Cheshire Estate & Legal Limited v Thomas Oliver Blanchfield & Ors

The authorities and the relevant legal principles were considered in detail by Etherton J in Shepherds Investments Ltd v Walters [2006] EWHC 836 (Ch), [2007] 2 BCLC 202.

In the light of the authorities, and in particular the judgment of Arden LJ in Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2005] 2 BCLC 91 at [41]-[43] and the decision of Hart J in British Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 466 (Ch), [2003] 2 BCLC 523, Etherton J stated at [105] that:

“..it is plain that the necessary starting point of the analysis is that it is the fiduciary duty of a director to act in good faith in the best interests of the company (Item Software at para [41]), that is to say “to do his best to promote its interests and to act with complete good faith towards it”, and not to place himself in a position in which his own interests conflict with those of the company (British Midland Tool at paragraph [81] and CMS Dolphin Ltd v Simmonet [2001] 2 BCLC 704 at paragraph [84]).”

In Item Software a director of a company had secretly approached the main customer of the company whilst the company was renegotiating its contract with the customer, proposing to divert the contract to a company he had set up for his own benefit. The renegotiations failed and the customer terminated the contract. On the company’s claim against the director for compensation, the director was held liable for breach of his duty in failing to disclose his own wrongdoing to the company. The Court of Appeal dismissed the director’s appeal, holding that there was no basis on which the director could reasonably have come to the conclusion that it was not in the interest of the company to know of his breach of duty: he could not fulfil his duty of loyalty on the facts of that case except by telling the claimant of his setting up of his own company, and his plan to acquire the contract for himself.

In Balston Ltd v Headline Filters Ltd [1990] FSR 385 Falconer J had identified a countervailing public policy which would excuse a director, who was not yet engaging in competing activity, from disclosing to the company his intention to set up a competing business:

“In my judgment an intention by a director of a company to set up business in competition with the company after his directorship has ceased is not to be regarded as a conflicting interest within the context of the principle, having regard to the rules of public policy as to restraint of trade, nor is the taking of preliminary steps to investigate or forward that intention so long as there is no actual competitive activity, such as, for instance, competitive tendering or actual trading, while he remains a director.”

In British Midland Tool, however, Hart J held that a director must resign as soon as his intention to compete is irrevocable, or he would be obliged to make disclosure to the company, recognising that view was inconsistent with Balston (but consistent with the facts in that case):

“89….A director's duty to act so as to promote the best interests of his company prima facie includes a duty to inform the company of any activity, actual or threatened, which damages those interests. The fact that the activity is contemplated by himself is, on the authority of Balston’s case, a circumstance which may excuse him from the latter aspect of the duty. But where the activity involves both himself and others, there is nothing in the authorities which excuses him from it. This applies, in my judgment, whether or not the activity in itself would constitute a breach by anyone of any relevant duty owed to the company. It does not, furthermore, seem to me that the public policy of favouring competitive business activity should lead to a different conclusion. A director is free to resign his directorship at any time notwithstanding the damage that the resignation may itself cause the company: see per Lawrence Collins J in CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 at para 95. By resigning his directorship he will put an end to his fiduciary obligations to the company so far as concerns any future activity by himself (provided that it does not involve the exploitation of confidential information or business opportunities available to him by virtue of his directorship). A director who wishes to engage in a competing business and not to disclose his intentions to the company ought, in my judgment, to resign his office as soon as his intention has been irrevocably formed and he has launched himself in the actual undertaking of preparatory steps. Although this might seem inconsistent with the wide statement of principle in Balson’s case, it is not inconsistent with the decision in that case on its particular facts: as already noted…the intention to compete does not appear to have been formed prior to the resignation as a director.”

I read Hart J’s analysis as meaning that the director’s obligation to disclose preparatory activities arises (and only arises) when a director has formed an irrevocable intention to form a competing business, both where he is acting alone and also where he is acting with others. The only basis for distinguishing between disclosing the actions of others and a disclosing director’s own actions and intentions was the reasoning in Balston, which Hart J effectively discounted.

That appears to be the effect of Etherton J’s analysis in Shepherds Investments. After agreeing that it was difficult to see any legitimate basis for the “trumping” of a director’s duties by “rules of policy as to restraint of trade”, Etherton J stated at [108]:

“What the cases show, and the parties before me agree, is that the precise point at which preparations for the establishment of a competing business by a director become unlawful will turn on the actual facts of any particular case. In each case, the touchstone for what, on the one hand, is permissible, and what, on the other hand, is impermissible unless consent is obtained from the company or employer after full disclosure, is what, in the case of a director, will be in breach of the fiduciary duties to which I have referred or, in the case of an employee, will be in breach of the obligation of fidelity. It is obvious, for example, that merely making a decision to set up a competing business at some point in the future and discussing such an idea with friends and family would not of themselves be in conflict with the best interests of the company and the employer. The consulting of lawyers and other professionals may, depending on all the circumstances, equally be consistent with a director's fiduciary duties and the employee's obligation of loyalty. At the other end of the spectrum, it is plain that soliciting customers of the company and the employer or the actual carrying on of trade by a competing business would be in breach of the duties of the director and the obligations of the employee. It is the wide range of activity and decision making between the two ends of the spectrum which will be fact sensitive in every case. In that context, Hart J may have been too prescriptive in saying, at paragraph [89] of his judgment, that the director must resign once he has irrevocably formed the intention to engage in the future in a competing business and, without disclosing his intentions to the company, takes any preparatory steps. On the facts of British Midland Tool, Hart J was plainly justified in concluding, in paragraph [90] of his judgment, that the preparatory steps had gone beyond what was consistent with the directors' fiduciary duty in circumstances where the directors were aware that a determined attempt was being made by a potential competitor to poach the company’s workforce and they did nothing to discourage, and at worst actively promoted, the success of that process, whereas their duty to the company required them to take active steps to thwart the process.”

