1. These proceedings arise out of an agreement which the First Defendant, Mr Anil Maroo, made with a Mr Braj Binani in February 2005. The agreement involved Mr Binani taking over a Spanish clothing business through the acquisition from Mr Maroo's wife, who is the Second Defendant, of the Claimant, GHLM Trading Limited ("GHLM"). Mr Binani invested 1 million at the outset, and he subsequently made substantial loans to GHLM. Mr and Mrs Maroo, however, continued to be GHLM's only directors.
2. In the event, the clothing business was unsuccessful, and Mr Binani came to lose confidence in Mr Maroo. By May 2007, Mr Binani had decided that the business should be closed down. Mr and Mrs Maroo were eventually removed as directors of GHLM in early 2009.
3. GHLM now seeks relief as against the Maroos and, to a lesser extent, the Third Defendant, Brocade International Limited ("Brocade"), a company of which the Maroos are directors and Mrs Maroo the sole shareholder. Various claims are put forward. They include (a) a claim in respect of sums said to be owing on the directors' loan account (in particular, on the basis that credit entries on the account have not been justified), (b) a claim that a sale of stock to Brocade shortly before the Maroos were removed as directors of GHLM involved breaches of duty on the part of the Maroos, (c) a claim to recover sums paid to the Maroos by way of remuneration on the basis that they failed to disclose wrongdoing and (d) a claim concerning a Mercedes car. Relief in respect of the sale of stock to Brocade is also sought against a Mr Jose Paulo Loureiro, the Fourth Defendant.
4. I also have before me a counterclaim by the Maroos and Brocade, notably for (a) outstanding remuneration and (b) failure to supply stock which (it is said) was sold to Brocade.
Narrative5. Mr Binani is currently the non-executive chairman of the Binani group, which has businesses in India, the Middle East, Africa and China and a net worth in excess of US$1 billion. The group produces and trades in commodities, in particular non-ferrous metals, cement and glass fibre.
6. The Binani and Maroo families, which come from the same community in Mumbai, have known each other for many years. An uncle of Mr Maroo was a friend of Mr Binani's father and is a director of a company in the Binani group. Mr Maroo himself knew Mr Binani's brother at college.
7. Mr Maroo first incorporated a British company in 1996, when Brocade was formed. Both he and his wife were appointed as directors, and the latter became the company's sole shareholder. The company traded in textiles. In 1998, Mr and Mrs Maroo moved to the United Kingdom from Dubai to concentrate on the business.
8. The Maroos acquired another British company in 2002. The company in question, Giant Eagle International Limited ("Giant Eagle"), was incorporated on 3 December 2002, and Mr and Mrs Maroo became directors and shareholders. Mr Maroo has described the company as providing textile management, design and supervision services.
9. GHLM, the Claimant, was incorporated in England and Wales in 2001. Mr and Mrs Maroo became directors in 2003, and all the issued shares were initially held by Mrs Maroo. Mr Maroo has explained that the company would organise the production of garments for new clients.
10. In 2003, the Maroos incorporated a Spanish company, Majestique Apparels SL ("Majestique"), with a view to carrying on a clothing business in Spain. Mr and Mrs Maroo were designated as the company's joint "administradores" (or directors) and subscribed for all the shares.
11. In 2004, it was agreed that the Spanish venture would be pursued in conjunction with a Mr Amir Kapadia, who, I gather, had previously run a grocery business in the United Kingdom. Frost Designs SL ("Frost Designs") was incorporated in Spain on 3 June 2004 in pursuance of the scheme. The shares were split equally between, on the one hand, the Maroos and, on the other, Mr Kapadia and his son Rafique, and the two families also had equal board representation.
12. At about this time, leases were taken of two shops in Madrid. On 5 May 2004, Majestique agreed to lease shop premises in Calle Conde de Penalver ("the Goya Shop"). The lease was for a period of five years from 1 July 2004, but Majestique was entitled to terminate after the first year on six months' notice. The rent was subject to annual review by reference to the consumer price index. Although Majestique was the named lessee, the shop was used by Frost Designs.
13. On 16 June 2004, a second lease was entered into, by Frost Designs itself. This lease related to shop premises in Calle Fuencarral ("the Fuencarral Shop"). The lease was for a 10-year term, but Frost Designs had the benefit of a break clause entitling it to bring the lease to an end on 90 days' notice after the first year. The rent was once again to be revised annually by reference to the consumer price index.
14. Trading began in the autumn of 2004, under the name "Frost London". The Goya Shop appears to have opened in October 2004, and the Fuencarral Shop in November. Frost Designs would buy all its stock from Majestique.
15. By December 2004, however, Mr Kapadia was expressing dissatisfaction. On 4 December, he told Mr Maroo in an email that he was "really upset at the way things are made to operate here in Madrid". He referred to debts which he had had to bear, commenting that he did "not run any business where people have to chase me for money and I have to keep on lying or make excuses to them that I am fully aware are stalling tactics" and that he had "had to put in [another 21,000] to keep my name clear". He also said this:
"I do not know where the money Sterling Pounds 250000 that I have given you has gone, I cannot see what I have got for it, ONE SHOP in Goya, which is like paid for. I got Detecsa to stall his payments for so long, Please find me a builder that will do so much work and not be paid a penny yet!!!!."
16. In October 2004, Mr Kapadia sought accounting and administrative assistance from a Mr Rami Panday. Mr Panday, an English-qualified chartered accountant, is a partner in Eurorevision, a firm of accountants and auditors in Madrid.
17. Some time in the second half of 2004, Mr Maroo approached Mr Binani for, and was given, a loan, apparently to fund liabilities in connection with shipments to Brocade. Mr Maroo was not able to repay the loan on time, but asked Mr Binani whether he would participate in a business venture. At this point, one of Mr Binani's daughters, Nidhi (now Mrs Singhania), was soon to graduate from university, and Mr Binani thought that she could gain from experience in a small London-based company. He therefore said that he wished to explore Mr Maroo's proposal, and in January 2005 Mr and Mrs Maroo visited Spain with Mr Binani, his daughter and his wife. In the course of the visit, the Binanis went to the Goya and Fuencarral Shops.
18. On 2 February 2005, Mr Maroo met Mr Binani at the latter's office in Mumbai; Mr Rajesh Bagri, a cousin of, and adviser to, Mr Binani, was also present. Mr Binani and Mr Bagri both said in evidence, and I accept, that the meeting was not a particularly long one (no more than about an hour) and did not involve in-depth discussion of detail. Mr Maroo proposed a joint venture in respect of the Spanish business, but Mr Binani said that he was not interested in joint ventures. It was ultimately agreed that Mr Binani would buy the business and invest 1 million in it, that Mr Maroo would be the managing director at a remuneration of 120,000 a year and that Mrs Maroo would work for the business at a remuneration of 72,000 a year. Amongst the other points agreed was that Mr Maroo would receive 10% of the net profits before tax in the event of a sale of the business.
19. The remuneration agreed for Mr and Mrs Maroo compared favourably with their incomes in previous years. For example, Mr and Mrs Maroo's tax returns show them to have had a total income of 51,452.22 in the year ended 5 April 2004. In cross-examination, Mr Maroo confirmed that he and his wife were receiving about 50,000 to 60,000 a year in 2002-2004.
20. At some point, Mr Maroo provided Mr Binani with a document headed "Project profile for the establishment of a chain of retail stores in Spain". This described "Existing operations" in these terms:
"'Frost London' is a registered brand that is selling clothing in Spain and is presently targeting the 16 30 age group for both men and women.
It retails through its own 2 stores located in Central Madrid and through several nominated stores all over Spain. Imports are cleared in Barcelona and brought for distribution from its warehouse cum office in San Sebastin de los Reyes on the outskirts of Madrid."
Under the heading "Future restructural expansion", the "Project profile" said this:
"It is proposed to expand above operations and restructure them to achieve the following objectives:
[a] Establish additional 16 stores in Spain/Portugal.
[b] Enlarge clothing range to cater to a wider segment as under.Ladies wear Formal Age group 18-40.
Ladies wear Formal Age group 18-40.
Ladies wear Casual Age group 16-40.Ladies wear Casual Age group 16-40.
Clothing accessories for both men and womenClothing accessories for both men and women
[c] Increase number of franchisee stores in Spain and look to develop markets in Portugal, Italy, Eastern Europe and India."
21. Mr Binani and Mr Bagri thought that the "Project profile" was first produced at the 2 February meeting, whereas Mr Maroo said that he had given Mr Binani a copy in late 2004. I do not believe the precise date matters. The evidence suggests that relatively little attention was paid to the document. Mr Bagri thought that there had been some discussion of it at the 2 February meeting, but not on a page-by-page basis; there was no need, he said, as Mr Maroo explained the business orally. In evidence, Mr Binani did not claim to have relied on the "Project profile"; he said that he would not have gone through the document but would just have discussed the principles.
22. The parties advance differing cases with regard to a liability of 412,000 which it was agreed that GHLM should assume. GHLM contends that the 412,000 figure related exclusively to stock. Mr Maroo, in contrast, attributes only 200,000 of the 412,000 to stock. According to Mr Maroo, the 412,000 was "the agreed buy out price of the assets which would be held in Majestique"; those assets (he says) included, but were not limited to, stock.
23. Mr Binani said the following about this in his witness statement:
"Mr Maroo said [at the 2 February meeting] there was stock in the business that he had already paid for. He said that it had cost 412,000 . Mr Maroo said it was good stock and would make a profit when it was sold. I said he could not draw down payment for this until the stock was sold and payment for it had been received. Mr Maroo said that if there was a loss on this stock, then Mr Maroo was to lose this money, not the business, but if there was a gain on the sale of the stock, the gain would be retained in the business".
Mr Binani also said that he did not recall any discussion at the meeting about shops' fixtures and fittings. During cross-examination, Mr Binani said that, in the event, he had subsequently agreed that Mr Maroo could draw down sums totalling 212,000. He said:
"Mr Maroo then came back after a few months and said he was running short, he had some cashflow issues for I don't exactly know why, and then we gave him the authorisation that he can draw down 112,000 from the company . Then he asked me once again for another 100,000, 'Can I take it out from the company?' I said, 'Go ahead and do it'".
24. Mr Bagri gave evidence to similar effect. He explained his recollection in these terms in cross-examination:
"[T]here was one thing which was coming in the way of the arrangement and that one thing was a stock of goods worth 412,000. Now, if we assume that that stock was left as it is, for a moment, then there would be a conflict of interest for Mr Maroo to be able to do the same business with the investment here. So in that context, Mr Maroo brought forward and disclosed there is a stock of goods which is lying. [W]e were satisfied with Mr Maroo saying that the stock is good and the value is assured, guaranteed, it will not be less than the value which is being invested in. In that respect, he also went further; that if there is a loss in liquidation of that stock then that will be to the account of Mr Maroo".Mr Bagri said:
"This [i.e. the 412,000] was the stock value and it was a conflict of interest and that is why it was brought and rightly disclosed by Mr Maroo and there were no other things disclosed".
25. For his part, Mr Maroo said that he had:
"advised Mr Binani that the value of the investment in the two stores, including stock, amounted to 412,500 and this had been funded by loans made by Brocade to Majestique. The sum of 412,500 included the value of the stock, the leases and the fixtures to the premises."
It was agreed at the 2 February meeting, Mr Maroo said, that "[t]he sum of 200,000 would be allocated to stock and the remainder sum of 212,500 would be allocated to the lease and fixtures attached to the premises". GHLM was:
"[to] repay the loan of Brocade owed by Majestique as follows:
i. 200,000 would be repaid from the sale of goods.
ii. 112,500 would be paid by 31st March 2006 (subsequently paid after Mr Binani's personal approval at a meeting in London in May 2006 ).
iii. 100,000 would be paid by 31st March, 2007".
26. Mr Maroo is supported by his wife. She gave evidence to the effect that, following the 2 February meeting, her husband had told her about it. She said in a witness statement that she had been informed that the matters agreed had included these:
"The sum of 200,000.00 would be allocated to stock and the remainder sum of 212,500 would be allocated to the leases and fixtures attached to the premises .
GHLM would acquire the shareholding in Majestique and would repay the loan of Brocade owed by Majestique as follows:
1. 200,000 would be paid from the sale of goods.
2. 112,500 would be paid by 31st March 2006
3. 100,000 would be paid by 31st March 2007".
27. Mr Maroo's case can also be said to accord with a passage from a letter bearing the date 1 April 2005. The letter in question, which is signed by Mr Maroo on behalf of GHLM and addressed to Brocade, includes this:
"We are pleased to inform you that Mr Braj Binani of Binani Group have approved an investment of 1 million into the business of the retailing run under the name of Majestique Apparels SL
We would be taking over this company and the brand Frost London and we would be paying your investment of 412500 in Majestique Apparels SL as under
a) 200000 by way of sale of stocks to you
b) 112500 by payment with interest by 31st March 2006
c) 100000 by payment with interest by 31st March 2007 ."
28. Notwithstanding this letter, I do not accept Mr Maroo's version of events. My reasons include these:
i) I consider Mr Binani and Mr Bagri to have been honest, and generally reliable, witnesses. In contrast, as mentioned further below, I take the view that Mr Maroo's evidence must be treated with the greatest of caution and that Mrs Maroo was also an unreliable witness;
ii) Mr Binani's account is consistent with a manuscript note he made in 2006. He wrote "Op. stock" (an abbreviation for "opening stock") against " 412000";
iii) On Mr Maroo's version of events, GHLM was to have the benefit of only some of the stock which had been bought, and it was for him to decide which stock should be allocated to GHLM and which he would retain. Mr Binani and Mr Bagri are, as it seems to me, unlikely to have agreed to such an arrangement. They would have seen it as giving rise to just the sort of conflict of interest that Mr Bagri thought unacceptable;
iv) I also think it unlikely that Mr Binani and Mr Bagri would lightly have agreed to GHLM undertaking liabilities in respect of matters other than stock. In particular, I doubt whether Mr Binani would have been willing to assume significant indebtedness for leases or fixtures and fittings, and I think it still less likely that he would have accepted such indebtedness without further inquiries;
v) A linked point is that, whatever may previously have been spent on the Goya and Fuencarral Shops, even Mr Maroo is unlikely to have seen them as of much value. Mr Maroo asserted that the lease of the Fuencarral Shop was worth 490,000, but I cannot accept this, especially since (a) there is no documentary confirmation (Mr Maroo said that there was a "verbal offer" from "two brokers in that area"), (b) the Shop had been leased less than eight months before the 2 February meeting at a rent which the landlord presumably considered to be a reasonable one, (c) the scope for the lease having acquired value is reduced to an extent by the fact that it provided for rent to increase in line with inflation, (d) the lease could not be assigned without the landlord's consent (Mr Maroo himself said, "We didn't have the right to sell the lease") and (e) the Fuencarral Shop was given up for nothing within a couple of years;
vi) I found some of Mr Maroo's evidence about the 412,000 hard to follow. For example, Mr Maroo said at one stage that "the summer stock hadn't started coming" on 2 February and that all the winter stock in Spain was allocated to Mr Binani. On this basis, all stock in Spain should seemingly have been allocated to Mr Binani. However, Mr Maroo also said that he "had to keep" some of the Spanish stock for himself. He spoke too of summer goods having been received "during January, February, March 2005" and "between January to March 2005" (i.e. in part before the 2 February meeting) and of 15% of the stock in Spain having been summer stock. It is hard to see how this evidence can be fully reconciled. A further point is that it is not obvious to me why even Mr Maroo would not have wanted all the stock in Spain to be included in his arrangement with Mr Binani. I should have thought that summer stock, in particular, was going to be needed for the purposes of that arrangement since (as Mr Maroo recognised in cross-examination) the shops would otherwise have had nothing to sell come April 2005. Mr Maroo, however, repeatedly claimed that only winter stock was allocated to Mr Binani;
vii) When Mr Maroo first met Mr Vimal Shah (as to whom, see paragraph 67 below) on 6 and 7 February 2008, he spoke of 412,000 as the value of the stock which Brocade had invested in GHLM and of its being payable only as and when the stock was sold. It was not until they met again on 11 March (so Mr Shah said, and I accept) that Mr Maroo said that only 200,000 of the 412,000 related to stock;
viii) No one on the Binani side was aware of the letter quoted in the previous paragraph until April 2009, when Mr Maroo produced it in response to a letter from GHLM's solicitors. The probability is that it was created at that stage and backdated.
