Enter your keyword

Company directors’ duties of disclosure may be wider than they think

Company directors may have to disclose matters to their company, or to third parties, in order to comply with their general statutory duty to promote the long-term success of their company for the benefit of its members, according to a recent case – even if their other, specific duties of disclosure would not require such a disclosure.

Husband and wife shareholders sold shares in their limited company GHLM to a family friend for £1 million. They remained the only directors of the company. It got into financial difficulty, so the new owner decided to suspend them as directors and close the company’s premises.

The two directors were owed money personally by GHLM. Before the new owner could close it down they sold all its stock to another limited company – a company of which they were also directors. The sale meant GHLM had enough cash to repay their loans, which it duly did.

They were later removed as directors, and GHLM claimed against them on grounds they had breached several of their directors’ duties.

Among its rulings, the court decided:

  • There is a statutory duty on directors to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. GHLM argued that this meant directors might sometimes have a duty to disclose a matter to their company (or to someone else, if doing that would promote the success of the company), including details of their own wrongdoing, if they honestly believe, in good faith, that to do so will promote the long-term success of the company. It said that, in these circumstances, the directors’ failure to disclose their wrongdoing did not amount to a breach of this duty.
  • However, if a company is in financial difficulties, that same duty can also include considering the interests of creditors, as a class. In this case the court decided the directors had put their interests as creditors above those of other creditors by selling GHLM’s stock to another company so GHLM could repay their loan. This meant the stock sale was void and GHLM could recover the money.
  • If a company paid money to a director (or credited a director’s loan account) the burden of proving that the money was properly paid (or credited) was on the director. On the facts the directors had failed to justify why they should be repaid their loan. The repayment was therefore a breach of their duties.

Recommendation

Directors should consider whether:

  • They have a duty to disclose any particular matter, including their own wrongdoing, (whether to their company or to anyone else) on grounds they honestly believe, in good faith, that to do so would promote the long-term success of the company.
  • They can justify any payments made to them by their company, or any credit entry in their loan account with the company.
  • If their company is in financial difficulty, they are considering the interests of creditors as a class.

Case ref: GHLM Trading Ltd v Maroo & Others [2012] EWHC 61

Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]