Company law revision question and answer

a) Maridadi Company Limited a private company limited shares has adopted Table A as its articles. In March 1997 the board of directors appointed Cook as managing director at a salary of Kshs100,000 per month. Under the terms of the appointment, Mr. Cook was to remain managing director for 5 years. Maridadi Company Limited has not made any profit for the last 4 years and the directors are very unhappy with Cook‟s performance. At an acrimonious board meeting, Cook outrightly refuses the board‟s proposals for improving the company‟s performance. The board of directors now seekyour advice as to whether it can lawfully take the following causes of action:

i) order Cook to confine his attention to the affairs of a subsidiary of Maridadi Co. Ltd.
ii) dismiss Cook as managing director
iii) remove Cook from membership of the Board
iv) reduce his salary reason of poor performance.
ANSWER
 The board can legitimately instruct Cook to confine his attention to the affairs of the subsidiary of Maridadi Co. Ltd. This is because:

– A company and its subsidiary are in essence one economic unit. It was so held in Harold Holdsworth v. Caddies.
– Under Article 109 of Table A which is Maridadi‟s Articles the board may entrust and confer upon a managing director any of the powers excercisable it to exercise collaterally or to the exclusion of the board . It is also empowered to revoke, vary or alter all or any of such powers.

The board it appears cannot dismiss Cook from his position as Managing Director. Since the terms of employment are explicit that he was to remain in office for 5 years. He can only be removed from office in accordance with the terms of the contract failing which the company may be held liable in damages for wrongful dismissal as was the case in Southern Foundaries Ltd. v. Shirlaw or in Shindler V.Northern Rain Coat Co. Ltd. Where managing directors had been appointed under contracts of service and the companies purported to remove them from office otherwise, the companies were held liable in damages for breach of contract.

The board of directors cannot remove Cook from his position as a director. This is because directors are elected members ordinary resolution in general meeting, hence the power of removal is vested in the general meeting and the board cannot exercise this power. This position is exemplified the principle of division of powers between the general meeting and the board.

The board of directors cannot unilaterally reduce the managing director‟s
salary reason of his poor performance. This is because the terms of employment ordain that he be paid a specific sum per month. Any purported reduction may precipitate an action in damages for breach of contract. The least the board can do is to persuade him to accept a lesser sum failing which it has no recourse in law.

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