29. In the circumstances, the 412,000 liability which GHLM subsequently undertook to Brocade will, as it seems to me, have been a qualified one. Consistently with what had been agreed at the 2 February meeting, the 412,000 will have been payable only (a) as and when stock was sold and (b) to the extent of the proceeds of sale. The 412,000 figure will have represented the maximum to which Brocade could become entitled.
30. A further issue between the parties relates to how long Mr Maroo was to be employed. Mr Maroo gave evidence to the effect that a "minimum five year commitment" had been agreed at the 2 February meeting. This, he argued, was reflected in letters of 1 April 2005. The letter bearing that date which was signed by Mr Maroo on behalf of GHLM and addressed to Brocade (see paragraph 27 above) included this:
"In addition we would be retaining the services of both your directors on the following terms
a) Mr Anil Maroo for a non terminable period of 5 years at the annual payment of 120000 euros as consultancy fees.
b) Mrs Nita [M]aroo on an annual payment of 72000 euros as designing/supervision fees."
Further letters bearing the date 1 April 2005 refer to the remuneration which Mr and Mrs Maroo were to receive from GHLM. One of the letters was addressed to Mrs Maroo and signed by Mr Maroo, the other addressed to Mr Maroo and signed by Mrs Maroo. The letter to Mr Maroo confirmed that he was to "receive a remuneration of 120000 per annum as consultancy / management charges for supervising the retail project in Spain". It also included this:
"This arrangement is irrevocably confirmed for a period of five years from 1st April 2005, as per dialogue with Mr Braj Binani who would be investing in this venture."
31. Mr Binani accepted that he had said that he would commit to keeping the business for at least five years; this is borne out by a manuscript note Mr Binani later made, reading, "5 yrs minimum [commitment]". Mr Binani also said, however, that he had told Mr Maroo that everything was subject to performance and that he "certainly did not agree to give Mr Maroo a fixed-term, non-terminable employment contract".
32. In similar vein, Mr Bagri said this in his witness statement:
"There was absolutely no discussion about a fixed term employment contract. I remember that there was a short discussion about how long Mr Binani would invest for and I recall that he said something like: 'We'll see what the position is in say 5 years' but that was in relation to his investment and when he might wish to sell the business. I do not believe that Mr Maroo could possibly have interpreted this to mean that he had a fixed term employment contract for 5 years".
33. For my part, I do not think a reasonable observer would have understood Mr Binani to be committing himself to Mr Maroo remaining employed for five years regardless of the circumstances. In any event, what matters in the context of the present proceedings is whether GHLM (as opposed to Mr Binani) was obliged to continue to employ Mr Maroo for five years. In my judgment, it was not. Any commitment was given by Mr Binani, not GHLM. I have already expressed the view that the letter dated 1 April 2005 to Brocade was backdated (see paragraph 28(viii) above). The likelihood is, as it seems to me, that the other letters bearing the 1 April date were similarly backdated.
34. In the period after the 2 February meeting, Shildon Holdings Limited ("Shildon Holdings"), a company of which Mr Binani is the ultimate beneficial owner, was incorporated in Cyprus and became GHLM's sole shareholder. Mr and Mrs Maroo transferred the shares they held, and further shares were allotted to Shildon Holdings, in return for the 1 million which was invested on Mr Binani's behalf by companies in the beneficial ownership of his family. The end result was that Shildon Holdings held 1 million shares in GHLM. Mr and Mrs Maroo remained GHLM's only directors and also Majestique's "administradores". The latter company appears to have been treated as a subsidiary of GHLM.
35. Before Mr Binani became involved, GHLM operated from the attic of the Maroos' home. When Mr Binani invested, it was decided that the company should have an office of its own and so premises were rented in Finchley Road.
36. On 1 April 2005, the landlord of the Fuencarral Shop agreed to the lease contract being assigned from Frost Designs to Majestique. In the course of April, Majestique entered into leases of two further Spanish shops, in Badalona (Barcelona) ("the Badalona Shop") and Alcorcon (Madrid) ("the Alcorcon Shop"). In June, Majestique leased a further shop in Madrid ("the Vallecas Shop"). A lease was also taken of another shop in Barcelona ("the Santa Coloma Shop"). Majestique leased warehouse premises too, in Aranjuez and Secoya (Madrid).
37. In the course of 2005, possibly even at the 2 February meeting, Mr Maroo asked if he and his wife could take their remuneration as consultancy fees to be charged by a company they owned, and Mr Binani agreed to this. Invoices for the Maroos' remuneration were accordingly raised by Brocade. Consistently with this practice, it seems to me that the Maroos' remuneration must have become payable to Brocade rather than to the Maroos personally.
38. In May 2005, Mrs Singhania came to work for GHLM. She was described by her father and Mr Maroo as a "management trainee". In practice, she tended to surf the internet for designs, pack clothes into boxes and do other general office jobs; she was not involved in management functions. Early in 2006, she started to become involved in other work for her father. She stopped working at GHLM altogether in about April 2006.
39. An "imprest" payment system was used to fund Mrs Singhania's personal expenses and also those of her father. Money was advanced to Mr Maroo so that he could pay such expenses. It is common ground between the parties that the "imprest" account was intended to be separate from the funding which Mr Binani provided to GHLM.
40. Mr Kapadia seems to have first expressed a desire to withdraw from the Frost Designs business in December 2004. By early February 2005, he and Mr Maroo had evidently decided to part company. On 6 February, Mr Kapadia told Mr Panday in an email that he and Mr Maroo were to "split the losses between ourselves and then work out a formula as to how [Mr Maroo] is going to refund the money I have invested back to me". Mr Kapadia also referred to the possibility of a VAT refund enabling Mr Maroo to pay him "the additional money [he] invested in November". Mr Kapadia further told Mr Panday that Mr Maroo "wanted [Mr Kapadia] to take over the Fuencarral shop" but that he had said that there "was little point in [him] carrying on". At some point, Mr Kapadia referred when speaking to Mr Panday to having lost "a quarter of a million".
41. In March 2005, Mr Maroo told Mr Kapadia in an email:
"I have tried to get a partner for this venture but Goya is not acceptable to anyone. For Fuencaral I do have someone who will invest $ 100000 in lieu of 50% shares of Frost Designs SL."
Mr Maroo proceeded to offer Mr Kapadia "$ 100000 from the investor in lieu of your shares of Frost Designs by mid May" and "Balance amount [after loss sharing] in four monthly instalments commencing from June onwards".
42. In June 2005, Mr Kapadia complained to Mr Maroo that the latter "had always said that [he] would refund the monies that was due to [Mr Kapadia] in 4 instalments starting from [J]une 2005", but had now said that he would "give [Mr Kapadia] a ring" if he could make a payment. In his reply, Mr Maroo said:
"As regards your investment in this project the situation is that I am trying to get someone else to invest in your place so that your investment can be replaced. The person will only talk after seeing the accounts and the delay is not of my making. I have not borrowed any money from you for this project you have invested on your own free will. We are trying to arrange encashing of assets and replacement of investment ."
43. After further chasing from Mr Kapadia, Mr Maroo sent him an email on 5 August 2005. He suggested that there had been losses on the project and "due to Goya closure" totalling 240,000. Deducting 50% of that from the money otherwise remaining due to Mr Kapadia, Mr Maroo arrived at a net figure of 134,700. Mr Maroo went on:
"The Goya owner has 48000 euros of deposits which can be recd only in Jan from him and this amount can be paid to you in Jan- approx 34000.
The Indian company is paying you 75000 for the shares of Frost design that they are willing to take up - they reduced their valuation of the shop so the amount got reduced.
That leaves a balance of 25000 which I will pay you by Dec end because I have inherited a lot of winter stock from Frost Design which can only be sold from Sept onwards on 90 day terms to customers."
44. In October 2005, Mr Maroo referred to being "supposed to hand over 5 pagares [i.e. promissory notes] of 20000 each to [Mr Panday] against transfer of shares of FROST DESIGN", "[a]s per talk with [Mr Kapadia]". The best part of a year later, in September 2006, Mr Kapadia was complaining that he had been made a fool of and had "parted with funds TOO EASILY". Mr Maroo wrote:
"I have closed Goya and written off the investment and am looking for a company to run Fuencaral. The retail business has not worked and has put me in acute financial losses. It is fortunate that you parted at the right time and on my part it would have been better not to have taken your share but to have jointly sold out the stores .
My intentions are to pay your dues and the only way it will work is by sales of stock to wholesale clients. It is taking time but it is happening. No doubt you may feel that I am just prolonging but it is best to apprise you of the real situation."
45. In his Defence, Mr Maroo asserted that there had been "no financial support" from Mr Kapadia. In cross-examination, Mr Maroo denied that Mr Kapadia had provided funding to the tune of 250,000; Mr Kapadia did no more (Mr Maroo said) than fund expenses as shown in Frost Designs' records. Mr Maroo explained the payments that he had agreed to make to Mr Kapadia by reference to the value of the lease of the Fuencarral Shop. He said that the goodwill for the Fuencarral Shop was assessed at 490,000 and went on:
"50 per cent of that goodwill amounted to 245,000. And 2 per cent was deducted because, if we sold the store, we would have to pay the broking company 2 per cent charges. So that was an arbitrary figure, and that left us with 240,100."
46. Having regard, however, to the matters mentioned in paragraphs 15 and 40-44 above, the likelihood must, I think, be that Mr Kapadia provided much more funding than Mr Maroo was prepared to admit. In emails to Mr Maroo, Mr Kapadia referred to having given Mr Maroo 250,000, to having had to put in "another" 21,000 and to having "parted with funds". Far from disagreeing with Mr Kapadia, Mr Maroo himself spoke of Mr Kapadia's "investment" and of his having "invested on [his] own free will". Mr Maroo also calculated that Mr Kapadia was owed 134,700 and agreed to pay him sums totalling 100,000. It seems to me, moreover, that these payments cannot plausibly be explained by reference to the value of the lease of the Fuencarral Shop (as to which, see paragraph 28(v) above).
47. A further point arising from Mr Maroo's email correspondence with Mr Kapadia is that some of Mr Maroo's comments cannot be squared with reality. For example, when Mr Maroo told Mr Kapadia in March 2005 that "Goya is not acceptable to anyone", Mr Binani had already agreed to invest in a business which included the Goya Shop. When Mr Maroo later informed Mr Kapadia that he was "trying to get someone else to invest" but the person "will only talk after seeing the accounts", Mr Binani had not only agreed to invest but had done so. Nor can there be any sound basis for Mr Maroo's claim that the "Indian company" was paying Mr Kapadia 75,000 for his shares, having "reduced their valuation of the shop".
48. In the first half of 2006, the number of shops leased by Majestique fell by two. In January 2006, a Court order was made for the Goya Shop to be vacated. The lease of the Badalona Shop was terminated in May 2006.
49. Soon after this, steps were taken to transfer the business carried on by Majestique to another Spanish company, Shildon Trading SL ("Shildon Trading"). Shildon Trading was incorporated on 1 July 2006 as a wholly-owned subsidiary of Shildon Holdings. Shortly afterwards, the Fuencarral lease was passed on to Shildon Trading with the landlord's agreement, and the Vallecas Shop was the subject of a similar assignment in October 2006. The other shops of which Majestique was the tenant were also taken over by Shildon Trading. Stock was sold from Majestique to Shildon Trading and then to GHLM. Accounting records also show shop fixtures and fittings to have been transferred to Shildon Trading from Majestique.
50. On 6 July 2006, Mr Maroo sent Mr Panday an email in which he said this:
"The Goya owner has taken his keys today so that solves the problem of future rent and also encashed his abal guarantee which only leaves with problem of net balance rent.
Under the circumstances if we continue with the existing accountant for completing accounts up to 31st [July] and then file for liquidation it would put a stop to several hassles."
51. In cross-examination, Mr Maroo said that the "only reason" for shifting the business from Majestique to Shildon Trading was "the problem with the Goya store". He explained what he meant in these terms:
"the Goya store, the rent was too high. We couldn't afford the rent compared to what was selling. Perpetually from the time of November 2005 onwards we have been late in rent payments, and there was no prospect that the product mix that we had or we were making would have acceptance in that area. Therefore, we requested the landlord to terminate the lease but he refused, and then we gave him another offer that, 'Please reduce the rent', and he refused. That left us with the only solution that we sell our business to Shildon and we go to the landlord and say, 'We are not doing trading business. So now you have no option but to take back the store.'"
52. It is apparent, as it seems to me, that a major motive for the transfer of business to Shildon Trading was to escape obligations in respect of the Goya Shop. The transfer was also, I think, seen as having advantages in relation to outstanding tax and social security liabilities. Mr Maroo reckoned that the authorities were more likely to take a "lenient view" (in particular, as regards penalties) if Majestique were no longer in business.
53. Mr Panday was Shildon Trading's first "administrador" (or director), but he said in evidence, and I accept, that he acted only on instructions. The work that he was prepared to undertake was essentially that set out in a written "Proposal for administrative and payroll services" which he sent to Mr Maroo in June 2006. Within a short time, Mr Loureiro, the Fourth Defendant, took over as "administrador", but it is obvious that he too will not have made significant decisions without instructions from Mr Maroo; in September 2008, Mr Loureiro asked Mr Maroo for "a document to say that I was only administrator for the purpose of writing and that it had no responsibility in any act of management". When no longer an "administrador", Mr Panday was empowered to act on its behalf, but he did not do so without the approval of Mr or Mrs Maroo or Mr Loureiro; he continued to follow instructions. Mr Panday said that "Mr Maroo was really the effective director of the company as he (or his wife, Nita) ordered and supervised every single operation".
