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The scope of fiduciary duties as a director once you resign

A director is a fiduciary of the company and must act in good faith and in the company’s best interests. The personal interests of a director must not conflict with those of the company.

These duties arise in equity, at common law and under statute and do not cease upon a director’s termination. However, the scope and duration of an ongoing duty is not always apparent, posing the question of when it will be permissible for an outgoing director to compete with the company.

Advanced Fuels Technology Pty Ltd v Blythe & Ors [2018] VSC 286 determined that such questions are answered on the facts and individual circumstances of each case, including the conduct of the parties.

 

Facts

Mr Blythe and Mr Thompson were directors and equal shareholders, through their respective companies, of Advanced Fuels Technology (AFT). Mr Thompson died unexpectedly, and his shares were acquired by his widow, Mrs Thompson.

Mr Blythe remained director and chief executive officer for two years until he resigned following ongoing disputes with Mrs Thompson regarding AFT’s future direction, leading to a deadlock.

Mr Blythe then took up consultancies with some of AFT’s clients.

In April 2013, Mr O’Leary, a friend of Mr Blythe’s, registered NGV Group Pty Ltd (NGV). Mr Blythe was sole director and held a 20% share. The remaining shares were held:

  • 70% as to Envirotrans Pty Ltd which was owned and controlled by Mr Blythe;
  • 10% as to a company associated with the father of an AFT technical employee, Mr Wilson.

Mr Wilson subsequently resigned from AFT after emailing to himself a list of business and personal contacts and copying some AFT documents to a SkyDrive. He joined Mr Blythe at NGV, canvassing for business opportunities in competition with AFT. NGV was successful in its endeavours, winning various tenders, but in different forms than those previously secured by AFT.

AFT brought proceedings for breaches under the common law and the Corporations Act 2001 (Cth). AFT alleged that Mr Blythe and Mr Wilson had colluded dishonestly and fraudulently by setting up NGV, and misused confidential information wrongfully retained after resigning, to usurp AFT’s business opportunities.

 

Decision

The Supreme Court dismissed all of AFT’s claims.

Concluding that ‘Mr Wilson held no fiduciary office with AFT nor was he subject to the statutory duty of good faith (not being an ‘officer’ of the company)’, the Court went on to consider any wrongdoing of Mr Blythe. In particular, had he ‘impermissibly pursued business opportunities that had been maturing for AFT while he was still in employment’.

 

Mr Blythe

The Court confirmed that a director’s statutory and fiduciary duties are not extinguished upon resignation. Ascertaining the scope and duration of such duties, and ‘when a former director might properly begin to compete with the company’ must be considered ‘by reference to the particular factual context in which it arises…’

The following matters were relevant in the Court’s conclusion:

  • The events leading to Mr Blythe’s resignation were pertinent in assessing his conduct. Rather than colluding a dishonest scheme of self-interest to the detriment of AFT, Mr Blythe was forced to employ his skills and experience elsewhere after having been unable to resolve a deadlock with an unforeseen incoming business partner.
  • There was no evidence of misuse of information through which NGV competed against AFT to secure a particular contract almost five months after Mr Blythe had resigned.
  • The alleged lost business opportunities of AFT were considered unrealistic and quite out of its reach. The Court reflected on one such contract that AFT had lost ‘because of its behaviour over the allegedly ageing and unsafe equipment’ and ‘high-handed manner almost calculated to destroy its success’.
  • Mr Blythe’s consultancy arrangements, including with former clients of AFT, were quite distinct to previous dealings and arrangements and considered not comparable to ‘any potential deal on offer to AFT’.
  • Mr Blythe (and Mr Wilson) were not subject to any contractual restraints of trade arising from their respective engagement or employment with AFT. There was also no evidence of either acting in their own self-interests or to the detriment of AFT leading to their respective resignations.
  • AFT’s record keeping was poor and it generally failed to produce evidence to support any of its allegations.

 

Mr Wilson

As noted, Mr Wilson did not owe a fiduciary duty to AFT. He was however subject to s 183(1) of the Corporations Act 2001 (improper use of information). Whilst the Court found Mr Wilson to be in breach of that provision by retaining and using certain AFT documents, there was no proof of AFT suffering any incidental loss from that breach. The contact details retained by Mr Wilson were considered to lack the necessary characteristics to constitute information confidential to AFT.

 

Conclusion

There is no doubt that the fiduciary duty of a director will survive his or her resignation. The scope and duration of that duty will be considered in light of the circumstances relevant to each case and the parties’ conduct.

Company officers should include appropriate restraint of trade provisions in employment and consultancy arrangements and maintain comprehensive records should these be called upon as evidence in a future dispute.

If you would like further information, please contact us on (02) 9274 8820 or email ch@lawbase.com.au

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