Off duty and off the hook: Directors’ fiduciary duties after resignation

The recent Victorian Supreme Court decision of Advanced Fuels Technology Pty Ltd v Blythe & Ors provides useful guidance regarding the Court’s approach to the survival of a company director’s fiduciary duties after the director’s resignation and whether the Court will restrain his or her ability to compete with the company.

The facts

Mr Blythe was a director and joint shareholder of Advanced Fuels Technology Pty Ltd (AFT), though resigned due to a irreconcilable deadlock with his fellow shareholder over the direction of AFT. Shortly after resigning, Mr Blythe and a friend, Mr O’Leary incorporated NGV Group Pty Ltd (NGV) and began competing for AFT’s clients and business opportunities.

Mr Wilson, a technical employee of AFT who also resigned, began his employment at NGV.

NGV was soon successful in winning several tenders for business opportunities that had been pursued, albeit in very different forms, by Mr Blythe whilst at AFT.

Neither of Mr Blythe’s or Mr Wilson’s employment contracts with AFT contained “restraint of trade” provisions.

AFT claimed that Mr Blythe and Mr Wilson had breached their fiduciary and statutory duties by misusing their positions and information obtained at AFT to usurp business opportunities that would otherwise have been secured by AFT.

The issues

The Supreme Court of Victoria was asked to consider:

• whether Mr Blythe and Mr Wilson had breached their fiduciary and statutory duties by:
  • misusing their positions at AFT to usurp maturing business opportunities after their resignation; and
  • misusing or retaining any information from AFT after their resignation;

• whether Mr Blythe, Mr Wilson and the other defendants engaged in any dishonest and fraudulent design to obtain business that might otherwise have been acquired by or remained with AFT.

The decision

The Court dismissed all of AFT’s claims.

Did Mr Blythe and Mr Wilson misuse their positions to usurp maturing opportunities?

The Court held that a fiduciary is restrained from usurping maturing business opportunities after resignation if it was his or her fiduciary position, rather than a fresh initiative, that led to that opportunity.

Rather than a planned scheme of disloyalty, bad faith and preference for self-interest over the interests of AFT, the Court found that Mr Blythe’s resignation was a forced choice to employ his skills in a new and unrestrained way that was the result of his conflicting views with AFT’s other shareholder.

Further, the Court held that AFT had lost the business opportunities of its own accord and in any event, that the opportunities taken up by NGV were different in nature to those open to AFT and were the result of Mr Blythe’s and NGV’s own initiative.

The Court held that Mr Wilson was not a fiduciary as he did not have the capacity in his role at AFT to significantly affect AFT’s financial position and to make executive decisions.

Did Mr Blythe and Mr Wilson misuse information belonging to AFT after their resignation?

The Court was critical of AFT’s poor record keeping practices and the lack of evidence of what information, if any, it claimed was missing or copied from Mr Blythe’s AFT devices. In light of the deficiencies in evidence, the Court was unable to satisfy itself that Mr Blythe had breached his fiduciary or statutory duties.

The Court held that whilst Mr Wilson did misuse a small number of AFT documents, AFT did not suffer any loss as a result of the breach of his statutory duty under section 183 of the Corporations Act.

Did the defendants engage in a dishonest and fraudulent design in resigning?

The Court found that the defendants had not engaged in a dishonest and fraudulent design against AFT as their conduct leading up to their resignations demonstrated their commitment as employees to AFT and its growth and development.

Key takeaway

Ultimately, all of AFT’s claims were dismissed in Advanced Fuels Technology Pty Ltd, as the business opportunities obtained by NGV were significantly different in nature from AFT’s business, AFT’s record-keeping was poor and it could not demonstrate that confidential information had been retained and misused to its detriment. Further, there was no evidence to suggest that Mr Blythe or Mr Wilson had acted in their own interest to the detriment of AFT in the lead up to their resignations.

Advanced Fuels Technology Pty Ltd supports the position that the scope of a fiduciary’s duties after resignation is highly dependent on the particular facts of each case and some of the following factors can be important in determining the outcome:

• the length of time the fiduciary should be restrained from pursuing the company’s maturing business opportunities;

• whether those opportunities are developed enough to be considered to be close to being secured by the company;

• the similarity of those maturing opportunities with those the company claims to have been “usurped” by the fiduciary;

• the conduct of the fiduciary during their employment at the aggrieved company and in the lead up to their resignation before commencing work with the competitor; and

• the records of the company and its ability to produce evidence to the Court that confidential information had been retained or misused.

One should be mindful that fiduciary duties of a director do not end upon resignation.  The outcome in this case could have been very different for AFT if it had better records to support its claims and if it had contractual “restraint of trade” provisions in its employment contracts as an additional level of protection of its interests.

Authored by: 
Barbara-Ann Sim, Partner
Hamish Nicholson, Solicitor