54. Mr Maroo said that his role was on behalf of Shildon Holdings as GHLM's parent. However, assessing the position by reference to English law (there being no evidence as to the relevant Spanish law), I have no doubt that Mr Maroo was a shadow director of Shildon Trading. It is noteworthy that Mr Maroo was never a director of Shildon Holdings.
55. There was some debate before me as to whether Mr Panday was Majestique's accountant. I accept Mr Panday's evidence that he never undertook this role.
56. The centre of gravity moved progressively towards Portugal. Mr Maroo confirmed Mr Loureiro's appointment as consignment agent for Portugal in May 2006. On 1 June 2006 GHLM entered into a lease of warehouse premises at Viseu in Portugal owned by T.S.R., a company owned by Mr Loureiro. Diferentes Texturas, Texteis, LDA ("Diferentes") was incorporated in Portugal on 13 December 2006 with Mr and Mrs Maroo as its only shareholders and directors. In the following month, it leased warehouse accommodation in Portugal. In the middle of 2007, books and records of GHLM which had already been moved from London to Madrid were transferred on to Portugal. In the July, it was decided that GHLM should "take back all goods supplied/or in possession with Shildon Trading SL and have these goods sent to the warehousing facilities of [Diferentes] ."
57. Mr Maroo asked Mr Binani on a number of occasions for additional money to be made available by way of loan. The first request was made in December 2005, when Mr Maroo sought a loan of 120,000 because "initial losses" had "temporarily depleted our capital"; 120,000 odd was advanced in February 2006, and extra funds were made available in April and August of 2006.
58. In September 2006, Mr Maroo requested a further loan of 70,000. In an email to Mr Binani, Mr Maroo attributed the need for the loan to matters relating to VAT. He said that Majestique had transferred assets/goods to a value of 1.5 million to Shildon Trading and had had to charge VAT on this amount. He went on:
"Due to the invoicing of 1.5 million euros the VAT amount payable by Majestique is 240000 euros but it had a credit balance of 140000 euros in respect of previous payment of VAT on assets/goods purchased. Therefore net payment due as on 30th Sept is 100000 euros.
Shildon Trading SL on the other hand has to take a refund of 240000 euros but it can only receive this by end March ."
On this basis, Mr Maroo asked for "a temporary advance of 70000 repayable by Feb from our collection of sales to pay this VAT liability", with the "refund of Shildon Trading SL earmarked to return the earlier accommodation of 150000 provided in Jan 2006".
59. By the end of 2006, Mr Binani had, in total, lent (or arranged the loan) to GHLM of some 477,500 on top of the initial investment of 1 million. At the close of his oral evidence, Mr Maroo suggested that the 477,500 represented "de facto capital" rather than loans, but I reject that claim.
60. In February 2007, Mr Maroo asked for a further 150,000, together with rescheduling of repayments of past loans. He explained in an email to Mr Binani:
"We have negotiated an order for supply of [annually] Stg 600000 of university uniforms in Portugal and the prospect of doing similar contracts for Spain are also promising ."
The business would, Mr Maroo claimed, "help us to reach Stg 900000 sales in 2007 and Stg 1.2 Million in 2008 on a conservative basis without accounting for any expected growth". Mr Binani refused to advance any more money, but in March 2007 Mr Maroo requested Mr Binani "to reconsider [his] decision and allow us an accommodation of 50000 repayable by 1st June to help in unlocking goods from bond", explaining that it was a "make or break situation for the company to go through the season smoothly".
61. In May 2007 Mr Binani decided that the business should be closed down. On 10 May 2007, Mr Maroo met Mr Bagri and Mrs Singhania at a London hotel to discuss the business. A day or two later, Mr Binani met the Maroos and instructed them to wind down the affairs of the business and realise its assets by 31 March 2008. Mr Maroo sought to persuade Mr Binani that it would be better to allow trading to continue until the end of 2008, but Mr Binani rejected this proposal because he thought it would require extra funding. Mr Bagri said that he got the sense that, if Mr Binani invested more money, he would just continue to lose money; in cross-examination, Mr Bagri described the resources as having been "prematurely exhausted" and drew an analogy with a "leaking tank".
62. In June 2007, Mr Binani, feeling that he had no real choice, agreed to advance a further 100,000, bringing the total lent to 577,500 (in addition to the 1 million invested in the shares). On 30 June, Mrs Maroo ceased to work for GHLM.
63. By August 2007, the business no longer had any shops. The Santa Coloma Shop had been handed over to its landlord at the end of 2006. The Alcorcon Shop had also been given up by May 2007. On 11 May 2007, Mr Maroo told Mr Panday in an email that the Fuencarral Shop had been vacated and that the keys were to be handed in the next day. On 13 July, the lease of the Vallecas Shop was cancelled. In an August email, Mr Maroo mentioned that "all the stores" had been closed. Mr Panday's recollection was to the effect that, the Alcorcon Shop apart, all the landlords had chased for payment when the leases were surrendered (although, he said, "the Fuencarral landlord did not chase too much"). In cross-examination, Mr Maroo initially accepted that it was not possible to sell any of the leases.
64. Mr Maroo nonetheless emailed Mr Bagri in the following terms on 24 September 2007:
"The leases of the two stores had been put up for sale in June but responses started coming only in Sept. The reasons being that July was a month when retailers were organising their end of season sales and in August most people were on their holidays. Finally through agents we have been able to sell the leases with effect from 1st October both stores without fittings. The fittings have been dismantled and sent by transport to our warehouse in Portugal from where we are advertising for their sales.
The leases have been sold for 145000 with two months rent free period and one month agent commission as are prevalent conditions in lease transfers. Payments will come in instalments between July 2008 to Dec 2008."
65. On the face of it, this makes no sense: there were no longer any shops to sell. Mr Maroo, however, attempted to justify his email. He said that, whereas other shops had had movable fittings (which, he said, had been removed and taken to the Portuguese warehouse), with the Fuencarral and Vallecas Shops "the total refurbishment was on the building" and so could not be extracted. To obtain value from such refurbishment work (which Mr Maroo termed "installations"), new occupiers were sought, on the basis that the landlords would be asked to transfer the leases to them. "What," Mr Maroo said, "we would get in return from that customer will be the cost of refurbishment that we have spent on the stores". Thus, when Mr Maroo told Mr Bagri that "leases have been sold for 145000", he was referring to:
"the equipment, the additions that were put in the store which the new buyer was going to reimburse for because we had got the leases transferred in his name from the owner."
"Wherever leases is written, it is actually installations", Mr Maroo claimed.
66. I do not accept this explanation. The email to Mr Bagri gave the impression that "leases" (and not "installations") had been successfully sold on terms common with "lease transfers". That, I think, must have been what Mr Maroo intended Mr Bagri to understand, and, even on Mr Maroo's version of events, it was untrue. The problems, however, go beyond this. There is no evidence of real significance that a sale of even the "installations" was ever agreed. It is, moreover, inherently most unlikely that incoming tenants would have been willing to pay Shildon Trading for "installations" which had accrued to the owners of the shops. Nor would Shildon Trading seem to have been the obvious person to find new tenants: both landlords appear to have chased Shildon Trading for unpaid rent, even if "the Fuencarral landlord did not chase too much". The truth, in my view, is that Mr Maroo was simply lying to Mr Bagri about the 145,000 which was said to be payable.
67. Towards the end of 2007, Shildon Holdings instructed Mr Vimal Shah, a chartered accountant with the London firm PSJ Alexander & Co Limited, to assist in and oversee the winding-down of GHLM's affairs.
68. In November 2007, Mr Maroo asked Mr Panday to arrange for a contract to be drafted on the following basis:
"a) Contract dated 1st July 2006 --date can be a few days later than the date on which Shildon Trading SL was incorporated-----between Frost Design SL and Shildon Trading SL to allow franchisee rights to sell Frost London brand goods exclusively in the stores based in Santa Coloma and Alcorcon.
b) Retail prices to be as fixed by Shildon Trading SL from time to time.
c) Franchisee agreement to be valid for a period of 3 years but can be terminated by either side by giving 6 months notice."
At the end of December, Mr Maroo requested Mr Panday to "have the lawyer do the franchisee agreement between Shildon and Frost" before a meeting scheduled for 16 January 2008. On 12 January, Mr Maroo told Mr Panday in an email:
"The [franchise] agreement needs to be short and something that fits on one paper the important clause is that it can only be terminated by giving 6 months notice by either side and the validity of the agreement is 3 years. Whatever else is put in the agreement is cosmetic."
69. In February 2008, Mr Maroo asked Mr Panday to arrange for another agreement to be prepared. He said in an email:
"Need from the lawyer a draft contract of sale of lease of shops---if she sends it in as an attachment I could fill in the details. I need this for my internal management issues. Please request her to make a simple draft contract ."
In a subsequent email, Mr Maroo requested Mr Panday to advise the lawyer:
"to make out a draft contract of sale of lease between Shildon and -------- incorporating the following
a) Address of shop as--------
b) Price of fittings------
c) Price of lease and [renovations]---------
d) Date of transfer---------
e) Payment due on ----------".
When Mr Panday replied, "sale of what lease??", Mr Maroo responded, "lease of shop", following which Mr Panday commented:
"[S]hildon has no leases to sell. There are no shops. I don't understand what you want."In reply, Mr Maroo said:
"I need it for my internal use only it has nothing to do with accounts".
70. Mr Maroo chased for the draft contract on 14 February 2008 and again on 19 February. Later in the year, in June, Mr Maroo emailed Mr Panday about some matters that had been raised by Mr Shah. Under the heading "Shop Sales", Mr Maroo wrote:
"Please express your ignorance about this saying that you are not involved."
71. Mr Maroo sought to explain this correspondence on the basis that it related to a proposed deal with a Mr Malhan. As I understand it, Mr Malhan is said to have run concessions in shops with a partner from the beginning or middle of 2006. Later that year, it was agreed (according to Mr Maroo) that Mr Malhan would be provided with two stores to run as a franchisee, but Mr Malhan was not willing to proceed until he was ready with the requisite money. When the Santa Coloma and Alcorcon Shops were vacated, the fittings in them were dismantled and sent to Portugal. In early 2008, the idea (on Mr Maroo's version of events) was to obtain two shops for Mr Malhan and install the Santa Coloma and Alcorcon fittings in them; Mr Maroo said in cross-examination:
"if Mr Malhan's agreement had to be executed, we had to find two premises where to put the fittings in place and the installations."
It was in this context that Mr Maroo asked for the draft contract of sale. Shildon Trading was to enter into leases of two shops and then transfer them to Frost Designs, Mr Malhan wishing "to take over the company by just buying the shares". The leases would not be taken in the name of Frost Designs from the outset because "[t]he contract was with Shildon". Mr Malhan would pay 150,000 for the fittings (or "installations"). In the event, however, Mr Malhan pulled out of the deal in March/April 2008.
72. The draft franchise agreement for which Mr Maroo had asked in November 2007 (paragraph 68 above) was also justified by reference to Mr Malhan. Mr Maroo said in cross-examination that Mr Malhan had asked for this and that the contract was to refer to "the stores based in Santa Coloma and Alcorcon" because Mr Maroo "knew that [they] could get new stores there"; the fittings which had been removed from the shops which Shildon Trading had formerly occupied in Santa Coloma and Alcorcon were thus to be installed in new shops in the very same areas. The contract was to be dated 1 July 2006 "[b]ecause that's the time [they] made the agreement with Mr Malhan".
73. Mr Maroo had been telling representatives of Shildon Holdings since at least January 2007 that he was expecting to receive 150,000 from a deal with Mr Malhan. Thus, an "Operations Review" sent to Mr Binani that month referred to "[t]he 2 franchise stores agreed" being "handed over by end June with proceeds being transferred to Shildon Trading S.L. by the end of the year". A balance sheet which Mr Maroo sent to Mr Bagri in January of the following year showed assets as including 150,000 in respect of "Franchisee storesale" (as well as 145,000 for "Own Store Sale" - as to which see paragraphs 64-66 above). When Mr Shah visited Madrid on 21 February 2008, he was provided with a balance sheet for Shildon Trading that included a figure of 148,000 for "Franchisee storesale" amongst the company's assets.
74. Soon after this, however, Mr Maroo was speaking of "premature termination" of a franchise agreement. In an email to Mr Binani of 10 March 2008, Mr Maroo referred to an issue "to meet the franchisee to whom 2 stores were sold last year and to settle the issue of premature termination of the franchisee agreement". In the April, Mr Maroo explained that the "Spanish Franchisee" was not (now) willing to pay as much as had been expected, in part because supplies had been "terminated without the 6 months termination notice period". Mr Shah said that the offer had to be 150,000, but in June Mr Maroo said that the matter had been settled on the basis of a payment of 111,360. Mr Shah both expressed surprise that an offer of this size had been accepted and pressed to know what had become of the 111,360. Mr Maroo responded that 107,000 of the money had been appropriated to his salary and 4,360 paid to Diferentes.
75. The likelihood is, I think, that Mr Maroo asked for the preparation of a form of franchise agreement incorporating a six-month termination provision with a view to using it to help to account for the fact that the anticipated 150,000 was not going to be received. Mr Maroo's explanation for why he wanted the document does not appear to me to hold water. Had he envisaged entering into a genuine agreement with Mr Malhan on the basis of the draft, Mr Maroo surely would not have said that all terms other than those relating to period and termination were "cosmetic". Further, I find unconvincing the reasons given for backdating the document and for identifying Santa Coloma and Alcorcon as the locations of as yet unfound stores.
76. I do not think the purported justification for the request for "a draft contract of sale of lease of shops" stands up to examination either. Mr Maroo himself told Mr Panday that the document was for "internal management issues" and "internal use only". Even apart from this, Mr Maroo's story is entirely implausible. For instance, why would Mr Malhan agree to pay 150,000 (or any sum) without knowing which shops it was proposed should be leased or whether "installations" from the Santa Coloma and Alcorcon Shops would be appropriate to them? Why would shops be leased by Shildon Trading first and then sold to Frost Designs, especially when the transfers would have required the landlords' consent? It also seems unlikely that second-hand fittings from the Santa Coloma and Alcorcon Shops would have been thought to be worth anything like as much as 150,000.
