Facts
The respondent directors (“the directors”) tendered their resignations as directors of a firm of solicitors, specialising in financial mi-selling and fraud claims.
The appellant firm (“the firm”) agreed that the directors would be placed on gardening leave, so that their consultancy agreements would terminate three months later.
After their resignations, the firm discovered that the directors had been taking preparatory steps to set up a new firm for months prior to their resignations.
Those steps included incorporating MTCC Solutions Ltd (“Solutions”) with both respondents as directors, applying to the Solicitors Regulation Authority (“the SRA”) to register Solutions, entering into discussions with litigation funders (“the litigation funders”), seeking professional indemnity insurance, setting up a website, and opening a bank account.
Procedural history
The firm claimed that the directors acted in breach of their fiduciary duties, were in breach of contract, and that they conspired with Solutions to injure the firm by unlawful means.
It sought injunctive relief, an account of profits, or equitable compensation, and damages.
The firm also applied for interim relief, however, the parties agreed that there should be an expedited trial of the issues, with interim injunctions in place in the meantime.
The trial judge made four findings.
First, the directors’ preparatory steps had not “crossed the line”, or otherwise put them in a position of conflict, so as to amount to a breach of their fiduciary duties. Secondly, there was no intention to injure the firm, so that the conspiracy claim would fail.
Thirdly, the directors were not in breach of the restrictive covenants in the consultancy agreements. Fourthly, the firm was not entitled to an injunction in respect of confidential information.
The claim was therefore dismissed.
The firm was ordered to pay the directors’ costs.
Appeal
The firm appealed against all four findings.
The firm confined the scope of their appeal to the findings as to liability for breach of fiduciary duty, and breach of contract, so that the firm could claim damages.
No arguable case of damage was advanced. Formally, or informally. There was no application to amend the pleadings, no draft amended particulars of claim, or evidence in support.
The primary aim was to reverse the order as to costs.
At trial, the main issue was whether injunctions should be continued and extended. Merely proving technical breaches of fiduciary duty, or contract, with no arguable case as to loss, would not in itself justify reversing the order as to costs.
The firm would have to prove that, had it succeeded on liability, it would have been granted injunctive relief.
Discussion
Phillips LJ (with whom Snowden and Lewison LJJ agreed) gave the leading judgment.
The trial judge found that there was no evidence that the directors solicited, or even threatened to solicit, clients or customers of the firm. Accordingly, it was right to refuse injunctive relief in respect of the restrictive covenants in the consultancy agreements.
The trial judge also found that the directors surrendered, or no longer had access to, any confidential documentation, or information, and that they would be unlikely to deploy it. Accordingly, it was right to refuse injunctive relief in respect of confidential information.
The trial judge further found that, even if the conduct was unlawful, which was rejected, the period of any advantage that the directors had was very limited; and there was no allegation that the directors started to trade, or that the firm had lost clients.
Accordingly, it was right to refuse injunctive relief, so as to prevent the directors from providing services or products of the type identified by the firm, or promoting or raising funding for any such business.
Therefore, even if the firm established technical breaches by the directors, it could not establish that it would have been entitled to relief after trial.
The correct approach is that “whether preparatory actions, short of active competition, are consistent with a director’s fiduciary duty to the company is highly fact sensitive in every case, and that even an irrevocable intention to compete does not necessarily mean that merely preparatory steps are unlawful.”
As to whether the preparatory steps taken by the directors were in breach of their duties to the firm, the trial judge conducted a very thorough review, and found that there was no breach.
“That conclusion was plainly open to him: (i) the steps taken were entirely preparatory to trading which would not start until six months after the respondents resigned, (ii) the venture might not have proceeded until the SRA’s response … (iii) the respondents tendered their resignation four days later; (iv) in the meantime the respondents were able to and did serve [the firm] faithfully.”
The directors did not challenge the finding that, even if the firm’s exclusive contract with its current funder was terminated, there was no evidence that the litigation funders could not have worked with both the firm and the directors.
Accordingly, the directors’ dealing with the litigation funder did not cause a conflict of interest.
Finally, the trial judge’s findings, as to when the directors formed an irrevocable intention to set up a competing business, was based on an assessment of all the evidence. It was not open to emphasise certain parts, and ignore the whole, of the evidence.
The findings were not plainly wrong.
Disposal
The appeal was dismissed.
The directors were not in breach of their fiduciary and statutory duties by taking preparatory steps towards setting up a competing company prior to resigning.
Written by Dominic Bright.
Commercial. Construction. Property.