DIRECTOR LIABLE FOR DIVERTING CORPORATE OPPORTUNITY

A company made a claim against a former director for breach of director’s fiduciary duty and duty of fidelity under employment law by his diverting a maturing business opportunity to a new business established by him after his resignation from the company, the resignation prompted or influenced by the wish to acquire for himself the opportunity sought by the company.

In an important judgment Lawrence Collins found for the claimant company. A director was entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the company and he was not thereafter precluded from using his general fund of skill and knowledge, or his personal connections, to compete with his former company. However the underlying basis of the liability of a director who exploited after his resignation a maturing business opportunity of the company was that the opportunity was to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he was appropriating for himself that property and became a constructive trustee of the fruits of his abuse of the company’s property which he acquired in a conflict of interest with the duty. A fiduciary should be accountable for the profits properly attributable to the breach of fiduciary duty, taking into account the expenses connected with those profits and a reasonable allowance for overheads although there had to be some reasonable connection between the breach of duty and the profits for which the fiduciary was accountable. The defendant director had deliberately left the company, had taken the staff with him and solicited the customers. He was responsible for breach of fiduciary duty and accountable for the profits emanating from the property which he put into a partnership and then transferred to a new company. He was also in breach of his contract of employment with the claimant by resigning without giving adequate notice and so continued to be subject to his contractual duties of loyalty and fidelity. The invitations to the staff to join him, the solicitation of the customers and the diversion of the business opportunities were in breach of those duties.

CMS Dolphin Ltd –v- Simonet [2002] BCC 600.

“Company Law Newsletter” 30.09.02 Sweet & Maxwell