UK: England and Wales: directors' duties - disclosure, creditors and other matters

Mr Justice Newey gave judgment earlier this week in GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch). Amongst the matters for consideration was a claim that a sale of stock by directors to another company shortly before they were removed as directors involved a breach of duty. The decision is interesting for several reasons. First, there is discussion of the consequences of insolvency (or near insolvency) on the application of the duty found in Section 172 of the Companies Act (2006). In this regard, the trial judge noted that "Where creditors are relevant, it will ... be a director's duty to have regard to the interests of the creditors as a class. If a director acts to advance the interests of a particular creditor, without believing the action to be in the interests of creditors as a class, it seems to me that he will commit a breach of duty" (para. [168]).

Second, the trial judge considered the consequences of a sale of stock by directors in pursuit of their own self-interest and not the company's where the contracting party had notice of this fact: the contract was void. Third, there is discussion of Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, in which Arden LJ held that a director could be required to disclose his own misconduct as part of the director's duty to act in what he in good faith considers to be the best interests of his company (the duty now incorporated in Section 172). Noting the controversy surrounding Arden LJ's decision, Mr Justice Newey observed (at paras. [193] and [194]):

Arguably, it breaks new ground in treating a fiduciary duty as prescriptive rather than merely proscriptive. Its result can perhaps now be justified also by reference to section 172 of the Companies Act 2006, which came into force on 1 October 2007. The duty to promote the success of a company which that provision imposes can be said to be expressed in prescriptive terms (a director "must act in the way he considers, in good faith, would be most likely to promote the success of the company …" – emphasis added). Be that as it may, Item Software (UK) Ltd v Fassihi is clearly binding on me. I therefore proceed on the basis that a director's duty of good faith can potentially require him to disclose misconduct. .... a company complaining of a director's failure to disclose a matter must, I think, 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". 

Fourth, Mr Justice Newey considered to whom the director was required to disclose information and stated (at para. [198] and [199]):

... it is perfectly possible to conceive of a director being bound to disclose a matter to someone other than fellow board members. Since the "touchstone" is the duty of a director to act in what he considers in good faith to be in the best interests of the company, the focus must be on what the relevant director in fact believed to be in the company's interests or would have believed to be in the company's interests had he been acting in good faith. 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 (or if he would have so concluded had he been acting in good faith), it would, it appears, 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. That disclosure might have been in a shareholder's interests will not matter as such.