Directors’ fiduciary duties arise in equity, at common law and under statute and do not cease upon a director’s termination. However, the scope and duration of an ongoing duty is not always apparent.
Advanced Fuels Technology Pty Ltd v Blythe & Ors  VSC 286 considered the question of when it will be permissible for an outgoing director to compete with the company he has left.
Mr Blythe and Mr Thompson were directors and equal shareholders, through their respective companies, of Advanced Fuels Technology (AFT). Mr Thompson died unexpectedly, and his shares were acquired by his widow, Mrs Thompson.
Mr Blythe remained director and chief executive officer for two years until he resigned following ongoing disputes with Mrs Thompson regarding AFT’s future direction, leading to a deadlock.
Mr Blythe then took up consultancies with some of AFT’s clients. He also became a director and shareholder in NGV Group Pty Ltd (NGV) which employed a former employee of AFT, who had resigned from AFT after emailing to himself a list of business and personal contacts and copying some AFT documents to a SkyDrive.
NGV canvassed for business opportunities in competition with AFT and was successful in its endeavours, winning various tenders, but in different forms than those previously secured by AFT.
AFT brought proceedings for breaches under the common law and the Corporations Act 2001 (Cth). AFT alleged that Mr Blythe and Mr Wilson had colluded dishonestly and fraudulently by setting up NGV, and misused confidential information wrongfully retained after resigning, to usurp AFT’s business opportunities.
The Court considered whether there had been any wrongdoing on the part of Mr Blythe. In particular, had he ‘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.
However, in this particular matter, the Supreme Court dismissed all of AFT’s claims.
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 his engagement or employment with AFT. There was also no evidence of him acting in his own self-interests or to the detriment of AFT leading to his resignation.
· AFT’s record keeping was poor and it generally failed to produce evidence to support any of its allegations.
Although the decision confirmed that the fiduciary duty of a director will survive his or her resignation, the scope and duration of that 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.