77. There were periodic references to the prospect of the 240,000 VAT refund which Mr Maroo had mentioned in September 2006 (see paragraph 58 above). In January 2007, Mr Maroo sent Mr Binani a document in which it was said that a "VAT refund of 150,000 has been applied for". In the March, Mr Maroo told Mr Binani that the "VAT refund of 150,000 when received" would be used to repay him (Mr Binani). In April, Mr Maroo showed a VAT refund of 150,000 as a receivable when writing to Mr Bagri, and the 150,000 figure featured in a number of statements which Mr Maroo sent Mr Bagri periodically. In November, Mr Maroo told Mr Bagri that the refund was "totally dependent on the fund allocation from the govt to the VAT dept". In January 2008, Mr Maroo told Mr Bagri, "Vat money not recd- have meeting in VAT office for this in the coming week". In February, Mr Maroo gave "non receipt of VAT refund of 150000" as a cause of cash flow problems.
78. In advance of Mr Shah's visit to Madrid on 21 February 2008, Mr Maroo sent Mr Panday an email on 7 February in which he said:
"Please do not discuss [amount] of the refund when we meet as it is he does not understand Spanish so what ever is the conversation is all greek to him."
In a further email of 8 February, Mr Maroo asked Mr Panday to "take care not to mention refund amount on any letter you write to the tax authorities". A week later, on 15 February, Mr Maroo requested Mr Panday's office to do certain things either "For Actual accounts" or "For Management Account". The steps that were to be taken in relation to "Management Account" included (a) the cancellation of a 100,000 "traspaso" (or journal entry) to be found in the VAT account in Shildon Trading's nominal ledger with the date 31 December 2007 and (b) a matching increase in the opening balance (from 100,603.43 to 200,603.43). The changes were thus to leave the total amount shown as owing to Shildon Trading in respect of VAT unchanged, but to attribute 100,000 of this to an earlier period.
79. When Mr Shah visited Madrid again in April 2008, he was told by Mr Panday that the "VAT refund is in enquiry as it relates to the sale of goods by [Majestique] to Shildon and there is an enquiry as to whether [Majestique] ever paid the VAT due on the sales" (to quote from an email Mr Shah sent Mr Panday following the visit). In May, having been provided with written authorisation for Mr Shah's firm to act on behalf of Shildon Holdings, Mr Panday told Mr Shah that the anticipated refund amounted to about 100,000. In June, Mr Shah challenged Mr Maroo on, among other things, why he had been showing a higher refund than in fact claimed. In his response, Mr Maroo said that the figures he had given accorded with trial balances, but that he and Mr Panday had recently discovered that "a purchase invoice from GHLM was wrongly posted to VAT paid account instead of purchases in the year 2006".
80. Mr Panday said in evidence that Mr Maroo had wanted him to cover up for him by saying that there had been an accounting error, but that he (Mr Panday) had flatly refused to do this. In cross-examination, Mr Panday said that he was furious when Mr Maroo claimed that there had been an accounting error. Mr Panday also said that Mr Maroo had told him that he (Mr Maroo) had lied to someone about how much VAT was due to be recovered.
81. Mr Panday explained in a witness statement that the bulk of the VAT borne by Shildon Trading emanated from three invoices: two invoices from Majestique, in respect of "assorted shirts" and fixtures and fittings respectively, for sums including VAT totalling 69,632, and an invoice from Frost Designs for shirts for a price which included VAT of 30,875.67. In all, Shildon Trading was, Mr Panday said, entitled to a VAT refund of around 105,000.
82. In cross-examination, Mr Maroo put forward two reasons for Shildon Trading's VAT refund being less than the 240,000 or 150,000 he had led representatives of Shildon Holdings to anticipate. One was that there had been a failure to invoice Shildon Holdings for assets transferred to it from Majestique. The other was to the effect that Mr Panday's firm had erroneously posted a particular invoice for 100,000 to the VAT account in Shildon Trading's nominal ledger.
83. As for the latter point, the VAT shown as recoverable in Shildon Trading's accounting records was increased by 100,000 between 28 December 2007 (the date of a print-out which did not include the change) and 16 January 2008 (the date of a print-out reflecting the change). The adjustment cannot, accordingly, account for the VAT figures Mr Maroo had already given. It is also to be noted that the instructions Mr Maroo gave in his 15 February email in respect of VAT entries would (as already mentioned) have left the amount shown as recoverable in respect of VAT unchanged. More generally, I accept Mr Panday's evidence that the VAT figures reflected instructions from Mr Maroo rather than any mis-posting.
84. As regards the suggestion that there had been a failure to invoice Shildon Trading for assets transferred to it, this seems to have emerged for the first time during the trial. Further, had there been such a problem, Mr Maroo would surely have raised an appropriate invoice rather than claiming (as he did) that a "purchase invoice from GHLM was wrongly posted". It is, moreover, too much of a coincidence to suppose that the additional VAT of which Shildon Trading could have sought recovery exactly matched the 100,000 allegedly mis-posted. In any case, the supposed failure to invoice by Majestique would not just have affected Shildon Trading's VAT position. It would presumably also have meant that a debt to Majestique of 625,000 should be recognised in Shildon Trading's accounts, but Mr Maroo did not propose adjustments to this effect in his 15 February email.
85. The truth, in my judgment, is simply that Mr Maroo had knowingly misled those associated with Mr Binani about how much VAT Shildon Trading stood to recover. This conclusion is borne out by Mr Panday's evidence (which I accept) that he was told by Mr Maroo that he (Mr Maroo) had lied about how much VAT was due to be recovered.
86. In the email of 15 February in which Mr Maroo asked for changes for "Actual accounts" and "Management Account" (see paragraph 78 above), Mr Maroo also requested alterations in relation to certain invoices rendered by Majestique and Shildon Trading. With regard to Majestique's invoices "FM-1 and FM-2", Mr Maroo asked that their date be altered to 1 October 2007 and that they be changed to refer to "IMMOBILARIO" (or fixed assets). Shildon Trading's invoices "08 and 09" were also to have a revised date (1 August 2007) and to read "IMMOBILARIO".
87. It is GHLM's case that the relevant Majestique invoices were in fact numbered "M-1" and "M-2". As they stood, these were respectively dated 29 June 2007 and 2 July 2007 and stated to be in respect of "T-shirts" and "Consultancy & design charges for the year 2007". On GHLM's case, the material Shildon Trading invoices were those numbered "08/007" and "09/007", which, as they stood, were dated 18 and 19 November 2007 and said to relate to "T-Shirts".
88. When Mr Panday was cross-examined, Mr Sami Rahman, who appeared for the Maroos and Brocade, put to him, after taking instructions, that Mr Maroo had not been referring to Majestique's invoices "M-1" and "M-2", which, it was suggested, were not the same as invoices "FM-1" and "FM-2". To my mind, however, it is clear that Mr Maroo was referring in his email to the invoices identified in the previous paragraph. Further, I was entirely unconvinced by the explanations that Mr Maroo gave during his oral evidence about the changes to invoices he had asked for.
89. Mr Panday said the following in a witness statement about the 15 February email:
"There was always only one set of accounts. What Mr Maroo used to do is meet with Cristina [i.e. Ms Cristina Tamayo, an employee of Eurorevision] and me and ask us to insert the entries for the 'actual accounts' and then print the accounts. Then Mr Maroo would ask us to insert the entries into the accounts for the 'management accounts' and ask us to print that version. He would then ask us to delete the extra entries which had been inserted in the 'management accounts'."
Mr Panday also said this about meetings that he and Ms Tamayo had with Mr Maroo:
"While we were meeting , Mr Maroo would tell us to include certain invoices in the accounts and then he would tell Cristina to print out the accounts. Mr Maroo would then review the accounts and say for example: 'How does that look?' Depending on how he wanted the accounts to look, he would either remove some or add some further ones, often between companies."
In cross-examination, Mr Panday went as far as to describe Majestique's accounts as "totally fictitious". That may be an exaggeration, but the accounts cannot in my view be treated as reliable.
90. In an email to Mr Shah of 26 March 2008, Mr Binani said:
"we cannot buy into his [Mr Maroo's] short and long stories".
At a meeting on 31 March, Mr Shah told Mr Maroo that his services should come to an end on 30 April. Mr Maroo, however, said that he would not step down as a director unless he was paid 100,000 (which he said was part of the original consideration for the purchase of the business) and was allowed to take 150,000 worth of stock in repayment of a loan which he said he had made to the business. Mr Shah said this was not acceptable and suggested that Mr Maroo make an offer to buy the business, but Mr Maroo responded that he did "not have the resources to run this company". In an email of 1 June, Mr Shah requested Mr Maroo to resign as a director and hand over all papers of the companies, to which Mr Maroo replied that he and his wife would resign that month. Mr Shah pointed out in an email to Mr Maroo of 27 October that he had "still not received the resignation and appointment of new directors forms", but Mr Maroo continued to take no steps to resign, and on 12 November he observed in an email to Mr Binani:
"Pending issues between us in which ever capacity cannot be settled piecemeal there has to be a comprehensive settlement."
91. In early December 2008, Mr Maroo went to Madrid with Mr Ram Jatia, Mr Binani's father-in-law. In advance of this visit, Mr Maroo asked Mr Panday to "politely avoid that accountant is not here" if asked for general ledgers. On the day after the visit, Mr Maroo encouraged Mr Panday to let time "relapse on the pretext of obtaining a nif no/or other papers" and requested that Ms Tamayo "go through all papers and eradicate anything in my handwriting from the file".
92. On 10 December 2008, Shildon Holdings (by Mr Shah) wrote to request that a general meeting be called so that resolutions could be passed removing Mr and Mrs Maroo as directors of GHLM and appointing new directors. Mr Maroo received the letter on 11 December. That same day, the company secretary, a company associated with Davis Bonley, GHLM's then accountants, resigned. According to minutes, Mr and Mrs Maroo attended a GHLM board meeting in India on 19 December at which "Mr A. Maroo informed the Board that on 11th Dec 2008 he had received a notice from the shareholders requesting him to call an Extraordinary General Meeting ". The minutes went on to say:
"Mr Maroo had sent the notice to the company's lawyers for legal opinion and has since then been advised that the request notice is incomplete as per statutory requirements and he would take up the issue with the holding co on his return to the UK in the first week of Jan 2009."
93. On 5 January 2009, a general meeting of GHLM was purportedly held in London and three directors (including Mr Rajeshbhai Patel) appointed. These then sought to hold a board meeting at which they "immediately suspended Mr Maroo and Mrs Maroo as directors of the company".
94. Mr Maroo returned to the United Kingdom from India on 7 January 2009. On 8 January, he told Mr Panday in an email that he had "some invoices and cash transactions to be entered in Shildon". In a further email to Mr Panday of 10 January, Mr Maroo said that he needed "to submit accounting inf invoices/receipts/payments for 2008 for Majestique Apparels / Frost Design / Shildon Trading" and sought confirmation that Mr Panday could see him on 21 January "so [he] could book [his] tickets". On 16 January, Mr Maroo booked day trips both from Luton to Madrid for 21 January and from London to Portugal for 26 January. When, however, Mr Jatia said that he would be coming to London on 21 January, Mr Maroo replied in an email sent at 11.44am on 17 January that he was "presently travelling and will be back in the UK by the 31st Jan", and he emailed Mr Panday to ask that, if Mr Jatia wished to meet him, he (Mr Panday) "avoid a meeting for a fortnight". On 23 January, Mr Maroo asked Mr Panday not to mention their 21 January meeting to Mr Shah and also to "delete all the entries put in Shildon on 21st Jan and bring it to the status as before".
95. When asked in cross-examination about how he had come to tell Mr Jatia in his 17 January email that he was travelling and would be "back in the UK by the 31st Jan", Mr Maroo claimed to have visited Madrid on 16-17 January as well as on 21 January. At one point, Mr Maroo said that he had "definitely" met Mr Panday in Madrid on 16 January, but he later said that he did not meet Mr Panday that day and that he had never said that he had. He referred to having returned on the "early morning flight" on 17 January, and then to "the flight that leaves in the afternoon". His position became that he had taken a flight that left at about 10.30am or 11am reaching the United Kingdom at about 1.30pm.
96. The truth, in my judgment, is that Mr Maroo was not in Madrid at all on 16-17 January. When he told Mr Jatia that he was out of the country, he was lying. Even on Mr Maroo's account, he was going to be back in the United Kingdom that very day rather than "by 31st Jan".
97. Steps were taken to sell stock (ownership of which had been transferred to GHLM) to Brocade on the basis that the purchase price would be set against sums said to be due to it. Minutes for a board meeting of GHLM on, apparently, 4 December 2008 record:
"Mr A. Maroo informed the Board that Brocade International Ltd had contracted with the company to buy goods in settlement of their invoices. He advised the Board that these sales would also settle Mrs Maroo's loan to the company"
On 23 January 2009, Mr Shah and Mr Patel spoke to Mr Loureiro on the telephone. Mr Shah gave the following account of this conversation in his witness statement:
"[Mr Loureiro] informed us that Mr Maroo, under the auspices of his company, namely Brocade, had instructed Mr Loureiro to release a shipment trailer of 1916 cartons to a freight forwarding company, Transnautica S.A for delivery to a consignee in France. I also found out from Mr Loureiro that Mr and Mrs Maroo and Brocade had been instructing Mr Loureiro to dispose of stock in large quantities and had been doing so during June 2008 when I had specifically told him to seek my prior approval.
Mr Loureiro did not accept that the stock sent to Transnautica was GHLM's and said that he would take instructions only from Mr and Mrs Maroo. He told me that the proceeds of sale had been paid to Brocade."
Mr Shah subsequently emailed Mr Loureiro to "confirm that Mr Anil Maroo and Mrs Nita Maroo have no authority with the Company anymore" and asking him to "UNLOAD TRAILER FOR FRANCE OR CALL IT BACK". He also contacted Transnautica with a view to having the shipment returned, but without success. The shipment, which appears to have left Viseu on 22 January, seems to have comprised 1,869 cartons (or 28,367 garments) priced (on the Maroos' case) at 99,285 (including VAT). The goods appear to have been sold to a customer in France called Futura. Mr Maroo explained that Brocade was paid some 16,000 and that, as a result of an asset preservation order which GHLM obtained on 13 March 2009, that sum has been retained in an account Brocade has with the ICICI Bank. In total, GHLM invoiced Brocade for more than 82,000 garments at a total price of 287,491 (by invoices dated 1 and 3 December 2008), but the intervention of Mr Shah and Mr Patel prevented the sale of the balance of the goods from going ahead. On 28 January, Mr Loureiro (who had been keen to resign as "administrador" of Shildon Trading for some time) informed Mr Maroo by email:
"No more carries of goods, whatever it may be, until I was sure of who is who . I take these positions because I think something is wrong because today I saw some documents that contradict some situations I want to say that I am out of your problems."
98. It was on 23 January 2009 that Mr and Mrs Maroo were informed that they had been suspended as directors of GHLM. However, on 25 January, Mr Maroo, without informing GHLM's newly-appointed directors, purported to remove them from the company's board. The Maroos were definitively removed as directors of GHLM at a further general meeting held on 11 March. GHLM's business has since been wound down, and it no longer trades.
