Before Resigning?
A key principle is that a director has a fiduciary duty to act in good faith in the best interests of the company. This means he or she must do their best to promote the company’s interests, act with complete good faith towards it, and not place themselves in a position of conflict.
In an important decision from the UK’s Court of Appeal, the appeal judges considered the legality of steps taken by the former directors of a law firm who were planning to set up a new law firm. The ruling has important persuasive authority on the courts in the Bahamas and other common law jurisdictions.
What’s the background?
Two individuals (the defendants) were previously directors of the claimant law firm (C). They had resigned, giving the required notice period, and were put on ‘gardening leave’ for three months.
However, C then discovered that for several months before resigning, the defendants had been taking preparatory steps to set up a new law firm. They had, for example, registered a trading name, set up a new website, opened a corporate bank account, arranged professional indemnity insurance, and entered discussions with a litigation funder with whom they had already negotiated on C’s behalf.
C brought proceedings alleging that the defendants had breached their fiduciary duties, were in breach of contract, and had conspired with their new company to injure C by unlawful means. C’s claim failed – the judge ruling that the defendants had not ‘crossed the line’ in the steps they had been taking.
C then lost once again on appeal.
No breach or losses
The Court of Appeal (CA) found that C had struggled to advance an arguable case that the preparatory steps the defendants had taken had caused it any damage – either in fees paid out to the defendants or in reputational damage.
Importantly, cases such as this will be fact-sensitive. The CA observed that the trial judge had thoroughly reviewed the facts on the basis of extensive evidence before concluding there was no breach of duty. For example, the steps taken by the defendants were entirely preparatory to trading, which would not start until six months after their resignations; and prior to their eventual resignation, they served C faithfully.
Further, C’s argument that dealing with a litigation funder gave rise to a conflict of interest was “tenuous at best,†as C had already contracted to deal exclusively with a different funder.
Nor had the directors breached the restrictive covenants contained in their consultancy agreements: there was no evidence they had solicited C’s clients or customers or threatened to.
The ruling will come as a relief to directors who may be considering leaving a company to launch a new business. They are not prohibited from taking initial preparatory steps so long as they do not, for example, cause loss to the company, create a conflict, or otherwise breach their duties or contractual terms. Each case will turn on its facts, and expert advice should always be taken to minimise the risk of a claim.
How we can help
For advice and representation on directors’ duties, including responsibilities on resigning as a director, contact the award-winning corporate and commercial lawyers at ParrisWhittaker at +1.242.352.6112.
1 Cheshire Estate & Legal Limited v Blanchfield [2024] EWCA Civ 1317
