Smith v Butler

The Court of Appeal held that a managing director’s implied authority is limited to those powers that would ordinarily be exercisable by a managing director in that position and that such implied authority does not extend to suspending the chairman or excluding him from company premises in the absence of an express delegation by the board. The judge’s conclusion that Mr Butler had no authority to suspend Mr Smith or to cause the Company to resist Mr Smith’s applications was upheld. Regulation 72 of Table A (Companies (Tables A to F) Regulations 1985) and the company’s articles were important in that they allow delegation but do not presume exclusion of board powers. The court also upheld the order that Mr Butler should indemnify the Company for costs incurred in resisting the applications and the order under section 306 of the Companies Act 2006 convening a general meeting with a quorum of one (for Mr Smith) on the grounds that it was impracticable to convene a meeting otherwise.

Background and parties: Philip John Smith was majority shareholder and executive chairman (68.8%); James Carl Butler was managing director and minority shareholder (31.2%). On 1 July 2011 Mr Butler suspended Mr Smith as chairman and excluded him from premises without a board resolution, relying on suspicions that Mr Smith had misused company funds. Mr Smith denied wrongdoing and sought relief.

Nature of the application: Mr Smith applied for a declaration that Mr Butler’s actions were outside his powers as managing director and for an order under section 306 of the Companies Act 2006 that the court convene a general meeting with a quorum of one to consider removal of Mr Butler. The Company and Mr Butler resisted.

Issues framed:

• The primary issue was whether the managing director had implied authority to suspend the chairman and to cause the Company to instruct solicitors and incur expenditure in resisting the applications.
• Consequential issues were whether Mr Butler should indemnify the Company for its costs and whether the judge erred in ordering a court-convened general meeting with a quorum of one under section 306.

Court’s reasoning: The court analysed the source and limits of implied authority, referring to regulation 72 of the 1985 Table A (adopted in the articles) which permits delegation by the board but does not imply exclusion of board powers. The test for implied actual authority was aligned with the ordinary scope of a managing director’s office and with ostensible authority principles (Freeman & Lockyer v Buckhurst Park). On the facts, suspension of the chairman and exclusion from premises were matters for the board, not for the managing director acting alone. The court rejected arguments that urgent action justified unilateral suspension, noting available statutory remedies (section 994 petition; Part 11 derivative action) and that the managing director had no authority to cause the Company to defend the proceedings. Consequently, the judge was entitled to order Mr Butler to indemnify the Company for costs incurred in resisting the applications on the basis that the Company’s name had been used without authority. The court also upheld the section 306 order convening a meeting with a quorum of one because the meeting was impracticable otherwise and the majority shareholder’s statutory right to remove directors (section 168) outweighed the minority’s ability to render meetings inquorate.

Procedural history: The appeal was from HHJ Behrens sitting in the Chancery Division, Leeds ([2011] EWHC 2301 (Ch)), to the Court of Appeal; the Court of Appeal dismissed the appeal.

This was an appeal. The Court of Appeal dismissed the appeal. The court held that Mr Butler, as managing director, had no implied authority to suspend the executive chairman or to exclude him from company premises without board delegation, and therefore had no authority to cause the Company to resist Mr Smith’s applications. The court upheld the judge’s order that Mr Butler indemnify the Company for its costs and upheld the exercise of discretion to convene a meeting under section 306 with a quorum of one for the majority shareholder to seek the removal of Mr Butler.

On appeal from the High Court of Justice (Chancery Division), Leeds District Registry, His Honour Judge Behrens: [2011] EWHC 2301 (Ch). Appeal heard in the Court of Appeal and reported as [2012] EWCA Civ 314.