Loyalty isn’t what it used to be

March 2025

Rating system:
Reading time (1-10 minutes): 2ish
Sophistication level (1 (idiot) – 10 (expert)): 4
Entertainment value (1 (turgid) – 10 (side-splitting)): 5 and a half

As well as my useful but possibly rather boring Guides on things like business sales, joint ventures and shareholder arrangements, I also do the occasional article which I put in the Updates and Tips section of my website. Usually they are based on a recent court decision which covers new or interesting issues in the world of corporate or commercial law. Mostly I cover judgments made by the two bigger UK courts – the Supreme Court and the Court of Appeal – because these often involve changes or at least developments in the law.

Here is a recent Court of Appeal case about directors’ duties. More specifically, about what directors can or can’t do if they are thinking of leaving and setting up another competing business.

Background

Directors have all sorts of fiduciary and statutory duties to their company.

These duties apply not just to actual appointed directors (registered as such at Companies House etc) but also to ‘de facto’ directors – people who act as though they are directors and who other directors treat as a director.

This case involved two of these duties set out in the Companies Act 2006:
• Section 172: a duty to act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole;
• Section 175: a duty to avoid a situation in which you have (or can have) a direct or indirect interest that conflicts (or might conflict) with the interests of your company.

So what are you allowed to do if you are a director of a company who wants to leave and set up another business which might compete with your company?

The safe advice used to be that so long as you remain a director of your current company you should be careful not to do anything (or at least ever be caught doing anything…) which might possibly be seen as showing an intention to set up a business to compete with your current company.

Recent case

What was it about?

Mr. Blanchfield and Mr. Montaldo were directors of a law firm, Cheshire Estate & Legal Limited (‘CEL’), which specialized in financial mis-selling and fraud claims. They wanted to leave and set up a new competing law firm. It takes quite a long time to set up a new firm, and they wanted to be up and running as soon as they could. So before they resigned they spent several months taking a number of preparatory steps:

• They set up a new company at Companies House called MTCC Solutions Limited (‘MTCC’)
• They looked into getting professional indemnity insurance for MTCC
• They set up a website for MTCC
• They opened a new bank account for MTCC
• They applied to the Solicitors Regulation Authority to register MTCC
• They started discussions with several litigation funders.

After they resigned, CEL discovered what they had been up to and went to court alleging that they had been in breach of their directors’ duties. CEL wanted an injunction to stop them going ahead with their new company, failing which CEL wanted to be paid a share of any profits MTCC might make, or other compensation and damages.

The High Court decided that Messrs Blanchfield and Montado’s actions were all permissible preparatory steps and didn’t amount to a breach of their duties. They hadn’t had a specific intention to injure CAL, but had just wanted to pursue the right anyone has to leave their current company and go into business on their own account. (The court confirmed on a separate issue that they hadn’t breached any of the restrictive covenants in their consultancy agreements). So the court dismissed CEL’s claims.

CEL appealed.

What did the Court of Appeal say?

The Court of Appeal upheld the High Court’s ruling. Lord Justice Phillips, delivering the leading judgment, said that taking preparatory steps to set up a new company doesn’t necessarily mean you are in breach of your duties as a director of your current company, even if you are doing so with a clear intention to compete in due course with your current company. He emphasized that determining whether preparatory actions violate a director’s fiduciary duties is highly fact-specific. The court found no evidence in this case that the directors’ preparatory actions themselves caused any loss to CEL. They certainly hadn’t commenced trading or solicited CEL’s clients prior to their resignation. So the appeal was dismissed.

Case: Cheshire Estate & Legal Limited v Blanchfield & Others [2024] EWCA Civ 1317

Key Takeaways and Tips

The case makes it clear that directors may take certain preparatory steps to establish a future competing business while still in office. However, these steps must not amount to active competition or conflict with their duty of loyalty to the current employer.

‘Loyalty’ seems to have a rather different meaning here to, say, what we might think it means in other relationships!

If in doubt, ask a lawyer.

Unfortunately , the case also emphasized that every case is highly fact-specific. So a lawyer might be useful in giving guidance as to some of the legal principles involved, but might find it hard to provide definitive legal advice as to whether on the particular facts any particular action might or not amount to an actionable breach of duties.

 

If you are thinking of entering into any shareholder arrangements with business partners or investors or are having any issues or difficulties with existing arrangements please feel free to email me at andrew.james@onhandcounsel.co.uk to arrange a complimentary ‘Shareholder arrangements’ consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls you might otherwise be exposed to, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.

 

Would you like to receive further Guides and other published articles containing legal updates and tips? If so, click below…
Sign up for more Guides and legal updates