Legal & Finance: Directors Warned over How They Quit

Article excerpt

Byline: John Duckers

Directors who are considering setting up or joining competing businesses need to take great care, or they could find themselves in court, a West Midlands corporate lawyer has warned.

Paul Bennett, a partner at Black Country law firm George Green, says directors planning to set up in competition with companies in which they hold office must ensure that they do nothing to compromise the best interests of that company.

'Being a director of a business carries additional legal duties beyond those owed by employees.

'Directors who breach their duties could end up being sued personally for unlimited sums or could face an injunction. Failure to comply with an injunction can lead to imprisonment,' said Mr Bennett, who is based in George Green's Cradley Heath offices.

Traditionally companies have relied on covenants in employment contracts to restrict directors from soliciting clients, contacts and other employees for a reasonable amount of time to safeguard their business should that director leave.

These restrictive covenants have to be drafted very narrowly to stand any prospect of succeeding and are notoriously difficult to enforce in practice.

Mr Bennett said: 'However, the law singles out directors for special attention.

'Directors owe fiduciary duties to their company which include a duty not to put themselves into a position where the interests of the company conflict with personal interests or duties to a third party; a duty not to make a profit out of their position as a director unless permitted to do so by the company; and a duty to act in good faith in the interests of the company.'

According to Mr Bennett, two recent cases highlight a trend of the courts affording greater protection to companies against competition from former directors through a broader interpretation of these fiduciary duties. In Hunter Kane v Alan Watkins, Mr Watkins resigned as a director and employee and returned his personal computer to the company which, on examination of the drives, discovered he intended setting up a business in competition, and to solicit clients.

'Mr Watkins had no contract of employment, but the court granted an injunction in favour of Hunter Kane, restricting Watkins from dealing with its customers,' said Mr Bennett. …