Director - Duty - Claimant seeking relief

GHLM Trading Ltd v Maroo and others: Chancery Division (Mr Justice Newey): 23 January 2012

The first and second defendants were husband and wife and the directors of the claimant company (the company). The proceedings arose out of an agreement between the first defendant and B, a businessman, made in February 2005. That agreement involved B taking over a clothing business through the acquisition from the second defendant of the claimant. B invested £1m at the outset, and he subsequently made substantial loans to the claimant. The first and second defendants, however, continued to be the claimant's only directors.

The clothing business was unsuccessful, and B came to lose confidence in the first defendant. By May 2007, B had decided that the business should be closed down. The first and second defendants were eventually removed as directors of the claimant in early 2009. The claimant sought relief against the first and second defendants and, to a lesser extent, the third defendant, B Ltd, a company of which the first and second defendants were directors and the second defendant the sole shareholder. The first and second defendants and B Ltd counterclaimed.

The claimant submitted, inter alia: (i) that sums were owed in respect of the directors' loan account, in particular, on the basis that credit entries on the account had not been justified; (ii) that a sale of stock to B Ltd shortly before the first and second defendants had been removed as directors of the claimant had involved breaches of duty on the part of the first and second defendants and; (iii) a claim to recover sums paid to the first and second defendants by way of remuneration on the basis that they failed to disclose wrongdoing. The first and second defendants and B Ltd contended: (i) that they were owed outstanding remuneration and; (ii) that there had been failure to supply stock which they alleged had been sold to B Ltd.

The court ruled: (1) Once it was shown that a company director had received company money, it would be for him to show that the payment had been proper. Similarly, where debit entries had been correctly made to a director's loan account, it would be incumbent on the director to justify credit entries on the account (see [149] of the judgment). On the facts, to a substantial extent the credit entries had not been satisfactorily justified. The ultimate problem with the first defendant's explanations and with the whole of the first and second defendants' case was that they very largely depended on the first defendant's word and hence his honesty, which had been shown to be flawed (see [150], [151] of the judgment).

(2) While the interests of a company would normally be identified with those of its members, the interests of creditors could become relevant if a company fell into financial difficulties. Where creditors' interests were relevant, it would be a director's duty to have regard to the interests of the creditors as a class. If a director acted to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, he would commit a breach of duty. Where a director caused his company to enter into a contract in pursuit of his own interests, and not in the interests of the company, its members or (where appropriate) its creditors as a class, and the other contracting party had notice of that fact, the contract would be void rather than voidable (see [164], [168], [171] of the judgment).

In the instant case, the contract for sale of stock to B Ltd was void. Therefore the contract upon which B Ltd's cross-claim was based would be void or, alternatively, ought to be set aside. Further, it had not been proven that B Ltd had suffered any loss (see [179], [180] of the judgment). The counterclaim would be dismissed regarding non-receipt of goods (see [180] of the judgment).

West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 applied; Continental Assurance Co of London plc (in liq), Re [2001] All ER (D) 229 (Apr) applied; Hopkins v TL Dallas Group Ltd [2004] All ER (D) 135 (Jun) applied; Ultraframe (UK) Ltd v Fielding; Northstar Systems Ltd v Fielding [2005] All ER (D) 397 (Jul) applied; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (in admin) [2011] All ER (D) 321 (Mar) applied; Burke v Morrison; Idessa Ltd, Re [2011] All ER (D) 129 (May) considered; Mumtaz Properties Ltd, Re; Wetton (as liq of Mumtaz Properties Ltd) v Ahmed [2011] All ER (D) 237 (May) considered.

(3) On the authorities, it could be incumbent on a director to reveal his own wrongdoing. Two points of relevance arose. The first was that a company complaining of a director's failure to disclose a matter had to establish that the fiduciary subjectively concluded that disclosure was in his company's interests or, at least, that the director would have so concluded had he been acting in good faith. The second was that it could be incumbent on a fiduciary to disclose matters other than wrongdoing. The single and overriding touchstone being the duty of a director to act in what he considered in good faith to be the best interests of the company, there would be no reason to restrict the necessary disclosure to misconduct (see [192], [194], [195] of the judgment).

In the circumstances, the claimant had not made out its case on wrongful non-disclosure (see [206] of the judgment). Regentcrest plc (in liq) v Cohen [2000] All ER (D) 747 applied; Item Software (UK) Ltd v Fassihi [2004] All ER (D) 187 (Sep) applied; Shepherds Investments Ltd v Walters [2006] All ER (D) 213 (Apr) applied.

(4) In the circumstances, B Ltd had a cross-claim for uninvoiced remuneration in the sum of €241,755, subject to any set-off. It would be B Ltd (as opposed to the first and second defendants personally) which had the benefit of that cross-claim (see [191], [207] of the judgment).

Paul Greenwood (instructed by Stewarts Law LLP) for the claimant. Sami Rahman (instructed through direct access) for the first, second and third defendants.