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The recent case of GHLM Trading Ltd v Maroo & Others [2012] EWHC 61 (Ch) has highlighted several key points directors should always keep in mind.

The general duties of a director of a UK company are codified in the Companies Act 2006 and include:

1. to act in a way most likely to promote the success of the company for the benefit of shareholders as a whole;
2. to exercise independent judgment;
3. to avoid a situation in which, the director has, or could have, a direct or indirect interest that conflicts or possibly may conflict with the interest of the company; and
4. to declare an interest in a transaction or arrangement with the company (whether proposed or one which has already been entered into).

A director owes these duties to the company, not the shareholders or to any third party such as a customer or supplier. If a director is in breach, only the company can claim against the director for the loss the company has sustained as a result. Mr and Mrs Maroo owned several clothing and textiles companies, including GHLM Trading Ltd. In 2005, Mr and Mrs Maroo sold the company for £1m to a family friend, Mr Binani. Mr and Mrs Maroo continued in their role as directors of the company. As the company continued to experience financial difficulties, Mr Binani decided to suspend Mr and Mrs Maroo and close the shop from which the company operated. However, shortly before being suspended, Mr and Mrs Maroo sold the company’s stock to a second company as a means of repaying themselves for a personal loan which was still outstanding.  The court considered whether the directors were in breach of their duty to sell the company’s stock and whether by failing to disclose their actions to the shareholders of the company the company should be entitled to recover the directors’ remuneration.

The court held that while the interests of a company were usually identified with those of its shareholders, when a company falls into financial difficulty the directors must also consider the interests of creditors. In doing so, the directors’ duty is to promote the success of the company for the interests of the creditors as a class. The directors are in breach of that duty if he acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class. 

In order to establish a breach of duty, the company had to show it had suffered loss, the directors had profited and the transaction was not binding on the company. As Mr and Mrs Maroo were directors of the company to whom they sold the stock, it was deemed the purchasing company had knowledge of the directors’ breach. The court thereby held that as the sale of the stock was in the directors’ self-interest and the not the company’s the contract of sale was void. 

It was further held that a director’s duty to act in what he considered in good faith to be in the best interests of the company could require him to disclose his own misconduct. A company trying to establish that a director’s failure to disclose was a breach of duty must be able to show that if the director had been acting in good faith he would have concluded that disclosure was in the company’s interests.

There was also consideration of whether a director is under a duty to disclose their actions to shareholders. It was held that “if a director subjectively concluded that it was in the company's interests for a matter to be disclosed to a person who was not a member of the board…it would…be incumbent on him to ensure that such disclosure was made. On the other hand, a director's duty of good faith is owed to his company, not to shareholders. The question is therefore as to what the director thought (or would have thought) was in the company's interests. Whether the disclosure might have been in a shareholder's interests will not matter as such.” 

Comment

The decision illustrates the fiduciary duties a director owes to his company and in times of insolvency a director’s duty to promote the success of the company extends to the interests of creditors. If a director acts in a manner which is contrary to the best interest of the company they may be required to disclose their own misconduct and leave themselves susceptible to a claim by the company and/or its shareholders. 

Rudy Capildeo
Solicitor

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.