Directors have a fundamental duty of loyalty and employees have a duty of fidelity

03/08/2009

The High Court recently found in Berryland Books Ltd v. BK Books Ltd and others that a director may not undermine his fundamental duty of loyalty to the company and has a good faith requirement to act in the best interests of the company. Similarly, employees have a duty of fidelity which requires them to be loyal and act with good faith in the company's best interests for as long as they are employed by the company.

The Claimant, a publishing company, brought an action against a new and rival publishing company (the first Defendant) which had been established by a director of the Claimant (the second Defendant) and other employees of the Claimant (additional Defendants).

The Court found that the second Defendant had made significant steps to establishing the rival publishing company whilst he was still acting as a director of the Claimant. The additional Defendants, whilst still employees of the Claimant, also engaged in preparatory acts in the establishment of the first Defendant. As well as taking steps to set up the first Defendant, the other Defendants diverted parts of the Claimant's business into it, including using the Claimant's confidential information, corporate opportunities and customers for the first Defendant's benefit.

The duties owed by the director, which he was found to have acted in breach of were set out by His Honour Judge Hodge QC, at paragraph 22, as follows:

"It is contrary to his duty of loyalty for a director to (1) act contrary to the best interests of the company; (2) seek to make a profit for himself through the use of corporate assets, information, or maturing business opportunities; or (3) solicit or procure his existing company's staff to work for his new company."

In relation to employees, at paragraph 23, the Judge stated that:

"the law regards it as unlawful to undertake the following: (1) working for a competitor while still employed; (2) personally competing while still employed; (3) concealing or diverting matured or maturing business opportunities; (4) misusing the employer's property, including confidential information and assets; and (5) taking the steps necessary to establish a competing business so that it is 'up and running' or 'ready to go' as soon as the employee leaves his employment".

It was not unlawful for the additional Defendants, who subsequently became employees of the first Defendant, to use the knowledge and skill which they had acquired in their previous employment to the advantage of their new employer, even if that results in detriment to their previous employer. The situation would have been different if the employees had disseminated trade secrets, but there was no such evidence in this case.

The actions of the Defendants went beyond what was allowed by law for the preparation of a rival business. Their actions were clearly in breach of the well-established duties that are owed to companies. This case offers useful guidance on the duties owed by directors and employees to their companies, particularly when they are considering new business ventures or employment.

(Berryland Books Ltd v. BK Books Ltd and others [2009] EWHC 1877 (Ch))

Contact: henryfarris@city-law.net

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