Directors: Powers of Managing Directors

The amount of power wielded by Managing Directors has been tested in a recent case. In Smith v Butler & Anor [2011] EWHC 2301 (Ch), the Chairman, the majority shareholder, sought a declaration that the Managing Director’s decision to suspend him as Chairman was invalid.

The Chairman also sought for the court to make a section 306 Companies Act 2006 order to force a general meeting to take place with a quorum of one in order to remove the Managing Director. Section 306 Companies Act 2006 grants power to the court to order a meeting if it is impracticable to call a meeting or to hold a meeting in accordance with the Articles of Association. The court can give directions as to how the meeting shall be called, held or conducted, and can direct that one member present at the meeting can be deemed to constitute a quorum.

In this case, the Articles of Association for the company provided that no business could be transacted at a meeting of members or directors, unless a quorum was present. In the Articles a quorum was defined as two persons, one of whom must be the Chairman. Therefore, if the Chairman was not present, no valid meeting of the Directors or members could occur.

Relationships within the company became strained when it appeared the Chairman had been committing fraud with the company’s money. The respondent, the Managing Director, attempted to suspend the Chairman and to exclude him from the company’s premises. No board resolution authorising this suspension was passed. Following the suspension, the respondent conducted the business of the company and made decisions on behalf of the company, without reference to the Chairman.

The Chairman’s legal representative requested an extraordinary general meeting to take place to remove the respondent as director of the company. The respondent refused and therefore, no quorum could be present to validly pass the resolution to do this. Proceedings were then brought by the Chairman and a section 306 Companies Act 2006 order was sought to force a meeting with a quorum of one to be held.

Decision

The court held that the decision to suspend the Chairman had been unlawful. The Articles of Association were designed to protect the majority shareholder so no resolutions could be passed to dismiss him as Chairman. It was for the board and not the Managing Director to suspend the Chairman, and no valid board resolution had been passed. The Managing Director did not have the implied authority to suspend the Chairman.

The section 306 order was also granted and the Chairman was therefore authorised to hold a quorum of one to remove the respondent and appoint a new director. The court held the Chairman was entitled to exercise his normal voting rights as majority shareholder and that his will was being thwarted by the refusal of the respondent to not attend meetings to create a quorum. The fact that claims had been made in relation to the alleged fraud did not prevent the Chairman from exercising his rights.

Conclusion

Few decisions on the implied powers of Managing Directors have been made; therefore, it has been unclear as to the extent of their power. In this case, the respondent has been granted leave to appeal to the Court of Appeal, and this should be heard early 2012. This case may therefore hold importance in shedding more light in this area of law.