99. On 16 July 2009, Mr Patel visited the Portuguese warehouse with Ms Cathy Stevens, a Portuguese lawyer. Mr Loureiro was asked to identify documents belonging to GHLM, and these were all removed, as was a computer. The documents have, I am told, all been included in the trial bundles.
100. There was somewhat conflicting evidence as to the part Mrs Maroo played in the business. Mr Maroo said that his wife was never involved in the running of the business but was merely a buyer. Mrs Maroo herself said that she "was only responsible for supervising and coordinating the design of the clothing and its ordering from the factories". Mrs Singhania said that Mrs Maroo oversaw designing and was involved in buying; she described Mr and Mrs Maroo as "a team" but said that she did not know how much Mrs Maroo had been involved in the finances of the business. Mr Panday said that, in his experience, Mrs Maroo was involved in the administrative side of the business (in particular, matters relating to personnel) and would attend (and contribute at) meetings he had with Mr Maroo about financial and accounting matters.
101. The likelihood, as it seems to me, is that Mrs Maroo had more knowledge of the affairs of the business than she was inclined to accept, but that her role in the business was nonetheless a relatively minor one. Mr Maroo was clearly the main decision-maker.
Witnesses102. GHLM called as witnesses of fact Mr Bagri, Mr Binani, Mr Panday, Mr Patel, Mr Shah and Mrs Singhania. All these witnesses appeared to me to give evidence in accordance with their recollections. I also consider their evidence to be broadly reliable.
103. GHLM called, too, Mr Adam Smith, a chartered accountant and partner in Deloitte LLP, to give expert evidence. I have found his evidence very helpful.
104. In addition, GHLM sought to rely on a statement of Ms Stevens by way of hearsay evidence. Mr Rahman objected to this statement being admitted. In the event, I do not think that the statement added anything of importance.
105. Turning to the Defendants' evidence, Mr and Mrs Maroo each gave evidence. As will be apparent from what I have said earlier in this judgment, I am afraid that I do not regard either of them as a reliable witness.
The Issues106. The issues raised by the proceedings can be conveniently addressed under the following headings:
i) The directors' loan account (paragraphs 107-153 below);
ii) Stock and the 412,000 liability (paragraphs 154-158 below);
iii) Payments to or for the benefit of Brocade (paragraphs 159-160 below);
iv) Payment of pre-existing debts by Majestique (paragraph 161 below);
v) The sale of stock to Brocade (paragraphs 162-180 below);
vi) Remuneration (paragraphs 181-207 below);vii) The Mercedes car (paragraphs 208-214 below);viii) The claim against Mr Loureiro (paragraphs 215-217 below);
ix) Relief (paragraphs 218-219 below).The directors' loan account107. The largest of GHLM's claims concerns the Maroos' loan account with GHLM.
108. While the Maroos were directors of GHLM, extensive use was made of their loan account. Mr Smith commented that GHLM's directors' loan account ("the DLA") contains "considerably more transactions than [he] would typically expect to be accounted for through the DLA for a business of this size and nature". Mr Maroo observed that the DLA was used "for multiple purposes not connected with any borrowings of the Directors".
109. Between 1 May 2005 and 31 December 2007, debit entries totalling 1,347,795 were made to the DLA. These entries represent amounts due to be recovered by GHLM from its directors and reflected, in particular, cash withdrawn from the company by the Maroos and their receipt of sums owing to the company.
110. The battleground between the parties relates to the other side of the account. The DLA had a brought forward credit balance of 51,892 as at 1 May 2005, and between that date and 31 December 2007 credit entries amounting to 1,295,903 were made to the account. GHLM challenges many of the credit entries. With one or two exceptions, the Maroos contend that they were justified.
111. With regard to the brought forward balance, 45,534.78 of this is attributable to indebtedness pre-dating 1 April 2005, when the agreement between Mr Maroo and Mr Binani took effect. As I see it, however, it was implicit in that agreement that, apart from the 412,000 liability referred to in paragraph 29 above, GHLM would not have outstanding liabilities when Mr Binani took it over. In the circumstances, the Maroos must, I think, be taken to have waived whatever was outstanding on the DLA as at 1 April 2005.
112. Turning to the credit entries made between May 2005 and December 2007, Mr Smith helpfully divided these into the following categories:
113. With the exception of the last (viz. the 6,632), I consider these different elements in turn in paragraphs 114-137 below.
Receipts from the Maroos ( 101,320)114. The 101,320 is the aggregate of 51 payments made into GHLM bank accounts between May 2005 and November 2007.
115. Mr Smith explained the problem which arises in respect of this category as follows in his first report:
"With one exception, I have been unable to match the receipts to any corresponding payment on the Maroos' bank statements. This would appear to suggest that the funds received into GHLM's bank account were cash deposits or payments from individuals other than the Maroos".
The exception related to a sum of 8,000 which is shown on GHLM's bank statements as having been received from Mr Maroo on 25 November 2005.
116. The Maroos' Re-Amended Defence and Counterclaim attempted to explain the entries in question on the basis that they "relate to receipt of funds from customers in Dubai and the accountants could have put these entries in a separate Dubai Trade Adjustment Account instead of in the DLA account". In cross-examination, however, Mr Maroo said that this was "the wrong explanation" and that he had not understood what Mr Smith was saying.
117. Mr Maroo's new explanation was to the effect that he had paid the relevant sums into GHLM's bank accounts in cash, and he tried to show how he came to have the cash. The exercise he undertook was not, however, compelling. The "Cash control" schedules which Mr Maroo used for the purpose are not said to have been prepared contemporaneously: when introducing them in a second supplementary witness statement of 4 October 2011, Mr Maroo said that he had compiled them "based upon information available to all parties". There is, moreover, no clear relationship between the sums Mr Maroo is said to have received and those he is said to have paid into GHLM's accounts. The sums credited to GHLM's accounts do not match those Mr Maroo is said to have received, and a payment in May 2005, for example, is sought to be justified by reference to transactions which had occurred over the previous four months. Further, there is good reason to doubt some of the supposed cash receipts. For instance, much of the money which Mr Maroo apparently received from a daughter seems to have been credited to a Brocade account rather than GHLM, and Mr Maroo's tax return shows him to have received much less by way of commission from Obaid Suroor Trading than the "Cash control" schedules state.
Receipts from third parties ( 151,799)118. Credit entries totalling 151,799 relate to funds paid into GHLM's bank account from other parties. The sums so credited include 50,000 from Binani Cement Factory LLC, 47,422 from "Lloyds Factoring" and 40,227 from "Greenland America".
119. With regard to the 50,000, Mr Maroo explained that this money had been paid to GHLM with a view to its being used to fund personal expenses of Mr Binani and his daughter, that he had borne such expenses himself and that he had been reimbursed through the DLA. I did not understand Mr Paul Greenwood, who appeared for GHLM, seriously to take issue with this evidence. The 50,000 credit thus appears appropriate.
120. Turning to the 47,422, Mr Maroo said that 47,000 had been paid to GHLM by Lloyds Commercial Finance in respect of debts that the company factored. Mr Maroo accepted that the payment should not as such have been credited to the DLA (as he said, it "has got nothing to do with the directors"), but he said that, in the event, Lloyds had for the most part been repaid by himself and his wife. In this connection, Mr Maroo was able to identify from bank statements payments amounting to 28,630.59 which had been made by himself, Giant Eagle or HGL. Mr Maroo maintained that all, or nearly all, of the balance had been paid to Lloyds in cash. However, there is no independent confirmation of this claim.
121. As for the 40,277 from "Greenland America", Mr Maroo said that the initial payment had "nothing to do with the directors" and so should not have been credited to the DLA, but that he and his wife had been responsible for repaying Greenland America. In this instance, it seems to me Mr Maroo's evidence derives sufficient support from documentary evidence. The 40,277 credit therefore appears to have been justified.
Payments to Majestique ( 127,044)122. 127,044 was credited to the DLA in respect of ten payments which Mr and Mrs Maroo are alleged to have made to Majestique on GHLM's behalf between May and December of 2005. With three of the payments, totalling some 19,670, Mr Smith was able find matching withdrawals in the Maroos' bank statements. In three further instances, Mr Smith identified withdrawals from the Maroos' bank accounts in the relevant amounts (viz. 17,443.41, 24,571.13 and 17,604.69), but the dates differed significantly from those shown for the alleged payments to Majestique. For example, the 17,604.69 was withdrawn on 3 March 2005, yet the corresponding payment to Majestique is not said to have been made until 1 May 2005.
123. Two of the other credits to the DLA are of 24,000, with a date of 1 May 2005, and 329.47, with a date of 31 December 2005. Mr Maroo sought to justify these credits by reference to four payments which he said had been made to Majestique rather earlier (in December 2004) and in different amounts ( 4,000, 10,000, 5,000 and 5,329.47). Mr Maroo said that the 4,000 had come from his daughter and the 10,000 and 5,000 from his wife. Asked, however, whether Mrs Maroo's bank statements would show a cash withdrawal of 5,000, Mr Maroo said, "No, not exactly 5,000"; he said that a variety of transactions would have enabled her to have 5,000 in cash, which she then gave to him, and he in turn paid to Majestique. To make matters worse, Majestique's bank statements do not record cash receipts of 4,000, 10,000, 5,000 or 5,329.47 in December 2004.
124. The reality is that, bar the three payments making up 19,670, Mr Maroo's claims are not supported by documentary evidence of real weight. They depend very much on his say-so.
Payments to Brocade ( 450,636)125. The 450,636 is the total of five entries by which Mr and Mrs Maroo were credited with sums said to have been owed formerly to Brocade. In cross-examination, Mr Maroo explained that it was the:
"standard procedure of the accountant, that whatever was the Brocade balance, was in the beginning of the year transferred to the directors' loan account".
126. In this area, the dispute between the parties related essentially to the extent of GHLM's liabilities to Brocade. Mr Greenwood questioned how far the debts purportedly transferred to the DLA had in fact existed.
127. The debts had four components. 191,272 concerned funds intended to be used as part of the "imprest" account system (as to which, see paragraph 39 above). 124,443 was said to arise from Brocade paying money to Obaid Suroor Trading on GHLM's behalf. 26,000 was attributed to Brocade paying that sum to Diferentes for GHLM. The balance (viz. 108,921) stemmed from the 412,000 liability which it was agreed between Mr Maroo and Mr Binani that GHLM should take on (see paragraph 29 above).
128. So far as the 191,272 is concerned, Mr Maroo said in his response to Mr Smith's first report that there had been a running account with Mr Binani on which, ultimately, he had owed 9,000 to Mr Binani personally; the "imprest" account, Mr Maroo said, "is not even remotely connected to the present litigation". I am prepared to accept that the 191,272 was owed to Brocade by GHLM.
129. With regard to the 124,443, Mr Maroo said that this had been paid to Obaid Suroor Trading by a Mr Prakash. Mr Maroo said that the payments had been made for goods and that invoices had been rendered. However, I was not taken to any such invoices. Mr Maroo suggested that the position could be verified by reference to stock movements, but this was not in fact done.
130. As for the payment to Diferentes, this is recorded as having been made on 30 June 2007. Mr Maroo sought to rely on three further payments entered as having been made on the same date. The payments in question are said to have been made to Shildon Trading and to have amounted, in total, to 63,000.
131. Mr Maroo said that all these payments (both that to Diferentes and those to Shildon Trading) had been made in cash. Asked about how Brocade had come to have the money with which to make the payments, Mr Maroo, referring once again to the "Cash Control" schedules he had prepared, said that the money had been available as a result of (a) one of his daughters returning 20,000 she had been lent in 2005 by her parents, (b) cash balances of 4,659 and 2,432 which he and his wife were said to have had in hand, (c) a balance of 13,536 which was said to have been available following transactions in Dubai, (d) the receipt of 10,000 from another daughter and (e) the receipt of 30,000 in respect of commission from Obaid Suroor Trading. None of this, however, finds any substantial support in the documents.
132. Turning to the 412,000, it seems to me, for the reasons explained in paragraphs 154-158 below, that Brocade became entitled to more than 108,921 of the 412,000. I can see no objection, therefore, to the DLA being credited with 108,921 on the strength of the 412,000 liability.
Payment to Giant Eagle ( 52,000)133. Mr Maroo said that the relevant invoice had been raised in error. The credits to the DLA thus fall to be reduced by the amount in question (viz. 52,000).
Settlement of purchase and expense liabilities ( 406,472)
134. Sums totalling 406,472 were credited to the DLA in respect of payments said to have been made by the Maroos on GHLM's behalf to settle liabilities in respect of purchase invoices and other expenses.
135. Summarising his position on this category in his second report, Mr Smith said:
"I have still not seen sufficient evidence to show that these amounts were paid by the Maroos and that they settled liabilities in respect of goods or services which generated any benefit for GHLM".
136. Mr Maroo explained his position in respect of this category by reference to an appendix to a supplementary witness statement of 19 September 2011. This includes, for each year, a schedule listing (a) items of expenditure (on the left-hand side) and (b) payments made by the Maroos (on the right-hand side). By way of example, the schedule for 2005 refers to "Congestion charge" payments of 10 and 44. In cross-examination, Mr Maroo sought to relate these to sums of 26 and 18 which were withdrawn from Mr Maroo's bank account on, respectively, 16 and 20 September 2005, but (a) the sums were different and (b) the relevant bank statement indicates that the 26 was paid for parking at Luton Airport and the 18 for parking at "EarlsCt/Olympia". There is, moreover, no confirmation that any congestion charges that were incurred could be properly charged to GHLM. Again, a supplier ledger card suggests that the 391 said to have been paid on GHLM's behalf to "Robert May" should be split between a 319.71 invoice of 30 November 2005 and a 71.67 invoice of 15 December 2005, and a 71.67 withdrawal from Mrs Maroo's bank account can plausibly be related to the latter. However, the list of payments by the Maroos contains no entry matching a 319.71 invoice. Further, the first item in the list of payments by the Maroos relates to a 15.64 withdrawal from an account held by Mrs Maroo on 31 December 2004 in favour of "WH Smith Brent Cross". There is no satisfactory way of confirming that this withdrawal was for the benefit of GHLM rather than Mrs Maroo personally; it has no obvious connection with any of the items on the left-hand side. Matters are made worse by the fact that some expenditure is simply termed "Miscellaneous". Another problem is that, each year, the payments shown as made by the Maroos include "Cash payments", with no further explanation, as a balancing item.
137. Notwithstanding such problems, I think it likely, looking at matters in the round, that the Maroos bore some of the 406,472 on GHLM's behalf. However, the evidence does not allow me to identify with any exactitude the proportion of the 406,472 with which the DLA should have been credited.
