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Case law: Court clarifies when company should not get compensation for former directors' breaches of duty

Employers should make sure they understand which preparatory steps a director may lawfully take before joining a competitor, which steps would be breaches of their directors' duties, and what compensation they can claim for breaches in such circumstances, when considering legal action against former directors.

Legal Alert

This update was published in Legal Alert - November 2016

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Two managing directors and shareholders of a company left in early 2012, resigning their directorships and selling their shares. Later in the year, they became directors of a competing business.

Their former company claimed they had breached their duties to it because of their activities between October 2010 and when they left. These were preparatory activities, carried out to enable them to join the competitor in due course. For example, they had:

  • travelled to the USA to meet the founders of the competitor company, taking steps to keep this secret from their employer;
  • secretly acquired shares in the competitor, using nominees;
  • helped the competitor create a price list;
  • approached customers as directors of the competitor;
  • held themselves out as directors of it;
  • carried out operational tasks for the competitor.

The High Court ruled that these activities were not in the best interests of their existing company – particularly the trip to the USA which involved substantial time off work and keeping what they were doing secret from their employer. They were therefore in breach of their fiduciary duties.

However, the employer had asked the High Court to order its former employees to:

  • repay their salaries paid by the company from 2010 to 2012;
  • repay the sums they received when they sold their shares;
  • pay a sum representing the salaries paid to them by the competitor, on grounds that their financial support and work gave the competitor a 'head start'.

The court refused to make such an order, finding that while they were in breach of their fiduciary duties:

  • The employees had continued to carry out their duties while still employed by the company (and were responsible for a major part of its turnover), had taken no significant time off work until the USA trip, and had carried out their activities outside working hours. They had therefore earned their salaries.
  • They were not paid salaries by the competitor until nine months after leaving their former employer. The court felt this was too long for there to be any causal link between the salaries and their activities. Also, the competitor was not dependent on financial support or work from the employees. It had already been set up by its founders and was operating on its own basis.
  • If the court ordered repayment of the sums received for their shares, the directors would be entitled to resume ownership of those shares – which the company did not want.

Operative date

  • Now

Recommendation

  • Employers should make sure they understand which preparatory steps a director may lawfully take before joining a competitor, which steps may be in breach of their directors' duties, and what compensation they can claim for such breaches, when considering taking legal action against former directors

Case ref: Gamatronic (UK) Ltd & Anor v Hamilton & Anor [2016] EWHC 2225

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.