Stylist created goodwill and so didn't breach legal duties

The High Court has ruled that a hair stylist had personally created the goodwill in her business and so had not breached her director's duties when she carried out her work through another company.

The court heart that the director had been a highly regarded personal stylist to a small group of wealthy individuals. Initially a sole trader, she incorporated her business for financial and tax reasons.

Her services included sourcing gifts for her clients. She recognised an opportunity to carve out a new luxury gifts business for a broader customer base and set up a second company for that purpose.

An external investor required the shares in the hair stylist business to be acquired by the new gifts company as a condition of his investment.

The investor agreed that the stylist could carry on her personal styling work in her own right as there were commercial benefits in her generating sales for the gifts company.

On professional advice, the director set up a third company from which she conducted her personal styling work.

Two years later, after a period of disappointing trading, the gifts business entered into administration followed by liquidation.

The liquidator alleged that the director had transferred the assets of the original stylist business to the new third company for no consideration and in breach of her fiduciary duties and her director's duties under the Companies Act 2006.

These transfers amounted to an unlawful distribution of capital.

The court ruled in favour of the stylist.

It held that the director had the skills, connections and clients before the original stylist business was incorporated. The business was attached to her abilities, characteristics, name and reputation, and her clients enlisted her services rather than the services of the company. 

Therefore, the goodwill generated by the business was generated by her personally. There was no unlawful transfer of business and no breach of her duties as a director.

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

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