Gwembe Valley Development Company Ltd. & Anor v Koshy & Ors

A company director who obtains an unauthorised profit through a transaction with the company must account for it unless the director has made the disclosure required by the company’s constitution or has made full disclosure of all material facts to the shareholders and obtained their informed approval or acquiescence.

For limitation purposes, a director’s dishonest breach of the fiduciary duty of loyalty is treated as fraudulent under section 21(1)(a) of the Limitation Act 1980. No limitation period therefore applies to an account of the resulting profits. The director must account for all profits made from the dishonest transaction, including indirect profits. Equitable compensation remains dependent on proof that the breach caused the company’s loss.

Gwembe Valley Development Company Ltd was the corporate vehicle for a Zambian agricultural joint venture. Its managing director, Mr Koshy, controlled Lasco, which made pipeline loans to the company at a substantial profit.

Rimer J found that Mr Koshy had dishonestly concealed the nature and extent of his interest and profit. He ordered an account, but confined it to profits derived from company property, and refused equitable compensation because loss had not been proved.

Mr Koshy appealed against liability to account. GVDC appealed the restricted form of the account and the refusal of compensation. The central issues were disclosure, limitation, the scope of an account of profits, and causation for equitable compensation.

1. Mr Koshy’s appeal was dismissed and GVDC’s appeal was allowed in part. A director may not retain an unauthorised profit made by using a fiduciary position. The rule does not depend on fraud, company loss, or whether the company could itself have made the profit. It was stated in Furs Ltd v Tomkies (1936) 54 CLR 583 and applied to company directors in Regal (Hastings) Ltd v Gulliver [1967] AC 134.

2. Articles 88 and 89 did not exempt Mr Koshy. Article 89 had to be read with Article 88, which required a director to declare the nature of the interest at a board meeting. Informal and piecemeal knowledge of individual directors did not satisfy that requirement. Under the general law, he also failed to prove full disclosure to all shareholders of the existence, source and scale of his intended profit.

3. The court upheld Rimer J’s finding that the non-disclosure was deliberate and dishonest. The material concealment concerned the massive profit, not merely Mr Koshy’s interest in Lasco or the fact that Lasco would make some profit. His conduct was a fraudulent breach of fiduciary duty for section 21(1)(a) of the Limitation Act 1980.

4. The claim for an account was not one to recover trust property under section 21(1)(b). The constructive trust, if any, arose from the impugned transaction and was therefore a class 2 constructive trust. But the fraudulent-breach exception in section 21(1)(a) meant that no limitation period applied. Laches also failed.

5. Rimer J wrongly limited the account to profits representing or derived from GVDC property. Mr Koshy had to account for all profits received from the pipeline loans, whether received directly or indirectly through the increased value of his Lasco interest.

6. GVDC’s claim for equitable compensation was properly dismissed. Non-disclosure establishes the fiduciary wrong and supports rescission or an account without inquiry into what would have happened on disclosure. Compensation, however, requires proof of causation. The judge was entitled to find that GVDC had not shown that it would probably have acted differently or suffered loss had full disclosure been made.

• Court of Appeal (Civil Division): In Gwembe Valley Development Company Ltd. & Anor v Koshy & Ors [2003] EWCA Civ 1048, dismissed Mr Koshy’s appeal, varied the account to cover all profits, and dismissed GVDC’s appeal for equitable compensation.
• High Court, Chancery Division: Rimer J found Mr Koshy liable to account for profits, but confined the account to profits derived from GVDC property and refused equitable compensation for want of proved loss.