Smith v Butler [2012] EWCA Civ 314

Mr Butler, managing director owning 31.2% of shares, suspended Mr Smith, chairman owning 68.8%, without board authority over alleged expense fraud. The Court of Appeal held a managing director lacks implied authority to suspend the chairman, affirming the judge's order for a meeting with quorum of one to remove Mr Butler.

Facts

The appellant, Mr Butler, was managing director and minority shareholder (31.2%) of Contact Holdings Limited. The respondent, Mr Smith, was chairman and majority shareholder (68.8%). On 1 July 2011, Mr Butler purported to suspend Mr Smith as chairman and excluded him from company premises, acting without board authority, based on suspicions that Mr Smith had claimed approximately £78,000 in improper expenses over seven years.

Mr Smith issued proceedings seeking declarations that Mr Butler’s actions were outside his powers and an order under section 306 of the Companies Act 2006 to convene a meeting with a quorum of one to remove Mr Butler as director. HHJ Behrens granted Mr Smith’s applications and ordered Mr Butler to indemnify the Company for costs incurred in defending the proceedings.

Issues

Primary Issue

Whether Mr Butler’s implied powers as managing director extended to suspending the company chairman without board authority.

Consequential Issues

Whether the judge erred in ordering Mr Butler to indemnify the Company for its costs; whether the judge erred in ordering a meeting with a quorum of one under section 306.

Judgment

Lady Justice Arden, delivering the lead judgment, held that the managing director’s implied powers must be determined by interpreting the contract of appointment in light of all relevant background. She stated:

“In essence, 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.”

The Court held that a managing director’s implied powers are those ordinarily exercisable by someone in that position, relying on Lord Denning MR in Hely-Hutchinson v Brayhead:

“[T]he board of directors, on appointing a managing director, ‘thereby impliedly authorise him to do all such things as fall within the usual scope of that office.'”

Arden LJ concluded that suspending the executive chairman was clearly a matter for the board, not for the managing director acting alone:

“To my mind it is inconceivable that Mr Butler did not need the instructions of the board on the question of the suspension of the chairman of the board.”

On the costs issue, the Court held Mr Butler had no authority to cause the Company to defend proceedings and was liable to indemnify it. On section 306, the Court upheld the judge’s discretion, noting the statutory policy in section 168 that shareholders should be able to remove directors by ordinary resolution.

Implications

This case clarifies that a managing director’s implied authority does not extend to suspending the company chairman or taking major strategic decisions without board approval. Managing directors must work within board-set strategy and refer significant matters back to the board. The case also confirms that courts will readily make orders under section 306 to prevent minority shareholders frustrating the majority’s statutory right to remove directors under section 168.

Verdict: Appeal dismissed. The judge’s orders were upheld: Mr Butler lacked authority as managing director to suspend Mr Smith; Mr Butler was required to indemnify the Company for costs incurred; the order convening a meeting with a quorum of one to remove Mr Butler was confirmed.

Source: Smith v Butler [2012] EWCA Civ 314