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A managing director is an employee as well as a director

Anderson v James Sutherland (Peterhead) Ltd. [1941] SC 203

The facts:

Mr. Anderson was appointed joint managing director of a private company, James Sutherland Ltd., in 1932. He was convicted of assault in 1940, following which the other directors resolved that as a result of his misconduct, they would dismiss him from his post as managing director and, in accordance with the company’s articles of association, redistribute his shares amongst the remaining directors.

The assault in question had occurred during a directors’ meeting the year previous, wherein Mr. Anderson produced a revolver and proceeded to shoot his co-directors, seriously injuring two of them.

Mr. Anderson sought a declaration from the Scottish Court of Session that the resolution of the directors to remove him from his membership of the company and to offer his shares to the remaining directors was void.

What the court decided:

A central question that the court had to determine was whether Mr. Anderson was employed in his capacity as managing director. In the event that he was in the employ of the company, the directors would be able to dismiss him for misconduct and therefore gain access to his shares under the company’s articles of association. Mr. Anderson contended that a managing director was simply an ordinary director entrusted with some special powers, and that his position as ‘permanent’ director could therefore not be usurped.

Gavel and block beside the scales of justice

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The court held that while a director is ordinarily not an employee of the company, a managing director holds two separate and distinct offices – manager and director – and that the managerial role is one of servitude.

Notable quotes from the judgment:

Per Lord Normand:

“I find nothing in the speeches of the majority which implies that the functions of a director and of a managing director are the same. In my opinion therefore the managing director has two functions and two capacities.”

“… As managing director he is a party to a contract with the company and this contract is a contract of employment; more specifically I am of the opinion that it is a contract of service and not a contract for services. There is nothing anomalous in this; indeed it is a commonplace of law that the same individual may have two or more capacities, each including special rights and duties in relation to the same thing or matter or in relation to the same persons.”

Take-away message:

A managing director is simultaneously a director of the company and an employee of it.

While in Mr. Anderson’s case this allowed the company to remove him from office and redistribute his shares, generally managing directors will benefit from their status as employees.

What follows is that a managing director who is removed from office as director – and as a result loses his or her position as managing director – maintains a right to sue for breach of contract. This principle has been affirmed by the Supreme Court of Victoria in Lincoln Mills v Gough [1964] VR 193.

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