In this case the Court of Appeal considered whether directors of a company who had taken preparatory steps towards setting up a competing business prior to their resignation had thereby acted in breach of their fiduciary duties.
Facts
Mr Blanchfield and Mr Montaldo were statutory directors of Cheshire Estate & Legal Ltd (CEL). They were also engaged by CEL as consultants, working 40 hours per week. On 10 January 2023, they resigned from both of these positions (giving the required six months' notice to terminate their consultancy agreements). On 12 January 2023, CEL agreed to place them both on garden leave for three months, and that their consultancy agreements would terminate on 13 April 2023.
CEL subsequently discovered that, over several months before their resignations, Mr Blanchfield and Mr Montaldo had been taking preparatory steps to establish their own law firm. These steps included registering a trading name, incorporating a company (MTCC Solutions Limited (MTCC), the third respondent in the case) of which they both became directors, opening a bank account for MTCC, applying to register MTCC with the Solicitors' Regulation Authority (SRA), and entering discussions with various litigation funders, including one with which they had previously negotiated on CEL's behalf.
On 1 February 2023, CEL brought proceedings against Mr Blanchfield and Mr Montaldo in the High Court, alleging that they had breached their fiduciary duties as directors, conspired with MTCC to injure CEL by unlawful means, and were in breach of the restrictive covenants in their consultancy agreements. CEL sought an injunction, account of profits and damages.
At a hearing in April 2023, the High Court dismissed CEL's claims, holding that the preparatory steps Mr Blanchfield and Mr Montaldo had taken had not "crossed the line", or otherwise put them in a position of conflict. There was therefore no breach of their fiduciary duties to CEL. Nor were they in breach of the restrictive covenants in their consultancy contracts. CEL appealed.
The Court of Appeal dismissed the appeal, noting that whether preparatory steps short of active competition involve a breach of a director's fiduciary duties will depend on the particular facts of the case, and even an irrevocable intention to compete does not necessarily mean that merely preparatory steps are unlawful.
In the present case, the High Court had found that Mr Blanchfield and Mr Montaldo's intention to compete with CEL was not cemented until 6 January 2023, when the SRA confirmed that it was "minded to approve" their application to register MTCC, and they did not intend that MTCC would begin trading until the end of their contractual notice period. Although negotiating with the litigation funder might have given rise to a conflict, no such conflict in fact arose because CEL had at the relevant time entered into an exclusive funding arrangement with a different provider.
On the basis of those facts, the Court of Appeal concluded that the High Court had been entitled to find that there was no breach of fiduciary duty. The steps Mr Blanchfield and Mr Montaldo had taken were entirely preparatory, they had resigned just four days after receiving the SRA's "minded to approve" notification, and they were able to and did continue to serve CEL faithfully in the meantime.
What does this mean for employers?
This case illustrates the limits of directors' fiduciary duties and confirms that taking some preparatory steps to establish a competing business will not necessarily amount to a breach of those duties. However, if such steps involve a conflict of interest, or a director acts in a way that is not in the best interest of the company, then a breach of fiduciary duty will be established. Since cases of this kind are highly fact sensitive, robust evidence will be required to persuade the court that there has been a breach.
The decision also serves as a reminder to employers carefully to consider their restrictive covenants and whether they provide appropriate protection against directors seeking to establish their own business ventures.
Cheshire Estate & Legal Limited v (1) Blanchfield (2) Montaldo (3) MTCC Solutions Limited
