Laying down the law

Where a business has invested in developing and supporting that talent, particularly in senior roles, it is important for that business to be able to protect the intellectual property which the business owns and which supports the work done by its management. Legal controls are therefore necessary to help manage this position.

Directors or de facto directors of a company often have access to some of the most confidential information and trade secrets of a business and have strong relationships with a company’s customers, suppliers and employees. If a director resigns and unlawfully sets up in competition, or takes a position with a competitor, this could pose a major threat to the business.

The recent High Court case of Burnell v Trans-Tag Ltd and Robert Aird (TransTag) has clarified the potential liability of directors and other senior staff as well as provided some helpful guidance to companies seeking to protect their business from such unlawful conduct.

When is a member of senior staff considered a de facto director? A key point in the Trans-Tag case was the clarification that in certain cases a senior manager who was not actually a director could be treated in law as if they were a director and be subject to the various legal duties that are imposed on company directors.

Even though a senior individual has not been formally appointed as a director, the judge in Trans-Tag confirmed that due to their actions they can be considered to be a de facto director. This means that they can be liable for a breach of duty in the same way as a director can be. The principles of how to determine whether a person is a de facto director were established in the 2014 case Smithton Limited v Naggar and include looking at:

• Whether they assumed the status and function of a director so as to make themselves responsible as if they were a director. • What role they took and whether their acts were directorial in nature with reference to the company’s corporate governance system. • Whether the company considered them to be a director and held them out as such. • Whether third parties considered them to be a director. Directors’ duties following resignation or termination of directorship Both directors and de facto directors owe a number of duties to a company pursuant to the Companies Act 2006 (CA 2006).

These include duties to:

• Promote the success of the company (s.172 CA 2006). • Exercise reasonable care skill and diligence (s.174 CA 2006). • Avoid conflicts of interest (s.175 CA 2006).

The general rule is that a director ceases to be subject to these general duties when they cease to be a director of the company. An exception to this is set out in s170(2) CA 2006, which confirms that a person who ceases to be a director continues to be subject to the duty to avoid conflicts of interests. Using information obtained at one company for the benefit of another company is likely to fall into this category.

Previously, it was considered that a breach of duty under s170(2) CA 2006 needed to be based on actions of the director before or at the time of resignation. However, following Trans-Tag this is no longer the case. The court held that s170(2) (a) CA 2006 is a continuing duty and that it must therefore be possible for a breach of

that continuing duty to be founded on acts which take place after a director has resigned his or her directorship or a de facto director has resigned from their role.

Such acts which occur after the resignation of the director or de facto director need to involve:

• The exploitation of ‘any property, information or opportunity’ of which the director became aware at a time when he or she was a director (as per s170(2) CA 2006); and • Consideration of the common law rules and equitable principles. For example, the nature of any pre-resignation and post-resignation conduct of that director.

Clear action to obtain and store data relating to customers prior to any resignation and then contacting those former customers soon after leaving is likely to be considered to be a breach of the duty to avoid conflicts of interest. The position is not always black or white and various shades of grey exist.

If a director or de facto director is also an employee of the company, they may also be subject to other employment duties and obligations, including the duty of confidence, which survives termination of an employment contract. Companies should therefore, also maintain a list of such duties and obligations and be prepared to enforce them.

Actions to avoid unfair competition If a company suspects that a former director or de facto director (or any former employee) has unlawfully exploited its confidential information or property either before or after resignation, a number of avenues may be available to the company.

These include:

• Injunctive relief to prevent the director from unlawfully competing with the company. • Commencing a breach of contract and/or breach of duty claim. • Claiming damages for loss of profits, account of profits and/or legal costs.

As with all business protection disputes, time is of the essence and specialist advice should be sought urgently when director wrongdoing is suspected. If the company is slow to react once it has become aware of the breach of duty, the court may infer that the company had limited concerns and the value of any claim made could be limited by the courts as a result.

Martin Fleetwood is a Consultant at Addleshaw Goddard’s Transport practice. The Rail Team has over 30 lawyers who advise clients in both the private and public sectors across a wide range of legal areas. As well as contractual issues, the team advises on operational matters, franchises, concessions, finance, regulatory, property, employment, environmental and procurement issues.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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