Court of Appeal confirms highly fact-sensitive nature of breach of directors’ duties when setting up a competing business

A Court of Appeal decision in Cheshire Estate & Legal Limited (CEL) v Blanchfield & Ors [2024] EWCA Civ 1317 considered the issue of whether directors of a company were in breach of their fiduciary and statutory duties by taking preparatory steps towards setting up a competing business prior to resigning from their positions. 

The decision emphasises that whether directors will be deemed to have breached their duties in these particular circumstances will be highly dependent on the facts of the case. Directors might be permitted to take preparatory steps to set up a competing business if they’ve continued to act faithfully, honestly and in the best interests of the company. 

Here, experienced commercial litigator Matthew Moy explains what this decision means for company directors and shareholders.

Director duties under the Companies Act 2006 (CA 2006)

Directors of a company owe a number of fiduciary and statutory duties pursuant to sections 170 to 177 of the CA 2006. In CEL v Blanchfield & Ors, the Court of Appeal was particularly interested in the following directors’ duties: 

Section 172 — a director of a company must act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

Section 175 — a director of a company must avoid a situation in which they have (or can have) a direct or indirect interest that conflicts (or possibly may conflict) with the interests of the company.

Breach of duty

CEL v Blanchfield & Ors concerned two individuals who tendered their resignations as directors of CEL, a firm of solicitors specialising in financial mis-selling and fraud claims. 

CEL agreed with the directors that they’d be placed on gardening leave for three months and that their consultancy agreements would then terminate. 

Following their resignations, CEL discovered that the directors had been taking preparatory steps to set up a new competing firm for several months prior to their resignations.

These steps included:

• Incorporating a new company called MTCC Solutions Limited (MTCC).
• Seeking professional indemnity insurance for MTCC.
• Setting up a website for MTCC.
• Opening a new bank account for MTCC. 
• Applying to the Solicitors Regulation Authority to register MTCC.
• Entering into discussions with several litigation funders.

CEL commenced court proceedings against the directors, alleging that they’d acted in breach of their directors’ duties and consultancy agreements — and that they’d conspired with MTCC to injure CEL by unlawful means. CEL sought injunctive relief, an account of profits or equitable compensation, and damages. 

High Court

The High Court held that the directors’ preparatory steps hadn’t “crossed the line” or put them in a position of conflict to amount to a breach of their directors’ duties. There was no intention to injure CEL and so the conspiracy claim must fail. There was also no breach of the restrictive covenants in the directors’ consultancy agreements. CEL was also not entitled to injunctive relief in respect of its confidential information or otherwise. 

CEL didn’t agree and appealed the ruling. 

Court of Appeal 

The Court of Appeal dismissed the appeal, which it described as being “ill-founded”.  It was held that “whether preparatory actions, short of active competition, are consistent with a director’s fiduciary duty to the company is highly fact sensitive in every case, and that even an irrevocable intention to compete does not necessarily mean that merely preparatory steps are unlawful.”

The Court of Appeal indicated that the steps taken by the directors were entirely preparatory and that they’d continued to act faithfully, honestly and to the best of their abilities. In particular, the directors hadn’t diverted any of CEL’s business, contacts or resources. The Court of Appeal agreed with the High Court that the former directors had continued to act in accordance with the duties that they owed to CEL. 

Useful guidance on the limits of fiduciary and statutory duties 

The Court of Appeal’s decision underlines that cases of this nature are highly fact sensitive and provides some useful guidance on the limits of directors’ fiduciary and statutory duties.  The judgment confirms that taking some preparatory steps to establish a competing business won’t necessarily amount to a breach of duties, provided that those directors continue to act in the best interests of the company and avoid a conflict of interest. 

However, any preparatory steps taken by directors will need to be carefully considered to ensure that they don’t end up ‘crossing the line’ into activities that would impact their ability to serve the company faithfully, honestly and to the best of their abilities. For example, activities such as active solicitation of clients and/or employees is highly likely to cause a loss to the company and constitute a breach of directors’ duties. 

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