Extracted from The Star, 8^th February 2000, by Cheah Foo Seng

A person who is appointed to manage a company by the board of directors is sometimes given many different titles. For example, a person may be given the title of chief executive officer, executive chairman, vice-president or president.

These titles are given on the basis of commercially accepted terminology without any bearings on terms used by company law and / or company is articles of association.

Service agreement

When a company appoints a managing director it usually enters into a service agreement with him, as is required under the articles of association.

The company’s articles will state clearly the treatment of a managing director in relation to retiring by rotation.

A managing director is not required to go through the process of retirement by rotation because of his service contract.

The service contract will contain terms prescribing the length of the engagement, requiring the managing director to use his best endeavours to promote the company’s interests, during normal business hours to devote the whole of his time to the company’s business and to perform duties delegated to him by the board.

The service agreement will also define his powers, prescribe his remuneration and entitlement to holidays, sick pay and other incidental benefits as well as prohibiting him from having an interest in nay competing company.

He is strictly an employee of the company which will bind him on matters pertaining to disclosure of confidential information relating to all aspects of the company.

As an employee, the managing director will be subject to the possibility that his company may be taken over and that the new controllers may wish to have him replaced.

Accordingly the employer has the power to terminate his employment but it has to be carried out according to the terms of the service agreement and the requirements of labour laws.

To be appointed as a managing director, the person has to be appointed as a director of the company.

If a managing director ceases to be a director he can no longer be managing director as the position ceases ipso facto.

The company’s articles usually spell out that a managing director need not retire by rotation. This is to avoid disturbance of his tenure while other directors are subject to retirement by rotation.

Without agreements

There are occasions when a managing director holds office under the articles of the company and no service contract is entered into between the person and the company.

In this case, his relationship to the company may be modified by the company altering the clause of the articles of association governing his employment and the company will not be in breach of contract.

The articles have in this case become the agreement between the managing director and the company.

Articles to be consistent with contract

There are times when a company unilaterally revokes the appointment of a managing director using the powers given by the articles without taking into consideration the agreement made.

In Nelson v James Nelson & Sons Ltd. (1914) 2 KB 770, the articles empowered the directors to appoint one of their numbers as managing director for such period as they deemed fit and to revoke the appointment.

The board also appointed the managing director with a written agreement stating the requirement of so long as he should remain a director, retain his share qualification and efficiently perform his duties.

The board revoked his appointment at the time when he was still a director and had retained a share qualification, but there was no suggestion of his inefficiency.

The Court of Appeal held that the managing director was entitle to damages for breach of contract by the company as the board cannot revoke at will but only in the manner consistent with the contract made.

It is, therefore, recommended that to avoid the inconsistency, the articles be framed so that the power of revocation is expressed to be subject to the terms of any agreement entered into by the company with the managing director.

In other cases an apparent inconsistency between articles and contracts is resolved by finding that it is a concurrent condition of the contract that the company will not of its own motion use powers which it possesses under the articles that will put an end to the contract.

The termination of employment of a managing director should be carried out with due care lest the company is sued for having to pay damages.

I want help                                   FreeAdvice

Please contact Alvin For Advertising & Sponsorship Information