Employment Update: Directors fiduciary duties

08 May 2007

What is the extent of a director’s fiduciary duty during his notice period?

In addition to any terms written into their contracts, company directors are under an unwritten fiduciary duty to be loyal to the company and avoid any conflict of duty or self-interest in their dealings as director. In Foster Bryant Surveying v Bryant the Court of Appeal has recently considered the extent of that duty once a director has resigned as director but is working out his notice period. It is established law that acts done while the contract still subsists that are preparatory to competition after it terminates are not necessarily in themselves a breach of the director’s fiduciary duty. In this case, there were 2 directors in a small company business. One, the controlling shareholder, informed the other (Mr Bryant) that he intended to make Mrs Bryant, who was also an employee of the company, redundant. He refused to allow Mr Bryant to break the news to her himself so Mr Bryant resigned. He continued to work conscientiously and effectively as an employee during his notice period but took no further part in the management of the company. A client of the company, on being informed of Mr Bryant’s imminent departure, asked him to continue to do work for them as they were concerned about the continuity of work on the projects on which the company was employed. Mr Bryant agreed to this proposal while still employed by the company and before his resignation as director took effect.

The company claimed that this was a breach of his fiduciary duty and claimed that it was entitled to any profits made by him as a result for a year.

It was accepted that he had not resigned as part of a dishonest plan to make use of a business opportunity for himself nor had he been deceitful in his dealings with the client. In other cases, where this has been so, directors had been found in breach of duty. However this was not such a case. Here, the position that Mr Bryant found himself in after his resignation meant that, so long as he remained honest and neither exploited nor took any property of the company, his duties extended no further than that.

Points to note

  • A director’s fiduciary duty will cease immediately upon resignation. However, directors will usually be bound by written contract to give notice of resignation which is why the question arises as to what extent they still owe a duty to the company during their notice period. Termination provisions in directors’ contracts must always be carefully drafted with a view to enabling both company and director to manage the transitional period.

  • Where breach of fiduciary duty can be proved, a company can claim any profits made by the director as a result without necessarily proving that that business would have come to the company but for his actions.

  • In the case of Foster Bryant an important extraneous factor was the client’s wish to continue to employ both individual directors. It was the client which took the initiative in its negotiations with Mr Bryant during his notice period. It was also the client which stated categorically that, after Mr Bryant’s departure, it was never going to give the company more work than the remaining director, Mr Foster, could deal with personally whatever Mr Bryant did. Cases like these are highly fact-sensitive. Please ask us for advice when appointing new directors and also when managing the departure of directors from the business.

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