Mr Chaisty referred to a dictum of HH Judge Hodge QC in Berryland Books Ltd v BK Books Ltd [2009] EWHC 1877 (Ch) (Footnote: ²) at [25], to the effect that, whilst still employed, it is unlawful for an employee to take steps necessary to establish a competing business so that it is ‘up and running’ or ready to go as soon as the employee leaves his employment. However, in my judgment that is too dogmatic a statement given the wide range of circumstances in which that situation might occur, whether in the context of a director or an employee. The preferable approach is that identified by Etherton J in Shepherds Investments, namely 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.

In the present case, after hearing evidence over the course of five days, including from Mr Blanchfield and Montaldo, the Judge made the following findings:

The Judge recognised at [320] that, on the authorities, there is no hard and fast rule or guidance as to whether, and the extent to which, the taking of preparatory steps is permissible or constitutes a breach of duty. However, at [321] the Judge stated that it was evident that the steps taken by the respondents to prepare for their new business venture fall into the middle ground identified by Etherton J in Shepherds Investments.

At [322] the Judge identified that, within that middle ground, each case turns on its own particular facts. He stated at [323] that a key issue related to the respondents’ intentions and frame of mind at the time the contentious steps were taken and, in particular, when they formed a settled intention to establish their new firm.

In view of his findings that the respondents did not form a settled intention to leave CEL until mid to late December or early January 2023, the Judge concluded at [335] that the majority of the actions taken by the respondents by way of preparatory steps did not cross the line and constitute a breach of their fiduciary duties. He pointed out at [336] that it was entirely possible that those steps could have been unsuccessful, in which event the respondents may well have remained at CEL and not sought to set up their own firm. He further held at [338] that the steps taken by the respondents would not have affected the respondents’ ability to serve CEL faithfully, honestly and to the best of their abilities. They could have remained in post, even though they had taken those steps.

The Judge found the position regarding Deminor more finely balanced, but on the basis of the factual findings referred to above, he decided at [345] that a reasonable person, looking at the facts of the case, would probably not conclude that there was a real possibility of conflict arising out of the respondents’ dealings with that funder.

The Judge therefore concluded at [350] that he did not find that the respondents were in breach of their fiduciary or statutory duties by failing to report their tentative plans to CEL.

CEL submitted that the respondents’ actions went well beyond legitimate conduct. They did not simply discuss possibilities, but acted to set themselves up so as to be ready to go as soon as possible, getting their “ducks in a row”. It was not a matter of their intentions, because their actions were secretive and underhand and well past what was acceptable for directors of a company. Dealing with Deminor was a prime example of the conflict created because the respondents were defined as key workers in CEL’s agreement with its funder and if they left, that funder could terminate its funding, leaving CEL in need of a new funder, and Deminor was itself a potential new funder.

CEL also challenged certain of the Judge’s factual findings, in particular his finding as to the date the respondents formed an irrevocable intention to set up a competing business, submitting that the Judge failed to have sufficient regard to messages passing between the respondents, Mr Blanchfield’s actions in emailing CEL material to himself and statements to the SRA and other third parties.

CEL further complained of the Judge’s refusal to admit evidence of Mr Blanchfield’s actions in downloading CEL documents to his One Drive, and also submitted that the Judge failed to give sufficient reasons for his decision.

As the Judge correctly identified, he was engaged in a fact sensitive exercise, assessing whether the preparatory steps taken by the respondents placed them in breach of their duties to CEL. The Judge conducted a very thorough review of those facts on the basis of the extensive evidence before him and came to a conclusion that there was no breach of duty. That conclusion was plainly open to him: (i) the steps taken were entirely preparatory to trading which would not start until six months after the respondents resigned, (ii) the venture might not have proceeded until the SRA’s response of 6 January 2023; (iii) the respondents tendered their resignation four days later; (iv) in the meantime the respondents were able to and did serve CEL faithfully. There is no recognised basis on which that conclusion could be overturned.

As for CEL’s case that the respondents’ dealings with Deminor gave rise to a conflict of interest, that was tenuous at best given that CEL had already entered a contract to deal exclusively with another funder. Any residual force in the point was ended, in my judgment, by the Judge’s finding (set out at [26(iv)] above) that there was no evidence that Deminor could not have worked with both CEL and the respondents in the event that CEL’s exclusive contract with its current funder was terminated. CEL did not challenge that finding.

Neither is there any basis on which to challenge any important aspect of the Judge’s findings of fact. In particular, his finding as to when the respondents formed an irrevocable intention to set up a competing business was based on an assessment of all the evidence (including the respondents’ oral evidence), set out, considered and explained by him. It is not open to CEL to challenge that finding by emphasising certain of that material, ignoring the whole: see Volpi v Volpi [2022] EWCA Civ 464. It would be necessary for CEL to show that the finding was plainly wrong, and that it cannot do.

As for the One Drive, it was open to CEL to cross-examine Mr Blanchfield about that exercise. As it did not do so, I see no merit in the complaint that the Judge excluded its late admission in the exercise of his discretion.

The judgment in this case extended to 69 pages and 523 paragraphs. The Judge gave very detailed reasons for his decision and the suggestion to the contrary is ill-founded.

I would dismiss the appeal.