Accounting records138. At points, Mr Maroo was inclined to blame the absence of evidence to support his case on the fact that documentation which existed is missing. More specifically, Mr Maroo asserted that GHLM had failed to obtain materials from the Portuguese warehouse (to which, Mr Maroo confirmed, all GHLM's documents had been taken).
139. During re-examination, however, Mr Maroo said that, "as far as the financial documents are concerned, everything is here and there is nothing missing". He also said that the trial bundles contained "all the records of the stock".
140. Mr Maroo continued to maintain that documents such as packing lists, contracts and stock movement records were missing. It seems to me, however, that the likelihood is that all, or nearly all, of the documents in the Portuguese warehouse have been recovered. As mentioned above (paragraph 99), Mr Patel and Ms Stevens collected all documents identified as belonging to GHLM when they visited the warehouse in July 2009.
141. Mr Maroo claimed in correspondence with GHLM's solicitors that he had been told on the telephone "by one of the girls who used to work as casual labour repackaging goods that no cartons from the wooden roof of the office/showroom were touched" when the warehouse was visited. Asked about this in cross-examination, Mr Maroo said:
"I told her the documents were lying on the mezzanine, on the roof. What happened? She said, 'I don't know, I think they haven't seen those documents. They haven't taken any cartons from the mezzanine' ".
142. I do not accept this evidence. Mr Maroo said that he did not remember the name of his supposed informant. It is difficult, moreover, to see why "one of the girls who used to work as casual labour repackaging goods" would have rung Mr Maroo as he alleges (in 2011) or, if she did, how she would have been in a position to comment on what documents GHLM's representatives saw. More than that, it is apparent from Mr Patel's evidence that, by the time he visited the warehouse with Ms Stevens, there was no longer a mezzanine. There can therefore have been no question of documents being left there.
The burden of proof143. It was Mr Greenwood's submission that the burden was on Mr and Mrs Maroo, as fiduciaries, to justify the credit entries on the DLA.
144. The authorities that Mr Greenwood cited in support of this contention included two cases decided in the last year. In the earlier of them, Burke (Liquidator of Idessa (UK) Ltd) v Morrison [2011] EWHC 804 (Ch), [2011] BPIR 957, a liquidator alleged misfeasance in respect of payments made out of company funds. Ms Lesley Anderson QC, sitting as a Deputy High Court Judge, said this about the burden of proof (in paragraph 28):
"I am satisfied that whether it is to be viewed strictly as a shifting of the evidential burden or simply an example of the well-settled principle that a fiduciary is obliged to account for his dealings with the trust estate [counsel for the liquidator] is correct to say that once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question. Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the Court to conclude that there was no proper justification for the payment. However, it seems to me to be a step too far for [counsel for the liquidator] to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes."
145. The second case was Re Mumtaz Properties Ltd, Wetton v Ahmed [2011] EWCA Civ 610, where a liquidator claimed for sums which he alleged were owing on directors' loan accounts. There were issues as to, among other things, whether one of the respondents had been a de facto director and whether another respondent (referred to as "Munir") had received the benefit of an item debited to his loan account. Arden LJ (with whom Aikens and Patten LJJ agreed) said this:
"16 The approach of the judge in this case was to seek to test the evidence by reference to both the contemporary documentary evidence and its absence. In my judgment, this was an approach that he was entitled to take. The evidence of the liquidator established a prima facie case and, given that the books and papers had been in the custody and control of the respondents to the proceedings, it was open to the judge to infer that the liquidator's case would have been borne out by those books and papers.
17 Put another way, it was not open to the respondents to the proceedings in the circumstances of this case to escape liability by asserting that, if the books and papers or other evidence had been available, they would have shown that they were not liable in the amount claimed by the liquidator. Moreover, persons who have conducted the affairs of limited companies with a high degree of informality, as in this case, cannot seek to avoid liability or to be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available."
With regard to the debit on the loan account, Arden LJ concluded as follows (at paragraph 57):
"[The Judge] was entitled to find, in the absence of evidence as to how and why the entry had been made, that it was what it appeared to be, namely a debit entry duly made and increasing Munir's liability on his loan account. Munir produced no evidence showing how the entry had come about and provided no explanation for the absence of such evidence. The judge was entitled to infer that he could have made enquiries about this entry if there was any evidence or explanation that would support his case."
146. Gillman & Soame Ltd v Young [2007] EWHC 1245 (Ch), another case on which Mr Greenwood relied, is also helpful. There, a company (referred to as "GSL") claimed that a former director (a Mr Young) was liable for breach of fiduciary duty for misappropriating company assets. Mr Robert Miles QC, sitting as a Deputy High Court Judge, said this (in paragraph 82):
"I should also say something about the burden of proof. Where a person in a fiduciary position receives property of his principal the burden is on him to account: United Pan-Europe Communications v Deutsche Bank (CA, 19 May 2000) at para 34. This principle applies to company directors as it does to trustees: Ultraframe (UK) Ltd v Northstar Systems Ltd & Ors [2005] EWHC 1638 (Ch) at para 1513. It is, therefore, for GSL to prove that Mr Young received a particular payment from the company; but where it does so, it is for him to show that the payment was proper."
147. The paragraph from Ultraframe (UK) Ltd v Northstar Systems Ltd to which Mr Miles referred reads as follows:
"The taking of an account is the means by which a beneficiary requires a trustee to justify his stewardship of trust property. The trustee must show what he has done with that property. If the beneficiary is dissatisfied with the way that a trustee has dealt with trust assets, he may surcharge or falsify the account. He surcharges the account when he alleges that the trustee has not obtained for the benefit of the trust all that he might have done, if he had exercised due care and diligence. If the allegation is proved, then the account is taken as if the trustee had received, for the benefit of the trust, what he would have received if he had exercised due care and diligence. The beneficiary falsifies the account when he alleges that the trustee has applied trust property in a way that he should not have done (e.g. by making an unauthorised investment). If the allegation is proved, then the account will be taken as if the expenditure had not been made; and as if the unauthorised investment had not formed part of the assets of the trust. Of course, if the unauthorised investment has appreciated in value, the beneficiary may choose not to falsify the account: in which case the asset will remain a trust asset and the expenditure on it will be allowed in taking the account."
148. This passage confirms that a "trustee must show what he has done with that [i.e. trust] property". It is less obvious that it provides authority for the proposition that the "principle applies to company directors as it does to trustees", but support for that view is, to my mind, to be found elsewhere. For example, in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 3 WLR 1153, Lord Neuberger MR (with whom Richards and Hughes LJJ agreed) said (in paragraph 34):
"Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: per Nourse LJ in In re Duckwari plc (No 2) [1999] Ch 253, 262. Similarly a person entrusted with another person's money for a specific purpose has fiduciary duties to the other person in respect of the use to which those moneys are put."
The close analogy between directors and trustees suggests, to my mind, that, much as a trustee "must show what he has done with [trust] property", it is incumbent on a director to explain what has become of company property in his hands.
149. In the circumstances, I agree with Mr Miles that, once it is shown that a company director has received company money, it is for him to show that the payment was proper. In a similar way, it seems to me that, where debit entries have correctly been made to a director's loan account, it must be incumbent on the director to justify credit entries on the account. That conclusion makes the more sense when it is remembered that the director (a) will have been (one of those) responsible for the management of the company's business and (b) will have had a responsibility for ensuring that proper accounting records were kept (see e.g. sections 386-389 of the Companies Act 2006).
The overall position150. Having regard to the matters discussed earlier in this section of the judgment, it seems to me that, to a substantial extent, the credit entries on the DLA have not been satisfactorily justified.
151. In his closing submissions, Mr Greenwood observed that the "ultimate problem with Mr Maroo's explanations and with the whole of the Maroos' case about the DLA is that they very largely depend on Mr Maroo's word and so on his honesty, which has been shown to be flawed". I agree.
152. The table below indicates the extent to which I have not been persuaded that credits to the DLA were legitimate:
153. With regard to the 406,472 credited in respect of settlement of purchase and expense liabilities, I expressed the view in paragraph 137 above that the Maroos are likely to have borne some of the 406,472 on GHLM's behalf, but that it is not possible to say with any exactitude what proportion of the 406,472 should have been credited to the DLA. Doing the best I can, I think it reasonable to infer that at least 100,000 of the 406,472 was borne by the Maroos on GHLM's behalf and so properly credited to the DLA. The balance of the 406,472 (viz. 306,472) has not, in my judgment, been adequately justified.
Stock and the 412,000 liability154. As explained above (paragraphs 29), I consider that GHLM undertook a liability to Brocade of a maximum of 412,000. Brocade was to be entitled to no more than the proceeds of sale of the stock which GHLM acquired.
155. It is the Defendants' case that the bulk of the stock was sold to concerns called Ali Badi Trading and Ningbo Giant Eagle International in 2005 for sums totalling 192,071. They also claim that stock sold in the Spanish shops realised 8,000.
156. The alleged sales to Ali Badi Trading and Ningbo Giant Eagle International were the subject of some debate before me. It is common ground, however, that the DLA was debited with the 192,071 on the footing, I think, that the sales had accrued to the benefit of the Maroos. That being so, I do not think I need spend time examining the sales. The debit to the DLA improved GHLM's financial position vis- -vis the Maroos by 192,071. Brocade should be recognised, I think, as having become entitled to a corresponding sum.
157. Turning to the 8,000 figure, it is, as it seems to me, reasonable to assume that stock was sold in the Spanish shops for 8,000. I therefore consider that Brocade should be credited with this sum too.
158. It follows that Brocade became entitled to 200,071 (i.e. 192,071 plus 8,000) of the 412,000. Brocade does not, however, fall to be credited with the balance of the 412,000, viz. 211,929. These figures must, accordingly, be taken into account when determining the financial position as between GHLM and Brocade.
Payments to or for the benefit of Brocade159. In 2006 GHLM paid sums totalling 14,277 to or for the benefit of Brocade. A payment of 2,800 was made to Brocade itself on 31 August, and amounts of 132.50, 2,350, 5.63 and 8,989.30 were paid to third parties on Brocade's behalf on 24 February (in the case of the first two payments), 6 March (in the case of the third payment) and 12 May (in the case of the last payment).
160. In the light of the conclusions reached in the previous section of this judgment (paragraphs 154-158 above), Brocade will not have been owed these sums by GHLM. On that basis, Mr Greenwood argued in his closing submissions that Mr Maroo had acted in breach of duty in causing the payments to be made. So far as I can see, however, this particular complaint was not advanced in these terms in the Re-Amended Particulars of Claim or explored fully during the oral evidence. In any case, the payments will have served to increase Brocade's indebtedness to GHLM, with the result that any breach of duty on Mr Maroo's part will have caused GHLM loss only if and to the extent that Brocade cannot pay GHLM what it owes. In the circumstances, it is not apparent from the available evidence that GHLM has suffered loss as a result of the payments.
Payment of pre-existing debts by Majestique161. 140,000 of Mr Binani's initial investment of 1 million was paid direct to Majestique on 8 February 2005. Some or all of this money may have been used to discharge indebtedness which Majestique had incurred before the 2 February meeting. This might be said to run contrary to Mr Binani's agreement with Mr Maroo. However, it does not seem to me to be something of which GHLM can complain. The payment of the 140,000 to Majestique would not seem, of itself, to have been improper. Further, I should not have thought that Mr Maroo would have committed any breach of his duties as a director (or "administrador") of Majestique in causing that company to pay sums it owed. If anyone is entitled to object to what occurred, it must be Mr Binani, but he is not the Claimant.
The sale of stock to BrocadeThe parties' cases162. It is GHLM's case that the sale of stock to Brocade in December 2008-January 2009 (as to which, see paragraph 97 above) involved breaches of duty on the part of the Maroos. It is argued that, in causing GHLM to agree to sell stock to Brocade and, as to the shipment in fact effected, to proceed with such sale, the Maroos acted to advance their own interests, not in the interests of GHLM, to which they owed duties as directors. It is said, moreover, that GHLM was at the relevant times insolvent (or least of doubtful solvency or on the verge of insolvency), with the result that the company's interests fell to be identified with those of its creditors. It is also submitted that the Maroos improperly exploited for their own benefit an opportunity (viz. to sell stock to Futura) which they ought to have pursued, if at all, for the benefit of GHLM. On these grounds, GHLM contends that the Maroos and Brocade are:
"liable in damages and/or to compensate the Claimant and/or to account for the value of the misappropriated stock and/or the sale is liable to be set aside".
163. For their part, the Maroos contend that the sale to Brocade was in the best interests of GHLM. Further, Brocade counterclaims for short delivery. It is said that GHLM contracted to sell Brocade 82,073 garments, with a value of 287,491, but only 28,367 garments, with a value of 99,285, were in fact delivered. The counterclaim accordingly seeks relief in respect of "Non receipt of goods of 188,206".
Relevant legal principles164. While the interests of a company are normally identified with those of its members, the interests of creditors can become relevant if a company has financial difficulties. In West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, Dillon LJ (with whom Croom-Johnson LJ and Caulfield J agreed) approved (at 252-253) the following statement of Street CJ in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722:
"In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration."
165. It has been said that the interests of creditors can "intrude" even when a company may not strictly be insolvent. For example, in Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 BCLC 153 Mr Leslie Kosmin QC (sitting as a Deputy High Court Judge) put the position as follows (at paragraph 74):
"Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors' money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion."(The emphasis has been added.)
166. In the West Mercia case, the Court of Appeal decided, basing itself in part on Re Washington Diamond Mining Co [1893] 3 Ch 95, that a director responsible for a fraudulent preference was guilty of misfeasance. West Mercia concerned a 4,000 payment which had had the effect of reducing the director's exposure under a guarantee. Dillon LJ concluded (at 253):
" Mr Dodd [the defendant director] was guilty of breach of duty when, for his own purposes, he caused the 4,000 to be transferred in disregard of the interests of the general creditors of this insolvent company".
167. The Courts have been less ready to impose liability on a director if the circumstances are such that no statutory remedy would be available. In Knight v Frost [1999] 1 BCLC 364, for example, it was argued in a derivative action brought by the plaintiff on behalf of a company referred to as "ZUK" that the discharge of indebtedness to the fourth defendant, Wildey, was "an improper use of ZUK's money since it involved an unlawful or improper preference of Wildey as creditor as against the plaintiff" (see 381). Hart J did not accept the submission. He said (at 382):
"[The plaintiff's counsel's] submission was that, since ZUK was insolvent in April 1995, [the first defendant] was in breach of his duty as a director of ZUK in causing it to discharge its debt to Wildey in preference to its debt to the plaintiff and was, accordingly, liable to make good to ZUK the money so paid away. In my judgment, the authorities do not support that proposition. In both the West Mercia Safetywear and Washington Diamond Milling cases, the payment in question had been a fraudulent preference because it had been made within the relevant statutory period prior to the commencement of a winding up. They are not authority for the proposition that a director who for his own purposes causes the company to prefer one of its creditors over another outside that statutory period is liable to replace the money at the suit of the company. It is through the mechanism of liquidation that the creditors are protected and the plaintiff has in this case chosen to pursue a derivative action as a shareholder rather than to petition, as creditor, for ZUK to be wound up."
