Directors Who Compete Face Court Wrath

January 12, 2010

Directors Who Compete Face Court Wrath

The courts have again shown that they will crack down on directors who put their own interests before their fiduciary duties as directors of the company, to the extent of causing it detriment.

In the case of British Midland Tool Ltd. v Midland International Tooling Ltd., a group of directors decided to set up a new company to compete with their existing employer, working on their plans while still employees.

They then resigned and immediately set up in competition with their old company. The judge took the view that while they were directors of the first company, they owed it a duty of care, which would include informing the company of any activity that might cause it loss: this included their own plans. Very substantial damages were awarded against the miscreant directors.

In another case, directors of a holding company who left and set up in competition with the company lost their argument that the non-competition clauses in their contracts did not apply because the business of the group was carried out by subsidiaries, not the holding company by which they were employed.

More recently, directors who failed to draw a fraud committed by a fellow director to the attention of the board (on the grounds that they could not prevent it) were found to be liable for losses resulting to the company.