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Company Law

Analysis - guidance - compliance

11 APR 2013

'Implied powers of a managing director

Given how common it is for companies to operate with a managing director, and given that the powers attached to that office are not defined in statute, it might be thought that the courts will have considered the question of a managing director's powers on numerous occasions over the years.  In fact, there is surprisingly little case law on point.

A recent decision has, however, added to our understanding of this area.  In Smith v Butler [2012] EWCA Civ 314, the Court of Appeal held that the managing director of a private company did not have an implied power to suspend the chairman and exclude him from the company's premises.  Arden LJ's leading judgment brings some clarity to the wider powers of a managing director, but it also emphasises the fact that the extent of a particular managing director's implied powers will depend upon the facts of the case.  Indeed, the main lesson to be drawn from the case is that boards should give careful thought to the specific powers which they wish to delegate, and should ensure that they document any such delegation properly.


Just as the Companies Act 2006 is silent on the matter of the underlying division of powers between shareholders and directors, so it leaves the division of powers amongst directors to the discretion of individual companies.  In practice, the articles of association will normally permit the delegation of 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 providing for directors to undertake services for the company (article 19 of the model articles for private companies and article 23 of the model articles for public companies) and allowing the board to delegate its powers to any person (article 5 of the model articles for private and public companies).

Listed companies will certainly give the question of delegation proper consideration, not least because the UK Corporate Governance Code (September 2012) requires them to prepare a schedule of matters which are reserved for the board's decision (Code Provision A.1.1).

Private companies are, unfortunately, less likely to give this matter their full attention.  Two of the most important decisions in this area - Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 and Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 - concerned individuals who were never formally appointed to the office of managing director, and even where a managing director is properly appointed the appointment may not be accompanied by any express delegation of powers.  In such cases, the question arises as to what powers, if any, have been impliedly delegated.

On one view, the appointment of a managing director does not, in itself, carry with it any implied powers at all (Mitchell & Hobbs (UK) Ltd v Mill [1996] 2 BCLC 102).  On another view, the appointment constitutes an implied power to do anything that falls "within the usual scope of that office" (Hely-Hutchinson, per Lord Denning MR).  Whilst the first view is not unattractive, for it can certainly be argued that it is not for the courts to imply powers where the board has declined to make an express delegation, the second view probably reflects more accurately directors' intentions when they appoint one of their number to the office of managing director.  Whatever the rights and wrongs of the argument, the decision in Smith v Butler has confirmed that the second view is to be preferred.

Smith v Butler

The relevant facts of Smith v Butler were as follows:

  • Smith and Butler were the only shareholders of Contact Holdings Ltd, with 68.8% and 31.2% stakes respectively
  • under Contact's articles, Smith was entitled to be a director as long as he remained a shareholder, and his presence was required in order to render a board meeting or general meeting quorate
  • Contact's board consisted of three directors: Smith (chairman), Butler (managing director) and Harris (finance director)
  • Butler's service contract was silent as to the delegation of any powers
  • acting without the authority of a formal board resolution, but having received the prior approval of Harris, Butler purported to suspend Smith from his office as chairman and to exclude him from Contact's premises
  • the question for the Court of Appeal was whether Butler 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".

On the specific question of Butler's implied powers, 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.    (It must be said that it is not immediately apparent from the judgment from what facts exactly Arden LJ discerned the intention not to delegate that particular power.  It might be thought that the quorum provisions in the articles were decisive, since they effectively gave Smith a veto over any board resolution to suspend him, but she stated expressly that they did not form the basis for her decision but merely reinforced it.)

In the course of her discussion of Mitchell & Hobbs and the more recent decision in Fusion Interactive Communication Solutions Ltd v Venture Investment Placement Ltd [2005] EWHC 736 (Ch), Arden LJ 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.  This is an interesting analysis, but it is worth noting that Rimer LJ, who delivered a brief judgment concurring with Arden LJ's decision, made a point of declining to express a general view on the question of any implied power to bring proceedings.

The current position

The position on implied powers in light of Smith v Butler may be summed up 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), 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.


Arden LJ's judgment has brought a degree of clarity to this area, in that it confirms that a managing director will normally have some implied powers simply by virtue of his appointment to that office.  It is also useful to know that the starting-point for identifying what those powers might be is to consider what powers a managing director normally possesses.  However, the scope of a particular managing director's implied powers will always depend on the facts of the case, and as a result 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 (see Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352) 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.  For example, the parties might supplement the broad provision by specifying that the managing director:

  • may not enter into contracts above a certain value without the authority of a board resolution
  • may not extend the company's activities into new areas of business without the authority of a board resolution
  • may bring legal proceedings without the authority of a board resolution
  • may, at his discretion, appoint directors to executive office and remove directors from executive office.

Clearly, some grey areas are likely to remain, no matter how specific the delegation.  However, companies which give careful consideration to this issue will be able to keep such areas of uncertainty to a minimum and thereby reduce the risk of any dispute arising in relation to the managing director's powers.

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