Park J echoed Hart J in Re Continental Assurance Co of London plc (No 4) [2007] 2 BCLC 287 (at 448).
168. To my mind, questions of breach and remedy need to be distinguished. A director of a company has a duty to act "in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole" (see section 172 of the Companies Act 2006). Where creditors' interests are relevant, it will similarly, in my view, 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. Whether or not section 239 of the Insolvency Act 1986 (dealing with preferences) is in point cannot be determinative. A director responsible for a preference vulnerable under that section will not necessarily commit a breach of duty (compare Re Brian D Pierson (Contractors) Ltd [2001] 1 BCLC 275, where, at 299, Miss Hazel Williamson QC, sitting as a Deputy High Court Judge, rejected as "too sweeping" the idea that directors "simply have a duty not to allow s 239 to be breached"). Conversely, the fact that the conditions laid down by section 239 are not all met should not, of itself, preclude a finding of breach of duty.
169. On the other hand, the applicability of section 239 of the 1986 Act may have a bearing on what, if any, remedy is available in respect of a breach of duty. As Hart J said in Knight v Frost, the West Mercia and Washington Diamond cases "are not authority for the proposition that a director who for his own purposes causes the company to prefer one of its creditors over another outside [the relevant] statutory period is liable to replace the money at the suit of the company". It seems to me that a company seeking redress in respect of a "preference" to which section 239 does not apply is likely to need to show (a) that is has suffered loss, (b) that the director has profited (so that the "no profit" rule operates) or (c) that the transaction in question is not binding on the company. In a typical case, the first of these may be impossible: if the "preference" involved the discharge of a debt, the company's balance sheet position is likely to be unaffected. The second might well also be problematic if the company has not entered an insolvency regime: if, say, the "preference" involved the discharge of a debt owed to a director, it could be hard to say whether or to what extent the director was better off than he would have been had he still been owed the money by the company.
170. As for whether the transaction is binding, ordinary agency principles indicate that a company can disavow a contract which a director has caused it to enter into if (a) the director was acting in his own interests rather than those of the company, its members or (where appropriate) its creditors as a class and (b) the other party to the contract had notice of the director's breach of duty. Thus, "Unless otherwise agreed, authority to act as agent includes only authority to act for the benefit of the principal" (Bowstead & Reynolds on Agency, 19th ed., at paragraph 3 007) and "No act done by an agent in excess of his actual authority is binding on the principal with respect to persons having notice that in doing the act the agent is exceeding his authority" (Bowstead & Reynolds, at paragraph 8 049). The transaction may also be open to challenge on equitable principles: "A contract made or act done by an agent which is, to the knowledge of the other party involved, in violation of the agent's equitable duties to his principal entitles the principal to equitable relief against the third party" (Bowstead & Reynolds, at paragraph 8 217).
171. The better view appears to be that, where a director has caused his company to enter into a contract in pursuit of his own interests, and not in the interests of the company, its members or (where appropriate) its creditors as a class, and the other contracting party had notice of that fact, the contract is void rather than voidable: see e.g. Bowstead & Reynolds, at paragraphs 8 067 and 8 220, Nolan [2009] CLJ 293, especially at 317-319, Heinl v Jyske Bank (Gibraltar) Ltd [1999] 1 Lloyd's Rep. Bank. 511 and Hopkins v TL Dallas Group Ltd [2005] 1 BCLC 543. On this basis, it is hard to see how it could matter whether the requirements of section 239 of the 1986 Act are satisfied.
172. Were the relevant contract not void but voidable, the applicability of section 239 would still be of no obvious significance. If restitutio in integrum were not possible, that could be an obstacle to rescission. However, the decision of the Court of Appeal in O'Sullivan v Management Agency and Music Ltd [1985] 1 QB 428 indicates that rescission may still be granted if practical justice can be achieved. In O'Sullivan, agreements obtained by undue influence were set aside even though the parties could not be restored to their original positions. Dunn LJ said (at 458):
"This analysis of the cases shows that the principles of restitutio in integrum is not applied with its full rigour in equity in relation to transactions entered into by persons in breach of a fiduciary relationship, and that such transactions may be set aside even though it is impossible to place the parties precisely in the position in which they were before, provided that the court can achieve practical justice between the parties by obliging the wrongdoer to give up his profits and advantages, while at the same time compensating him for any work that he has actually performed pursuant to the transaction".Similarly, Fox LJ said (at 466-467):
"Accordingly, it seems to me that the principle that the court will do what is practically just as between the parties is applicable to a case of undue influence even though the parties cannot be restored to their original position. That is, in my view, applicable to the present case. The question is not whether the parties can be restored to their original position; it is what does the justice of the case require? That approach is quite wide enough, if it be necessary in the individual case, to accommodate the protection of third parties. The rights of a bona fide purchaser for value without notice would not in any event be affected".Discussion
173. At the time the stock was sold to Brocade, GHLM was known to have financial difficulties. To judge from board minutes dated 31 January 2008 (although GHLM queried this date), Mrs Maroo had said a year before the sale that she would want a loan which she had allegedly made to "be transferred to Brocade and be adjusted against the sales invoices of the goods sold to Brocade in case there was shortage of cash flow from sales of goods to other client" (emphasis added). In their Re-Amended Defence, the Maroos said that Mrs Maroo had agreed to accept stock "[a]s there was insufficient cash flow". In cross-examination, Mr Maroo accepted that there was insufficient cashflow to pay salaries and expenses. It follows, as it seems to me, that GHLM was insolvent or at any rate "of doubtful solvency or on the verge of insolvency". It will thus have been incumbent on the Maroos, as directors of GHLM, to have regard to the interests of the company's creditors as a class.
174. Mr Maroo raised in March 2008 the possibility of taking stock in repayment of a loan and was told by Mr Shah that was not acceptable (see paragraph 90 above). The Maroos nonetheless devised more than one scheme under which assets of GHLM would be used to discharge the loan that Mrs Maroo was said to have made. Thus, on 30 June 2008 the Maroos decided that Mr Maroo should "buy the company car" and use the proceeds "to part pay the loan of Mrs Maroo" (paragraph 212 below), and that plan was taken forward in December of that year (paragraph 212 below). Further, as already mentioned (paragraph 97 above), minutes record that at a board meeting of GHLM on 4 December 2008:
"Mr A. Maroo informed the Board that Brocade International Ltd had contracted with the company to buy goods in settlement of their invoices. He advised the Board that these sales would also settle Mrs Maroo's loan to the company".
175. The Maroos pursued this course despite knowing that Mr Binani wanted them to resign as directors (see paragraph 90 above).
176. In cross-examination, Mr Maroo eventually asserted that he had considered the requirements of other creditors. To my mind, however, it is plain that Mr and Mrs Maroo caused GHLM to enter into the transaction with Brocade with a view to advancing their own interests and those of Brocade rather than (a) those of GHLM as such, (b) those of Shildon Holdings as GHLM's owner or (c) those of GHLM's creditors as a class. Not wishing to be left with an unsecured claim against GHLM, the Maroos sought to exchange the claim for stock.
177. I am satisfied, accordingly, that the Maroos acted in breach of their duties as directors of GHLM. I am satisfied, too, that Brocade had the requisite notice of the breach of duty: after all, Mrs Maroo owned the company and she and her husband were both directors.
178. What, if any, remedies should be awarded in consequence? In the course of argument, Mr Greenwood accepted that the sale to Brocade would not have worsened GHLM's balance sheet and, hence, that a claim for loss is difficult. He also accepted that it would be hard, if not impossible, to calculate the extent to which transaction had improved the Maroos' position. For my part, I do not think that a case has been made out for either compensation or a profit-based award.
179. On the other hand, the contract for the sale of stock to Brocade was, in my judgment, void. That means, as it seems to me, that (a) Brocade must account for the sums it has received from selling stock on to Futura but (b) Brocade is entitled to resurrect whatever claim it had earlier had against GHLM. Had I taken the view that the Maroos' breach of duty rendered the contract with Brocade voidable rather than void, I would in any event have considered that a result along the lines outlined in the previous sentence would achieve "practical justice between the parties" (to quote from Dunn LJ in the O'Sullivan case).
180. Turning to Brocade's cross-claim, the conclusions I have already arrived at mean that the contract on which this is based is void or, alternatively, should be set aside. Moreover, it has not been proved that Brocade suffered any loss, let alone the 188,206 alleged, as a result of the non-delivery of the balance of the 82,073 garments. In the circumstances, I shall dismiss the counterclaim for relief in respect of "Non receipt of goods".
RemunerationThe parties' cases181. The Maroos and Brocade allege that the remuneration which was agreed for Mr and Mrs Maroo has not been paid in full. They therefore counterclaim for "Outstanding Salaries of 361,473".
182. For its part, GHLM not only denies that it has any liability to pay further salary but claims to be entitled to recover sums already paid by way of remuneration. It is said that the Maroos, in breach of their fiduciary duties, failed to disclose wrongdoing and that they in consequence received remuneration which they would not otherwise have received.
Remuneration due to the Maroos183. Putting to one side for the moment GHLM's claim to recover remuneration, sums of 10,000 and 6,000 a month became payable from April 2005 in respect of Mr and Mrs Maroo's services. Mrs Maroo worked for GHLM until the end of June 2007. A total of 162,000 thus became due (i.e. 6,000 a month for 27 months). As regards Mr Maroo, he was not definitively removed as a director of GHLM until 11 March 2009. By then, remuneration of about 473,548 will have become payable. In total, therefore, payments of 635,548 were due from GHLM.
184. As already mentioned (paragraph 30 above), Mr Maroo claimed that his employment could not be terminated for five years and, hence, that he was entitled to be paid, not merely until 11 March 2009, but up to the end of March 2010. However, Mr Rahman did not press this point in closing submissions, and I in any event reject it. I concluded in paragraph 33 above that GHLM was not under any obligation to continue to employ Mr Maroo for five years.
Remuneration received by the Maroos185. Brocade raised invoices totalling 218,331 (or 286,793) for services rendered by Mr and Mrs Maroo up to 2008.
186. There is an issue between the parties as to whether Mr Maroo retained a further sum of 111,360 (as to which, see paragraph 74 above) against remuneration. GHLM alleges that he did, on the basis of an email of 15 June 2008 in which Mr Maroo told Mr Shah that the 111,360 had been appropriated as follows:
"1) [ ]107000 was in form of staggered cheques between April to June and was received by me against my salaries for the period November to June .
2) [ ]4360 was paid to [Diferentes] and will be accounted for in their cash flow shortly".
187. One of Mr Maroo's responses to GHLM's allegation was, as I understand it, to the effect that the 107,000 served to discharge liabilities invoiced by Brocade; the 107,000 does not therefore (so it is said) fall to be added to the sums invoiced by Brocade. However, I am not aware of documents showing the 107,000 to have been taken into account as between GHLM and Brocade. Nor, so far as I can see, was it suggested to Mr Smith that there were any entries confirming that.
188. Mr Maroo also asserted that he had personally paid the 111,360, the alleged franchisee having withdrawn. This, it was said in the Re-Amended Defence, was "simply done to avoid any controversy with Mr Binani". However, this account of events is inconsistent with Mr Maroo's email of 15 June 2008. Moreover, (a) Mr Maroo's explanation is unsupported by documentation and (b) it is highly improbable that Mr Maroo would have been both in a position to pay the 111,360 and willing to do so.
189. In the circumstances, the likelihood is, as it seems to me, that the Maroos somehow received 107,000 in addition to the amounts invoiced by Brocade.
190. Two further points arise in relation to the extent of the remuneration Mr and Mrs Maroo have received. In the first place, Mr Smith pointed out that GHLM's accounting records contain entries under "Wages and salaries control" with the description of "N Maroo" or "NM". However, Mr Maroo maintained that these entries all related to one of his daughters, and I think that is likely to be correct. Secondly, Mr Smith suggested that the 52,000 invoice from Giant Eagle which Mr Maroo accepts was raised in error should be taken into account here. I have, however, already dealt with this invoice in the context of the DLA (see paragraph 133 above).
191. It follows that, subject to the points discussed below, Brocade has a cross-claim for 241,755 (i.e. 635,548[5] less ( 286,793[6] plus 107,000[7])) for uninvoiced remuneration. The conclusion I arrived at in paragraph 37 above seems to me to mean that it is Brocade (as opposed to the Maroos personally) which has the benefit of the cross-claim.
GHLM's claim: legal principles192. Recent authority establishes that it can be incumbent on a director to reveal his own wrongdoing. The leading case is Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2005] 2 BCLC 91. In Item Software (UK) Ltd v Fassihi, Arden LJ (with whom Mummery LJ and Holman J expressed agreement) said that a fiduciary does not owe a separate and independent duty to disclose misconduct (paragraph 41). She concluded, however, that a director's "fundamental" duty "to act in what he in good faith considers to be the best interests of his company" could mean that a director has to disclose misconduct on his part (paragraphs 41 and 44). On the facts, Arden LJ considered that the director in question "could not fulfil his duty of loyalty" except by telling his company of steps he had taken to divert business to himself (paragraph 44).
193. As was mentioned in Brandeaux Advisers (UK) Ltd v Chadwick [2010] EWHC 3241 (QB) (at paragraph 47), Item Software (UK) Ltd v Fassihi is a somewhat controversial decision. 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.
194. Two points of relevance seem to me to flow from the Court of Appeal's analysis in Item Software (UK) Ltd v Fassihi. The first derives from the fact that the duty of good faith focuses on a fiduciary's subjective intentions. Thus, in Regentcrest plc v Cohen [2001] 2 BCLC 80 Jonathan Parker J explained (at paragraph 120):
"The duty imposed on directors to act bona fide in the interests of the company is a subjective one . The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director's state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company's interest; but that does not detract from the subjective nature of the test."
Accordingly, 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.
195. The second point is that it can be incumbent on a fiduciary to disclose matters other than wrongdoing. The "single and overriding touchstone" being the duty of a director to act in what he considers in good faith to be in the best interests of the company (to quote from Etherton J in Shepherds Investments Ltd v Walters [2006] EWHC 836 (Ch), [2007] 2 BCLC 202, at paragraph 132), there is no reason to restrict the disclosure that can be necessary to misconduct. Were a director subjectively to consider that it was in the company's interests for something other than misconduct to be disclosed, he would, it appears, commit a breach of his duty of good faith if he failed to do so.
GHLM's claim: discussion196. The Re-Amended Particulars of Claim allege failure to disclose to "GHLM". The pleadings do not spell out the organ of the company to which disclosure should (on GHLM's case) have been made. In the course, however, of submissions, Mr Greenwood made it plain that the complaint was of failure to disclose to GHLM's shareholder. This is of course unsurprising: the Maroos were themselves the only members of the board.
