Andrew Butler KC and Richard Alford in significant “business breakdown” decision
5th June 2023
Andrew Butler KC and Richard Alford have been involved in a case which has potentially significant implications for joint venturers following business breakdown.
In 2006, Andrew and Richard’s client (“F”) and a long-time acquaintance (“D”) became involved in certain not-for-profit social enterprises. The trial Judge (in a finding which was challenged, but not disturbed on appeal) found that by 2009 the two had become partners.
By 2009, they resolved to formalise their relationship, creating a new consultancy business. They agreed to conduct their activities through two existing corporate special purpose vehicles (“the BME Companies”) which had historically been vehicles for F’s family and personal consultancy business but were by then dormant. Both became directors of the BME Companies.
In 2012, they became involved with the affairs of another group of companies (“the DA Companies”), of which, following discussions at the time, F became the sole director and shareholder. Following a falling-out in 2017, it became apparent to F that formalities required to make D a shareholder in the BME Companies had never been attended to. D accepted this but alleged that this was the result of a breach of fiduciary duty by F, whom D had understood to be responsible for attending to such matters, and D relied upon it.
This allegation was accepted by the trial Judge who held that F held his shares in the BME Companies on constructive trust for D. He also held that F held his shares in the DA Companies on trust for himself and D (alternatively for the BME Companies) and accordingly D was entitled to a 50% beneficial interest in those shares too. He supported the latter conclusion by reference to an express trust (based on a record of a 2013 meeting between the parties) and a constructive trust based on Pallant v Morgan principles.
As well as directing that F should account for sums paid to himself out of the businesses, the Trial Judge also granted an injunction restraining him from competing with them (which, it was alleged, he had been doing).
The appellate Judge (Sir Anthony Mann) held that the finding of partnership was “particularly significant” and led to the conclusion that there were residual fiduciary duties at the time of the adoption of the BME Companies, as a result of which F was obliged to provide D with a shareholding in those. Accordingly, the trial Judge’s finding that the non-provision of a shareholding was a breach of fiduciary duty was also upheld. That finding meant that D similarly had a beneficial interest in the shares in the DA Companies (albeit Sir Anthony upheld the appeal so far as it related to the imposition of such a trust on Pallant v Morgan principles).
Sir Anthony did, however, agree that the injunction restraining competitive activities was not appropriate. He upheld F’s submission that, where duties arise as a result of a fiduciary relationship, those duties will (absent special circumstances) fall away when the relationship giving rise to them ends. Sir Anthony drew an analogy with the field of employment law, in which (absent enforceable contractual covenants) an employer cannot restrain a former employee from competition. He recognised that there were limits to that analogy, because – unlike in the field of employment – the law does not prescribe a time at which a joint venture relationship comes to an end.
The correct approach, he considered, was to ask whether the relationship between the two men changed such that the duty of loyalty no longer prevented competition, or whether it still existed. He held that F had been entitled to withdraw unilaterally from the joint venture, and (on the basis of communications at the time of the falling out in November 2017) had done so. While he accepted that there might be a case for an injunction against competition for a time to allow for the orderly winding up of the business, and to prevent exploitation of joint venture assets, there could not be an injunction against competition which was unlimited in time or scope, as the Judge’s had been.
A copy of the judgment can be found here.
Team: Andrew Butler KC
, Richard Alford
Expertise: Commercial Contracts
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