Judgment Details

G Attwood Holdings Limited and Another v Gordon Woodward and Others [2009] EWHC (Ch) ******  (John Martin QC sitting as a deputy judge of the Chancery Division of the High Court)  saw Chris Quinn of Littleton Chambers succeed for claimants in a case which raises once again the much-litigated problems of how far a director may go in the way of making preparations for future competition against his company and how far the company is able to restrain such competition after the resignation of the director in the absence of any restrictive covenant. It is an important decision for four reasons:

(1)    it adds two matters to the list of relevant principles to be applied in such cases which was approved by the Court of Appeal in Foster Bryant Surveying Limited v Bryant [2007] 2 BCLC 239;

(2)    it finds that the nature of the conduct of the fellow employee which gives rise to the duty to report on the part of the company director need not itself be such as would amount to a breach of that employee’s duty of fidelity;

(3)    it sees the Court provide a firm answer to the frequently asked, all-important, questions of exactly when, and how, a director crosses the line into impermissible activity when preparing to compete his company and warns that it may be at a much earlier stage and in more innocuous circumstances than is frequently thought; and

(4)    it shows the Court imposing a Springboard Injunction of as long as one year despite the absence of any restrictive covenants in the contract between the company and the director.

In Foster Bryant Surveying Limited v Bryant [2007] 2 BCLC 239 the Court of Appeal accepted as “perceptive and useful” a statement of relevant principles from the judgment of Mr Livesey QC in Hunter Kane Ltd v Watkins [2002] EWHC 186 (Ch). However the judge felt it necessary to add two matters to that list. First, it is impermissible to copy or take documents belonging to the company for using them as an aid to competition after the relationship has ended (as with the customer lists in Robb v Green [1895] 2 QB 315). Secondly, as an incident of his fiduciary duty, a director is obliged to alert the company to any nascent threat to its business, even if he is himself part of that threat: British Midland Tool Limited v Midland International Tooling Limited [2003] 2 BCLC 523 at paragraph 89; Shepherds Investments Ltd v Walters [2007] IRLR 110 per Etherton J at paragraph 105. The judge rejected the submissions made on behalf of Mr Woodward that these cases go to far, holding that: “It seems clear to me that, if a director learns that an employee is proposing to set up in competition, he is under an obligation to warn the company of that fact; and that obligation cannot be any weaker merely because he is himself involved in the proposal.”

Having considered the authorities, the judge held that in the absence of any relevant restrictive covenants the proper approach was to:

“approach the claimants’ complaints on the basis that Mr Woodward was entitled, as soon as he had resigned as a director on 20 June 2008, to compete against [the company] in any way he chose, and to use for that purpose the skill, knowledge and contacts that he had acquired while working for [the company]; and that the claimants can only succeed if they can establish one or more of the following: that he failed to alert [the company] to a nascent business threat; that the preparatory steps he took before resigning as a director amounted to a breach of duty; that he took with him when he resigned material belonging to [the company] to assist him in competition; and that he exploited after his resignation business opportunities which are properly to be regarded as belonging to [the company].”

Significantly, the judge held that the duty upon a director to warn his company of a nascent commercial threat arising because of the activities of one of its employees did not only arise when that employee’s behaviour was itself such as to constitute a breach of his duty of fidelity as an employee. It is enough that the director is aware that a senior employee is taking concerted steps to put in place a structure which would enable effective competition to be conducted as soon as that employee chose to give up his employment.

The judge very helpfully identifies the precise position of the relevant line between permissible and impermissible activity on the facts before him, namely his finding that Mr Woodward and his fellow employee, Mr Gwilliam, had discussed the possibility of contracts for the new company with the claimants’ customers, stating:

“Were it not for the statements in the Business Start-Up Proposal, I would regard his activities as on the borderline between what was acceptable and what was not. Apart from those statements, the plans had not gone beyond the stage of making preparations which were in themselves innocuous. In principle, I do not think that discussions about future competition, the investigation of potential funding, and the preparation of business plans necessarily lead to the conclusion that a director has put himself in a position where his interests conflict with his duties to his company; and, in the present case, the evidence that Mr Woodward continued to carry out his functions on behalf of [the company] would have led me to the conclusion that, on balance, he had not broken his duty. However, it seems to me that the statements in the Business Start-Up Proposal to the effect that the possibility of contracts for the new company had already been discussed with the customers- reflected something that had actually happened [while he was still a director]. The only customers referred to in the document are those who were already customers of [the company]; and an approach to them on his own behalf by Mr Woodward…will have constituted the plainest possible breach of his duty.”

It was a feature of the case that the claimants had not taken any steps to protect their business by entering into restrictive covenants with the director. Nevertheless the judge ordered the extension of Springboard relief which had been obtained against him on an earlier interim application so that it would last a full year from the date of his resignation.

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