Are fiduciary duties owed by former directors?

Company directors owe various duties to their company and its shareholders.  For example, sections 180, 181, 182, 183 and 184 of the Corporations Act 2001 (Cth)(Act) impose statutory duties to exercise care and diligence, maintain good faith and refrain from using their position or information to gain an advantage for themselves.  However, the legislation, barring section 183, does not clearly express the extent to which these duties, as well as similar common law duties, continue to apply after a director has ceased being the director of a company.  Addressing this shortfall, the Court in Advanced Fuels Technology Pty Ltd v Blythe & Ors [2018] VSC 286 (Advanced Fuels) found that whether or not these duties endure after the cessation of a directorship depends on the facts and circumstances of each case.

A situation where former directors need to be particularly careful in observing any ‘ongoing’ duties to their former company is when they set up or join a different company which is a competitor to their previous company.  Specifically, directors need to ensure they do not:

• reproduce substantial parts of their former company’s copyrighted material; and
• disclose confidential information of their former company.

Copyright infringement and use of information by a former director

Section 183 of the Act provides:

“(1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.“

Section 183 can be distinguished from similar duties in the Act by its use of the words ‘have been’, enlivening the duty in circumstances post-resignation of a director.

The case of TICA Default Tenancy Control Pty Ltd v Datakatch Pty Ltd [2016] FCA 815 provides an interesting example of how section 183 of the Act may apply to a former director after their resignation (at [155]).  This case involves Mr Nounnis Jnr who was a director of TICA Default Tenancy Control Pty Ltd (Applicant), involved in all aspects of its business, who later left the Applicant after the irreconcilable breakdown of the relationship with his father. Mr Nounnis Jnr, amongst others, later established Datakatch Pty Ltd (First Respondent) which became a competitor of the Applicant.

Allegations were brought by the Applicant that the First Respondent utilised its source code, database schema (the blueprint of how a database is constructed) and format stylesheets.  The Court was open to finding an infringement of copyright but relied on expert evidence suggesting only a ‘trivial’ amount of work was copied and thus no infringement was found (at [131]).  The Court did, however, find that a case under section 183 of the Act succeeded (at [156]).

Breach of duty of confidence

The Court also heard argument from the Applicant that the Respondents had breached their duty of confidence. In support of that position, the Applicant put forward evidence that the Respondents had utilised the usernames and passwords of various computer systems owned and operated by the Applicant. This information had been made available to the Respondents on a confidential basis and, as such, they were burdened with an equitable duty, which survived the termination of their role as directors of TICA, to preserve its confidentiality.  The Court held the Respondents failed to observe this duty by acquiring and using the confidential information without authorisation. Further, the Court also held this use constituted a breach of sections 182 and 183 of the Act, notwithstanding that the Respondents were no longer directors of TICA.

Breach of fiduciary duty

In Advanced Fuels the former director of Advanced Fuels Technology Pty Ltd (Plaintiff), following irreconcilable differences with a substantial shareholder, resigned.  The former director took with him computers containing information owned by the Plaintiff, a list of business and personal contacts alongside various documents of the Plaintiff. The Court held at [326]:

“the potential for liability for breach of fiduciary duty for post-resignation conduct remained, although it is somewhat narrowed. … Despite such narrowing, [the Defendant] was nonetheless restrained by his fiduciary duty, for a time, from diverting and then converting for himself or a company with which he was related, specific business opportunities for AFT that had matured to the requisite degree before he resigned. The time period over which that restraint operated; the required specificity of those opportunities; and the required degree of maturity of the opportunities, are all ingredients which combine to determine the effective scope or shape of the fiduciary duty applicable in the factual context of this particular relationship.”

Takeaways

The Court will apply equitable, common law and statutory director’s duties upon a former director of a company.  What is clear is that former directors engaged in subsequent business endeavours need to, as a minimum, respect the information gleaned from their time as directors at their former company. They must not utilise that information in their current capacity either for the benefit of themselves or the company they now direct.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Advanced Fuels Technology Pty Ltd v Blythe & Ors [2018] VSC 286

TICA Default Tenancy Control Pty Ltd v Datakatch Pty Ltd [2016] FCA 815

Further information about directors duties

If you need advice on your ongoing obligations to a company you formerly directed, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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