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Court supports ex-director?s right to start new business

When senior employees leave a company, the commercial risks presented can be considerable.

A recent case on this subject concerned a director who left the company he worked for and then set up in competition with it.  The company supplied energy surveys of buildings to its customers, normally annually.  The director had left his employment in October 2008.  Initially, he had joined another firm but his employment there was terminated four months later and he set up his own business.  Both of his new positions involved the carrying on of business activities that competed with his former employer.

His contract of service with the first company contained a clause that prevented him from soliciting business from any client of the company (which included any person who had been a client in the preceding 12 months) with whom he had dealt to a material extent, for a period of six months after his employment ceased.  His contract of employment also prevented him from divulging any confidential information about his former employer’s business that was not in the public domain and which had come to him by way of his employment.

In addition, the Companies Act 2006 contains a statutory duty regarding the conduct of directors, which prevents them from acting in their self-interest in a way which conflicts with their duties as a director.

The Act contains provisions whereby conflicting acts can be approved by shareholders or other directors, but those provisions were not relevant to this case.

The man’s first employer went to court to obtain an order restraining him from canvassing or soliciting its customers.  The ex-director argued that his knowledge, which he applied to his new business, was not the exclusive property of his former employer and that it would be unfair for the court to prevent him from exploiting his abilities for his own benefit.  The restriction in his contract was for six months, and that period had expired very shortly after he left his new employer.

The court concluded that the former employer had failed to provide adequate evidence of the man’s use of confidential information acquired whilst he was a director.  Had he made use of a particular trade secret, the decision may well have been different.

Furthermore, it could not be shown that he had attempted to acquire specific contracts or interests which had been under negotiation when he was a director: he had merely left in order to pursue a new opportunity.

This case provides support for the proposition that when a director leaves his former company and sets up a new business, where he does not breach his contract of employment or (in effect) conspire against the old company before resigning as a director and does not make use of what is clearly confidential information acquired as a result of his former position, there is a good chance that the court will find nothing actionable in his conduct.

The courts are often not willing to make rulings which could be interpreted as denying a person the right to make a living using their existing knowledge and skills.

If you face the loss of senior personnel (whether by their choice or yours), we can help you protect your business to the maximum extent possible under the law.

For more information contact Amanda Finn at Gullands by email: a.finn@gullands.com.