Directors breached duties by diverting business to another company

The High Court has ruled that two directors of a recycling centre had breached their legal duties by diverting its business to a firm that they owned.

The court was told that Kenneth Davies had set up a company called Green Box Recycling (GBR) in 2010 to take over a recycling business. He entrusted the growth and development of the company to two directors.

A year later, he discovered that the two directors had incorporated their own company called Green Box Recycling Kent (GBRK)

He claimed they had breached their contractual and fiduciary duties by incorporating another company diverting the recycling business to it that should have gone to GBR.

GBRK grew into a successful business. GBR was struck off the register of companies and was dissolved in late 2011. Although it was restored to the register in 2016, it was placed in compulsory liquidation soon afterwards.

One of the directors said that he had incorporated GBRK to take over the recycling business because, at the time, GBR was close to insolvency and had been abandoned by Mr Davies.

The court ruled against the directors. It held that there was no evidence that they had been engaged merely as employees or consultants. They were directors and as such had breached the fiduciary duties imposed by company law to promote GBR's success and to avoid conflicts of interest.

They had incorporated GBRK intending that it, and not GBR, would trade from the recycling business's site. They had taken various steps in GBRK's interests, including taking a lease on the site and obtaining regulatory authority for GBRK to conduct the business.

It was not possible to say that GBR was close to insolvency at the time but, even if it had been, it was immaterial that it might not have been able to take those steps itself.

Please contact us if you would like more information about the issues raised in this article or any aspect of company law.

to chat