting or by written resolution, in accordance with the company’s articles. It does not refer to individual directors acting by themselves.
So, for an MD to have the power to do something, he must be given authority either by a board resolution or in his service contract with the company – that service contract should itself have been entered into by, and signed on behalf of, the company following an authorising board resolution.
The court’s decision
The court decided that Butler had no authority to suspend Smith: the board had not delegated the powers to him to do that, either by board resolution or in his service contract. The court pointed out that, in the absence of an express delegation of authority, an MD’s position is generally no different from that of any other director.
The court did concede that an MD may have implied authority to take some commercial decisions in the day-to-day running of the business, although it did not address the point directly. However, the court was clear that suspending a chairman could never be seen as a commercial decision. Therefore, it was for the board to suspend the chairman, not an individual director.
In addition, the court said that Butler’s decision to instruct lawyers to defend the case should also have been made by the board and not by an individual director. It stated that it is not within an MD’s sole remit to instruct lawyers and incur legal costs on behalf of the company.
Our thoughts on this case
This case provides a clear reminder that an MD should be wary of making major decisions without first obtaining board approval - especially decisions which are clearly not in the category of day-to-day, commercial decisions.
MDs should review the terms of their appointment and their service agreements before assuming that their job title imbues them with any authority over and above that of any other director.
This case is being appealed, so we may have more to say on this in due course.
Here’s a link to the High Court judgment of Smith v Butler and another  EWHC 2301 (Ch)