Can an MD suspend the Chairman?

In most companies, it is commonly accepted that a Managing Director will not have the power to suspend a Chairman, due to the Chairman’s arguably more senior role.  In the case of Smith v Butler (2012) the Chairman, Smith, owned 68.8% of the company’s shares, whilst the Managing Director, Butler, owned the remaining 31.2%.  This, however, did not stop Butler from attempting to suspend Smith as Chairman, although it did eventually prevent his success.

When assuming the role of Chairman, one must ensure the smooth-running of the company, and must always act with the best interests of the company at heart, for example challenging members of the Board (even the Managing Director) when they are not performing to the required standards.  In this case Smith did not like how Butler was running the company, and so made the decision to call a meeting to appoint another Managing Director in his place.  As a result of this, Butler responded by claiming that Smith had been committing fraud, by using his company credit card to claim for expenses to which he was not entitled, and diverting funds from the company into his own pocket.

If any of the accusations had been true, many would argue that perhaps Butler had a right to suspend Smith, due to his position as Managing Director.  This, however, was not the case, as there was no board authority for the suspension, let alone any evidence for the serious allegations.  Smith continued with his original plans to set up a meeting to remove Butler as Managing Director, who subsequently said he would not attend the meeting.  In order for a meeting to be regarded as valid (along with any decisions made during that meeting), there is often a minimum number of people that must be present.  By deliberately not attending the meeting, Butler argued that any decision made to remove him as Managing Director would be void, leaving the Board in a difficult situation.

In cases when there is dispute among the Board, the directors can apply to the Courts for help, which is exactly what Smith did in this case. He wanted the Court to state that Butler could not legally suspend him from his post, due to his lack of sufficient power with which to do so. Perhaps more importantly, he asked for the Court to allow a meeting to remove Butler from his post with only one member present (namely Smith), and that would be sufficient attendance for it to be deemed valid, which is what the Judge granted. He also ordered Butler to reimburse the company for its legal costs incurred in opposing B’s unsuccessful legal applications.

The Court ruled that, although there are numerous powers and responsibilities which are part of holding office as the Managing Director, those powers do not include suspending the company Chairman; the MD had to accept that the set-up of the Board was such that Smith was Chairman of the Board, and therefore the suspension of the Chairman was a matter for the entirety of the Board, not for Butler acting alone as MD.