Case Study: Scope of Directors’ Fiduciary Duties After Resignation

Directors’ fiduciary duties arise in equity, at common law, and under statute, and do not necessarily cease upon a director’s resignation or termination.

One of the main questions of ongoing directors’ fiduciary duties is, when is it permissible for an outgoing director to compete with the company?

Advanced Fuels Technology Pty Ltd v Blythe [2018] VSC 286 considered this question and determined the answer is dependent on the circumstances of each case.

Facts

Mr Blythe and Mr Thompson were directors and equal shareholders, through their respective companies, of Advanced Fuels Technology (‘AFT’). Mr Thompson died in February 2011 unexpectedly, and his shares were acquired by his widow, Mrs Thompson.

Mr Blythe remained director and chief executive officer of AFT for two years until on 18 February 2013 he abruptly resigned following ongoing disputes with Mrs Thompson regarding AFT’s future direction.

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 80% was distributed in the following manner:

  • 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 Blythe took up consultancy with some of AFT’s clients. Further, in May 2013, a valued employee of AFT resigned and joined Mr Blythe at NGV. The employee brought with him from AFT a list of business contacts, personal contacts, and documents. NGV subsequently canvassed 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 against Mr. Blythe as well the past AFT employee for breaches under the common law and sections 181, 182 and 183 of the Corporations Act 2001 (Cth).

Decision

The Supreme Court considered if there had been any wrongdoing on behalf of Mr Blythe. In particular, the Court considered if Mr Blythe had ‘impermissibly pursued business opportunities that had been maturing for AFT while he was still in employment’.

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 was 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.

Conclusion

There is no doubt that directors’ fiduciary duties will survive his or her resignation. The scope and duration of that ongoing 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.

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