DIRECTORS, BEWARE!!

In this modern day and age, it is no more common practice to remain in a fixed place of work for a lifetime. The same principle applies to directors. In fact, the Companies Act 2001 (the “Companies Act”) even provides for such a situation. Section 143 (1) (h) of the Companies Act provides that a director cannot compete with the company or become a director or officer of a competing company, unless it is approved by the company. To complicate matters, the term “competing company” is not defined in the Companies Act.

So, when is a director of a company in competition with its company?

More than an answer, there is now some guidance in the recent judgment I-Mediate Ltd vs. Taranee R. &Ors 2015 SCJ 75. It is to be noted that it is a judgment given in chambers by his Honor Mr. Justice Angoh.

In the aforementioned case, I-Mediate Ltd (the “Applicant”) is suing two of its previous directors (the “Respondents”) and an insurance broker company incorporated by the Respondents (the “Insurance Broker”). It is the contention of the Applicant that the Respondentswere the directors and shareholders of the Insurance Broker whilst simultaneously being directors and shareholders of the Applicant. It was further averred by the Applicant that the Respondents did not have the authorization of the Board of Directors of the Applicant to act as directors of the Insurance Broker in breach of section 143 (1) (h) of the Companies Act.

In effect, the Applicant was seeking relief in the nature of an injunction under section 143 (5) (b) (ii) which provides that:

“(5) (a) Subject to paragraph (b), the duties imposed by this section shall be owed to the company, and not to the shareholders, debenture holders or creditors of the company.

(b) Without prejudice to any other action with regard to the same matter that is lawfully available, including an action under section 170, any member or debenture holder, as the case may be, may apply to the Court for –

(i) a declaration that an act or transaction, or proposed act or transaction, by the directors or any director or former director constitutes a breach of any of their duties under this Act;

(ii) an injunction to restrain the directors or any director or former director from doing any proposed act or transaction in breach of their duties under this Act.”

Counsel for the Respondents took the point that the Applicant could not enter an action under section 143 (5) (b) (ii) given that the Applicant is neither a member nor a debenture holder.

A literal reading of section 143 (5) (b) (ii) would lead to the same conclusion as was argued by Counsel for the Respondents.

However, the contrary view was taken by the learned Judge who stated that this action was not only open to members or debenture holders but also to the company. The reasoning of the learned Judge was that the Applicant was also entitled to seek relief under this section since according to section 143 (5) (a) of the Companies Act, the duties of directors under section 143 of the Companies Act are owed to the company.

It is to be noted that the relief under section 143 (5) (b) of the Companies Act is limited to directors and former directors and therefore an action under this section could not be entertained against the Insurance Broker as a competing company.

However, since an action against the Insurance Broker as competing company could be entertained under section 169 of the Companies Act which provides for injunctions generally as follows:

“ (1)    The Court may, on an application under this section, make an order restraining a company that, or a director of a company who, proposes to engage in conduct that would contravene the constitution of the company or this Act from engaging in that conduct.

(2)    An application may be made by-

(a) the company;
(b) a director or shareholder of the company; or
(c) an entitled person.

(3)    Where the Court makes an order under subsection (1), it may also grant such consequential relief as it thinks fit.

(4)    An order may not be made under this section in relation to a conduct or a course of conduct that has been completed.

(5)    The Court may, at any time before the final determination of an application under subsection (1), make, as an interim order, any order that it is empowered to make under that subsection,” the learned judge decided to entertain the application under this section as there was no objection from the parties.

Quoting several authorities, the learned Judge came to the conclusion that: “the taking of preparatory steps by a director is not in itself in conflict with his fiduciary duties towards the company.” It will be decided on a case to case basis when a director is deemed to have started unlawfully competing against the company.

In the present case, though the Respondents had set up the Insurance Broker, they had already resigned as directors of the Applicant before the Insurance Broker started its operations, meaning that the action for which the injunction was sought for had already been completed and the application for injunction could not succeed in light of section 169 (4) of the Companies Act..

In other words, should any director of a company wish to compete with the company of which he is a director, he shall first seek such company’s permission under section 143 (1) (h) of the Companies Act. When a director fails to seek such permission, it will be determined on a case to case basis by the Supreme Court if he has acted in breach of his duties towards the company according to the provisions of the Companies Act.

By Ashwin Mudhoo