Smith v Butler

A managing director has implied actual authority to perform functions within the usual scope of that office. The precise authority is determined by interpreting the contract of appointment in its factual context. It remains subject to the company’s articles and any express agreement.

The appointment does not supplant the board. A managing director must refer matters outside an established board strategy to the board. Accordingly, the managing director cannot act alone to suspend an executive chairman whose appointment forms part of that strategy.

A member’s threatened refusal to attend a general meeting may make the meeting impracticable under section 306 of the Companies Act 2006. The court may direct a quorum of one where this is necessary to prevent the minority from frustrating the majority’s statutory power to remove a director.

The appellant was the managing director and minority shareholder of a private company. The respondent was its executive chairman and majority shareholder. Suspecting misuse of company funds, the managing director purported to suspend the chairman without a board resolution and caused the company to resist the chairman’s resulting proceedings.

The High Court granted declarations and injunctions against the managing director, ordered him to indemnify the company for its costs, and directed under section 306 of the Companies Act 2006 that a general meeting to consider his removal could proceed with a quorum of one: [2011] EWHC 2301 (Ch).

The appeal concerned the managing director’s implied actual authority, his liability for the company’s unauthorised litigation costs, and the validity of the order permitting a one-member quorum.

1. Appeal dismissed. The managing director had no implied authority to suspend the executive chairman, to exclude him from the company’s premises, or to cause the company actively to resist the chairman’s proceedings. The costs indemnity and the order convening a general meeting with a quorum of one were upheld.

2. A managing director’s implied powers comprise those ordinarily exercisable by a person holding that office. Another formulation is that the managing director may perform functions for which specific board directions are unnecessary. This is a default position, subject to the company’s articles and any express agreement. The contract of appointment or employment must be interpreted in its factual context: Hely-Hutchinson v Brayhead [1968] 1 QB 549 and Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1485 applied.

   Regulation 72 of the Companies (Tables A to F) Regulations 1985 permitted the board to delegate its powers to a managing director. Although no specific powers had been expressly delegated, the appointment necessarily carried some implied authority. It did not ordinarily exclude the board’s own powers.

3. A managing director does not supplant the board and must operate within the strategy established by it. The board’s strategy was that the respondent should serve as executive chairman. His suspension was therefore a matter for the board. The chairman’s special quorum rights under the articles reinforced, but were not essential to, that conclusion.

4. Mitchell & Hobbs (UK) v Mill [1996] 2 BCLC 102 went too far insofar as it treated the absence of an express delegation as meaning that a managing director had no greater authority than any other director. A managing director has powers by implication from the office. Those powers may often include commencing proceedings, although the board’s decisions and probable response remain relevant. Rimer LJ expressly reserved his position on that wider, non-dispositive question.

5. The managing director lacked authority to instruct the company to resist the proceedings. Under section 51 of the Senior Courts Act 1981, the judge had a wide costs discretion. The established practice concerning proceedings conducted in a company’s name without authority also required the managing director to indemnify the company on the indemnity basis. Section 1157 of the Companies Act 2006 provided no defence.

6. The threatened refusal of the minority shareholder to attend made it impracticable to hold a quorate general meeting, satisfying section 306 of the Companies Act 2006. Directing a quorum of one was a proper exercise of discretion. The policy reflected in section 168, which enables shareholders to remove a director by ordinary resolution, outweighed the minority shareholder’s ability to paralyse meetings by staying away.

1. Court of Appeal (Civil Division): The appeal was dismissed. The costs indemnity and the direction permitting a general meeting with a quorum of one were upheld: [2012] EWCA Civ 314.

2. High Court of Justice, Chancery Division: HHJ Behrens declared that the managing director lacked authority, restrained interference with the chairman’s employment, ordered the managing director to indemnify the company for its costs, and convened a general meeting with a quorum of one: [2011] EWHC 2301 (Ch).