Powers of directors
Chapter 11
Powers of directors
Chapter Contents
11.4 Validity of the acts of directors
11.5 The rule in Turquand’s case
Generally, companies will delegate considerable powers of management to the directors of the company. Table A of the Companies Act 1985, Article 70, for example, provided:
Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company. No alteration of the memorandum or articles and no such direction shall invalidate any prior act of the directors which would have been valid if that alteration had not been made or that direction had not been given.
The model articles for private companies limited by shares under the Companies Act 2006 provide in Article 3 – Directors’ General Authority – ‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company’ (The Companies (Model Articles) Regulations 2008).
Article 4 of the model articles for private companies, as well as Article 4 of the model articles for public companies (both under the 2006 Act), provide that the members of a company may give instructions to the board by special resolution.
The company will obviously delegate only such powers as it itself has. Thus, the directors are not competent to engage in ultra vires transactions. As has been seen, however, ultra vires transactions may be ratified and the breach of directors’ duties may be ratified by a separate special resolution. Furthermore, the directors can only validly act in the interests of the company and for the purposes for which the powers are conferred upon them: see Hogg v Cramphorn Ltd [1967] Ch 254 and Bamford v Bamford [1970] Ch 212 (see section 12.5.1).
The powers delegated to the directors are delegated to them collectively. It is open to the directors, of course, to sub-delegate powers to individual directors or, indeed, to others.
In general, the directors are vested with management by the members. Their removal from office is by an ordinary resolution passed in general meeting following special notice: see s 168 CA 2006. Directors may exercise their powers of management while they are in office: see Salmon v Quin and Axtens Ltd [1909] 1 Ch 311. Where companies have articles like Article 3 of the Private Company Model Regulations 2008 (see section 11.1), however, this permits directions to be given by special resolution to the directors.
In John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, the Court of Appeal refused to allow the members to override the decision of the directors to commence legal proceedings. In Breckland Group Holdings Ltd v London and Suffolk Properties Ltd [1989] BCLC 100, the company attempted to commence legal proceedings. The company had two members, B Ltd and C Ltd. It had been agreed that C Ltd would appoint two directors and B Ltd one director. It had further been agreed that for legal proceedings to be commenced, both B Ltd and C Ltd would have to agree. The High Court restrained the parties from taking any further steps until a board meeting of the company could be held. The matter was one for the board of directors to determine under the equivalent of Table A, Art 70. Previously, in Marshalls Valve Gear v Manning Wardle & Company [1909] 1 Ch 267, it had been held that the board of directors could be overridden by the company in general meeting in relation to potential litigation involving one of the directors.
In other circumstances, the members may have to act to fill a void.
The House of Lords, in Alexander Ward & Co v Samyang Navigation Co [1975] 1 WLR 673, allowed two members to act to protect the interests of the company when the company had no directors. In this case before the House of Lords on appeal from Scotland, the claimant company brought the action at the instance of two shareholders of a company having no board of directors.
The House of Lords accepted that in such circumstances it was open to the general meeting to assume the powers of management of the company.
In Re Argentum Reductions (UK) Ltd [1975] 1 WLR 186, Megarry J declined to decide whether the members had reserve powers where the directors were unable to act, stating at p. 189 that ‘there are deep waters here’. There was an application under the provisions of the Companies Act to obtain leave of the court to allow a company, against which a winding-up petition had been filed, to pay certain debts.
Megarry J held that in his judgment the shareholder had a sufficient locus standi to make the application.
The cases are far from consistent. On occasion, the courts have permitted the members to act where there is deadlock on the board of directors. Thus in Barron v Potter [1914] 1 Ch 895, the company had two directors who were not on speaking terms. It was impossible to hold constructive board meetings. Canon Barron refused to attend board meetings with Potter. Potter tried to call a general meeting. Barron intended to boycott this meeting but his train was met at Paddington by Potter, who proceeded to try to hold a meeting on the platform. He proposed Charles Herbert, William George Walter Barnard and John Tolhurst Musgrave as additional directors. Barron objected and Potter purported to use his casting vote as chairman. The court held that this was an ineffective meeting. In the circumstances, it was held that in view of the deadlock on the board of directors, the powers were exercisable by the members in general meeting. In a similar way, in Foster v Foster [1916] 1 Ch 532, there was a dispute over which of the two directors should be appointed as managing director of the company. There were three directors in all. The articles gave the power to appoint a managing director to the board of directors. However, directors could not vote on a matter in which they had a personal interest. It was, accordingly, not possible to pass the resolution. The general meeting accordingly could fill the vacuum.