Managing director's powers

Updated: Nov 13 2005, 05:30am hrs
The Supreme Court has recently dealt with the question of the powers of directors vis-a-vis the managing director (MD) [SMC Pharmaceuticals Ltd v Neeta Bhalla [2005] 127 Comp Cas 563]. The division of powers between shareholders, board and MD has been examined by the courts in several cases.

The powers of an MD derive from one of the source stated in the Companies Act (CA), although the law does recognise 'implied powers'; the principal source of an MD's powers is the board of directors (BoD). This principle carries great weight with respect liability for defaults and contraventions of law by the company, because the liability depends on the powers.

The directors of a company can do what the company can do, subject to the restrictions imposed in law and the articles of the company. Recognising this principle, s.291 of the CA vests in the BoD, as a governing body and the supreme managerial organ of a company, general powers of management of a company, subject, however, to the exceptions mentioned in that section. The BoD is the principal organ of a company.

The management is vested in the board and all powers excepting those which are specifically reserved for the general meeting by the Act or the articles or memorandum or otherwise must be done by the Board [Luxmi Tea Co Ltd v PK Sarkar (1990) 67 Comp Cas 518 (SC)].

Shareholders of a company cannot interfere with directors' powers. If the articles vest management of the company's business in the directors and confer on them full powers of the company, the shareholders are not entitled, by resolution passed at a general meeting without altering the articles, to give effective directions to the directors as to how the company's affairs are to be managed, nor to overrule any decision come to by the directors in the conduct of the business.

The articles of association usually confer on the board general and specific powers of management and authorize delegation of or all of those powers. Usually, the day-to-day management is vested in one or more directors. Sometimes, a person who is not a member of the board is entrusted with the management.

According to s 197A of the CA, a company cannot have at the same time a MD and a manager. A company may, however, at the same time, appoint or employ two or more MDs (or by different names such as MD, Joint MD, Deputy MD).

A company may also appoint one or more MDs or one MD and one or more whole-time directors or only one or more whole-time directors.

The basic ingredients of the position of MD are:

(a) The MD must be a director of the company;

(b) The MD must be entrusted with substantial powers of management of the company which would not otherwise be exercisable by a director;

(c) The powers to do administrative acts are not to be deemed to be substantial powers of management;

(d) The powers of management may be entrusted with a MD by an agreement or a resolution passed at a general or a board's meeting or by the memorandum or the articles of the company;

(e) The powers of management so entrusted with a MD are to be exercised by him subject to the superintendence, control and direction of the BoD;

(f) A person who occupies the position of MD without being designated as such would also be deemed to be a MD.

An MD derives the powers from the company or its board, and s.2(26) of CA gives sufficient indication as to the sources of powers of a MD.

From the definition, it is clear that a MD may derive his substantial powers of management to act for and on behalf of the company on the basis of an agreement or by virtue of a resolution passed in the general meeting or by the BoD or by virtue of the memorandum of association or the articles of association of the company [G Subba Rao v Rasmi Die-Casting Ltd (1991) 32 CLA 183 (AP)].

Subject to the articles, the powers and duties of a MD are defined by his contract with the company. It is common to execute an agreement between the company and the MD. It is desirable to delegate to the MD powers of management by a power of attorney approved by the Board and duly authenticated by a notary public.

The courts have accepted the proposition that, as the donor of the powers, it is within the competence of the BoD to curtail the powers of a MD [Mani (M S) v Madhusoodonan (M S) (1991) 5 CLA 187 (Ker)].

A word of advice: in the realm of law, documents speak louder than human beings and to resolve any dispute courts go by the documents.

Three documents are crucial: (a) the articles of association; (b) the board's resolutions; and (c) the agreement between the managing director and the company. These documents define and limit the scope of powers of MD. So, these documents need to be drafted with care, caution and clarity.

The author is practising company secretary and past president, The Institute of Company Secretaries of India