The Court of Appeal (CoA) had to answer the question as to what former directors can do as planning before it is considered a breach of their fiduciary duty.
Background:
On 10 January 2023, Mr. Blanchfield and Mr. Montaldo tendered their resignations as directors of CEL Solicitors, a corporate firm of solicitors specialising in financial misselling and fraud claims. They gave the required 6 months’ notice. The pair were placed on gardening leave following their resignations.
Several months later, they discovered that Mr. Blanchfield and Mr. Montaldo had taken preparatory steps to set up a new law firm and registered the trading name ‘complex claims’ on the 15th August 2022, incorporating MTCC as the corporate vehicle for the firm on the 22nd August 2022. They took out professional indemnity insurance for the new company in August/September 2022 and set up a website on the 30th of September 2022. They applied to the Solicitors Regulation Authority to register MTCC in October 2022 and opened a bank account for MTCC on the 30th November 2022.
CEL started proceedings against the former directors, although the High Court found that they were not in breach of their fiduciary duty when taking steps to set up a competitor. CEL appealed all of the findings.
Decision:
The CoA dismissed the appeal as ‘ill-founded’ and agreed with the High Court, ruling this week that CEL Solicitors had no basis for alleging that Mr. Blanchfield and Mr. Montaldo had breached their fiduciary duty before resigning in 2023. The majority of the actions taken did not constitute a breach of fiduciary duty, as they did not form an intention to leave CEL until late December 2022. Phillips LJ held that: “whether preparatory actions, short of active competition, are consistent with a director’s fiduciary duty to the company is highly fact-sensitive in every case and even an irrevocable intention to compete does not necessarily mean that merely preparatory steps are unlawful.”
The Court noted that the former directors did not divert any of CEL’s resources, business or contracts to their new venture before resigning. As such, they actually acted in accordance with the fiduciary duties they owed to CEL.
The Judge also ruled that there was insufficient evidence to support CEL’s claim that the respondents solicited clients or improperly used confidential information. The CoA also confirmed the difficulty in challenging factual findings on appeal.
Implications:
This important judgement highlights the importance for directors who want to resign to set up their businesses to make sure they act in accordance with the fiduciary duties they owe to the company.
Despite directors owing a duty to act in the best interests of the company, the ruling clarifies that certain preparatory steps taken to set up future companies will not automatically amount to a breach of the duty if they continue to act in the best interest of their current company. It provides good guidance as to what preparatory actions can in fact be taken.
It is also important to have a robust system in place to ensure post-employment restrictions, if necessary.