Thursday, April 12, 2012

The Implied Authority of a Managing Director


Does a managing director have implied authority to suspend the Chairman of the board of directors? This is a question the Court of Appeal considered in its recent judgment in James Butler v John Smith. The leading judgment was given by Arden LJ. The case is significant because it dealt not with the ostensible authority of an MD in relation to a third party (on which there is a plethora of authority), but with his actual (implied) authority.
Mr James was the MD and Mr Smith the Chairman of Contact Holdings Ltd, holding, respectively, 31.2 % and 68.8 % of its issued shares. They were therefore its only shareholders and any meeting in the absence of either one of them would have been inquorate. On 1 July 2011, Mr James, without a prior board resolution authorising him to do so, informed Mr Smith that he was suspended with immediate effect and denied him entry into the company’s premises. Mr James said that he did this because he discovered that Mr Smith had diverted the company’s funds to pay his own credit card expenses and had committed financial fraud in other ways. His explanation for his failure to seek a board resolution was that this would have allowed Mr Smith to intimidate employees and destroy or tamper with evidence before the resolution could be effectively implemented. As Arden LJ notes in her judgment, however, protecting the company was not the only reason for Mr James’ intervention – Mr Smith had in the past threatened to appoint a CEO over Mr James’ protests that this would constitute constructive dismissal and the two had disagreed on other important issues. Mr Smith then issued a notice demanding an extraordinary general meeting to consider the removal of Mr James, but Mr James intimated that he would not attend this meeting, thereby rendering it inquorate.
Mr Smith then brought an action for a declaration that his removal as Chairman was beyond Mr James’ powers as MD, and for an order under section 306 of the Companies Act, 2006, convening a general meeting with only one member (Mr Smith himself), to consider the removal of Mr James as MD. The Company and Mr James resisted these applications but the order was made at first instance.
In the Court of Appeal, it was argued for Mr Smith that an MD does not possess the power to suspend a Chairman, in the absence of a special provision in the articles of association authorising him to take this step, or a specific delegation of power from the board of directors. For this proposition, reliance was placed on a first instance decision, Mitchell & Hobbs v Mill [1966] 2 BCLC 102, where Mr Machin QC had held that an individual director, as a general rule, lacks the power to commence proceedings in the name of the company. For Mr James, it was submitted that this case in fact supported him, because the judge was said to have also held that a director who is in breach of duty cannot set up lack of authority as a defence in proceedings to remedy that defect.
In her judgment, Arden LJ explains that the starting point of the analysis must be the articles of association of the company and the contract of employment between the company and the MD. This is because the MD is a director but also an employee of the company. In this case, nothing in the contract shed light on his power to suspend the Chairman, and the company had adopted Table A as its articles of association. Regulation 72 of Table A provided that the board could appoint a managing director and delegate to him such powers as it deems fit, and deprive itself of those powers. Since no specific delegation had been made, it was necessary to determine what powers it was intended the MD should have. Arden LJ held that the default rule is that an MD’s “powers extend to carrying out those functions on which he did not need to obtain the specific directions of the board.” The obvious question is what those functions are. Arden LJ’s answer is that this depends on applying to the contract of employment (and presumably to the articles of association) the process of interpretation that Lord Hoffmann explained in AG Belize v Belize Telecom to ascertain what powers a reasonable man would have understood the MD to have been given by the board.
Applying this test, Arden LJ said this:
On this basis, as might be expected, the test of what is within the implied actual authority of a managing director coincides with the test of what is within the ostensible authority of a managing director: see Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 176.
This accords with the view expressed in the masterly work on the law of agency, Bowstead and Reynolds, where the editors explain that “actual authority” consists not only of authority conferred expressly on the agent (such as through a power of attorney) but also of: (a) incidental authority (which consists of those acts which are necessary to execute express authority); (b) usual authority (which is the authority an agent in such a position normally has) and (c) customary authority (which is the authority that is found in the general business practices of the particular segment). Readers will notice that “ostensible authority”, as the editors point out, will normally coincide with usual (and therefore implied actual) authority. This may seem somewhat anomalous at first sight since ostensible authority is premised on a lack of actual authority, but the explanation simply is that implied actual authority is relevant as between the agent and the principal, whereas ostensible authority is relevant as between the principal and the third party (thus a private instruction to an agent limiting his authority affects implied actual, but not ostensible authority, constructive notice apart). Of course, it should be noted that there is controversy over whether the classification of usual authority as a part of implied actual authority is correct, or whether it is more appropriate to consider it a species of apparent authority, or perhaps a distinct head of authority altogether.
This led Arden LJ to the conclusion that it could never have been intended by the board of directors that the MD have the power to suspend its chairman without its prior authorisation. But the importance of the analysis is that, contrary to the view expressed in Mitchell & Hobbs v Mill, an MD does have implied authority, including the authority to commence proceedings in the name of the company.* It is simply that this implied authority does not extend to suspending the chairman.
The Court of Appeal also affirmed the order made under section 306 ordering a meeting with a single member, since Mr James’ actions had clearly made it “impracticable” to order a meeting on the ordinary terms. In addition, the judge had ordered Mr James to pay the costs incurred by the company in resisting Mr Smith’s actions, and Arden LJ affirmed this on the principle that one who litigates in the name of the company without authority is liable to pay its costs.
* Readers may wish to note that Rimer LJ, although concurring with Arden LJ on the result, preferred to reserve his opinion on the implied authority of the MD to commence proceedings. But Mr Justice Ryder concurred with Arden LJ in the entirety of her judgment and that therefore is the judgment of the Court.


2 comments:

vswami said...

The write-up impels one to embark on a detailed study of the cited case, so also other court cases dealing with similar issues. The points of debate, the issues raised and the ruling of the court (s) raise more than one interesting, rather intriguing and disturbing doubts requiring an in-depth examination.

May be, for a better understanding and appreciation of the particular episode, the following are some of the crucial clinching aspects to be kept in view, serving as a useful backdrop:
A. The respective role, responsibilities, and powers vested in the two warring personnel, namely, a MD and Chairperson of a company.
B. The legal relationship of the two vis a vis the connected corporate; for instance, MD, in a manner of speaking, represents the board of directors, who in turn are the 'trustees' of the corporate, one believes (open to correction) Chairperson is not so; in any case, in an identical way.
C. The impact of their role and the consequences to the overriding consideration of the 'stake-holders' rights and interests, as a community, the protection and preservation whereof is the sole responsibility exclusively vested in the MD, in his representative capacity; not in Chairperson.

It is now thrown open to the 'Experts' in the field to carry on a truly searching debate, with a view to reaching a , in comparison, better conclusion in a profoundly wholesome manner.

For doing so, one would suggest that, the concepts of 'power' and 'inherent' require to be the deciding criteria; in place of the two other concepts- 'authority' and 'implied' as spoken of , which, in comparison, are seemingly inappropriate or inapplicable.

vswami said...

@vswami

For knowing more on the subject, it is recommended, one may read, besides a host of others in public domain, the comprehensively illuminating article @
http://www.legalserviceindia.com/article/l341-Duties-&-Liabilities-of-Officers-of-a-Company.html

Any discussion, such as herein (turning on the peculiar facts of the cited English case, of a closely held company, that too with Chairman himself having a substantial holding), with reference to foreign case law, will not serve a useful purpose, other than simply an academic one, or be of any helpful guidance, unless it is done based on / having special regard to the scheme of connected provisions of company law in force in the other country (ies); in particular, those, in comparison, are at variance with Indian law.