Legal Updates

Commercial Law – Fiduciary Duties of Company – Former Director - Breach of Fiduciary Duty
 

The claimant company in Multi Installations Ltd v Varsani and Another [2008] brought proceedings against the first defendant, who was a former director, alleging breach of fiduciary duties in relation to three commercial contracts. In April 1997, the claimant company was incorporated by P with the purpose of providing subcontracting services to a company manufacturing high security doors.

In 2000, the first defendant agreed to manage the claimant’s security business. Both P and the first defendant were made company directors.

Following some difficulties between them, on 12 June 2006, the first defendant and P entered into an agreement to enable P to acquire shares in the claimant company held by the first defendant and his wife.

Subsequent to the resignation of the first defendant, he set up a new company, namely the second defendant in this case.

The claimant then brought proceedings against both defendants. The claimant alleged that the first defendant had breached his fiduciary duties to the claimant in respect of three commercial contracts.

The claimant argued that the actions of the first defendant resulted in a breach of his duties by declining to proceed with the first contract during his directorship, instead directing the business to Pacestar, which was a company run by the first defendant’s friend.

The first defendant argued that he had done so due to the fact that the business opportunity had been an unprofitable one which the claimant could not have fulfilled within the time allowed. With regards to the second and third contracts, the claimant argued that the first defendant had diverted a number of maturing business opportunities of the claimant for the benefit of himself, the second defendant and Pacestar.

In response to these allegations, the first defendant argued that, upon being asked to 'revisit' a quotation for the third contract given six months earlier, he had not realised that it had been given by him on behalf of the claimant.

The court held as follows:

§             On the evidence presented before the court, it was held that the reasons given by the first defendant for failing to enter into the first contract had merely been pretexts. They had not represented his genuine view as to the reasons why the claimant could not or should not have performed the contract. Therefore, the court awarded damages or equitable compensation in the sum of £70,110 against the defendants.

§             The first defendant had diverted the sub-contract work of the second contract from the claimant to himself. This was done either by using his company or Pacestar as a cover. It had been the most obvious breach of his fiduciary duties to the claimant, due to the fact that he had been diverting a maturing business opportunity of significant potential value in full knowledge of what he had been doing. As a result, the court awarded damages or equitable compensation in the sum of £178,494 against the defendants.

§             In the circumstances of this case, it had not been proved whether the first defendant had known that the quotation in respect of the third contract had been the claimant's quotation. This meant that it could not be determined whether the defendant had been knowingly engaging in the task of diverting to the second defendant one of the claimant’s maturing business opportunities.

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© RT COOPERS, 2008. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.

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