Powers of Managing Director

[csarengarajan]

The case reported in  October 2008 Chartered Secretary

Whether the managing director  had power to initiate suit on behalf of the company without authorization from the Board of Directors.

Wasava Tyres V  Printers (Mysore) Ltd (2008) 56 SCL  171 (KAR)  K.Sreedhar Rao J  Decided on20.11.2008

Act :  Companies Act  1956  - Section 2 (26)  Powers of Managing Director -  Managing Director of the respondent company  filed  suit against  the appellants-  Appleant  contended that  MD  had no proper authorisation  to file  the suit  -

Brief Facts:  The Managing Director  of the respondent company   files a suit  on behalf of the company against  the appellants tenants  and the trial court  granted  decree  directing  the tenant to  vacant  and deliver  possession  of the tenanted  premises.

Reply by Appellant:  A  person to file a suit  on behalf of the company should have  the necessary  authorization  from the board  to institute  the suit in order to bind the  company and  in the instant case, the managing director  had no proper authorization  from the board of Directors.

Judgement:   The institution of  the suit  on behalf of the company  by the managing director  is deemed to  be within  substantial powers of the management. Therefor  by virtue of provisions  of Section 2 (26)  the suit  instituted by  the managing director  is deemed to be  within his  power  and authority.

Section 2(26) specifically provides that the powers of management may be entrusted with a managing director 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 and the powers of management so entrusted with a managing director are to be exercised by him subject to the superintendence, control and direction of the Board of directors. Shareholders of a company have no authority to interfere with the powers of the Board or of a managing director.

The Managing Director entrusted the powers by virtue of  provisions contained in Section 2 (26) of the Companies Act, 1956.   The powers already conferred by him  by way of agreement or resolution passed  by the Board or the company or  by virtue of its memorandum and Articles of Association of the company.  Normally the companies prefer to pass a  resolution before filing a suit on behalf of the company. In the instant case no resolution was passed and  the managing director filed the suit.  The court observed that by virtue of substantial powers of managment, the Managing Director is competent to file suit on behalf of the comapny. At the time of  appointment of Managing directors, these powers will be conferred to him by a way of resolution by the Board of Directors. It is not necessary to pass another resolution at the time of initating the suit.

Substantial powers of management

The "substantial powers" of management may be conferred upon him by virtue of an agreement with the company, or by a resolution of the company or the Board or by virtue of its memorandum and articles

Section 2 (26) of the Companies Act, 1956 defines the term Managing Directors.  The features of the definition are as follows.

a)  He must be a   director of the company

b)  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)  Delegation of powers to Managing Director  by -
    i)  an agreement   or
   ii)  a resolution passed at a general or a board's meeting  or
  iii)  by the memorandum  or the articles of association of the company.

e)  The powers so delegated to the Managing director are to be exercised by him  subject to the superintendence, control and direction of the Board of directors.

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

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 day to day management is entrusted to the managing director who can exercise powers of management without referring to the Board. It is necessary that the articles must provide for such an appointment being made. Boschoek Proprietary Co. Ltd. v. Fuke, (1906) 1 Ch 148.

In absence of any Regulations in the articles, the Board can confer powers of management on the managing director by virtue of the definition given in s. 2(26) read with s. 291 of the Companies Act 1956 ('the Act'). The Board is competent to do this under s. 291. The general management and conduct of the affairs of the company are vested in the Board of directors. The Board is collectively responsible for the management and conduct of the business of the company. A managing director as such has no specific powers or duties recognised by the Act. He derives the powers from the company or its Board, and s. 2(26) gives sufficient indication as to the sources of powers of a managing director. A managing director has those duties to perform which the Board of directors may from time to time entrust with him.

Readers view invited on the above subject.