197. I was not referred to any authority dealing directly with disclosure to a shareholder in that capacity. In Item Software (UK) Ltd v Fassihi, the trial judge had found that the claimant's managing director would have acted differently had he known of the errant director's behaviour. In Brandeaux Advisers (UK) Ltd v Chadwick, it was said that the defendant director should have reported what she had done to her company's board.
198. Nevertheless, 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.
199. 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.
200. It is perhaps also relevant in this context that regulation 70 of Table A in the Companies (Tables A to F) Regulations 1985, which is incorporated into GHLM's articles of association, provides that, subject to exceptions, "the business of the company shall be managed by the directors". In a normal case, therefore, disclosure to the board should suffice. Mr Greenwood pointed out that, where the two members of a board are involved in wrongdoing, disclosure by one director to the other would not be likely to achieve anything. However, I do not think a director in such a case would necessarily be bound to inform shareholders. Supposing that he had a change of heart and was acting in good faith in the company's interests, he could potentially conclude that what the company's interests required was a change of course by the board or, if the wrongdoing were in the past, that nothing need be done. There could even be cases in which directors could legitimately take the view that it would be contrary to their companies' interests for shareholders to be given information. It is necessary, I think, to look at the particular facts of individual cases.
201. The matters which it is suggested that the Maroos should have disclosed in the present case were summarised as follows in GHLM's written closing submissions:
"322.1 that they [i.e. Mr and Mrs Maroo] intended from the outset to act in breach of the [agreement made with Mr Binani on 2 February 2005] (and/or in any event, that they subsequently did so) in particular, by paying pre-Binani debts and by repaying the Brocade debt [i.e. the 412,000 liability mentioned in paragraph 29 above] other than from the proceeds of sale of extant stock;
322.2 that they intended from the outset to operate the Business in breach of their duty to maintain proper books and records and through the medium of their own accounts, intermingling the company's affairs with their own affairs for their own private benefit (and/or in any event, that they subsequently did so);
322.3 that the Business was effectively insolvent from some time in 2005;
322.4 that the 'transfer' to Shildon Trading was in the nature of a phoenix venture, its purpose having been to abandon debts owed both to trade creditors and the Spanish state;
322.5 that they were deliberately providing false information to the shareholder regarding the state of the Business;
322.6 that they were raising further sums from the sole shareholder on a false basis;
322.7 that they were acting for their own benefit despite the insolvency of the company (and of the Business generally)".
202. The matters listed are not obviously confined to alleged wrongdoing (see, more specifically, paragraph 322.3 of the closing submissions). As mentioned above, however, it can be incumbent on a director to disclose something other than wrongdoing.
203. Of more significance, as it seems to me, is the fact that the matters listed appear to go beyond GHLM's pleaded case. In particular, I do not read the Re-Amended Particulars of Claim as alleging wrongful non-disclosure of the matters referred to in paragraphs 322.3, 322.4 and 322.6 of the closing submissions. This is the more important since the complaint of non-disclosure involves an allegation of breach of the duty of good faith and, hence, of dishonesty (compare Armitage v Nurse [1998] Ch 241, where Millett LJ said at 251 that a trustee who "acts in a way which he does not honestly believe is in [the] interests [of the beneficiaries] is acting dishonestly"). Such allegations "must be pleaded clearly and with particularity" (Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, at 258; see also e.g. Armitage v Nurse, at 256-257, and Abbey Forwarding Ltd v Hone [2010] EWHC 2029 (Ch), at paragraphs 36-37).
204. Allegations of dishonesty (or want of good faith) also need to be put in cross-examination: see e.g. Abbey Forwarding Ltd v Hone, at paragraphs 46-48. In the present case, however, GHLM's allegations of non-disclosure were not fully explored during the evidence. I do not remember it being suggested to Mrs Maroo that she had even known of all the matters alleged in paragraph 322 of the closing submissions. It was certainly not put to her that she had subjectively concluded that disclosure to Shildon Holdings was in the interests of GHLM or that she would have so concluded had she been acting in good faith. So far as I can see, such points were not put to Mr Maroo either, despite the generally painstaking cross-examination.
205. Further, I do not think it has been established what would have happened if Shildon Holdings had been informed of matters such as are listed in paragraph 322 of the closing submissions. Mr Binani's evidence did not address what he would have done in such circumstances, and the other witnesses called by GHLM did not deal with this topic either. There are, moreover, specific reasons to doubt to what extent, if any, the Maroos' employment would have been brought to an end sooner if Shildon Holdings had been told of each matter. Were the Maroos culpable for failing to disclose insolvency in 2005, it would surely be for failing to reveal the financial problems of Majestique rather than GHLM itself (I should not have thought that GHLM was insolvent on a balance sheet basis or even, probably, on a cashflow basis at that stage), and it is apparent from Mr Binani's witness statement that by the end of 2005 he knew at any rate that the business was making a loss. By May 2007, Mr Bagri was seeking to find out "why [the business] was doing so badly" and found "Mr Maroo's explanations were unclear and did not make sense". It was also at this stage that Mr Binani decided that the business should be closed down. In March of the following year, Mr Maroo was told that his services were to come to an end on 30 April, Mr Binani having tired of Mr Maroo's "short and long stories". Nonetheless, Mr Maroo did not definitively cease to be a director until March 2009.
206. In all the circumstances, I do not think that GHLM has made out its case on wrongful non-disclosure.
The outcome207. The result is that, subject to any set-off, GHLM is liable to Brocade for 241,755 for uninvoiced remuneration.
The Mercedes car208. In early 2007, Mr Binani asked Mr Maroo to acquire a Mercedes car for him. The car in question had a purchase price of 41,700, and, when giving evidence, Mr Binani was confident that this amount had been transferred to GHLM, although (he said) part of it may have been paid to Mr Maroo or possibly Brocade. Mr Maroo maintained that only 30,000 had been provided by Mr Binani, but I think it likely that the full 41,700 was supplied. For what it is worth, GHLM was recorded as having received 41,700 in its accounting records. Further, a balance sheet which Mr Maroo sent Mr Bagri in January 2008 included a 42,000 entry in respect of "Braj Car loan". However, 11,700 of the 41,700 was probably paid to Mr Maroo or Brocade rather than to GHLM itself.
209. On 2 February 2007, GHLM entered into a contract in respect of the Mercedes, but it was one of hire-purchase rather than simply sale. Mr Maroo claimed that this arrangement accorded with Mr Binani's intentions. In contrast, Mr Binani said that there had been no suggestion that the car would be purchased on a hire-purchase basis. I prefer Mr Binani's evidence. As already indicated, I consider him to be the more reliable witness by far. It is difficult to see, moreover, why Mr Binani would have provided 41,700 (or even 30,000, the figure Mr Maroo accepts) if he had envisaged hire-purchase. It is noteworthy, too, that Mr Maroo showed GHLM to have a "Motor Car" worth 42,000 as an asset in the balance sheet he sent to Mr Bagri in January 2008. Finally, matters mentioned in paragraph 212 below are consistent with Mr Binani having thought that the car had been purchased outright and with Mr Maroo having appreciated that that was Mr Binani's understanding.
210. In the event, money which Mr Binani supplied for the purchase of the Mercedes was not used for that purpose. With regard to the 30,000 that he accepted that GHLM had received, Mr Maroo said that it "was banked in the accounts of the company and used for the business of the company".
211. By the end of 2007, Mr Maroo had been credited in the DLA to the tune of 42,048 in respect of the Mercedes. In cross-examination, Mr Maroo explained that the credit was based on the fact that he had guaranteed GHLM's obligations under the hire-purchase contract. He accepted that he had not paid for the car. He did, however, make or otherwise bear payments to Mercedes totalling 13,549.74. As I understand it, Mr Smith considered that it was also appropriate for Mr Maroo to be credited with the 11,700 which Mr Binani appears to have paid to Mr Maroo or Brocade rather than GHLM (the point being, I assume, that Mr Maroo/Brocade will have incurred a corresponding liability to Mr Binani).
212. At a meeting with Mr Binani and Mr Shah in February 2008, Mr Maroo was asked to transfer ownership of the Mercedes to Mr Binani since GHLM was being wound down. In the March, Mr Maroo agreed that the Mercedes would be transferred into Mr Binani's name. However, minutes record that on 30 June 2008 the board of GHLM (comprising, of course, Mr and Mrs Maroo) approved a proposal from Mr Maroo that he should "buy the company car at market value and use the proceeds to part pay the loan of Mrs Maroo". When, a few weeks later, Mr Shah asked for "the car log book and documents asap", Mr Maroo replied evasively, saying:
"The insurance papers were handed over to you with all the Sky details. Any other paper connected to the car would be in the accounts file with the auditors"and then:
"Road tax and insurance papers sent by post.
Car log book with accounts files in Davis Bonleys office ."
In October, Mr Binani complained to Mr Maroo that a proposed sale of the car "could not be executed for want of [documents]". Minutes for a meeting of GHLM's board (i.e. Mr and Mrs Maroo) on 4 December state:
"Mr A. Maroo informed the Board that the company car has been bought by him for 23325 which was the fair market value advised by the accountants of the company. Those funds would be used in payment of Mrs Maroo's loan."
213. In the event, Mercedes repossessed the car and has claimed upwards of 6,000 from GHLM.
214. Recognising that the sums involved were relatively small, Mr Greenwood did not spend much time on what claims GHLM might have as a result of these events. Nor shall I. What, however, can be said is that Mr Maroo should be credited in the DLA with no more than 25,249.74 (i.e. 13,549.74 plus 11,700) of the 42,048 hitherto credited.
The claim against Mr Loureiro215. The claim advanced by GHLM against Mr Loureiro relates to the stock sold to Brocade in January 2009. It is alleged in the Re-Amended Particulars of Claim that Mr Loureiro "facilitated the misappropriation" of the stock "by transferring or permitting the transfer of the stock to Brocade and/or the nominee of Brocade" when he knew or suspected that:
"105.1 the Maroos were self dealing and arranging a transfer of GHLM's stock to Brocade, a company owned and controlled by themselves;
105.2 the shareholder of GHLM was dissatisfied with the Maroos and was intending to remove them from the position of director;
105.3 the Maroos were acting without calling a board meeting to authorise the transfer of stock; and,
105.4 in the premises, that the Maroos were acting in breach of fiduciary duty by authorising the misappropriation of stock".
216. Mr Greenwood took a realistic position in relation to this claim and did not press it. He sensibly conceded that a critical question is whether the email in which Mr Shah asked Mr Loureiro to "UNLOAD TRAILER FOR FRANCE OR CALL IT BACK" on 23 January 2009 (see paragraph 97 above) reached Mr Loureiro in time for the latter to stop the shipment. As Mr Greenwood also accepted, that is by no means clear. The available evidence suggests that the shipment had already left Viseu on 22 January. Thus, Mr Shah referred to the shipment having "left from Viseu on 22 January" when emailing Transnautica on the next day. Again, Mr and Mrs Maroo spoke of goods having been "transferred on 22 Jan 2009 to Futura TR" in affidavits they swore in April 2009. Likewise, Mr Maroo's principal witness statement mentioned the delivery of "28,367 pieces in 1,916 cartons on 22nd January".
217. In the circumstances, the claim against Mr Loureiro has not been proved and I shall dismiss it.
Relief218. Section 1157(1) of the Companies Act 2006 provides as follows:
"If in proceedings for negligence, default, breach of duty or breach of trust against
(a) an officer of a company, or
(b) a person employed by a company as auditor (whether he is or is not an officer of the company),
it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit".
219. Mr Rahman suggested that it would be appropriate for relief to be granted under section 1157 in the present case, but the point was not developed to any great extent in submissions. In any case, I do not consider that any relief should be granted under section 1157.
Conclusion220. I can summarise my principal conclusions as follows:
i) Credit entries on the DLA totalling 773,935.19 have not been satisfactorily justified and should be disregarded (paragraphs 150-153 above);
ii) Brocade is entitled to be credited with only 200,071 of the liability of (up to) 412,000 which GHLM assumed in 2005 (paragraph 158 above);
iii) The contract for the sale of stock to Brocade was void. Accordingly, Brocade (a) must account for the sums it has received from selling stock on to Futura but (b) is entitled to resurrect whatever claim it had earlier had against GHLM (paragraph 179 above);
iv) The counterclaim for relief in respect of "Non receipt of goods" should be dismissed (paragraph 180 above);
v) GHLM's claim to recover remuneration paid in respect of the Maroos' services fails (paragraph 206 above);
vi) Subject to any set-off, GHLM is liable to Brocade for 241,755 for uninvoiced remuneration (paragraph 207 above);
vii) Mr Maroo should be credited in the DLA with only 25,249.74 of the 42,048 hitherto credited in respect of the Mercedes car (paragraph 214 above);
viii) The claim against Mr Loureiro should be dismissed (paragraph 217 above).
221. Unless the parties are able to reach agreement on the implications of my conclusions, I shall hear further argument on the subject and as to the order that should be made. All matters arising from this judgment (including any application for permission to appeal) are adjourned to a date to be fixed.
222. I should like, finally, to record my thanks to Mr Greenwood for his careful and detailed submissions, which I found very helpful.
Note 1 I.e. 101,320 minus 8,000 (paragraph 115). [Back] Note 2 I.e. 47,422 minus 28,630.59 (paragraph 120). [Back] Note 3 I.e. 127,044 minus 19,670 (paragraph 122). [Back] Note 4 I.e. 124,443 (paragraph 129) plus 26,000 (paragraphs 127, 130 and 131). [Back] Note 5 See paragraph 183 above. [Back] Note 6 See paragraph 185 above. [Back] Note 7 See paragraph 189 above. [Back]
Note 1 I.e. 101,320 minus 8,000 (paragraph 115). [Back] Note 2 I.e. 47,422 minus 28,630.59 (paragraph 120). [Back] Note 3 I.e. 127,044 minus 19,670 (paragraph 122). [Back] Note 4 I.e. 124,443 (paragraph 129) plus 26,000 (paragraphs 127, 130 and 131). [Back] Note 5 See paragraph 183 above. [Back] Note 6 See paragraph 185 above. [Back] Note 7 See paragraph 189 above. [Back]Note 1 I.e. 101,320 minus 8,000 (paragraph 115). [Back]
Note 2 I.e. 47,422 minus 28,630.59 (paragraph 120). [Back]
Note 3 I.e. 127,044 minus 19,670 (paragraph 122). [Back]
Note 4 I.e. 124,443 (paragraph 129) plus 26,000 (paragraphs 127, 130 and 131). [Back]
Note 5 See paragraph 183 above. [Back]Note 6 See paragraph 185 above. [Back]Note 7 See paragraph 189 above. [Back]
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