The words of Lord Greel in Shaw V. Shaw are an embodiment of the principle of division of powers between the general meeting and the board in company law.
Company law recognises the general meeting and the board as the principal organs of the company and the articles of association vests powers in both.
Some powers can only be exercised the board while others are only exercisable members in general meeting, e.g. the general meeting is empowered to elect directors, appoint auditors, remove directors or auditor from office, alter the articles and memorandum, authorise bonus shares, adopt accounts. The board of directors on the other hand is empowered to recommend dividend, borrow, appoint the managing director and the secretary, etc.
The principle of division of powers ordains that each organ must exercise the power vested in it and must not hijack those of the other unless the powers are being abused, exceeded or exercised in bad faith or contrary to the articles.
Courts of law have enthusiastically enforced the division of powers.
The question as to which organ exercises which power is one of interpretation of the
Articles. It was so held in Automatic Self-cleansing Filter SyndicateV.Cunninghame.
Article 80 of Table A is emphatic that the business of the company shall be managed the directors and who may exercise all such powers as are not required to be exercised the company in general meeting. In Alexander Ward and Co VSamyang Navigation it was observed that article 80 means that the directors and no one else are responsible for the company‟s management except in relation to matters specifically alloted to the company in general meeting.
In Scott V Scott it was held that since the power to pay interim dividend was vested in the board the general meeting could not interfere. A similar holding was made in Shaw V Shaw.
The principle of division of powers extends to powers not vested in either organ. If either organ purports to exercise such power, the other must not interfere with its exercise.
However, it is contended that the general meeting is more dominant in that it is empowered to:
i) Alter the articles
ii) Remove directors from office, but before such a step is taken directors are free to ignore instructions of the general meeting on how to exercise a power vested in the board.
The principle of division of powers is subject to three exceptions. These are circumstances in which the general meeting exercises powers vested in the board.
If directors refuse, fail or neglect to sue on behalf of the company or to defend an action against the company, the power becomes exercisable the general meeting. Marshals Valve Gear Co. V. Manning Wardle
Ratification of excesses directors
Whenever the general meeting ratifies an abuse of power the board, the transaction becomes a valid act of the company.
The general meeting so doing exercises powers vested in the board.
The transaction must have been intra vires the company. As was the case in Bamford and Another V Bamford and others.
Deadlock in management
If a company‟s board of directors cannot function in any material respect reason of a deadlock, the powers of the board becomes exercisable the general meeting . As was the case in Barron V Porter. Evidently therefore the principle of division of powers generally holds.