No board can decide everything itself. Section 111 of the Companies Act 1997 permits delegation, and prices it.
Section 111(1) — who may be delegated to
Subject to any restrictions in the constitution, the board may delegate to a committee of directors, a director or employee of the company, or any other person, any one or more of its powers other than its powers under any of the sections set out in Schedule 3.
The permitted delegates are wide — including “any other person”, which covers a professional manager, an agent, a related company or an outsourced service provider. What is narrow is the list of powers that cannot go.
Schedule 3 — the non-delegable powers
| Section | Power |
|---|---|
| 43 | Issue of shares |
| 47 | Consideration for the issue of shares — the determination and certificate |
| 50 | Authorising a distribution |
| 52 | Shares in lieu of dividends |
| 53 | Shareholder discount schemes |
| 57 | Offer to purchase the company’s own shares |
| 63 | Giving financial assistance |
| 65(4) | Refusing or delaying registration of a share transfer |
| 162 | Changing the registered office |
| 168 | Changing the address for service |
| 234 | Approving an amalgamation proposal |
| 235 | A short form amalgamation |
Most of the reserved powers are ones where the Act requires the board to form an opinion and sign a certificate — the solvency test for distributions, buy-backs, financial assistance and amalgamations, and the fair-and-reasonable determination for share issues. Those judgments belong to the directors personally and cannot be handed to a manager.
The remaining items — refusing a transfer, and changing the registered office or address for service — are decisions that affect the public record and shareholders’ rights directly.
Section 111(2) — the board stays responsible
A board that delegates a power is responsible for the exercise of the power by the delegate as if the power had been exercised by the board, unless the board —
(a) believed on reasonable grounds at all times before the exercise of the power that the delegate would exercise the power in conformity with the duties imposed on directors by this Act and the constitution; and
(b) has monitored, by means of reasonable methods properly used, the exercise of the power by the delegate.
Paragraph (a) requires reasonable grounds for confidence at all times before the power is exercised — not merely at the moment of appointment. If something happens that should shake the board’s confidence, the belief is no longer reasonably held.
Paragraph (b) requires actual monitoring, by reasonable methods properly used. A reporting system that exists on paper but is never read does not satisfy it. This is the statutory expression of the supervision limb of section 109(1) — management by, or under the direction or supervision of, the board.
Delegating safely
- Check the constitution first — section 111(1) is subject to any restriction in it.
- Delegate in writing, by board resolution, identifying the power, the delegate and the limits — monetary thresholds, categories of transaction, duration.
- Do not delegate a Schedule 3 power. A purported delegation of one is ineffective, and the resulting act is the board’s problem, not the delegate’s.
- Record why the delegate is suitable — qualifications, experience, terms of engagement. That is the evidence for paragraph (a).
- Build the monitoring in: regular written reports, standing agenda items, financial reporting, exception reporting, and periodic review of the delegation itself. That is the evidence for paragraph (b).
- Review when circumstances change — a delegate’s poor results, a compliance failure, or a change of role should trigger reconsideration.
- Remember the delegate may become a director. Under section 107(1)(c), a person to whom a board power or duty has been directly delegated with their consent or acquiescence is a director for the purposes of sections 112 to 127, 344 and 350 — so the delegate takes the duties too.
Even where the board escapes responsibility under section 111(2), each director still owes the section 115 duty to exercise powers and discharge duties with the care and diligence of a reasonable person in that office. And under section 116 reliance on an employee, adviser or committee is protected only where the director acts in good faith, makes proper inquiry where the circumstances indicate the need, and has no knowledge that the reliance is unwarranted.
Section 111(2) and section 116 work together: the first governs the board’s responsibility for a delegate’s act, the second governs an individual director’s reliance on what others tell them.
Committees
A committee of directors is the most common delegate — an audit committee, a remuneration committee, or a transaction committee formed to complete a deal. Two points follow from the Act:
- Under section 116(1)(c), a director may rely on a committee of directors upon which the director did not serve, in relation to matters within the committee’s designated authority — so the committee’s terms of reference should be recorded.
- Under Schedule 4, the proceedings of the board are governed by that Schedule unless the constitution provides otherwise; a committee should adopt equivalent procedures and keep minutes, which form part of the company records under section 164.
Sources
- Companies Act 1997 — ss 43, 47, 50, 52, 53, 57, 63, 65, 107, 109, 111, 112–116, 138, 162, 164, 168, 234, 235, 344, 350; Schedules 3 and 4
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.