GHLM Trading Ltd v Maroo & Ors

A director who has received company money, or seeks credit on a director’s loan account, must justify the propriety of the payment or credit. The duty reflects the director’s fiduciary stewardship and responsibility for proper accounting records.

Where a company is insolvent, of doubtful solvency or on the verge of insolvency, directors must have regard to creditors’ interests as a class. A director who causes the company to prefer a creditor for personal reasons, rather than for the creditors as a class, breaches duty. A contract made in those circumstances is void where the counterparty has notice of the breach.

A director’s duty of good faith may require disclosure of misconduct, but liability depends on what the director honestly believed, or would have believed in good faith, to be in the company’s interests.

GHLM Trading Ltd sought relief against its former directors, Anil and Nita Maroo, their company Brocade International Ltd, and Mr Loureiro. The claims concerned disputed credits on the directors’ loan account, a contingent liability for stock, payments, a sale of GHLM stock to Brocade, remuneration, and a Mercedes car.

The Maroos and Brocade counterclaimed for unpaid remuneration and for stock allegedly contracted for but not delivered. GHLM also alleged that the Maroos had failed to disclose wrongdoing and that Mr Loureiro had assisted the improper transfer of stock.

The central issues were whether the directors had justified the loan-account credits, whether the stock-sale contract was valid when the company was financially distressed, and whether GHLM could recover remuneration already paid.

1. The claims and counterclaims succeeded in part. Credits on the directors’ loan account totalling £773,935.19 had not been satisfactorily justified and were to be disregarded. Once company money has been received by a director, or debit entries have properly been made to a director’s loan account, the director must show that the payment or credit was proper. That conclusion was reinforced by directors’ responsibility for accounting records under the Companies Act 2006.

2. GHLM had assumed a contingent liability to Brocade of up to £412,000, payable only from proceeds of the relevant stock. Brocade was entitled to £200,071, but not the remaining £211,929.

3. The sale of GHLM’s stock to Brocade was void. GHLM was insolvent, or at least of doubtful solvency or on the verge of insolvency. The Maroos were therefore required to consider creditors’ interests as a class. They instead caused the sale to exchange their unsecured claim for stock, for their own benefit and Brocade’s benefit. Their conduct breached duty, and Brocade had notice through its ownership and control by the Maroos. The requirements of section 239 of the Insolvency Act 1986 did not determine whether a breach had occurred.

4. Brocade had to account for sums received on its onward sale of the stock to Futura, while its earlier claim against GHLM was revived. Its counterclaim for non-delivery was dismissed because the contract was void and no loss was proved.

5. Following Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, a director’s duty of good faith can require disclosure of misconduct. The inquiry is subjective and concerns the company’s interests, not merely a shareholder’s interests. GHLM had not established the pleaded non-disclosure case, which was not fully put in cross-examination and did not show what would have happened on disclosure. Its claim to recover remuneration therefore failed. Subject to set-off, GHLM owed Brocade €241,755 in uninvoiced remuneration.

6. Only £25,249.74 of the £42,048 Mercedes-related credit was allowable on Mr Maroo’s loan account. The claim against Mr Loureiro was dismissed because it was not proved that he could have stopped the stock shipment.

not stated in the judgment.