Director and employee duties after resigning from an Australian company
Updated: 18 April 2020
Directors still have duties after they resign from an Australian company.
You can benefit from seeing the courts view.
So, below is here’s what we can learn from the case of Advanced Fuels Technology v Blythe & Ors [2018] (AFT case).
In a hurry? jump ahead.
Case background
The question in the AFT case: did Blythe (a former director), Wilson (former employee) and other associates lawfully obtain business belonging to AFT, a company they previously worked at?
On 18 February 2013, Blythe resigned.
Blythe took up a consultancy role with Clean Air Power (CAP), a client of AFT. A few weeks later, Wilson also left to work for NGV group.
Also, the case addresses whether Blythe or Wilson's continuing participation in the gas industry gives rise to any liability to pay damages or equitable compensation to AFT.
Targeting customers
AFT allege that NGV and Environtrans (a majority shareholder of NGV) took up contracts with customers or business prospects of AFT.
Restraint of trade
In this case, there was no restraint of trade in either Blythe or Wilson's employment contract.
Important reader note: the absence of a restraint did not stop AFT from taking legal action.
So what exactly did AFT allege? we'll discuss this next.
Fraudulent and dishonest conduct
AFT alleges that Blythe and Wilson had a plan to resign from AFT, set up a business called NGV and use information wrongfully taken from AFT so NGV could take up AFT’s business opportunities.
Both Blythe and Wilson deny the allegations.
Blythe admits he was a director and had fiduciary and statutory duties, but denies he was an employee; he says he was a consultant.
Wilson admits he was an employee but denies a fiduciary duty as senior management or that he was an officer at AFT.
Both Blythe and Wilson deny allegations for breaches of the duties, dishonest and fraudulent conduct or wrongfully keeping or using AFT property or information.
Lawful competition defence
The defence: both Wilson and Blythe say it was lawful competition using know-how they were free to use.
Fiduciary’s personal benefit or gain
Briefly, a person that’s under a fiduciary obligation must account to the person to whom the duty is owed for any benefit or gain where a conflict or possibility of conflict exists between the fiduciary duty and the personal interest.
Good faith - s. 181 civil obligation
A director or other officer must exercise their powers and duties in good faith in the best interests of the company and for a proper purpose.
Use of position - s. 182 civil obligation
A director, secretary, other officer or employee must not improperly use their position to gain an advantage for themselves or someone else or cause harm to the company.
Use of information - s. 183 civil obligation
Section 183 also applies to directors, officers and employees; they cannot improperly use information to gain an advantage for themselves or someone else or cause harm to the company.
Can an employee be an officer?
In this case it was held that Wilson did not hold a senior role at AFT to justify characterising him as a fiduciary to the company.
Here are the details of Wilsons role - branch manager of AFT operations with a $56,000 per annum salary.
Also, Wilson had no power to bind the company to business or to decisions he made.
The Corporation Act's section 9 definition of ‘officer’ was taken into account to see if Wilson would be subject to section 181 (good faith).
An officer is someone that makes decisions that affect the whole or a substantial part of the business of the company.
And there was no evidence Wilson had capacity to affect the company’s financial standing.
Also relevant - the AFT directors did not act on Wilson’s directions or wishes, so the court view is that he’s not an officer.
Employee's use of information & position
However, Wilson was subject to s. 182 (use of position) and section 183 (use of information) as an employee.
Retention or misuse of confidential information (Blythe and Wilson)
Wilson and Blythe kept customer and supplier contact information.
The court held the information was not confidential because the information was available from public sources.
Blythe and Wilson did not deprive AFT of the information. They gave back laptops and mobile phones with AFT data.
Dishonest and fraudulent design
When attempting to purchase shares from a majority shareholder Mrs Thompson said Blythe made made statements about the value of the company’s affairs that were pessimistic in outlook.
This allegation was made because Blythe was aware of business opportunities and there were existing businesses contract renewals.
Despite this, the court held that independent valuation was an available option. So, Blythe was not attempting to shield Mrs Thompson from another picture of the company valuation.
Also, the court did not believe that there were discussions to establish a new business and divert business from AFT prior to Blythe's resignation so there was no dishonest and fraudulent design.
An employee’s duty after resignation
For Wilson, as an employee, only section 183 (use of information) is relevant, that is, his duty is not to improperly use information after resignation.
Also, he is not subject to the statutory duty of good faith as he was not an officer of the AFT.
As Director, Blythe is also subject to section 183 (not to improperly use information).
Fiduciary duties after resignation
There needs to be an actual or potential conflict between personal interest and the duty of fiduciary office.
The office ceases when the fiduciary resigns.
Blythe still had to comply with his fiduciary duty to not take for himself business opportunities for AFT that matured before he resigned.
Balancing a non-compete and the freedom of competition
The court notes a tension between the director's fiduciary duty not to compete on one hand and the freedom of competition on the other.
There was no evidence that Blythe sought to prepare his departure from AFT, build any new business to take over AFT’s opportunities or divert AFT business to his company.
The outcome
So the court held that there should be limits on any restraint on Blythe.
The restraint should limit Blythe in the short term from using information obtained while at AFT to compete.
Also, the restraint should be for customers of AFT or opportunities that they were very close to being secured by AFT as its own.
And, the final outcome...
No breach of duties
In this case AFT did not establish any breach of fiduciary duty by Blythe (a director).
Specifically, there was no breach for obtaining or pursuing or preventing AFT from opportunities to do business with other companies.
Finally, contact data kept by Wilson (an employee) was not confidential to AFT.
Also, use of the information after Wilson's resignation was not an improper use of information.