The Powers of a Managing Director

19 June 2012

What, exactly, is the role of a managing director? The Companies Act 2006 has nothing to say on the matter, and a recent decision of the Court of Appeal has highlighted the fact that case-law does not provide a satisfactory answer. In the circumstances, companies should consider expressly defining the scope of their managing director's powers.

Introduction

Day-to-day responsibility for an SME's affairs will often reside with the company's managing director. Ideally, that individual's appointment will have been accompanied by an express delegation of powers, but if it was not, the question arises as to whether he has any implied powers.

There is little case-law on point, but the recent decision of the Court of Appeal in Smith v Butler [2012] EWCA Civ 314 has highlighted the fact that the extent of a managing director's implied powers will depend upon the circumstances of the case. Given the inherent uncertainty which results from this approach, the lesson to be drawn from the decision is that boards should give serious thought to delegating powers to the managing director expressly.

Background

The Companies Act 2006 leaves the division of powers amongst directors to the discretion of individual companies. In practice, the articles of association will normally permit the board to delegate powers to executive directors. Table A under the Companies Act 1985 contained provisions for the appointment of a managing director (regulation 84) and the delegation of the board's powers to him (regulation 72), whilst the model articles under the Companies Act 2006 adopt a slightly different approach, not referring explicitly to a managing director but allowing the board to delegate its powers to any person (Article 5).

Some boards will appoint a managing director by passing a formal resolution which also specifies the powers which they are delegating to him. What is the position, though, in the absence of an express delegation? Historically, there was some confusion about the answer to this question. On one view, the appointment of a managing director was not thought, in itself, to carry with it any implied powers (Mitchell & Hobbs (UK) Ltd v Mill [1996] 2 BCLC 102). On another view, the appointment constituted an implied power to do anything that falls ‘within the usual scope of that office' (Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, per Lord Denning MR). The second view probably reflects more accurately directors' intentions when they appoint one of their numbers to the office of managing director, and the decision in Smith v Butler has confirmed that this view is to be preferred.

Smith v Butler

In Smith v Butler, the managing director of a private company purported to suspend the company's chairman and exclude him from the company's premises. The managing director's service contract was silent as to the delegation of any powers, and his actions against the chairman were taken without the authority of a formal board resolution. The question for the Court of Appeal was whether he had implied authority to act as he did.

Arden LJ accepted the proposition ‘that, in principle, the implied powers of a managing director are those that would ordinarily be exercisable by a managing director in his position', but added, crucially, that this is subject to the articles and any express agreement between the parties. As she put it, ‘the issue is one of interpreting the contract of appointment or employment in the light of all the relevant background, and asking what that contract would reasonably be understood to have meant'.

As to the implied powers of the managing director in the case at hand, she concluded that whilst, on the facts, there was an intention to delegate some powers to him, the power to suspend the chairman was not amongst them. (Although she also commented that a managing director's implied powers will often include a power to bring proceedings on behalf of the company as long as the board does not oppose that course of action, Rimer LJ, who delivered a brief judgment concurring with her decision, declined to express a general view on this point.)

The current position

The position on a managing director's implied powers in light of Smith v Butler may be summarised as follows:

  • subject to the articles and any agreement between the parties, a managing director has those powers which a managing director in his position would normally possess;
  • those powers will normally include the power to enter into contracts in the ordinary course of the company's business (see Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480), and may include the power to bring proceedings of which the board approves.

It is difficult to draw from Smith v Butler any general conclusions about a managing director's implied power to suspend the company's chairman. The most one can say, perhaps, is that we now have a decision in which, on the facts, a managing director of a private company was found not to have that power.

Comment

The decision in Smith v Butler confirms that a managing director will normally have some implied powers simply by virtue of his appointment to that office, but since the scope of his powers will depend on the facts of the case there will often be considerable uncertainty as to precisely what he can and cannot do. The obvious solution is for powers to be delegated expressly, whether through a board resolution, a service contract or the articles themselves. Even a broad provision to the effect that the managing director has the power to manage the company's affairs on a day-to-day basis is better than nothing, but the more specific the delegation, the clearer the managing director's position will be.

Many SMEs operate with a degree of informality, and it may not occur to some boards that the managing director should be formally appointed, let alone that powers should be delegated to him expressly. However, the fact that an express delegation would reduce the risk of any dispute arising in relation to his powers should act as a powerful incentive to companies to give this matter their full attention.