Contractors' Questions: What if our 'Ltd' director oversteps the mark?

Contractor’s Question: Removing him from the company is a little premature at this stage, but what can our IT business do if a director oversteps the mark, in relation, say, to entering into a contract with a third party?

Expert’s Answer: Firstly, some background. A company operates through its directors. The extent of powers that the directors have are set out in the company’s Articles, Memorandum of Association, shareholders’ or board resolutions, or other agreements.

Unless authority has been delegated to individual directors, or groups of directors, any company decision needs to be made by the board of directors as a whole and no individual director is entitled to act on their own.

It is usual for a company to delegate certain tasks and functions to individual directors. For example, it is common for the board to decide that day-to-day decision-making can be made by an individual director whereas major decisions need to be made by the board as a whole.

Which powers are delegated and which reserved for the board as whole differs from company to company. Nevertheless, it is important that the powers that are delegated are agreed by the board in writing as otherwise there can be disputes as to whether a particular director had authority to make a particular decision.

When the delegated powers are not in writing, the courts will often look at the history of the company when deciding on whether a director had authority to make a particular decision. If, for example, the managing director routinely entered into major contracts on behalf of the company and the other directors never objected, the court may decide that the managing director had the authority to enter into such contracts without board approval.

Where a director does act outside his authority (or ultra vires as lawyers tend to refer to it), it makes no difference as far as third parties are concerned, unless they knew that the director lacked authority.

For example, it is common for a company to delegate day-to-day decision making to individual directors but not to enter into major contracts. If, nevertheless, a sole director does enter into a major contract, then the company will not usually be able to get out of the contract on the basis that the director did not have authority to agree it.

In the event a director exceeds his authority, then he becomes personally liable as far as the company is concerned and the company can sue him for any losses.

In addition, if there is good reason to believe that a director is about to do something outside his authority and he won’t back down, then the company may be able to make an application to the court for an injunction order to prevent him from doing so.

If a minority shareholder is likely to be unfairly prejudiced by a decision about to be made by a director without authority, then that shareholder may also be able to make an application to the court to prevent the director from making the decision. If it has already been made, the court can make various orders to assist the wronged shareholder.  

The expert was Gary Cousins, solicitor and founder of Cousins Business Law.

Editor’s Note: Further Reading –

Contractors’ Questions: Will I be disqualified as a company director?

When there’s a rogue director in your company’s ranks